Form 8-K/A

0001193125-13-366682.txt : 20130913 0001193125-13-366682.hdr.sgml : 20130913 20130913164639 ACCESSION NUMBER: 0001193125-13-366682 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20130913 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20130913 DATE AS OF CHANGE: 20130913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH CARE REIT INC /DE/ CENTRAL INDEX KEY: 0000766704 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341096634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08923 FILM NUMBER: 131096775 BUSINESS ADDRESS: STREET 1: 4500 DORR STREET CITY: TOLEDO STATE: OH ZIP: 43615 BUSINESS PHONE: 419-247-2800 MAIL ADDRESS: STREET 1: 4500 DORR STREET CITY: TOLEDO STATE: OH ZIP: 43615 8-K/A 1 d586143d8ka.htm FORM 8-K/A Form 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

Amendment No. 1

CURRENT REPORT

Pursuant to Section 13 OR 15(d)

of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 13, 2013

Health Care REIT, Inc.

(Exact name of registrant as specified in its charter)


Delaware	1-8923	34-1096634
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File Number)	Identification No.)


4500 Dorr Street, Toledo, Ohio		43615
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (419) 247-2800

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

On July 8, 2013, Health Care REIT, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) disclosing the completion of its purchase of membership interests in the following joint ventures: CHTSun Partners IV, LLC, CC3 Acquisition, LLC, CLPSun Partners II, LLC and CLPSun Partners III, LLC. These purchases were completed following the Company’s acquisition (the “Acquisition”) of the real estate business of Sunrise Senior Living, Inc. (“Sunrise”) pursuant to the terms of the Agreement and Plan of Merger, dated as of August 21, 2012, as amended, by and among Sunrise, Brewer Holdco, Inc., a wholly owned subsidiary of Sunrise (“Holdco”), Brewer Holdco Sub, Inc., a wholly owned subsidiary of Holdco, the Company and Red Fox, Inc., a wholly owned subsidiary of the Company. The Company is filing this Amendment No. 1 (the “Amendment”) on Form 8-K/A to amend the Original Form 8-K to include the financial statements and exhibits required by Item 9.01(a) and Item 9.01(b) of Form
8-K.

The financial statements attached hereto should be read in conjunction with the Original Form 8-K and this Amendment.

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

This Amendment provides the financial statements attached hereto as Exhibits 99.2 through 99.9.

(b) Pro forma financial information.

This Amendment provides the Company’s unaudited pro forma condensed consolidated financial statements as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012 relating to the Acquisition, attached hereto as Exhibit 99.1.

(d) Exhibits.


No.		Description

23.1		Consent of Ernst & Young LLP

23.2		Consent of Ernst & Young LLP

99.1		Health Care REIT, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012

99.2		CHTSun Partners IV, LLC Consolidated Financial Statements as of December 31, 2012 and for the period from June 29, 2012 (date of recapitalization) to December 31, 2012

99.3		CHTSun Partners IV, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.4		CC3 Acquisition, LLC Consolidated Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and for the period from January 10, 2011 (date of recapitalization) to December 31, 2011

99.5		CC3 Acquisition, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.6		CLPSun Partners II, LLC Consolidated Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and the period from August 2, 2011 (date of recapitalization) to December 31, 2011

99.7		CLPSun Partners II, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.8		CLPSun Partners III, LLC and CLPSun III Tenant, LP Combined Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and for the period from October 12, 2011 (date of recapitalization) to December 31, 2011

99.9		CLPSun Partners III, LLC and CLPSun III Tenant, LP Unaudited Combined Financial Statements as of and for the six months ended June 30, 2013

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.


HEALTH CARE REIT, INC.

By:		/s/ GEORGE L. CHAPMAN
George L. Chapman
Its: Chairman, Chief Executive Officer and President

Dated: September 13, 2013

EXHIBIT INDEX


No.		Description

23.1		Consent of Ernst & Young LLP

23.2		Consent of Ernst & Young LLP

99.1		Health Care REIT, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012

99.2		CHTSun Partners IV, LLC Consolidated Financial Statements as of December 31, 2012 and for the period from June 29, 2012 (date of recapitalization) to December 31, 2012

99.3		CHTSun Partners IV, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.4		CC3 Acquisition, LLC Consolidated Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and for the period from January 10, 2011 (date of recapitalization) to December 31, 2011

99.5		CC3 Acquisition, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.6		CLPSun Partners II, LLC Consolidated Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and the period from August 2, 2011 (date of recapitalization) to December 31, 2011

99.7		CLPSun Partners II, LLC Unaudited Consolidated Financial Statements as of and for the six months ended June 30, 2013

99.8		CLPSun Partners III, LLC and CLPSun III Tenant, LP Combined Financial Statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and for the period from October 12, 2011 (date of recapitalization) to December 31, 2011

99.9		CLPSun Partners III, LLC and CLPSun III Tenant, LP Unaudited Combined Financial Statements as of and for the six months ended June 30, 2013

EX-23.1 2 d586143dex231.htm EX-23.1 EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of Health Care REIT, Inc.:

•

Registration Statement (Form S-8 No. 333-01239) dated February 27, 1996 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-40771) dated November 21, 1997 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-73916) dated November 21, 2001 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-126195) dated June 28, 2005 pertaining to the Health Care REIT, Inc. 2005 Long-Term Incentive Plan;

•

Registration Statement (Form S-8 No. 333-161131) dated August 6, 2009 pertaining to the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan;

•

Registration Statement (Form S-3 No. 333-181185) dated May 4, 2012 pertaining to an indeterminate amount of debt securities, common stock, preferred stock, depositary shares, warrants and units of Health Care REIT, Inc.; and

•

Registration Statement (Form S-3 No. 333-188346) dated May 3, 2013 pertaining to the Health Care REIT, Inc. Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan;

of our report dated February 26, 2013 (except for Notes 5 and 17 as to which the date is August 6, 2013), with respect to the consolidated financial statements and schedules of Health Care REIT, Inc. included in the Form 8-K dated August 6, 2013 and our report dated February 26, 2013 on the effectiveness of internal control over financial reporting of Health Care REIT, Inc., included in its Annual Report (Form 10-K) for the year ended December 31, 2012, all incorporated by reference in this Form 8-K/A of Health Care REIT, Inc.

/s/ ERNST & YOUNG LLP

Toledo, Ohio

September 12, 2013

EX-23.2 3 d586143dex232.htm EX-23.2 EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the following Registration Statements of Health Care REIT, Inc.:

•

Registration Statement (Form S-8 No. 333-01239) dated February 27, 1996 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-40771) dated November 21, 1997 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-73916) dated November 21, 2001 pertaining to the Health Care REIT, Inc. 1995 Stock Incentive Plan;

•

Registration Statement (Form S-8 No. 333-126195) dated June 28, 2005 pertaining to the Health Care REIT, Inc. 2005 Long-Term Incentive Plan;

•

Registration Statement (Form S-8 No. 333-161131) dated August 6, 2009 pertaining to the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan;

•

Registration Statement (Form S-3 No. 333-188346) dated May 3, 2013 pertaining to the Health Care REIT, Inc. Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan;

of our report dated March 15, 2013, with respect to the consolidated financial statements of CHTSun Partners IV, LLC, our report dated March 15, 2013, with respect to the consolidated financial statements of CC3 Acquisition, LLC, our report dated March 27, 2013, with respect to the consolidated financial statements of CLPSun Partners II, LLC, and our report dated March 27, 2013 with respect to the combined financial statements of CLPSun Partners III, LLC and CLPSun III Tenant, LP, included in this Form 8-K/A of Health Care REIT, Inc.

/s/ ERNST & YOUNG LLP

McLean, Virginia

September 12, 2013

EX-99.1 4 d586143dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed consolidated financial statements presented below have been prepared based on certain pro forma adjustments to the historical consolidated financial statements of Health Care REIT, Inc. (the “Company”) as of and for the six month period ended June 30, 2013 and for the Company and Sunrise Senior Living, Inc. (“Sunrise”) for the year ended December 31, 2012. The historical consolidated financial statements of the Company are contained in its Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Current Report on Form 8-K dated August 6, 2013, and in its Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2013, which are incorporated by reference into this Amendment on Form 8-K/A. The historical consolidated financial statements of Sunrise and certain acquired joint ventures for the year ended December 31, 2012 are contained in the Company’s Form 8-K/A dated March 25, 2013 and are incorporated by reference into this Amendment on Form 8-K/A. The historical consolidated financial statements of certain acquired joint ventures are included as Exhibits 99.2 to 99.9 to this Amendment on Form 8-K/A.

The accompanying unaudited pro forma condensed consolidated financial statements give effect to the transaction which includes the following components (collectively referred to as the “Acquisition”):

Prior to December 31, 2012, Sunrise acquired majority interests in 37 joint venture properties through a series of transactions (collectively, the “Sunrise Acquisitions”) using Sunrise’s cash on hand and proceeds from a $580,834,000 loan provided by the Company. Sunrise used a portion of the proceeds from the loan to extinguish debt related to Sunrise Acquisitions. Adjustments included below to interest income and interest expense represent the elimination of interest income and expense related to the loan. Pro forma adjustments to the condensed consolidated statement of income for the year ended December 31, 2012 represent the results of operations of the Sunrise Acquisitions from January 1, 2012 through date of acquisition by Sunrise. This loan was acquired by the Company upon completion of the Acquisition. Sunrise Acquisitions included the following transactions:

•

On October 1, 2012, Sunrise acquired the 75% interest held by HVP Sun Investor LLC in Metropolitan Senior Housing LLC, Sunrise Lafayette Hills Assisted Living, L.P. and Sunrise Paoli Assisted Living, L.P and the 80% interest held by HVP Sun Investor II LLC in Sunrise HBLR, LLC for approximately $171,000,000.

•

On October 16, 2012, Sunrise acquired the approximate 90% direct and indirect equity interest held by Morgan Stanley Real Estate Fund VI Special-A International, L.P., MSREF VI Special-B C.V., Morgan Stanley Real Estate Fund VI International-T, L.P., MSREF VI TE C.V. and Morgan Stanley Real Estate Investors VI International, L.P. in Dawn Limited Partnership for approximately $46,000,000.

•

On November 30, 2012, Sunrise purchased the 70% interest held by HJSI Portfolio II, LLC in SunVest, LLC for approximately $11,750,000.

•

On December 14, 2012, Sunrise purchased the 70% interest held by CNL SR Fox Hill, LLC in AU-HCU Holdings, LLC for approximately $6,500,000.

Prior to December 31, 2012 the Company acquired majority interests in several joint venture properties in which Sunrise held a noncontrolling interest prior to the Acquisition through the following transactions:

•

On August 31, 2012, the Company acquired the 100% interest held by PS UK Investment (Jersey) Limited Partnership and PS UK Investment II (Jersey) Limited Partnership (collectively, “PS UK”) in five joint venture properties in the United Kingdom for $243,500,000 of cash consideration. The Company acquired the 20% interest held by PS UK from Sunrise and the 80% interest from PS UK’s other joint venture partners.

•

On December 20, 2012, the Company acquired the 80% interest held by Sunrise First Euro Holdings (Jersey) Limited and Sunrise Jersey Holdings IV Limited (collectively, “First Euro”) in five joint venture properties in the United Kingdom for $238,500,000 of cash consideration. The remaining 20% interest held by First Euro was owned by Sunrise as of December 31, 2012 and was acquired by the Company as part of the Acquisition.

PS UK and First Euro pro forma adjustments to the condensed consolidated statement of income for the year ended December 31, 2012 represent the results of operations of PS UK and First Euro from January 1, 2012 through the date of acquisition by the Company.

Pursuant to the Agreement and Plan of Merger (“Merger Agreement”), Sunrise sold the management business of Sunrise (“Management Company”) and certain additional assets and liabilities to Red Fox Management, LP (the “Management Business Buyer”) immediately prior to the Company’s acquisition of the Sunrise property portfolio on January 9, 2013 pursuant to the terms of the Membership Interest Purchase Agreement, dated as of September 13, 2012. The parties intend that under no circumstances shall the Company be deemed the owner of, or otherwise have control over Management Company or the assets, liabilities and equity thereof for any period of time (Sunrise’s historical consolidated financial statements include the results of operations and financial position of Management Company. As such, all relevant amounts relating to Management Company have been eliminated from Sunrise historical statements and adjustments identified represent assets, liabilities, revenues and expenses of Management Company).

On January 9, 2013, the Company completed the acquisition of (i) the property portfolio of Sunrise which included 57 wholly-owned properties and noncontrolling interests in 58 joint venture properties, (ii) a 20% interest in the Management Business Buyer (to be accounted for as an equity method investment), and (iii) rights to acquire additional joint venture partner interests, pursuant to the Merger Agreement for a total purchase price of approximately $2,697,712,000. As a result of the Acquisition and in accordance with the Merger Agreement, each former share of Sunrise common stock was converted into the right to receive an aggregate consideration of $14.50 in cash per share. The Company funded the Acquisition through cash on hand and funds available under the New Credit Agreement. The total purchase price of $2,697,712,000 includes cash consideration of $2,039,784,000 and the fair value of debt assumed of $77,094,000. The remaining purchase price of $580,834,000 relates to activity that occurred prior to December 31, 2012 relating to loans provided to Sunrise to fund Sunrise Acquisitions as described above.

On February 15, 2013, the Company acquired four joint venture properties through the acquisition of the remaining 80% interest in Master CNL Sun Dev 1, LLC (“Master CNL”) for cash consideration of $34,058,000 and fair value of debt assumed of $61,165,000. The remaining 20% interest in Master CNL was owned by Sunrise as of December 31, 2012 and was acquired by the Company as part of the Acquisition.

On July 1, 2013, the Company acquired (i) seven joint venture properties through the acquisition of the remaining 55.02% interest in CHTSun Partners IV, LLC (“Sun IV”); (ii) 29 joint venture properties through the acquisition of the remaining 60% interest in CC3 Acquisition, LLC (“CC3”); (iii) six joint venture properties through the acquisition of the remaining 70% interest in CLPSun Partners II, LLC (“Sun II”); and (iv) seven joint venture properties through the acquisition of the remaining 67.88% interest in CLPSun PartnersIII, LLC (“Sun III”) (collectively, these acquisitions are referred to as the “Joint Venture Buy-Outs”) for aggregate cash consideration of $362,400,000 (which includes $96,041,000 of amounts funded from restricted cash) and fair value of debt assumed of $704,985,000 (the existing secured debt relating to the Sun II properties was paid off at closing and not assumed by the Company). The remaining interests in the four portfolios were owned by Sunrise as of December 31, 2012 and were acquired by the Company as part of the Acquisition.

The unaudited pro forma condensed consolidated balance sheet as of June 30, 2013 has been prepared as if the Acquisition had occurred as of that date. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2012 and the six month period ended June 30, 2013 have been prepared as if the Acquisition had occurred as of January 1, 2012. Such statements also give effect to the use of cash on hand to fund the Acquisition.

In the opinion of the Company’s management, the pro forma condensed consolidated financial statements include all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisition. The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. The unaudited pro forma condensed consolidated financial statements are based on estimates and assumptions that are preliminary and are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the Acquisition been completed as of the dates indicated or that may be achieved in the future. The completion of the valuation, accounting for the Acquisition, the allocation of the purchase price and the impact of ongoing integration activities could cause material differences in the information presented. Furthermore, the Company expects to apply its own methodologies and judgments in accounting for the assets and liabilities acquired in the Acquisition, which may differ from those reflected in Sunrise’s historical consolidated financial statements and the pro forma condensed consolidated financial statements.

Health Care REIT, Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

June 30, 2013

(In thousands)


	Company Historical			Joint Venture Buy Out Historical		Pro Forma Adjustments				Company Pro Forma
Assets
Net real property owned	$	19,651,760		$	1,090,270	$	266,130		(B)	$	21,008,160
Net real estate loans receivable		312,356			—		—				312,356

Net real estate investments		19,964,116			1,090,270		266,130				21,320,516
Other assets:
Equity investments		768,737			—		(299,941	)	(A)		468,796
Goodwill		68,321			7,597		(7,597	)	(C)		68,321
Deferred loan expenses		71,218			2,731		(1,512	)	(E)		72,437
Cash and cash equivalents		512,472			20,515		(266,359	)	(A)		266,628
Restricted cash		212,812			10,431		(96,041	)	(A)		127,202
Receivables and other assets		598,717			7,972		(1,268	)	(D)		605,421

Total other assets		2,232,277			49,246		(672,718	)			1,608,805

Total assets		22,196,393			1,139,516		(406,588	)			22,929,321

Liabilities and equity
Liabilities:
Borrowings under unsecured lines of credit arrangements		—			—		—				—
Senior unsecured notes		6,604,979			—		—				6,604,979
Secured debt		2,875,606			786,055		(81,071	)	(E)		3,580,590
Capital lease obligations		79,481			—		—				79,481
Accrued expenses and other liabilities		539,361			39,922		(7,134	)	(D)		572,149

Total liabilities		10,099,427			825,977		(88,205	)			10,837,199
Redeemable noncontrolling interests		32,810			—		—				32,810
Equity:
Preferred stock		1,022,917			—		—				1,022,917
Common stock		285,085			—		—				285,085
Capital in excess of par value		12,263,927			313,539		(313,539	)	(C)		12,263,927
Treasury stock		(21,248	)		—		—				(21,248	)
Cumulative net income		2,264,573			—		(4,844	)	(A)		2,259,729
Cumulative dividends		(4,127,597	)		—		—				(4,127,597	)
Accumulated other comprehensive income		(49,174	)		—		—				(49,174	)
Other equity		5,678			—		—				5,678

Total Health Care REIT, Inc. stockholders' equity		11,644,161			313,539		(318,383	)			11,639,317
Noncontrolling interests		419,995			—		—				419,995

Total equity		12,064,156			313,539		(318,383	)			12,059,312

Total liabilities and equity	$	22,196,393		$	1,139,516	$	(406,588	)		$	22,929,321

Health Care REIT, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

Six Months Ended June 30, 2013

(In thousands, except per share data)


			Company Historical			Joint Venture Buy Out Historical			Pro Forma Adjustments				Company Pro Forma
Revenues:
Rental income			$	598,753		$	8,729		$	(8,729	)	(G)	$	598,753
Resident fees and service				698,319			127,959			38,443		(N)		864,721
Interest income				16,696			—			(758	)	(Q)		15,938
Other income				1,725			820			—				2,545

Total revenues				1,315,493			137,508			28,956				1,481,957
Expenses:
Interest expense				220,585			24,296			970		(O)		245,851
Property operating expenses				531,941			93,699			24,470		(N)		650,091
										(19	)	(I)
Depreciation and amortization				386,837			20,157			15,745		(P)		422,739
General and administrative expenses				51,081			—			—				51,081
Transaction costs				94,116			—			(65,344	)	(S)		28,772
Loss (gain) on derivatives				(407	)		—			—				(407	)
Loss (gain) on extinguishment of debt				(308	)		—			—				(308	)
Provision for loan losses				—			—			—				—
Impairment of long-lived assets				—			—			—				—
Gain on the sale of real estate and equity interests				—			—			—				—

Total expenses				1,283,845			138,152			(24,178	)			1,397,819

Income (loss) from continuing operations before income taxes and income from unconsolidated entities				31,648			(644	)		53,134				84,138
Income tax (expense) benefit				(3,978	)		(66	)		(184	)	(D)		(4,228	)
Income (loss) from unconsolidated entities				(3,198	)		—			3,194		(A)		(4	)

Income (loss) from continuing operations				24,472			(710	)		56,144				79,906
Less:
Preferred dividends				33,203			—			—				33,203
Preferred stock redemption charge				—			—			—				—
Net income (loss) attributable to noncontrolling interests				(774	)		—			—				(774	)

Income (loss) from continuing operations attributable to common stockholders			$	(7,957	)	$	(710	)	$	56,144			$	47,477

