Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission file number: 1-10989
 
Ventas, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Delaware   61-1055020
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
111 S. Wacker Drive, Suite 4800
Chicago, Illinois
(Address of Principal Executive Offices)
60606
(Zip Code)
(877) 483-6827
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class of Common Stock:   Outstanding at October 31, 2011:
     
Common Stock, $0.25 par value   287,921,317
 
 

 

 


 

VENTAS, INC.
FORM 10-Q
INDEX
         
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 Exhibit 12.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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Table of Contents

PART I—FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
VENTAS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
                 
    September 30,     December 31,  
    2011     2010  
    (Unaudited)     (Audited)  
 
 
Assets
               
Real estate investments:
               
Land and improvements
  $ 1,584,842     $ 559,072  
Buildings and improvements
    15,289,744       6,035,295  
Construction in progress
    60,978       6,519  
Acquired lease intangibles
    821,613       146,813  
 
           
 
    17,757,177       6,747,699  
Accumulated depreciation and amortization
    (1,761,135 )     (1,468,180 )
 
           
Net real estate property
    15,996,042       5,279,519  
Secured loans receivable, net
    302,264       149,263  
Investments in unconsolidated entities
    119,322       15,332  
 
           
Net real estate investments
    16,417,628       5,444,114  
Cash and cash equivalents
    57,482       21,812  
Escrow deposits and restricted cash
    84,783       38,940  
Deferred financing costs, net
    12,424       19,533  
Other assets
    633,453       233,622  
 
           
Total assets
  $ 17,205,770     $ 5,758,021  
 
           
 
               
Liabilities and equity
               
Liabilities:
               
Senior notes payable and other debt
  $ 6,313,141     $ 2,900,044  
Accrued interest
    65,985       19,296  
Accounts payable and other liabilities
    1,128,706       207,143  
Deferred income taxes
    274,852       241,333  
 
           
Total liabilities
    7,782,684       3,367,816  
 
               
Redeemable OP unitholder interests
    92,817        
Commitments and contingencies
               
 
               
Equity:
               
Ventas stockholders’ equity:
               
Preferred stock, $1.00 par value; 10,000 shares authorized, unissued
           
Common stock, $0.25 par value; 600,000 and 300,000 shares authorized at September 30, 2011 and December 31, 2010, respectively; 287,962 and 157,279 shares issued at September 30, 2011 and December 31, 2010, respectively
    72,025       39,391  
Capital in excess of par value
    9,595,495       2,576,843  
Accumulated other comprehensive income
    19,237       26,868  
Retained earnings (deficit)
    (439,015 )     (255,628 )
Treasury stock, 37 and 14 shares at September 30, 2011 and December 31, 2010, respectively
    (1,980 )     (748 )
 
           
Total Ventas stockholders’ equity
    9,245,762       2,386,726  
Noncontrolling interest
    84,507       3,479  
 
           
Total equity
    9,330,269       2,390,205  
 
           
Total liabilities and equity
  $ 17,205,770     $ 5,758,021  
 
           
See accompanying notes.

 

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Table of Contents

VENTAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Revenues:
                               
Rental income:
                               
Triple-net leased
  $ 211,479     $ 117,906     $ 450,211     $ 351,625  
Medical office buildings
    58,398       22,817       106,392       47,246  
 
                       
 
    269,877       140,723       556,603       398,871  
Resident fees and services
    276,364       113,182       593,348       331,535  
Medical office building and other services revenue
    9,271       6,711       26,050       6,711  
Income from loans and investments
    10,072       4,014       24,548       11,336  
Interest and other income
    373       35       529       420  
 
                       
Total revenues
    565,957       264,665       1,201,078       748,873  
 
                               
Expenses:
                               
Interest
    73,756       45,519       170,046       133,449  
Depreciation and amortization
    161,027       52,104       293,541       154,458  
Property-level operating expenses:
                               
Senior living
    188,856       74,066       403,706       219,802  
Medical office buildings
    20,305       7,941       37,259       16,267  
 
                       
 
    209,161       82,007       440,965       236,069  
Medical office building services costs
    6,347       4,633       19,837       4,633  
General, administrative and professional fees
    20,624       15,278       51,010       35,819  
Loss on extinguishment of debt
    8,685             25,211       6,549  
Litigation proceeds, net
    (85,327 )           (85,327 )      
Merger-related expenses and deal costs
    69,350       5,142       131,606       11,668  
Other
    14,436       (419 )     6,664       (404 )
 
                       
Total expenses
    478,059       204,264       1,053,553       582,241  
 
                       
 
                               
Income before income (loss) from unconsolidated entities, income taxes, discontinued operations and noncontrolling interest
    87,898       60,401       147,525       166,632  
Income (loss) from unconsolidated entities
    182       (392 )     (71 )     (392 )
Income tax benefit (expense)
    13,904       (1,657 )     23,310       (2,352 )
 
                       
Income from continuing operations
    101,984       58,352       170,764       163,888  
Discontinued operations
          542             7,139  
 
                       
Net income
    101,984       58,894       170,764       171,027  
Net (loss) income attributable to noncontrolling interest (net of tax of $0 and $613 for the three months ended 2011 and 2010, respectively, and $0 and $1,591 for the nine months ended 2011 and 2010, respectively)
    (901 )     996       (781 )     2,443  
 
                       
Net income attributable to common stockholders
  $ 102,885     $ 57,898     $ 171,545     $ 168,584  
 
                       
 
                               
Earnings per common share:
                               
Basic:
                               
Income from continuing operations attributable to common stockholders
  $ 0.36     $ 0.37     $ 0.82     $ 1.03  
Discontinued operations
          0.00             0.05  
 
                       
Net income attributable to common stockholders
  $ 0.36     $ 0.37     $ 0.82     $ 1.08  
 
                       
Diluted:
                               
Income from continuing operations attributable to common stockholders
  $ 0.35     $ 0.37     $ 0.81     $ 1.02  
Discontinued operations
          0.00             0.05  
 
                       
Net income attributable to common stockholders
  $ 0.35     $ 0.37     $ 0.81     $ 1.07  
 
                       
 
                               
Weighted average shares used in computing earnings per common share:
                               
Basic
    287,365       156,631       208,470       156,566  
Diluted
    290,794       157,941       210,850       157,453  
 
                               
Dividends declared per common share
  $ 0.4486     $ 0.535     $ 1.725     $ 1.605  
See accompanying notes.

 

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Table of Contents

VENTAS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2011 and the Year Ended December 31, 2010
(In thousands, except per share amounts)
                                                                 
                    Accumulated                                  
    Common     Capital in     Other     Retained             Total Ventas              
    Stock Par     Excess of     Comprehensive     Earnings     Treasury     Stockholders’     Noncontrolling        
    Value     Par Value     Income     (Deficit)     Stock     Equity     Interest     Total Equity  
Balance at January 1, 2010
  $ 39,160     $ 2,573,039     $ 19,669     $ (165,710 )   $ (647 )   $ 2,465,511     $ 18,549     $ 2,484,060  
 
                                                               
Comprehensive Income:
                                                               
Net income
                      246,167             246,167       3,562       249,729  
Foreign currency translation
                6,951                   6,951             6,951  
Change in unrealized gain on marketable debt securities
                354                   354             354  
Other
                (106 )                 (106 )           (106 )
 
                                                         
 
                                                               
Comprehensive income
                                  253,366       3,562       256,928  
 
                                                               
Net change in noncontrolling interest
          (18,503 )                       (18,503 )     (18,632 )     (37,135 )
Dividends to common stockholders — $2.14 per share
                      (336,085 )           (336,085 )           (336,085 )
Issuance of common stock for stock plans
    197       21,076                   3,371       24,644             24,644  
Grant of restricted stock, net of forfeitures
    34       1,231                   (3,472 )     (2,207 )           (2,207 )
 
                                               
 
                                                               
Balance at December 31, 2010
    39,391       2,576,843       26,868       (255,628 )     (748 )     2,386,726       3,479       2,390,205  
 
                                                               
Comprehensive Income:
                                                               
Net income
                      171,545             171,545       (781 )     170,764  
Foreign currency translation
                (4,234 )                 (4,234 )           (4,234 )
Change in unrealized gain on marketable debt securities
                (2,964 )                 (2,964 )           (2,964 )
Other
                (433 )                 (433 )           (433 )
 
                                                         
 
                                                               
Comprehensive income
                                  163,914       (781 )     163,133  
 
                                                               
Acquisition-related activity
    31,202       6,711,054                   (4,326 )     6,737,930       83,702       6,821,632  
Net change in noncontrolling interest
          (3,170 )                       (3,170 )     (1,893 )     (5,063 )
Dividends to common stockholders — $1.725 per share
                      (354,932 )           (354,932 )           (354,932 )
Issuance of common stock
    1,390       298,311                         299,701             299,701  
Issuance of common stock for stock plans
    9       14,402                   307       14,718             14,718  
Adjust redeemable OP unitholder interests to current fair value
          1,582                         1,582             1,582  
Grant of restricted stock, net of forfeitures
    33       (3,527 )                 2,787       (707 )           (707 )
 
                                               
 
                                                               
Balance at September 30, 2011
  $ 72,025     $ 9,595,495     $ 19,237     $ (439,015 )   $ (1,980 )   $ 9,245,762     $ 84,507     $ 9,330,269  
 
                                               
See accompanying notes.

 

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Table of Contents

VENTAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                 
    For the Nine Months  
    Ended September 30,  
    2011     2010  
Cash flows from operating activities:
               
Net income
  $ 170,764     $ 171,027  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization (including amounts in discontinued operations)
    293,541       154,922  
Amortization of deferred revenue and lease intangibles, net
    (15,454 )     (4,580 )
Other non-cash amortization
    (6,185 )     6,455  
Change in fair value of financial instruments
    2,898        
Stock-based compensation
    13,596       10,128  
Straight-lining of rental income, net
    (9,254 )     (7,975 )
Loss on extinguishment of debt
    25,211       6,549  
Net gain on sale of real estate assets (including amounts in discontinued operations)
          (5,393 )
Gain on real estate loan investments
    (3,255 )      
Gain on sale of marketable securities
    (733 )      
Income tax (benefit) expense
    (23,310 )     2,352  
Loss from unconsolidated entities
    71       392  
Other
    2,004       (8 )
Changes in operating assets and liabilities:
               
Increase in other assets
    (27,009 )     (9,017 )
Increase in accrued interest
    19,141       15,763  
Increase in accounts payable and other liabilities
    1,875       5,504  
 
           
Net cash provided by operating activities
    443,901       346,119  
Cash flows from investing activities:
               
Net investment in real estate property
    (344,687 )     (239,157 )
Purchase of noncontrolling interest
    (3,319 )      
Investment in loans receivable
    (619,859 )     (38,725 )
Proceeds from real estate disposals
    14,961       25,597  
Proceeds from loans receivable
    138,934       1,552  
Proceeds from sale of marketable securities
    23,050        
Development project expenditures
    (23,233 )     (1,649 )
Capital expenditures
    (28,658 )     (11,594 )
Other
    (113 )     (4,500 )
 
           
Net cash used in investing activities
    (842,924 )     (268,476 )
Cash flows from financing activities:
               
Net change in borrowings under revolving credit facilities
    434,000       233,004  
Proceeds from debt
    957,753       201,237  
Repayment of debt
    (895,043 )     (331,378 )
Payment of deferred financing costs
    (1,898 )     (1,872 )
Issuance of common stock, net
    299,926        
Cash distribution to common stockholders
    (354,932 )     (251,921 )
Cash distribution to redeemable OP unitholders
    (4,038 )      
Contributions from noncontrolling interest
    2       818  
Distributions to noncontrolling interest
    (1,997 )     (6,633 )
Other
    1,017       5,426  
 
           
Net cash provided by (used in) financing activities
    434,790       (151,319 )
 
           
Net increase (decrease) in cash and cash equivalents
    35,767       (73,676 )
Effect of foreign currency translation on cash and cash equivalents
    (97 )     69  
Cash and cash equivalents at beginning of period
    21,812       107,397  
 
           
Cash and cash equivalents at end of period
  $ 57,482     $ 33,790  
 
           
 
               
Supplemental schedule of non-cash activities:
               
Assets and liabilities assumed from acquisitions:
               
Real estate investments
  $ 11,034,620     $ 125,846  
Other assets acquired
    431,679       (385 )
Debt assumed
    3,508,226       125,320  
Other liabilities
    992,122       141  
Deferred income tax liability
    43,889        
Redeemable OP unitholder interests
    100,430        
Noncontrolling interests
    83,702        
Equity issued
    6,737,930        
See accompanying notes.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF BUSINESS
Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”) is a real estate investment trust (“REIT”) with a geographically diverse portfolio of seniors housing and healthcare properties in the United States and Canada. As of September 30, 2011, our portfolio consisted of 1,361 properties: 673 seniors housing communities, 398 skilled nursing facilities, 47 hospitals and 243 medical office buildings (“MOBs”) and other properties in 46 states, the District of Columbia and two Canadian provinces. We are a constituent member of the S&P 500® index, a leading indicator of the large cap U.S. equities market, with our headquarters located in Chicago, Illinois.
Our primary business consists of acquiring and owning seniors housing and healthcare properties and leasing those properties to unaffiliated tenants or operating those properties through independent third party managers. Through our Lillibridge Healthcare Services, Inc. (“Lillibridge”) subsidiary and our ownership interest in PMB Real Estate Services LLC (“PMBRES”), which we acquired in July 2011 in connection with our acquisition of Nationwide Health Properties, Inc. (“NHP”), we also provide management, leasing, marketing, facility development and advisory services to highly rated hospitals and health systems throughout the United States. In addition, from time to time, we make real estate loans and other investments relating to seniors housing and healthcare companies or properties.
As of September 30, 2011, we leased 927 of our properties (excluding MOBs) to healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses (including maintenance, utilities, repairs, taxes, insurance and capital expenditures), and we engaged independent third parties, such as Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) and Atria Senior Living, Inc. (“Atria”), to manage 199 of our seniors housing communities pursuant to long-term management agreements.
NOTE 2 — ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The accompanying Consolidated Financial Statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011. Certain prior period amounts have been reclassified to conform to the current period presentation.
Principles of Consolidation
The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries and the joint venture entities over which we exercise control. All intercompany transactions and balances have been eliminated in consolidation, and net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
We apply FASB guidance for arrangements with variable interest entities (“VIEs”), which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We consolidate investments in VIEs when we are determined to be the primary beneficiary of the VIE. We may change our original assessment of a VIE due to events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary. We identify the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the entity. We perform this analysis on an ongoing basis. At September 30, 2011, we did not have any unconsolidated VIEs.

