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(Exact Name of Registrant as Specified in Its Charter)
C:
C:C:
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
61-1055020
(I.R.S. Employer Identification No.)
C:
111 S. Wacker Drive, Suite 4800
Chicago, Illinois
(Address of Principal Executive Offices)
60606
(Zip Code)
(877) 483-6827
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
General, administrative and professional fees (including non-cash
stock-based compensation expense of $4,352 and $3,057 for the three
months ended 2011 and 2010, respectively, and $8,368 and $6,089 for
the six months ended 2011 and 2010, respectively)
15,554
9,858
30,386
20,541
Loss on extinguishment of debt
6
6,549
16,526
6,549
Merger-related expenses and deal costs
55,807
4,207
62,256
6,526
Other
(7,773
)
121
(7,772
)
15
Total expenses
351,052
189,798
575,494
377,977
Income before loss from unconsolidated entities, income taxes,
discontinued operations and noncontrolling interest
13,608
53,522
59,627
106,231
Loss from unconsolidated entities
(83
)
—
(253
)
—
Income tax benefit (expense)
6,209
(409
)
9,406
(695
)
Income from continuing operations
19,734
53,113
68,780
105,536
Discontinued operations
—
5,852
—
6,597
Net income
19,734
58,965
68,780
112,133
Net income attributable to noncontrolling interest (net of tax of $0 and $559
for the three months ended 2011 and 2010, respectively, and $0 and $978
for the six months ended 2011 and 2010, respectively)
58
898
120
1,447
Net income attributable to common stockholders
$
19,676
$
58,067
$
68,660
$
110,686
Earnings per common share:
Basic:
Income from continuing operations attributable to common
stockholders
$
0.11
$
0.33
$
0.41
$
0.67
Discontinued operations
—
0.04
—
0.04
Net income attributable to common stockholders
$
0.11
$
0.37
$
0.41
$
0.71
Diluted:
Income from continuing operations attributable to common
stockholders
$
0.11
$
0.33
$
0.40
$
0.66
Discontinued operations
—
0.04
—
0.04
Net income attributable to common stockholders
$
0.11
$
0.37
$
0.40
$
0.70
Weighted average shares used in computing earnings per common share:
Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the
context otherwise requires, “we,”“us” or “our”) is a real estate investment trust (“REIT”) with a
geographically diverse portfolio of seniors housing and healthcare properties in the United States
and Canada. As of June 30, 2011, our portfolio consisted of 719
properties: 357 seniors housing
communities, 187 skilled nursing facilities, 40 hospitals and 135 medical office buildings (“MOBs”)
and other properties in 43 states, the District of Columbia and two Canadian provinces. We are a
constituent member of the S&P 500® index, a leading indicator of the large cap U.S.
equities market, with our headquarters located in Chicago, Illinois.
Our primary business consists of acquiring, financing and owning seniors housing and
healthcare properties and leasing those properties to third parties or operating those properties
through independent third party managers. Through our Lillibridge Healthcare Services, Inc.
(“Lillibridge”) subsidiary, we also provide management, leasing, marketing, facility development
and advisory services to highly rated hospitals and health systems throughout the United States.
In addition, from time to time, we make real estate loan and other investments relating to seniors
housing and healthcare companies or properties.
As
of June 30, 2011, we leased 393 of our properties to healthcare operating companies under
“triple-net” or “absolute-net” leases, which require the tenants to pay all property-related
expenses, and we engaged independent third parties, such as Sunrise Senior Living, Inc. (together
with its subsidiaries, “Sunrise”) and Atria Senior Living, Inc. (“Atria”), to manage 199 of our
seniors housing communities pursuant to long-term management agreements.
NOTE 2 — ACCOUNTING POLICIES
C:
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) for interim financial information set forth in
the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards
Board (“FASB”), and with the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of
results for the interim period have been included. Operating results for the three and six months
ended June 30, 2011 are not necessarily an indication of the results that may be expected for the
year ending December 31, 2011. The accompanying Consolidated Financial Statements and related notes
should be read in conjunction with the consolidated financial statements and notes thereto included
in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on
February 18, 2011. Certain prior period amounts have been reclassified to conform to the current
period presentation.
Revenue Recognition
C:
Triple-Net
Leased Properties and MOB Operations
Certain of our triple-net leased properties, including the majority of our leases with
Brookdale Senior Living Inc. (together with its subsidiaries,
“Brookdale Senior Living”), and the
majority of our MOB leases provide for periodic and determinable increases in base rent. We
recognize base rental revenues under these leases on a straight-line basis over the term of the
applicable lease. Income on our straight-line revenue is recognized when collectibility is
reasonably assured, and in the event we determine that collectibility of straight-line revenue is
not reasonably assured, we establish an allowance for estimated losses. Recognizing rental income
on a straight-line basis results in recognized revenue exceeding cash amounts contractually due
from our tenants during the first half of the term for leases that have straight-line treatment.
The cumulative excess is included in other assets, net of allowances, on our Consolidated Balance
Sheets and totaled $90.0 million and $86.3 million at June 30, 2011 and December 31, 2010,
respectively.
Our master lease agreements with Kindred Healthcare, Inc. (together with its subsidiaries,
“Kindred”) (the “Kindred Master Leases”) and certain of our other leases provide for an annual
increase in rental payments only if certain revenue parameters or other substantive contingencies
are met. We recognize the increased rental revenue under these leases only if such parameters or
contingencies are met, rather than on a straight-line basis over the term of the applicable lease.
We recognize resident fees and services, other than move-in fees, monthly as services are
provided. We recognize move-in fees on a straight-line basis over the average resident stay. Our
lease agreements with residents generally have a term of twelve to eighteen months and are
cancelable by the resident with 30 days’ notice.
We recognize income from rent, lease termination fees, management advisory services and all
other income when all of the following criteria are met in accordance with SEC Staff Accounting
Bulletin 104: (i) the applicable agreement has been fully executed and delivered; (ii) services
have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is
reasonably assured.
Long-Lived Assets and Intangibles
C:
We record investments in real estate assets at cost. We account for acquisitions using the
acquisition method and allocate the cost of the properties acquired among tangible and recognized
intangible assets and liabilities based upon their estimated fair values as of the acquisition
date. Recognized intangibles primarily include the value of in-place leases, acquired lease
contracts, tenant and customer relationships, trade names/trademarks and goodwill.
We estimate the fair value of buildings acquired on an as-if-vacant basis and depreciate the
building value over the estimated remaining life of the building. We determine the allocated value
of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon
the replacement cost and depreciate such value over the assets’ estimated remaining useful lives.
We determine the value of land by considering the sales prices of similar properties in recent
transactions or based on (i) internal analyses of recently acquired and existing comparable
properties within our portfolio or (ii) real estate tax assessed values in relation to the total
value of the asset. The fair value of acquired lease intangibles, if any, reflects (i) the estimated value
of any above and/or below market leases, determined by discounting the difference between the
estimated market rent and the in-place lease rent, the resulting intangible asset or liability of
which is amortized to revenue over the remaining life of the associated lease plus any bargain
renewal periods and (ii) the estimated value of in-place leases related to the cost to obtain tenants,
including tenant allowances, tenant improvements and leasing commissions, and an estimated value of
the absorption period to reflect the value of the rent and recovery costs foregone during a
reasonable lease-up period as if the acquired space was vacant, which
is amortized to amortization expense over the
remaining life of the associated lease.
We estimate the fair value of tenant or other customer relationships acquired, if any, by
considering the nature and extent of existing business relationships with the tenant or customer,
growth prospects for developing new business with the tenant or customer, the tenant’s credit
quality, expectations of lease renewals with the tenant, and the potential for significant,
additional future leasing arrangements with the tenant and amortize that value over the expected
life of the associated arrangements or leases, including the remaining terms of the related leases
and any expected renewal periods. We estimate the fair value of trade names/trademarks using a
royalty rate methodology and amortize that value over the estimated useful life of the trade
name/trademark.
In connection with a business combination, we may assume the rights and obligations of certain
lease agreements pursuant to which we become the lessee of a given property. We assume the lease
classification previously determined by the prior lessee absent a modification in the assumed lease
agreement. For capital leases we have assumed that contain bargain purchase options, we recognize
an asset based on the acquisition date fair value of the underlying asset and a liability based on
the fair value of the capital lease obligation. Assets recognized
under capital leases that
contain bargain purchase options are depreciated over the asset’s useful life. Assumed operating
leases, including ground leases, are assessed to determine if the lease terms are favorable or unfavorable given current
market conditions on the acquisition date. To the extent the lease arrangement is favorable or
unfavorable relative to market conditions on the acquisition date, we recognize an asset or
liability at fair value.
All
lease related intangible assets are included within acquired lease intangibles
and all lease related intangible liabilities are included within accounts payable and other liabilities on our
Consolidated Balance Sheets. In addition, operating lease intangibles are valued utilizing discounted cash flow
projections. The recognized asset or liability for these leases is amortized to rental expense over
the term of the lease and is included in our Consolidated
Statements of Income.
We calculate the fair value of long-term debt by discounting the remaining
contractual cash flows on each instrument at the current market rate for those borrowings, which we
approximate based on the rate we would expect to incur to replace each instrument on the date of
acquisition, and recognize any fair value adjustments related to long-term debt as effective yield
adjustments over the remaining term of the instrument. If applicable, we record a liability for
contingent consideration at fair value as of the acquisition date (included in accounts payable and
other liabilities on our Consolidated Balance Sheets) and reassess
the fair value at the end of each reporting
period, with any changes being recognized in earnings. Increases or decreases in the fair value
of contingent consideration can result from changes in discount periods, discount rates and
probabilities that contingencies will be met. We do not amortize goodwill, which is included in
other assets on our Consolidated Balance Sheets and represents the excess of the purchase price
paid over the fair value of the net assets of the acquired business.
Furniture,
fixtures and equipment, with a net book value of $97.0 million and $34.5 million at June 30,2011 and December 31, 2010, respectively, is included in net real estate property on our
Consolidated Balance Sheets. We record depreciation on a straight-line basis, using estimated
useful lives ranging from 20 to 50 years for buildings and improvements and three to ten years for
furniture, fixtures and equipment. Depreciation is discontinued when a property is identified as
held-for-sale.
Leases
We include assets under capital leases within net real estate assets, and we include capital
lease obligations within senior notes payable and other debt on our Consolidated Balance Sheets.
Lease payments under capital lease arrangements are segregated between interest expense and a
reduction to the outstanding principal balance, using the effective interest method. We account
for payments made pursuant to operating leases as lease expense within property-level operating
expenses in our Consolidated Statements of Income based on actual rent paid, plus or minus a
straight-line rent adjustment for minimum lease escalators.
Derivative Instruments
We recognize all derivative instruments in either other assets or accounts payable and accrued
liabilities on our Consolidated Balance Sheets at fair value as of the reporting date. We
recognize changes in the fair value of derivative instruments in other expenses on our Consolidated
Statements of Income or accumulated other comprehensive income on our Consolidated Balance Sheets,
depending on the intended use of the derivative and our designation of the instrument.
We do not use our derivative financial instruments, including interest rate caps, interest
rate swaps, and foreign currency forward contracts, for trading or speculative purposes. Our
interest rate caps were designated as having a hedging relationship with their underlying
securities and therefore qualified for hedge accounting under GAAP. Our interest rate caps are
recorded on our Consolidated Balance Sheets at fair value, and we recognize changes in the fair
value of these instruments in accumulated other comprehensive income on our Consolidated Balance
Sheets. Our interest rate swaps and foreign currency forward contracts were not designated as
having a hedging relationship with their underlying securities and therefore do not qualify for
hedge accounting under GAAP. Our interest rate swaps and foreign currency forward contracts are
recorded on our Consolidated Balance Sheets at fair value, and we recognize changes in the fair
value of these instruments in current earnings in other expenses on our Consolidated Statements of
Income.
Fair Values of Financial Instruments
C:
Fair value is a market-based measurement, not an entity-specific measurement, and should be
determined based on the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair value measurements,
FASB guidance establishes a fair value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within levels one and two of the hierarchy) and the
reporting entity’s own assumptions about market participant assumptions (unobservable inputs
classified within level three of the hierarchy).
Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in
active markets that the reporting entity has the ability to access. Level two inputs are inputs
other than quoted prices included in level one that are directly or indirectly observable for the
asset or liability. Level two inputs may include quoted prices for similar assets and liabilities
in active markets, as well as other observable inputs for the asset or liability, such as interest
rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.
Level three inputs are unobservable inputs for the asset or liability, which are typically based on
the reporting entity’s own assumptions, as there is little, if any, related market activity. If
the determination of the fair value measurement is based on inputs from different levels of the
hierarchy, the level within which the entire fair value measurement falls is based on the lowest
level input that is significant to the fair value measurement in its entirety. Our assessment of
the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or liability.
We use the following methods and assumptions in estimating fair value of financial
instruments.
•
Cash and cash equivalents: The carrying amount of unrestricted cash and cash
equivalents reported on our Consolidated Balance Sheets approximates fair value due to the
short maturity of these instruments.
•
Loans receivable: We estimate the fair value of loans receivable by discounting
the future cash flows using current interest rates at which similar loans with the same
maturities would be made to borrowers with similar credit ratings. The inputs used to
measure the fair value of our loans receivable are level two and level three inputs.
Additionally, we determine the valuation allowance for loan losses based on level three
inputs. See “Note 5—Loans Receivable.”
•
Marketable debt securities: We estimate the fair value of marketable debt
securities using quoted prices for similar assets or liabilities in active markets that we
have the ability to access. The inputs used to measure the fair value of our marketable
debt securities are level two inputs.
•
Derivative instruments: With the assistance of a third party, we estimate the
fair value of our derivative instruments, including interest rate caps, interest rate
swaps, and foreign currency forward contracts, using level two inputs. We determine the
fair value of interest rate caps using forward yield curves and other relevant
information. We estimate the fair value of interest rate swaps using alternative
financing rates derived from market-based financing rates, forward yield curves and
discount rates. We determine the fair value of foreign currency forward contracts by
estimating the future values of the two currency tranches using forward exchange rates
that are based on traded forward points and calculating a present value of the net amount
using a discount factor based on observable traded interest rates.
•
Senior notes payable and other debt: We estimate the fair value of borrowings by
discounting the future cash flows using current interest rates at which we could make
similar borrowings. The inputs used to measure the fair value of our senior notes payable
and other debt are level two inputs.
•
Contingent consideration: We estimate the fair value of contingent consideration
using probability assessments of expected future cash flows over the period in which the
obligation is expected to be settled, and by applying a discount rate that appropriately
captures a market participant’s view of the risk associated with the obligation. The
inputs we use to determine fair value of contingent consideration are considered level
three inputs.
Recently Issued or Adopted Accounting Standards
C:
In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05, Presentation of
Comprehensive Income (“ASU 2011-05”), which amends current guidance found in ASC Topic 220,
Comprehensive Income (“ASC 220”). ASU 2011-05 requires entities to present comprehensive income in
either: (i) one continuous financial statement or (ii) two separate but consecutive statements that
display net income and the components of other comprehensive income. Totals and individual
components of both net income and other comprehensive income must be included in either
presentation. The provisions of ASU 2011-05 are effective for us beginning with the first quarter
of 2012, but we do not expect ASU 2011-05 to have a significant impact on our Consolidated
Financial Statements.
C:
On January 1, 2011, we adopted ASU 2010-29, Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which impacts any
public entity that enters into business combinations that are material on an individual or
aggregate basis. ASU 2010-29 specifies that a public entity presenting comparative financial
statements should disclose revenues and earnings of the combined entity as though the business
combination(s) that occurred during the year had occurred at the beginning of the prior annual
reporting period when preparing the pro forma financial information for both the current and prior
reporting periods. This guidance, which is effective for business combinations consummated in
periods beginning after December 15, 2010, also requires that pro forma disclosures be accompanied
by a narrative description regarding the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination(s) included in reported pro forma
revenues and earnings. We have presented supplementary pro forma information related to our
acquisition of substantially all of the real estate assets and working capital of Atria Senior
Living Group, Inc. (together with its affiliates, “Atria Senior Living”) in May 2011 and our
acquisition of Nationwide Health Properties, Inc. (“NHP”) in July 2011 in “Note 4—Acquisitions of
Real Estate Property.”
On January 1, 2011, we adopted ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment
Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28
states that if a reporting unit has a carrying amount equal to or less than zero and there are
qualitative factors that indicate it is more likely than not that a goodwill impairment exists,
Step 2 of the goodwill impairment test must be performed. The adoption of ASU 2010-28 did not
impact our Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”), which expands required disclosures related to an entity’s fair value
measurements. Certain provisions of ASU 2010-06 were effective for interim and annual reporting
periods beginning after December 15, 2009, and we adopted those provisions as of January 1, 2010.
The remaining provisions, which were effective for interim and annual reporting periods beginning
after December 15, 2010, require additional disclosures related to purchases, sales, issuances and
settlements in an entity’s reconciliation of recurring level three investments. We adopted the
final provisions of ASU 2010-06 as of January 1, 2011. The adoption of ASU 2010-06 did not impact
our Consolidated Financial Statements.
NOTE 3 — CONCENTRATION OF CREDIT RISK
As of June 30, 2011, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated
approximately 31.5%, 24.4%, 12.6% and 8.4%, respectively, of our properties based on their gross
book value. Also, as of June 30, 2011, seniors housing communities constituted approximately 76.4%
of our portfolio based on gross book value, with skilled nursing facilities, hospitals, MOBs and
other healthcare assets collectively comprising the remaining 23.6%. Our properties were located
in 43 states, the District of Columbia and two Canadian provinces as of June 30, 2011, with
properties in only one state (California) accounting for 10% or more of our total revenues for the
six months then ended.
Triple-Net Leased Properties
Approximately 19.8% and 25.2% of our total revenues and 32.3% and 37.0% of our total net
operating income (“NOI,” which is defined as total revenues, excluding interest and other income,
less property-level operating expenses and medical office building services costs) (including
amounts in discontinued operations) for the six months ended June 30, 2011 and 2010, respectively,
were derived from our four Kindred Master Leases. Approximately 9.3% and 12.5% of our total
revenues and 15.1% and 18.3% of our total NOI (including amounts in discontinued operations) for
the six months ended June 30, 2011 and 2010, respectively, were derived from our lease agreements
with Brookdale Senior Living. Each of the Kindred Master Leases and our leases with Brookdale
Senior Living is a triple-net lease pursuant to which the tenant is required to pay all insurance,
taxes, utilities and maintenance and repairs related to the properties and to comply with the terms
of the mortgage financing documents, if any, affecting the properties.