Average number of common shares outstanding:
Basic				266,602										266,602
Diluted				266,602										269,580

Income (loss) from continuing operations attributable to common stockholders per share:	(R	)
Basic			$	(0.03	)								$	0.18
Diluted				(0.03	)									0.18

Health Care REIT, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Income

Year Ended December 31, 2012

(In thousands, except per share data)


			Company Historical			Sunrise Historical			Historical Adjustments				Master CNL Historical		Joint Venture Buy Out Historical			Pro Forma Adjustments				Company Pro Forma
Revenues:
Rental income				$1,076,250		$	670,567		$	—			$	—	$	17,659		$	(688,226	)	(G)	$	1,076,250
Resident fees and service				697,494			491,290			(75,500	)	(F)		22,405		224,901			23,779		(U)		1,384,369
Interest income				39,065			1,103			(1,103	)	(F)		—		—			(6,208	)	(Q)		32,857
Other income				5,271			101,537			(84,359	)	(F)		91		1,396			(17,044	)	(G)		6,892

Total revenues				1,818,080			1,264,497			(160,962	)			22,496		243,956			(687,699	)			2,500,368
Expenses:
Interest expense				365,712			47,940			(7,609	)	(F)		3,101		46,427			(3	)	(H)		449,360
																			(6,208	)	(Q)
Property operating expenses				570,117			1,071,799			(112,646	)	(F)		16,668		162,148			(5,954	)	(I)		1,025,090
																			16,270		(U)
																			(693,312	)	(G)
Depreciation and amortization				514,271			48,225			28,023		(F)		2,428		39,079			176,539		(J)		808,565
General and administrative expenses				97,341			133,316			(124,892	)	(F)		—		—			(8,424	)	(K)		97,341
Transaction costs				61,609			—			—				—		1,521			(1,521	)	(S)		61,609
Loss (gain) on derivatives				(1,825	)		—			—				—		—			—				(1,825	)
Loss (gain) on extinguishment of debt				(775	)		—			—				—		—			—				(775	)
Provision for loan losses				27,008			1,534			(1,202	)	(F)		—		—			—				27,340
Impairment of long-lived assets				—			1,969			(705	)	(F)		—		—			—				1,264
Gain on the sale of real estate and equity interests				—			(4,457	)		—				—		—			4,457		(K)		—

Total expenses				1,633,458			1,300,326			(219,031	)			22,197		249,175			(518,156	)			2,467,969

Income (loss) from continuing operations before income taxes and income from unconsolidated entities				184,622			(35,829	)		58,069				299		(5,219	)		(169,543	)			32,399
Income tax (expense) benefit				(7,612	)		373			(42,769	)	(F)		—		268			38,628		(D)		(11,112	)
Income (loss) from unconsolidated entities				2,482			113,683			(5,587	)	(F)		—		—			(1,693	)	(L)		(86	)
																			(33,561	)	(V)
																			(75,410	)	(K)

Income (loss) from continuing operations				179,492			78,227			9,713				299		(4,951	)		(241,579	)			21,201
Less:
Preferred dividends				69,129			—			—				—		—			—				69,129
Preferred stock redemption charge				6,242			—			—				—		—			—				6,242
Net income (loss) attributable to noncontrolling interests				(2,415	)		1,741			(1,741	)	(F)		—		—			(41	)	(T)		(2,456	)

Income (loss) from continuing operations attributable to common stockholders			$	106,536		$	76,486		$	11,454			$	299	$	(4,951	)	$	(241,538	)		$	(51,714	)


Average number of common shares outstanding:
Basic				224,343																			224,343
Diluted				225,953																			224,343

Income (loss) from continuing operations attributable to common stockholders per share:	(M	)
Basic			$	0.47																		$	(0.23	)
Diluted				0.47																			(0.23	)

Health Care REIT, Inc.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto included as Exhibits 99.2 to 99.9 as well as included in the Current Report on Form 8-K/A dated March 25, 2013.

On July 1, 2013, the Company acquired (i) seven joint venture properties through the acquisition of the remaining 55.02% interest in CHTSun Partners IV, LLC (“Sun IV”); (ii) 29 joint venture properties through the acquisition of the remaining 60% interest in CC3 Acquisition, LLC (“CC3”); (iii) six joint venture properties through the acquisition of the remaining 70% interest in CLPSun Partners II, LLC (“Sun II”); and (iv) seven joint venture properties through the acquisition of the remaining 67.88% interest in CLPSun PartnersIII, LLC (“Sun III”) for aggregate cash consideration of $362,400,000 (which includes $96,041,000 of amounts funded from restricted cash) and fair value of debt assumed of $704,985,000 (the existing secured debt relating to the Sun II properties was paid off at closing and not assumed by the Company). The remaining interests in the four portfolios were owned by Sunrise as of December 31, 2012 and were acquired by the Company as part of the Acquisition. Accordingly, the equity investments balance has been reduced by $299,941,000 as of June 30, 2013 and the equity loss has been reduced by $3,194,000 for the six months ended June 30, 2013 to eliminate such balances relating to the Joint Venture Buy-Outs.

Approximately $484,000 of the cash consideration was for transaction costs associated with the Joint Venture Buy-Outs. Additional transaction costs associated with the Joint Venture Buy-Outs were incurred and paid subsequent to June 30, 2013 in the amount of $4,360,000. These amounts have been reflected as an adjustment on the Pro Forma Condensed Consolidated Balance Sheet to recognize the cash that was paid and the corresponding impact to cumulative net income.

B.	Adjustments to reflect the fair value of real property for the Joint Venture Buy-Outs are as follows (in thousands):


Land and land improvements	$	(23,660	)
Buildings and improvements		104,864
Acquired lease intangibles		105,476
Accumulated depreciation and intangible amortization		79,450

Total net real property owned adjustments	$	266,130

The real property associated with the Joint Venture Buy-Outs have been adjusted to their preliminary estimated fair values and the related historical balances of accumulated depreciation have been eliminated when in-service real property assets are recorded at fair value.

C.	The historical goodwill balance of $7,597,000 relating to the Joint Venture Buy-Outs has been eliminated. The adjustment to the total stockholders’ equity represents the elimination of the historical balances for the Joint Venture Buy-Outs.

The Company has elected and continues to operate as a real estate investment trust (“REIT”). Qualification and taxation as a REIT depends upon the Company’s ability to meet a variety of qualification tests imposed under federal income tax law with respect to income, assets, distribution level and diversity of share ownership. Sunrise became a qualified REIT subsidiary by operation of tax law at the time of the Acquisition and is not expected to impact the REIT status of the Company. Resident level rents and related operating expenses for facilities included in a Taxable REIT Subsidiary (“TRS”) are subject to federal taxes. Adjustments primarily represent the elimination of Sunrise historical deferred tax assets and liabilities and recognition of estimated income tax expense.

E.	Adjustments to reflect the fair value of secured debt for the Joint Venture Buy-Outs are as follows (in thousands):


Eliminate Sun II balance paid off at closing	$	(104,549	)
Fair value of debt adjustment for assumed debt		23,478

Total secured debt adjustments	$	(81,071	)

In addition, historical deferred loan expenses of $2,731,000 were eliminated and $1,219,000 of costs incurred at closing of the Joint Venture Buy-Outs has been capitalized.

Historical adjustments to reflect the sale of Management Company to eliminate the Management Company results of operations from the Sunrise historical results of operations, the acquisition by the Company of the PS UK portfolio and the First Euro portfolio to reflect the results of operations from the date of acquisition through December 31, 2012, and the acquisition by Sunrise of the 37 joint venture properties to reflect the results of operations from the date of the acquisition through December 31, 2012, as if such transactions occurred on January 1, 2012. The pro forma adjustments summarize the adjustments related to all three transactions which were previously presented separately in the Form 8-K/A dated March 25, 2013.

G.	The Acquisition was structured under the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). Adjustment represents the elimination of Sunrise’s historical rental income and the corresponding property operating expenses under the provisions of RIDEA.

H.	Adjustments to interest expense are as follows (in thousands):


Elimination of Sunrise interest expense (excluding interest expense on Company loan and Management Company amounts)	$	(83,651	)
Interest expense associated with New Credit Agreement		14,848
Interest related to assumed Sunrise debt		68,800

Net interest expense to be eliminated	$	(3	)

I.	The Management Business Buyer will provide management services to the Sunrise property portfolio acquired by the Company under incentive-based management contracts. Adjustment represents management fees under the terms of new management contracts.

Adjustments to depreciation and amortization represent the elimination of historical depreciation of Sunrise and Sunrise Acquisitions ($89,732,000) offset by depreciation and amortization expense as a result of the recording of real property and intangible lease assets acquired, excluding PS UK and First Euro, at their estimated fair value ($266,271,000). Estimated useful lives of 40 years and 15 years were assumed to compute depreciation for buildings and improvements, respectively, on a straight-line basis. Intangible lease assets were amortized over the assumed re-leasing period which range from 5 to 33 months.

K.	Adjustment represents the elimination of income from unconsolidated entities and loss on derivatives recorded by Sunrise for PS UK, First Euro and the joint venture properties acquired as part of the Sunrise Acquisitions.

L.	Adjustment represents the Company’s proportionate share of loss attributable to the noncontrolling interest in the Management Company effective January 1, 2012 including the impact of the new management contracts.

M.	The calculations of basic and diluted earnings per share are as follows (in thousands, except per share data):


	Historical			Pro Forma
Income from continuing operations	$	179,492		$	21,201
Preferred stock dividends		(69,129	)		(69,129	)
Preferred stock redemption charge		(6,242	)		(6,242	)
Net (income) loss attributable to noncontrolling interests		2,415			2,456

Income (loss) from continuing operations attributable to common stockholders	$	106,536		$	(51,714	)

Basic shares outstanding		224,343			224,343
Effect of dilutive securities		1,610			0

Diluted shares outstanding		225,953			224,343

Income (loss) from continuing operations attributable to common stockholders per share:
Basic	$	0.47		$	(0.23	)
Dilutive		0.47			(0.23	)

N.	Adjustments to include a full six months of resident fees and services and property operating expenses for properties acquired in 2013.

O.	Adjustments to interest expense are as follows (in thousands):


Elimination of Sunrise interest expense (excluding interest expense on Company loan)	$	(24,296	)
Interest related to assumed Sunrise debt		25,266

Net interest expense to be added	$	970

Adjustments to depreciation and amortization represent the elimination of historical depreciation of Joint Venture Buy-Outs ($20,157,000) offset by depreciation and amortization expense as a result of the recording of real property and intangible lease assets acquired at their estimated fair value ($35,902,000). Estimated useful lives of 40 years and 15 years were assumed to compute depreciation for buildings and improvements, respectively, on a straight-line basis. Intangible lease assets were amortized over the assumed re-leasing period which range from 5 to 33 months.

In relation to the Sunrise Acquisitions, the Company provided a loan in the amount of $580,834,000 for which Sunrise used a portion of the proceeds from the loan to extinguish debt related to Sunrise Acquisitions. Adjustments included to interest income and interest expense represent the elimination of interest income and expense related to the loan. Pro forma adjustments to the condensed consolidated statement of income represent the results of operations of the Sunrise Acquisitions from January 1, 2012 through date of acquisition by Sunrise. This loan was acquired by the Company upon completion of the Acquisition.

R.	The calculations of basic and diluted earnings per share are as follows (in thousands, except per share data):


	Historical			Pro Forma
Income from continuing operations	$	24,472		$	79,906
Preferred stock dividends		(33,203	)		(33,203	)
Net (income) loss attributable to noncontrolling interests		774			774

Income (loss) from continuing operations attributable to common stockholders	$	(7,957	)	$	47,477

Basic shares outstanding		266,602			266,602
Effect of dilutive securities		0			2,978

Diluted shares outstanding		266,602			269,580

Income (loss) from continuing operations attributable to common stockholders per share:
Basic	$	(0.03	)	$	0.18
Dilutive		(0.03	)		0.18

S.	Adjustments represent costs associated with the Acquisition or Sunrise Acquisitions which are “one time” costs that are not expected to continue into the future and as a result have been eliminated.

T.	Adjustment to net income attributable to noncontrolling interests represents the elimination of the proportionate share of equity in First Euro owned by Sunrise as of December 31, 2012.

U.	Adjustments represent the additional 6 months of operations for Sun IV based on the historical financial statements which had a recapitalization date of June 29, 2012.

V.	Adjustment represents the elimination of income from unconsolidated entities recorded by Sunrise for Sun II, Sun, III, Sun IV and CC3.

EX-99.2 5 d586143dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

CHTSun Partners IV, LLC

Consolidated Financial Statements as of December

31, 2012 and for the Period From June 29, 2012 (Date

of Recapitalization) to December 31, 2012 with Report

of Independent Auditors

CHTSUN PARTNERS IV, LLC

TABLE OF CONTENTS


	Page
REPORT OF INDEPENDENT AUDITORS		1

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND FOR THE PERIOD FROM JUNE 29, 2012 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2012:

Consolidated Balance Sheet		2

Consolidated Statement of Operations		3

Consolidated Statement of Changes in Members’ Equity		4

Consolidated Statement of Cash Flows		5–6

Notes to Consolidated Financial Statements		7–13

Report of Independent Auditors

To the Members of

CHTSun Partners IV, LLC:

We have audited the accompanying consolidated financial statements of CHTSun Partners IV, LLC (the “Company”), which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statement of operations, changes in members’ equity, and cash flows for the period from June 29, 2012 (date of recapitalization) to December 31, 2012, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CHTSun Partners IV, LLC at December 31, 2012, and the consolidated results of its operations and its cash flows for the period from June 29, 2012 (date of recapitalization) to December 31, 2012 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

McLean, Virginia

March 15, 2013

CHTSUN PARTNERS IV, LLC

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2012


ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	29,066,615
Building and building improvements		195,327,142
Furniture, fixtures, and equipment		5,703,819
Construction in progress		63,295

		230,160,871
Less accumulated depreciation		(3,687,598	)

Property and equipment — net		226,473,273
CASH AND CASH EQUIVALENTS		5,138,976
RESTRICTED CASH		211,574
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $96,560		394,608
PREPAID EXPENSES AND OTHER ASSETS		246,381
DEFERRED FINANCING COSTS — Net of accumulated amortization of $47,551		585,988
GOODWILL		7,597,472
RESIDENT LEASE INTANGIBLE — Net of accumulated amortization of $562,612		562,611

TOTAL	$	241,210,883

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable, net of premium	$	127,791,504
Accounts payable and accrued expenses		2,326,333
Accrued interest		519,011
Payable to affiliates — net		300,743
Security and reservation deposits		36,800
Deferred tax liability		7,179,122
Deferred revenue		2,200,902

Total liabilities		140,354,415
MEMBERS’ EQUITY		100,856,468

TOTAL	$	241,210,883

See notes to consolidated financial statements.

- 2 -

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD FROM JUNE 29, 2012 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2012


OPERATING REVENUE:
Resident fees	$	23,778,774
Other income		134,340

Total operating revenue		23,913,114

OPERATING EXPENSES:
Labor		9,291,472
Depreciation and amortization		4,250,210
Transaction costs		1,521,000
General and administrative		1,478,522
Management fees to affiliate		1,433,443
Food		905,859
Insurance		747,695
Taxes and license fees		742,707
Utilities		628,551
Repairs and maintenance		433,959
Advertising and marketing		345,942
Ancillary expenses		225,883
Bad debt		35,810

Total operating expenses		22,041,053

INCOME FROM OPERATIONS		1,872,061

OTHER EXPENSE (INCOME) :
Interest expense		3,001,846
Income tax benefit (Note 6)		(418,350	)

Total other expense		2,583,496

NET LOSS	$	(711,435	)

See notes to consolidated financial statements.

- 3 -

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

FOR THE PERIOD FROM JUNE 29, 2012 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2012


	Sunrise Senior Living Investments, Inc.			CHT SL IV Holding, LLC			Total
MEMBERS’ EQUITY — June 29, 2012 (Date of Recapitalization)	$	—		$	—		$	—
Contributions		46,382,873			56,738,700			103,121,573
Distributions		—			(1,553,670	)		(1,553,670	)
Net loss		(319,995	)		(391,440	)		(711,435	)

MEMBERS’ EQUITY — December 31, 2012	$	46,062,878		$	54,793,590		$	100,856,468

See notes to consolidated financial statements.

- 4 -


CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(711,435	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		3,687,598
Amortization of resident lease intangible		562,612
Amortization of financing costs		47,551
Provision for bad debts		35,810
Amortization of debt premium		(240,269	)
Deferred taxes		(418,350	)
Changes in operating assets and liabilities:
Accounts receivable		333,647
Prepaid expenses and other assets		(50,114	)
Accounts payable and accrued expenses		245,600
Accrued interest		305,428
Payable to affiliates—net		300,743
Security and reservation deposits		13,800
Deferred revenue		436,645

Net cash provided by operating activities		4,549,266

CASH FLOWS FROM INVESTING ACTIVITIES:
Acqusition of Sun IV LLC, net of cash acquired		(123,084,389	)
Purchase of property and equipment		(453,957	)
Restricted cash		(211,574	)

Net cash used in investing activities		(123,749,920	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs paid		(633,539	)
Proceeds from notes payable		70,000,000
Payments on notes payable		(211,861	)
Contributions		56,738,700
Distributions		(1,553,670	)

Net cash provided by financing activities		124,339,630

NET INCREASE IN CASH AND CASH EQUIVALENTS		5,138,976
CASH AND CASH EQUIVALENTS — Date of recapitalization		—

CASH AND CASH EQUIVALENTS — End of year	$	5,138,976

(continued)

- 5 -

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM JUNE 29, 2012 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2012


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	2,887,468

SUPPLEMENTAL DISCLOSURES OF NONCASH INFORMATION:
SSLII’s contribution of equity in Sun IV LLC	$	46,382,873

Accrued capital expenditures	$	3,882

See notes to consolidated financial statements.

- 6 -

CHTSUN PARTNERS IV, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND FOR THE PERIOD FROM JUNE 29, 2012 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2012

1.	ORGANIZATION AND PRESENTATION

Organization — CHTSun Partners IV, LLC (the “Company”) was formed on May 22, 2012 under the laws of the state of Delaware as a limited liability company. The Company was organized to acquire 100% of the membership interests in Sun IV LLC (“Sun IV”) which owned and operated seven assisted living facilities (collectively, the “Facilities”). At formation, its sole member was Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”). On June 29, 2012, the Company acquired 100% of the membership interests in Sun IV. In conjunction with the transaction, CHT SL IV Holding, LLC (“CHT”) contributed $56,738,700 and was admitted as the managing member to the Company, owning 55.02% (the “2012 Recapitalization”). SSLII transferred its equity of $46,382,873 along with its share of transaction and closing costs, and owns 44.98% of the Company. The Company shall continue in full force and effect until June 29, 2042 unless sooner terminated under the terms of the Amended and Restated Limited Liability Company Agreement of CHTSun Partners IV, LLC (“LLC Agreement”).

As part of the 2012 Recapitalization, SSLII and CHT obtained new financing for five of the facilities and modified the existing financing of $55,000,000 associated with two of the other facilities (Note 5).

The LLC Agreement effective June 29, 2012, details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All net cash flow from operations and capital proceeds are to be distributed according to the priorities as specified in the agreements. Any member can require additional capital to cure an event of default or to avoid an event of default under the loan agreements. The members must mutually agree upon additional capital requests for all other circumstances, including funding for operating shortfalls if they are determined to be reasonably necessary to effectuate any cost or expense associated with the operation or maintenance of any of the Facilities or as it may be contemplated under the management agreements of the Facilities. Contributions are made in proportion to the relative percentage interests of the member at the time of the request. Net income (loss) is allocated to the members in proportion to their relative percentage interests.