 

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We also apply FASB guidance related to investments in joint ventures based on the type of rights held by the limited partner(s) which may preclude consolidation by the sole general partner in certain circumstances in which the general partner would otherwise consolidate the joint venture. We assess limited partners’ rights and their impact on the presumption of control of the limited partnership by the sole general partner when an investor becomes the sole general partner and we reassess if (i) there is a change to the terms or in the exercisability of the rights of the limited partners, (ii) the sole general partner increases or decreases its ownership of limited partnership interests, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. We also apply this guidance to managing member interests in limited liability companies.
Revenue Recognition
Triple-Net Leased Properties and MOB Operations
Certain of our triple-net leases, including the majority of our leases with Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”), and most of our MOB leases provide for periodic and determinable increases in base rent. We recognize base rental revenues under these leases on a straight-line basis over the applicable lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a straight-line rent receivable that is included in other assets on our Consolidated Balance Sheets. At September 30, 2011 and December 31, 2010, this net cumulative excess totaled $95.5 million and $86.3 million, respectively.
Our master lease agreements with Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) (the “Kindred Master Leases”) and certain of our other leases provide for periodic increases in base rent only if certain revenue parameters or other substantive contingencies are met. We recognize the increased rental revenue under these leases as the related parameters or contingencies are met, rather than on a straight-line basis over the applicable lease term.
Senior Living Operations
We recognize resident fees and services, other than move-in fees, monthly as services are provided. We recognize move-in fees on a straight-line basis over the average resident stay. Our lease agreements with residents generally have a term of twelve to eighteen months and are cancelable by the resident upon 30 days’ notice.
Other
We recognize interest income from loans, including discounts and premiums, using the effective interest method when collectibility is reasonably assured. The effective interest method is applied on a loan-by-loan basis, and discounts and premiums are recognized as yield adjustments over the related loan term. We recognize interest income on an impaired loan to the extent our estimate of the fair value of the collateral is sufficient to support the balance of the loan, other receivables and all related accrued interest. When the balance of the loans, other receivables and all related accrued interest is equal to our estimate of the fair value of the collateral, we recognize interest income on a cash basis. We provide a reserve against an impaired loan to the extent our total investment in the loan exceeds our estimate of the fair value of the loan collateral.
We recognize income from rent, lease termination fees, management advisory services and all other income when all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104: (i) the applicable agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is reasonably assured.

 

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Allowances
We assess the collectibility of our rent receivables, including straight-line rent receivables, in accordance with the applicable accounting standards and our reserve policy, and we defer recognition of revenue if collectibility is not reasonably assured. Our assessment of the collectibility of rent receivables (excluding straight-line receivables) is based on several factors, including, among other things, payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to recover the full value of the receivable, we provide a reserve against the portion of the receivable that we estimate may not be recovered. Our assessment of the collectibility of straight-line receivables is based on several factors, including, among other things, the financial strength of the tenant and any guarantors, the historical operations and operating trends of the property, the historical payment pattern of the tenant, and the type of property. If our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future, we defer recognition of the straight-line rental income and, in certain circumstances, provide a reserve against the previously recognized straight-line rent receivable asset for a portion, up to its full value, that we estimate may not be recovered. If we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease, we may adjust our reserve to increase or reduce the rental revenue recognized and/or to increase or reduce the reserve against the existing straight-line rent receivable.
Business Combinations
We account for acquisitions using the acquisition method and allocate the cost of the properties acquired among tangible and recognized intangible assets and liabilities based upon their estimated fair values as of the acquisition date. Recognized intangibles primarily include the value of in-place leases, acquired lease contracts, tenant and customer relationships, trade names/trademarks and goodwill. We do not amortize goodwill, which is included in other assets on our Consolidated Balance Sheets and represents the excess of the purchase price paid over the fair value of the net assets of the acquired business.
We estimate the fair value of buildings acquired on an as-if-vacant basis and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon the replacement cost and depreciate such value over the assets’ estimated remaining useful lives. We determine the value of land by considering the sales prices of similar properties in recent transactions or based on (i) internal analyses of recently acquired and existing comparable properties within our portfolio or (ii) real estate tax assessed values in relation to the total value of the asset. The fair value of acquired lease intangibles, if any, reflects (i) the estimated value of any above and/or below market leases, determined by discounting the difference between the estimated market rent and the in-place lease rent, the resulting intangible asset or liability of which is amortized to revenue over the remaining life of the associated lease plus any bargain renewal periods, and (ii) the estimated value of in-place leases related to the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, and an estimated value of the absorption period to reflect the value of the rent and recovery costs foregone during a reasonable lease-up period as if the acquired space was vacant, which is amortized to amortization expense over the remaining life of the associated lease. We estimate the fair value of tenant or other customer relationships acquired, if any, by considering the nature and extent of existing business relationships with the tenant or customer, growth prospects for developing new business with the tenant or customer, the tenant’s credit quality, expectations of lease renewals with the tenant, and the potential for significant, additional future leasing arrangements with the tenant and amortize that value over the expected life of the associated arrangements or leases, including the remaining terms of the related leases and any expected renewal periods. We estimate the fair value of trade names/trademarks using a royalty rate methodology and amortize that value over the estimated useful life of the trade name/trademark.
In connection with a business combination, we may assume the rights and obligations under certain lease agreements pursuant to which we become the lessee of a given property. We assume the lease classification previously determined by the prior lessee absent a modification in the assumed lease agreement. In connection with our recent acquisitions, all capital leases acquired or assumed contain bargain purchase options that we intend to exercise. Therefore, we recognized an asset based on the acquisition date fair value of the underlying property and a liability based on the acquisition date fair value of the capital lease. We assess capital leases that contain bargain purchase options are depreciated over the asset’s useful life. We assess assumed operating leases, including ground leases, to determine if the lease terms are favorable or unfavorable given current market conditions on the acquisition date. To the extent the lease arrangement is favorable or unfavorable relative to market conditions on the acquisition date, we recognize an intangible asset or liability at fair value. The recognized asset or liability (excluding purchase option intangibles) for these leases is amortized to interest or rental expense over the applicable lease term and is included in our Consolidated Statements of Income. All lease-related intangible assets are included within acquired lease intangibles and all lease-related intangible liabilities are included within accounts payable and other liabilities, on our Consolidated Balance Sheets.

 

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For loans receivable acquired in connection with a business combination, we determine fair value by discounting the estimated future cash flows using current interest rates at which similar loans with the same maturities and same terms would be made to borrowers with similar credit ratings. The estimated future cash flows reflect our judgment regarding the uncertainty of those cash flows and, therefore, we do not establish a valuation allowance at the acquisition date. The difference between the acquisition date fair value and the total expected cash flows is recognized as interest income using an effective interest method over the life of the applicable loan. Subsequent to the acquisition date, we evaluate changes regarding the uncertainty of future cash flows and the need for a valuation allowance.
We estimate the fair value of investments in unconsolidated entities and noncontrolling interests assumed using assumptions that are consistent with those used in valuing all of the underlying assets and liabilities.
We calculate the fair value of long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which we approximate based on the rate we would expect to incur to replace the instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
We record a liability for contingent consideration at fair value as of the acquisition date (which is included in accounts payable and other liabilities on our Consolidated Balance Sheets) and reassess the fair value at the end of each reporting period, with any changes being recognized in earnings. Increases or decreases in the fair value of contingent consideration can result from changes in discount periods, discount rates and probabilities that contingencies will be met.
Loans Receivable
Loans receivable, other than those acquired in connection with a business combination, are recorded on our Consolidated Balance Sheets at the unpaid principal balance, net of any deferred origination fees, purchase discounts or premiums and valuation allowances. Unsecured loans receivable are included in other assets on our Consolidated Balance Sheets. We amortize net deferred origination fees, which are comprised of loan fees collected from the borrower net of certain direct costs, and purchase discounts or premiums over the contractual life of the loan using the effective interest method and recognize any unamortized balances in income immediately if the loan is repaid before its contractual maturity.
We regularly evaluate the collectibility of loans receivable based on several factors, including without limitation (i) corporate and facility-level financial and operational reports, (ii) compliance with any financial covenants set forth in the applicable loan agreement, (iii) the financial strength of the borrower and any guarantor, (iv) the payment history of the borrower, and (v) current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to collect all amounts due according to the terms of the applicable loan agreement, we provide a reserve against the portion of the receivable that we estimate may not be collected.
Leases
We include assets under capital leases within net real estate assets, and we include capital lease obligations within senior notes payable and other debt, on our Consolidated Balance Sheets. Lease payments under capital lease arrangements are segregated between interest expense and a reduction to the outstanding principal balance, using the effective interest method. We account for payments made pursuant to operating leases in our Consolidated Statements of Income based on actual rent paid, plus or minus a straight-line rent adjustment for minimum lease escalators.
Derivative Instruments
We recognize all derivative instruments in either other assets or accounts payable and accrued liabilities on our Consolidated Balance Sheets at fair value as of the reporting date. We recognize changes in the fair value of derivative instruments in other expenses on our Consolidated Statements of Income or accumulated other comprehensive income on our Consolidated Balance Sheets, depending on the intended use of the derivative and our designation of the instrument.

 

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We do not use our derivative financial instruments, including interest rate caps, interest rate swaps, and foreign currency forward contracts, for trading or speculative purposes. Our interest rate caps were designated as having a hedging relationship with their underlying securities and therefore meet the criteria for hedge accounting under GAAP. Our interest rate caps are recorded on our Consolidated Balance Sheets at fair value, and we recognize changes in the fair value of these instruments in accumulated other comprehensive income on our Consolidated Balance Sheets. Our interest rate swaps and foreign currency forward contracts were not designated as having a hedging relationship with their underlying securities and therefore do not meet the criteria for hedge accounting under GAAP. Our interest rate swaps and foreign currency forward contracts are recorded on our Consolidated Balance Sheets at fair value, and we recognize changes in the fair value of these instruments in current earnings (in other expenses) on our Consolidated Statements of Income.
Redeemable Limited Partnership Unitholder Interests
As part of the NHP acquisition, we acquired a majority interest in NHP/PMB L.P. (“NHP/PMB”), a limited partnership that was formed in 2008 to acquire properties from entities affiliated with Pacific Medical Buildings LLC. We consolidate NHP/PMB, as our wholly owned subsidiary is the general partner and exercises control. As of September 30, 2011, third party investors owned 2,375,027 Class A limited partnership units in NHP/PMB (“OP Units”), which represented 29.1% of the total units then outstanding, and we owned 5,795,210 Class B limited partnership units in NHP/PMB, representing the remaining 70.9%. At any time following the first anniversary of the date of issuance, the OP Units may be redeemed, at the election of the holder, for cash or, at our option, 0.7866 shares of our common stock per unit, subject to adjustment in certain circumstances. We are party to a registration rights agreement with the holders of the OP Units that requires us, subject to the terms and conditions set forth therein, to file and maintain a registration statement relating to the issuance of shares of our common stock upon redemption of OP Units. As registration rights are outside of our control, the redeemable OP unitholder interests are classified outside of permanent equity on our Consolidated Balance Sheets. We applied the provisions of ASC Topic 480, Distinguishing Liabilities from Equity, to reflect the redeemable OP unitholder interests at the greater of cost or fair value. As of September 30, 2011, the fair value of the redeemable OP unitholder interests was $92.8 million. The change in fair value from the acquisition date to September 30, 2011 has been recorded through capital in excess of par value. Our diluted earnings per share (“EPS”) includes the effect of any potential shares outstanding from these OP Units.
Noncontrolling Interests
For entities that we control (and thus consolidate) but do not own 100% of the equity, the portion of the equity we do not own is presented as noncontrolling interests and classified as a component of consolidated equity. Each such entity’s contribution to our income and earnings per share is based on income attributable to the entity’s parent and is included in net income attributable to common stockholders on our Consolidated Statements of Income. As our ownership of a controlled subsidiary increases or decreases, any difference between the aggregate consideration paid to acquire the noncontrolling interests and our noncontrolling interest balance is recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest.
As of September 30, 2011 and December 31, 2010, we had controlling interests in 29 properties and six properties, respectively, owned through joint ventures. The noncontrolling interest in these properties as of September 30, 2011 and December 31, 2010 was $84.5 million and $3.5 million, respectively. For the three months ended September 30, 2011 and 2010, we recorded a loss attributable to noncontrolling interests of $0.9 million and income attributable to noncontrolling interests of $1.0 million, respectively. For the nine months ended September 30, 2011 and 2010, we recorded a loss attributable to noncontrolling interests of $0.8 million and income attributable to noncontrolling interests of $2.4 million, respectively.
Fair Values of Financial Instruments
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).
Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in active markets that the reporting entity has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are directly or indirectly observable for the asset or liability. Level two inputs may include quoted prices for similar assets and liabilities in active markets, as well as other inputs for the asset or liability, such as interest rates, foreign exchange rates and yield curves, that are observable at commonly quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based on the reporting entity’s own assumptions, as there is little, if any, related market activity. If the determination of the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