Because Kindred and Brookdale Senior Living are large tenants and account for a significant
portion of our total revenues and NOI, their financial condition and ability and willingness to
satisfy their obligations under their respective leases and other agreements with us, and their
willingness to renew those leases upon expiration of the terms thereof, have a considerable impact
on our results of operations and ability to service our indebtedness and to make distributions to
our stockholders. We cannot assure you that either Kindred or Brookdale Senior Living will have
sufficient assets, income and access to financing to enable it to satisfy its obligations, and any
inability or unwillingness on its part to do so would have a material adverse effect on our
business, financial condition, results of operations and liquidity, on our ability to service our
indebtedness and other obligations and on our ability to make distributions to our stockholders, as
required for us to continue to qualify as a REIT (a “Material Adverse Effect”). We also cannot
assure you that either Kindred or Brookdale Senior Living will elect to renew its leases with us
upon expiration of the initial base terms or any renewal terms thereof or that, if some or all of
those leases are not renewed, we will be able to reposition the affected properties on a timely
basis or on the same or better terms, if at all.
As of June 30, 2011, Sunrise and Atria, collectively, provided comprehensive property
management and accounting services with respect to 196 of our seniors housing communities for which
we pay an annual management fee pursuant to long-term management agreements. Each management
agreement with Sunrise has a term of 30 years, and each management agreement with Atria has a term
of ten years, subject to successive automatic ten-year renewal periods. Because Sunrise and Atria
do not lease properties from us, we are not directly exposed to their credit risk. However,
Sunrise’s and Atria’s inability to efficiently and effectively manage our properties and to provide
timely and accurate accounting information with respect thereto could have a Material Adverse
Effect on us. Although we have various rights as owner under the Sunrise and Atria management
agreements, we rely on Sunrise’s and Atria’s personnel, good faith, expertise, historical
performance, technical resources and information systems, proprietary information and judgment to
manage our seniors housing communities efficiently and effectively. We also rely on Sunrise and
Atria to set resident fees and otherwise operate those properties in compliance with our management
agreements. Sunrise’s or Atria’s inability or unwillingness to satisfy its obligations under our
management agreements, changes in Sunrise’s or Atria’s senior management or any adverse
developments in Sunrise’s or Atria’s business and affairs or financial condition could have a
Material Adverse Effect on us.
Kindred, Brookdale Senior Living, Sunrise and Atria Information
Each of Kindred, Brookdale Senior Living and Sunrise is subject to the reporting requirements
of the 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 Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Quarterly
Report on Form 10-Q is derived from filings made by Kindred, Brookdale Senior Living or Sunrise, as
the case may be, with the SEC or other publicly available information, or has been provided to us
by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either
through an independent investigation or by reviewing Kindred’s, Brookdale Senior Living’s or
Sunrise’s public filings. We have no reason to
believe that this information is inaccurate in any material respect, but we cannot assure you
that all of this information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s
filings with the SEC can be found at the SEC’s website at www.sec.gov. We are providing this data
for informational purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior
Living’s and Sunrise’s publicly available filings from the SEC.
Atria is not subject to the reporting requirements of the SEC. The information related to
Atria contained or referred to within this Quarterly Report on Form 10-Q is derived from
information provided to us by Atria. We have not verified this information through an independent
investigation. We have no reason to believe that this information is inaccurate in any material
respect, but we cannot assure you that all of this information is accurate.
NOTE 4 — ACQUISITIONS OF REAL ESTATE PROPERTY
We engage in acquisition activity primarily to invest in additional seniors housing and
healthcare properties and achieve an expected yield on investment, to grow and diversify our
portfolio and revenue base and to reduce our dependence on any single operator, geography or asset
type.
Atria Senior Living Acquisition
On May 12, 2011, we acquired substantially all of the real estate assets and working capital
of privately-owned Atria Senior Living for a total purchase price of $3.4 billion, which we funded
in part through the issuance of 24.96 million shares of our common stock (which shares had a total
value of $1.38 billion based on the May 12, 2011 closing price of our common stock of $55.33 per
share). As a result of the transaction, we added to our senior living operating portfolio 117
private pay seniors housing communities and one development land parcel located
primarily in affluent coastal markets such as the New York metropolitan area, New England and
California. Prior to the closing, Atria Senior Living spun off its management operations to a
newly formed entity, Atria, which continues to operate the acquired assets under long-term
management agreements with us. For both the three and six months ended June 30, 2011, we recorded
revenues and NOI from the acquired assets of $85.7 million and $26.2 million, respectively.
We are accounting for the acquisition under the acquisition method in accordance with ASC
Topic 805, Business Combinations (“ASC 805”), and our initial accounting for this business
combination is essentially complete. The following table summarizes the acquisition date fair
values of the assets acquired and liabilities assumed, which we determined using level two and
level three inputs (in thousands):
C:
Land
$
293,550
Buildings and improvements
2,941,478
Acquired lease intangibles
170,360
Other assets
188,440
Total assets acquired
3,593,828
Notes payable and other debt
1,621,641
Deferred tax liability
48,087
Other liabilities
200,962
Total liabilities assumed
1,870,690
Net assets acquired
1,723,138
Cash acquired
77,718
Equity issued
1,380,956
Total cash used
$
264,464
As
of June 30, 2011, we had incurred a total of $51.0 million of acquisition-related costs
related to the Atria Senior Living transaction, all of which were expensed as incurred and included
in merger-related expenses and deal costs on our Consolidated Statements of Income for the
applicable periods. For the three and six months ended June 30,2011, we expensed $43.5 million and
$46.7 million, respectively, of acquisition-related costs related to the Atria Senior Living
acquisition.
As partial consideration for the Atria Senior Living acquisition, the sellers received the
right to earn additional amounts (“contingent consideration”) based upon the achievement of certain
performance metrics, including the future operating results of the acquired assets, and other
factors. The contingent consideration, if any, will be payable to the sellers following the
applicable measurement date for the period ending December 31, 2014 or December 31, 2015, at the
election of the sellers. We cannot determine the actual amount of contingent consideration, if
any, that may become due to the sellers because it is dependent on various factors, such as the
future performance of the acquired assets and our equity multiple, which are subject to many risks
and uncertainties beyond our control. We are also unable to estimate a range of potential amounts
for the same reason. Therefore, we estimated the fair value of contingent consideration as of the
acquisition date and as of June 30, 2011 using probability assessments of expected future cash
flows over the period in which the obligation is expected to be settled, and by applying a discount
rate that appropriately captures a market participant’s view of the risk associated with the
obligation. This contingent consideration liability is carried on our
Consolidated Balance Sheets
as of June 30, 2011 at its fair value, and we will record any changes in fair value in earnings on
our Consolidated Statements of Income. As of the acquisition date and June 30, 2011, the estimated
fair value of contingent consideration was $44.2 million, which
is included in accounts payable and other liabilities on our
Consolidated Balance Sheets, and our Consolidated Statements of Income
for the three and six months ended June 30, 2011 reflect no change in the fair value of contingent
consideration.
NHP Acquisition
On
July 1, 2011, we acquired NHP in a stock-for-stock transaction.
Pursuant to the terms and subject to the conditions set forth in the agreement and plan of merger
dated as of February 27, 2011, at the effective time of the merger, each outstanding share of NHP
common stock (other than shares owned by us or any of our subsidiaries or any wholly owned
subsidiary of NHP) was converted into the right to receive 0.7866 shares of our common stock, with
cash paid in lieu of fractional shares. As a result of the
transaction, we added 654 seniors housing and healthcare properties to our portfolio. Since the transaction was
consummated after June 30, 2011, we recognized no revenues or NOI from NHP’s operations for
the three and six months ended June 30, 2011.
We are accounting for the NHP acquisition under the acquisition method in accordance with ASC
805. The preliminary purchase price is being allocated among tangible and
intangible real estate assets ($8.4 billion), other liabilities,
net ($0.8 billion), debt ($2.2 billion) and
equity issued ($5.4 billion). Because the NHP transaction was consummated after June 30, 2011, our
initial accounting for the NHP business combination is a preliminary assessment only. Our
assessment of fair value and the allocation of the NHP purchase price to the identified tangible
and intangible assets is our current best estimate of fair value.
As
of June 30, 2011, we had incurred a total of $12.3 million of acquisition-related costs
related to the NHP transaction, all of which we expensed as incurred and included in merger-related
expenses and deal costs on our Consolidated Statements of Income for the applicable periods. For
the three and six months ended June 30, 2011, we expensed
$10.4 million and $12.3 million,
respectively, of acquisition-related costs related to the NHP acquisition.
Lillibridge Acquisition
On July 1, 2010, we completed the acquisition of businesses owned and operated by Lillibridge
and its related entities and their real estate interests in 96 MOBs and ambulatory facilities for
approximately $381 million, including the assumption of $79.5 million of mortgage debt.
As a result of the transaction, we acquired: a 100% interest in Lillibridge’s property
management, leasing, marketing, facility development, and advisory services business; a 100%
interest in 38 MOBs; a 20% joint venture interest in 24 MOBs; and a 5% joint venture interest in 34
MOBs. We are the managing member of these joint ventures and the property manager for the joint
venture properties. Two institutional third parties hold the controlling interests in these joint
ventures, and we have a right of first offer on those interests. We funded the acquisition with
cash on hand, borrowings under our unsecured revolving credit facilities and the assumption of
mortgage debt. In connection with the acquisition, $132.7 million of mortgage debt was repaid.
Other 2010 Acquisitions
In December 2010, we acquired Sunrise’s noncontrolling interests in 58 of our seniors housing
communities currently managed by Sunrise for a total valuation of approximately $186 million,
including assumption of Sunrise’s share of mortgage debt totaling $144 million. The noncontrolling
interests acquired represented between 15% and 25% ownership interests in the communities, and we
now own 100% of all 79 of our Sunrise-managed seniors housing communities. We recorded the
difference between the consideration paid and the noncontrolling interest balance as a component of
equity in capital in excess of par value on our Consolidated Balance Sheets.
Also in December 2010, we purchased five MOBs under our Lillibridge platform for a purchase
price of $36.6 million.
The following table illustrates the effect on net income and earnings per share as if we had
consummated the Atria Senior Living and NHP acquisitions as of January 1, 2010:
Income from continuing operations attributable to common stockholders
90,650
73,466
158,181
137,704
Discontinued operations
—
5,852
—
6,597
Net income attributable to common stockholders
90,650
79,318
158,181
144,301
Earnings per common share:
Basic:
Income from continuing operations attributable to common
stockholders
$
0.32
$
0.26
$
0.55
$
0.49
Discontinued operations
—
0.02
—
0.02
Net income attributable to common stockholders
$
0.32
$
0.28
$
0.55
$
0.51
Diluted:
Income from continuing operations attributable to common
stockholders
$
0.31
$
0.26
$
0.55
$
0.49
Discontinued operations
—
0.02
—
0.02
Net income attributable to common stockholders
$
0.31
$
0.28
$
0.55
$
0.51
Weighted average shares used in computing earnings per common share:
Basic
287,357
281,419
286,282
281,341
Diluted
289,040
282,249
287,926
282,014
Acquisition-related costs related to the Atria Senior Living and NHP acquisitions are not
expected to have a continuing impact and therefore have been excluded from these pro forma results.
The pro forma results also do not include the impact of any synergies that may be achieved in the
transactions, any lower costs of borrowing resulting from the transactions or any strategies that
management may consider in order to continue to efficiently manage our operations, nor do they give
pro forma effect to any other acquisitions, dispositions or capital markets transactions that we
completed during the periods presented. These pro forma results are not necessarily indicative of
the operating results that would have been obtained had the Atria Senior Living and NHP
acquisitions occurred at the beginning of the periods presented, nor are they necessarily
indicative of future operating results.
NOTE 5 — LOANS RECEIVABLE
As of June 30, 2011 and December 31, 2010, we had $634.5 million and $149.3 million,
respectively, of net loans receivable relating to seniors housing and healthcare companies or
properties.
In June 2011, we made a first mortgage loan in the aggregate principal amount of $12.9
million, bearing interest at a fixed rate of 9.0% per annum and maturing in 2016.
In May 2011, we made a senior unsecured term loan to NHP in the aggregate principal amount of
$600.0 million, bearing interest at a fixed rate of 5.0% per annum and maturing in 2021.
In April 2011, we received proceeds of $112.4 million in final repayment of a first mortgage
loan and recognized a gain of $3.3 million in income from loans and investments on our Consolidated Statements of
Income in connection with this repayment in the second quarter of 2011.
In March 2011, we received proceeds of $19.9 million in final repayment of a first mortgage
loan and recognized a gain of $0.8 million in income from loans and investments on our Consolidated Statements of
Income in connection with this repayment in the first quarter of 2011.
NOTE 6 — INVESTMENTS IN UNCONSOLIDATED ENTITIES
We report investments in unconsolidated entities, which we acquired in connection with the
2010 Lillibridge acquisition, over whose operating and financial policies we have the ability to
exercise significant influence under the equity method of accounting. We serve as the managing
member of each unconsolidated entity and provide various services in exchange for fees and
reimbursements. Our joint venture partners have significant participating rights, and, therefore,
we are not required to consolidate these entities. Additionally, these entities are not considered
variable interest entities as they are viable entities controlled by equity holders with sufficient
capital. At June 30, 2011, we owned interests in 58 properties that were accounted for under the
equity method. Our net investment in these properties as of June 30, 2011 and December 31, 2010
was $14.8 million and $15.3 million, respectively. For the three months ended June 30, 2011 and
2010, we recorded a loss from unconsolidated entities of $0.1 million and $0, respectively. For
the six months ended June 30, 2011 and 2010, we recorded a loss from unconsolidated entities of
$0.3 million and $0, respectively.
Remaining weighted average amortization period of
lease-related intangible assets in years
9.1
18.5
Intangible liabilities:
Below market lease intangibles
$
51,333
$
22,398
Accumulated amortization
(14,393
)
(12,495
)
Net intangible liabilities
$
36,940
$
9,903
Remaining weighted average amortization period of
lease-related intangible liabilities in years
6.0
6.9
Above market lease intangibles and in-place and other lease intangibles are included in
acquired lease intangibles within real estate investments on our Consolidated Balance Sheets.
Other intangibles (including non-compete agreements and trade names/trademarks) and goodwill
are included in other assets on our Consolidated Balance Sheets. Below market lease intangibles are included in accounts payable
and other liabilities on our Consolidated Balance Sheets. The net amortization expense related to
these intangibles was $14.8 million and $0.8 million for the three months ended June 30, 2011 and
2010, respectively. The net amortization expense related to these
intangibles was $17.8 million and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. The estimated net
amortization expense related to these intangibles for each of the next five years is as follows:
2012 —$63.1 million; 2013 —$7.6 million; 2014 —$7.1 million; 2015 —$6.0 million; and 2016
—$4.6 million.
As of June 30, 2011, our joint venture partners’ share of total debt was $10.5 million with
respect to four of our properties owned through consolidated joint ventures. As of December 31,2010, our joint venture partners’ share of total debt was $4.8 million with respect to three of our
properties owned through consolidated joint ventures. Total debt does not include our portion of
debt related to our investments in unconsolidated entities, which was $45.5 million and $45.9
million at June 30, 2011 and December 31, 2010, respectively.
As of June 30, 2011, our indebtedness (excluding capital lease obligations) had the following
maturities:
C:
Unsecured
Principal Amount
Revolving Credit
Scheduled Periodic
Due at Maturity
Facilities (1)
Amortization
Total Maturities
(In thousands)
2011
$
230,700
$
—
$
20,137
$
250,837
2012
185,684
139,500
41,821
367,005
2013
558,075
—
35,701
593,776
2014
186,740
—
32,208
218,948
2015
575,377
—
25,509
600,886
Thereafter
2,436,484
—
153,438
2,589,922
Total maturities
$
4,173,060
$
139,500
$
308,814
$
4,621,374
(1)
At June 30, 2011, we had $26.7 million of unrestricted cash and cash equivalents, for
$112.8 million of net borrowings outstanding under our unsecured revolving credit
facilities.
Unsecured Revolving Credit Facilities and Term Loan
As of June 30, 2011, we had $1.0 billion of aggregate borrowing capacity under our unsecured
revolving credit facilities, all of which matures on April 26, 2012. Borrowings under our
unsecured revolving credit facilities bear interest at a fluctuating rate per annum (based on U.S.
or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate), plus
an applicable percentage based on our consolidated leverage. At June 30, 2011, the applicable
percentage was 2.30%. Our unsecured revolving credit facilities also have a 20 basis point facility
fee. At June 30, 2011, we had $139.5 million of borrowings outstanding, $9.3 million of
outstanding letters of credit and $851.2 million of available borrowing capacity under our
unsecured revolving credit facilities.
In connection with the NHP acquisition, we acquired additional liquidity from an $800.0
million senior unsecured term loan previously extended to NHP. At our option, borrowings under the
term loan, which are available from time to time on a non-revolving basis, bear interest at the
applicable LIBOR plus 1.50% (1.69% at June 30, 2011) or the
“Alternate Base Rate” plus 0.50% (3.75%
at June 30, 2011). We pay a facility fee of 0.10% per annum on the unused commitments under the
term loan agreement. Borrowings under the term loan mature on June 1, 2012. As of the date of
this filing, there was approximately $250.0 million of borrowings outstanding under the term loan,
and we were in compliance with all covenants under the term loan.
Mortgages
We assumed mortgage debt of $1.2 billion and $0.4 billion, respectively, in connection with
the Atria Senior Living and NHP acquisitions.
In February 2011, we repaid in full mortgage loans outstanding in the aggregate principal
amount of $307.2 million and recognized a loss on extinguishment of debt of $16.5 million in
connection with this repayment in the first quarter of 2011.
Senior Notes
In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750% senior
notes due 2021, at a public offering price equal to 99.132% of par for total proceeds of $693.9
million, before the underwriting discount and expenses.
In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior notes
due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the
redemption date, pursuant to the call option contained in the indenture governing the notes. As a
result, we paid a total of approximately $206.5 million, plus accrued and unpaid interest, on the
redemption date and expect to recognize a loss on extinguishment of debt of $8.7 million during the
third quarter of 2011.