Effective June 29, 2012 and as of December 31, 2012, the Company owns the following seven Facilities:


Operator Entity	Location	Date Opened
Gilbert AZ Senior Living Owner, LLC	Gilbert, AZ	August 2008
Metairie LA Senior Living Owner, LLC	Metairie, LA	January 2009
Baton Rouge LA Senior Living Owner, LLC	Baton Rouge, LA	August 2008
Lombard IL Senior Living Owner, LLC	Lombard, IL	June 2009
Louisville KY Senior Living Owner, LLC	Louisville, KY	October 2009
Santa Monica Assisted Living Owner, LLC	Santa Monica, CA	October 2003
Sunrise Connecticut Avenue Assisted Living Owner, LLC	Washington, DC	January 2004

The Company owns and operates the Facilities providing assisted living services to seniors. Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

The Company has a pooling arrangement in which the terms and conditions of the management agreements are considered under one consolidated agreement.

- 7 -

Sunrise has the option to purchase, exercisable in Sunrise’s sole discretion, one hundred percent (100%) of CHT’s ownership interest in the Company upon the expiration of the second Company Year per the LLC Agreement. If Sunrise exercises the purchase option at any time from and after the third Company Year, CHT will be paid a purchase price equal to the amount necessary to return to CHT a 13% internal rate of return on the CHT total capital contributions, after taking into account all amounts previously distributed to CHT.

On August 21, 2012, SSLI and Health Care REIT, Inc. (“HCN”) entered into an agreement for HCN to acquire all of the outstanding common stock of SSLI for $14.50 per share in an all-cash transaction.

On September 13, 2012, in conjunction with the August 21, 2012 agreement, Red Fox Management, LP (“Red Fox”), a new entity formed by Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement with SSLI to acquire Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLII, for approximately $130,000,000, with HCN investing approximately $26,000,000 for a 20% ownership interest. The Company has management agreements with SSLMI to manage the Facilities (Note 3).

On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrise’s equity interests in joint ventures that own 58 senior housing communities, including the Company. In addition, HCN announced the acceleration of all planned joint venture buyouts, including the Company.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The accompanying consolidated financial statements include the consolidated accounts of the Company after elimination of all significant intercompany accounts and transactions. The Company reviewed subsequent events through March 15, 2013, the date the consolidated financial statements were issued, for inclusion in these consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the allocation of the purchase price of the Facilities, the useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.

Property and Equipment — Property and equipment were recorded at their fair value as of the date of acquisition. All subsequent additions were recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:


Land improvements			15 years
Building and improvements			10-40 years
Furniture, fixtures, and equipment			3-10 years

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Impairment is recognized when the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss for such assets by comparing the fair value of the asset to its carrying amount. No impairment charge was recorded in 2012.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

- 8 -

Restricted Cash — The Company established a capital expenditure reserve to cover the cost of replacements and repairs to the Facilities’ furniture, fixtures, and equipment. The required deposit is $1,000 per unit for year one and $1,000 per unit as increased by the consumer price index in subsequent years. As a result of the pooling arrangements entered into by the Company, all amounts in the capital expenditure reserves for the Facilities are considered to be pooled into one account and may be used for any of the Facilities. The balance in the capital reserve was $211,574 as of December 31, 2012 and is included in restricted cash in the accompanying consolidated balance sheet.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense in 2012 was $47,551.

Goodwill – The Company accounts for goodwill in accordance with U.S. generally accepted accounting principles. Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. There was no goodwill impairment in 2012.

Resident Lease Intangible — Resident lease intangible includes the fair value assigned to the in-place resident leases at the Facilities acquired. The asset is being amortized using the straight-line method over a period of one year, based on management’s estimate of the average resident’s length of stay. Amortization expense in 2012 was $562,612. Amortization expense for 2013 will be $562,611.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Income Taxes — The Company wholly owns CHT SL IV TRS Corporation (“TRS”), a taxable REIT subsidiary as defined in Section 856 of the Internal Revenue Code, which is subject to federal and state tax. The Company has a provision for federal income taxes related to TRS. The Company is also subject to franchise taxes in California, where one of the Facilities is located. These federal and state taxes are expensed as incurred and are included in income tax benefit in the accompanying consolidated financial statements.

ASC 740-10-25, Income Taxes, Overall Recognition describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities have full knowledge of the position and all relevant facts, but without considering time values. The Company adheres to the provisions of this statement. The Company has no uncertain tax positions that require accrual as of December 31, 2012.

The statute of limitations for the IRS and the states to perform audits on the Company are three and four years, respectively. The Company is currently not under an audit by any tax jurisdiction. The statute of limitations for the periods included in the financial statements expires on December 31, 2015 and December 31, 2016 for the IRS and the states, respectively.

- 9 -

Fair Value Measurement — Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

As of December 31, 2012, the carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

3.	ACQUISITION OF SUN IV

The Company accounted for the acquisition of Sun IV as a business combination which requires the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. The acquisition was funded through the initial capitalization of the Company which consisted of assumed debt of $55,000,000 and cash contributions of $56,738,700 and equity of $46,382,873 by CHT and SSLII, respectively.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the date of acquisition, June 29, 2012:


Land and land improvements	$	29,054,159
Building and building improvements		195,289,839
Furniture, fixtures, and equipment		5,359,033
Resident lease intangible		1,125,223
Goodwill		7,597,472
Other assets		2,460,332
Notes payable		(58,243,633	)
Deferred tax liability		(7,597,472	)
Other liabilities		(4,077,691	)

Net assets acquired		170,967,262
SSLII’s contribution of equity in Sun IV		(46,382,873	)

Total Consideration, excluding transaction costs	$	124,584,389
Transaction costs		1,521,000

Total Consideration	$	126,105,389

Total Consideration, excluding transaction costs		124,584,389
Cash acquired		(1,500,000	)

Total cash consideration	$	123,084,389

The estimated fair value of the real estate assets at acquisition was $229,703,031. To determine the fair value of the real estate, the Company examined various data points including (i) transactions with similar assets in similar markets (Level 3) and (ii) independent appraisals of the acquired assets (Level 3). As of the acquisition date, the fair value of the working capital approximated its carrying value.

- 10 -

The resident lease intangible of $1,125,223 represents opportunity costs associated with lost rentals. Based on management’s historical experience, the Company determined one month’s operating revenues less operating expenses approximated the value of these opportunity costs (Level 3).

The Company recorded the notes payable on the consolidated balance sheet at its estimated fair value on date of the acquisition. The fair value was estimated at $58,243,633, which was based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets (Level 3). The difference of $3,243,633 between the outstanding principal of $55,000,000 as of the date of acquisition and the fair value is recorded as a premium to the loan on the accompanying consolidated balance sheet. The premium is amortized using the effective interest method over the amended term of the loan. As of December 31, 2012, total amortization was $240,269 and is included in interest expense in the accompanying consolidated financial statements.

Goodwill consists of the excess of the purchase price over the fair value of the acquired assets and represents the estimated economic value attributable to future operations.

At closing, SSLII and CHT obtained new financing of $70,000,000 with Prudential Insurance Company of America (“Prudential”) for five of the Facilities: Gilbert AZ Senior Living Owner, LLC; Metairie LA Senior Living Owner, LLC; Baton Rouge LA Senior Living Owner, LLC; Lombard IL Senior Living Owner, LLC; and Louisville KY Senior Living Owner, LLC (“Five Pack”) and modified the existing financing of $55,000,000 associated with two of the other Facilities: Santa Monica Assisted Living Owner, LLC and Sunrise Connecticut Avenue Assisted Living Owner, LLC (Note 5).

4.	TRANSACTIONS WITH AFFILIATES

On June 29, 2012, the Company entered into a management agreement with SSLMI, an affiliate of SSLII to manage the Facilities. SSLMI receives a monthly management fee equal to 6% of the gross revenues of the Facility. Management fees incurred in 2012 were $1,433,443.

The management agreements also provide for reimbursement to SSLMI of all direct costs of operations. Payments to SSLMI for direct operating expenses were $13,493,143 in 2012.

The Company obtains workers compensation, professional, general liability and automobile coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $790,869 in 2012.

The Company had net payable to SSLMI of $300,743 as of December 31, 2012. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as payable to affiliates—net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

5.	NOTES PAYABLE

On June 29, 2012, the Company obtained $70,000,000 new loan for Five Pack Facilities with Prudential. The Company also modified the existing $55,000,000 loan for Santa Monica Assisted Living Owner, LLC and Sunrise Connecticut Avenue Assisted Living Owner, LLC with Prudential. The loans mature on March 5, 2019. The loans are secured by the Facilities, cross-collateralized and cross-defaulted. The loans are interest only for the first six months and bear interest of 5.25% for the Five Pack loans and 4.66% for the Santa Monica Assisted Living Owner, LLC and Sunrise Connecticut Avenue Assisted Living Owner, LLC loans.

- 11 -

A summary of the loan terms and balances at December 31, 2012 are as follows:


								Loan		Loan Balance as of
Facilities	Lender		Interest Rate			Maturity Date		Commitment		December 31, 2012
Gilbert AZ Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019	$	17,061,000	$	17,061,000
Metairie LA Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		13,839,000		13,839,000
Baton Rouge LA Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		9,769,000		9,769,000
Lombard IL Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		17,657,000		17,657,000
Louisville KY Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		11,674,000		11,674,000
Santa Monica Assisted Living Owner, LLC		Prudential		4.66	%		March 5, 2019		21,068,000		20,986,846
Sunrise Connecticut Avenue Assisted Living Owner, LLC		Prudential		4.66	%		March 5, 2019		33,932,000		33,801,294

								$	125,000,000	$	124,788,140

Debt premium											3,003,364

Total notes payable										$	127,791,504

Principal maturities of notes payable as of December 31, 2012, are as follows:


2013	$	1,775,306
2014		1,949,642
2015		2,048,854
2016		2,153,133
Thereafter		116,861,205

	$	124,788,140

The Company is subject to non-financial covenants under the loan agreement. As of December 31, 2012, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The fair value of the Company’s notes payable was approximately $126,342,521 as of December 31, 2012.

6.	INCOME TAXES

The Company, as an LLC, has elected to be treated as a partnership for federal income tax purposes. An LLC is a flow through entity, and therefore the income or loss generated is recognized by the members rather than the Company. Deferred income taxes reflect the net tax effect of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for income tax purposes.

The Company wholly owns the TRS, which was formed on June 6, 2012 under the laws of the state of Delaware. The first year the TRS was subject to taxation was 2012. The TRS has properties in Arizona, California, District of Columbia, Illinois, Kentucky and Louisiana and files a separate corporate income tax return in each state. The TRS had a deferred tax asset at December 31, 2012 of $1,237,004 related to the difference between tax and book basis related to the fair value of debt, NOL carryforwards of $484,714 expected to expire through 2023 and various accruals. As of December 31, 2012 the TRS had a deferred tax liabilities related to the difference between the tax and book basis in the real property of $8,416,126.

The TRS has a current year tax benefit of $418,350 which is reflected in the accompanying consolidated statement of operations.

- 12 -

7.	CONTINGENCIES

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management of the Company does not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s consolidated financial position.

8.	SUBSEQUENT EVENT

On January 9, 2013, Sunrise consummated the transaction with HCN and Red Fox (Note 1).

* * * * * *

- 13 -

EX-99.3 6 d586143dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

CHTSUN PARTNERS IV, LLC

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012


	June 30,			December 31,
	2013 (UNAUDITED)			2012
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	29,110,996		$	29,066,615
Building and building improvements		195,332,117			195,327,142
Furniture and equipment		5,942,729			5,703,819
Construction in progress		200,615			63,295

		230,586,457			230,160,871
Less accumulated depreciation		(7,381,183	)		(3,687,598	)

Property and equipment — net		223,205,274			226,473,273
CASH AND CASH EQUIVALENTS		5,157,862			5,138,976
RESTRICTED CASH		379,870			211,574
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $95,281 and $96,560 in 2013 and 2012, respectively		382,235			394,608
PREPAID EXPENSES AND OTHER ASSETS		135,341			246,381
DEFERRED FINANCING COSTS — Net of accumulated amortization of $95,067 and $47,551 in 2013 and 2012, respectively		538,473			585,988
GOODWILL		7,597,472			7,597,472
RESIDENT LEASE INTANGIBLE—Net of accumulated amortization of $1,125,223 and $562,612 in 2013 and 2012, respectively		—			562,611

TOTAL	$	237,396,527		$	241,210,883

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable, net of premium	$	126,715,060		$	127,791,504
Accounts payable and accrued expenses		2,096,739			2,326,333
Accrued interest		429,637			519,011
Payable to affiliates — net		1,008,075			300,743
Security and reservation deposits		13,000			36,800
Deferred tax liability		7,362,378			7,179,122
Deferred revenue		1,955,728			2,200,902

Total liabilities		139,580,617			140,354,415
MEMBERS’ EQUITY		97,815,910			100,856,468

TOTAL	$	237,396,527		$	241,210,883

See notes to consolidated financial statements.

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


	2013
OPERATING REVENUE:
Resident fees	$	23,955,550
Other income		163,501

Total operating revenue		24,119,051

OPERATING EXPENSES:
Labor		9,489,057
Depreciation		4,289,867
Management fees to affiliate		1,445,374
General and administrative		1,325,952
Food		872,731
Insurance		861,244
Taxes and license fees		795,092
Utilities		625,563
Repairs and maintenance		550,104
Advertising and marketing		385,204
Ancillary expenses		260,295
Bad debt		16,079

Total operating expenses		20,916,562

INCOME/LOSS FROM OPERATIONS		3,202,489

OTHER EXPENSE:
Interest expense		2,825,524
Interest income		(2,196	)
Income tax benefit		411,414

Total other expenses		3,234,742

NET LOSS	$	(32,253	)

See notes to consolidated financial statements.

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


	Sunrise Senior Living Investments, Inc.			CHT SL IV Holding, LLC			Total
MEMBERS’ EQUITY — December 31, 2012	$	46,062,878		$	54,793,590		$	100,856,468
Distributions		—			(3,008,305	)		(3,008,305	)
Net loss		(14,507	)		(17,746	)		(32,253	)

MEMBERS’ EQUITY — JUNE 30, 2013	$	46,048,371		$	51,767,539		$	97,815,910

See notes to consolidated financial statements.

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(32,253	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		3,727,256
Amortization of resident lease intangible		562,611
Amortization of financing costs		47,516
Provision for bad debts		16,079
Amortization of debt premium		(240,269	)
Income tax benefit		183,256
Changes in operating assets and liabilities:
Accounts receivable		(3,706	)
Prepaid expenses and other assets		111,040
Accounts payable and accrued expenses		(396,725	)
Accrued interest		(89,374	)
Payable to affiliates—net		673,660
Security and reservation deposits		(23,800	)
Deferred revenue		(245,174	)

Net cash provided by operating activities		4,290,117

CASH FLOWS FROM INVESTING ACTIVITIES:
Development and purchase of property and equipment		(258,455	)
Change in restricted cash		(168,296	)

Net cash used in investing activities		(426,751	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable		(836,175	)
Distributions		(3,008,305	)

Net cash used in financing activities		(3,844,480	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		18,886
CASH AND CASH EQUIVALENTS — Beginning of year		5,138,976

CASH AND CASH EQUIVALENTS — End of period	$	5,157,862

(continued)

CHTSUN PARTNERS IV, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	2,847,949

SUPPLEMENTAL DISCLOSURES OF NONCASH INFORMATION:
Accrued capital expenditures	$	167,131

See notes to consolidated financial statements.

CHTSUN PARTNERS IV, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2013 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)

1.	ORGANIZATION AND PRESENTATION

As of June 30, 2013, the Company owns the following seven Facilities:


Operator Entity	Location	Date Opened
Gilbert AZ Senior Living Owner, LLC	Gilbert, AZ	August 2008
Metairie LA Senior Living Owner, LLC	Metairie, LA	January 2009
Baton Rouge LA Senior Living Owner, LLC	Baton Rouge, LA	August 2008
Lombard IL Senior Living Owner, LLC	Lombard, IL	June 2009
Louisville KY Senior Living Owner, LLC	Louisville, KY	October 2009
Santa Monica Assisted Living Owner, LLC	Santa Monica, CA	October 2003
Sunrise Connecticut Avenue Assisted Living Owner, LLC	Washington, DC	January 2004

The Company has a pooling arrangement in which the terms and conditions of the management agreements are considered under one consolidated agreement.

On July 1, 2013, HCN closed on a purchase and sale agreement (“PSA”) with CHT. Pursuant to the PSA, HCN purchased CHT’s membership interests in the Company for a purchase price of approximately $62,485,000, including transaction costs.

2.	NOTES PAYABLE

A summary of the loan terms and balances at June 30, 2013 are as follows:


Facilities	Lender		Interest Rate			Maturity Date		Loan Commitment		Loan Balance as of June 30, 2013
Gilbert AZ Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019	$	17,061,000	$	16,962,292
Metairie LA Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		13,839,000		13,758,933
Baton Rouge LA Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		9,769,000		9,712,481
Lombard IL Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		17,657,000		17,554,844
Louisville KY Senior Living Owner, LLC		Prudential		5.25	%		March 5, 2019		11,674,000		11,606,459
Santa Monica Assisted Living Owner, LLC		Prudential		4.66	%		March 5, 2019		21,068,000		20,821,679
Sunrise Connecticut Avenue Assisted Living Owner, LLC		Prudential		4.66	%		March 5, 2019		33,932,000		33,535,277

								$	125,000,000	$	123,951,965

Debt premium											2,763,095

Total notes payable										$	126,715,060

Principal maturities of notes payable as of June 30, 2013, are as follows:


2013	$	939,131
2014		1,949,642
2015		2,048,854
2016		2,153,133
Thereafter		116,861,205

	$	123,951,965

The Company is subject to non-financial covenants under the loan agreement. At June 30, 2013, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s notes payable approximated their carrying value at June 30, 2013.

3.	SUBSEQUENT EVENT

On July 1, 2013, HCN closed on a PSA with CHT. Pursuant to the PSA, HCN purchased CHT’s membership interests in the Company for a purchase price of approximately $62,485,000, including transaction costs. The PSA was a result of exercising the purchase option under the LLC agreement as described in Note 1.

The Company reviewed subsequent events through September 12, 2013, the date the consolidated financial statements were issued.