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We use the following methods and assumptions in estimating fair value of financial instruments:
    Cash and cash equivalents: The carrying amount of unrestricted cash and cash equivalents reported on our Consolidated Balance Sheets approximates fair value due to the short maturity of these instruments.
    Loans receivable: We estimate the fair value of loans receivable by discounting future cash flows using current interest rates at which similar loans with the same maturities and same terms would be made to borrowers with similar credit ratings. The inputs used to measure the fair value of our loans receivable are level two and level three inputs. Additionally, we determine the valuation allowance for losses on loans receivable based on level three inputs.
    Marketable debt securities: We estimate the fair value of marketable debt securities using quoted prices for similar assets or liabilities in active markets that we have the ability to access. The inputs used to measure the fair value of our marketable debt securities are level two inputs.
    Derivative instruments: With the assistance of a third party, we estimate the fair value of our derivative instruments, including interest rate caps, interest rate swaps, and foreign currency forward contracts, using level two inputs. We determine the fair value of interest rate caps using forward yield curves and other relevant information. We estimate the fair value of interest rate swaps using alternative financing rates derived from market-based financing rates, forward yield curves and discount rates. We determine the fair value of foreign currency forward contracts by estimating the future values of the two currency tranches using forward exchange rates that are based on traded forward points and calculating a present value of the net amount using a discount factor based on observable traded interest rates.
    Senior notes payable and other debt: We estimate the fair value of borrowings by discounting the future cash flows using current interest rates at which we could make similar borrowings. The inputs used to measure the fair value of our senior notes payable and other debt are level two inputs.
    Contingent consideration: We estimate the fair value of contingent consideration using probability assessments of expected future cash flows over the period in which the obligation is expected to be settled, and by applying a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. The inputs we use to determine the fair value of contingent consideration are considered level three inputs.
    Redeemable OP unitholder interests: We estimate the fair value of redeemable OP unitholder interests based on the closing price of our common stock, as the OP Units may be redeemed, at the election of the holder, for cash or, at our option, 0.7866 shares of our common stock, subject to adjustment in certain circumstances. The inputs used to measure the fair value of redeemable OP unitholder interests are level two inputs.
Recently Issued or Adopted Accounting Standards
In September 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which permits companies to first assess qualitative factors to determine the likelihood that the fair value of a reporting unit is less than its carrying amount, before performing the current two-step analysis. If a company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company must proceed with the two-step approach to evaluating impairment. The provisions of ASU 2011-08 will be effective for us beginning with the first quarter of 2012, but we do not expect ASU 2011-08 to have a significant impact on our Consolidated Financial Statements. Also, on January 1, 2011, we adopted ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 states that if a reporting unit has a carrying amount that is equal to or less than zero and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists, Step 2 of the goodwill impairment test must be performed. The adoption of ASU 2010-28 did not impact our Consolidated Financial Statements.

 

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In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends current guidance found in ASC Topic 220, Comprehensive Income. ASU 2011-05 requires entities to present comprehensive income in either: (i) one continuous financial statement or (ii) two separate but consecutive statements that display net income and the components of other comprehensive income. Totals and individual components of both net income and other comprehensive income must be included in either presentation. The provisions of ASU 2011-05 will be effective for us beginning with the first quarter of 2012.
On January 1, 2011, we adopted ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), affecting public entities who enter into business combinations that are material on an individual or aggregate basis. ASU 2010-29 specifies that a public entity presenting comparative financial statements should disclose revenues and earnings of the combined entity as though the business combination(s) that occurred during the year had occurred at the beginning of the prior annual reporting period when preparing the pro forma financial information for both the current and prior reporting periods. This guidance, which is effective for business combinations consummated in reporting periods beginning after December 15, 2010, also requires that pro forma disclosures be accompanied by a narrative description regarding the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in reported pro forma revenues and earnings. We have presented supplementary pro forma information related to our acquisition of substantially all of the real estate assets and working capital of Atria Senior Living Group, Inc. (together with its affiliates, “Atria Senior Living”) in May 2011 and our acquisition of NHP in July 2011 in “Note 4—Acquisitions of Real Estate Property.”
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which expands required disclosures related to an entity’s fair value measurements. Certain provisions of ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and we adopted those provisions as of January 1, 2010. The remaining provisions, which are effective for interim and annual reporting periods beginning after December 15, 2010, require additional disclosures related to purchases, sales, issuances and settlements in an entity’s reconciliation of recurring level three investments. We adopted those provisions of ASU 2010-06 as of January 1, 2011. The adoption of ASU 2010-06 did not impact our Consolidated Financial Statements.
NOTE 3 — CONCENTRATION OF CREDIT RISK
As of September 30, 2011, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated approximately 18.7%, 14.4%, 13.0% and 5.0%, respectively, of our properties based on their gross book value. Also, as of September 30, 2011, seniors housing communities constituted approximately 66.2% of our real estate portfolio based on gross book value, with skilled nursing facilities, hospitals, MOBs and other healthcare assets collectively comprising the remaining 33.8%. Our properties were located in 46 states, the District of Columbia and two Canadian provinces as of September 30, 2011, with properties in only one state (California) accounting for more than 10% of our total revenues or net operating income (“NOI”, which is defined as total revenues, excluding interest and other income, less property-level operating expenses and medical office building services costs) for the three months then ended.
Triple-Net Leased Properties
For the three months ended September 30, 2011 and 2010, approximately 11.3% and 23.5%, respectively, of our total revenues and 18.3% and 34.8%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our four Kindred Master Leases. For the same periods, approximately 8.1% and 11.3%, respectively, of our total revenues and 13.1% and 16.8%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our lease agreements with Brookdale Senior Living. Each of the Kindred Master Leases and our leases with Brookdale Senior Living is a triple-net lease pursuant to which the tenant is required to pay all property-related expenses and to comply with the terms of the mortgage financing documents, if any, affecting the properties.

 

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Because the properties we lease to Kindred and Brookdale Senior Living account for a significant portion of our total revenues and NOI, Kindred’s and Brookdale Senior Living’s financial condition and ability and willingness to satisfy their obligations under their respective leases and other agreements with us, and their willingness to renew those leases upon expiration of the terms thereof, have a notable impact on our results of operations and ability to service our indebtedness and to make distributions to our stockholders. We cannot assure you that either Kindred or Brookdale Senior Living will have sufficient assets, income and access to financing to enable it to satisfy its obligations, and any inability or unwillingness on its part to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”). We also cannot assure you that either Kindred or Brookdale Senior Living will elect to renew its leases with us upon expiration of the initial base terms or any renewal terms thereof or that, if some or all of those leases are not renewed, we will be able to reposition the affected properties on a timely basis or on the same or better terms, if at all.
The properties we lease to Kindred pursuant to the Kindred Master Leases are grouped into bundles containing a varying number of properties. All properties within a single bundle have the same primary lease term of ten to fifteen years from May 1, 1998 and, provided certain conditions are satisfied, each bundle is subject to three five-year renewal terms at the tenant’s option. The current lease term for ten bundles covering a total of 89 triple-net properties (the “Renewal Assets”) leased to Kindred will expire on April 13, 2013 unless Kindred provides us with renewal notices with respect to one or more of those bundles on or before April 30, 2012. The ten bundles expiring in 2013 each contain six or more properties, including at least one hospital, and collectively represent $122.8 million of annual base rent from May 1, 2011 through April 30, 2012. Kindred is required to continue to perform all of its obligations under the applicable lease for the properties within any bundle that is not renewed until expiration of the term on April 30, 2013, including without limitation payment of all rental amounts. Therefore, as to any bundles for which we do not receive a renewal notice, we will have at least one year to arrange for the repositioning of the applicable properties with new operators. Moreover, we own or have the rights to all licenses and certificates of need at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator. While we believe that aggregate current rents for the Renewal Assets approximate current market rents, we cannot assure you that Kindred will elect to renew any or all of the bundles comprising the Renewal Assets or, if Kindred does not renew one or more of such bundles that we will be able to reposition the affected properties on a timely basis or on the same or better terms, if at all.
Six of the ten bundles up for renewal in 2013, containing 53 assets and representing $66 million of annual base rent, are in the second five-year renewal period and, therefore, we have a unilateral bundle-by-bundle option to initiate a fair market rental reset process on any of these six bundles that may be renewed by Kindred. If we elect to initiate the fair market rental reset process for any of these six renewal bundles, the renewal rent will be the higher of contract rent and fair market rent determined by an appraisal process set forth in the applicable Kindred Master Lease. In certain cases following initiation by us of a fair market rental reset process respecting a renewal bundle, Kindred may have the right to revoke its renewal of that particular bundle.
The determination of the market rent, whether on re-leasing or under the reset process, is dependent on and may be influenced by a variety of factors and is highly speculative, and there can be no assurances regarding what market rent may be for any of the Renewal Assets.
Senior Living Operations
As of September 30, 2011, Sunrise and Atria, collectively, provided comprehensive property management and accounting services with respect to 196 of our seniors housing communities for which we pay an annual management fee pursuant to long-term management agreements. Each management agreement with Sunrise has a term of 30 years, and each management agreement with Atria has a term of ten years, subject to successive automatic ten-year renewal periods. While Sunrise and Atria do not lease properties from us and, therefore, we are not directly exposed to credit risk with respect to those entities, any inability by Sunrise or Atria to efficiently and effectively manage our properties or to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. Although we have various rights as the property owner under our management agreements, we rely on Sunrise’s and Atria’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on Sunrise and Atria to set resident fees and otherwise operate those properties in compliance with our management agreements. Sunrise’s or Atria’s inability or unwillingness to satisfy its obligations under our management agreements, changes in Sunrise’s or Atria’s senior management or any adverse developments in Sunrise’s or Atria’s business and affairs or financial condition could have a Material Adverse Effect on us.

 

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Kindred, Brookdale Senior Living, Sunrise and Atria Information
Each of Kindred, Brookdale Senior Living and Sunrise is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Kindred, Brookdale Senior Living or Sunrise, as the case may be, with the SEC or other publicly available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either through an independent investigation or by reviewing Kindred’s, Brookdale Senior Living’s or Sunrise’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s filings with the SEC can be found at the SEC’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior Living’s and Sunrise’s publicly available filings from the SEC.
Atria is not subject to the reporting requirements of the SEC. The information related to Atria contained or referred to within this Quarterly Report on Form 10-Q has been provided to us by Atria. We have not verified this information through an independent investigation. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate.
NOTE 4 — ACQUISITIONS OF REAL ESTATE PROPERTY
We engage in acquisition activity primarily to invest in additional seniors housing and healthcare properties and achieve an expected yield on investment, to grow and diversify our portfolio and revenue base and to reduce our dependence on any single operator, geographic area, asset type or revenue source.
Atria Senior Living Acquisition
On May 12, 2011, we acquired substantially all of the real estate assets and working capital of privately-owned Atria Senior Living. We funded a portion of the purchase price through the issuance of 24.96 million shares of our common stock (which shares had a total value of $1.38 billion based on the May 12, 2011 closing price of our common stock of $55.33 per share). Subsequent to September 30, 2011, we cancelled 83,441 shares issued to the sellers for a working capital adjustment in accordance with the purchase agreement. As a result of the transaction, we added to our senior living operating portfolio 117 private pay seniors housing communities and one development land parcel located primarily in affluent coastal markets such as the New York metropolitan area, New England and California. Prior to the closing, Atria Senior Living spun off its management operations to a newly formed entity, Atria, which continues to operate the acquired assets under long-term management agreements with us. For the three months ended September 30, 2011 and for the period from May 12, 2011 through September 30, 2011, revenues attributable to the acquired assets were $157.1 million and $242.8 million, respectively, and NOI attributable to the acquired assets was $47.5 million and $73.7 million, respectively.
We are accounting for the Atria Senior Living acquisition under the acquisition method in accordance with ASC Topic 805, Business Combinations (“ASC 805”), and our initial accounting for this acquisition is essentially complete. The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed, which we determined using level two and level three inputs (in thousands):
         
Land and improvements
  $ 342,330  
Buildings and improvements
    2,878,807  
Acquired lease intangibles
    160,340  
Other assets
    213,325  
 
     
 
       
Total assets acquired
    3,594,802  
Notes payable and other debt
    1,629,212  
Deferred tax liability
    43,889  
Other liabilities
    203,082  
 
     
 
       
Total liabilities assumed
    1,876,183  
 
     
 
       
Net assets acquired
    1,718,619  
Cash acquired
    77,718  
Equity issued
    1,376,437  
 
     
 
       
Total cash used
  $ 264,464  
 
     

 

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The allocation of fair values of the assets acquired and liabilities assumed has changed and is subject to further adjustment from the allocation reported in “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated Financial Statements included in Part I of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 5, 2011, due primarily to reclassification adjustments for presentation, adjustments to our valuation assumptions and final purchase price settlement with the sellers in accordance with the terms of the acquisition agreement. The changes to our valuation assumptions were based on more accurate information concerning the subject assets and liabilities. None of these changes had a material impact on our Consolidated Financial Statements.
Included in other assets is $79.2 million of goodwill, which represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed as of the acquisition date. All of the goodwill was assigned to our senior living operations reportable segment, and we do not expect to deduct any of the goodwill balance for tax purposes.
As of September 30, 2011, we had incurred a total of $52.5 million of acquisition-related costs related to the Atria Senior Living acquisition, all of which were expensed as incurred and included in merger-related expenses and deal costs on our Consolidated Statements of Income for the applicable periods. For the three and nine months ended September 30, 2011, we expensed $1.5 million and $48.2 million, respectively, of acquisition-related costs related to the Atria Senior Living acquisition.
As partial consideration for the Atria Senior Living acquisition, the sellers received the right to earn additional amounts (“contingent consideration”) based upon the achievement of certain performance metrics, including the future operating results of the acquired assets, and other factors. The contingent consideration, if any, will be payable to the sellers following the applicable measurement date for the period ending December 31, 2014 or December 31, 2015, at the election of the sellers. We cannot determine the actual amount of contingent consideration, if any, that may become due to the sellers because it is dependent on various factors, such as the future performance of the acquired assets and our equity multiple, which are subject to many risks and uncertainties beyond our control. We are also unable to estimate a range of potential outcomes for the same reason. We estimated the fair value of contingent consideration as of the acquisition date and as of September 30, 2011 using probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and applying a discount rate that appropriately captures a market participant’s view of the risk associated with the obligation. This contingent consideration liability is carried on our Consolidated Balance Sheets (in accounts payable and other liabilities) as of September 30, 2011 at its fair value, and we record any changes in fair value in earnings on our Consolidated Statements of Income. As of both September 30, 2011 and the acquisition date, the estimated fair value of contingent consideration was $44.2 million.
NHP Acquisition
On July 1, 2011, we acquired NHP in a stock-for-stock transaction. Pursuant to the terms and subject to the conditions set forth in the agreement and plan of merger dated as of February 27, 2011, at the effective time of the merger, each outstanding share of NHP common stock (other than shares owned by us or any of our subsidiaries or any wholly owned subsidiary of NHP) was converted into the right to receive 0.7866 shares of our common stock, with cash paid in lieu of fractional shares. In connection with the acquisition, we paid $105 million at closing to repay amounts then outstanding and terminated the commitments under NHP’s revolving credit facility. The NHP acquisition added 643 seniors housing and healthcare properties to our portfolio (including properties that are owned through joint ventures). For both the three and nine months ended September 30, 2011, revenues attributable to the acquired assets were $134.8 million and NOI attributable to the acquired assets was $122.9 million.