As a result of the NHP acquisition, we assumed approximately $991.7 million aggregate
principal amount of outstanding unsecured senior notes of NHP. On July 15, 2011, we repaid in
full, at par, $339.0 million principal amount then outstanding of NHP’s 6.50% senior notes due 2011
upon maturity. The remaining NHP senior notes outstanding bear interest at fixed rates ranging
from 6.00% to 8.25% per annum and have maturity dates ranging between
July 1, 2012 and July 7, 2038, subject in certain cases to
earlier repayments at the option of the holder.
Capital Leases
As of June 30, 2011, we leased from NHP twelve seniors housing communities pursuant to
arrangements that we assumed in connection with the Atria Senior Living acquisition and that were
accounted for as capital leases. We have excluded these leases with NHP (which was a $209.9
million capital lease obligation as of June 30, 2011) for purposes of the presentation below, as
they are being eliminated in consolidation within our Consolidated Balance Sheet as of July 1,2011.
As of June 30, 2011, we leased from another party eight seniors housing communities pursuant
to arrangements that we also assumed in connection with the Atria Senior Living acquisition and
that were accounted for as capital leases. Rent under the capital leases is subject to increase
based upon changes in the Consumer Price Index or gross revenues attributable to the property,
subject to certain limits, as defined in the individual lease agreements. Pursuant to the capital
lease agreements, we have bargain options to purchase each leased property and an option to
exercise renewal terms.
Future minimum lease payments required under the capital lease agreements, including amounts
that would be due under purchase options, as of June 30, 2011 are as follows (in thousands):
C:
2011
$
4,686
2012
9,447
2013
9,573
2014
9,700
2015
9,826
Thereafter
172,553
Total minimum lease payments
215,785
Less: Amount related to interest
(72,554
)
$
143,231
Net assets held under capital leases are included in net real estate investments on our
Consolidated Balance Sheets and totaled $228.9 million and $0 as of June 30, 2011 and December 31,2010, respectively.
NOTE 9 — FAIR VALUES OF FINANCIAL INSTRUMENTS
As of June 30, 2011 and December 31, 2010, the carrying amounts and fair values of our
financial instruments were as follows:
Fair value estimates are subjective in nature and depend upon several important assumptions,
including estimates of future cash flows, risks, discount rates and relevant comparable market
information associated with each financial instrument. The use of different market assumptions and
estimation methodologies may have a material effect on the reported estimated fair value amounts.
Accordingly, the estimates presented above are not necessarily indicative of the amounts we would
realize in a current market exchange.
At June 30, 2011, we held corporate marketable debt securities, classified as
available-for-sale, with an aggregate amortized cost basis and fair value of $40.7 million and
$43.8 million, respectively, and included these securities
within other assets on our Consolidated Balance
Sheets. At December 31, 2010, our marketable debt securities had an aggregate amortized cost basis
and fair value of $61.9 million and $66.7 million, respectively. The contractual maturities of our
marketable debt securities range from October 1, 2012 to April 15, 2016. In January and March
2011, we sold certain marketable debt securities and received proceeds of approximately $10.6
million and $12.5 million, respectively. We recognized aggregate gains from these sales of approximately
$1.8 million in income from loans and investments
on our Consolidated Statements of Income during the first quarter of 2011.
Litigation Relating to the Sunrise REIT Acquisition
On May 3, 2007, we filed a lawsuit against HCP, Inc. (“HCP”) in the United States District
Court for the Western District of Kentucky (the “District Court”), entitled Ventas, Inc. v. HCP,
Inc., Case No. 07-cv-238-JGH. We asserted claims of tortious interference with contract and
tortious interference with prospective business advantage. Our complaint alleged that HCP
interfered with our purchase agreement to acquire the assets and liabilities of Sunrise Senior
Living Real Estate Investment Trust (“Sunrise REIT”) and with the process for unitholder
consideration of the purchase agreement. The complaint alleged, among other things, that HCP made
certain improper and misleading public statements and/or offers to acquire Sunrise REIT and that
HCP’s actions caused us to suffer substantial damages, including, among other things, the payment
of materially greater consideration to acquire Sunrise REIT resulting from the substantial increase
in the purchase price above the original contract price necessary to obtain unitholder approval and
increased costs associated with the delay in closing the acquisition, including increased costs to
finance the transaction as a result of the delay.
HCP brought counterclaims against us alleging misrepresentation and negligent
misrepresentation by Sunrise REIT related to its sale process, claiming that we were responsible
for those actions as successor. HCP sought compensatory and punitive damages. On March 25, 2009,
the District Court granted us judgment on the pleadings against all counterclaims brought by HCP
and dismissed HCP’s counterclaims with prejudice. Thereafter, the District Court confirmed the
dismissal of HCP’s counterclaims.
On July 16, 2009, the District Court denied HCP’s summary judgment motion as to our claim for
tortious interference with business advantage, permitting us to present that claim against HCP at
trial. The District Court granted HCP’s motion for summary judgment as to our claim for tortious
interference with contract and dismissed that claim. The District Court also ruled that we could
not seek to recover a portion of our alleged damages.
On September 4, 2009, the jury unanimously held that HCP tortiously interfered with our
business expectation to acquire Sunrise REIT at the agreed price by employing significantly
wrongful means such as fraudulent misrepresentation, deceit and coercion. The jury awarded us
$101.6 million in compensatory damages, which is the full amount of damages the District Court
permitted us to seek at trial. The District Court entered judgment on the jury’s verdict on
September 8, 2009.
On November 16, 2009, the District Court affirmed the jury’s verdict and denied all of HCP’s
post-trial motions, including a motion requesting that the District Court overturn the jury’s
verdict and enter judgment for HCP or, in the alternative, award HCP a new trial. The District
Court also denied our motion for pre-judgment interest and/or to modify the jury award to increase
it to reflect the currency rates in effect on September 8, 2009, the date of entry of the judgment.
On November 17, 2009, HCP appealed the District Court’s judgment to the United States Court of
Appeals for the Sixth Circuit (the “Sixth Circuit”). HCP argued that the judgment against it
should be vacated and the case remanded for a new trial and/or that judgment should be entered in
its favor as a matter of law.
On November 24, 2009, we filed a cross-appeal to the Sixth Circuit. In addition to
maintaining the full benefit of our favorable jury verdict, in our cross-appeal, we asserted that
we are entitled to substantial monetary relief in addition to the jury verdict, including punitive
damages, additional compensatory damages and pre-judgment interest.
On December 11, 2009, HCP posted a $102.8 million letter of credit in our favor to serve as
security to stay execution of the jury verdict pending the appellate proceedings.
On May 17, 2011, the Sixth Circuit unanimously affirmed the $101.6 million jury verdict in our
favor and ruled that we are entitled to seek punitive damages against HCP for its conduct. The
Sixth Circuit also denied our appeal seeking additional compensatory damages and pre-judgment
interest. On June 27, 2011, the Sixth Circuit denied HCP’s motion to request a rehearing with
respect to its decision.
On July 5, 2011, the Sixth Circuit issued a mandate terminating the appellate proceedings and
transferring jurisdiction back to the District Court for the enforcement of the $101.6 million
compensatory damages award and the trial for punitive damages. On July 26, 2011, the District
Court issued an order scheduling a jury trial on the matter of punitive damages for February21, 2012.
We are vigorously pursuing proceedings in the District Court on the matter of punitive damages
and to collect the $101.6 million compensatory damages judgment against HCP.
Litigation Relating to the NHP Acquisition
In the weeks following the announcement of our acquisition of NHP on February 28, 2011,
purported stockholders of NHP filed seven lawsuits against NHP and its directors. Six of these
lawsuits also named Ventas, Inc. as a defendant and five named our subsidiary, Needles Acquisition
LLC, as a defendant. The purported stockholder plaintiffs commenced these actions in two
jurisdictions: the Superior Court of the State of California, Orange County (the “California State
Court”); and the Circuit Court for Baltimore City, Maryland (the “Maryland State Court”). All of
these actions were brought as putative class actions, and two also purport to assert derivative
claims on behalf of NHP. All of these stockholder complaints allege that NHP’s directors breached
certain alleged duties to NHP’s stockholders by approving the merger agreement with us, and certain
complaints allege that NHP aided and abetted those breaches. Those complaints that name Ventas,
Inc. and Needles Acquisition LLC allege that we aided and abetted the purported breaches of certain
alleged duties by NHP’s directors. All of the complaints request an injunction of the merger.
Certain of the complaints also seek damages.
In the California State Court, the following actions were filed purportedly on behalf of NHP
stockholders: on February 28, 2011, a putative class action entitled Palma v. Nationwide Health
Properties, Inc., et al.; on March 3, 2011, a putative class action entitled Barker v. Nationwide
Health Properties, Inc., et al.; and on March 3, 2011, a putative class action entitled Davis v.
Nationwide Health Properties, Inc., et al., which was subsequently amended on March 11, 2011 under
the caption Davids v. Nationwide Health Properties, Inc., et al. Each action names NHP and members
of the NHP board of directors as defendants. The Barker and Davids actions also name Ventas, Inc.
as a defendant, and the Davids action names Needles Acquisition LLC as a defendant. Each complaint
alleges, among other things, that NHP’s directors breached certain alleged duties by approving the
merger agreement between us and NHP because the proposed transaction purportedly fails to maximize
stockholder value and provides the directors personal benefits not shared by NHP stockholders, and
the Barker and Davids actions allege that we aided and abetted those purported breaches. Along
with other relief, the complaints seek an injunction against the closing of the proposed merger.
On April 4, 2011, the defendants demurred and moved to stay the Palma, Barker, and Davids actions
in favor of the parallel litigation in the Maryland State Court described below. On April 27,2011, all three actions were consolidated pursuant to a Stipulation and Proposed Order on
Consolidation of Related Actions signed by the parties on March 22, 2011. On May 12, 2011, the
California State Court granted the defendants’ motion to stay.
In the Maryland State Court, the following actions were filed purportedly on behalf of NHP
stockholders: on March 7, 2011, a putative class action entitled Crowley v. Nationwide Health
Properties, Inc., et al.; on March 10, 2011, a putative class action entitled Taylor v. Nationwide
Health Properties, Inc., et. al.; on March 17, 2011, a putative class action entitled Haughey
Family Trust v. Pasquale, et al.; and on March 31, 2011, a putative class action entitled Rappoport
v. Pasquale, et al. All four actions name NHP, its directors, Ventas, Inc. and Needles Acquisition
LLC as defendants. All four actions allege, among other things, that NHP’s directors breached
certain alleged duties by approving the merger agreement between us and NHP because the proposed
transaction purportedly fails to maximize stockholder value and provides certain directors personal
benefits not shared by NHP stockholders and that we aided and abetted those purported breaches. In
addition to asserting direct claims on behalf of a putative class of NHP shareholders, the Haughey
and Rappoport actions purport to bring derivative claims on behalf of NHP, asserting breaches of
certain alleged duties by NHP’s directors in connection with their approval of the proposed
transaction. All four actions seek to enjoin the proposed merger, and the Taylor action seeks
damages.
On March 30, 2011, pursuant to stipulation of the parties, the Maryland State Court entered an
order consolidating the Crowley, Taylor and Haughey actions. The Rappoport action was consolidated
with the other actions on April 15, 2011.
On April 1, 2011, pursuant to stipulation of the parties, the Maryland State Court entered an
order: (i) certifying a class of NHP shareholders; and (ii) providing for the plaintiffs to file a
consolidated amended complaint. The plaintiffs filed a consolidated amended complaint on April 19,2011, which the defendants moved to dismiss on April 29, 2011. Plaintiffs opposed that motion on
May 9, 2011. Plaintiffs moved for expedited discovery on April 19, 2011, and the defendants
simultaneously opposed that motion and moved for a protective order staying discovery on April 26,2011. The Maryland State Court denied plaintiffs’ motion for expedited discovery and granted
defendants’ motion for a protective order on May 3, 2011. On May 6, 2011, plaintiffs moved for
reconsideration of the Maryland State Court’s grant of the protective order. The Maryland State
Court denied the plaintiffs’ motion for reconsideration on May 11, 2011. On May 27, 2011,
the Maryland State Court entered an order dismissing the consolidated
action with prejudice. Plaintiffs moved
for reconsideration of that order on June 6, 2011.
On June 9, 2011, we and NHP agreed on a settlement in principle with the plaintiffs in the
consolidated action pending in Maryland State Court, which required
us and NHP to make certain supplemental disclosures to stockholders
concerning the merger. We and NHP made the supplemental
disclosures on June 10, 2011. The settlement is subject to appropriate
documentation by the parties and approval by the Maryland State Court.
We believe that each of these actions is without merit.
Proceedings against Tenants, Operators and Managers
From time to time, Kindred, Brookdale Senior Living, Sunrise, Atria and our other tenants,
operators and managers are parties to certain legal actions, regulatory investigations and claims
arising in the conduct of their business and operations. Even though we are not party to these
proceedings, the unfavorable resolution of any such actions, investigations or claims could,
individually or in the aggregate, materially adversely affect such tenants’, operators’ or
managers’ liquidity, financial condition or results of operations and their ability to satisfy
their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Indemnified and Defended by Third Parties
From time to time, we are party to certain legal actions, regulatory investigations and claims
against which third parties are contractually obligated to indemnify and defend us and hold us harmless.
The tenants of our triple-net leased properties and, in some cases, affiliates of the tenants are
required by the terms of their leases and other agreements with us to indemnify, defend and hold us
harmless against certain actions, investigations and claims arising in the course of their business and
related to the operations of our triple-net leased properties. In addition, third parties from
whom we acquired certain of our assets are required by the terms of the related conveyance
documents to indemnify, defend and hold us harmless against certain actions, investigations and
claims related to the conveyed assets and arising prior to our ownership. In some cases, we hold a
portion of the purchase price consideration in escrow as collateral for the indemnification
obligations of third parties related to acquired assets. Certain tenants and other obligated third
parties are currently defending us in these types of matters. We cannot assure you that our
tenants or their affiliates or other obligated third parties will continue to defend us in these
matters, that our tenants or their affiliates or other obligated third parties will have sufficient
assets, income and access to financing to enable them to satisfy their defense and indemnification
obligations to us or that any purchase price consideration held in escrow will be sufficient to
satisfy claims for which we are entitled to indemnification. The unfavorable resolution of any
such actions, investigations or claims could, individually or in the aggregate, materially
adversely affect our tenants’ or other obligated third parties’ liquidity, financial condition or
results of operations and their ability to satisfy their respective obligations to us, which, in
turn, could have a Material Adverse Effect on us.
Proceedings Arising in Connection with Senior Living and MOB Operations; Other Litigation
From time to time, we are also party to various legal actions, regulatory investigations and
claims (some of which may not be insured) arising in connection with our senior living and MOB
operations or otherwise in the course of our business. In limited circumstances, the manager of
the applicable seniors housing community or MOB may be contractually obligated to indemnify, defend
and hold us harmless against such actions, investigations and claims. It is the opinion of
management that, except as otherwise set forth in this Note 10, the disposition of any such actions,
investigations and claims that are currently pending will not, individually or in the aggregate,
have a Material Adverse Effect on us. However, regardless of their
merits, these matters may force us to expend significant financial
resources. We are unable to predict the ultimate outcome of
these actions, investigations and claims, and if management’s assessment of our liability with
respect thereto is incorrect, such actions, investigations and
claims could have a Material Adverse Effect on us.
NOTE 11 — INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the
“Code”), commencing with the year ended December 31, 1999. We have also elected for certain of our
subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are
subject to federal and state income taxes. Although the TRS entities were not liable for any cash
federal income taxes for the six months ended June 30, 2011, their federal income tax liabilities
may increase in future periods as we exhaust net operating loss carryforwards and as our senior
living operations and MOB operations reportable segments grow. Such increases could be significant.
Our consolidated provision for income taxes for the three months ended June 30, 2011 and 2010
was a benefit of $6.2 million and an expense of $0.4 million, respectively. These amounts were
adjusted by income tax expense of $0 million and $0.6 million, respectively, related to the
noncontrolling interest share of net income. Our consolidated provision for income taxes for the
six months ended June 30, 2011 and 2010 was a benefit of $9.4 million and an expense of $0.7
million, respectively. These amounts were adjusted by income tax expense of $0 million and $1.0
million, respectively, related to the noncontrolling interest share of net income. A substantial
portion of the $9.4 million benefit relates to the reversal of the deferred tax liability
established for the Atria Senior Living acquisition. Realization of a deferred tax benefit related
to net operating losses is dependent in part upon generating sufficient taxable income in future
periods. Our net operating loss carryforwards begin to expire in 2024 with respect to our TRS
entities and in 2020 with respect to our other entities.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and
liabilities. Net deferred tax liabilities with respect to our TRS entities totaled $279.7 million
and $241.3 million at June 30, 2011 and December 31, 2010, respectively, and related primarily to
differences between the financial reporting and tax bases of fixed and intangible assets and to net
operating losses. This amount includes the initial net deferred tax liability related to the Atria
Senior Living acquisition of $48.1 million as adjusted for activity for the period from May 12,2011 through June 30, 2011.
Generally, we are subject to audit under the statute of limitations by the Internal Revenue
Service for the year ended December 31, 2007 and subsequent years and are subject to audit by state
taxing authorities for the year ended December 31, 2006 and subsequent years. We are also subject
to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent
to 2004 related to entities acquired or formed in connection with our Sunrise REIT acquisition.
NOTE 12 — STOCKHOLDERS’ EQUITY
On July 1, 2011, following approval by our stockholders, we amended our Amended and Restated
Certificate of Incorporation, as previously amended, to increase the number of authorized shares of
our capital stock to 610,000,000, comprised of 600,000,000 shares of common stock, par value $0.25
per share, and 10,000,000 shares of preferred stock, par value $1.00 per share.
On
July 1, 2011, in connection with the NHP acquisition, we issued
99,849,106 shares of our
common stock to NHP stockholders and holders of NHP equity awards,
and reserved 2,253,366
additional shares of our common stock for issuance in connection with equity awards and other
convertible or exchangeable securities that we assumed in connection with the transaction.