* * * * * *

EX-99.4 7 d586143dex994.htm EX-99.4 EX-99.4

Exhibit 99.4

CONSOLIDATED FINANCIAL STATEMENTS

CC3 Acquisition, LLC

As of December 31, 2012 and 2011 and for the Year Ended

December 31, 2012 and for the Period from January 10, 2011

(Date of Recapitalization) to December 31, 2011

With Report of Independent Auditors

CC3 ACQUISITION, LLC

TABLE OF CONTENTS


	Page
REPORT OF INDEPENDENT AUDITORS		1

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND 2011 AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011:

Consolidated Balance Sheets		2

Consolidated Statements of Operations		3

Consolidated Statements of Changes in Members’ Equity		4

Consolidated Statements of Cash Flows		5-6

Notes to Consolidated Financial Statements		7-15

Report of Independent Auditors

To the Members of

CC3 Acquisition, LLC:

We have audited the accompanying consolidated financial statements of CC3 Acquisition, LLC (the “Company”), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2012 and for the period from January 10, 2011(date of recapitalization) to December 31, 2011, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CC3 Acquisition, LLC at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the year ended December 31, 2012 and for the period from January 10, 2011 (date of recapitalization) to December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

McLean, Virginia

March 15, 2013

- 1 -

CC3 ACQUISITION, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011


	2012			2011
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	68,262,391		$	67,722,706
Building and building improvements		548,934,910			547,147,143
Furniture, fixtures, and equipment		18,394,875			14,416,746
Construction in progress		670,660			4,827,379

		636,262,836			634,113,974
Less accumulated depreciation		(42,647,192	)		(19,566,053	)

Property and equipment — net		593,615,644			614,547,921
CASH AND CASH EQUIVALENTS		11,608,102			9,663,977
RESTRICTED CASH		7,574,763			7,810,301
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $225,273 and $290,150 for 2012 and 2011, respectively		1,263,494			1,637,637
RENT AND WORKING CAPITAL RECEIVABLE FROM AFFILIATES		221,212			618,932
PREPAID EXPENSES AND OTHER ASSETS		1,458,374			1,507,251
DEFERRED RENT RECEIVABLE		2,298,285			1,421,333
DEFERRED FINANCING COSTS — Net of accumulated amortization of $5,445,873 and $2,722,932 for 2012 and 2011, respectively		2,949,853			5,672,794
DEFERRED TAX ASSET		911,418			424,328
RESIDENT LEASE INTANGIBLE—Net of accumulated amortization of $3,948,458 and $3,852,931 for 2012 and 2011, respectively		—			95,527
BELOW MARKET LEASE INTANGIBLE—Net of accumulated amortization of $167,946 and $83,973 for 2012 and 2011, respectively		2,932,054			3,016,027

TOTAL	$	624,833,199		$	646,416,028

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable	$	434,940,000		$	434,940,000
Accrued interest		2,123,345			2,123,317
Accounts payable and accrued expenses		6,814,708			7,620,771
Income taxes payable		—			362,638
Payable to affiliates — net		397,232			1,203,983
Payable to Sunrise Third partners (Note1)		152,535			152,435
Reserve funds due to affiliates		—			130,970
Deferred rent liability		675,206			339,975
Deferred revenue		5,901,050			5,335,150
Security and reservation deposits		64,500			79,250
Above market lease intangible—Net of accumulated amortization of $11,278 and $5,485 for 2012 and 2011, respectively		488,722			494,515

Total liabilities		451,557,298			452,783,004
MEMBERS’ EQUITY		173,275,901			193,633,024

TOTAL	$	624,833,199		$	646,416,028

See notes to consolidated financial statements.

- 2 -

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
OPERATING REVENUE:
Resident fees	$	120,355,224		$	110,858,853
Lease income from affiliate		17,658,881			16,619,854
Other income		724,262			1,015,247

Total operating revenue		138,738,367			128,493,954

OPERATING EXPENSES:
Labor		51,288,650			47,713,155
Depreciation and amortization		23,283,368			23,418,984
Management fees to affiliate		6,037,331			5,582,569
General and administrative		6,022,363			6,066,192
Taxes and license fees		5,915,026			5,600,192
Insurance		4,300,584			3,548,808
Food		4,053,744			3,783,493
Utilities		3,429,139			3,415,787
Repairs and maintenance		3,308,943			4,000,890
Advertising and marketing		1,835,162			1,708,065
Ancillary expenses		1,276,128			1,086,973
Ground lease expense		845,807			839,850
Bad debt		332,865			222,712
Transaction costs		—			9,234,723

Total operating expenses		111,929,110			116,222,393

INCOME FROM OPERATIONS		26,809,257			12,271,561

OTHER EXPENSES (INCOME):
Interest expense		32,615,458			31,728,084
Income tax (income) expense		(248,794	)		471,914
Interest income		(766	)		(3,874	)
Other income		(30,876	)		—

Total other expenses		32,335,022			32,196,124

NET LOSS	$	(5,525,765	)	$	(19,924,563	)

See notes to consolidated financial statements.

- 3 -

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	CNL Income Senior Holding, LLC			Sunrise Senior Living Investments, Inc.			Total
MEMBERS’ EQUITY — January 10, 2011 (Date of Recapitalization)	$	—		$	—		$	—
Contributions		134,865,252			89,910,168			224,775,420
Distributions		(11,217,833	)		—			(11,217,833	)
Net loss		(11,954,738	)		(7,969,825	)		(19,924,563	)

MEMBERS’ EQUITY — December 31, 2011		111,692,681			81,940,343			193,633,024
Contributions		1,863,880			1,242,587			3,106,467
Distributions		(15,665,426	)		(2,272,399	)		(17,937,825	)
Net loss		(3,315,459	)		(2,210,306	)		(5,525,765	)

MEMBERS’ EQUITY — December 31, 2012	$	94,575,676		$	78,700,225		$	173,275,901

See notes to consolidated financial statements.

- 4 -

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,525,765	)	$	(19,924,563	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		23,187,841			19,566,053
Gain on sale of assets		(30,876	)		—
Provision for bad debts		332,865			222,712
Deferred rent receivable		(876,952	)		(1,421,333	)
Amortization of financing costs		2,722,941			2,722,932
Deferred tax		(487,090	)		199,371
Amortization of resident lease intangible		95,527			3,852,931
Amortization of net below market lease intangible		78,180			78,488
Deferred rent liability		335,231			339,975
Changes in operating assets and liabilities:
Accounts receivable		41,278			(456,679	)
Rent and working capital receivable from affiliates		397,720			(1,546,241	)
Prepaid expenses and other assets		48,877			(685,879	)
Accounts payable and accrued expenses		(174,843	)		1,310,729
Income taxes payable		(362,638	)		362,638
Accrued interest		28			1,118,941
Payable to affiliates — net		(806,751	)		1,000,910
Reserve funds due to affiliates		(130,970	)		130,970
Deferred revenue		565,900			1,217,574
Security and reservation deposits		(14,750	)		(32,750	)

Net cash provided by operating activities		19,395,753			8,056,779

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Sunrise Third, net of cash acquired		—			(545,618,396	)
Payable to Sunrise Third partners		—			(221,944	)
Restricted cash		235,538			(3,879,639	)
Purchases of property and equipment		(2,947,195	)		(8,775,108	)
Proceeds from sale of assets		91,387			—

Net cash used in investing activities		(2,620,270	)		(558,495,087	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		—			435,000,000
Payment on notes payable		—			(60,000	)
Financing costs paid		—			(8,395,726	)
Contributions		3,106,467			144,775,844
Distributions		(17,937,825	)		(11,217,833	)

Net cash (used in) provided by financing activities		(14,831,358	)		560,102,285

NET INCREASE IN CASH AND CASH EQUIVALENTS		1,944,125			9,663,977
CASH AND CASH EQUIVALENTS — Beginning of year		9,663,977			—

CASH AND CASH EQUIVALENTS — End of year	$	11,608,102		$	9,663,977

(Continued) (Continued)

- 5 -

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012		2011
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
SSLII’s contribution of equity in Sunrise Third	$	—	$	79,999,576

Accrued capital expenditures	$	162,576	$	793,696

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	29,890,165	$	26,881,834

See notes to consolidated financial statements.

- 6 -

CC3 ACQUISITION, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND 2011 AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011

1.	ORGANIZATION

CC3 Acquisition, LLC (the “Company”) was formed on November 5, 2010 under the laws of the state of Delaware as a limited liability company. The Company was organized to acquire 100% of the membership interests in Sunrise Third Senior Living Holdings, LLC (“Sunrise Third”) which owned and operated 29 assisted living facilities (collectively, the “Facilities”). At formation, its sole member was Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI” or “Sunrise”). On January 10, 2011, the Company acquired 100% of the membership interests in Sunrise Third and in conjunction with the transaction, CNL Income Senior Holding, LLC (“CNL”) contributed $134,865,252 and was admitted as a member of the Company. SSLII contributed cash of $9,910,592 in conjunction with the transaction along with its interest in Sunrise Third valued at fair value of approximately $79,999,576 (the “2011 Recapitalization”). The limited liability agreement (“LLC Agreement”) was amended and the capital accounts were adjusted to reflect the new ownership structure with CNL as the managing member owning 60% and SSLII owning 40%. The Company shall continue in full force and effect until January 10, 2041 unless sooner terminated under the terms of the LLC Agreement.

In conjunction with the 2011 Recapitalization, the Company obtained new debt of $435,000,000 as further described in Note 5.

Total consideration paid for Sunrise Third, including interests contributed, was $630,625,410 (excluding transaction costs). At the 2011 Recapitalization date, $374,379 was payable to the Sunrise Third partners for earnings prior to the 2011 Recapitalization. At December 31, 2012, $152,535 of the payable was still outstanding.

The LLC Agreement, effective January 10, 2011, details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All net cash flow from operations and capital proceeds is to be distributed according to the priorities as specified in the agreements. Any member can require additional capital to cure an event of default or to avoid an event of default under the loan agreements. The members must mutually agree upon additional capital requests for all other circumstances, including funding for operating shortfalls if they are determined to be reasonably necessary to effectuate any cost or expense associated with the operation or maintenance of any Facility or as it may be contemplated under the management agreements of the Facilities. Contributions are made in proportion to the relative percentage interests of the member at the time of the request. Net income (loss) is allocated to the members in proportion to their relative percentage interests.

Sunrise has the option to purchase, exercisable in Sunrise’s sole discretion, one hundred percent (100%) of CNL’s ownership interest in the Company upon the expiration of the second Company Year per the LLC Agreement. If Sunrise exercises the purchase option at any time prior to the fourth Company Year, CNL will be paid a purchase price equal to the amount necessary to return to CNL a 13% internal rate of return on the CNL total capital contributions, after taking into account all amounts previously distributed to CNL. If Sunrise exercises the purchase option at any time on or after the fourth Company Year, CNL will be paid a purchase price equal to the amount necessary to return to CNL a 14% internal rate of return on the CNL total capital contributions.

- 7 -

Effective January 10, 2011 and as of December 31, 2012, the Company owns the following 29 Facilities:


Operator Entity	Location	Date Opened
Sunrise Village House, LLC	Montgomery Village, Maryland	May 1993
Sunrise Weston Assisted Living, LP	Weston, Massachusetts	December 1997
Sunrise Flossmoor Assisted Living, LLC	Flossmoor, Illinois	November 1999
Sunrise Gahanna Assisted Living, LLC	Gahanna, Ohio	March 1998
Sunrise Third Tustin, SL, LP	Tustin, California	September 2000
Sunrise Third Edgewater SL, LLC	Edgewater, New Jersey	October 2000
Sunrise Third Alta Loma SL, LP	Alta Loma, California	January 2001
Sunrise Chesterfield Assisted Living, LLC	Chesterfield, Missouri	October 2000
Sunrise Third Claremont SL, LP	Claremont, California	December 2000
Sunrise Third Holbrook SL, LLC	Holbrook, New York	June 2001
Sunrise Third Crystal Lake SL, LLC	Crystal Lake, Illinois	February 2001
Sunrise Third Gurnee SL, LLC	Gurnee, Illinois	May 2002
Sunrise Third West Bloomfield SL, LLC	West Bloomfield, Michigan	August 2000
Sunrise Third University Park SL, LLC	Colorado Springs, Colorado	February 2001
East Meadow A.L., LLC	East Meadow, New York	March 2002
Sunrise Third East Setauket SL, LLC	East Setauket, New York	June 2002
Sunrise North Naperville Assisted Living, LLC	Naperville, Illinois	June 2002
Sunrise Third Schaumburg SL, LLC	Schaumburg, Illinois	September 2001
Sunrise Third Roseville SL, LLC	Roseville, Minnesota	December 2001
Sunrise Third Lincroft SL, LLC	Lincroft, New Jersey	December 2001
Sunrise Third Plainview SL, LLC	Plainview, New York	January 2002
White Oak Assisted Living, LLC	Silver Spring, Maryland	March 2002
Canoga Park Assisted Living, LLC	West Hills, California	June 2002
Sunrise Basking Ridge Assisted Living, LLC	Basking Ridge, New Jersey	September 2002
Sunrise Third Dix Hills SL, LLC	Dix Hills, New York	March 2003
Sunrise Marlboro Assisted Living, LLC	Marlboro, New Jersey	January 2002
Sunrise Belmont Assisted Living, LLC	Belmont, California	October 2002
Sunrise Third West Babylon SL, LLC	West Babylon, New York	January 2003
Sunrise Kennebunk ME Senior Living, LLC	Kennebunk, Maine	December 2005

The Company owns and operates the 23 Facilities that are not located in the State of New York (“Non-NY Facilities”) to provide senior living services. Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Non-NY Facilities’ services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

The Company owns and leases the six Facilities located in the State of New York (“NY Facilities”) to Sunrise NY Tenant, LLC (“SRZ Tenant”), a wholly owned subsidiary of SSLI as further described in Note 9. SRZ Tenant has site control and cash surplus agreements with six limited liability companies (the “GWCs”) to operate the NY Facilities. The GWCs are ultimately controlled by SSLI with 2 of the 3 voting interests held by employees of Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly owned subsidiary of SSLI.

On September 13, 2012, in conjunction with the August 21, 2012 agreement, Red Fox Management, LP (“Red Fox”), a new entity formed by Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement with SSLI to acquire SSLMI for approximately $130,000,000 with HCN investing approximately $26,000,000 for a 20% ownership interest. The Company has management agreements with SSLMI to manage the Facilities (see Note 4).

- 8 -

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The accompanying consolidated financial statements include the consolidated accounts of the Company after elimination of all significant intercompany accounts and transactions. The Company has reviewed subsequent events through March 15, 2013, the date the consolidated financial statements were issued, for inclusion in these consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the allocation of the purchase price of the Facilities, the useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.


Land improvements			15 years
Building and improvements			10-40 years
Furniture, fixtures, and equipment			3-10 years

Restricted Cash — Restricted cash balances represent amounts set aside for debt service charges, real estate taxes, insurance, ground rent, and capital expenditures as required by the loan and management agreements. In addition, the loan agreement, as further described in Note 5, provides for a cash management account to be controlled by the lender. All cash received from residents is deposited into this account, and amounts are reserved to pay the monthly interest amounts due to the lender and to fund the various escrow accounts. Excess cash amounts are then transferred to an operating cash account controlled by the Company.

The Company funds amounts on a monthly basis into a capital expenditures reserve account held by the lender. The amounts funded are for all 29 Facilities, and the lender maintains the escrow for all 29 Facilities in one account. This escrow amount is included in the restricted cash balance. The GWCs have reimbursed the Company for amounts related to the NY Facilities, and the Company reported a liability to the GWCs for the escrow funds it was holding for them as of December 31, 2011. This liability is reported as reserve funds due to affiliates in the accompanying consolidated balance sheets.

In 2012, the decision was made to consider capital expenditures reserve amounts reimbursed by the GWCs as lease expense to the GWCs and lease income from affiliate to the Company. The Company reported $449,000 in lease income from affiliate in 2012 for amounts reimbursed by the GWCs in 2011 and 2012. As a result of this change, no liability was reported in reserve funds due to affiliates in the accompanying consolidated balance sheets as of December 31, 2012.

- 9 -

Resident Lease Intangible — Resident lease intangible includes the fair value assigned of the in-place resident leases at the Facilities acquired. The asset is being amortized using the straight-line method over a period of one year, based on management’s estimate of the average resident’s length of stay. Amortization expense for the years ended December 31, 2012 and 2011 was $95,527 and $3,852,931 respectively.

Above and Below Market Lease Intangibles — Above and below market lease intangible includes the fair value assigned to the land leases the Company assumed for the Facilities in Lincroft, New Jersey and East Meadow, New York as further described in Note 8. The above and below market lease intangibles are being amortized as a decrease and an increase to ground lease expense using the straight-line method over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal period for the East Meadow Facility. Amortization expense for the years ended December 31, 2012 and 2011 was $78,180 and $78,488 respectively. Amortization expense for each of the next five years will be $78,334.

Lease income is recognized on a straight-line basis over the non-cancelable term of the lease.

Income Taxes — The Company wholly owns CC3 Acquisition TRS Corporation (the “TRS”), a taxable REIT subsidiary as defined in Section 856 of the Internal Revenue Code, which is subject to federal and state income taxes. The Company has a provision for federal income taxes related to the TRS.

In 2011, the Company was subject to modified gross receipts taxes in Michigan, where one of the Facilities is located. The Financial Accounting Standards Board (“FASB”) has determined that the modified gross receipts tax in Michigan should be treated as an income tax for financial statement purposes. As of January 1, 2012, Michigan imposed a corporate income tax (“CIT”) that replaced the Michigan Business Tax (“MBT”) and all income or loss generated within Michigan flow through to the Members. These federal and state taxes are expensed as incurred and are included in income tax expense in the accompanying consolidated financial statements.

ASC 740-10-25, Income Taxes, Overall Recognition describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ have full knowledge of the position and all relevant facts, but without considering time values. The Company adheres to the provisions of this statement. The Company has no uncertain tax positions that require accrual as of December 31, 2012 and 2011.

Fair Value Measurements — Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

- 10 -

As of December 31, 2012 and 2011, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

Reclassifications — Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation. Transaction costs for 2011 were reclassified from Other Expenses (Income) to Operating Expenses in the accompanying consolidated statement of operations. Above/below market lease intangible for 2011 was presented as a net amount in the assets section and is now presented separately in the respective asset and liabilities section of the accompanying consolidated balance sheets.

3.	ACQUISITION OF SUNRISE THIRD

The Company accounted for the acquisition of Sunrise Third as a business combination which requires the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs were expensed as incurred. The acquisition was funded through the initial capitalization of the Company which consisted of debt of $435,000,000, contribution of cash by CNL of $134,865,252, and contribution of cash and existing equity interest in Sunrise Third by SSLII of $89,910,168.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the date of acquisition, January 10, 2011:


Land and land improvements	$	67,135,946
Building and building improvements		545,840,515
Furniture, fixtures, and equipment		11,568,709
Resident lease intangible		3,948,458
Above and below market lease intangible		2,600,000
Other assets		10,805,257
Other liabilities		(10,899,096	)
Payable to Sunrise Third partners		(374,379	)

		630,625,410
SSLII’s contribution of equity in Sunrise Third		(79,999,576	)

Total consideration, excluding transaction costs		550,625,834
Transaction costs		9,234,723

Total consideration	$	559,860,557

Total consideration, excluding transaction costs	$	550,625,834
Cash acquired		(5,007,438	)

Total cash consideration	$	545,618,396

The estimated fair value of the real estate assets at acquisition was $624,545,170. To determine the fair value of the real estate, the Company examined various data points including (i) transactions with similar assets in similar markets (Level 3) and (ii) independent appraisals of the acquired assets (Level 3). As of the acquisition date, the fair value of the working capital approximated its carrying value.

The resident lease intangible of $3,948,458 represents opportunity costs associated with lost rentals. Based on management’s historical experience, the Company determined one month’s operating revenues less operating expenses approximated the value of these opportunity costs (Level 3).

The above/below market lease intangible of $2,600,000 represents the amount by which the land leases assumed by the Company for the Facilities in Lincroft, New Jersey and East Meadow, New York are unfavorable in the case of Lincroft or favorable in the case of East Meadow compared with the pricing of current market transactions with the same or similar terms. The above/below market cash flow of the leases is determined by comparing the projected cash flows of the leases in place to projected cash flows of comparable market-rate leases (Level 3).

- 11 -

4.	TRANSACTIONS WITH AFFILIATES

The Company has lease agreements with SRZ Tenant for the use of the NY Facilities, as further discussed in Note 9.

On January 10, 2011, the Company entered into management agreements with SSLMI to manage each of the Non-NY Facilities. The agreements have terms of 30 years and expire in 2041. The agreements provide for management fees to be paid monthly for 5% of the Facilities’ gross revenues for the first 7 years and 6% of gross revenues for the remainder of the term. The agreements also provide for SSLMI to earn an incentive management fee commencing January 2017 provided certain thresholds, as described in the pooling agreement, are met. Total management fees incurred were $6,037,331 and $5,582,569 in 2012 and 2011, respectively.

The agreements also provide for reimbursement to SSLMI of all direct costs of operations. Payments to SSLMI for direct operating expenses were $75,530,356 and $68,319,879 in 2012 and 2011, respectively

The Company obtains worker’s compensation, professional and general liability, and automobile coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $4,208,423 and $2,902,388 in 2012 and 2011, respectively.

