Real Property Acquisitions and Development

9 Months Ended

Sep. 30, 2011

Real Property Acquisitions and Development [Abstract]

Real Property Acquisitions and Development

3. Real Property Acquisition and Development

Genesis Acquisition

On April 1, 2011, we completed the acquisition of substantially all of the real estate assets (147 properties) of privately-owned Genesis HealthCare Corporation. The total purchase price of approximately $2,475,144,000 is comprised of the $2,400,000,000 cash consideration and the fair value of capital lease obligations totaling approximately $75,144,000 and has been allocated on a preliminary basis in the amounts of $144,091,000 to land and land improvements and $2,331,053,000 to buildings and improvements. We funded the cash consideration and other associated costs of the acquisition primarily through the proceeds of the offerings of common stock, preferred stock and senior unsecured notes completed in March 2011. Effective April 1, 2011, we began leasing the acquired facilities to Genesis pursuant to a master lease. In addition to rent, the triple net master lease requires Genesis to pay all operating costs, utilities, real estate taxes, insurance, building repairs, maintenance costs and all obligations under the ground leases. All obligations under the master lease have been guaranteed by FC-GEN Operations Investment, LLC, which was spun-off by Genesis prior to closing the acquisition. The initial term is fifteen years. Genesis has one option to renew for an additional term of fifteen years. The master lease provides that the base rent for the first year is $198,000,000 and will increase at least 1.75% but no more than 3.50% (subject to CPI changes) for each of the years two through six during the initial term and at least 1.50% but no more than 3.00% per year thereafter (subject to CPI changes). We expect to recognize rental income based on the minimum rent escalators during the initial term.

The following unaudited pro forma consolidated results of operations have been prepared as if the Genesis acquisition had occurred as of January 1, 2010 based on the preliminary purchase price allocations discussed above. Amounts are in thousands, except per share data:

	Nine Months Ended September 30,
	2011		2010
Revenues	$	1,074,416	$	632,555
Income from continuing operations attributable to common stockholders	$	87,113	$	66,733
Income from continuing operations attributable to common stockholders per share:
Basic	$	0.48	$	0.44
Diluted	$	0.48	$	0.43

Strategic Medical Office Partnership

As discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2010, we formed a strategic partnership with a national medical office building company (“MOBJV”) on December 31, 2010 whereby the partnership invested in 17 medical office properties. We own a controlling interest in 11 properties and consolidate them. Consolidation is based on a combination of ownership interest and control of operational decision-making authority. We do not own a controlling interest in six properties and account for them under the equity method. Our investment in the strategic partnership provides us access to health systems and includes development and property management resources. During the quarter ended September 30, 2011, we finalized the purchase price allocation for our investment in the MOBJV in accordance with ASC 805, Business Combinations. The updated purchase price allocation reflects changes primarily to our estimate of additional purchase consideration that is contingent upon certain occupancy and development project performance thresholds. These adjustments did not have a significant impact on our consolidated results of operations for the three and nine months ended September 30, 2011.

The following table presents the updated purchase price calculation and the allocation to assets acquired and liabilities assumed, based upon their estimated fair values (in thousands):

Land and land improvements	$	10,240
Buildings and improvements		170,886
Acquired lease intangibles		41,519
Investment in unconsolidated joint venture		21,321
Goodwill		68,321
Other acquired intangibles		36,439
Cash and cash equivalents		3,873
Restricted cash		107
Receivables and other assets		5,390
Total assets acquired		358,096
Secured debt		61,664
Below market lease intangibles		4,188
Accrued expenses and other liabilities		36,834
Total liabilities assumed		102,686
Redeemable noncontrolling interests		10,848
Preferred stock		16,667
Capital in excess of par		2,721
Net assets acquired	$	225,174

Seniors Housing Operating—Silverado Partnership

During the three months ended March 31, 2011, we completed the formation of our partnership with Silverado Senior Living, Inc. to own and operate a portfolio of 18 combination seniors housing and care communities located in California, Texas, Arizona and Utah. We own a 95.4% partnership interest and Silverado owns the remaining 4.6% interest and continues to manage the communities. The partnership owns and operates six communities previously owned by us and 12 additional communities previously owned by Silverado. The transaction took advantage of the structure authorized by the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). The results of operations for this partnership have been included in our consolidated results of operations beginning as of January 1, 2011 and are a component of our seniors housing operating segment. Consolidation is based on a combination of ownership interest and operational decision-making control authority.