In connection with the NHP acquisition, on June 20, 2011, our Board of Directors declared a
prorated third quarter dividend on our common stock, payable in cash to stockholders of record at the close of
business on June 30, 2011. At June 30, 2011, we recorded an accrued dividend of $23.8 million
($0.1264 per share) for this prorated dividend, which is included in accounts payable and other
liabilities on our Consolidated Balance Sheets. The prorated dividend was paid on July 12, 2011.
On May 12, 2011, as partial consideration for the Atria Senior Living assets, we issued to the
sellers in a private placement 24,958,543 shares of our common stock (which shares had a total
value of $1.38 billion based on the May 12, 2011 closing price of our common stock of $55.33 per
share). On May 19, 2011, we filed a shelf registration statement
relating to the resale of those shares by the selling stockholders.
In February 2011, we completed the sale of 5,563,000 shares of our common stock in an
underwritten public offering pursuant to our existing shelf registration statement. We received
$300.0 million in aggregate proceeds from the sale, which we used to repay existing mortgage debt
and for working capital and other general corporate purposes.
Upon consummation of the Atria Senior Living acquisition, we entered into long-term management
agreements with Atria to operate the acquired assets. Atria is owned by private equity funds
managed by Lazard Real Estate Partners LLC (“LREP”). Effective May 13, 2011, LREP Chief Executive
Officer and Managing Principal and Atria Chairman Matthew J. Lustig was appointed to our Board of
Directors. For the three and six months ended June 30, 2011, we paid Atria $4.3 million in
management fees related to the Atria Senior Living properties. See “Note 4—Acquisitions of Real
Estate Property.”
From
time to time, we may engage Cushman & Wakefield, a global commercial real estate firm, to
act as a leasing agent with respect to certain of our MOBs. Cushman & Wakefield President and
Chief Executive Officer Glenn J. Rufrano has served as a member of our Board of Directors since
June 2010. We believe the brokers’ fees we pay to Cushman & Wakefield in connection with the
provision of these services are customary and represent market
rates. Total fees we paid to Cushman & Wakefield in 2010 and
the first six months of 2011
were de minimis.
Effective upon consummation of the NHP acquisition, Richard I. Gilchrist, a former NHP
director, was appointed to our Board of Directors. Mr. Gilchrist currently serves as Senior
Advisor to The Irvine Company, and from 2006 until July 2011, he served as President of The Irvine
Company’s Investment Properties Group, from whom NHP leased its corporate headquarters prior to the
acquisition. In 2010, NHP paid approximately $536,000 in rent to The Irvine Company. Nationwide
Health Properties, LLC, our wholly owned subsidiary, continues to rent office space in the building
owned by The Irvine Company.
NOTE 15 — SEGMENT INFORMATION
As of June 30, 2011, we operated through three reportable business segments: triple-net leased
properties, senior living operations and MOB operations. Our triple-net leased properties segment
consists of acquiring and owning seniors housing and healthcare properties in the United States and
leasing those properties to healthcare operating companies under “triple-net” or “absolute-net”
leases, which require the tenants to pay all property-related expenses. Our senior living
operations segment consists of investments in seniors housing communities located in the United
States and Canada for which we engage independent third parties, such as Sunrise and Atria, to
manage the operations. Our MOB operations segment primarily consists of acquiring, owning,
developing, leasing and managing MOBs. Information provided for “all other” includes revenues such
as income from loans and investments and other miscellaneous income and various corporate-level
expenses not directly attributable to our three reportable business segments. Assets included in
all other consist primarily of corporate assets, including cash, restricted cash, deferred
financing costs, notes receivable and miscellaneous accounts receivable.
With the addition of the Lillibridge businesses and properties in July 2010, we believed the
segregation of our MOB operations into its own reportable business segment would be useful in
assessing the performance of this portion of our business in the same way that management reviews
our performance and makes operating decisions. Prior to the Lillibridge acquisition, we operated
through two reportable business segments: triple-net leased properties and senior living
operations. Prior year amounts have been restated to reflect the segregation of our MOB operations
into a reportable business segment.
We evaluate performance of the combined properties in each reportable business segment based
on segment profit, which we define as NOI adjusted for gain/loss from unconsolidated entities. We
define NOI as total revenues, less interest and other income, property-level operating expenses and
medical office building services costs. We believe that net income, as defined by GAAP, is the
most appropriate earnings measurement. However, we believe that segment profit serves as a useful
supplement to net income because it allows investors, analysts and our management to measure
unlevered property-level operating results and to compare our operating results to the operating
results of other real estate companies and between periods on a consistent basis. Segment profit
should not be considered as an alternative to net income (determined in accordance with GAAP) as an
indicator of our financial performance. In order to facilitate a clear understanding of our
consolidated historical operating results, segment profit should be examined in conjunction with
net income as presented in our Consolidated Financial Statements and data included elsewhere in
this Quarterly Report on Form 10-Q.
Interest expense, depreciation and amortization, general, administrative and professional fees
and non-property specific revenues and expenses are not allocated to individual reportable business
segments for purposes of assessing segment performance. There are no intersegment sales or
transfers.
The three and six months ended June 30, 2010 include $11.1 million in earnest money deposits related to
the acquisition of businesses owned and operated by Lillibridge.
Our portfolio of properties and real estate loan and other investments are located in the
United States and Canada. Revenues are attributed to an individual country based on the location of
each property.
Geographic information regarding our operations is as follows:
In connection with the NHP acquisition, we acquired a portfolio of 32 triple-net leased
seniors housing communities operated by affiliates of Hearthstone Senior Services, L.P. (together
with its affiliates, “Hearthstone”). We have elected to transition the operation of these
properties to affiliates of Senior Care, Inc. (together with its affiliates, “Senior Care”), which
has been a tenant in 64 of our seniors housing and other healthcare
properties since 2006. To effect the
transition of these properties, on August 1, 2011, we terminated the Hearthstone master lease
relating to 30 seniors housing communities and entered into a new master lease with Senior Care
with respect to those properties, having a term of fifteen years,
subject to two five-year renewal periods. Under a license agreement with Senior Care, Hearthstone will
continue to hold the operating licenses for the properties until Senior Care receives new operating licenses
with respect to the properties. We expect to terminate the leases for the remaining two seniors
housing communities operated by Hearthstone and enter into new leases with Senior Care with respect
to those properties upon receipt of lender approval. Hearthstone has agreed to fully cooperate in
the transition pursuant to certain arrangements entered into concurrently with the termination of
the Hearthstone master lease.
At the time of initial issuance, we and certain of our direct and indirect wholly owned
subsidiaries (the “Wholly Owned Subsidiary Guarantors”) fully and unconditionally guaranteed, on a
joint and several basis, the obligation to pay principal and interest with respect to the senior
notes of our subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”) and Ventas Capital
Corporation (collectively, the “Issuers”) (other than our 3.125% senior notes due 2015 and our
4.750% senior notes due 2021). Ventas Capital Corporation is a wholly owned direct subsidiary of
Ventas Realty that was formed in 2002 to facilitate offerings of the senior notes and has no assets
or operations. In addition, at the time of initial issuance, Ventas Realty and the Wholly Owned
Subsidiary Guarantors fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to our convertible notes. Other subsidiaries
(“Non-Guarantor Subsidiaries”) that were not included among the Wholly Owned Subsidiary Guarantors
were not obligated with respect to the senior notes or the convertible notes. On September 30,2010, the Wholly Owned Subsidiary Guarantors were released from their obligations with respect to
each series of then outstanding senior notes (other than the 9% senior notes due 2012) of the
Issuers and our convertible notes pursuant to the terms of the applicable indentures. Contractual
and legal restrictions, including those contained in the instruments governing certain
Non-Guarantor Subsidiaries’ outstanding indebtedness, may under certain circumstances restrict our
ability to obtain cash from our Non-Guarantor Subsidiaries for the purpose of meeting our debt
service obligations, including our guarantee of payment of principal and interest on the senior
notes and our primary obligation to pay principal and interest on the convertible notes. Certain of
our real estate assets are also subject to mortgages. The following summarizes our condensed
consolidating information as of June 30, 2011 and December 31, 2010 and for the three and six
months ended June 30, 2011 and 2010:
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2011
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
Unless otherwise indicated or except where the context otherwise requires, the terms “we,”“us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Ventas, Inc.
and its consolidated subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our
or our tenants’, operators’, managers’ or borrowers’ expected future financial position, results of
operations, cash flows, funds from operations, dividends and dividend plans, financing plans,
business strategy, budgets, projected costs, operating metrics, capital expenditures, competitive
positions, acquisitions, investment opportunities, dispositions, merger integration, growth
opportunities, expected lease income, continued qualification as a real estate investment trust
(“REIT”), plans and objectives of management for future operations and statements that include
words such as “anticipate,”“if,”“believe,”“plan,”“estimate,”“expect,”“intend,”“may,”“could,”“should,”“will” and other similar expressions are forward-looking statements. These
forward-looking statements are inherently uncertain, and security holders must recognize that
actual results may differ from our expectations. We do not undertake a duty to update these
forward-looking statements, which speak only as of the date on which they are made.
Our actual future results and trends may differ materially from expectations depending on a
variety of factors discussed in our filings with the Securities and Exchange Commission (the
“SEC”). These factors include without limitation:
•
The ability and willingness of our tenants, operators, borrowers,
managers and other third parties to meet and/or perform their obligations under
their respective contractual arrangements with us, including, in some cases, their
obligations to indemnify, defend and hold us harmless from and against various
claims, litigation and liabilities;
•
The ability of our tenants, operators, borrowers and managers to maintain the
financial strength and liquidity necessary to satisfy their respective obligations
and liabilities to third parties, including without limitation obligations under
their existing credit facilities and other indebtedness;
•
Our success in implementing our business strategy and our ability to
identify, underwrite, finance, consummate and integrate diversifying acquisitions
or investments, including the Nationwide Health Properties, Inc. (“NHP”)
transaction and those in different asset types and outside the United States;
•
Macroeconomic conditions such as a disruption of or lack of access to
the capital markets, changes in the debt rating on U.S. government securities,
default and/or delay in payment by the United States of its obligations, and changes in
the federal budget resulting in the reduction or nonpayment of
Medicare or Medicaid reimbursement rates;
•
The nature and extent of future competition;
•
The extent of future or pending healthcare reform and regulation,
including cost containment measures and changes in reimbursement policies,
procedures and rates;
•
Increases in our cost of borrowing as a result of changes in interest
rates and other factors;
•
The ability of our operators and managers, as applicable, to deliver
high quality services, to attract and retain qualified personnel and to attract
residents and patients;
•
Changes in general economic conditions and/or economic conditions in
the markets in which we may, from time to time, compete, and the effect of those
changes on our revenues and our ability to access the capital markets or other
sources of funds;
•
Our ability to pay down, refinance, restructure and/or extend our
indebtedness as it becomes due;
•
Our ability and willingness to maintain our qualification as a REIT
due to economic, market, legal, tax or other considerations;
The ability and willingness of our tenants to renew their leases with
us upon expiration of the leases and our ability to reposition our properties on
the same or better terms in the event such leases expire and are not renewed by
our tenants or in the event we exercise our right to replace an existing tenant
upon a default;
•
Risks associated with our senior living operating portfolio, such as
factors causing volatility in our operating income and earnings generated by our
properties, including without limitation national and regional economic
conditions, costs of materials, energy, labor and services, employee benefit
costs, insurance costs and professional and general liability claims, and the
timely delivery of accurate property-level financial results for those properties;
•
The movement of U.S. and Canadian exchange rates;
•
Year-over-year changes in the Consumer Price Index and the effect of
those changes on the rent escalators, including the rent escalator for Master
Lease 2 with Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”),
and our earnings;
•
Our ability and the ability of our tenants, operators, borrowers and
managers to obtain and maintain adequate liability and other insurance from
reputable and financially stable providers;
•
The impact of increased operating costs and uninsured professional
liability claims on the liquidity, financial condition and results of operations
of our tenants, operators, borrowers and managers and the ability of our tenants,
operators, borrowers and managers to accurately estimate the magnitude of those
claims;
•
Risks associated with our medical office building (“MOB”) portfolio
and operations, including our ability to successfully design, develop and manage
MOBs, to accurately estimate our costs in fixed fee-for-service projects and to
retain key personnel;
•
The ability of the hospitals on or near whose campuses our MOBs are
located and their affiliated health systems to remain competitive and financially
viable and to attract physicians and physician groups;
•
Our ability to maintain or expand our relationships with our existing
and future hospital and health system clients;
•
Risks associated with our investments in joint ventures and
unconsolidated entities, including our lack of sole decision-making authority and
our reliance on our joint venture partners’ financial condition;
•
The impact of market or issuer events on the liquidity or value of
our investments in marketable securities; and
•
The impact of any financial, accounting, legal or regulatory issues
or litigation that may affect us or our major tenants, operators and managers.
Many of these factors are beyond our control and the control of our management.
Kindred, Brookdale Senior Living, Sunrise and Atria Information
Each of Kindred, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale
Senior Living”) and Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) is
subject to the reporting requirements of the 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 Kindred, Brookdale Senior Living and Sunrise
contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by
Kindred, Brookdale Senior Living or Sunrise, as the case may be, with the SEC or other publicly
available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise.
We have not verified this information either through an independent investigation or by reviewing
Kindred’s, Brookdale Senior Living’s or Sunrise’s public filings. We have no reason to believe that
this information is inaccurate in any material respect, but we cannot assure you that all of this
information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s filings with the SEC
can be found at the SEC’s website at www.sec.gov. We are providing this data for informational
purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior Living’s and Sunrise’s
publicly available filings from the SEC.
Atria Senior Living, Inc. (“Atria”) is not subject to the reporting requirements of the SEC.
The information related to Atria contained or referred to in this Quarterly Report on Form 10-Q is
derived from information provided to us by Atria. We have not verified this information through an
independent investigation. We have no reason to believe that this information is inaccurate in any
material respect, but we cannot assure you that all of this information is accurate.
Company Overview
We are a REIT with a geographically diverse portfolio of seniors housing and healthcare
properties in the United States and Canada. As of June 30, 2011,
our portfolio consisted of 719
properties: 357 seniors housing communities, 187 skilled nursing
facilities, 40 hospitals and 135 MOBs
and other properties in 43 states, the District of Columbia and two Canadian provinces. We are a
constituent member of the S&P 500® index, a leading indicator of the large cap U.S.
equities market, with our headquarters located in Chicago, Illinois.
Our primary business consists of acquiring, financing and owning seniors housing and
healthcare properties and leasing those properties to third parties or operating those properties
through independent third-party managers. Through our Lillibridge Healthcare Services, Inc.
(“Lillibridge”) subsidiary, we also provide management, leasing, marketing, facility development
and advisory services to highly rated hospitals and health systems throughout the United States.
In addition, from time to time, we make real estate loan and other investments relating to seniors
housing and healthcare companies or properties.
As
of June 30, 2011, we leased 393 of our properties to healthcare operating companies under
“triple-net” or “absolute-net” leases, which require the tenants to pay all property-related
expenses, and we engaged independent third parties, such as Sunrise and Atria, to manage 199 of our
seniors housing communities pursuant to long-term management agreements.
Our business strategy is comprised of three principal objectives: (1) generating consistent,
reliable and growing cash flows; (2) maintaining a well-diversified portfolio; and (3) preserving
our investment grade balance sheet and liquidity.
Access to external capital is critical to the success of our strategy as it impacts our
ability to repay maturing indebtedness and make future investments. Our access to and cost of
capital depend on various factors, including general market conditions, interest rates, credit
ratings on our securities, perception of our potential future earnings and cash distributions and
the market price of our common stock. Generally, we attempt to match the long-term duration of
most of our investments with long-term fixed rate financing. At June 30, 2011, only 11.1% of our
consolidated debt was variable rate debt.
Operating Highlights and Key Performance Trends
2011 Highlights
•
Our Board of Directors declared the first and second quarterly installments of our 2011
dividend in the amount of $0.575 per share, which represents a 7.5% increase over our 2010
quarterly dividend. The first quarterly installment of the 2011 dividend was paid on March31, 2011 to stockholders of record on March 11, 2011. The second quarterly installment of
the 2011 dividend was paid on June 30, 2011 to stockholders of record on June 10, 2011. In
connection with the NHP acquisition, on June 20, 2011, our Board of Directors declared a
prorated third quarter dividend on our common stock, payable in cash to stockholders of
record at the close of business on June 30, 2011. The prorated dividend ($0.1264 per
share) was paid on July 12, 2011.
•
In February 2011, we completed the sale of 5,563,000 shares of our common stock in an
underwritten public offering pursuant to our existing shelf registration statement. We
received $300.0 million in aggregate proceeds from the sale, which we used to repay
existing mortgage debt and for working capital and other general corporate purposes.
•
In February 2011, we repaid in full mortgage loans outstanding in the aggregate
principal amount of $307.2 million and recognized a loss on extinguishment of
debt of $16.5 million in connection with this repayment in the first quarter of 2011.
In April 2011, we received proceeds of $112.4 million in final repayment of a first
mortgage loan and recognized a gain of $3.3 million in income from loans and investments on
our Consolidated Statements of Income in connection with this repayment in the second
quarter of 2011.
•
In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750%
senior notes due 2021, at a public offering price equal to 99.132% of par for total
proceeds of $693.9 million, before the underwriting discount and expenses. We used a
portion of the proceeds from the issuance to fund a senior unsecured
term loan to NHP in the
aggregate principal amount of $600.0 million, bearing interest at a fixed rate of 5.0% per
annum and maturing in 2021.
•
In May 2011, we acquired substantially all of the real estate assets and working capital
of privately-owned Atria Senior Living Group, Inc. (together with its affiliates, “Atria
Senior Living”) for a total purchase price of $3.4 billion. See “Note 4—Acquisitions of
Real Estate Property” of the Notes to Consolidated Financial Statements included in Part I of this
Quarterly Report on Form 10-Q.
•
Effective May 13, 2011, Matthew J. Lustig, Chief Executive Officer and
Managing Principal of Lazard Real Estate Partners LLC and Atria Chairman, was appointed to our Board of Directors.
•
In July 2011, we acquired NHP in a stock-for-stock transaction.