 

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We are accounting for the NHP acquisition under the acquisition method in accordance with ASC 805, and we have completed our initial accounting for this acquisition, which is subject to further adjustment. The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed, which we determined using level two and level three inputs (in thousands):
         
Land and improvements
  $ 687,142  
Buildings and improvements
    6,414,258  
Acquired lease intangibles
    515,535  
Other assets
    701,743  
 
     
 
       
Total assets acquired
    8,318,678  
Notes payable and other debt
    1,879,014  
Other liabilities
    789,040  
 
     
 
       
Total liabilities assumed
    2,668,054  
 
     
 
       
Redeemable OP unitholder interests assumed
    100,429  
Noncontrolling interest assumed
    83,702  
 
     
 
       
Net assets acquired
    5,466,493  
Cash acquired
    29,202  
Equity issued
    5,361,493  
 
     
 
       
Total cash used
  $ 75,798  
 
     
Included in other assets is $189.6 million of goodwill, which represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed as of the acquisition date. We have allocated $129.4 million and $60.2 million of the goodwill balance to our triple-net leased properties and operating assets, respectively. We do not expect to deduct any of the goodwill balance for tax purposes.
As of September 30, 2011, we had incurred a total of $54.8 million of acquisition-related costs related to the NHP acquisition, all of which we expensed as incurred and included in merger-related expenses and deal costs on our Consolidated Statements of Income for the applicable periods. For the three and nine months ended September 30, 2011, we expensed $42.5 million and $54.8 million, respectively, of acquisition-related costs related to the NHP acquisition.
Other 2011 Acquisitions
In August 2011, we purchased one seniors housing community for a purchase price of $3.8 million. In October 2011, we purchased two MOBs and two seniors housing communities (one of which is being managed by Atria) for approximately $150.3 million, including the assumption of $37.7 million in debt.
Lillibridge Acquisition
On July 1, 2010, we completed the acquisition of businesses owned and operated by Lillibridge and its related entities and their real estate interests in 96 MOBs and ambulatory facilities for approximately $381 million, including the assumption of $79.5 million of mortgage debt.
As a result of the Lillibridge acquisition, we acquired: a 100% interest in Lillibridge’s property management, leasing, marketing, facility development, and advisory services business; a 100% interest in 38 MOBs; a 20% joint venture interest in 24 MOBs; and a 5% joint venture interest in 34 MOBs. We are the managing member of these joint ventures and the property manager for the joint venture properties. Two institutional third parties hold the controlling interests in these joint ventures, and we have a right of first offer on those interests. We funded the acquisition with cash on hand, borrowings under our unsecured revolving credit facilities and the assumption of mortgage debt. In connection with the acquisition, $132.7 million of mortgage debt was repaid.

 

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Other 2010 Acquisitions
In December 2010, we acquired Sunrise’s noncontrolling interests in 58 of our seniors housing communities currently managed by Sunrise for a total valuation of approximately $186 million, including the assumption of Sunrise’s share of mortgage debt totaling approximately $144 million. The noncontrolling interests acquired represented between 15% and 25% ownership interests in the communities, and we now own 100% of all 79 of our Sunrise-managed seniors housing communities. We recorded the difference between the consideration paid and the noncontrolling interest balance as a component of equity in capital in excess of par value on our Consolidated Balance Sheets.
Also in December 2010, we purchased five MOBs for a purchase price of $36.6 million.
Unaudited Pro Forma
The following table illustrates the effect on net income and earnings per share as if we had consummated the Atria Senior Living and NHP acquisitions as of January 1, 2010:
                                 
    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (In thousands, except per share amounts)  
 
                               
Revenues
  $ 565,424     $ 556,779     $ 1,698,376     $ 1,625,552  
Income from continuing operations attributable to common stockholders
    183,517       90,891       399,249       280,216  
Discontinued operations
          542             7,139  
Net income attributable to common stockholders
    183,517       91,433       399,249       287,355  
 
                               
Earnings per common share:
                               
Basic:
                               
Income from continuing operations attributable to common stockholders
  $ 0.64     $ 0.32     $ 1.39     $ 1.00  
Discontinued operations
          0.00             0.02  
 
                       
Net income attributable to common stockholders
  $ 0.64     $ 0.32     $ 1.39     $ 1.02  
 
                       
 
                               
Diluted:
                               
Income from continuing operations attributable to common stockholders
  $ 0.63     $ 0.32     $ 1.38     $ 0.99  
Discontinued operations
          0.00             0.03  
 
                       
Net income attributable to common stockholders
  $ 0.63     $ 0.32     $ 1.38     $ 1.02  
 
                       
 
                               
Weighted average shares used in computing earnings per common share:
                               
Basic
    287,365       281,439       286,647       281,374  
Diluted
    290,794       282,749       289,027       282,261  
Acquisition-related costs related to the Atria Senior Living and NHP acquisitions are not expected to have a continuing significant impact and therefore have been excluded from these pro forma results. The pro forma results also do not include the impact of any synergies or lower borrowing costs that may be achieved as a result of the acquisitions or any strategies that management may consider in order to continue to efficiently manage our operations, nor do they give pro forma effect to any other acquisitions, dispositions or capital markets transactions that we completed during the periods presented. These pro forma results are not necessarily indicative of the operating results that would have been obtained had the Atria Senior Living and NHP acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

 

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NOTE 5 — LOANS RECEIVABLE
As of September 30, 2011 and December 31, 2010, we had $367.6 million and $149.3 million, respectively, of net loans receivable relating to seniors housing and healthcare companies or properties.
In November 2011, we received proceeds of $3.0 million in final repayment of two secured loans receivable.
In October 2011, we received proceeds of $6.4 million in final repayment of a first mortgage loan.
In August 2011, we received proceeds of $5.5 million in final repayment of a secured mortgage loan.
In connection with the NHP acquisition, on July 1, 2011, we acquired (i) mortgage loans receivable with an initial aggregate fair value of approximately $270 million that are secured by 53 seniors housing and healthcare properties and (ii) other loans receivable with an initial aggregate fair value of approximately $60 million that are unsecured.
In June 2011, we made a first mortgage loan in the aggregate principal amount of $12.9 million, bearing interest at a fixed rate of 9.0% per annum and maturing in 2016.
In May 2011, we made a senior unsecured term loan to NHP in the aggregate principal amount of $600.0 million, bearing interest at a fixed rate of 5.0% per annum and maturing in 2021. As of our acquisition date of NHP, this investment and related interest were eliminated in consolidation.
In April 2011, we received proceeds of $112.4 million in final repayment of a first mortgage loan and recognized a gain of $3.3 million (included in income from loans and investments on our Consolidated Statements of Income) in connection with this repayment in the second quarter of 2011.
In March 2011, we received proceeds of $19.9 million in final repayment of a first mortgage loan and recognized a gain of $0.8 million (included in income from loans and investments on our Consolidated Statements of Income) in connection with this repayment in the first quarter of 2011.
NOTE 6 — INVESTMENTS IN UNCONSOLIDATED ENTITIES
We report investments in unconsolidated entities, which we acquired in connection with our Lillibridge and NHP acquisitions, over whose operating and financial policies we have the ability to exercise significant influence under the equity method of accounting. We serve as the managing member of each unconsolidated entity and provide various services in exchange for fees and reimbursements. Our joint venture partners have significant participating rights, and, therefore, we are not required to consolidate these entities. Additionally, these entities are viable entities controlled by equity holders with sufficient capital and, therefore, are not considered variable interest entities. At September 30, 2011 and December 31, 2010, we owned interests (ranging between 5% and 25%) in 92 properties and interests (ranging between 5% and 20%) in 58 properties, respectively, that were accounted for under the equity method. Our net investment in these properties as of September 30, 2011 and December 31, 2010 was $119.3 million and $15.3 million, respectively. For the three months ended September 30, 2011 and 2010, we recorded income from unconsolidated entities of $0.2 million and a loss from unconsolidated entities of $0.4 million, respectively. For the nine months ended September 30, 2011 and 2010, we recorded a loss from unconsolidated entities of $0.1 million and $0.4 million, respectively.

 

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NOTE 7 — INTANGIBLES
The following is a summary of our intangibles as of September 30, 2011 and December 31, 2010:
                 
    September 30,     December 31,  
    2011     2010  
    (Dollars in thousands)  
 
               
Intangible assets:
               
Above market lease intangibles
  $ 203,460     $ 13,232  
In-place and other lease intangibles
    618,153       133,582  
Other intangibles
    16,453       13,649  
Accumulated amortization
    (152,486 )     (100,808 )
Goodwill
    288,196       19,901  
 
           
Net intangible assets
  $ 973,776     $ 79,556  
 
           
 
               
Remaining weighted average amortization period of lease-related intangible assets in years
    19.6       18.5  
 
               
Intangible liabilities:
               
Below market lease intangibles
  $ 486,228     $ 22,398  
Other lease intangibles
    157,971        
Accumulated amortization
    (26,425 )     (12,495 )
 
           
Net intangible liabilities
  $ 617,774     $ 9,903  
 
           
 
               
Remaining weighted average amortization period of lease-related intangible liabilities in years
    18.5       6.9  
Above market lease intangibles and in-place and other lease intangibles are included in acquired lease intangibles within real estate investments on our Consolidated Balance Sheets. Other intangibles (including non-compete agreements and trade names/trademarks) and goodwill are included in other assets on our Consolidated Balance Sheets. Below market lease and other lease intangibles are included in accounts payable and other liabilities on our Consolidated Balance Sheets. For the three months ended September 30, 2011 and 2010, our net amortization expense related to these intangibles was $23.9 million and $2.3 million, respectively. For the nine months ended September 30, 2011 and 2010, our net amortization expense related to these intangibles was $40.0 million and $5.7 million, respectively. The estimated net amortization expense related to these intangibles for each of the next five years is as follows: 2012 — $76.1 million; 2013 — $18.4 million; 2014 — $15.0 million; 2015 — $8.9 million; and 2016 — $7.0 million.

 

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NOTE 8 — SENIOR NOTES PAYABLE AND OTHER DEBT
The following is a summary of our senior notes payable and other debt as of September 30, 2011 and December 31, 2010:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Unsecured revolving credit facilities
  $ 474,000     $ 40,000  
37/8% Convertible Senior Notes due 2011
    230,000       230,000  
9% Senior Notes due 2012
    82,433       82,433  
81/4% Senior Notes due 2012
    72,950        
Unsecured term loan due 2012
    250,000        
Unsecured term loan due 2013
    200,000       200,000  
6.25% Senior Notes due 2013
    269,850        
3.125% Senior Notes due 2015
    400,000       400,000  
6% Senior Notes due 2015
    234,420        
61/2% Senior Notes due 2016
    200,000       400,000  
63/4% Senior Notes due 2017
    225,000       225,000  
4.750% Senior Notes due 2021
    700,000        
6.90% Senior Notes due 2037
    52,400        
6.59% Senior Notes due 2038
    22,973        
Mortgage loans and other
    2,651,830       1,349,521  
 
           
Total
    6,065,856       2,926,954  
Capital lease obligations
    143,119        
Unamortized fair value adjustment
    145,647       11,790  
Unamortized commission fees and discounts
    (41,481 )     (38,700 )
 
           
 
               
Senior notes payable and other debt
  $ 6,313,141     $ 2,900,044  
 
           
As of September 30, 2011, our joint venture partners’ share of total debt was $45.9 million with respect to seven properties owned through consolidated joint ventures. As of December 31, 2010, our joint venture partners’ share of total debt was $4.8 million with respect to three properties owned through consolidated joint ventures. Total debt does not include our portion of debt related to our investments in unconsolidated entities, which was $131.7 million and $45.9 million at September 30, 2011 and December 31, 2010, respectively.