The Company had a net payable to SSLMI of $397,232 and $1,203,983 as of December 31, 2012 and 2011, respectively. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as payable to affiliates – net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

5.	NOTES PAYABLE

On January 10, 2011, the Company entered into a loan agreement to obtain new debt totaling $435,000,000 to finance the acquisition of the 29 Facilities. The loan agreement originally provided for a loan in the amount of $325,000,000 and three mezzanine loans totaling $110,000,000. The loans are secured by the Facilities and are subject to prepayment penalties if paid prior to August 2013. Payments required on the loan are guaranteed by SSLI and CNL Income Partners, LP, an affiliate of CNL. The loan agreement provides for an initial fixed interest rate of 6.76% and requires monthly interest-only payments until maturity in February 2014.

In March 2011, the loan agreement was amended to provide for the loan amount to be subdivided into five components with an aggregate interest rate of 6.11%. The amendments also changed the allocation of amounts financed under the three mezzanine loans and provided for varying interest rates for these loans. The weighted average of the interest rates for all loans remained at 6.76%.

A summary of loan terms and balances as of December 31, 2012 and 2011 is as follows:


	Interest			Loan Balances as of
Loan Tranche	Rate			December 31, 2012 and 2011
Loan		6.11	%	$	324,940,000
Mezzanine A Loan		8.00	%		40,000,000
Mezzanine B Loan		8.50	%		45,000,000
Mezzanine C Loan		10.15	%		25,000,000

Total		6.76	%	$	434,940,000

The Company is subject to non-financial covenants under the loan agreement. As of December 31, 2012, the Company was in compliance with all covenants.

- 12 -

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s notes payable was approximately $446,089,265 and $452,450,000 as of December 31, 2012 and 2011, respectively.

6.	INCOME TAXES

The Company wholly owns a taxable REIT subsidiary. The TRS was formed on November 5, 2010 under the laws of the state of Delaware. The first year the TRS was subject to taxation was 2011. For the year ended December 31, 2012 the TRS had a deferred provision for income taxes of ($487,108) and a current provision of $237,700 for total tax benefit of $248,794. For the period ended December 31, 2011, the TRS had a deferred provision for income taxes of $199,371 and a current provision of $362,638 for total tax expense of $562,009. Items in the TRS contributing to temporary differences that lead to deferred taxes include deferred revenue, accrued insurance reserves, and the allowance for doubtful accounts.

No income tax was recorded for the non-TRS entities. The net tax benefit of $248,794 is reflected in income tax (income) expense in the accompanying consolidated statement of operations.

The Company had a deferred tax asset at December 31, 2012 and 2011 respectively of $911,418 and $424,328. All available sources of positive and negative evidence were evaluated to determine if there should be a valuation allowance on the Company’s deferred tax asset. The Company determined that no valuation allowance on the deferred tax asset was necessary as the TRS is generating net income.

7.	CONTINGENCIES

8.	COMMITMENTS

In conjunction with the 2011 Recapitalization, the Company assumed three lease agreements from Sunrise Third. Two of the lease agreements relate to the land associated with the Facilities in Lincroft, New Jersey and East Meadow, New York. The Lincroft lease has a remaining term at December 31, 2012 of approximately 87 years. The base rent escalates 20% every five years. The East Meadow lease has a remaining term at December 31, 2012 of approximately 15 years with five 10-year and one 14-year extension options. The base rent escalates by amounts defined in the lease agreement in March 2011 and March 2016. Lease expense for Lincroft and East Meadow is recognized on a straight-line basis over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal terms of the lease for the East Meadow Facility. The deferred rent liability is computed as the cumulative difference between expenses accrued on a straight-line basis and contractually due payments.

The third lease that the Company assumed relates to the land associated with the Facility in Belmont, California. In conjunction with the 2011 Recapitalization, the Belmont lease was amended resulting in an increase to the monthly rental payment. The Belmont lease has a remaining term at December 31, 2012 of approximately 36 years with two 10-year extensions. The base rent escalates every five years by the accumulated CPI increase with a maximum increase of 4% per year, and every 15 years there is a fair market value increase with a maximum increase of 15% of the prior-year rent, as defined in the agreement.

- 13 -

Future minimum lease payments, including payments under expected lease renewal terms, as of December 31, 2012 are as follows:


2013	$	432,396
2014		432,396
2015		436,044
2016		451,678
2017		453,345
Thereafter		45,333,262

Total	$	47,539,121

At the acquisition date, the Company determined the fair value of the land lease for the East Meadow Facility was below market compared with the pricing of current market transactions with similar terms by $3,100,000, and that the fair value of the land lease for the Lincroft Facility was above market by $500,000, resulting in a net below market lease intangible of $2,600,000. The net below market lease intangible is being amortized as an increase to ground lease expense over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal terms of the lease for the East Meadow Facility.

Future amortization to be recognized on the above and below market lease intangible as of December 31, 2012 is as follows:


	Above Market Lease			Below Market Lease
	Intangible			Intangible
2013	$	(5,639	)	$	83,973
2014		(5,639	)		83,973
2015		(5,639	)		83,973
2016		(5,639	)		83,973
2017		(5,639	)		83,973
Thereafter		(460,527	)		2,512,189

Total	$	(488,722	)	$	2,932,054

9.	LEASES

On January 10, 2011, the Company, as lessor, entered into non-cancelable lease agreements with SRZ Tenant for the use of the NY Facilities. The leases expire in January 2016. The lease agreements provide for minimum rent and additional rent based on the operating expense of the Facilities. Minimum rent, as defined in each lease agreement, increases by 5% each year. In addition, the lease agreements require the GWCs to transfer amounts into a capital expenditure reserve on a monthly basis. As described in Note 2, the Company funds amounts for all 29 Facilities into a capital expenditure reserve, and the GWCs reimburse the Company for amounts related to the NY Facilities (“FF&E rent”). The lease agreements require the GWCs to fund $500 per unit per year in 2011 and 2012 and provide for annual increases starting in 2013. As of December 31, 2012 and 2011, respectively, the Company had rent receivable from SRZ Tenant totaling $221,212 and $226,940 which is included in rent and working capital receivable from affiliates in the accompanying consolidated balance sheet. The Company recognizes lease income from minimum rent and FF&E rent on a straight-line basis. Deferred rent receivable in the accompanying consolidated balance sheet represents the cumulative effect of straight-lining the leases with SRZ Tenant over their non-cancelable term and is computed as the difference between income accrued on a straight-line basis and contractually due payments.

In conjunction with the 2011 Recapitalization, the Company assigned certain working capital accounts to the GWCs, affiliates of SRZ Tenant, valued at a net liability of $927,309. The Company overpaid this amount in March 2011 resulting in a receivable from the GWCs of $391,992 as of December 31, 2011 which is included in rent and working capital receivable from affiliates in the accompanying consolidated balance sheet. The Company received the $391,992 amount from the GWC’s in January 2012.

- 14 -

Future minimum rent to be received under non-cancelable leases in place at December 31, 2012 is as follows:


2013	$	15,278,821
2014		16,094,958
2015		16,898,022
2016		408,132

Total	$	48,679,933

The carrying value of properties under lease was $172,066,096 as of December 31, 2012:


Land and land improvements	$	19,306,120
Building and building improvements		160,521,140
Furniture, fixtures and equipment		4,158,040
Construction in progress		71,964

		184,057,264
Less accumulated depreciation		(11,991,168	)

Property and equipment — net	$	172,066,096

10.

SUBSEQUENT EVENTS

On January 9, 2013, Sunrise consummated the transaction with HCN and Red Fox (see Note 1).

* * * * * *

- 15 -

EX-99.5 8 d586143dex995.htm EX-99.5 EX-99.5

Exhibit 99.5

CC3 ACQUISITION, LLC

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012


	June 30, 2013			December 31,
	(unaudited)			2012
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	68,324,433		$	68,262,391
Building and building improvements		549,459,770			548,934,910
Furniture, fixtures, and equipment		18,750,777			18,394,875
Construction in progress		1,106,507			670,660

		637,641,487			636,262,836
Less accumulated depreciation		(53,512,270	)		(42,647,192	)

Property and equipment — net		584,129,217			593,615,644
CASH AND CASH EQUIVALENTS		6,313,610			11,608,102
RESTRICTED CASH		9,467,939			7,574,763
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $294,650 and $225,273 for 2013 and 2012, respectively		1,403,963			1,263,494
RENT AND WORKING CAPITAL RECEIVABLE FROM AFFILIATES		219,170			221,212
PREPAID EXPENSES AND OTHER ASSETS		824,777			1,458,374
DEFERRED RENT RECEIVABLE		2,333,664			2,298,285
DEFERRED FINANCING COSTS — Net of accumulated amortization of $6,807,344 and $5,445,873 for 2013 and 2012, respectively		1,588,382			2,949,853
DEFERRED TAX ASSET		1,101,563			911,418
BELOW MARKET LEASE INTANGIBLE—Net of accumulated amortization of $209,932 and $167,946 for 2013 and 2012, respectively		2,890,068			2,932,054

TOTAL	$	610,272,353		$	624,833,199

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable	$	434,940,000		$	434,940,000
Accrued interest		2,041,678			2,123,345
Accounts payable and accrued expenses		5,718,524			6,814,708
Payable to affiliates — net		602,448			397,232
Payable to Sunrise Third partners (Note1)		152,535			152,535
Deferred rent liability		842,822			675,206
Deferred revenue		5,908,174			5,901,050
Security and reservation deposits		50,000			64,500
Above market lease intangible—Net of accumulated amortization of $14,098 and $11,278 for 2013 and 2012, respectively		485,902			488,722

Total liabilities		450,742,083			451,557,298
MEMBERS’ EQUITY		159,530,270			173,275,901

TOTAL	$	610,272,353		$	624,833,199

See notes to consolidated financial statements.

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
OPERATING REVENUE:
Resident fees	$	62,604,726		$	59,171,804
Lease income from affiliate		8,728,700			8,863,644
Other income		380,342			361,716

Total operating revenue		71,713,768			68,397,164

OPERATING EXPENSES:
Labor		27,237,737			25,586,119
Depreciation and amortization		10,865,077			11,797,278
General and administrative		3,262,247			2,772,282
Taxes and license fees		3,162,122			3,038,828
Management fees to affiliate		3,138,831			2,961,154
Food		2,087,911			1,974,592
Insurance		1,848,941			2,103,813
Utilities		1,736,694			1,699,866
Repairs and maintenance		1,506,571			1,570,825
Advertising and marketing		1,031,664			880,756
Ancillary expenses		725,581			598,113
Ground lease expense		423,120			422,827
Bad debt		208,443			310,436

Total operating expenses		57,234,939			55,716,889

INCOME FROM OPERATIONS		14,478,829			12,680,275

OTHER EXPENSES (INCOME):
Interest expense		16,153,508			16,225,662
Income tax expense		70,094			138,517
Interest income		(268	)		(577	)
Other income		(19,022	)		(21,258	)

Total other expenses		16,204,312			16,342,344

NET LOSS	$	(1,725,483	)	$	(3,662,069	)

See notes to consolidated financial statements.

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


	CNL Income Senior Holding, LLC			Sunrise Senior Living Investments, Inc.			Total
MEMBERS’ EQUITY — December 31, 2012	$	94,575,676		$	78,700,225		$	173,275,901
Distributions		(7,829,557	)		(4,190,591	)		(12,020,148	)
Net loss		(1,035,290	)		(690,193	)		(1,725,483	)

MEMBERS’ EQUITY — June 30, 2013	$	85,710,829		$	73,819,441		$	159,530,270

See notes to consolidated financial statements.

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,725,483	)	$	(3,662,069	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		10,865,077			11,701,751
Gain on sale of assets		(19,022	)		(21,258	)
Provision for bad debts		208,443			310,436
Deferred rent receivable		(35,379	)		(384,614	)
Amortization of financing costs		1,361,471			1,361,470
Deferred tax		(190,145	)		—
Amortization of resident lease intangible		—			95,527
Amortization of net below market lease intangible		39,166			39,013
Deferred rent liability		167,616			167,616
Changes in operating assets and liabilities:
Accounts receivable		(348,912	)		126,630
Rent and working capital receivable from affiliates		2,042			453,333
Prepaid expenses and other assets		633,597			777,200
Accounts payable and accrued expenses		(971,982	)		(1,026,051	)
Income taxes payable		—			(362,638	)
Accrued interest		(81,667	)		(81,666	)
Payable to affiliates — net		205,216			(664,211	)
Reserve funds due to affiliates		—			(130,970	)
Deferred revenue		7,124			74,761
Security and reservation deposits		(14,500	)		(7,000	)

Net cash provided by operating activities		10,102,662			8,767,260

CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		(1,893,176	)		(1,488,892	)
Purchases of property and equipment		(1,502,852	)		(1,736,949	)
Proceeds from sale of assets		19,022			81,258

Net cash used in investing activities		(3,377,006	)		(3,144,583	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions		—			3,106,467
Distributions		(12,020,148	)		(10,075,899	)

Net cash used in financing activities		(12,020,148	)		(6,969,432	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(5,294,492	)		(1,346,755	)
CASH AND CASH EQUIVALENTS — Beginning of year		11,608,102			9,663,977

CASH AND CASH EQUIVALENTS — End of period	$	6,313,610		$	8,317,222

(Continued)

CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013		2012
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued capital expenditures	$	38,374	$	104,255

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	14,863,415	$	14,945,082

See notes to consolidated financial statements.

CC3 ACQUISITION, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2013 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

1.	ORGANIZATION

In conjunction with the 2011 Recapitalization, the Company obtained new debt of $435,000,000 as further described in Note 2.

Total consideration paid for Sunrise Third, including interests contributed, was $630,625,410 (excluding transaction costs). At the 2011 Recapitalization date, $374,379 was payable to the Sunrise Third partners for earnings prior to the 2011 Recapitalization. At June 30, 2013, $152,535 of the payable was still outstanding.

As of June 30, 2013, the Company owns the following 29 Facilities:


Operator Entity	Location	Date Opened
Sunrise Village House, LLC	Montgomery Village, Maryland	May 1993
Sunrise Weston Assisted Living, LP	Weston, Massachusetts	December 1997
Sunrise Flossmoor Assisted Living, LLC	Flossmoor, Illinois	November 1999
Sunrise Gahanna Assisted Living, LLC	Gahanna, Ohio	March 1998
Sunrise Third Tustin, SL, LP	Tustin, California	September 2000
Sunrise Third Edgewater SL, LLC	Edgewater, New Jersey	October 2000
Sunrise Third Alta Loma SL, LP	Alta Loma, California	January 2001
Sunrise Chesterfield Assisted Living, LLC	Chesterfield, Missouri	October 2000
Sunrise Third Claremont SL, LP	Claremont, California	December 2000
Sunrise Third Holbrook SL, LLC	Holbrook, New York	June 2001
Sunrise Third Crystal Lake SL, LLC	Crystal Lake, Illinois	February 2001
Sunrise Third Gurnee SL, LLC	Gurnee, Illinois	May 2002
Sunrise Third West Bloomfield SL, LLC	West Bloomfield, Michigan	August 2000
Sunrise Third University Park SL, LLC	Colorado Springs, Colorado	February 2001
East Meadow A.L., LLC	East Meadow, New York	March 2002
Sunrise Third East Setauket SL, LLC	East Setauket, New York	June 2002
Sunrise North Naperville Assisted Living, LLC	Naperville, Illinois	June 2002
Sunrise Third Schaumburg SL, LLC	Schaumburg, Illinois	September 2001
Sunrise Third Roseville SL, LLC	Roseville, Minnesota	December 2001
Sunrise Third Lincroft SL, LLC	Lincroft, New Jersey	December 2001
Sunrise Third Plainview SL, LLC	Plainview, New York	January 2002
White Oak Assisted Living, LLC	Silver Spring, Maryland	March 2002
Canoga Park Assisted Living, LLC	West Hills, California	June 2002
Sunrise Basking Ridge Assisted Living, LLC	Basking Ridge, New Jersey	September 2002
Sunrise Third Dix Hills SL, LLC	Dix Hills, New York	March 2003
Sunrise Marlboro Assisted Living, LLC	Marlboro, New Jersey	January 2002
Sunrise Belmont Assisted Living, LLC	Belmont, California	October 2002
Sunrise Third West Babylon SL, LLC	West Babylon, New York	January 2003
Sunrise Kennebunk ME Senior Living, LLC	Kennebunk, Maine	December 2005

The Company owns and leases the six Facilities located in the State of New York (“NY Facilities”) to Sunrise NY Tenant, LLC (“SRZ Tenant”), a wholly owned subsidiary of SSLI. SRZ Tenant has site control and cash surplus agreements with six limited liability companies (the “GWCs”) to operate the NY Facilities. The GWCs are ultimately controlled by SSLI with 2 of the 3 voting interests held by employees of Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly owned subsidiary of SSLI.

On September 13, 2012, in conjunction with the August 21, 2012 agreement, Red Fox Management, LP (“Red Fox”), a new entity formed by Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement with SSLI to acquire SSLMI for approximately $130,000,000 with HCN investing approximately $26,000,000 for a 20% ownership interest. The Company has management agreements with SSLMI to manage the Facilities.

On July 1, 2013, HCN closed on a purchase and sale agreement (“PSA”) with CNL. Pursuant to the PSA, HCN purchased CNL’s membership interests in the Company for a purchase price of approximately $144,880,000, including transaction costs.

2.	NOTES PAYABLE

A summary of loan terms and balances as of June 30, 2013 is as follows:


	Interest			Loan Balances as of
Loan Tranche	Rate			June 30, 2013
Loan		6.11	%	$	324,940,000
Mezzanine A Loan		8.00	%		40,000,000
Mezzanine B Loan		8.50	%		45,000,000
Mezzanine C Loan		10.15	%		25,000,000

Total		6.76	%	$	434,940,000

The Company is subject to non-financial covenants under the loan agreement. As of June 30, 2013, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s notes payable approximated their carrying value at June 30, 2013.

3.	SUBSEQUENT EVENTS

On July 1, 2013, HCN closed on a PSA with CNL. Pursuant to the PSA, HCN purchased CNL’s membership interests in the Company for a purchase price of approximately $144,880,000, including transaction costs. The PSA was a result of exercising the purchase option under the LLC agreement as described in Note 1.

The Company reviewed subsequent events through September 12, 2013, the date the consolidated financial statements were issued.