At the effective time, each outstanding share of NHP common stock (other than shares owned
by us or any of our subsidiaries or any wholly owned subsidiary of NHP) was converted into
the right to receive 0.7866 shares of our common stock, with cash paid in lieu of
fractional shares. See “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated
Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
•
On July 1, 2011, following approval by our stockholders, we amended our Amended and
Restated Certificate of Incorporation, as previously amended, to increase the number of
authorized shares of our capital stock to 610,000,000, comprised of 600,000,000 shares of
common stock, par value $0.25 per share, and 10,000,000 shares of preferred stock, par
value $1.00 per share.
•
Also on July 1, 2011, we amended our Fourth Amended and Restated
By-laws to increase the maximum number of directors allowed to serve on the Board of
Directors at any one time from eleven to thirteen and appointed three former NHP directors
to our Board: Douglas M. Pasquale, Richard I. Gilchrist and Robert D. Paulson.
•
In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior
notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid
interest to the redemption date, pursuant to the call option contained in the indenture
governing the notes. As a result, we paid a total of approximately $206.5 million, plus
accrued and unpaid interest, on the redemption date and expect to recognize a loss on
extinguishment of debt of $8.7 million during the third quarter of 2011.
We use concentration ratios to understand the potential risks of economic downturns or other
adverse events affecting our various asset types, geographic locations or tenants, operators and
managers. We evaluate our concentration risk in terms of investment mix and operations mix.
Investment mix measures the portion of our investments that consists of a certain asset type or
that is operated or managed by a particular tenant, operator or manager. Operations mix measures
the portion of our operating results that is attributed to a certain tenant or operator, geographic
location or business model. The following tables reflect our concentration risk as of the dates
and for the periods presented:
Operations mix by tenant and operator and business model:
Revenues1:
Senior living operations2
49.5
%
44.7
%
Kindred
19.8
%
25.2
%
Brookdale Senior Living
9.3
%
12.5
%
All others
16.5
%
16.0
%
Adjusted EBITDA3:
Kindred
30.5
%
35.8
%
Senior living operations2
27.0
%
22.1
%
Brookdale Senior Living
14.3
%
16.2
%
All others
28.2
%
25.9
%
NOI4:
Kindred
32.3
%
37.0
%
Senior living operations2
26.2
%
21.9
%
Brookdale Senior Living
15.1
%
18.3
%
All others
26.4
%
22.8
%
Operations mix by geographic location5:
California
12.5
%
12.5
%
Illinois
8.5
%
10.4
%
New York
6.5
%
3.6
%
Pennsylvania
5.2
%
5.6
%
Ontario
5.1
%
5.9
%
All others
57.3
%
60.4
%
1
Total revenues includes medical office building services revenue, revenue from loans
and investments and interest and other income. Revenues from properties sold or held for sale
as of the reporting date are included in this presentation.
2
Amounts attributable to senior living operations managed by Atria relate to the period
from May 12, 2011, the date of the Atria Senior Living acquisition, through June 30, 2011.
3
“Adjusted EBITDA” is defined as earnings before interest, taxes, depreciation and
amortization (including non-cash stock-based compensation expense), excluding merger-related
expenses and deal costs, gains or losses on sales of real property assets, and changes in the fair value of interest rate swaps (including
amounts in discontinued operations).
4
“NOI” represents net operating income, which is defined as total revenues, excluding
interest and other income, less property-level operating expenses and medical office building
services costs (including amounts in discontinued operations).
5
Ratios are based on total revenues for each period presented. Total revenues includes
medical office building services revenue, revenue from loans and investments and interest and
other income. Revenues from properties sold as of the reporting date are excluded from this
presentation.
See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for
additional disclosures and reconciliations of Adjusted EBITDA and NOI to our net income or total revenues, as applicable, as computed
in accordance with U.S. generally accepted accounting principles (“GAAP”).
Recent Developments Regarding Government Regulation
Medicare Reimbursement: Long-Term Acute Care Hospitals
On
August 1, 2011, the Centers for Medicare & Medicaid
Services (“CMS”) put on public display for August 18, 2011
publication its final
rule updating the prospective payment system for long-term acute care hospitals (LTAC PPS) for the
2012 fiscal year (October 1, 2011 through September 30,2012). Under the final rule, the LTAC
PPS standard federal payment rate will increase by 1.8% in fiscal
year 2012, reflecting a 2.9%
increase in the market basket index, less a 1.0% productivity
adjustment and an additional 0.1%
negative adjustment mandated by the Patient Protection and Affordable Care Act and its
reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, the
“Affordable Care Act”). As a result, CMS estimates that net payments to long-term acute care
hospitals under the final rule will increase by approximately
$126 million, or 2.5%, in fiscal
year 2012 due to area wage adjustments, as well as increases in high-cost and short-stay outlier
payments and other policies adopted in the final rule.
We are currently analyzing the financial
implications of the final rule issued by CMS on the operators of our long-term acute care hospitals. We
cannot assure you that this rule or future updates to LTAC PPS or Medicare
reimbursement for long-term acute care hospitals will not materially adversely affect our
operators, which, in turn, could have a material adverse effect on our business, financial
condition, results of operations and liquidity, on our ability to service our indebtedness and
other obligations and on our ability to make distributions to our stockholders, as required for us
to continue to qualify as a REIT (a “Material Adverse Effect”).
On
July 29, 2011, CMS put on public display for August 8, 2011
publication its final rule updating the prospective payment system for
skilled nursing facilities (SNF PPS) for the 2012 fiscal year (October 1, 2011 through September30, 2012). Under the final rule, the update to
the SNF PPS standard federal payment rate includes a
2.7% increase in the market basket index, less a 1.0% productivity adjustment mandated by the
Affordable Care Act and a 12.6% “parity
adjustment recalibration” to account for estimated overpayments under the RUG-IV classification
model, resulting in a net 11.1% decrease in the SNF PPS standard federal payment rate for fiscal
year 2012. The final rule also requires group therapy to be treated in the same manner as
concurrent therapy (i.e., allocating therapy minutes among the group’s patients, rather than count
the same minutes for each patient), which may additionally affect net payments to skilled nursing
facilities. CMS estimates that net payments to skilled nursing facilities as a result of the final
rule will decrease by approximately $3.87 billion in fiscal year 2012. However, CMS has stated
that “Even with the recalibration, the FY 2012 payment rates will be 3.4 percent higher than the
rates established for FY 2010, the period immediately preceding the unintended spike in payment levels.”
We are currently analyzing the financial
implications of the final rule issued by CMS on the operators of our skilled nursing facilities. We cannot
assure you that this rule or future updates to SNF PPS or Medicare
reimbursement for skilled nursing facilities will not materially adversely affect our operators,
which, in turn, could have a Material Adverse Effect on us.
Debt Ceiling and Deficit Reduction Legislation
On
August 2, 2011, President Obama and the U.S. Congress enacted
legislation to lift the federal government’s
borrowing authority (the so-called “debt ceiling”) and
reduce the federal government’s
projected operating deficit. To implement this legislation, President Obama and members of the U.S. Congress have proposed various spending cuts and
tax reform initiatives, some
of which could result
in changes (including substantial reductions in funding) to
Medicare, Medicaid or Medicare
Advantage Plans. These measures and any future federal legislation relating to the debt
ceiling or deficit reduction could have a material
adverse effect on our operators’ liquidity, financial condition or results of operations, which
could adversely affect their ability to satisfy their obligations to us and which, in turn, could
have a Material Adverse Effect on us.
In an effort to address their own budget shortfalls, many state legislatures have proposed or
enacted widespread changes to their Medicaid programs that are anticipated to reduce future
payments to healthcare providers, including skilled nursing facility operators. At
this time, we cannot predict the impact such changes would have on our skilled nursing
facility operators, nor can we predict whether significant Medicaid rate freezes, cuts or
other program changes will be adopted by other states in the future. Severe and
widespread rate cuts or freezes could adversely affect our skilled nursing facility operators’
ability to satisfy their obligations to us and, in turn, could have a Material Adverse Effect on
us.
Our Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q
have been prepared in accordance with GAAP for interim financial information set forth in the
Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board
(“FASB”). GAAP requires us to make estimates and assumptions about future events that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. We base these estimates on our experience and on various other assumptions we
believe to be reasonable under the circumstances. However, if our judgment or interpretation of
the facts and circumstances relating to various transactions or other matters had been different, a
different accounting treatment may have been applied, resulting in a different presentation of our
financial statements. We periodically re-evaluate our estimates and assumptions, and in the event
they prove to be different from actual results, we make adjustments in subsequent periods to
reflect more current estimates and assumptions about matters that are inherently uncertain. In
addition to the policies outlined below, please refer to our Annual Report on Form 10-K for the
year ended December 31, 2010, filed with the SEC on February 18, 2011, for further information
regarding the critical accounting policies that affect our more significant estimates and
assumptions used in the preparation of our Consolidated Financial Statements included in Item 1 of
this Quarterly Report on Form 10-Q.
Long-Lived Assets and Intangibles
We record investments in real estate assets at cost. We account for acquisitions using the
acquisition method and allocate the cost of the properties acquired among tangible and recognized
intangible assets and liabilities based upon their estimated fair values as of the acquisition
date. Recognized intangibles primarily include the value of in-place leases, acquired lease
contracts, tenant and customer relationships, trade names/trademarks and goodwill.
Our method for allocating the purchase price paid to acquire investments in real estate
requires us to make subjective assessments for determining fair value of the assets acquired and
liabilities assumed. This includes determining the value of the buildings and improvements, land
and improvements, ground leases, tenant improvements, in-place leases, above and/or below market
leases and any debt assumed. These estimates require significant judgment and in some cases involve
complex calculations. These allocation assessments directly impact our results of operations, as
amounts allocated to certain assets and liabilities have different depreciation or amortization
lives. In addition, we amortize the value assigned to above and/or below market leases as a
component of revenue, unlike in-place leases and other intangibles, which we include in
depreciation and amortization in our Consolidated Statements of Income.
We estimate the fair value of buildings acquired on an as-if-vacant basis and depreciate the
building value over the estimated remaining life of the building. We determine the allocated value
of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon
the replacement cost and depreciate such value over the assets’ estimated remaining useful lives.
We determine the value of land by considering the sales prices of similar properties in recent
transactions or based on (i) internal analyses of recently acquired and existing comparable
properties within our portfolio or (ii) real estate tax assessed values in relation to the total
value of the asset. The fair value of acquired lease intangibles, if any, reflects (i) the estimated value
of any above and/or below market leases, determined by discounting the difference between the
estimated market rent and the in-place lease rent, the resulting intangible asset or liability of
which is amortized to revenue over the remaining life of the associated lease plus any bargain
renewal periods and (ii) the estimated value of in-place leases related to the cost to obtain tenants,
including tenant allowances, tenant improvements and leasing commissions, and an estimated value of
the absorption period to reflect the value of the rent and recovery costs foregone during a
reasonable lease-up period, as if the acquired space was vacant,
which is amortized to amortization expense over the
remaining life of the associated lease.
We estimate the fair value of tenant or other customer relationships acquired, if any, by
considering the nature and extent of existing business relationships with the tenant or customer,
growth prospects for developing new business with the tenant or customer, the tenant’s credit
quality, expectations of lease renewals with the tenant, and the potential for significant,
additional future leasing arrangements with the tenant and amortize that value over the expected
life of the associated arrangements or leases, including the remaining terms of the related leases
and any expected renewal periods. We estimate the fair value of trade names/trademarks using a
royalty rate methodology and amortize the value over the estimated useful life of the trade
name/trademark.
In connection with a business combination, we may assume the rights and obligations of certain
lease agreements pursuant to which we become the lessee of a given property. We assume the lease
classification previously determined by the prior lessee absent a modification in the assumed lease
agreement. For capital leases we have assumed that contain bargain purchase options, we recognize
an asset based on the acquisition date fair value of the underlying asset and a liability based on
the fair value of the capital lease obligation. Assets recognized
under capital leases that
contain bargain purchase options are depreciated over the asset’s useful life. Assumed operating
leases, including ground leases, are assessed to determine if the lease terms are favorable or unfavorable given current
market conditions on the acquisition date. To the extent the lease arrangement is favorable or
unfavorable relative to market conditions on the acquisition date, we recognize an asset or
liability at fair value.
All
lease related intangible assets are included within acquired lease intangibles
and all lease related intangible liabilities are included within accounts payable and other liabilities on our
Consolidated Balance Sheets. In addition, operating lease intangibles are valued utilizing discounted cash flow
projections. The recognized asset or liability for these leases is amortized to rental expense over
the term of the lease and is included in our Consolidated
Statements of Income.
We calculate the fair value of long-term debt by discounting the remaining
contractual cash flows on each instrument at the current market rate for those borrowings, which we
approximate based on the rate we would expect to incur to replace each instrument on the date of
acquisition, and recognize any fair value adjustments related to long-term debt as effective yield
adjustments over the remaining term of the instrument. If applicable, we record a liability for
contingent consideration at fair value as of the acquisition date (included in accounts payable and
other liabilities on our Consolidated Balance Sheets) and reassess
the fair value at the end of each reporting
period, with any change being recognized in earnings. Increases or decreases in the fair value of
the contingent consideration can result from changes in discount periods, discount rates and
probabilities that contingencies will be met. We do not amortize goodwill, which is included in
other assets on our Consolidated Balance Sheets and represents the excess of the purchase price
paid over the fair value of the net assets of the acquired business.
Fair Value
We follow FASB guidance that defines fair value and provides direction for measuring fair
value and making the necessary related disclosures. The guidance emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and should be determined based on the
assumptions that market participants would use in pricing the asset or liability. As a basis for
considering market participant assumptions in fair value measurements, the guidance establishes a
fair value hierarchy that distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs that are classified
within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within level three of the hierarchy).
Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in
active markets that the reporting entity has the ability to access. Level two inputs are inputs
other than quoted prices included in level one that are directly or indirectly observable for the
asset or liability. Level two inputs may include quoted prices for similar assets and liabilities
in active markets, as well as other observable inputs for the asset or liability, such as interest
rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.
Level three inputs are unobservable inputs for the asset or liability, which are typically based on
the reporting entity’s own assumptions, as there is little, if any, related market activity. In
instances where the determination of the fair value measurement is based on inputs from different
levels of the hierarchy, the level within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its entirety. If an
entity determines there has been a significant decrease in the volume and level of activity for an
asset or liability relative to the normal market activity for such asset or liability (or similar
assets or liabilities), then transactions or quoted prices may not accurately reflect fair value.
In addition, if there is evidence that the transaction for the asset or liability is not orderly,
the entity shall place little, if any, weight on that transaction price as an indicator of fair
value. Our assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to the asset or liability.
We determined the fair value of our current investments in marketable debt securities using
level two inputs. We determined the valuation allowance for loan losses based on level three
inputs.
With the assistance of a third party, we estimate the fair value of our derivative
instruments, including interest rate caps, interest rate swaps, and foreign currency forward
contracts, using level two inputs. We determine the fair value of interest rate caps using forward
yield curves and other relevant information. We estimate the fair value of interest rate swaps
using alternative financing rates derived from market-based financing rates, forward yield curves
and discount rates. We determine the fair value of foreign currency forward contracts by
estimating the future values of the two currency tranches using forward exchange rates that are
based on traded forward points and calculating a present value of the net amount using a discount
factor based on observable traded interest rates.
We estimate the fair value of contingent consideration using probability assessments of
expected future cash flows over the period in which the obligation is expected to be settled, and
by applying a discount rate that appropriately captures a market participant’s view of the risk
associated with the obligation. The inputs we used to determine fair value of contingent
consideration are considered level three inputs.
Recently Issued or Adopted Accounting Standards
In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05 Presentation of
Comprehensive Income (“ASU 2011-05”), which amends current guidance found in ASC Topic 220,
Comprehensive Income (“ASC 220”). ASU 2011-05 requires entities to present comprehensive income in
either: (i) one continuous financial statement or (ii) two separate but consecutive statements that
display net income and the components of other comprehensive income. Totals and individual
components of both net income and other comprehensive income must be included in either
presentation. The provisions of ASU 2011-05 are effective for us beginning with the first quarter
of 2012, but we do not expect ASU 2011-05 to have a significant impact on our Consolidated
Financial Statements.
On January 1, 2011, we adopted ASU 2010-29, Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which impacts any
public entity that enters into business combinations that are material on an individual or
aggregate basis. ASU 2010-29 specifies that a public entity presenting comparative financial
statements should disclose revenues and earnings of the combined entity as though the business
combination(s) that occurred during the year had occurred at the beginning of the prior annual
reporting period when preparing the pro forma financial information for both the current and prior
reporting periods. This guidance, which is effective for business combinations consummated in
periods beginning after December 15, 2010, also requires that pro forma disclosures be accompanied
by a narrative description regarding the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination(s) included in reported pro forma
revenues and earnings. We have presented supplementary pro forma information related to our
acquisition of substantially all of the real estate assets and working capital of Atria Senior
Living in May 2011 and our acquisition of NHP in July 2011 in “Note 4—Acquisitions of Real Estate
Property” of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly
Report on Form 10-Q.
On January 1, 2011, we adopted ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment
Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28
states that if a reporting unit has a carrying amount equal to or less than zero and there are
qualitative factors that indicate it is more likely than not that a goodwill impairment exists,
Step 2 of the goodwill impairment test must be performed. The adoption of ASU 2010-28 did not
impact our Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”), which expands required disclosures related to an entity’s fair value
measurements. Certain provisions of ASU 2010-06 were effective for interim and annual reporting
periods beginning after December 15, 2009, and we adopted those provisions as of January 1, 2010.
The remaining provisions, which were effective for interim and annual reporting periods beginning
after December 15, 2010, require additional disclosures related to purchases, sales, issuances and
settlements in an entity’s reconciliation of recurring level three investments. We adopted the
final provisions of ASU 2010-06 as of January 1, 2011. The adoption of ASU 2010-06 did not impact
our Consolidated Financial Statements.
Results of Operations
As of June 30, 2011, we operated through three reportable business segments: triple-net leased
properties, senior living operations and MOB operations. Our triple-net leased properties segment
consists of acquiring and owning seniors housing and healthcare properties in the United States and
leasing those properties to healthcare operating companies under “triple-net” or “absolute-net”
leases, which require the tenants to pay all property-related expenses. Our senior living
operations segment consists of investments in seniors housing communities located in the United
States and Canada for which we engage independent third parties, such as Sunrise and Atria, to
manage the operations. Our MOB operations segment primarily consists of acquiring, owning,
developing, leasing and managing MOBs. Information provided for “all other” includes revenues such
as income from loans and investments and other miscellaneous income and various corporate-level
expenses not directly attributable to our three reportable business segments. Assets included in
all other consist primarily of corporate assets, including cash, restricted cash, deferred
financing costs, notes receivable and miscellaneous accounts receivable.