 

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As of September 30, 2011, our indebtedness (excluding capital lease obligations) had the following maturities:
                                 
            Unsecured              
    Principal Amount     Revolving Credit     Scheduled Periodic        
    Due at Maturity     Facilities (1)     Amortization     Total Maturities  
    (In thousands)  
 
                               
2011
  $ 230,700     $     $ 12,798     $ 243,498  
2012 (2)
    517,913       474,000       50,347       1,042,260  
2013
    872,623             44,110       916,733  
2014
    220,891             39,998       260,889  
2015
    835,792             32,503       868,295  
Thereafter (3)
    2,539,451             194,730       2,734,181  
 
                       
Total maturities
  $ 5,217,370     $ 474,000     $ 374,486     $ 6,065,856  
 
                       
     
(1)   At September 30, 2011, we had $57.5 million of unrestricted cash and cash equivalents, for $416.5 million of net borrowings outstanding under our unsecured revolving credit facilities. On October 18, 2011, we repaid all borrowings outstanding and terminated the commitments under our unsecured revolving credit facilities and entered into a new $2.0 billion unsecured revolving credit facility due 2015, subject to a one-year extension. See “Unsecured Revolving Credit Facilities and Term Loans” below.
 
(2)   Includes $250.0 million of borrowings outstanding under an $800.0 million senior unsecured term loan previously extended to NHP, which was repaid in full subsequent to September 30, 2011. See “Unsecured Revolving Credit Facilities and Term Loans” below.
 
(3)   Includes $52.4 million aggregate principal amount of 6.90% Senior Notes due 2037 of NHP, which are subject to repurchase, at the option of the holders, on October 1 of each of 2012, 2017 and 2027, and $23.0 million aggregate principal amount of 6.59% Senior Notes due 2038 of NHP, which are subject to repurchase, at the option of the holders, on July 7 of each of 2013, 2018, 2023 and 2028.
Unsecured Revolving Credit Facilities and Term Loans
As of September 30, 2011, we had $1.0 billion of aggregate borrowing capacity under our then-existing unsecured revolving credit facilities, all of which was scheduled to mature on April 26, 2012. Borrowings under our unsecured revolving credit facilities bore interest at a fluctuating rate per annum (based on U.S. or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate), plus an applicable percentage based on our consolidated leverage. At September 30, 2011, the applicable percentage was 2.80%. Our unsecured revolving credit facilities also had a 20 basis point facility fee. At September 30, 2011, we had $474.0 million of borrowings outstanding, $8.3 million of outstanding letters of credit and $517.7 million of available borrowing capacity under our unsecured revolving credit facilities, and we were in compliance with all covenants under our unsecured revolving credit facilities.
Effective October 18, 2011, we repaid all borrowings outstanding and terminated the commitments under our unsecured revolving credit facilities and entered into a new unsecured revolving credit facility. Our new unsecured revolving credit facility provides us with $2.0 billion of aggregate borrowing capacity, which may be increased, at our option subject to the satisfaction of certain conditions, to up to $2.5 billion, and includes sublimits of (i) up to $200 million for letters of credit, (ii) up to $200 million for swingline loans, (iii) up to $250 million for loans in certain alternative currencies, and (iv) up to 50% of the facility for certain negotiated rate loans. Borrowings under our new unsecured revolving credit facility bear interest at a fluctuating rate per annum (based on the applicable LIBOR for Eurocurrency rate loans and the higher of (i) the federal funds rate plus 0.50%, (ii) the administrative agent’s prime rate and (iii) the applicable LIBOR plus 1.0% for base rate loans, plus, in each case, an applicable percentage based on our senior unsecured long-term debt ratings). At October 18, 2011, the applicable percentage was 1.25% for Eurocurrency rate loans and 0.25% for base rate loans. We also pay a facility fee ranging from 15 to 45 basis points per annum (based on our senior unsecured long-term debt ratings) on the aggregate revolving commitments under our new unsecured revolving credit facility. At October 18, 2011, the facility fee was 25 basis points. Borrowings under our new unsecured revolving credit facility mature on October 16, 2015, but may be extended, at our option subject to the satisfaction of certain conditions, for an additional period of one year.

 

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Our new unsecured revolving credit facility imposes certain customary restrictions on us, including restrictions pertaining to: (i) liens; (ii) investments; (iii) the incurrence of additional indebtedness; (iv) mergers, sales of assets and dissolutions; (v) certain dividend, distribution and other payments; (vi) permitted businesses; (vii) transactions with affiliates; (viii) agreements limiting certain liens; and (ix) the maintenance of certain consolidated total leverage, secured debt leverage, unsecured leverage and fixed charge coverage ratios and minimum consolidated adjusted net worth, and contains customary events of default.
As of November 2, 2011, we had $727 million of borrowings outstanding, $8 million of outstanding letters of credit and $1.26 billion of available borrowing capacity under our new unsecured revolving credit facility.
In connection with the NHP acquisition, on July 1, 2011, we acquired additional liquidity from an $800.0 million senior unsecured term loan previously extended to NHP. At our option, borrowings under the term loan, which are available from time to time on a non-revolving basis, bear interest at the applicable LIBOR plus 1.50% (1.69% at September 30, 2011) or the “Alternate Base Rate” plus 0.50% (we had no base rate borrowings outstanding at September 30, 2011). We pay a facility fee of 10 basis points per annum on the unused commitments under the term loan agreement. Borrowings under the term loan mature on June 1, 2012. At September 30, 2011, we had $250.0 million of borrowings outstanding and $550.0 million of available borrowing capacity under the term loan, and we were in compliance with all covenants under the term loan. On November 1, 2011, we repaid the $250.0 million of borrowings outstanding and continue to have $550.0 million of available borrowing capacity under the term loan.
Mortgages
We assumed mortgage debt of $1.2 billion and $0.4 billion, respectively, in connection with our Atria Senior Living and NHP acquisitions.
In February 2011, we repaid in full mortgage loans outstanding in the aggregate principal amount of $307.2 million and recognized a loss on extinguishment of debt of $16.5 million in connection with this repayment in the first quarter of 2011.
Senior Notes
In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750% senior notes due 2021, at a public offering price equal to 99.132% of par for total proceeds of $693.9 million, before the underwriting discount and expenses.
In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes. As a result, we paid a total of $206.5 million, plus accrued and unpaid interest, on the redemption date and recognized a loss on extinguishment of debt of $8.7 million during the third quarter of 2011.
As a result of the NHP acquisition, we assumed $991.6 million aggregate principal amount of outstanding unsecured senior notes of NHP. On July 15, 2011, we repaid in full, at par, $339.0 million principal amount then outstanding of NHP’s 6.50% senior notes due 2011 upon maturity. The remaining NHP senior notes outstanding bear interest at fixed rates ranging from 6.00% to 8.25% per annum and have maturity dates ranging from July 1, 2012 to July 7, 2038, subject in certain cases to earlier repayment at the option of the holders.
Capital Leases
As of September 30, 2011, we leased eight seniors housing communities pursuant to arrangements that we assumed in connection with the Atria Senior Living acquisition which are accounted for as capital leases. Rent under each capital lease is subject to increase based upon changes in the Consumer Price Index or gross revenues attributable to the property, subject to certain limits, as defined in the applicable lease agreement. Pursuant to each capital lease agreement, we have a bargain option to purchase the leased property and an option to exercise renewal terms.

 

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Future minimum lease payments required under the capital lease agreements, including amounts that would be due under purchase options, as of September 30, 2011 are as follows (in thousands):
         
2011
  $ 2,343  
2012
    9,446  
2013
    9,573  
2014
    9,699  
2015
    9,826  
Thereafter
    172,553  
 
     
Total minimum lease payments
    213,440  
Less: Amount related to interest
    (70,321 )
 
     
 
  $ 143,119  
 
     
Net assets held under capital leases are included in net real estate investments on our Consolidated Balance Sheets and totaled $226.9 million and $0 as of September 30, 2011 and December 31, 2010, respectively.
NOTE 9 — FAIR VALUES OF FINANCIAL INSTRUMENTS
As of September 30, 2011 and December 31, 2010, the carrying amounts and fair values of our financial instruments were as follows:
                                 
    September 30, 2011     December 31, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
    (In thousands)  
 
                               
Assets:
                               
Cash and cash equivalents
  $ 57,482     $ 57,482     $ 21,812     $ 21,812  
Secured loans receivable, net
    302,264       302,393       149,263       155,377  
Derivative instruments
    8,536       8,536       99       99  
Marketable debt securities
    42,788       42,788       66,675       66,675  
Unsecured loans receivable, net
    65,384       65,384              
 
                               
Liabilities:
                               
Senior notes payable and other debt, gross
    6,065,856       6,415,640       2,926,954       3,055,435  
Derivative instruments
    24,537       24,537       3,722       3,722  
Contingent consideration liabilities
    56,218       56,218              
 
                               
Redeemable OP unitholder interests
    92,817       92,817              
Fair value estimates are subjective in nature and depend upon several important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts we would realize in a current market exchange.
At September 30, 2011, we held corporate marketable debt securities, classified as available-for-sale and included within other assets on our Consolidated Balance Sheets, having an aggregate amortized cost basis and fair value of $41.0 million and $42.8 million, respectively. At December 31, 2010, our marketable debt securities had an aggregate amortized cost basis and fair value of $61.9 million and $66.7 million, respectively. The contractual maturities of our marketable debt securities range from October 1, 2012 to April 15, 2016. In the first quarter of 2011, we sold certain marketable debt securities and received proceeds of approximately $23.1 million. We recognized aggregate gains from these sales of approximately $1.8 million (included in income from loans and investments on our Consolidated Statements of Income) during the first quarter of 2011.

 

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NOTE 10 — LITIGATION
Litigation Relating to the Sunrise REIT Acquisition
On May 3, 2007, we filed a lawsuit against HCP, Inc. (“HCP”) in the United States District Court for the Western District of Kentucky (the “District Court”), entitled Ventas, Inc. v. HCP, Inc., Case No. 07-cv-238-JGH. We asserted claims of tortious interference with contract and tortious interference with prospective business advantage. Our complaint alleged that HCP interfered with our purchase agreement to acquire the assets and liabilities of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) and with the process for unitholder consideration of the purchase agreement. The complaint alleged, among other things, that HCP made certain improper and misleading public statements and/or offers to acquire Sunrise REIT and that HCP’s actions caused us to suffer substantial damages, including, among other things, the payment of materially greater consideration to acquire Sunrise REIT resulting from the substantial increase in the purchase price above the original contract price necessary to obtain unitholder approval and increased costs associated with the delay in closing the acquisition, including increased costs to finance the transaction as a result of the delay.
HCP brought counterclaims against us alleging misrepresentation and negligent misrepresentation by Sunrise REIT related to its sale process, claiming that we were responsible for those actions as successor. HCP sought compensatory and punitive damages. On March 25, 2009, the District Court granted us judgment on the pleadings against all counterclaims brought by HCP and dismissed HCP’s counterclaims with prejudice. Thereafter, the District Court confirmed the dismissal of HCP’s counterclaims.
On July 16, 2009, the District Court denied HCP’s summary judgment motion as to our claim for tortious interference with business advantage, permitting us to present that claim against HCP at trial. The District Court granted HCP’s motion for summary judgment as to our claim for tortious interference with contract and dismissed that claim. The District Court also ruled that we could not seek to recover a portion of our alleged damages.
On September 4, 2009, the jury unanimously held that HCP tortiously interfered with our business expectation to acquire Sunrise REIT at the agreed price by employing significantly wrongful means such as fraudulent misrepresentation, deceit and coercion. The jury awarded us $101.6 million in compensatory damages, which is the full amount of damages the District Court permitted us to seek at trial. The District Court entered judgment on the jury’s verdict on September 8, 2009.
On November 16, 2009, the District Court affirmed the jury’s verdict and denied all of HCP’s post-trial motions, including a motion requesting that the District Court overturn the jury’s verdict and enter judgment for HCP or, in the alternative, award HCP a new trial. The District Court also denied our motion for pre-judgment interest and/or to modify the jury award to increase it to reflect the currency rates in effect on September 8, 2009, the date of entry of the judgment.
On November 17, 2009, HCP appealed the District Court’s judgment to the United States Court of Appeals for the Sixth Circuit (the “Sixth Circuit”). HCP argued that the judgment against it should be vacated and the case remanded for a new trial and/or that judgment should be entered in its favor as a matter of law.
On November 24, 2009, we filed a cross-appeal to the Sixth Circuit. In addition to maintaining the full benefit of our favorable jury verdict, in our cross-appeal, we asserted that we are entitled to substantial monetary relief in addition to the jury verdict, including punitive damages, additional compensatory damages and pre-judgment interest.
On December 11, 2009, HCP posted a $102.8 million letter of credit in our favor to serve as security to stay execution of the jury verdict pending the appellate proceedings.
On May 17, 2011, the Sixth Circuit unanimously affirmed the $101.6 million jury verdict in our favor and ruled that we are entitled to seek punitive damages against HCP for its conduct. The Sixth Circuit also denied our appeal seeking additional compensatory damages and pre-judgment interest. On June 27, 2011, the Sixth Circuit denied HCP’s motion to request a rehearing with respect to its decision.
On July 5, 2011, the Sixth Circuit issued a mandate terminating the appellate proceedings and transferring jurisdiction back to the District Court for the enforcement of the $101.6 million compensatory damages award and the trial for punitive damages. On July 26, 2011, the District Court issued an order scheduling a jury trial on the matter of punitive damages for February 21, 2012.
On August 22, 2011, the District Court ruled that HCP could not further delay enforcement of our $101.6 million compensatory damages award. On August 23, 2011, HCP paid us $102.8 million for the judgment plus certain costs and interest. After accrual of certain unpaid fees and $5.75 million in contingent fees for our outside legal counsel and payment of a $3 million donation to the Ventas Charitable Foundation, we recognized approximately $85 million in net proceeds from the compensatory damages award in our Consolidated Statements of Income.

