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) |
Registrants 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 Companys 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 Companys 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 |
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
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. 333-181185) 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 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
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 Companys 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 Sunrises 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 UKs 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 Companys 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 (Sunrises 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 Companys 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 Sunrises 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 | ||||||||||||||
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|
|
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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 | ||||||||||||
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Total other assets |
2,232,277 | 49,246 | (672,718 | ) | 1,608,805 | |||||||||||||
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|
|||||||||||
Total assets |
22,196,393 | 1,139,516 | (406,588 | ) | 22,929,321 | |||||||||||||
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Liabilities and equity |
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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 | ||||||||||||
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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 | ||||||||||||||
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Total Health Care REIT, Inc. stockholders' equity |
11,644,161 | 313,539 | (318,383 | ) | 11,639,317 | |||||||||||||
Noncontrolling interests |
419,995 | | | 419,995 | ||||||||||||||
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|||||||||||
Total equity |
12,064,156 | 313,539 | (318,383 | ) | 12,059,312 | |||||||||||||
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Total liabilities and equity |
$ | 22,196,393 | $ | 1,139,516 | $ | (406,588 | ) | $ | 22,929,321 | |||||||||
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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 | ||||||||||||||||||
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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 |
| | | | ||||||||||||||||||
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|
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Total expenses |
1,283,845 | 138,152 | (24,178 | ) | 1,397,819 | |||||||||||||||||
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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 | ) | |||||||||||||||
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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 | ) | ||||||||||||||||
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Income (loss) from continuing operations attributable to common stockholders |
$ | (7,957 | ) | $ | (710 | ) | $ | 56,144 | $ | 47,477 | ||||||||||||
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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.
A. | 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. |
D. | The Company has elected and continues to operate as a real estate investment trust (REIT). Qualification and taxation as a REIT depends upon the Companys 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.
F. | 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 Sunrises 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. |
J. | 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 Companys 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 | ||
|
|
P. | 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. |
Q. | 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. |
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 |
56 | |||
Notes to Consolidated Financial Statements |
713 |
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.
Managements 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.
Auditors 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 auditors 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 entitys 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 entitys 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 affiliatesnet |
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: |
||||
SSLIIs 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.
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Sunrise has the option to purchase, exercisable in Sunrises sole discretion, one hundred percent (100%) of CHTs 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 OKeefe & 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 Sunrises 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 assets 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.
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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 units 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 managements estimate of the average residents 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.
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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 | |||
SSLIIs 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.
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The resident lease intangible of $1,125,223 represents opportunity costs associated with lost rentals. Based on managements historical experience, the Company determined one months 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 affiliatesnet 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.
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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 Companys 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 Companys 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.
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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 Companys consolidated financial position.
8. | SUBSEQUENT EVENT |
On January 9, 2013, Sunrise consummated the transaction with HCN and Red Fox (Note 1).
* * * * * *
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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 INTANGIBLENet 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 MEMBERS 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 affiliatesnet |
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 |
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 2).
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.
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 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.
Sunrise has the option to purchase, exercisable in Sunrises sole discretion, one hundred percent (100%) of CHTs 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 OKeefe & 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.
On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrises 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.
On July 1, 2013, HCN closed on a purchase and sale agreement (PSA) with CHT. Pursuant to the PSA, HCN purchased CHTs membership interests in the Company for a purchase price of approximately $62,485,000, including transaction costs.
2. | 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.
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 | ||||||||||||||
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$ | 125,000,000 | $ | 123,951,965 | |||||||||||||||||
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Debt premium |
2,763,095 | |||||||||||||||||||
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Total notes payable |
$ | 126,715,060 | ||||||||||||||||||
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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 | |||
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$ | 123,951,965 | |||
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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 Companys 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 Companys 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 CHTs 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.
* * * * * *
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.
Managements 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.
Auditors 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.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 entitys 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 entitys 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 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 |
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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 | ||||||
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636,262,836 | 634,113,974 | |||||||
Less accumulated depreciation |
(42,647,192 | ) | (19,566,053 | ) | ||||
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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 INTANGIBLENet of accumulated amortization of $3,948,458 and $3,852,931 for 2012 and 2011, respectively |
| 95,527 | ||||||
BELOW MARKET LEASE INTANGIBLENet of accumulated amortization of $167,946 and $83,973 for 2012 and 2011, respectively |
2,932,054 | 3,016,027 | ||||||
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TOTAL |
$ | 624,833,199 | $ | 646,416,028 | ||||
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LIABILITIES AND MEMBERS EQUITY |
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LIABILITIES: |
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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 intangibleNet of accumulated amortization of $11,278 and $5,485 for 2012 and 2011, respectively |
488,722 | 494,515 | ||||||
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Total liabilities |
451,557,298 | 452,783,004 | ||||||
MEMBERS EQUITY |
173,275,901 | 193,633,024 | ||||||
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TOTAL |
$ | 624,833,199 | $ | 646,416,028 | ||||
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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 | ||||||
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Total operating revenue |
138,738,367 | 128,493,954 | ||||||
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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 | ||||||
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Total operating expenses |
111,929,110 | 116,222,393 | ||||||
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INCOME FROM OPERATIONS |
26,809,257 | 12,271,561 | ||||||
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OTHER EXPENSES (INCOME): |
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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 | ) | | |||||
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Total other expenses |
32,335,022 | 32,196,124 | ||||||
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NET LOSS |
$ | (5,525,765 | ) | $ | (19,924,563 | ) | ||
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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 | ) | ||||||
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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 | ) | ||||||
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MEMBERS EQUITY December 31, 2012 |
$ | 94,575,676 | $ | 78,700,225 | $ | 173,275,901 | ||||||
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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: |
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Net loss |
$ | (5,525,765 | ) | $ | (19,924,563 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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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: |
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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 | ) | ||||
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Net cash provided by operating activities |
19,395,753 | 8,056,779 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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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 | | ||||||
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Net cash used in investing activities |
(2,620,270 | ) | (558,495,087 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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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 | ) | ||||
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Net cash (used in) provided by financing activities |
(14,831,358 | ) | 560,102,285 | |||||
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
1,944,125 | 9,663,977 | ||||||
CASH AND CASH EQUIVALENTS Beginning of year |
9,663,977 | | ||||||
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CASH AND CASH EQUIVALENTS End of year |
$ | 11,608,102 | $ | 9,663,977 | ||||
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(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: |
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SSLIIs contribution of equity in Sunrise Third |
$ | | $ | 79,999,576 | ||||
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Accrued capital expenditures |
$ | 162,576 | $ | 793,696 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest |
$ | 29,890,165 | $ | 26,881,834 | ||||
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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 Sunrises sole discretion, one hundred percent (100%) of CNLs 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 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 OKeefe & 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 -
On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrises 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 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.