With the addition of the Lillibridge businesses and properties in July 2010, we believed the
segregation of our MOB operations into its own reportable business segment would be useful in
assessing the performance of this portion of our business in the same way that management reviews
our performance and makes operating decisions. Prior to the acquisition, we operated through two
reportable business segments: triple-net leased properties and senior living operations.
The table below shows our results of operations for the three months ended June 30, 2011 and
2010 and the effect on our income of changes in those results from period to period.
For the Three Months
Increase (Decrease) to
Ended June 30,
Income
2011
2010
$
%
(Dollars in thousands)
Segment NOI:
Triple-Net Leased Properties
$
120,129
$
117,386
$
2,743
2.3
%
Senior Living Operations
65,743
38,808
26,935
69.4
MOB Operations
17,348
8,116
9,232
> 100
All Other
8,391
3,705
4,686
> 100
Total segment NOI
211,611
168,015
43,596
25.9
Interest and other income
78
122
(44
)
(36.1
)
Interest expense
(53,732
)
(43,840
)
(9,892
)
(22.6
)
Depreciation and amortization
(80,755
)
(50,040
)
(30,715
)
(61.4
)
General, administrative and professional fees
(15,554
)
(9,858
)
(5,696
)
(57.8
)
Loss on extinguishment of debt
(6
)
(6,549
)
6,543
99.9
Merger-related expenses and deal costs
(55,807
)
(4,207
)
(51,600
)
(> 100
)
Other
7,773
(121
)
7,894
> 100
Income before loss from unconsolidated entities, income
taxes, discontinued operations and noncontrolling
interest
13,608
53,522
(39,914
)
(74.6
)
Loss from unconsolidated entities
(83
)
—
(83
)
nm
Income tax benefit (expense)
6,209
(409
)
6,618
> 100
Income from continuing operations
19,734
53,113
(33,379
)
(62.8
)
Discontinued operations
—
5,852
(5,852
)
(100.0
)
Net income
19,734
58,965
(39,231
)
(66.5
)
Net income attributable to noncontrolling interest, net of tax
58
898
840
93.5
Net income attributable to common stockholders
$
19,676
$
58,067
$
(38,391
)
(66.1
)%
nm — not meaningful
Segment NOI – Triple-Net Leased Properties
NOI for our triple-net leased properties reportable segment consists solely of rental income
earned from these assets. We incur no direct operating expenses for this segment.
The increase in our triple-net leased properties reportable segment NOI for the three months
ended June 30, 2011 over the same period in 2010 primarily reflects $1.6 million of additional rent
resulting from the annual escalators in the rent paid under our four master lease agreements with
Kindred (the “Kindred Master Leases”) effective May 1, 2011 and various escalations in the rent
paid on our other existing triple-net leased properties.
Revenues related to our triple-net leased properties reportable segment consist of fixed
rental amounts (subject to annual escalations) received directly from our tenants based on the
terms of the applicable leases and generally do not depend on the operating performance of our
properties. Therefore, while occupancy information is relevant to the operations of our tenants,
our revenues and financial results are not directly impacted by the overall occupancy levels or
profits at the triple-net leased properties. Average occupancy rates related to triple-net leased
properties we owned at June 30, 2011, for the first quarter of 2011, which is the most recent
information available to us from our tenants, are shown below.
A summary of our senior living operations reportable segment NOI is as follows:
For the Three Months
Increase (Decrease)
Ended June 30,
to Income
2011
2010
$
%
(Dollars in thousands)
Segment NOI — Senior Living Operations:
Total revenues
$
202,482
$
109,867
$
92,615
84.3
%
Less:
Property-level operating expenses
(136,739
)
(71,059
)
(65,680
)
(92.4
)
Segment NOI
$
65,743
$
38,808
$
26,935
69.4
%
Revenues related to our senior living operations reportable segment are resident fees
and services, which include all amounts earned from residents at our seniors housing communities,
such as rental fees related to resident leases, extended health care fees and other ancillary
service income. The increase in senior living operations reportable segment revenues for the three
months ended June 30, 2011 over the same period in 2010 is attributed primarily to our Atria Senior
Living acquisition, an increase in average daily rates and a decrease in the average Canadian
dollar exchange rate. Average occupancy rates related to our senior living operations reportable
segment during the three months ended June 30, 2011 and 2010 were as follows:
Occupancy related to the seniors housing communities acquired in connection with the Atria
Senior Living acquisition reflects activity from May 12, 2011, the date of the acquisition,
through June 30, 2011.
Property-level operating expenses related to our senior living operations reportable
segment include labor, food, utility, marketing, management and other property operating costs.
Property-level operating expenses increased for the three months ended June 30, 2011 over the same
period in 2010 primarily due to our Atria Senior Living acquisition and a decrease in the average
Canadian dollar exchange rate.
A summary of our MOB operations reportable segment NOI is as follows:
For the Three Months
Increase (Decrease)
Ended June 30,
to Income
2011
2010
$
%
(Dollars in thousands)
Segment NOI — MOB Operations:
Rental income
$
23,758
$
12,240
$
11,518
94.1
%
Medical office building services revenue
9,822
—
9,822
nm
Total revenues
33,580
12,240
21,340
> 100
Less:
Property-level operating expenses
(8,278
)
(4,124
)
(4,154
)
(> 100
)
Medical office building services costs
(7,954
)
—
(7,954
)
nm
Segment NOI
$
17,348
$
8,116
$
9,232
> 100
%
nm — not meaningful
MOB operations reportable segment revenues and property-level operating expenses both
increased for the three months ended June 30, 2011 over the same period in 2010 primarily due to
the additional MOBs we acquired in July 2010 as part of the Lillibridge acquisition. Occupancy
rates related to our MOB operations reportable segment at June 30, 2011 and 2010 were as follows:
Medical office building services revenue and costs are a direct result of the Lillibridge
businesses that we acquired in July 2010.
Segment NOI – All Other
All other NOI for the three months ended June 30, 2011 and 2010 consists solely of income from
loans and investments. Income from loans and investments increased for the three months ended June30, 2011 over the same period in 2010 due primarily to a prepayment premium recognized in
connection with a first mortgage loan repayment and income recognized from our senior unsecured
term loan to NHP.
Interest Expense
Total interest expense, including interest allocated to discontinued operations of $0 million
and $0.3 million for the three months ended June 30, 2011 and 2010, respectively, increased $9.6
million for the second quarter of 2011 over the same period in 2010. This difference is attributed
primarily to a $15.6 million increase in interest due to higher loan balances and $3.2 million of
interest related to capital leases we assumed as part of the Atria Senior Living acquisition, partially offset by a $9.5
million decrease in interest due to lower effective interest rates. Our effective interest rate,
excluding activity related to our capital leases, was 5.5% for the three months ended June 30,2011, compared to 6.6% for the same period in 2010. A decrease in the average Canadian dollar
exchange rate had an unfavorable impact on interest expense of $0.1 million for the three months
ended June 30, 2011, compared to the same period in 2010.
Depreciation and amortization increased $30.7 million for the three months ended June 30, 2011
over the same period in 2010 due primarily to the properties we acquired in connection with the
Atria Senior Living acquisition.
General, Administrative and Professional Fees
General, administrative and professional fees increased $5.7 million for the three months
ended June 30, 2011 over the same period in 2010 due primarily to our enterprise growth.
Loss on Extinguishment of Debt
The loss on extinguishment of debt for the three months ended June 30, 2010 relates primarily
to our redemption in June 2010 of all $142.7 million principal amount then outstanding of our
71/8% senior
notes due 2015, at a redemption price equal to 103.56% of par, plus accrued and unpaid interest to
the redemption date, pursuant to the call option contained in the indenture governing the notes.
No similar significant transactions occurred during the three months ended June 30, 2011.
Merger-Related Expenses and Deal Costs
Merger-related expenses and deal costs for the three months ended June 30, 2011 and 2010
consisted of expenses relating to our favorable $101.6 million compensatory damages judgment against HCP, Inc.
(“HCP”) and subsequent cross-appeals arising out of our Sunrise Senior Living REIT acquisition,
transition and integration expenses related to consummated transactions and deal costs required by
GAAP to be expensed rather than capitalized into the asset value. These deal costs primarily
include certain fees and expenses incurred in connection with our Lillibridge, Atria Senior Living
and NHP acquisitions.
Other
Other consists primarily of the fair value adjustment on the interest rate swaps we acquired
in connection with the Atria Senior Living acquisition, partially offset by other expenses.
Loss from Unconsolidated Entities
Loss from unconsolidated entities for the three months ended June 30, 2011 relates to our
noncontrolling interests in joint ventures we acquired as part of the Lillibridge acquisition. Our
ownership interests in these joint ventures, which comprise 58 MOBs, range between 5% and 20%.
Income Tax Expense/Benefit
Income tax benefit for the three months ended June 30, 2011 was due primarily to our Atria
Senior Living acquisition.
Discontinued Operations
We had no assets classified as discontinued operations for the three months ended June 30,2011. Discontinued operations for the three months ended June 30, 2010 includes the operations of
six assets sold during 2010.
Net Income Attributable to Noncontrolling Interest, Net of Tax
Net income attributable to noncontrolling interest, net of tax for the three months ended June30, 2011 primarily represents our partners’ joint venture interests in six MOBs. Net income
attributable to noncontrolling interest, net of tax for the three months ended June 30, 2010
primarily represents Sunrise’s share of net income from its previous ownership interests in 60 of
our seniors housing communities, which we acquired during 2010.
The table below shows our results of operations for the six months ended June 30, 2011 and
2010 and the effect on our income of changes in those results from period to period.
For the Six Months
Increase (Decrease) to
Ended June 30,
Income
2011
2010
$
%
(Dollars in thousands)
Segment NOI:
Triple-Net Leased Properties
$
238,732
$
233,719
$
5,013
2.1
%
Senior Living Operations
102,134
72,617
29,517
40.6
MOB Operations
34,329
16,103
18,226
> 100
All Other
14,476
7,322
7,154
97.7
Total segment NOI
389,671
329,761
59,910
18.2
Interest and other income
156
385
(229
)
(59.5
)
Interest expense
(96,290
)
(87,930
)
(8,360
)
(9.5
)
Depreciation and amortization
(132,514
)
(102,354
)
(30,160
)
(29.5
)
General, administrative and professional fees
(30,386
)
(20,541
)
(9,845
)
(47.9
)
Loss on extinguishment of debt
(16,526
)
(6,549
)
(9,977
)
(> 100
)
Merger-related expenses and deal costs
(62,256
)
(6,526
)
(55,730
)
(> 100
)
Other
7,772
(15
)
7,787
> 100
Income before loss from unconsolidated entities, income
taxes, discontinued operations and noncontrolling
interest
59,627
106,231
(46,604
)
(43.9
)
Loss from unconsolidated entities
(253
)
—
(253
)
nm
Income tax benefit (expense)
9,406
(695
)
10,101
> 100
Income from continuing operations
68,780
105,536
(36,756
)
(34.8
)
Discontinued operations
—
6,597
(6,597
)
(100.0
)
Net income
68,780
112,133
(43,353
)
(38.7
)
Net income attributable to noncontrolling interest, net of tax
120
1,447
1,327
91.7
Net income attributable to common stockholders
$
68,660
$
110,686
$
(42,026
)
(38.0
)%
nm — not meaningful
Segment NOI – Triple-Net Leased Properties
The increase in our triple-net leased properties reportable segment NOI for the six months
ended June 30, 2011 over the same period in 2010 primarily reflects $3.2 million of additional rent
resulting from the annual escalators in the rent paid under the Kindred Master Leases effective May1, 2011 and various escalations in the rent paid on our other existing triple-net leased
properties.
A summary of our senior living operations reportable segment NOI is as follows:
For the Six Months
Increase (Decrease)
Ended June 30,
to Income
2011
2010
$
%
(Dollars in thousands)
Segment NOI — Senior Living Operations:
Total revenues
$
316,984
$
218,353
$
98,631
45.2
%
Less:
Property-level operating expenses
(214,850
)
(145,736
)
(69,114
)
(47.4
)
Segment NOI
$
102,134
$
72,617
$
29,517
40.6
%
The increase in senior living operations segment reportable revenues for the six months ended
June 30, 2011 over the same period in 2010 is attributed primarily to our Atria Senior Living
acquisition, an increase in average daily rates and a decrease in the average Canadian dollar
exchange rate. Average occupancy rates related to our senior living operations reportable segment
during the six months ended June 30, 2011 and 2010 were as follows:
Occupancy related to the seniors housing communities acquired in connection with the Atria Senior Living acquisition
reflects activity from May 12, 2011, the date of the acquisition, through June 30, 2011.
Property-level operating expenses increased for the six months ended June 30, 2011 over the
same period in 2010 primarily due to our Atria Senior Living acquisition and a decrease in the
average Canadian dollar exchange rate.
Segment NOI — MOB Operations
A summary of our MOB operations reportable segment NOI is as follows:
MOB operations reportable segment revenues and property-level operating expenses both
increased for the six months ended June 30, 2011 over the same period in 2010 primarily due to the
additional MOBs we acquired in July 2010 as part of the Lillibridge acquisition.
Medical office building services revenue and costs are a direct result of the Lillibridge
businesses that we acquired in July 2010.
Segment NOI — All Other
All other NOI for the six months ended June 30, 2011 and 2010 consists solely of income from
loans and investments. Income from loans and investments increased for the six months ended June30, 2011 over the same period in 2010 due primarily to gains recorded related to the sale of
marketable debt securities, prepayment premiums recognized in connection with loan repayments and
income recognized from our senior unsecured term loan to NHP.
Interest Expense
Total interest expense, including interest allocated to discontinued operations of $0 million
and $0.7 million for the six months ended June 30, 2011 and 2010, respectively, increased $7.7
million for the six months ended June 30, 2011 over the same period in 2010. This difference is
attributed primarily to a $16.9 million increase in interest due to higher loan balances and $3.2 million of
interest related to the capital leases we assumed as part of the Atria Senior Living acquisition, partially offset by a $12.8
million decrease in interest due to lower effective interest rates. Our effective interest rate,
excluding activity related to our capital leases, was 5.7% for the six months ended June 30,2011, compared to 6.6% for the same period in 2010. A decrease in the average Canadian dollar
exchange rate had an unfavorable impact on interest expense of $0.2 million for the six months
ended June 30, 2011, compared to the same period in 2010.
Depreciation and Amortization
Depreciation and amortization increased $30.2 million for the six months ended June 30, 2011
over the same period in 2010 due primarily to our Atria Senior Living acquisition.
General, Administrative and Professional Fees
General, administrative and professional fees increased $9.8 million for the six months ended
June 30, 2011 over the same period in 2010 due primarily to our enterprise growth.
Loss on Extinguishment of Debt
The loss on extinguishment of debt for the six months ended June 30, 2011 relates primarily to
our early repayment of $307.2 million principal amount of existing mortgage debt in February 2011.
The loss on extinguishment of debt for the six months ended June 30, 2010 relates primarily to our
redemption in June 2010 of all $142.7 million principal amount then outstanding of our 7?% senior notes
due 2015, at a redemption price equal to 103.56% of par, plus accrued and unpaid interest to the
redemption date, pursuant to the call option contained in the indenture governing the notes.
Merger-Related Expenses and Deal Costs
Merger-related expenses and deal costs for the six months ended June 30, 2011 and 2010
consisted of expenses relating to our favorable $101.6 million compensatory damages judgment against HCP and
subsequent cross-appeals arising out of our Sunrise Senior Living REIT acquisition, transition and
integration expenses related to consummated transactions and deal costs required by GAAP to be
expensed rather than capitalized into the asset value. These deal costs primarily include certain
fees and expenses incurred in connection with our Lillibridge, Atria Senior Living and NHP
acquisitions.
Other
Other consists primarily of the fair value adjustment on the interest rate swaps we acquired
in connection with the Atria Senior Living acquisition, partially offset by other expenses.
Loss from unconsolidated entities for the six months ended June 30, 2011 relates to our
noncontrolling interests in joint ventures we acquired as part of the Lillibridge acquisition. Our
ownership interests in these joint ventures, which comprise 58 MOBs, range between 5% and 20%.
Income Tax Expense/Benefit
Income tax benefit for the six months ended June 30, 2011 was due primarily to our Atria
Senior Living acquisition.
Discontinued Operations
We had no assets classified as discontinued operations for the six months ended June 30, 2011.
Discontinued operations for the six months ended June 30, 2010 includes the operations of seven
assets sold during 2010.
Net Income Attributable to Noncontrolling Interest, Net of Tax
Net income attributable to noncontrolling interest, net of tax for the six months ended June30, 2011 primarily represents our partners’ joint venture interests in six MOBs. Net income
attributable to noncontrolling interest, net of tax for the six months ended June 30, 2010
primarily represents Sunrise’s share of net income from its previous ownership interests in 60 of
our seniors housing communities, which we acquired during 2010.
Non-GAAP Financial Measures
We believe that net income, as defined by GAAP, is the most appropriate earnings measurement.
However, we consider certain non-GAAP financial measures to be useful supplemental measures of our
operating performance. A non-GAAP financial measure is generally defined as one that purports to
measure historical or future financial performance, financial position or cash flows, but excludes
or includes amounts that would not be so adjusted in the most comparable GAAP measure. Set forth
below are descriptions of the non-GAAP financial measures we consider relevant to our business and
useful to investors, as well as reconciliations of these measures to our most directly comparable
GAAP financial measures.
The non-GAAP financial measures we present herein are not necessarily identical to those
presented by other real estate companies due to the fact that not all real estate companies use the
same definitions. These measures should not be considered as alternatives to net income
(determined in accordance with GAAP) as indicators of our financial performance or as alternatives
to cash flow from operating activities (determined in accordance with GAAP) as measures of our
liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our
needs. We believe that in order to facilitate a clear understanding of our consolidated historical
operating results, these measures should be examined in conjunction with net income as presented in
our Consolidated Financial Statements and data included elsewhere in this Quarterly Report on Form
10-Q.
