Acquisitions of Real Estate Property

9 Months Ended

Sep. 30, 2011

Acquisitions of Real Estate Property [Abstract]

ACQUISITIONS OF REAL ESTATE PROPERTY

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, geographic area, asset type or revenue source.

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. We funded a portion of the purchase price 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). Subsequent to September 30, 2011, we cancelled 83,441 shares issued to the sellers for a working capital adjustment in accordance with the purchase agreement. 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 the three months ended September 30, 2011 and for the period from May 12, 2011 through September 30, 2011, revenues attributable to the acquired assets were $157.1 million and $242.8 million, respectively, and NOI attributable to the acquired assets was $47.5 million and $73.7 million, respectively.

We are accounting for the Atria Senior Living acquisition under the acquisition method in accordance with ASC Topic 805, Business Combinations (“ASC 805”), and our initial accounting for this acquisition 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):

Land and improvements	$	342,330
Buildings and improvements		2,878,807
Acquired lease intangibles		160,340
Other assets		213,325
Total assets acquired		3,594,802
Notes payable and other debt		1,629,212
Deferred tax liability		43,889
Other liabilities		203,082
Total liabilities assumed		1,876,183
Net assets acquired		1,718,619
Cash acquired		77,718
Equity issued		1,376,437
Total cash used	$	264,464

The allocation of fair values of the assets acquired and liabilities assumed has changed and is subject to further adjustment from the allocation reported in “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated Financial Statements included in Part I of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 5, 2011, due primarily to reclassification adjustments for presentation, adjustments to our valuation assumptions and final purchase price settlement with the sellers in accordance with the terms of the acquisition agreement. The changes to our valuation assumptions were based on more accurate information concerning the subject assets and liabilities. None of these changes had a material impact on our Consolidated Financial Statements.

Included in other assets is $79.2 million of goodwill, which represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed as of the acquisition date. All of the goodwill was assigned to our senior living operations reportable segment, and we do not expect to deduct any of the goodwill balance for tax purposes.

As of September 30, 2011, we had incurred a total of $52.5 million of acquisition-related costs related to the Atria Senior Living acquisition, 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 nine months ended September 30, 2011, we expensed $1.5 million and $48.2 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 outcomes for the same reason. We estimated the fair value of contingent consideration as of the acquisition date and as of September 30, 2011 using probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and 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 (in accounts payable and other liabilities) as of September 30, 2011 at its fair value, and we record any changes in fair value in earnings on our Consolidated Statements of Income. As of both September 30, 2011 and the acquisition date, the estimated fair value of contingent consideration was $44.2 million.

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. In connection with the acquisition, we paid $105 million at closing to repay amounts then outstanding and terminated the commitments under NHP’s revolving credit facility. The NHP acquisition added 643 seniors housing and healthcare properties to our portfolio (including properties that are owned through joint ventures). For both the three and nine months ended September 30, 2011, revenues attributable to the acquired assets were $134.8 million and NOI attributable to the acquired assets was $122.9 million.

We are accounting for the NHP acquisition under the acquisition method in accordance with ASC 805, and we have completed our initial accounting for this acquisition, which is subject to further adjustment. 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):

Land and improvements	$	687,142
Buildings and improvements		6,414,258
Acquired lease intangibles		515,535
Other assets		701,743
Total assets acquired		8,318,678
Notes payable and other debt		1,879,014
Other liabilities		789,040
Total liabilities assumed		2,668,054
Redeemable OP unitholder interests assumed		100,429
Noncontrolling interest assumed		83,702
Net assets acquired		5,466,493
Cash acquired		29,202
Equity issued		5,361,493
Total cash used	$	75,798

Included in other assets is $189.6 million of goodwill, which represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed as of the acquisition date. We have allocated $129.4 million and $60.2 million of the goodwill balance to our triple-net leased properties and operating assets, respectively. We do not expect to deduct any of the goodwill balance for tax purposes.

As of September 30, 2011, we had incurred a total of $54.8 million of acquisition-related costs related to the NHP acquisition, 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 nine months ended September 30, 2011, we expensed $42.5 million and $54.8 million, respectively, of acquisition-related costs related to the NHP acquisition.

Other 2011 Acquisitions

In August 2011, we purchased one seniors housing community for a purchase price of $3.8 million. In October 2011, we purchased two MOBs and two seniors housing communities (one of which is being managed by Atria) for approximately $150.3 million, including the assumption of $37.7 million in debt.

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 Lillibridge acquisition, 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 the assumption of Sunrise’s share of mortgage debt totaling approximately $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 for a purchase price of $36.6 million.

Unaudited Pro Forma

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:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(In thousands, except per share amounts)
Revenues	$	565,424	$	556,779	$	1,698,376	$	1,625,552
Income from continuing operations attributable to common stockholders		183,517		90,891		399,249		280,216
Discontinued operations		—		542		—		7,139
Net income attributable to common stockholders		183,517		91,433		399,249		287,355
Earnings per common share:
Basic:
Income from continuing operations attributable to common stockholders	$	0.64	$	0.32	$	1.39	$	1.00
Discontinued operations		—		0.00		—		0.02
Net income attributable to common stockholders	$	0.64	$	0.32	$	1.39	$	1.02
Diluted:
Income from continuing operations attributable to common stockholders	$	0.63	$	0.32	$	1.38	$	0.99
Discontinued operations		—		0.00		—		0.03
Net income attributable to common stockholders	$	0.63	$	0.32	$	1.38	$	1.02
Weighted average shares used in computing earnings per common share:
Basic		287,365		281,439		286,647		281,374
Diluted		290,794		282,749		289,027		282,261

Acquisition-related costs related to the Atria Senior Living and NHP acquisitions are not expected to have a continuing significant impact and therefore have been excluded from these pro forma results. The pro forma results also do not include the impact of any synergies or lower borrowing costs that may be achieved as a result of the acquisitions 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.