 

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On October 25, 2011, HCP filed a petition for certiorari with the U.S. Supreme Court seeking to challenge the Sixth Circuit’s May 17, 2011 decision affirming the compensatory damages award and ordering a trial on punitive damages.
We are vigorously pursuing proceedings in the District Court on the matter of punitive damages. We cannot assure you as to the outcome of HCP’s petition for certiorari to the U.S. Supreme Court, which we believe will not be granted, or the District Court trial on the matter of punitive damages.
Litigation Relating to the NHP Acquisition
In the weeks following the announcement of our acquisition of NHP on February 28, 2011, purported stockholders of NHP filed seven lawsuits against NHP and its directors. Six of these lawsuits also named Ventas, Inc. as a defendant and five named our subsidiary, Needles Acquisition LLC, as a defendant. The purported stockholder plaintiffs commenced these actions in two jurisdictions: the Superior Court of the State of California, Orange County (the “California State Court”); and the Circuit Court for Baltimore City, Maryland (the “Maryland State Court”). All of these actions were brought as putative class actions, and two also purport to assert derivative claims on behalf of NHP. All of these stockholder complaints allege that NHP’s directors breached certain alleged duties to NHP’s stockholders by approving the merger agreement with us, and certain complaints allege that NHP aided and abetted those breaches. Those complaints that name Ventas, Inc. and Needles Acquisition LLC allege that we aided and abetted the purported breaches of certain alleged duties by NHP’s directors. All of the complaints request an injunction of the merger. Certain of the complaints also seek damages.
In the California State Court, the following actions were filed purportedly on behalf of NHP stockholders: on February 28, 2011, a putative class action entitled Palma v. Nationwide Health Properties, Inc., et al.; on March 3, 2011, a putative class action entitled Barker v. Nationwide Health Properties, Inc., et al.; and on March 3, 2011, a putative class action entitled Davis v. Nationwide Health Properties, Inc., et al., which was subsequently amended on March 11, 2011 under the caption Davids v. Nationwide Health Properties, Inc., et al. Each action names NHP and members of the NHP board of directors as defendants. The Barker and Davids actions also name Ventas, Inc. as a defendant, and the Davids action names Needles Acquisition LLC as a defendant. Each complaint alleges, among other things, that NHP’s directors breached certain alleged duties by approving the merger agreement between us and NHP because the proposed transaction purportedly fails to maximize stockholder value and provides the directors personal benefits not shared by NHP stockholders, and the Barker and Davids actions allege that we aided and abetted those purported breaches. Along with other relief, the complaints seek an injunction against the closing of the proposed merger. On April 4, 2011, the defendants demurred and moved to stay the Palma, Barker, and Davids actions in favor of the parallel litigation in the Maryland State Court described below. On April 27, 2011, all three actions were consolidated pursuant to a Stipulation and Proposed Order on Consolidation of Related Actions signed by the parties on March 22, 2011. On May 12, 2011, the California State Court granted the defendants’ motion to stay.
In the Maryland State Court, the following actions were filed purportedly on behalf of NHP stockholders: on March 7, 2011, a putative class action entitled Crowley v. Nationwide Health Properties, Inc., et al.; on March 10, 2011, a putative class action entitled Taylor v. Nationwide Health Properties, Inc., et. al.; on March 17, 2011, a putative class action entitled Haughey Family Trust v. Pasquale, et al.; and on March 31, 2011, a putative class action entitled Rappoport v. Pasquale, et al. All four actions name NHP, its directors, Ventas, Inc. and Needles Acquisition LLC as defendants. All four actions allege, among other things, that NHP’s directors breached certain alleged duties by approving the merger agreement between us and NHP because the proposed transaction purportedly fails to maximize stockholder value and provides certain directors personal benefits not shared by NHP stockholders and that we aided and abetted those purported breaches. In addition to asserting direct claims on behalf of a putative class of NHP shareholders, the Haughey and Rappoport actions purport to bring derivative claims on behalf of NHP, asserting breaches of certain alleged duties by NHP’s directors in connection with their approval of the proposed transaction. All four actions seek to enjoin the proposed merger, and the Taylor action seeks damages.
On March 30, 2011, pursuant to stipulation of the parties, the Maryland State Court entered an order consolidating the Crowley, Taylor and Haughey actions. The Rappoport action was consolidated with the other actions on April 15, 2011.

 

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On April 1, 2011, pursuant to stipulation of the parties, the Maryland State Court entered an order: (i) certifying a class of NHP shareholders; and (ii) providing for the plaintiffs to file a consolidated amended complaint. The plaintiffs filed a consolidated amended complaint on April 19, 2011, which the defendants moved to dismiss on April 29, 2011. Plaintiffs opposed that motion on May 9, 2011. Plaintiffs moved for expedited discovery on April 19, 2011, and the defendants simultaneously opposed that motion and moved for a protective order staying discovery on April 26, 2011. The Maryland State Court denied plaintiffs’ motion for expedited discovery and granted defendants’ motion for a protective order on May 3, 2011. On May 6, 2011, plaintiffs moved for reconsideration of the Maryland State Court’s grant of the protective order. The Maryland State Court denied the plaintiffs’ motion for reconsideration on May 11, 2011. On May 27, 2011, the Maryland State Court entered an order dismissing the consolidated action with prejudice. Plaintiffs moved for reconsideration of that order on June 6, 2011.
On June 9, 2011, we and NHP agreed on a settlement in principle with the plaintiffs in the consolidated action pending in Maryland State Court, which required us and NHP to make certain supplemental disclosures to stockholders concerning the merger. We and NHP made the supplemental disclosures on June 10, 2011. The settlement is subject to appropriate documentation by the parties and approval by the Maryland State Court.
We believe that each of these actions is without merit.
Proceedings against Tenants, Operators and Managers
From time to time, Kindred, Brookdale Senior Living, Sunrise, Atria and our other tenants, operators and managers are parties to certain legal actions, regulatory investigations and claims arising in the conduct of their business and operations. Even though we generally are not party to these proceedings, the unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect such tenants’, operators’ or managers’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Indemnified and Defended by Third Parties
From time to time, we are party to certain legal actions, regulatory investigations and claims against which third parties are contractually obligated to indemnify and defend us and hold us harmless. The tenants of our triple-net leased properties and, in some cases, affiliates of the tenants are required by the terms of their leases and other agreements with us to indemnify, defend and hold us harmless against certain actions, investigations and claims arising in the course of their business and related to the operations of our triple-net leased properties. In addition, third parties from whom we acquired certain of our assets are required by the terms of the related conveyance documents to indemnify, defend and hold us harmless against certain actions, investigations and claims related to the conveyed assets and arising prior to our ownership. In some cases, we hold a portion of the purchase price consideration in escrow as collateral for the indemnification obligations of third parties related to acquired assets. Certain tenants and other obligated third parties are currently defending us in these types of matters. We cannot assure you that our tenants or their affiliates or other obligated third parties will continue to defend us in these matters, that our tenants or their affiliates or other obligated third parties will have sufficient assets, income and access to financing to enable them to satisfy their defense and indemnification obligations to us or that any purchase price consideration held in escrow will be sufficient to satisfy claims for which we are entitled to indemnification. The unfavorable resolution of any such actions, investigations or claims could, individually or in the aggregate, materially adversely affect our tenants’ or other obligated third parties’ liquidity, financial condition or results of operations and their ability to satisfy their respective obligations to us, which, in turn, could have a Material Adverse Effect on us.
Proceedings Arising in Connection with Senior Living and MOB Operations; Other Litigation
From time to time, we are also party to various legal actions, regulatory investigations and claims (some of which may not be insured) arising in connection with our senior living and MOB operations or otherwise in the course of our business. In limited circumstances, the manager of the applicable seniors housing community or MOB may be contractually obligated to indemnify, defend and hold us harmless against such actions, investigations and claims. It is the opinion of management that, except as otherwise set forth in this Note 10, the disposition of any such actions, investigations and claims that are currently pending will not, individually or in the aggregate, have a Material Adverse Effect on us. However, regardless of their merits, these matters may force us to expend significant financial resources. We are unable to predict the ultimate outcome of these actions, investigations and claims, and if management’s assessment of our liability with respect thereto is incorrect, such actions, investigations and claims could have a Material Adverse Effect on us.

 

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NOTE 11 — INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal and state income taxes. Although the TRS entities were not liable for any cash federal income taxes for the nine months ended September 30, 2011, their federal income tax liabilities may increase in future periods as we exhaust net operating loss carryforwards and as our senior living operations and MOB operations reportable segments grow. Such increases could be significant.
Our consolidated provision for income taxes for the three months ended September 30, 2011 and 2010 was a benefit of $13.9 million and an expense of $1.7 million, respectively. These amounts were adjusted by income tax expense of $0 million and $0.6 million, respectively, related to the noncontrolling interest share of net income. Our consolidated provision for income taxes for the nine months ended September 30, 2011 and 2010 was a benefit of $23.3 million and an expense of $2.4 million, respectively. These amounts were adjusted by income tax expense of $0 million and $1.6 million, respectively, related to the noncontrolling interest share of net income. The benefit for the three and nine months ended September 30, 2011 primarily relates to the reversal of certain income tax contingency reserves, including interest, and the deferred tax liabilities established for the Atria Senior Living acquisition. The statute of limitations with respect to our 2007 U.S. federal income tax returns expired in September 2011. We did not recognize any income tax expense as a result of the litigation proceeds that we received in the third quarter of 2011, as no income taxes are payable on these proceeds.
Realization of a deferred tax benefit related to net operating losses is dependent in part upon generating sufficient taxable income in future periods. Our net operating loss carryforwards begin to expire in 2024 with respect to our TRS entities and in 2020 with respect to our other entities.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. Net deferred tax liabilities with respect to our TRS entities totaled $274.9 million and $241.3 million at September 30, 2011 and December 31, 2010, respectively, and related primarily to differences between the financial reporting and tax bases of fixed and intangible assets and to net operating losses. This amount includes the initial net deferred tax liability related to the Atria Senior Living acquisition of $43.9 million and adjustments for activity for the period from May 12, 2011 through September 30, 2011.
Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service for the year ended December 31, 2008 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2007 and subsequent years. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to 2004 related to entities acquired or formed in connection with our Sunrise REIT acquisition.
NOTE 12 — STOCKHOLDERS’ EQUITY
On July 1, 2011, following approval by our stockholders, we amended our Amended and Restated Certificate of Incorporation, as previously amended, to increase the number of authorized shares of our capital stock to 610,000,000, comprised of 600,000,000 shares of common stock, par value $0.25 per share, and 10,000,000 shares of preferred stock, par value $1.00 per share.
On July 1, 2011, in connection with the NHP acquisition, we issued 99,849,106 shares of our common stock to NHP stockholders and holders of NHP equity awards (which shares had a total value of $5.4 billion based on the July 1, 2011 closing price of our common stock of $53.74 per share). We reserved 2,253,366 additional shares of our common stock for issuance in connection with equity awards and other convertible or exchangeable securities (specifically the OP Units) that we assumed in connection with the NHP acquisition.
On June 20, 2011, in connection with the NHP acquisition, our Board of Directors declared a prorated third quarter dividend on our common stock in the amount of $0.1264 per share, payable in cash to stockholders of record at the close of business on June 30, 2011. The prorated dividend of $23.8 million was paid on July 12, 2011. On August 19, 2011, our Board of Directors declared another prorated third quarter dividend on our common stock in the amount of $0.4486 per share, which was paid in cash on September 30, 2011 to stockholders of record on September 13, 2011. Together, these two prorated amounts equate to our regular quarterly dividend of $0.575 per share and constitute the third quarterly installment of our 2011 dividend.