EX-99.6 9 d586143dex996.htm EX-99.6 EX-99.6

Exhibit 99.6

CLPSun Partners II, LLC

Consolidated Financial Statements As of December

31, 2012 and 2011, and for the year ended December

31, 2012 and the period from August 2, 2011 (Date of

Recapitalization) to December 31, 2011 with Report of

Independent Auditors

CLPSUN PARTNERS II, LLC

TABLE OF CONTENTS


	Page
REPORT OF INDEPENDENT AUDITORS		1

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND 2011, AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUST 2, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011:

Consolidated Balance Sheets		2

Consolidated Statements of Operations		3

Consolidated Statements of Changes in Members’ Equity		4

Consolidated Statements of Cash Flows		5–6

Notes to Consolidated Financial Statements		7–12

Report of Independent Auditors

To the Members of

CLPSun Partners II, LLC:

We have audited the accompanying consolidated financial statements of CLPSun Partners II, LLC (the “Company”), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year ended December 31, 2012 and for the period from August 2, 2011 (date of recapitalization) to December 31, 2011, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Auditor’s Responsibility

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CLPSun Partners II, LLC at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the period for the year ended December 31, 2012 and the period from August 2, 2011 (date of recapitalization) to December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

McLean, Virginia

March 27, 2013

CLPSUN PARTNERS II, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011


	2012			2011
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	14,405,356		$	14,348,650
Building and building improvements		108,448,716			108,387,294
Furniture, fixtures, and equipment		5,810,362			5,658,556
Construction in progress		34,274			49,657

		128,698,708			128,444,157
Less accumulated depreciation		(6,528,789	)		(1,955,513	)

Property and equipment — net		122,169,919			126,488,644
CASH AND CASH EQUIVALENTS		4,411,533			5,211,699
RESTRICTED CASH		306,242			599,747
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $58,354 and $92,041 in 2012 and 2011, respectively		328,699			458,200
PREPAID EXPENSES AND OTHER ASSETS		291,029			365,969
DEFERRED TAX ASSET (Note 6)		121,737			—
DEFERRED FINANCING COSTS — Net of accumulated amortization of $137,448 and $40,356 in 2012 and 2011, respectively		128,900			225,992
RESIDENT LEASE INTANGIBLE — Net of accumulated amortization of $717,783 and $299,076 in 2012 and 2011, respectively		—			418,707

TOTAL	$	127,758,059		$	133,768,958

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable	$	104,549,267		$	104,549,267
Accounts payable and accrued expenses		3,175,973			1,583,761
Accrued interest		412,331			412,331
Payable to affiliates — net		114,993			454,865
Security and reservation deposits		20,000			12,000
Deferred revenue		2,006,106			1,458,283

Total liabilities		110,278,670			108,470,507
MEMBERS’ EQUITY		17,479,389			25,298,451

TOTAL	$	127,758,059		$	133,768,958

See notes to consolidated financial statements.

- 2 -

CLPSUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUST 2, 2011 (DATE

OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
OPERATING REVENUE:
Resident fees	$	37,008,371		$	14,255,749
Other income		292,665			182,969

Total operating revenue		37,301,036			14,438,718

OPERATING EXPENSES:
Labor		14,999,428			6,019,752
Depreciation and amortization		4,991,983			2,254,589
General and administrative		2,327,219			957,299
Management fees to affiliate		1,862,585			721,126
Repairs and maintenance		1,636,152			258,856
Taxes and license fees		1,570,019			620,659
Insurance		1,501,594			523,273
Food		1,435,809			522,358
Utilities		991,278			425,575
Advertising and marketing		608,299			280,117
Ancillary expenses		357,265			135,415
Bad debt		49,330			16,191
Transaction costs (Note 2)		—			707,766

Total operating expenses		32,330,961			13,442,976

INCOME FROM OPERATIONS		4,970,075			995,742

OTHER EXPENSE (INCOME):
Interest expense		4,951,981			2,067,759
Other expense		—			546,226
Income tax expense (benefit)		398,940			(186,903	)

Total other expense		5,350,921			2,427,082

NET LOSS	$	(380,846	)	$	(1,431,340	)

See notes to consolidated financial statements.

- 3 -

CLPSUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUEST 2, (DATE

OF RECAPITALIZTION) TO DECEMBER 31, 2011


	Sunrise Senior Living Investments, Inc.			CNL Income SL II Holding, LLC			Total
MEMBERS’ EQUITY — August 2, 2011 (Date of Recapitalization)	$	—		$	—		$	—
Contributions		8,140,714			18,994,998			27,135,712
Distributions		—			(405,921	)		(405,921	)
Net loss		(429,402	)		(1,001,938	)		(1,431,340	)

MEMBERS’ EQUITY — December 31, 2011	$	7,711,312		$	17,587,139		$	25,298,451
Distributions		(2,249,529	)		(5,188,687	)		(7,438,216	)
Net loss		(114,253	)		(266,593	)		(380,846	)

MEMBERS’ EQUITY — December 31, 2012	$	5,347,530		$	12,131,859		$	17,479,389

See notes to consolidated financial statements.

- 4 -

CLPSUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUST 2, 2011 (DATE

OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(380,846	)	$	(1,431,340	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		4,573,276			1,955,513
Amortization of resident lease intangible		418,707			299,076
Amortization of financing costs		83,804			40,356
Provision for bad debts		49,330			16,191
Deferred tax		(121,737	)		—
Changes in operating assets and liabilities:
Accounts receivable		80,171			(91,999	)
Prepaid expenses and other assets		74,940			(144,721	)
Accounts payable and accrued expenses		1,594,854			(1,157,454	)
Accrued interest		—			(113,189	)
Payable to affiliates—net		(326,584	)		281,124
Security and reservation deposits		8,000			(3,000	)
Deferred revenue		547,823			222,498

Net cash provided by (used in) operating activities		6,601,738			(126,945	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and restricted cash acquired in acquisition of Pool One		—			7,758,172
Purchase of property and equipment		(257,193	)		(47,579	)
Restricted cash		293,505			(135,392	)

Net cash provided by investing activities		36,312			7,575,201

CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs paid		—			(266,348	)
Payments on notes payable		—			(28,700,000	)
Contributions		—			27,135,712
Distributions		(7,438,216	)		(405,921	)

Net cash used in financing activities		(7,438,216	)		(2,236,557	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(800,166	)		5,211,699
CASH AND CASH EQUIVALENTS — Beginning of period		5,211,699			—

CASH AND CASH EQUIVALENTS — End of year	$	4,411,533		$	5,211,699

(continued)

- 5 -

CLPSUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUST 2, 2011 (DATE

OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012		2011
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	4,868,162	$	1,210,390

SUPPLEMENTAL DISCLOSURES OF NONCASH INFORMATION:
Accrued capital expenditures	$	2,642	$	7,332

Assumption of note payable	$	—	$	133,249,267

See notes to consolidated financial statements.

- 6 -

CLPSUN PARTNERS II, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND 2011, AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE PERIOD FROM AUGUST 2, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011

1.	ORGANIZATION AND PRESENTATION

Organization — CNLSun Partners II, LLC (the “Company”) was formed on June 8, 2011 under the laws of the state of Delaware as a limited liability company. On January 31, 2012, the Certificate of Formation was amended to change the name of the limited liability company from CNLSun Partners II, LLC to CLPSun Partners II, LLC. The Company was organized to acquire 100% of the membership interests in MetSun Two Pool One, LLC (“Pool One”) which owned and operated six assisted living facilities (collectively, the “Facilities” or individually, the “Facility”). At formation, its sole member was Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”). On August 2, 2011, the Company acquired 100% of the membership interests in Pool One and in conjunction with the transaction, CNL Income SL II Holding, LLC (“CNL”) was admitted as a member to the Company (the “2011 Recapitalization”). The limited liability agreement (“LLC Agreement”) was amended and the capital accounts were adjusted to reflect the new ownership structure with CNL as the managing member owning 70% and SSLII owning 30%. The Company shall continue in full force and effect until August 2, 2041 unless sooner terminated under the terms of the LLC Agreement.

Total capital contribution at closing was $27,135,712, which was immediately used by the Company to fund a portion of the pay down of the existing financing in connection with the existing financing modification (Note 5) and other closing costs. Each party to the sale of the members’ interests was responsible for its own third party costs.

The LLC Agreement effective August 2, 2011, details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All net cash flow from operations and capital proceeds are to be distributed according to the priorities as specified in the agreements. Any member can require additional capital to cure an event of default or to avoid an event of default under the loan agreements. The members must mutually agree upon additional capital requests for all other circumstances, including funding for operating shortfalls if they are determined to be reasonably necessary to effectuate any cost or expense associated with the operation or maintenance of any Facility or as it may be contemplated under the management agreements of the Facilities. Contributions are made in proportion to the relative percentage interests of the member at the time of the request. Net income (loss) is allocated to the members in proportion to their relative percentage interests.

As of December 31, 2012 and 2011, the Company owns the following six Facilities:


Operator Entity	Location	Date Opened
Bloomfield South MI Senior Lving Owner, LLC	Bloomfield, MI	March 2009
Broomfield CO Senior Living Owner, LLC	Broomfield, CO	May 2009
Johns Creek GA Senior Living Owner, LLC	Johns Creek, GA	March 2009
McCandless PA Senior Living Owner, LP	McCandless, PA	June 2009
Simi Valley CA Senior Living Owner, LLC	Simi Valley, CA	August 2009
Wake County NC Senior Living Owner, LLC	Cary, NC	July 2009

- 7 -

The Company has a pooling arrangement in which the terms and conditions of the management agreements are considered under one consolidated agreement.

Sunrise has the option to purchase, exercisable in Sunrise’s sole discretion, one hundred percent (100%) of CNL’s ownership interest in the Company upon the expiration of the third Company Year per the LLC Agreement. If Sunrise exercises the purchase option at any time prior to the sixth Company Year, CNL will be paid a purchase price equal to the amount necessary to return to CNL a 16% internal rate of return on the CNL total capital contributions, after taking into account all amounts previously distributed to CNL. Sunrise will not be able to exercise the option to purchase after the sixth Company Year.

2.	SUMMERY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The accompanying consolidated financial statements include the consolidated accounts of the Company after elimination of all intercompany accounts and transactions. The Company reviewed subsequent events through March 27, 2013, the date the consolidated financial statements were issued, for inclusion in these consolidated financial statements.

Property and Equipment — Property and equipment are recorded at their fair value as of the date of acquisition. All subsequent additions were recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:


Land improvements			15 years
Building and improvements			10-40 years
Furniture, fixtures, and equipment			3-10 years

- 8 -

Restricted Cash — The Company established a capital expenditure reserve to cover the cost of replacements and repairs to the Facilities’ furniture, fixtures, and equipment. The required deposit is $750 per unit from year one to year three, and $1,000 per unit as increased by the consumer price index in subsequent years. As a result of the pooling arrangements entered into by the Company, all amounts in the capital expenditure reserves for the Facilities are considered to be pooled into one account and may be used for any of the Facilities. The balance in the capital reserve was $306,242 and $599,747 as of December 31, 2012 and 2011, respectively and is included in restricted cash in the accompanying consolidated balance sheets.

Resident Lease Intangible — Resident lease intangible includes the fair value assigned to the in-place resident leases at the Facilities acquired. The asset is being amortized using the straight-line method over a period of one year, based on management’s estimate of the average resident’s length of stay. Amortization expense for 2012 and 2011 was $418,707 and $299,076, respectively.

Reclassifications — Certain amounts have been reclassified to conform to the current year presentation. The transaction costs totaling $707,766 have been reclassified from other expenses to operating expenses in the consolidated statements of operations.

Income Taxes — The Company wholly owns CNL Income SL II TRS Corporation (“TRS”), a taxable REIT subsidiary as defined in Section 856 of the Internal Revenue Code, which is subject to federal and state tax. The Company has a provision for federal income taxes related to TRS. The Company is also subject to franchise taxes in the states of California, Colorado, Georgia, Michigan, North Carolina and Pennsylvania, where some of the Facilities are located. The Company is also subject to modified gross receipts taxes in Michigan, where one of the Facilities is located. The modified gross receipts tax in Michigan should be treated as an income tax for financial statement purposes. Effective January 1, 2012, Michigan imposed a corporate income tax (“CIT”) and replaced the Michigan Business Tax (“MBT”) for most taxpayers. With the CIT in effect, all income or loss generated within Michigan flows through to the Members. These federal and state taxes are expensed as incurred and are included in income tax expense (benefit) in the accompanying consolidated financial statements.

- 9 -

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

As of December 31, 2012 and 2011, the carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

3.	ACQUISITION OF POOL ONE

On August 2, 2011, the Company accounted for the acquisition of Pool One as a business combination which requires the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. The acquisition was funded through the initial capitalization of the Company which consisted of debt of $133,249,267 and contributions of cash by CNL and SSLII of $18,994,998 and $8,140,714, respectively.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the date of acquisition, August 2, 2011:


Land and land improvements	$	14,339,408
Building and building improvements		108,384,621
Furniture, fixtures, and equipment		5,665,217
Resident lease intangible		717,783
Other assets		8,826,168
Notes payable		(133,249,267	)
Other liabilities		(4,683,930	)

		—
Transaction costs		707,766

Total consideration	$	707,766

The estimated fair value of the real estate assets at acquisition was $128,389,246. To determine the fair value of the real estate, the Company examined various data points including (i) transactions with similar assets in similar markets (Level 3) and (ii) independent appraisals of the acquired assets (Level 3). As of the acquisition date, the fair value of the working capital approximated its carrying value.

The resident lease intangible of $717,783 represents opportunity costs associated with lost rentals. Based on management’s historical experience, the Company determined one month’s operating revenues less operating expenses approximated the value of these opportunity costs (Level 3).

- 10 -

At closing, the existing debt of $133,249,267 which approximated fair value was assumed by the Company. Fair value approximated book value as the debt was due at the date of closing.

4.	TRANSACTIONS WITH AFFILIATES

On August 2, 2011, the Company entered into a management agreement with Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLII to manage the Facilities. SSLMI receives a monthly management fee equal to 5% of the gross revenues of the Facility for the period commencing on the effective date and ending on the day immediately prior to the sixth anniversary of the effective date. For the period starting on the sixth anniversary of the effective date and continuing throughout the entire term of the agreement, the management fee is 6% percent of gross revenues per month. Management fees incurred in 2012 and 2011 were $1,862,585 and $721,126, respectively.

The management agreements also provide for reimbursement to SSLMI of all direct costs of operations. Payments to SSLMI for direct operating expenses in 2012 and 2011 were $22,844,762 and $8,924,257, respectively.

The Company had net payable to SSLMI of $114,993 and $454,865 as of December 31, 2012 and 2011, respectively. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as payable to affiliates—net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

5.	NOTES PAYABLE

On August 2, 2011, the Company assumed the debt of $133,249,267 of Pool One and entered into an amended and restated loan agreement for the six Facilities with Prudential Insurance Company of America (“Prudential”). At the time of the amendment, a principal payment of $25,744,325 was paid by SSLII and CNL and $2,955,675 of restricted cash held in escrow at Prudential was applied to the loan. The loans mature on April 5, 2014 with two twelve month extensions. The loans are secured by the Facilities, cross-collateralized and cross-defaulted. The loans are interest only and bear interest at London Interbank Offered Rate (“LIBOR”) plus 2.08%. The LIBOR is subjected to a floor of 2.50%. As of December 31, 2012 and 2011, the LIBOR rates were 0.21% and 0.28%, respectively.

A summary of the loan balances at December 31, 2012 and 2011 are as follows:


Bloomfield South MI Senior Lving Owner, LLC	$	17,078,929
Broomfield CO Senior Living Owner, LLC		24,392,253
Johns Creek GA Senior Living Owner, LLC		12,086,603
McCandless PA Senior Living Owner, LP		14,523,128
Simi Valley CA Senior Living Owner, LLC		15,216,277
Wake County NC Senior Living Owner, LLC		21,252,077

	$	104,549,267

The Company is subject to non-financial covenants under the loan agreement. As of December 31, 2012 and 2011, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s notes payable was approximately $104,320,076 and $104,549,267 as of December 31, 2012 and 2011, respectively.

- 11 -

6.	INCOME TAXES

Entities that are recognized as partnerships for federal income tax purpose are not subject to income tax at the entity level as the income or loss generated by the partnership is recognized by the partners and is included on their respective tax returns. Most state income taxes follow the same methodology but there are a few states that tax partnerships on their gross receipts. The Company has properties in California, Colorado, Georgia, Michigan, North Carolina and Pennsylvania. For the period ending December 31, 2011, Michigan required partnerships to pay a modified gross receipt tax at partnership level. Effective January 1, 2012, the MBT was replaced by a CIT and therefore, Michigan will no longer tax partnerships as amounts will flow through to the owners.

The Company wholly owns CNL Income SL II TRS Corporation. The TRS was formed on June 8, 2011 under the laws of the state of Delaware. The first year the TRS was subject to taxation was 2011. The TRS has properties in California, Colorado, Georgia, Michigan, North Carolina, and Pennsylvania. The TRS files a separate state corporate tax return in California, Colorado, Georgia, North Carolina and Pennsylvania and files consolidated with a related party in the state of Michigan. The TRS had a deferred tax asset of $121,737 and $167,827 at December 31, 2012 and 2011, respectively. The deferred tax asset is related to the difference between tax and book basis related to various accruals. The Company determined that a valuation allowance of $167,827 was necessary in 2011. In the current year management reviewed all positive and negative evidence and determined that a valuation allowance was no longer necessary. The TRS had no deferred tax liabilities as of December 31, 2012 and 2011.

The TRS had tax expense of $398,940 and $21,499 at December 31, 2012 and 2011 respectively.

7.	CONTINGENCIES

During 2012, the Facility in Broomfield, CO experienced shifting in soils that resulted in damage to the underground pipes. As of December 31, 2012, costs to repair the damage of $991,545 were incurred and recorded to repairs and maintenance expense in the accompanying consolidated financial statements. During 2013, $1,072,922 of additional costs to repair the damage were incurred. Management is working through an open insurance claim related to the incident with the insurance company. Proceeds from the insurance company will be recorded as a reduction to the costs incurred when such recoveries are deemed probable.

8.	SUBSEQUENT EVENT

On January 9, 2013, Sunrise consummated the transaction with HCN and Red Fox (Note 1).

* * * * * *

- 12 -

EX-99.7 10 d586143dex997.htm EX-99.7 EX-99.7

Exhibit 99.7

CLP SUN PARTNERS II, LLC

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012


	June 30,			December 31,
	2013 (unaudited)			2012
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	14,412,241		$	14,405,356
Building and building improvements		108,451,721			108,448,716
Furniture and equipment		5,837,385			5,810,362
Construction in progress		160,809			34,274

		128,862,156			128,698,708
Less accumulated depreciation		(8,772,049	)		(6,528,789	)

Property and equipment — net		120,090,107			122,169,919
CASH AND CASH EQUIVALENTS		3,306,259			4,411,533
RESTRICTED CASH		425,450			306,242
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $37,838 and $58,354 in 2013 and 2012, respectively		359,142			328,699
RECEIVABLE FROM AFFILIATES — Net		22,681			—
PREPAID EXPENSES AND OTHER ASSETS		67,515			291,029
DEFERRED TAX ASSET		512,548			121,737
DEFERRED FINANCING COSTS — Net of accumulated amortization of 185,786 and $137,448 in 2013 and 2012, respectively		80,563			128,900

TOTAL	$	124,864,265		$	127,758,059

LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Notes payable	$	104,549,267		$	104,549,267
Accounts payable and accrued expenses		1,827,566			3,175,973
Accrued interest		332,525			412,331
Payable to affiliates — net		—			114,993
Security and reservation deposits		16,000			20,000
Deferred revenue		1,904,142			2,006,106

Total liabilities		108,629,500			110,278,670
MEMBERS’ EQUITY		16,234,765			17,479,389

TOTAL	$	124,864,265		$	127,758,059

See notes to consolidated financial statements.

CLP SUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
OPERATING REVENUE:
Resident fees	$	19,501,523		$	18,004,908
Other income		152,854			130,386

Total operating revenue		19,654,377			18,135,294

OPERATING EXPENSES:
Labor		7,914,846			7,477,713
Repairs and maintenance		2,278,402			344,466
Depreciation and amortization		2,243,260			2,688,391
General and administrative		1,034,322			1,177,552
Management fees to affiliate		982,300			905,614
Insurance		795,276			641,426
Taxes and license fees		784,024			808,892
Food		752,896			687,087
Utilities		548,297			466,577
Advertising and marketing		331,619			313,521
Ancillary expenses		207,164			169,510
Bad debt		8,369			23,016

Total operating expenses		17,880,775			15,703,765

INCOME FROM OPERATIONS		1,773,602			2,431,529

OTHER INCOME (EXPENSES):
Interest Income		385			525
Interest expense		(2,389,312	)		(2,456,247	)
Income tax benefit (expense)		415,835			(102,822	)

Total other expenses		(1,973,092	)		(2,558,544	)

NET LOSS	$	(199,490	)	$	(127,015	)

See notes to consolidated financial statements.