Funds From Operations and Normalized Funds From Operations
Historical cost accounting for real estate assets implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values, instead, have
historically risen or fallen with market conditions, many industry investors have considered
presentations of operating results for real estate companies that use historical cost accounting to
be insufficient by themselves. To overcome this problem, we consider Funds From Operations (“FFO”)
and normalized FFO appropriate measures of operating performance of an equity REIT. Moreover, we
believe that normalized FFO provides useful information because it allows investors, analysts and
our management to compare our operating performance to the operating performance of other real
estate companies and between periods on a consistent basis without having to account for
differences caused by unanticipated items. We use the National Association of Real Estate
Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income (computed in
accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real
estate depreciation and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated
to reflect FFO on the same basis. We define normalized FFO as FFO excluding the following income
and expense items (which may be recurring in nature): (a) gains and losses on the sales of real
property assets; (b) merger-related costs and expenses, including amortization of intangibles and
transition and integration expenses, and deal costs and expenses, including expenses and
recoveries, if any, relating to our lawsuit against HCP, Inc. and the issuance of preferred stock
or bridge loan
fees; (c) the impact of any expenses related to asset impairment and valuation allowances, the
write-off of unamortized deferred financing fees, or additional costs, expenses, discounts,
make-whole payments, penalties or premiums incurred as a result of early debt retirement or payment
of our debt; (d) the non-cash effect of income tax benefits or expenses; (e) the impact of future
unannounced acquisitions or divestitures (including pursuant to tenant options to purchase) and
capital transactions; (f) the reversal or incurrence of contingent consideration and liabilities;
and (g) gains and losses for non-operational foreign currency hedge agreements and changes in the
fair value of interest rate swaps.
Our FFO and normalized FFO for the three and six months ended June 30, 2011 and 2010 are
summarized in the following table.
We consider Adjusted EBITDA an important supplemental measure to net income because it
provides additional information with which to evaluate the performance of our operations and serves
as another indication of our ability to service debt. We define Adjusted EBITDA as earnings
before interest, taxes, depreciation and amortization (including non-cash stock-based compensation
expense), excluding merger-related expenses and deal costs, gains or losses on sales of real
property assets and changes in the fair value of
interest rate swaps (including amounts in discontinued operations). The following is a
reconciliation of Adjusted EBITDA to net income (including amounts in discontinued operations) for
the three and six months ended June 30, 2011 and 2010:
Taxes (including amounts in general,
administrative and
professional fees)
(5,892
)
659
(8,821
)
1,195
Depreciation and amortization
80,755
50,185
132,514
102,722
Non-cash stock-based compensation expense
4,352
3,057
8,368
6,089
Merger-related expenses and deal costs
55,807
4,207
62,256
6,526
Gain on sale of real property assets
—
(5,041
)
—
(5,225
)
Change in fair value of interest rate swaps
(8,887
)
—
(8,887
)
—
Adjusted EBITDA
$
199,607
$
162,753
$
367,026
$
318,620
NOI
We consider NOI an important supplemental measure to net income because it allows investors,
analysts and our management to measure unlevered property-level operating results and to compare
our operating results to the operating results of other real estate companies and between periods
on a consistent basis. We define NOI as total revenues, excluding interest and other income, less
property-level operating expenses and medical office building services costs (including amounts in
discontinued operations). The following is a reconciliation of NOI to total revenues (including
amounts in discontinued operations) for the three and six months ended June 30, 2011 and 2010:
During the six months ended June 30, 2011, our principal sources of liquidity were proceeds
from the issuance of debt and equity securities, cash flows from operations, proceeds from our
loans receivable and marketable securities portfolios and cash on hand. For the remainder of 2011,
our principal liquidity needs are to: (i) fund normal operating expenses; (ii) meet our debt
service requirements; (iii) repay maturing mortgage and other debt, including our convertible notes
due November 15, 2011; (iv) fund capital expenditures for our senior living operations and MOB
operations reportable segments; (v) fund acquisitions, investments and/or commitments and any
development activities; and (vi) make distributions to our stockholders, as required for us to
continue to qualify as a REIT. We funded the Atria Senior Living transaction, including deal
costs, through the issuance of 24.96 million shares of our common stock, cash on hand, borrowings
under our unsecured revolving credit facilities and assumed mortgage financing. We funded the NHP
transaction, including deal costs, through the issuance of 99.8 million shares of our common stock,
cash on hand, borrowings under our unsecured revolving credit facilities and the assumption of
debt. We believe that our other liquidity needs will be satisfied by cash flows from operations,
cash on hand, debt assumptions and financings, issuance of equity securities, proceeds from sales
of assets and borrowings under our unsecured revolving credit facilities. However, if these
sources of capital are not available and/or if we make a significant amount of acquisitions and
investments, we may be required to obtain funding from additional borrowings, assume existing debt
from the seller, dispose of assets (in whole or in part through joint venture arrangements with
third parties) and/or issue secured or unsecured long-term debt or other securities.
As of June 30, 2011, we had a total of $26.7 million of unrestricted cash and cash
equivalents, operating cash and cash related to our senior living operations and MOB operations
reportable segments that is deposited and held in property-level accounts. Funds maintained in the
property-level accounts are used primarily for the payment of property-level expenses and certain
capital expenditures. At June 30, 2011, we also had escrow deposits and restricted cash of $64.3
million and $851.2 million of unused borrowing capacity available under our unsecured revolving
credit facilities.
Unsecured Revolving Credit Facilities and Term Loan
At June 30, 2011, we had $1.0 billion of aggregate borrowing capacity under our unsecured
revolving credit facilities, all of which matures on April 26, 2012. Borrowings under our
unsecured revolving credit facilities bear interest at a fluctuating rate per annum (based on U.S.
or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate), plus
an applicable percentage based on our consolidated leverage. At June 30, 2011, the applicable
percentage was 2.30%. Our unsecured revolving credit facilities also have a 20 basis point
facility fee.
In connection with the NHP acquisition, we acquired additional liquidity from an $800.0
million senior unsecured term loan previously extended to NHP. At our option, borrowings under the
term loan, which are available from time to time on a non-revolving basis, bear interest at the
applicable LIBOR plus 1.50% (1.69% at June 30, 2011) or the “Alternate Base Rate” plus 0.50% (3.75%
at June 30, 2011). We pay a facility fee of 0.10% per annum on the unused commitments under the
term loan agreement. Borrowings under the term loan mature on June 1, 2012. As of the date of
this filing, there was approximately $250.0 million of borrowings outstanding under the term loan,
and we were in compliance with all covenants under the term loan.
Mortgages
We assumed mortgage debt of $1.2 billion and $0.4 billion, respectively, in connection with
the Atria Senior Living and NHP acquisitions.
In February 2011, we repaid in full mortgage loans outstanding in the aggregate principal
amount of $307.2 million and recognized a loss on extinguishment of debt of $16.5 million in
connection with this repayment during the first quarter of 2011.
Equity Offerings
In February 2011, we completed the sale of 5,563,000 shares of our common stock in an
underwritten public offering pursuant to our existing shelf registration statement. We received
$300.0 million in aggregate proceeds from the sale, which we used to repay existing mortgage debt
and for working capital and other general corporate purposes.
On May 19, 2011, we filed a shelf registration
statement relating to the resale by the selling stockholders of the shares of our common stock issued as
partial consideration for the Atria Senior Living acquisition.
In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750% senior
notes due 2021, at a public offering price equal to 99.132% of par for total proceeds of $693.9
million, before the underwriting discount and expenses. We used a portion of the proceeds from
the issuance to fund a senior unsecured term loan to NHP in the aggregate principal amount of $600.0
million, bearing interest at a fixed rate of 5.0% per annum and maturing in 2021.
In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior notes
due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the
redemption date, pursuant to the call option contained in the indenture governing the notes. As a
result, we paid a total of approximately $206.5 million, plus accrued and unpaid interest, on the
redemption date and expect to recognize a loss on extinguishment of debt of $8.7 million during the
third quarter of 2011.
As a result of the NHP acquisition, we assumed approximately $991.7 million aggregate
principal amount of outstanding unsecured senior notes. On July 15, 2011, we repaid in full, at
par, $339.0 million principal amount then outstanding of NHP’s 6.50% senior notes due 2011 upon
maturity. The remaining NHP senior notes outstanding bear interest at fixed rates ranging from
6.00% to 8.25% per annum and have maturity dates ranging between July 1, 2012 and July 7, 2038,
subject in certain cases to earlier repayment at the option of the holder.
Cash Flows
The following is a summary of our sources and uses of cash flows for the six months ended June30, 2011 and 2010:
For the Six Months
Ended June 30,
Change
2011
2010
$
%
(Dollars in thousands)
Cash and cash equivalents at beginning of period
$
21,812
$
107,397
$
(85,585
)
79.7
%
Net cash provided by operating activities
186,300
207,717
(21,417
)
10.3
Net cash used in investing activities
(744,606
)
(21,437
)
(723,169
)
> 100
Net cash provided by (used in) financing activities
563,095
(265,835
)
828,930
> 100
Effect of foreign currency translation on cash and
cash equivalents
101
(48
)
149
> 100
Cash and cash equivalents at end of period
$
26,702
$
27,794
$
(1,092
)
3.9
%
Cash Flows from Operating Activities
Cash flows from operating activities decreased during the six months ended June 30, 2011 over
the same period in 2010 primarily due to higher merger-related expenses and deal costs and
interest expense, partially offset by higher NOI from our senior living and MOB operations.
Cash Flows from Investing Activities
Cash used in investing activities during the six months ended June 30, 2011 and 2010 consisted
primarily of our investments in real estate ($264.5 million and $22.9 million in 2011 and 2010,
respectively), purchase of noncontrolling interests ($3.3 million in 2011), investments in loans
receivable ($612.9 million and $15.8 million in 2011 and 2010, respectively) and capital
expenditures ($19.2 million and $7.1 million in 2011 and 2010, respectively). These uses were
offset by proceeds from real estate disposals ($23.0 million in 2010), proceeds from loans
receivable ($132.4 million and $1.3 million in 2011 and 2010, respectively) and proceeds from the
sale of marketable debt securities ($23.1 million in 2011).
Cash Flows from Financing Activities
Cash provided by financing activities during the six months ended June 30, 2011 consisted
primarily of $99.5 million of net borrowings under our unsecured revolving credit facilities,
$704.1 million of proceeds from the issuance of debt and $299.9 million of net proceeds from the
issuance of common stock. These cash inflows were partially offset by $337.4 million of debt
repayments and $201.9 million of cash dividend payments to common stockholders.
Cash used in financing activities during the six months ended June 30, 2010 consisted
primarily of $215.2 million of debt repayments, $167.8 million of cash dividend payments to common
stockholders, $4.3 million of distributions to noncontrolling interests and $1.8 million of
payments for deferred financing costs. These uses were partially offset by $117.3 million of net
borrowings under our unsecured revolving credit facilities.
Capital Expenditures
Our tenants generally bear the responsibility of maintaining and improving our triple-net
leased properties. Accordingly, we do not expect to incur any major capital expenditures in
connection with these properties. After the terms of the triple-net leases expire, or in the event
that the tenants are unable or unwilling to meet their obligations under those leases, we
anticipate funding any capital expenditures for which we may become responsible by cash flows from
operations or through additional borrowings. With respect to our senior living operations and MOB
operations reportable segments, we expect that capital expenditures will be funded by the cash
flows from the properties or through additional borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, our liquidity may be affected adversely. Our
ability to borrow additional funds may be restricted in certain circumstances by the terms of the
instruments governing our outstanding indebtedness.
Contractual Obligations
The following table summarizes the effect that minimum debt (which includes principal and
interest payments) and other material noncancelable commitments are expected to have on our cash
flow in future periods as of June 30, 2011:
Less than 1
More than 5
Total
year (5)
1-3 years (6)
3-5 years (7)
years (8)
(In thousands)
Long-term debt obligations (1)(2)
$
6,087,876
$
941,931
$
1,096,090
$
1,399,207
$
2,650,648
Capital lease obligations (3)
215,785
9,410
19,146
19,653
167,576
Acquisition commitments (4)
122,000
122,000
—
—
—
Operating and ground lease
obligations
259,893
15,379
24,005
19,546
200,963
Total
$
6,685,554
$
1,088,720
$
1,139,241
$
1,438,406
$
3,019,187
(1)
Amounts represent contractual amounts due, including interest.
(2)
Interest on variable rate debt was based on forward rates obtained as of June 30, 2011.
(3)
Excludes capital leases with NHP, which are being eliminated in consolidation
beginning July 1, 2011, the effective date of the NHP acquisition.
(4)
Represents our commitments for the acquisitions of two seniors housing communities.
(5)
Includes $230.0 million outstanding principal amount of
our 37/8% convertible senior notes due 2011,
$200.0 million outstanding principal amount of our 61/2% senior notes due 2016 that were redeemed in
July 2011, $139.5 million of borrowings outstanding under our unsecured revolving credit facilities that
mature in 2012, and $82.4 million outstanding principal amount of our 9% senior notes
due 2012.
(6)
Includes $200.0 million of borrowings under our unsecured term loan due
2013.
(7)
Includes $400.0 million outstanding principal amount of our 3.125% senior notes due 2015 and the
remaining $200.0 million outstanding principal amount of our 61/2% senior notes due 2016.
(8)
Includes $225.0 million outstanding principal amount of
our 63/4% senior notes due 2017 and
$700.0 million outstanding principal amount of our 4.750% senior notes due 2021.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of our exposure to various market risks contains forward-looking
statements that involve risks and uncertainties. These projected results have been prepared
utilizing certain assumptions considered reasonable in light of information currently available to
us. Nevertheless, because of the inherent unpredictability of interest rates as well as other
factors, actual results could differ materially from those projected in such forward-looking
information.
We are exposed to market risk related to changes in interest rates on borrowings under our
unsecured revolving credit facilities, certain of our mortgage loans that are floating rate
obligations, mortgage loans receivable and marketable debt securities. These market risks result
primarily from changes in U.S. or Canadian LIBOR rates, the Canadian Bankers’ Acceptance rate or
the U.S. or Canadian Prime rates. We continuously monitor our level of floating rate debt with
respect to total debt and other factors, including our assessment of the current and future
economic environment.
Interest rate fluctuations generally do not affect our fixed rate debt obligations until they
mature. However, changes in interest rates affect the fair value of our fixed rate debt. If
interest rates have risen at the time our fixed rate debt matures or is refinanced, our future
earnings and cash flows could be adversely affected by the additional borrowing costs. Conversely,
lower interest rates at the time of maturity or refinancing may lower our overall borrowing costs.
To highlight the sensitivity of our fixed rate debt to changes in interest rates, the
following summary shows the effects of a hypothetical instantaneous change of 100 basis points
(“BPS”) in interest rates as of June 30, 2011 and December 31, 2010:
Fair value reflecting change in interest rates: (1)
-100 BPS
4,470,769
3,008,630
+100 BPS
4,082,956
2,794,140
(1)
The change in fair value of fixed rate debt was due primarily to overall changes in
interest rates and the assumption of debt in connection with the Atria Senior Living
acquisition.
The variable rate debt in the table above
reflects, in part, the effect of $167.9 million notional amount of interest rate swaps with a maturity of February 1, 2013 that effectively convert
fixed rate debt to variable rate debt.
The increase in our outstanding variable rate debt from December 31, 2010 is primarily
attributable to debt assumed in connection with the Atria Senior Living acquisition and borrowings
under our unsecured revolving credit facilities. Pursuant to the terms of certain leases with one of our
tenants, if interest rates increase on certain variable rate debt that we have totaling $80.0
million as of June 30, 2011, our tenant is required to pay us additional rent (on a
dollar-for-dollar basis) in an amount equal to the increase in interest expense resulting from the
increased interest rates. Therefore, the
increase in interest expense related to this debt is equally offset by an increase in additional
rent due to us from the tenant. Assuming a 100 basis point increase in the weighted average
interest rate related to our variable rate debt, and assuming no change in the outstanding balance
as of June 30, 2011, interest expense for 2011 would increase by approximately $4.9 million, or
$0.03 per diluted common share. The fair value of our fixed and variable rate debt is based on
current interest rates at which we could obtain similar borrowings.
We earn interest from investments in marketable debt securities on a fixed rate basis. We
record these investments as available-for-sale at fair value, with unrealized gains and losses
recorded as a component of stockholders’ equity. Interest rate fluctuations and market conditions
will cause the fair value of these investments to change. As of June 30, 2011 and December 31,2010, the fair value of our marketable debt securities held at June 30, 2011, which had an original
cost of
$37.8 million, was $43.8 million and $43.4 million, respectively. In January and March 2011,
we sold marketable debt securities and received proceeds of approximately $10.6 million and $12.5
million, respectively. As of June 30, 2011, the fair value of our loans receivable was $635.1
million and was based on our estimates of currently prevailing rates for comparable loans.
We are subject to fluctuations in U.S. and Canadian exchange rates which may, from time to
time, have an impact on our financial condition and results of operations. Increases or decreases
in the value of the Canadian dollar will impact the amount of net income we earn from our senior
living operations in Canada. Based on results for the six months ended June 30, 2011, if the
Canadian dollar exchange rate were to increase or decrease by $0.10, our results from operations
would decrease or increase, as applicable, by approximately $0.1 million for the six-month period.
If we increase our international presence through investments in, and/or acquisitions or
development of, seniors housing and/or healthcare assets outside the United States, we may also
decide to transact additional business in currencies other than U.S. or Canadian dollars. Although
we may decide to pursue hedging alternatives (including additional borrowings in local currencies)
to protect against foreign currency fluctuations, we cannot assure you that any such fluctuations
will not have a Material Adverse Effect on us.
We may engage in hedging strategies to manage our exposure to market risks in the future,
depending on an analysis of the interest rate and foreign currency exchange rate environments and
the costs and risks of such strategies. We do not use derivative financial instruments for
speculative purposes.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2011. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were
effective as of June 30, 2011, at the reasonable assurance level.
Internal Control Over Financial Reporting
In May 2011, we acquired substantially all of the real estate assets and working capital of privately-owned Atria
Senior Living. As a result of the transaction, we added to our senior living operating portfolio
117 private pay seniors housing communities and one development land parcel.