 

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On May 12, 2011, as partial consideration for the Atria Senior Living assets, we issued to the sellers in a private placement 24,958,543 shares of our common stock (which shares had a total value of $1.38 billion based on the May 12, 2011 closing price of our common stock of $55.33 per share). On May 19, 2011, we filed a shelf registration statement relating to the resale of those shares by the selling stockholders. Subsequent to September 30, 2011, we cancelled 83,441 shares issued to the sellers for a working capital adjustment in accordance with the purchase agreement.
In February 2011, we completed the sale of 5,563,000 shares of our common stock in an underwritten public offering pursuant to our existing shelf registration statement. We received $300.0 million in aggregate proceeds from the sale, which we used to repay existing mortgage debt and for working capital and other general corporate purposes.
Accumulated Other Comprehensive Income
The following is a summary of our accumulated other comprehensive income as of September 30, 2011 and December 31, 2010:
                 
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
 
               
Foreign currency translation
  $ 18,776     $ 23,010  
Unrealized gain on marketable debt securities
    1,830       4,794  
Other
    (1,369 )     (936 )
 
           
 
               
Total accumulated other comprehensive income
  $ 19,237     $ 26,868  
 
           

 

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NOTE 13 — EARNINGS PER COMMON SHARE
The following table shows the amounts used in computing basic and diluted earnings per common share:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands, except per share amounts)  
 
                               
Numerator for basic and diluted earnings per share:
                               
Income from continuing operations attributable to common stockholders
  $ 102,885     $ 57,356     $ 171,545     $ 161,445  
Discontinued operations
          542             7,139  
 
                       
Net income attributable to common stockholders
  $ 102,885     $ 57,898     $ 171,545     $ 168,584  
 
                       
 
                               
Denominator:
                               
Denominator for basic earnings per share — weighted average shares
    287,365       156,631       208,470       156,566  
Effect of dilutive securities:
                               
Stock options
    412       451       458       375  
Restricted stock awards
    38       95       57       62  
OP units
    1,868             630        
Convertible notes
    1,111       764       1,235       450  
 
                       
Denominator for diluted earnings per share — adjusted weighted average shares
    290,794       157,941       210,850       157,453  
 
                       
 
                               
Basic earnings per share:
                               
Income from continuing operations attributable to common stockholders
  $ 0.36     $ 0.37     $ 0.82     $ 1.03  
Discontinued operations
          0.00             0.05  
 
                       
Net income attributable to common stockholders
  $ 0.36     $ 0.37     $ 0.82     $ 1.08  
 
                       
 
                               
Diluted earnings per share:
                               
Income from continuing operations attributable to common stockholders
  $ 0.35     $ 0.37     $ 0.81     $ 1.02  
Discontinued operations
          0.00             0.05  
 
                       
Net income attributable to common stockholders
  $ 0.35     $ 0.37     $ 0.81     $ 1.07  
 
                       
NOTE 14 — RELATED PARTY TRANSACTIONS
Upon consummation of the Atria Senior Living acquisition, we entered into long-term management agreements with Atria to operate the acquired assets. Atria is owned by private equity funds managed by Lazard Real Estate Partners LLC (“LREP”). Effective May 13, 2011, LREP Chief Executive Officer and Managing Principal and Atria Chairman Matthew J. Lustig was appointed to our Board of Directors pursuant to the terms of a Director Appointment Agreement between us and the sellers of the acquired assets. For the three months ended September 30, 2011 and for the period from May 12, 2011 through September 30, 2011, we paid Atria $7.9 million and $12.1 million, respectively, in management fees related to the Atria Senior Living properties.
From time to time, we may engage Cushman & Wakefield, a global commercial real estate firm, to act as a leasing agent with respect to certain of our MOBs. Cushman & Wakefield President and Chief Executive Officer Glenn J. Rufrano has served as a member of our Board of Directors since June 2010. We believe the brokers’ fees we pay to Cushman & Wakefield in connection with the provision of these services are customary and represent market rates. Total fees we paid to Cushman & Wakefield during the first nine months of 2011 were de minimis.
Effective upon consummation of the NHP acquisition, Richard I. Gilchrist, a former NHP director, was appointed to our Board of Directors. Mr. Gilchrist currently serves as Senior Advisor to The Irvine Company, and from 2006 until July 2011, he served as President of The Irvine Company’s Investment Properties Group, from whom NHP leased its corporate headquarters prior to the acquisition. Nationwide Health Properties, LLC, the successor to NHP and our wholly owned subsidiary, continues to rent office space in the building owned by The Irvine Company. For both the three and nine months ended September 30, 2011, we paid $0.1 million to The Irvine Company.

 

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NOTE 15 — ELMCROFT II PORTFOLIO UPDATE
In connection with the NHP acquisition, we acquired a portfolio of 32 triple-net leased seniors housing communities in ten states leased to a single operator. Subsequent to the acquisition, we transitioned the operation of these properties to affiliates of Senior Care, Inc., which now operates under the name “Elmcroft Senior Living” (together with its affiliates, “Elmcroft”). Elmcroft has been a tenant of 64 of our seniors housing and other healthcare properties since 2006. To effect the transition of the properties to Elmcroft, we terminated the previously existing master lease and two other individual leases relating to the properties and entered into new leases with Elmcroft. Each of the new Elmcroft leases has a term of fifteen years and is subject to two five-year renewal options. The previous operator will continue to hold the operating licenses for the properties pursuant to temporary license agreements with Elmcroft until Elmcroft receives new operating licenses. To date, eleven licenses have been granted to Elmcroft and the remaining licenses are in process.
NOTE 16 — SEGMENT INFORMATION
As of September 30, 2011, we operated through three reportable business segments: triple-net leased properties, senior living operations and MOB operations. Our triple-net leased properties segment consists of acquiring and owning seniors housing and healthcare properties in the United States and leasing those properties to healthcare operating companies under “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our senior living operations segment consists of investments in seniors housing communities located in the United States and Canada for which we engage independent third parties, such as Sunrise and Atria, to manage the operations. Our MOB operations segment primarily consists of acquiring, owning, developing, leasing and managing MOBs. Information provided for “all other” includes revenues such as income from loans and investments and other miscellaneous income and various corporate-level expenses not directly attributable to our three reportable business segments. Assets included in all other consist primarily of corporate assets, including cash, restricted cash, deferred financing costs, loans receivable and miscellaneous accounts receivable.
We evaluate performance of the combined properties in each reportable business segment based on segment profit, which we define as NOI adjusted for gain/loss from unconsolidated entities. We define NOI as total revenues, less interest and other income, property-level operating expenses and medical office building services costs. We believe that net income, as defined by GAAP, is the most appropriate earnings measurement. However, we believe that segment profit serves as a useful supplement to net income because it allows investors, analysts and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies and between periods on a consistent basis. Segment profit should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance. In order to facilitate a clear understanding of our consolidated historical operating results, segment profit should be examined in conjunction with net income as presented in our Consolidated Financial Statements and data included elsewhere in this Quarterly Report on Form 10-Q.
Interest expense, depreciation and amortization, general, administrative and professional fees, and non-property specific revenues and expenses are not allocated to individual reportable business segments for purposes of assessing segment performance. There are no intersegment sales or transfers.

 

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Summary information by reportable business segment is as follows:
For the three months ended September 30, 2011:
                                         
    Triple-Net     Senior                    
    Leased     Living     MOB     All        
    Properties     Operations     Operations     Other     Total  
    (In thousands)  
Revenues:
                                       
Rental income
  $ 211,479     $     $ 58,398     $     $ 269,877  
Resident fees and services
          276,364                   276,364  
Medical office building and other services revenue
    1,109             8,162             9,271  
Income from loans and investments
                      10,072       10,072  
Interest and other income
                      373       373  
 
                             
Total revenues
  $ 212,588     $ 276,364     $ 66,560     $ 10,445     $ 565,957  
 
                             
 
                                       
Total revenues
  $ 212,588     $ 276,364     $ 66,560     $ 10,445     $ 565,957  
Less:
                                       
Interest and other income
                      373       373  
Property-level operating expenses
          188,856       20,305             209,161  
Medical office building services costs
                6,347             6,347  
 
                             
Segment NOI
    212,588       87,508       39,908       10,072       350,076  
 
                                       
Income from unconsolidated entities
    121             61             182  
 
                             
Segment profit
  $ 212,709     $ 87,508     $ 39,969     $ 10,072       350,258  
 
                               
 
                                       
Interest and other income
                                    373  
Interest expense
                                    (73,756 )
Depreciation and amortization
                                    (161,027 )
General, administrative and professional fees
                                    (20,624 )
Loss on extinguishment of debt
                                    (8,685 )
Litigation proceeds, net
                                    85,327  
Merger-related expenses and deal costs
                                    (69,350 )
Other
                                    (14,436 )
Income tax benefit
                                    13,904  
 
                                     
Net income
                                  $ 101,984  
 
                                     

 

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For the three months ended September 30, 2010:
                                         
    Triple-Net     Senior                    
    Leased     Living     MOB     All        
    Properties     Operations     Operations     Other     Total  
    (In thousands)  
Revenues:
                                       
Rental income
  $ 117,906     $     $ 22,817     $     $ 140,723  
Resident fees and services
          113,182                   113,182  
Medical office building and other services revenue
                6,711             6,711  
Income from loans and investments
                      4,014       4,014  
Interest and other income
                      35       35  
 
                             
Total revenues
  $ 117,906     $ 113,182     $ 29,528     $ 4,049     $ 264,665  
 
                             
 
                                       
Total revenues
  $ 117,906     $ 113,182     $ 29,528     $ 4,049     $ 264,665  
Less:
                                       
Interest and other income
                      35       35  
Property-level operating expenses
          74,066       7,941             82,007  
Medical office building services costs
                4,633             4,633  
 
                             
Segment NOI
    117,906       39,116       16,954       4,014       177,990  
 
                                       
Loss from unconsolidated entities
                (392 )           (392 )
 
                             
Segment profit
  $ 117,906     $ 39,116     $ 16,562     $ 4,014       177,598  
 
                               
 
                                       
Interest and other income
                                    35  
Interest expense
                                    (45,519 )
Depreciation and amortization
                                    (52,104 )
General, administrative and professional fees
                                    (15,278 )
Merger-related expenses and deal costs
                                    (5,142 )
Other
                                    419  
Income tax expense
                                    (1,657 )
Discontinued operations
                                    542  
 
                                     
Net income
                                  $ 58,894  
 
                                     

 

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For the nine months ended September 30, 2011:
                                         
    Triple-Net     Senior                    
    Leased     Living     MOB     All        
    Properties     Operations     Operations     Other     Total  
    (In thousands)  
Revenues:
                                       
Rental income
  $ 450,211     $     $ 106,392     $     $ 556,603  
Resident fees and services
          593,348                   593,348  
Medical office building and other services revenue
    1,109             24,941             26,050  
Income from loans and investments
                      24,548       24,548  
Interest and other income
                      529       529  
 
                             
Total revenues
  $ 451,320     $ 593,348     $ 131,333     $ 25,077     $ 1,201,078  
 
                             
 
                                       
Total revenues
  $ 451,320     $ 593,348     $ 131,333     $ 25,077     $ 1,201,078  
Less:
                                       
Interest and other income
                      529       529  
Property-level operating expenses
          403,706       37,259             440,965  
Medical office building services costs
                19,837             19,837  
 
                             
Segment NOI
    451,320       189,642       74,237       24,548       739,747  
 
                                       
Income (loss) from unconsolidated entities
    121             (192 )           (71 )
 
                             
Segment profit
  $ 451,441     $ 189,642     $ 74,045     $ 24,548       739,676  
 
                               
 
                                       
Interest and other income
                                    529  
Interest expense
                                    (170,046 )
Depreciation and amortization
                                    (293,541 )
General, administrative and professional fees
                                    (51,010 )
Loss on extinguishment of debt
                                    (25,211 )
Litigation proceeds, net
                                    85,327  
Merger-related expenses and deal costs
                                    (131,606 )
Other
                                    (6,664 )
Income tax benefit
                                    23,310  
 
                                     
Net income
                                  $ 170,764  
 
                                     

 

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For the nine months ended September 30, 2010:
                                         
    Triple-Net     Senior                    
    Leased     Living     MOB     All        
    Properties     Operations     Operations     Other     Total  
    (In thousands)  
Revenues:
                                       
Rental income
  $ 351,625     $     $ 47,246     $     $ 398,871  
Resident fees and services
          331,535                   331,535  
Medical office building and other services revenue
                6,711             6,711  
Income from loans and investments
                      11,336       11,336  
Interest and other income
                      420       420  
 
                             
Total revenues
  $ 351,625     $ 331,535     $ 53,957     $ 11,756     $ 748,873  
 
                             
 
                                       
Total revenues
  $ 351,625     $ 331,535     $ 53,957     $ 11,756     $ 748,873  
Less:
                                       
Interest and other income
                      420       420  
Property-level operating expenses
          219,802       16,267             236,069  
Medical office building services costs
                4,633             4,633  
 
                             
Segment NOI
    351,625       111,733       33,057       11,336       507,751  
 
                                       
Loss from unconsolidated entities
                (392 )           (392 )
 
                             
Segment profit
  $ 351,625     $ 111,733     $ 32,665     $ 11,336       507,359  
 
                               
 
                                       
Interest and other income
                                    420  
Interest expense
                                    (133,449 )
Depreciation and amortization
                                    (154,458 )
General, administrative and professional fees
                                    (35,819 )
Loss on extinguishment of debt
                                    (6,549 )
Merger-related expenses and deal costs
                                    (11,668 )
Other
                                    404  
Income tax expense
                                    (2,352 )
Discontinued operations
                                    7,139  
 
                                     
Net income
                                  $ 171,027  
 
                                     
Assets by reportable business segment are as follows:
                                 
    As of     As of  
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Assets:
                               
Triple-net leased properties
  $ 8,652,706       50.3 %   $ 2,474,612       43.0 %
Senior living operations
    5,807,192       33.7       2,297,041       39.9  
MOB operations
    2,367,480       13.8       748,945       13.0  
All other assets
    378,392       2.2       237,423       4.1  
 
                       
Total assets
  $ 17,205,770       100.0 %   $ 5,758,021       100.0 %
 
                       

 

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Capital expenditures, including investments in real estate property and development project expenditures, by reportable business segment are as follows:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Capital expenditures:
                               
Triple-net leased properties
  $ 68,604     $ 211     $ 69,831     $ 12,303  
Senior living operations
    20,842       3,889       296,446       6,782  
MOB operations
    23,432       218,307       30,301       233,315  
 
                       
Total capital expenditures
  $ 112,878     $ 222,407     $ 396,578     $ 252,400  
 
                       
Our portfolio of properties and real estate loan and other investments are located in the United States and Canada. Revenues are attributed to an individual country based on the location of each property.
Geographic information regarding our operations is as follows:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands)  
Revenues:
                               
United States
  $ 542,533     $ 246,358     $ 1,132,047     $ 695,252  
Canada
    23,424       18,307       69,031       53,621  
 
                       
Total revenues
  $ 565,957     $ 264,665     $ 1,201,078     $ 748,873  
 
                       
                 
    As of     As of  
    September 30,     December 31,  
    2011     2010  
    (In thousands)  
Net real estate property:
               
United States
  $ 15,598,457     $ 4,857,510  
Canada
    397,585       422,009  
 
           
Total net real estate property
  $ 15,996,042     $ 5,279,519  
 
           
NOTE 17 — CONDENSED CONSOLIDATING INFORMATION
At the time of initial issuance, we and certain of our direct and indirect wholly owned subsidiaries (the “Wholly Owned Subsidiary Guarantors”) fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the 9% senior notes due 2012, the 61/2% senior notes due 2016 and the 63/4% senior notes due 2017 of our wholly owned subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”) and Ventas Capital Corporation (collectively, the “Ventas Issuers”). Ventas Capital Corporation is a direct subsidiary of Ventas Realty that was formed in 2002 to facilitate offerings of the senior notes and has no assets or operations. In addition, at the time of initial issuance, Ventas Realty and the Wholly Owned Subsidiary Guarantors fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to our 37/8% convertible senior notes due 2011. Other subsidiaries (“Non-Guarantor Subsidiaries”) that were not included among the Wholly Owned Subsidiary Guarantors were not obligated with respect to the senior notes or the convertible notes. On September 30, 2010, the Wholly Owned Subsidiary Guarantors were released from their obligations with respect to the 61/2% senior notes due 2016 and the 63/4% senior notes due 2017 of the Ventas Issuers and our convertible notes pursuant to the terms of the applicable indentures.