CLP SUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)


	Sunrise Senior Living Investments, Inc			CNL Income SL II Holding, LLC			Total
MEMBERS’ EQUITY — December 31, 2012	$	5,347,530		$	12,131,859		$	17,479,389
Distributions		—			(1,045,134	)		(1,045,134	)
Net loss		(59,847	)		(139,643	)		(199,490	)

MEMBERS’ EQUITY — June 30, 2013	$	5,287,683		$	10,947,082		$	16,234,765

See notes to consolidated financial statements.

CLP SUN PARTNERS II, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(199,490	)	$	(127,015	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		2,243,260			2,329,499
Amortization of financing costs		48,337			35,467
Amortization of residential leasing intangible		—			358,892
Provision for bad debts		8,369			23,016
Deferred taxes		(390,811	)		—
Changes in operating assets and liabilities:
Accounts receivable		(38,812	)		161,465
Receivable from affiliates—net		(22,681	)		—
Prepaid expenses and other assets		223,514			188,727
Accounts payable and accrued expenses		(1,355,151	)		(166,968	)
Accrued interest		(79,806	)		(13,301	)
Payable to affiliates—net		(114,993	)		(347,931	)
Security and reservation deposits		(4,000	)		12,000
Deferred revenue		(101,964	)		314,703

Net cash provided by operating activities		215,772			2,768,554

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(156,704	)		(168,143	)
Change in restricted cash		(119,208	)		410,444

Net cash (used in) provided by investing activities		(275,912	)		242,301

CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions		(1,045,134	)		(3,421,276	)

Net cash used in financing activities		(1,045,134	)		(3,421,276	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,105,274	)		(410,421	)
CASH AND CASH EQUIVALENTS — Beginning of year		4,411,533			5,211,699

CASH AND CASH EQUIVALENTS — End of period	$	3,306,259		$	4,801,278

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	2,221,265		$	2,434,081

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING INFORMATION:
Accrued capital expenditures	$	6,744		$	302

See notes to consolidated financial statements.

CLPSUN PARTNERS II, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2013 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

1.	ORGANIZATION AND PRESENTATION

As of June 30, 2013, the Company owns the following six Facilities:


Operator Entity	Location	Date Opened
Bloomfield South MI Senior Lving Owner, LLC	Bloomfield, MI	March 2009
Broomfield CO Senior Living Owner, LLC	Broomfield, CO	May 2009
Johns Creek GA Senior Living Owner, LLC	Johns Creek, GA	March 2009
McCandless PA Senior Living Owner, LP	McCandless, PA	June 2009
Simi Valley CA Senior Living Owner, LLC	Simi Valley, CA	August 2009
Wake County NC Senior Living Owner, LLC	Cary, NC	July 2009

The Company has a pooling arrangement in which the terms and conditions of the management agreements are considered under one consolidated agreement.

2.	NOTES PAYABLE

On August 2, 2011, the Company assumed the debt of $133,249,267 of Pool One and entered into an amended and restated loan agreement for the six Facilities with Prudential Insurance Company of America (“Prudential”). At the time of the amendment, a principal payment of $25,744,325 was paid by SSLII and CNL and $2,955,675 of restricted cash held in escrow at Prudential was applied to the loan. The loans mature on April 5, 2014 with two twelve month extensions. The loans are secured by the Facilities, cross-collateralized and cross-defaulted. The loans are interest only and bear interest at London Interbank Offered Rate (“LIBOR”) plus 2.08%. The LIBOR is subjected to a floor of 2.50%. As of June 30, 2013 and December 31, 2012, the LIBOR rates were 0.19% and 0.21%, respectively.

A summary of the loan balances at June 30, 2013 are as follows:


Bloomfield South MI Senior Lving Owner, LLC	$	17,078,929
Broomfield CO Senior Living Owner, LLC		24,392,253
Johns Creek GA Senior Living Owner, LLC		12,086,603
McCandless PA Senior Living Owner, LP		14,523,128
Simi Valley CA Senior Living Owner, LLC		15,216,277
Wake County NC Senior Living Owner, LLC		21,252,077

	$	104,549,267

The Company is subject to non-financial covenants under the loan agreement. As of June 30, 2013, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of the Company’s notes payable approximated their carrying value at June 30, 2013.

3.	CONTINGENCIES

During 2012, the Facility in Broomfield, CO experienced shifting in soils that resulted in damage to the underground pipes. As of June 30, 2013, costs to repair the damage of $2,166,483 were incurred and recorded to repairs and maintenance expense in the accompanying consolidated financial statements. Management is working through an open insurance claim related to the incident with the insurance company. Proceeds from the insurance company will be recorded as a reduction to the costs incurred when such recoveries are deemed probable.

4.	SUBSEQUENT EVENT

On July 1, 2013, HCN closed on a PSA with CNL. Pursuant to the PSA, HCN purchased CNL’s membership interests in the Company for a purchase price of approximately $17,640,000, including transaction costs. The PSA was a result of exercising the purchase option under the LLC agreement as described in Note 1. In addition, the debt was paid off.

The Company reviewed subsequent events through September 12, 2013, the date the consolidated financial statements were issued.

* * * * * *

EX-99.8 11 d586143dex998.htm EX-99.8 EX-99.8

Exhibit 99.8

COMBINED FINANCIAL STATEMENTS

CLPSun Partners III, LLC and CLPSun III Tenant, LP

As of December 31, 2012 and 2011 and for the Year ended

December 31, 2012 and for the Period from October 12, 2011

(Date of Recapitalization) to December 31, 2011 with Report

of Independent Auditors

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

TABLE OF CONTENTS


	Page
REPORT OF INDEPENDENT AUDITORS		1

COMBINED FINANCIAL STATEMENTS OF CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP AS OF DECEMBER 31, 2012 AND 2011 AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM OCTOBER 12, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011:

Combined Balance Sheets		2

Combined Statements of Operations		3

Combined Statements of Changes in Members’ Equity and Partners’ Capital		4

Combined Statements of Cash Flows		5

Notes to Combined Financial Statements		6–13

Report of Independent Auditors

To the Members and the Partners of

CLPSun Partners III, LLC and CLPSun III Tenant, LP:

We have audited the accompanying combined financial statements of CLPSun Partners III, LLC and CLPSun III Tenant, LP (the “Companies”), which comprise the combined balance sheets as of December 31, 2012 and 2011, and the related combined statements of operations, changes in members’ equity and partners’ capital, and cash flows for the year ended December 31, 2012 and for the period from October 12, 2011 (date of recapitalization) to December 31, 2011, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements

Auditor’s Responsibility

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Companies at December 31, 2012 and 2011, and the combined results of their operations and their cash flows for the year ended December 31, 2012 and for the period from October 12, 2011 (date of recapitalization) to December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

McLean, Virginia

March 27, 2013

- 1 -

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011


	2012			2011
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	11,706,623		$	11,670,556
Building and improvements		153,705,957			153,705,957
Furniture, fixtures, and equipment		3,903,744			3,340,938
Construction in progress		261,460			101,948

		169,577,784			168,819,399
Less accumulation depreciation		(7,025,577	)		(1,345,253	)

Property and equipment — net		162,552,207			167,474,146
CASH AND CASH EQUIVALENTS		8,984,056			7,658,945
RESTRICTED CASH		52,069			362,871
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $52,372 and $73,312 for 2012 and 2011, respectively		349,773			370,112
DUE FROM AFFILIATES — net		11,736			—
PREPAID EXPENSES AND OTHER ASSETS		563,297			696,266
DEFERRED FINANCING COSTS — Net of accumulated amortization of $121,066 and $22,853 for 2012 and 2011, respectively		572,431			666,062
RESIDENT LEASE INTANGIBLE — Net of accumulated amortization of $1,116,781 and $243,170 for 2012 and 2011, respectively		—			873,611

TOTAL	$	173,085,569		$	178,102,013

LIABILITIES AND MEMBERS’ EQUITY AND PARTNERS’ CAPITAL
NOTES PAYABLE	$	120,000,000		$	120,000,000
ACCRUED INTEREST		480,000			480,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES		1,753,970			2,078,341
DEFERRED RENT LIABILITY		520,426			118,567
ABOVE MARKET LEASE INTANGIBLE — Net of accumulated amortization of $67,323 and $12,119 for 2012 and 2011, respectively		2,782,677			2,837,881
DEFERRED REVENUE		1,827,343			1,872,116
DUE TO AFFILIATES — net		—			311,437
PAYABLE TO MASTER MORSUN, LP PARTNERS (Note 1)		—			185,232

Total liabilities		127,364,416			127,883,574
MEMBERS’ EQUITY AND PARTNERS’ CAPITAL		45,721,153			50,218,439

TOTAL	$	173,085,569		$	178,102,013

See notes to combined financial statements.

- 2 -

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

OCTOBER 12, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
OPERATING REVENUE:
Resident fees	$	43,758,527		$	9,182,052
Other income		212,954			115,328

Total operating revenue		43,971,481			9,297,380

OPERATING EXPENSES:
Labor		16,600,495			3,636,797
Depreciation and amortization		6,553,935			1,588,423
Management fees to affiliate		3,079,166			650,219
General and administrative		2,451,947			465,773
Food		1,474,219			304,440
Insurance		1,323,620			314,524
Taxes and license fees		1,263,612			348,528
Utilities		1,095,290			218,975
Ground lease expense		896,655			227,685
Repairs and maintenance		866,023			232,241
Advertising and marketing		603,208			151,713
Ancillary expenses		255,961			44,517
Bad debt (recovery) expense		(16,606	)		8,531
Transaction costs		—			1,664,220

Total operating expenses		36,447,525			9,856,586

INCOME (LOSS) FROM OPERATIONS		7,523,956			(559,206	)
OTHER INCOME/ (EXPENSES):
Interest income		114			—
Interest expense		(5,858,213	)		(1,366,853	)

NET INCOME (LOSS)	$	1,665,857		$	(1,926,059	)

See notes to combined financial statements.

- 3 -

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY AND PARTNERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

OCTOBER 12, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	CLP SL III Holding, LLC			CLPSun III Tenant Acquisition, LLC			Sunrise Senior Living Investments, Inc.			CLPSun III Tenant GP, LLC			Total
MEMBERS’ EQUITY AND PARTNERS’ CAPITAL — October 12, 2011—Date of Recapitalization	$	—		$	—		$	—		$	—		$	—
Contributions		35,224,832			167,195			16,749,971			2,500			52,144,498
Net income (loss)		(1,384,262	)		75,762			(618,692	)		1,133			(1,926,059	)

MEMBERS’ EQUITY AND PARTNERS’ CAPITAL — December 31, 2011		33,840,570			242,957			16,131,279			3,633			50,218,439
Distributions		(5,239,621	)		(16,227	)		(907,052	)		(243	)		(6,163,143	)
Net income (loss)		(470,454	)		1,577,612			535,110			23,589			1,665,857

MEMBERS’ EQUITY AND PARTNERS’ CAPITAL — December 31, 2012	$	28,130,495		$	1,804,342		$	15,759,337		$	26,979		$	45,721,153

See notes to combined financial statements.

- 4 -

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE PERIOD FROM

OCTOBER 12, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,665,857		$	(1,926,059	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		5,680,324			1,345,253
(Recovery of) provision for bad debts		(16,606	)		8,531
Amortization of resident lease intangible		873,611			243,170
Amortization of financing cost		98,213			22,853
Deferred rent liability		401,859			118,567
Amortization of above market lease intangible		(55,204	)		(12,119	)
Changes in operating assets and liabilities:
Accounts receivable		36,945			(350,211	)
Prepaid expenses and other assets		132,969			37,693
Accrued interest		—			480,000
Accounts payable and accrued expenses		(362,037	)		(251,712	)
Deferred revenue		(44,773	)		1,797,993
Due (from) to affiliates — net		(323,173	)		358,609

Net cash provided by operating activities		8,087,985			1,872,568

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Master MorSun, LP and MorSun Tenant, LP, net of cash acquired		—			(148,875,676	)
Payable to Master MorSun, LP partners		(185,232	)		(228,334	)
Restricted cash		310,802			346,636
Purchases of property and equipment		(720,719	)		(161,861	)

Net cash used in investing activities		(595,149	)		(148,919,235	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		—			120,000,000
Financing costs paid		(4,582	)		(688,915	)
Distributions		(6,163,143	)		—
Contributions		—			35,394,527

Net cash (used in) provided by financing activities		(6,167,725	)		154,705,612

NET INCREASE IN CASH AND CASH EQUIVALENTS:		1,325,111			7,658,945
CASH AND CASH EQUIVALENTS — Beginning of year/Date of recapitalization		7,658,945			—

CASH AND CASH EQUIVALENTS — End of year	$	8,984,056		$	7,658,945

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	5,760,000		$	864,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
SSLII’s contribution of equity in Master MorSun, LP and MorSun Tenant, LP	$	—		$	16,749,971

Accrued capital expenditures	$	37,666		$	27,355

See notes to combined financial statements.

- 5 -

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

NOTES TO COMBINED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2012 AND 2011, AND FOR THE YEAR ENDED DECEMBER 31, 2012 AND FOR THE

PERIOD FROM OCTOBER 12, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011

1.	ORGANIZATION

CLPSun Partners III, LLC (“PropCo”) was formed on August 18, 2011 under the laws of the state of Delaware as a limited liability company. At formation, its sole member was Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”). On September 16, 2011, SSLII assigned to PropCo its right to acquire the 80.00% limited partnership interest in Master MorSun, LP held by Master MorSun Acquisition, LLC, an affiliate of Special Situation Property Fund, JP Morgan Chase Bank, N.A., as trustee (“SSPF”). SSLII owned a 19.00% limited partnership interest in Master MorSun, LP and through its wholly owned subsidiary Master MorSun GP, LLC owned a 1.00% general partnership interest. Master MorSun, LP owned seven assisted living facilities (collectively, the “Facilities”) which it leased to MorSun Tenant, LP. On October 12, 2011, PropCo acquired SSPF’s 80.00% limited partnership interest in Master MorSun, LP, and SSLII contributed its 19.00% limited partnership interest and 1.00% general partnership interest in Master MorSun, LP to PropCo. In conjunction with those transactions, CLP SL III Holding, LLC (“CLP Holding”) contributed $35,224,832 and was admitted as a member to PropCo. The membership interests and capital accounts of PropCo were adjusted to reflect CLP Holding as the managing member owning 67.88% and SSLII owning 32.12%.

CLPSun III Tenant, LP (“OpCo”), formerly known as MorSun Tenant, LP, was formed on November 15, 2004 under the laws of the state of Delaware as a limited partnership. OpCo was formed to operate the Facilities. Prior to October 12, 2011, OpCo’s limited partners consisted of MorSun Tenant Acquisition, LLC, an affiliate of SSPF (50.00%) and SSLII (49.00%). The 1.00% general partnership interest was owned by MorSun Tenant GP, LLC, a wholly owned subsidiary of SSLI. On October 12, 2011, CLPSun III Tenant Acquisition, LLC (“CLP Tenant”), a wholly-owned subsidiary of CLP Holding, acquired MorSun Tenant Acquisition, LLC’s 50% limited partnership interest, SSLII transferred and assigned to CLP Tenant a 16.88% limited partnership interest, and SSLI transferred and assigned to CLPSun III Tenant GP, LLC, a wholly-owned subsidiary of CLP Holding, its 1.00% general partnership interest (together with PropCo’s ownership change, the “2011 Recapitalization”). CLP Tenant and CLPSun III Tenant GP, LLC contributed $167,195 and $2,500, respectively, to OpCo in conjunction with the transaction. As of December 31, 2011 and 2012, OpCo’s limited partnership interests were owned by CLP Tenant (66.88%) and SSLII (32.12%), and the 1.00% general partnership interest was owned by CLPSun III Tenant GP, LLC.

PropCo and OpCo (collectively, the “Companies”) shall continue in full force and effect until the earlier of October 12, 2041 or the date on which the last management agreement expires, including any renewals thereof.

The fair value of SSLII’s contribution to PropCo of its direct interest in and, through Master MorSun GP, LLC, its indirect interest in Master MorSun, LP was determined to be $16,669,666. SSLI transferred its interest in MorSun Tenant GP, LLC to SSLII, and the fair value of SSLII’s contribution to OpCo of its direct interest in and, through MorSun Tenant GP, LLC, its indirect interest in MorSun Tenant, LP was determined to be $80,305.

- 6 -

In conjunction with the 2011 Recapitalization, the Companies obtained new debt of $120,000,000 as further described in Note 5.

Total consideration, including transaction costs and interests contributed, for Master MorSun, LP and MorSun Tenant, LP was $171,335,121. At the 2011 Recapitalization date, $413,566 was payable to the Master MorSun, LP partners for earnings prior to the 2011 Recapitalization. At December 31, 2012, this amount has been fully paid to Master MorSun, LP partners.

PropCo was organized to own the Facilities, which it leases to OpCo, and OpCo was organized to operate those Facilities. On October 12, 2011, PropCo and OpCo entered into new lease arrangements.

PropCo owns 100% of the interest in three limited liability companies and four limited partnerships (collectively, the “Project Owners”), each of which owns, operates, leases, manages, and will dispose of individual assisted living facilities.

As of December 31, 2012 and 2011, the Facilities owned by the Project Owners are as follows:


Project Owners	Facilities	Location	Date Opened
CLPSun III Palo Alto Senior Living, LP	Sunrise of Palo Alto	Palo Alto, CA	November 2006
CLPSun III Lenexa Senior Living, LLC	Sunrise of Lenexa	Lenexa, KS	February 2006
CLPSun III Shelby Senior Living, LLC	Sunrise of Shelby	Shelby, MI	February 2006
CLPSun III Golden Valley Senior Living, LLC	Sunrise of Golden Valley	Golden Valley, MN	September 2005
CLPSun III Minnetonka Senior Living, LLC	Sunrise of Minnetonka	Minnetonka, MN	November 2005
CLPSun III Dresher Senior Living, LP	Sunrise of Dresher	Dresher, PA	June 2006
CLPSun III Plano Senior Living, LP	Sunrise of Plano	Plano, TX	June 2006

OpCo operates the Facilities and provides assisted living services to seniors. Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

PropCo’s limited liability company agreement and OpCo’s limited partnership agreement, effective October 12, 2011, detail the commitments of the members and partners and provides the procedures for the return of capital to the members and partners with defined priorities. All net cash flow from operations and capital proceeds is to be distributed according to the priorities as specified in the agreements. Any member or partner can require additional capital to cure an event of default or to avoid an event of default under the loan agreements. The members or partners must mutually agree upon additional capital requests for all other circumstances, including funding for operating shortfalls if they are determined to be reasonably necessary to effectuate any cost or expense associated with the operation or maintenance of any Facility or as it may be contemplated under the management agreements of the Facilities. Contributions are made in proportion to the relative percentage interests of the member or partner at the time of the request. Net income (loss) is allocated to the members and partners in proportion to their relative percentage interests.

PropCo’s limited liability company agreement and OpCo’s limited partnership agreement also provides Sunrise a purchase option from and after the expiration of the third Company Year. Sunrise has the option to purchase, exercisable in Sunrise’s sole discretion, one hundred percent (100%) of CNL’s ownership interest in the Company. If Sunrise exercises the purchase option at any time prior to the sixth Company Year, CNL will be paid a purchase price equal to the amount necessary to return to CNL a 13% internal rate of return on the CNL total capital contributions, after taking into account all amounts previously distributed to CNL.

- 7 -

On September 13, 2012, in conjunction with the August 21, 2012 agreement, Red Fox Management, LP (“Red Fox”), a new entity formed by Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement with SSLI to acquire Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLI, for approximately $130,000,000 with HCN investing approximately $26,000,000 for a 20% ownership interest. The Companies have management agreements with SSLMI to manage the Facilities (see Note 4).

