Acquisitions of Real Estate Property

12 Months Ended

Dec. 31, 2011

Acquisitions of Real Estate Property

Acquisitions of Real Estate Property

Note 4—Acquisitions of Real Estate Property

        The following summarizes our acquisitions in 2011, 2010 and 2009. 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 tenant, operator or manager, geographic area, asset type, business model or revenue source.

ASLG

        In May 2011, we acquired substantially all of the real estate assets and working capital of privately-owned ASLG. 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 acquisition date closing price of our common stock of $55.33 per share). In October 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 ASLG 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, ASLG 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 period from May 12, 2011 through December 31, 2011, revenues attributable to the acquired assets were $403.2 million and NOI attributable to the acquired assets was $122.1 million.

        We are accounting for the ASLG acquisition under the acquisition method in accordance with ASC Topic 805, Business Combinations ("ASC 805"). 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	$	341,540
Buildings and improvements		2,876,717
Acquired lease intangibles		160,340
Other assets		216,009
Total assets acquired		3,594,606
Notes payable and other debt		1,629,212
Deferred tax liability		44,608
Other liabilities		202,167
Total liabilities assumed		1,875,987
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 September 30, 2011, filed with the SEC on November 7, 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 purchase 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 $81.0 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 December 31, 2011, we had incurred a total of $53.3 million of acquisition-related costs related to the ASLG acquisition, all of which were expensed as incurred and included in merger-related expenses and deal costs in our Consolidated Statements of Income for the applicable periods. For the year ended December 31, 2011, we expensed $48.9 million of acquisition-related costs related to the ASLG acquisition.

        As partial consideration for the ASLG 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 December 31, 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 as of December 31, 2011 at its discounted fair value, and we record any changes in its discounted fair value in earnings in our Consolidated Statements of Income. As of both December 31, 2011 and the acquisition date, the estimated discounted fair value of contingent consideration was $44.2 million.

NHP Acquisition

        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. 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 owned through joint ventures). For the period from July 1, 2011 through December 31, 2011, revenues attributable to the acquired assets were $269.1 million and NOI attributable to the acquired assets was $245.1 million (including amounts in discontinued operations).

        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	$	704,315
Buildings and improvements		6,216,925
Acquired lease intangibles		503,451
Investment in unconsolidated entities		93,553
Other assets		756,074
Total assets acquired		8,274,318
Notes payable and other debt		1,882,752
Other liabilities		744,410
Total liabilities assumed		2,627,162
Redeemable OP unitholder interests assumed		100,888
Noncontrolling interest assumed		79,773
Net assets acquired		5,466,495
Cash acquired		29,202
Equity issued		5,361,495
Total cash used	$	75,798

        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 September 30, 2011, filed with the SEC on November 7, 2011, due primarily to reclassification adjustments for presentation, adjustments to our valuation assumptions and acquiring additional information not readily available at the date of acquisition. The changes to our valuation assumptions were based on more accurate information concerning the subject assets and liabilities. The changes related primarily to a decrease in investments in real estate of approximately $161.6 million and a corresponding increase in other assets.

        Included in other assets is $347.9 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 $293.0 million and $54.9 million of the goodwill balance to our triple-net leased properties and MOB operations reportable business segments, respectively, based on relative fair value. We do not expect to deduct any of the goodwill balance for tax purposes.

        As of and for the year ended December 31, 2011, we had incurred a total of $53.3 million of acquisition-related costs related to the NHP acquisition, all of which we expensed as incurred during 2011 and included in merger-related expenses and deal costs in our Consolidated Statements of Income.

Other 2011 Acquisitions

        During 2011, we also invested approximately $329.5 million, including the assumption of $134.9 million in debt, in MOBs and seniors housing communities.

Lillibridge Acquisition

        In July 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 that was not repaid in connection with the closing.

        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

        During 2010, we also purchased five MOBs for a purchase price of $36.6 million and acquired Sunrise's noncontrolling interests in 58 of our Sunrise-managed seniors housing communities 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.

2009 Acquisitions

        During 2009, we purchased four MOBs for an aggregate purchase price of $77.7 million, including $1.7 million of noncontrolling interest. We own one of these MOBs through a consolidated joint venture with a partner that provides management and leasing services for the property. Additionally, in 2009, we purchased one skilled nursing facility for $10.0 million and leased it to Brookdale Senior Living.

        We also completed the development of two MOBs, both of which we consolidate, pursuant to an arrangement we entered into with a nationally recognized private developer of MOBs and healthcare facilities in 2008. That arrangement gave us the exclusive right, as part of a joint venture, to develop up to ten identified MOBs on hospital campuses in eight states.

Pending Acquisition

        In December 2011, we signed a definitive agreement to acquire Cogdell Spencer Inc. ("Cogdell"), including its 100% ownership interest in 72 MOBs and its MOB property management business, which has existing agreements to manage 44 MOBs, in an all-cash transaction. At closing, we expect our investment in Cogdell, including our share of debt, to approximate $760 million to $770 million, before anticipated transaction expenses.

        Pursuant to the terms of and subject to the conditions set forth in the agreement, at the effective time of the merger, each outstanding share of Cogdell common stock and each outstanding unit of limited partnership interest in Cogdell's operating partnership, Cogdell Spencer LP, will be converted into the right to receive $4.25 per share (or unit), and each outstanding share of Cogdell's preferred stock will be converted into the right to receive $25 per share, plus accrued and unpaid dividends through the closing. Cogdell has also reached an agreement pursuant to which, prior to the closing, Cogdell will sell its design-build and development business to an unaffiliated third party. Completion of the transaction is subject to approval of Cogdell's stockholders, the sale of Cogdell's design-build and development business and certain other customary closing conditions. We expect to complete the Cogdell transaction in the second quarter of 2012, although we cannot provide any assurance as to whether or when the transaction will occur.

Unaudited Pro Forma

        The following table illustrates the effect on net income and earnings per share as if we had consummated the ASLG and NHP acquisitions as of January 1, 2010:

	For the Year Ended December 31,
	2011		2010
	(In thousands, except per share amounts)
Revenues	$	2,256,319	$	2,178,897
Income from continuing operations attributable to common stockholders		583,446		321,637
Earnings per common share:
Basic:
Income from continuing operations attributable to common stockholders	$	2.03	$	1.14
Diluted:
Income from continuing operations attributable to common stockholders	$	2.02	$	1.14
Weighted average shares used in computing earnings per common share:
Basic		286,856		281,333
Diluted		289,193		282,382

        Acquisition-related costs related to the ASLG and NHP acquisitions are not expected to have a continuing significant impact on our financial results 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 we have or may achieve as a result of the acquisitions or any strategies that management has or may consider in order to continue to efficiently manage our operations, nor do they give pro forma effect to any other acquisitions, investments, 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 ASLG and NHP acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.