During the initial transition period following this acquisition, which will include the remainder
of 2011, we believe we have implemented adequate procedures and controls to ensure that the
financial information of these properties is materially correct and properly reflected in our
Consolidated Financial Statements. However, we cannot provide absolute assurance that such
information is materially correct in all respects.
Except as described above, during the second quarter of 2011, there were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
The information contained in “Note 10—Litigation” of the Notes to Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by
reference into this Item 1. Except as set forth therein, there have been no new material legal
proceedings and no material developments in the legal proceedings reported in our Annual Report on
Form 10-K for the year ended December 31, 2010.
ITEM 1A.
RISK FACTORS
The following risk factors reflect certain modifications of, or additions
to, the risk factors continued in our Annual Report on Form 10-K for the year ended December 31, 2010 primarily as a
result of our Atria Senior Living and NHP acquisitions.
The properties managed by Sunrise and Atria account for a significant portion of our revenues and
operating income; Although Sunrise and Atria are managers, not
tenants, in our properties, adverse developments in their business and affairs or financial
condition could have a Material Adverse Effect on us.
As of June 30, 2011, Sunrise and Atria, collectively, managed 196 of our seniors housing
communities pursuant to long-term management agreements. These properties represent a substantial
portion of our portfolio, based on their gross book value, and account for a significant portion of
our total revenues and operating income. Although we have various rights as owner under the Sunrise
and Atria management agreements, we rely on Sunrise’s and Atria’s personnel, good faith, expertise,
historical performance, technical resources and information systems, proprietary information and
judgment to manage our seniors housing communities efficiently and effectively. We also rely on
Sunrise and Atria to set resident fees, to provide accurate property-level financial results for
our properties in a timely manner and to otherwise operate those properties in accordance with the
terms of our management agreements and in compliance with all applicable laws and regulations. For
example, we depend on Sunrise’s and Atria’s ability to attract and retain skilled management
personnel who are responsible for the day-to-day operations of our seniors housing communities. A
shortage of nurses or other trained personnel or general inflationary pressures may force Sunrise or Atria
to enhance its pay and benefits package to compete effectively for such personnel, and Sunrise or
Atria may not be able to offset such added costs by increasing the rates charged to residents. Any
increase in labor costs and other property operating expenses, any failure by Sunrise or Atria to
attract and retain qualified personnel, or changes in Sunrise’s or Atria’s senior management could
adversely affect the income we receive from our seniors housing communities and have a Material
Adverse Effect on us.
Because
Sunrise and Atria do not lease properties from us, we are not
directly exposed to their credit risk. However, any adverse
developments in Sunrise’s or Atria’s business and affairs
or financial
condition could impair their ability to manage our properties efficiently and effectively and could have a Material
Adverse Effect on us. If Sunrise or Atria experiences any significant financial, legal, accounting
or regulatory difficulties due to the weakened economy or otherwise, such difficulties could result
in, among other adverse events, acceleration of its indebtedness, impairment of its continued
access to capital, the enforcement of default remedies by its counterparties, or the commencement of
insolvency proceedings by or against it under the U.S. Bankruptcy Code, any one or a
combination of which indirectly could have a Material Adverse Effect on us.
The acquisition of NHP presents certain risks to our business and operations.
In July 2011, we acquired NHP in a stock-for-stock transaction. Pursuant to the terms and
subject to the conditions set forth in the agreement and plan of merger dated as of February 27,2011, at the effective time of the merger, each outstanding share of NHP common stock (other than
shares owned by us or any of our subsidiaries or any wholly owned subsidiary of NHP) was converted
into the right to receive 0.7866 shares of our common stock, with cash paid in lieu of fractional
shares.
The NHP acquisition presents certain risks to our business and operations, including, among other
things, that:
•
we may be unable to successfully integrate our business and NHP’s business and
realize the anticipated benefits of the merger or do so within the anticipated
timeframe;
•
we may not be able to effectively manage our expanded operations;
•
changes to the composition of our board of directors made upon completion of the
merger may affect future decisions relating to our company;
•
we may be unable to retain key employees;
•
the market price of our common stock may decline; and
•
we may be unable to continue paying dividends at the current rate.
We cannot assure you that we will be able to integrate NHP’s business without encountering
difficulties or that any such difficulties will not have a Material Adverse Effect on us.
The weakened economy could adversely impact our operating income and earnings, as well as the
results of operations of our tenants and operators, which could impair their ability to meet their
obligations to us.
Continued concerns about the U.S. economy and the systemic impact of high unemployment,
volatile energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage
market and a severely distressed real estate market have contributed to increased market volatility
and weakened business and consumer confidence. This difficult operating environment could
adversely affect our ability to generate revenues and/or increase our costs in our senior living
and MOB operations, thereby reducing our operating income and earnings. It could also have an
adverse impact on the ability of our tenants and operators to maintain occupancy and rates in our
properties, which could harm their financial condition. These economic conditions could cause us
to experience operating deficiencies in our senior living and MOB operations and/or cause our
tenants and operators to be unable to meet their rental payments and other obligations due to us,
which could have a Material Adverse Effect on us.
If the federal government’s borrowing authority is not increased
as needed to meet its future financial obligations or if the debt
rating on U.S. government securities is downgraded, our access to and cost of capital may be
adversely affected; Any legislation to address the federal government’s borrowing authority or
projected operating deficit could have a material adverse effect on our operators’ liquidity,
financial condition or results of operations.
The amount of debt that the federal government is permitted to incur (the “debt ceiling”) is
limited by statute and can be increased only by legislation adopted
by the U.S. Congress. Prior to the passage of the Budget Control Act
of 2011 (the “Budget Control Act”), the
U.S. Department of the Treasury had indicated in public statements that, without an increase of the
debt ceiling, the federal government would be unable to meet all of its financial commitments
beginning in August 2011.
Despite the legislation enacted on August 2, 2011 to lift the debt ceiling and reduce the federal government’s
projected operating deficit, the federal government’s failure to
further increase the debt ceiling as needed to meet
its future financial commitments and/or a downgrade in the debt rating on U.S.
government securities could lead to a weakened U.S. dollar, rising interest rates and constrained
access to capital, which could materially adversely affect the U.S.
and global economies, increase our costs of borrowing and
have a Material Adverse Effect on us.
To implement the Budget Control Act, President Obama and members of
the U.S. Congress have proposed
various spending cuts and tax reform initiatives, some of which could result in changes (including substantial reductions in funding) to
Medicare, Medicaid or Medicare Advantage Plans.
These measures and any future federal legislation relating to the debt ceiling or deficit
reduction could have a material adverse effect on our operators’ liquidity, financial
condition or results of operations, which could adversely affect their ability to satisfy
their obligations to us and which, in turn, could have a Material Adverse Effect on us.
We are exposed to various operational risks, liabilities and claims with respect to our operating
assets that may adversely affect our ability to generate revenues and/or increase our costs and
could have a Material Adverse Effect on us.
We are exposed to various operational risks, liabilities and claims with respect to our
operating assets, including our third-party managed seniors housing communities and our MOBs, that
may adversely affect our ability to generate revenues and/or increase our costs, thereby reducing
our profitability. These risks include fluctuations in occupancy levels, the inability to achieve
economic resident fees (including anticipated increases in those fees), rent control regulations,
increases in costs of materials, energy, labor (as a result of unionization or otherwise) and
services, national and regional economic conditions, the imposition of new or increased taxes,
capital expenditure requirements, professional and general liability claims and the availability
and costs of professional and general liability insurance. Any one or a combination of these
factors could result in operating deficiencies at our operating assets which could have a Material
Adverse Effect on us.
We have only limited rights to terminate our management agreements with Sunrise and Atria, and we
may be unable to replace Sunrise or Atria if our management agreements are terminated or not
renewed.
We are parties to long-term management agreements with each of Sunrise and Atria pursuant to
which Sunrise and Atria, collectively, provide comprehensive property management services with
respect to 196 of our seniors housing communities.
Each management agreement with Sunrise has an original term of 30 years commencing as early as
2004, and each management agreement with Atria has a term of ten years, subject to successive
automatic ten-year renewal periods. Each management agreement with Sunrise or Atria may be
terminated by us upon the occurrence of an event of default by Sunrise or Atria, respectively, in
the performance of a material covenant or term thereof (including, in certain circumstances, the
revocation of any licenses or certificates necessary for operation), subject in most cases to
Sunrise’s or Atria’s rights to cure such defaults. Each management agreement with Sunrise or Atria
may also be terminated upon the occurrence of certain insolvency events relating to Sunrise or
Atria, respectively. In addition, we may terminate each management agreement with Sunrise based on
the failure to achieve certain net operating income targets or to comply with certain expense
control covenants and each management agreement with Atria based on the failure to achieve certain
net operating income targets. Under certain circumstances, we may also terminate each management
agreement with Atria upon the payment of a fee. However, various legal and contractual
considerations may limit or delay our exercise of any or all of these termination rights.
In the event that our management agreements with Sunrise or Atria are terminated for any
reason or are not renewed upon expiration of their terms, we will have to find another manager for
the properties covered by those agreements. We believe there are a number of qualified national
and regional seniors care providers that would be interested in managing our seniors housing
communities. However, we cannot assure you that we will be able to locate another suitable manager
or, if we are successful in locating such a manager, that it will manage the properties
effectively. Moreover, any such replacement manager would require approval by the applicable
regulatory authority and, in most cases, the mortgage lender of the applicable property. We cannot
assure you that such approvals would be granted or that, if granted, the process of seeking such
approvals would not cause delay. Any inability or lengthy delay in replacing Sunrise or Atria as
manager following termination or non-renewal of our management agreements could have a Material
Adverse Effect on us.
Revenues from our senior living operations are dependent on private pay sources; Events which
adversely affect the ability of seniors to afford our daily resident fees could cause our occupancy
rates, resident fee revenues and results of operations to decline.
By and large, assisted and independent living services currently are not reimbursable under
government reimbursement programs, such as Medicare and Medicaid. Hence, substantially all of the
resident fee revenues generated by our senior living operations are derived from private pay
sources consisting of income or assets of residents or their family members. In general, due to
the expense associated with building new properties and the staffing and other costs of providing
services at these properties, only seniors with income or assets meeting or exceeding the
comparable median in the regions where our properties are located typically can afford to pay the
daily resident and care fees. The current economic downturn and depressed housing market, as well
as other events such as changes in demographics, could adversely affect the ability of seniors to
afford these fees. If the managers of our seniors housing communities are unable to attract and
retain seniors with sufficient income, assets or other resources required to pay the fees
associated with assisted and independent living services, our occupancy rates, resident fee
revenues and results of operations could decline, which, in turn, could have a Material Adverse
Effect on us.
Termination of resident lease agreements could adversely affect our revenues and earnings.
Applicable regulations governing assisted living communities generally require written
resident lease agreements with each resident. Most of these regulations also require that each
resident have the right to terminate the resident lease agreement for any reason on reasonable
notice. Consistent with these regulations, the resident lease agreements signed by the managers of
our seniors housing communities generally allow residents to terminate their lease agreements on 30
days’ notice. Thus, our managers cannot contract with residents to stay for longer periods of
time, unlike typical apartment leasing arrangements with terms of up to one year or longer. In
addition, the resident turnover rate in our seniors housing communities may be difficult to
predict. If a large number of resident lease agreements terminate at or around the same time, and
if our units remained unoccupied, then our revenues and earnings could be adversely affected,
which, in turn, could have a Material Adverse Effect on us.
Significant legal actions could subject us or our tenants, operators and managers to increased
operating costs and substantial uninsured liabilities, which could materially adversely affect our
or their liquidity, financial condition and results of operation.
From time to time, we may be directly involved in lawsuits and other legal proceedings. We
may also be named as defendants in lawsuits arising out of alleged actions of our tenants,
operators and managers for which such tenants, operators and managers have agreed to indemnify,
defend and hold us harmless from and against certain claims and liabilities. An unfavorable
resolution of pending or future litigation could have a Material Adverse Effect on us.
Our tenants, operators and managers continue to experience increases in both the frequency and
severity of professional liability claims. In addition to large compensatory claims, plaintiffs’
attorneys continue to seek significant punitive damages and attorneys’ fees. Due to the
historically high frequency and severity of professional liability claims against healthcare
providers, the availability of professional liability insurance has been restricted and the
premiums on such insurance coverage remain very high. As a result, the insurance coverage of our
tenants, operators and managers might not cover all claims against them or continue to be available
to them at a reasonable cost. If our tenants, operators and managers are unable to maintain
adequate insurance coverage or are required to pay punitive damages, they may be exposed to
substantial liabilities.
In addition, many healthcare providers are pursuing different organizational and corporate
structures coupled with self-insurance programs that provide less insurance coverage. For example,
Kindred insures its professional liability risks, in part, through a wholly owned, limited purpose
insurance company, which insures initial losses up to specified coverage levels per occurrence with
no aggregate coverage limit. Coverage for losses in excess of those per occurrence levels is
maintained through unaffiliated commercial insurance carriers up to an aggregate limit, and all
claims in excess of the aggregate limit are then insured by the limited purpose insurance company.
Similarly, Sunrise maintains a self-insurance program to cover its general and professional
liabilities. Our tenants, operators and managers, like Kindred and Sunrise, that insure any part
of their general and professional liability risks through their own captive limited purpose
entities generally estimate the future cost of general and professional liability through actuarial
studies that rely primarily on historical data. However, due to the rise in the number and
severity of professional claims against healthcare providers, these actuarial studies may
underestimate the future cost of claims, and reserves for future claims may not be adequate to
cover the actual cost of those claims.
As a result, the tenants, operators and managers of our properties could incur large funded
and unfunded professional liability expense, which could materially adversely affect their
liquidity, financial condition and results of operations, and, in turn, their ability to make
rental payments under, or otherwise comply with the terms of, their leases with us or, in the case
of our senior living operations, our results of operations, which could have a Material Adverse
Effect on us.
Registration Rights Agreement, dated as of May 12, 2011, by
and among Ventas, Inc., Prometheus Senior Quarters LLC, Lazard
Senior Housing Partners LP and LSHP Coinvestment Partnership I
LP.
Lockup Agreement, dated as of May 12, 2011, by and among
Ventas, Inc., Prometheus Senior Quarters LLC, Lazard Senior
Housing Partners LP and LSHP Coinvestment Partnership I LP.
Ownership Limit Waiver Agreement, dated as of May 12, 2011, by
and among Ventas, Inc., Prometheus Senior Quarters LLC, Lazard
Senior Housing Partners LP and LSHP Coinvestment Partnership I
LP.
Loan Agreement, dated May 17, 2011, by and between Ventas
Realty, Limited Partnership and Nationwide Health Properties,
LLC (as successor to Nationwide Health Properties, Inc.).
Term Loan Agreement, dated as of June 3, 2011, among
Nationwide Health Properties, LLC (as successor to Nationwide
Health Properties, Inc.), the Lenders party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent.
Nationwide Health Properties, Inc. 2005 Performance Incentive Plan.
Incorporated by
reference to
Appendix B to the
Proxy Statement of
Nationwide Health
Properties, Inc.
(File No.
001-09028), filed
pursuant to Section
14(a) of the
Exchange Act on
March 24, 2005.
10.10
First Amendment to the Nationwide Health Properties, Inc. 2005
Performance Incentive Plan, dated October 28, 2008.
Incorporated by
reference to
Exhibit 10.1 to the
Current Report on
Form 8-K of
Nationwide Health
Properties, Inc.
(File No.
001-09028), filed
on November 3,2008.
10.11
Nationwide Health Properties, Inc. Retirement Plan for Directors, as
amended and restated on April 20, 2006.
Incorporated by
reference to
Exhibit 10.1 to the
Quarterly Report on
Form 10-Q of
Nationwide Health
Properties, Inc.
(File No.
001-09028) for the
quarter ended March31, 2006.
10.12
Amendment to the Nationwide Health Properties, Inc. Retirement Plan for
Directors, as amended and restated on April 20, 2006.
Incorporated by
reference to
Exhibit 10.9 to the
Current Report on
Form 8-K of
Nationwide Health
Properties, Inc.
(File No.
001-09028), filed
on November 3,2008.
10.13
Amended and Restated Deferred Compensation Plan of Nationwide Health
Properties, Inc., dated October 28, 2008.
Incorporated by
reference to
Exhibit 10.6 to the
Current Report on
Form 8-K of
Nationwide Health
Properties, Inc.
(File No.
001-09028), filed
on November 3,2008.
12.1
Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
Certification of Richard A. Schweinhart, Executive Vice President and
Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer,
pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. § 1350.
Certification of Richard A. Schweinhart, Executive Vice President and
Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registration Rights Agreement, dated as of May 12, 2011, by
and among Ventas, Inc., Prometheus Senior Quarters LLC, Lazard
Senior Housing Partners LP and LSHP Coinvestment Partnership I
LP.
Lockup Agreement, dated as of May 12, 2011, by and among
Ventas, Inc., Prometheus Senior Quarters LLC, Lazard Senior
Housing Partners LP and LSHP Coinvestment Partnership I LP.
Ownership Limit Waiver Agreement, dated as of May 12, 2011, by
and among Ventas, Inc., Prometheus Senior Quarters LLC, Lazard
Senior Housing Partners LP and LSHP Coinvestment Partnership I
LP.
Loan Agreement, dated May 17, 2011, by and between Ventas
Realty, Limited Partnership and Nationwide Health Properties,
LLC (as successor to Nationwide Health Properties, Inc.).
Term Loan Agreement, dated as of June 3, 2011, among
Nationwide Health Properties, LLC (as successor to Nationwide
Health Properties, Inc.), the Lenders party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent.
Nationwide Health Properties, Inc. 2005 Performance Incentive Plan
Incorporated by reference to
Appendix B to the Proxy
Statement of Nationwide Health
Properties, Inc. (File No.
001-09028), filed pursuant to
Section 14(a) of the Exchange
Act on March 24, 2005.
10.10
First Amendment to the Nationwide Health Properties, Inc. 2005
Performance Incentive Plan, dated October 28, 2008.
Certification of Debra A. Cafaro, Chairman and Chief Executive
Officer, pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended.
Certification of Richard A. Schweinhart, Executive Vice President
and Chief Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
Certification of Debra A. Cafaro, Chairman and Chief Executive
Officer, pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. § 1350.
Certification of Richard A. Schweinhart, Executive Vice President
and Chief Financial Officer, pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, as amended, and 18 U.S.C. §
1350.