On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrise’s equity interests in joint ventures that own 58 senior housing communities, including the Companies. In addition, HCN announced the acceleration of all planned joint venture buyouts, including the Companies.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying combined financial statements were prepared in accordance with U.S. generally accepted accounting principles. The accompanying combined financial statements include the combined accounts of the Companies after elimination of all significant intercompany accounts and transactions. The financial results of the Companies have been combined to reflect the combined results of PropCo and OpCo, effectively the results of the seven Facilities, which are under the common ownership and control of CLP Holding and SSLII. The combined financial statements attributable to the accounts of PropCo include the consolidated accounts of PropCo and the Project Owners after elimination of all significant intercompany accounts and transactions. The Companies have reviewed subsequent events through March 27, 2013, the date the combined financial statements were issued, for inclusion in these combined financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the allocation of the purchase price of the Facilities, useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.


Land improvements			15 years
Building and improvements			10-40 years
Furniture, fixtures, and equipment			3-10 years

- 8 -

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Impairment is recognized when the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Companies measure an impairment loss for such assets by comparing the fair value of the asset to its carrying amount. No impairment charge was recorded in 2012 and 2011.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Companies may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

Restricted Cash — Restricted cash includes a furniture, fixtures, and equipment escrow account to be used to replace fixtures, equipment, structural elements, and other components of the Facilities as required in the management agreements.

Allowance for Doubtful Accounts — The Companies provide an allowance for doubtful accounts on their outstanding receivables balance based on their collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Companies have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense for 2012 and 2011 was $98,213 and $22,853, respectively.

Resident Lease Intangible — Resident lease intangible includes the fair value assigned of the in-place resident leases at the Facilities acquired. The asset is being amortized using the straight-line method over a period of one year, based on management’s estimate of the average resident’s length of stay. Amortization expense for 2012 and 2011 was $873,611 and $243,170, respectively.

Above Market Lease Intangible — Above market lease intangible includes the fair value assigned to the land lease the Companies assumed for the Facility in Palo Alto, California as further described in Note 7. The above market lease intangible is being amortized as a decrease to ground lease expense using the straight-line method over the remaining non-cancelable term of the lease. Amortization expense for 2012 and 2011 was $55,204 and $12,119, respectively. Amortization expense for each of the next five years will be $53,858.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenues are recognized when services are rendered. The Companies bill the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Income Taxes — OpCo is recognized as a partnership for federal income tax purposes. PropCo, as a limited liability company, has elected to be treated as a partnership for federal income tax purposes. Entities that are recognized as partnerships for federal income tax purposes are not subject to income tax at the entity level as the income or loss generated by the partnership is recognized by the partners and is included on their respective tax returns. Most state income taxes follow the same methodology, but there are a few states that tax partnerships on their gross

- 9 -

receipts. The Companies have properties in California, Kansas, Michigan, Minnesota, Pennsylvania, and Texas. The Companies are subject to franchise taxes in the states of California, Minnesota, and Pennsylvania, where some of the Facilities are located. The Companies are also subject to modified gross receipts taxes in Michigan and Texas, where two of the Facilities are located. For the period ending December 31, 2011, both Michigan and Texas required partnerships to pay a modified gross receipts tax at the partnership level.

Effective January 1, 2012, the Michigan Business Tax was replaced by a Corporate Income Tax and all income or loss generated within Michigan flow through to the owners. As of December 31, 2012 and 2011, the Companies do not have a deferred tax asset or liability.

The Companies had income tax expense of $19,260 and $66,787 in 2012 and 2011, respectively, related to the gross receipts tax in Michigan and Texas, which is included in taxes and license fees in the accompanying combined financial statements.

ASC 740-10-25, Income Taxes, Overall Recognition describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities have full knowledge of the position and all relevant facts, but without considering time values. The Companies adhere to the provisions of this statement. The Companies have no uncertain tax positions that require accrual as of December 31, 2012 and 2011.

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

Reclassifications — Certain amounts have been reclassified to conform to the current year presentation. The transaction costs totaling $1,664,220 have been reclassified from other expenses to operating expenses in the combined statements of operations.

- 10 -

3.	ACQUISITION OF MASTER MORSUN, LP AND MORSUN TENANT, LP

The Companies accounted for the acquisition of Master MorSun, LP and MorSun Tenant, LP as a business combination which requires the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs were expensed as incurred. The acquisition was funded through the initial capitalization of the Companies which consisted of debt of $120,000,000, contribution of cash by CLP Holding of $35,394,527, and contribution of its existing equity interest in Master MorSun, LP and MorSun Tenant, LP by SSLII of $16,749,971.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the date of acquisition, October 12, 2011:


Land and land improvements	$	11,672,881
Building and building improvements		153,635,686
Furniture, fixtures, and equipment		3,108,993
Resident lease intangible		1,116,781
Other assets		5,776,948
Above market lease intangible		(2,850,000	)
Other liabilities		(2,376,822	)
Payable to Master MorSun, LP partners		(413,566	)

		169,670,901
SSLII’s contribution of equity in Master MorSun, LP and MorSun
Tenant, LP		(16,749,971	)

Total consideration, excluding transaction costs		152,920,930
Transaction costs		1,664,220

Total consideration	$	154,585,150

Total consideration, excluding transaction costs	$	152,920,930
Cash acquired		(4,045,254	)

Total cash consideration	$	148,875,676

The estimated fair value of the real estate assets at acquisition was $168,417,560. To determine the fair value of the real estate, the Company examined various data points including (i) transactions with similar assets in similar markets (Level 3) and (ii) independent appraisals of the acquired assets (Level 3). As of the acquisition date, the fair value of the working capital approximated its carrying value.

The resident lease intangible of $1,116,781 represents opportunity costs associated with lost rentals. Based on management’s historical experience, the Companies determined one month’s operating revenues less operating expenses approximated the value of these opportunity costs (Level 3).

The above market lease intangible of $2,850,000 represents the amount by which the land lease assumed by the Companies for the Facility in Palo Alto, California was unfavorable compared with the pricing of current market transactions with the same or similar terms. The above market cash flow of the lease is determined by comparing the projected cash flows of the lease in place to projected cash flows of comparable market-rate leases (Level 3).

- 11 -

4.	TRANSACTIONS WITH AFFILIATES

On October 12, 2011, the Companies entered into management agreements with SSLMI to manage the Facilities. The agreements have a term of 29 years and eleven months. The agreements provide for management fees to be paid monthly for 7% of gross operating revenues. Total management fees incurred in 2012 and 2011 were $3,079,166 and $650,219, respectively.

The agreements also provide for reimbursement to SSLMI for all direct costs of operation. Payments to SSLMI for direct operating expenses in 2012 and 2011 were $25,846,514 and $4,892,117, respectively.

The Companies obtain worker’s compensation, professional and general liability, and automobile coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $1,187,460 and $197,454 in 2012 and 2011, respectively.

The Companies had a net receivable from SSLMI of $11,736 as of December 31, 2012 and a net payable to SSLMI of $311,437 as of December 31, 2011. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate. The amounts have been presented as due from affiliates-net and due to affiliates-net in the accompanying combined balance sheets. The amounts are non-interest-bearing and due on demand.

5.	NOTES PAYABLE

On October 12, 2011, the Companies entered into a loan agreement to obtain seven notes payable totaling $120,000,000 to finance the acquisition of the Facilities. The notes are cross-collateralized and secured by the Facilities. Payments required on the loan are guaranteed by SSLII and CNL Income Partners, LP, an affiliate of CLP Holding. The loan agreement provides for a fixed rate of 4.80% and requires monthly interest-only payments until maturity in November 2018.

Notes payable as of December 31, 2012 and 2011 consist of the following:


Borrower
CLPSun III Palo Alto Senior Living, LP	$	17,560,300
CLPSun III Lenexa Senior Living, LLC		10,174,500
CLPSun III Shelby Senior Living, LLC		17,211,200
CLPSun III Golden Valley Senior Living, LLC		20,598,600
CLPSun III Minnetonka Senior Living, LLC		16,948,400
CLPSun III Dresher Senior Living, LP		7,543,100
CLPSun III Plano Senior Living, LP		29,963,900

	$	120,000,000

The Companies are subject to non-financial covenants under the loan agreement. As of December 31, 2012 and 2011, the Companies were in compliance with all covenants.

The fair value of the Companies’ notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The estimated fair value of its notes payable approximated their carrying value at December 31, 2012 and 2011.

- 12 -

6.	CONTINGENCIES

The Companies are involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management and general counsel of the Companies do not believe the ultimate resolution of these matters will have a material adverse effect on the Companies’ financial position.

7.	GROUND LEASE

In conjunction with the 2011 Recapitalization, the Companies assumed a ground lease from Master MorSun, LP. The lease includes base rate increases of 10% every five years with adjustments to fair market rent in years 26 and 46 of the lease. The lease has a term of 720 months and expires on August 31, 2064. Lease expense is recognized on a straight-line basis over the non-cancelable term of the lease. Ground lease expense in 2012 and 2011 was $896,655 and $227,685, respectively. The deferred rent liability is computed as the cumulative difference between expenses accrued on a straight-line basis and contractually due payments.

Future minimum payments under the ground lease as of December 31, 2012 are as follows:


2013	$	550,000
2014		568,334
2015		605,000
2016		605,000
2017		605,000
Thereafter		46,842,478

Total	$	49,775,812

At the acquisition date, the Companies determined the fair value of the land lease for the Palo Alto Facility was above market compared with the pricing of current market transactions with similar terms by $2,850,000. The above market lease intangible is being amortized as a decrease to ground lease expense over the remaining non-cancelable term of the lease.

Future amortization to be recognized on the above market lease intangible as of December 31, 2012 is as follows:


2013	$	53,858
2014		53,858
2015		53,858
2016		53,858
2017		53,858
Thereafter		2,513,387

Total	$	2,782,677

8.	SUBSEQUENT EVENT

On January 9, 2013, Sunrise consummated the transaction with HCN and Red Fox (Note 1).

******

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EX-99.9 12 d586143dex999.htm EX-99.9 EX-99.9

Exhibit 99.9

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED BALANCE SHEETS

AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012


	June 30, 2013			December 31,
	(unaudited)			2012
ASSETS
PROPERTY AND EQUIPMENT:
Land and land improvements	$	11,792,733		$	11,706,623
Building and improvements		153,806,450			153,705,957
Furniture, fixtures, and equipment		3,872,497			3,903,744
Construction in progress		268,252			261,460

		169,739,932			169,577,784
Less accumulation depreciation		(9,784,346	)		(7,025,577	)

Property and equipment — net		159,955,586			162,552,207
CASH AND CASH EQUIVALENTS		5,736,880			8,984,056
RESTRICTED CASH		157,558			52,069
ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $20,044 and $52,372 for 2013 and 2012, respectively		227,079			349,773
DUE FROM AFFILIATES — net		27,833			11,736
PREPAID EXPENSES AND OTHER ASSETS		354,012			563,297
DEFERRED FINANCING COSTS — Net of accumulated amortization of $169,441 and $121,066 for 2013 and 2012, respectively		524,056			572,431

TOTAL	$	166,983,004		$	173,085,569

LIABILITIES AND MEMBERS’ EQUITY AND PARTNERS’ CAPITAL
NOTES PAYABLE	$	119,850,402		$	120,000,000
ACCRUED INTEREST		479,402			480,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES		1,463,393			1,753,970
DEFERRED RENT LIABILITY		722,091			520,426
ABOVE MARKET LEASE INTANGIBLE — Net of accumulated amortization of $94,252 and $67,323 for 2013 and 2012, respectively		2,755,748			2,782,677
DEFERRED REVENUE		1,753,934			1,827,343

Total liabilities		127,024,970			127,364,416
MEMBERS’ EQUITY AND PARTNERS’ CAPITAL		39,958,034			45,721,153

TOTAL	$	166,983,004		$	173,085,569

See notes to combined financial statements.

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
OPERATING REVENUE:
Resident fees	$	21,897,658		$	21,486,719
Other income		101,154			111,581

Total operating revenue		21,998,812			21,598,300

OPERATING EXPENSES:
Labor		8,417,091			8,314,375
Depreciation and amortization		2,758,769			3,290,847
Management fees to affiliate		1,538,384			1,512,839
General and administrative		1,031,872			1,211,770
Insurance		798,376			646,170
Food		727,687			720,650
Taxes and license fees		663,191			622,026
Utilities		578,389			522,276
Ground lease expense		449,736			446,919
Repairs and maintenance		409,495			403,856
Advertising and marketing		304,342			273,713
Ancillary expenses		124,099			123,248
Bad debt (recovery) expense		21,899			(13,690	)

Total operating expenses		17,823,330			18,074,999

INCOME FROM OPERATIONS		4,175,482			3,523,301
OTHER INCOME/ (EXPENSE):
Interest income		103			60
Interest expense		(2,927,776	)		(2,929,449	)

NET INCOME	$	1,247,809		$	593,912

See notes to combined financial statements.

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY (DEFICIT) AND PARTNERS’ CAPITAL

FOR THE PERIOD ENDED JUNE 30, 2013 (UNAUDITED)


	CLP SL III Holding, LLC			CLPSun III Tenant Acquisition, LLC			Sunrise Senior Living Investments, Inc.			CLPSun III Tenant GP, LLC			Total
MEMBERS’ EQUITY AND PARTNERS’ CAPITAL — December 31, 2012	$	28,130,495		$	1,804,342		$	15,759,337		$	26,979		$	45,721,153
Distributions		(1,260,515	)		(2,827,608	)		(2,880,525	)		(42,280	)		(7,010,928	)
Net income		288,489			550,268			400,823			8,228			1,247,809

MEMBERS’ EQUITY (DEFICIT) AND PARTNERS’ CAPITAL — June 30, 2013	$	27,158,469		$	(472,997	)	$	13,279,636		$	(7,074	)	$	39,958,034

See notes to combined financial statements.

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

COMBINED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)


	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,247,809		$	593,912
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		2,758,769			2,732,456
Provision for (Recovery of) bad debts		21,899			(13,690	)
Amortization of resident lease intangible		—			558,391
Amortization of financing cost		48,375			44,868
Deferred rent liability		201,665			200,194
Amortization of above market lease intangible		(26,929	)		(28,275	)
Changes in operating assets and liabilities:
Accounts receivable		100,795			70,732
Prepaid expenses and other assets		209,285			246,344
Accrued interest		(598	)		—
Accounts payable and accrued expenses		(305,180	)		(576,277	)
Deferred revenue		(73,409	)		(63,766	)
Due from affiliates — net		(16,097	)		(265,452	)

Net cash provided by operating activities		4,166,384			3,499,437

CASH FLOWS FROM INVESTING ACTIVITIES:
Payable to Master MorSun, LP partners		—			(185,232	)
Restricted cash		(105,489	)		290,086
Purchases of property and equipment		(147,545	)		(280,721	)

Net cash used in investing activities		(253,034	)		(175,867	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable		(149,598	)		—
Distributions		(7,010,928	)		(4,489,251	)

Net cash used in financing activities		(7,160,526	)		(4,489,251	)

NET DECREASE IN CASH AND CASH EQUIVALENTS:		(3,247,176	)		(1,165,681	)
CASH AND CASH EQUIVALENTS — Beginning of year		8,984,056			7,658,945

CASH AND CASH EQUIVALENTS — End of period	$	5,736,880		$	6,493,264

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest	$	2,880,000		$	2,880,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Accrued capital expenditures	$	14,603		$	25,144

See notes to combined financial statements.

CLPSUN PARTNERS III, LLC AND CLPSUN III TENANT, LP

NOTES TO COMBINED FINANCIAL STATEMENTS

AS OF JUNE 30, 2013 AND FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

1.	ORGANIZATION

In conjunction with the 2011 Recapitalization, the Companies obtained new debt of $120,000,000 as further described in Note 2.

Total consideration, including transaction costs and interests contributed, for Master MorSun, LP and MorSun Tenant, LP was $171,335,121. At the 2011 Recapitalization date, $413,566 was payable to the Master MorSun, LP partners for earnings prior to the 2011 Recapitalization. At June 30, 2013, this amount has been fully paid to Master MorSun, LP partners.

PropCo was organized to own the Facilities, which it leases to OpCo, and OpCo was organized to operate those Facilities. On October 12, 2011, PropCo and OpCo entered into new lease arrangements.

As of June 30, 2013, the Facilities owned by the Project Owners are as follows:


Project Owners	Facilities	Location	Date Opened
CLPSun III Palo Alto Senior Living, LP	Sunrise of Palo Alto	Palo Alto, CA	November 2006
CLPSun III Lenexa Senior Living, LLC	Sunrise of Lenexa	Lenexa, KS	February 2006
CLPSun III Shelby Senior Living, LLC	Sunrise of Shelby	Shelby, MI	February 2006
CLPSun III Golden Valley Senior Living, LLC	Sunrise of Golden Valley	Golden Valley, MN	September 2005
CLPSun III Minnetonka Senior Living, LLC	Sunrise of Minnetonka	Minnetonka, MN	November 2005
CLPSun III Dresher Senior Living, LP	Sunrise of Dresher	Dresher, PA	June 2006
CLPSun III Plano Senior Living, LP	Sunrise of Plano	Plano, TX	June 2006

PropCo’s limited liability company agreement and OpCo’s limited partnership agreement also provides Sunrise a purchase option from and after the expiration of the third Company Year. Sunrise has the option to purchase, exercisable in Sunrise’s sole discretion, one hundred percent (100%) of CNL’s ownership interest in the Companies. If Sunrise exercises the purchase option at any time prior to the sixth Company Year, CNL will be paid a purchase price equal to the amount necessary to return to CNL a 13% internal rate of return on the CNL total capital contributions, after taking into account all amounts previously distributed to CNL.

On September 13, 2012, in conjunction with the August 21, 2012 agreement, Red Fox Management, LP (“Red Fox”), a new entity formed by Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O’Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement with SSLI to acquire Sunrise Senior Living Management, Inc. (“SSLMI”), an affiliate of SSLI, for approximately $130,000,000 with HCN investing approximately $26,000,000 for a 20% ownership interest. The Companies have management agreements with SSLMI to manage the Facilities (see Note 4).

On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrise’s equity interests in joint ventures that own 58 senior housing communities, including the Companies. In addition, HCN announced the acceleration of all planned joint venture buyouts, including the Companies.

On July 1, 2013, HCN closed on a purchase and sale agreement (“PSA”) with CLP Holding, CLP Tenant and CLP Tenant GP (collectively “CNL”). Pursuant to the PSA, HCN purchased CNL’s membership interests in the Companies for a purchase price of approximately $33,400,000, including transaction costs.

2.	NOTES PAYABLE

Notes payable as of June 30, 2013 consist of the following:


Borrower
CLPSun III Palo Alto Senior Living, LP	$	17,538,408
CLPSun III Lenexa Senior Living, LLC		10,161,816
CLPSun III Shelby Senior Living, LLC		17,189,744
CLPSun III Golden Valley Senior Living, LLC		20,572,921
CLPSun III Minnetonka Senior Living, LLC		16,927,271
CLPSun III Dresher Senior Living, LP		7,533,696
CLPSun III Plano Senior Living, LP		29,926,546

	$	119,850,402

The Companies are subject to non-financial covenants under the loan agreement. As of June 30, 2013, the Companies were in compliance with all covenants.

3.	SUBSEQUENT EVENT

On July 1, 2013, HCN closed on a purchase and sale agreement (“PSA”) with CNL. Pursuant to the PSA, HCN purchased CNL’s membership interests in the Companies for a purchase price of approximately $33,400,000, including transaction costs. The PSA was a result of exercising the purchase options under PropCo’s limited liability company agreement and OpCo’s limited partnership agreement as described in Note 1.

The Companies reviewed subsequent events through September 12, 2013, the date the combined financial statements were issued.

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