In conjunction with the formation of the partnership, we contributed $163,368,000 of cash and the six properties previously owned by us. Silverado contributed the remaining 12 properties to the partnership and the secured debt relating to these properties in exchange for its 4.6% interest in the partnership. The six properties are recorded at their historical carrying values and the noncontrolling interest was established based on such values. The difference between the fair value of the consideration received relating to these properties and the historical allocation of the 4.6% noncontrolling interest was recorded in capital in excess of par value. The total purchase price for the 12 communities acquired has been allocated to the tangible and identifiable intangible assets and liabilities based upon their respective fair values in accordance with the company’s accounting policies. During the quarter ended September 30, 2011, we finalized the purchase price allocation for the transaction, and such finalization did not result in significant changes from the amounts recorded in the preliminary purchase price allocation or to our consolidated results of operations. The following table presents the final purchase price allocation to the assets acquired and liabilities assumed, based on their estimated fair values (in thousands):

Land and land improvements	$	11,170
Buildings and improvements		173,841
Acquired lease intangibles		19,305
Investment in unconsolidated subsidiary		14,960
Cash and cash equivalents		6,715
Restricted cash		1,930
Receivables and other assets		3,455
Total assets acquired		231,376
Secured debt		60,667
Accrued expenses and other liabilities		8,306
Total liabilities assumed		68,973
Capital in excess of par		6,017
Noncontrolling interests		7,823
Net assets acquired	$	148,563

Seniors Housing Operating—Benchmark Partnership

During the three months ended March 31, 2011, we completed the formation of our partnership with Benchmark Senior Living to own and operate a portfolio of 34 seniors housing communities located in New England. We own a 95% partnership interest and Benchmark owns the remaining 5% interest and continues to manage the communities. The 34 communities included in the partnership were previously owned by The GPT Group and Benchmark. The transaction took advantage of the structure authorized by RIDEA. The results of operations for this partnership have been included in our consolidated results of operations beginning as of March 28, 2011 and are a component of our seniors housing operating segment. Consolidation is based on a combination of ownership interest and operational decision-making control authority.

In conjunction with the formation of the partnership, we contributed $383,356,000 of cash. Benchmark contributed the 34 properties to the partnership and the secured debt relating to these properties in exchange for its 5% interest in the partnership. The total purchase price for the communities acquired has been allocated to the tangible and identifiable intangible assets and liabilities based upon their respective fair values in accordance with the company’s accounting policies. During the quarter ended September 30, 2011, we finalized the purchase price allocation for the transaction, and such finalization did not result in significant changes from the amounts recorded in the preliminary purchase price allocation or to our consolidated results of operations. The following table presents the final purchase price allocation to the assets acquired and liabilities assumed, based on their estimated fair values (in thousands):

Land and land improvements	$	60,440
Buildings and improvements		794,886
Acquired lease intangibles		68,980
Cash and cash equivalents		28,258
Restricted cash		6,255
Total assets acquired		958,819
Secured debt		524,990
Accrued expenses and other liabilities		17,468
Entrance fee liability		13,269
Total liabilities assumed		555,727
Noncontrolling interests		19,737
Net assets acquired	$	383,355

Real Property Investment Activity

The following is a summary of our real property investment activity for the periods presented (in thousands):

	Nine Months Ended
	September 30, 2011					September 30, 2010
	Properties		Amount			Properties		Amount
Real property acquisitions:
Seniors housing operating		46	$	1,126,130			25	$	576,000
Seniors housing triple-net		179		3,202,273			15		219,772
Medical facilities		22		305,915			19		246,582
Land parcels		1		6,770			—		—
Total acquisitions		248		4,641,088			59		1,042,354
Less: Assumed debt				(727,882	)				(353,165	)
Assumed other items, net (1)				(152,391	)				(152,349	)
Cash disbursed for acquisitions				3,760,815					536,840
Construction in progress additions:
Seniors housing triple-net				121,382					62,115
Medical facilities				138,898					184,973
Total construction in progress additions				260,280					247,088
Less: Capitalized interest				(10,090	)				(15,536	)
Accruals (2)				(33,451	)				(8,088	)
Cash disbursed for construction in progress				216,739					223,464
Capital improvements to existing properties				52,890					40,660
Total cash invested in real property			$	4,030,444				$	800,964

(1) Includes $75,144,000 of capital lease obligations.

(2) Represents non-cash accruals for amounts to be paid in future periods relating to properties that converted in the period noted above.

The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented:

	Nine Months Ended
	September 30, 2011		September 30, 2010
Development projects:
Seniors housing triple-net	$	39,462	$	269,261
Medical facilities		325,562		145,973
Total development projects		365,024		415,234
Expansion projects		43,793		2,320
Total construction in progress conversions	$	408,817	$	417,554

Transaction costs for the nine months ended September 30, 2011 primarily represent costs incurred with the Genesis, Silverado, and Benchmark transactions (including due diligence costs, fees for legal and valuation services, and termination of a pre-existing relationship computed based on the fair value of the assets acquired), lease termination fees and costs incurred in connection with the new property acquisitions.