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 assets 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 or 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 Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.
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 -
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 for the years ended December 31, 2012 and 2011 was $2,722,941 and $2,722,932, 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 managements estimate of the average residents 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.
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.
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 years 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 | ||||
SSLIIs 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 managements historical experience, the Company determined one months 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 workers 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 Companys 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 Companys notes payable was approximately $446,089,265 and $452,450,000 as of December 31, 2012 and 2011, respectively.
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 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 Companys 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 |
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 Companys consolidated financial position.
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 GWCs 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 -
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 INTANGIBLENet 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 intangibleNet 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 |
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 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.
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 Sunrises sole discretion, one hundred percent (100%) of CNLs 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.
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 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. 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 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 OKeefe & 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 January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrises 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.
On July 1, 2013, HCN closed on a purchase and sale agreement (PSA) with CNL. Pursuant to the PSA, HCN purchased CNLs membership interests in the Company for a purchase price of approximately $144,880,000, including transaction costs.
2. | 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 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 Companys 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 Companys 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 CNLs 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.
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 |
56 | |||
Notes to Consolidated Financial Statements |
712 |
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.
Managements 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.
Auditors 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.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 entitys 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 entitys 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 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 affiliatesnet |
(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 |
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.
- 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 Sunrises sole discretion, one hundred percent (100%) of CNLs 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.
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 OKeefe & 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 4).
On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrises 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. | 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.
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 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 |
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 assets 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 and 2011.
- 8 -
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.
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.
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 was $83,804 and $40,356 for 2012 and 2011, respectively.
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 managements estimate of the average residents length of stay. Amortization expense for 2012 and 2011 was $418,707 and $299,076, respectively.
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.
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.
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 position that requires accrual as of December 31, 2012 and 2011.
- 9 -
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.
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 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 managements historical experience, the Company determined one months 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 obtains workers compensation, professional, general liability and automobile coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments were $1,262,079 and $476,737 in 2012 and 2011, 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 affiliatesnet 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 Companys 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 Companys 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 |
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 Companys consolidated financial position.
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 -
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 affiliatesnet |
(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 affiliatesnet |
(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 |
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 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 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.
Sunrise has the option to purchase, exercisable in Sunrises sole discretion, one hundred percent (100%) of CNLs 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.
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 OKeefe & 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.
On January 9, 2013, Sunrise consummated the transactions with HCN and Red Fox. As part of the transaction, HCN acquired Sunrises 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.
On July 1, 2013, HCN closed on a purchase and sale agreement (PSA) with CNL. Pursuant to the PSA, HCN purchased CNLs membership interests in the Company for a purchase price of approximately $17,640,000, including transaction costs.
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 Companys 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 Companys notes payable approximated their carrying value at June 30, 2013.
3. | 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 Companys consolidated financial position.
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 CNLs 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.
* * * * * *
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 |
613 |
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.
Managements 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.
Auditors 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.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 entitys 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 entitys 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 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, 2011Date 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: |
||||||||
SSLIIs 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 SSPFs 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, OpCos 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, LLCs 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 PropCos 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, OpCos 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 SSLIIs 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 SSLIIs 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.
PropCos limited liability company agreement and OpCos 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.
PropCos limited liability company agreement and OpCos 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 Sunrises sole discretion, one hundred percent (100%) of CNLs 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 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 OKeefe & 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 Sunrises 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.
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 -
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 assets 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 managements estimate of the average residents 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.
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.
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 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 | ||||
SSLIIs 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 managements historical experience, the Companies determined one months 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 workers 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).
******
- 13 -
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 |
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 SSPFs 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, OpCos 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, LLCs 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 PropCos 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, OpCos 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 (CLP Tenant GP).
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 SSLIIs 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 SSLIIs 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.
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.
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 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 |
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.
PropCos limited liability company agreement and OpCos 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.
PropCos limited liability company agreement and OpCos 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 Sunrises sole discretion, one hundred percent (100%) of CNLs 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 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 OKeefe & 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 Sunrises 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 CNLs membership interests in the Companies for a purchase price of approximately $33,400,000, including transaction costs.
2. | 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 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 | |||
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$ | 119,850,402 | |||
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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.
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 June 30, 2013.
3. | SUBSEQUENT EVENT |
On July 1, 2013, HCN closed on a purchase and sale agreement (PSA) with CNL. Pursuant to the PSA, HCN purchased CNLs 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 PropCos limited liability company agreement and OpCos 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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