 

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In connection with the NHP acquisition, our wholly owned subsidiary, Nationwide Health Properties, LLC, assumed the obligation to pay principal and interest with respect to the 81/4% senior notes due 2012, the 6.25% senior notes due 2013, the 6.00% senior notes due 2015, the 6.90% senior notes due 2037 and the 6.59% senior notes due 2038 of NHP. We, the Ventas Issuers and our subsidiaries (other than Nationwide Health Properties, LLC) are not obligated with respect to the NHP senior notes.
Contractual and legal restrictions, including those contained in the instruments governing our subsidiaries’ outstanding mortgage indebtedness, may under certain circumstances restrict our ability to obtain cash from our subsidiaries for the purpose of meeting our debt service obligations, including our guarantee of payment of principal and interest on the Ventas Issuers’ senior notes and our primary obligation to pay principal and interest on our convertible notes. Certain of our real estate assets are also subject to mortgages.
The following summarizes our condensed consolidating information as of September 30, 2011 and December 31, 2010 and for the three and nine months ended September 30, 2011 and 2010:
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2011
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Assets
                                               
Net real estate investments
  $ 464     $ 3,388,426     $ 566,852     $ 12,461,886     $     $ 16,417,628  
Cash and cash equivalents
    2,252       24,898             30,332             57,482  
Escrow deposits and restricted cash
    1,961       25,901       7,131       49,790             84,783  
Deferred financing costs, net
    2,914       725       2,298       6,487             12,424  
Investment in and advances to affiliates
    8,441,898             1,728,685             (10,170,583 )      
Other assets
    67,190       196,204       8,134       361,925             633,453  
 
                                   
 
                                               
Total assets
  $ 8,516,679     $ 3,636,154     $ 2,313,100     $ 12,910,420     $ (10,170,583 )   $ 17,205,770  
 
                                   
 
                                               
Liabilities and equity
                                               
Liabilities:
                                               
Senior notes payable and other debt
  $ 229,363     $ 235,185     $ 2,240,589     $ 3,608,004     $     $ 6,313,141  
Intercompany loans
    (211,796 )     843,546       (670,085 )     38,335              
Accrued interest
    (218 )     744       40,093       25,366             65,985  
Accounts payable and other liabilities
    95,091       174,086       17,867       841,662             1,128,706  
Deferred income taxes
    274,852                               274,852  
 
                                   
Total liabilities
    387,292       1,253,561       1,628,464       4,513,367             7,782,684  
Redeemable OP unitholder interests
                      92,817             92,817  
Total equity
    8,129,387       2,382,593       684,636       8,304,236       (10,170,583 )     9,330,269  
 
                                   
 
                                               
Total liabilities and equity
  $ 8,516,679     $ 3,636,154     $ 2,313,100     $ 12,910,420     $ (10,170,583 )   $ 17,205,770  
 
                                   

 

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CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2010
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Assets
                                               
Net real estate investments
  $ 937     $ 3,244,243     $ 688,158     $ 1,510,776     $     $ 5,444,114  
Cash and cash equivalents
    1,083       15,659             5,070             21,812  
Escrow deposits and restricted cash
    76       19,786       9,169       9,909             38,940  
Deferred financing costs, net
    2,691       1,961       7,961       6,920             19,533  
Investment in and advances to affiliates
    1,414,170             1,028,721             (2,442,891 )      
Other assets
    75,794       119,773       8,057       29,998             233,622  
 
                                   
 
                                               
Total assets
  $ 1,494,751     $ 3,401,422     $ 1,742,066     $ 1,562,673     $ (2,442,891 )   $ 5,758,021  
 
                                   
 
                                               
Liabilities and equity
                                               
Liabilities:
                                               
Senior notes payable and other debt
  $ 225,644     $ 539,564     $ 1,301,089     $ 833,747     $     $ 2,900,044  
Intercompany loans
    (144,897 )     586,605       (434,454 )     (7,254 )            
Accrued interest
    (113 )     2,704       12,852       3,853             19,296  
Accounts payable and other liabilities
    41,355       103,444       15,712       46,632             207,143  
Deferred income taxes
    241,333                               241,333  
 
                                   
Total liabilities
    363,322       1,232,317       895,199       876,978             3,367,816  
Total equity
    1,131,429       2,169,105       846,867       685,695       (2,442,891 )     2,390,205  
 
                                   
 
                                               
Total liabilities and equity
  $ 1,494,751     $ 3,401,422     $ 1,742,066     $ 1,562,673     $ (2,442,891 )   $ 5,758,021  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended September 30, 2011
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Revenues:
                                               
Rental income
  $ 623     $ 55,453     $ 71,611     $ 142,190     $     $ 269,877  
Resident fees and services
          100,885             175,479             276,364  
Medical office building and other services revenues
          8,162             1,109             9,271  
Income from loans and investments
    1,124       428       103       8,417             10,072  
Equity earnings in affiliates
    52,119       258                   (52,377 )      
Interest and other income
    6       7       10       350             373  
 
                                   
Total revenues
    53,872       165,193       71,724       327,545       (52,377 )     565,957  
 
                                               
Expenses:
                                               
Interest
    392       14,241       21,952       37,171             73,756  
Depreciation and amortization
    440       34,908       8,795       116,884             161,027  
Property-level operating expenses
          78,415       115       130,631             209,161  
Medical office building services costs
          6,347                         6,347  
General, administrative and professional fees
    1,194       9,074       6,427       3,929             20,624  
Loss on extinguishment of debt
                8,685                   8,685  
Litigation proceeds, net
    (85,327 )                             (85,327 )
Merger-related expenses and deal costs
    47,309       674             21,367             69,350  
Other
    883       1,863             11,690             14,436  
 
                                   
Total expenses
    (35,109 )     145,522       45,974       321,672             478,059  
 
                                   
 
                                               
Income from continuing operations before gain from unconsolidated entities, income taxes and noncontrolling interest
    88,981       19,671       25,750       5,873       (52,377 )     87,898  
Gain from unconsolidated entities
                61       121             182  
Income tax benefit
    13,904                               13,904  
 
                                   
Net income
    102,885       19,671       25,811       5,994       (52,377 )     101,984  
Net loss attributable to noncontrolling interest, net of tax
                      (901 )           (901 )
 
                                   
Net income attributable to common stockholders
  $ 102,885     $ 19,671     $ 25,811     $ 6,895     $ (52,377 )   $ 102,885  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended September 30, 2010
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Revenues:
                                               
Rental income
  $ 607     $ 52,463     $ 70,534     $ 17,119     $     $ 140,723  
Resident fees and services
          65,252             47,930             113,182  
Medical office building and other services revenues
          6,711                         6,711  
Income from loans and investments
    1,406       755       1,853                   4,014  
Equity earnings in affiliates
    61,077       439                   (61,516 )      
Interest and other income
    18       4       21       (8 )           35  
 
                                   
Total revenues
    63,108       125,624       72,408       65,041       (61,516 )     264,665  
 
                                               
Expenses:
                                               
Interest
    820       18,386       13,261       13,052             45,519  
Depreciation and amortization
    412       28,889       9,296       13,507             52,104  
Property-level operating expenses
          46,908       134       34,965             82,007  
Medical office building services costs
          4,633                         4,633  
General, administrative and professional fees
    203       8,311       5,575       1,189             15,278  
Merger-related expenses and deal costs
    3,573       1,569                         5,142  
Other
    (477 )     60             (2 )           (419 )
 
                                   
Total expenses
    4,531       108,756       28,266       62,711             204,264  
 
                                   
 
                                               
Income before loss from unconsolidated entities, income taxes, discontinued operations and noncontrolling interest
    58,577       16,868       44,142       2,330       (61,516 )     60,401  
Loss from unconsolidated entities
                (392 )                 (392 )
Income tax expense
    (679 )     (978 )                       (1,657 )
 
                                   
Income from continuing operations
    57,898       15,890       43,750       2,330       (61,516 )     58,352  
Discontinued operations
          422       120                   542  
 
                                   
Net income
    57,898       16,312       43,870       2,330       (61,516 )     58,894  
Net income attributable to noncontrolling interest, net of tax
          352             644             996  
 
                                   
Net income attributable to common stockholders
  $ 57,898     $ 15,960     $ 43,870     $ 1,686     $ (61,516 )   $ 57,898  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended September 30, 2011
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Revenues:
                                               
Rental income
  $ 1,848     $ 165,454     $ 212,653     $ 176,648     $     $ 556,603  
Resident fees and services
          252,803             340,545             593,348  
Medical office building and other services revenues
          24,941             1,109             26,050  
Income from loans and investments
    5,070       2,495       8,566       8,417             24,548  
Equity earnings in affiliates
    160,275       1,102                   (161,377 )      
Interest and other income
    96       19       52       362             529  
 
                                   
Total revenues
    167,289       446,814       221,271       527,081       (161,377 )     1,201,078  
 
                                               
Expenses:
                                               
Interest
    (474 )     45,409       53,457       71,654             170,046  
Depreciation and amortization
    1,273       95,651       26,706       169,911             293,541  
Property-level operating expenses
          192,137       414       248,414             440,965  
Medical office building services costs
          19,837                         19,837  
General, administrative and professional fees
    (5,840 )     28,101       21,625       7,124             51,010  
Loss on extinguishment of debt
          16,526       8,685                   25,211  
Litigation proceeds, net
    (85,327 )                             (85,327 )
Merger-related expenses and deal costs
    108,509       1,730             21,367             131,606  
Other
    913       2,950             2,801             6,664  
 
                                   
Total expenses
    19,054       402,341       110,887       521,271             1,053,553  
 
                                   
 
                                               
Income from continuing operations before (loss) income from unconsolidated entities, income taxes and noncontrolling interest
    148,235       44,473       110,384       5,810       (161,377 )     147,525  
(Loss) income from unconsolidated entities
                (192 )     121             (71 )
Income tax benefit
    23,310                               23,310  
 
                                   
Net income
    171,545       44,473       110,192       5,931       (161,377 )     170,764  
Net income attributable to noncontrolling interest, net of tax
                      (781 )           (781 )
 
                                   
Net income attributable to common stockholders
  $ 171,545     $ 44,473     $ 110,192     $ 6,712     $ (161,377 )   $ 171,545  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended September 30, 2010
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
Revenues:
                                               
Rental income
  $ 1,802     $ 141,317     $ 209,879     $ 45,873     $     $ 398,871  
Resident fees and services
          190,801             140,734             331,535  
Medical office building and other services revenues
          6,711                         6,711  
Income from loans and investments
    4,247       1,635       5,454                   11,336  
Equity earnings in affiliates
    176,659       1,307                   (177,966 )      
Interest and other income
    310       40       63       7             420  
 
                                   
Total revenues
    183,018       341,811       215,396       186,614       (177,966 )     748,873  
 
                                               
Expenses:
                                               
Interest
    1,096       56,371       39,658       36,324             133,449  
Depreciation and amortization
    1,219       84,084       28,429       40,726             154,458  
Property-level operating expenses
          132,036       398       103,635             236,069  
Medical office building services costs
          4,633                         4,633  
General, administrative and professional fees
    323       16,870       15,414       3,212             35,819  
Loss on extinguishment of debt
          102       6,447                   6,549  
Merger-related expenses and deal costs
    10,041       1,617             10             11,668  
Other
    (435 )     31                         (404 )
 
                                   
Total expenses
    12,244       295,744       90,346       183,907             582,241  
 
                                   
 
                                               
Income before loss from unconsolidated entities, income taxes, discontinued operations and noncontrolling interest
    170,774       46,067       125,050       2,707       (177,966 )     166,632  
Loss from unconsolidated entities
                (392 )                 (392 )
Income tax expense
    (2,190 )     (162 )                       (2,352 )
 
                                   
Income from continuing operations
    168,584       45,905       124,658       2,707       (177,966 )     163,888  
Discontinued operations
          1,132       6,007                   7,139  
 
                                   
Net income
    168,584       47,037       130,665       2,707       (177,966 )     171,027  
Net income attributable to noncontrolling interest, net of tax
          1,134             1,309             2,443  
 
                                   
Net income attributable to common stockholders
  $ 168,584     $ 45,903     $ 130,665     $ 1,398     $ (177,966 )   $ 168,584  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2011
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
 
                                               
Net cash (used in) provided by operating activities
  $ (3,510 )   $ 107,282     $ 180,935     $ 159,194     $     $ 443,901  
 
                                               
Net cash (used in) provided by investing activities
    (431,727 )     89,296       (500,879 )     386             (842,924 )
 
                                               
Cash flows from financing activities:
                                               
Net change in borrowings under revolving credit facilities
                434,000                   434,000  
Proceeds from debt
                689,374       268,379             957,753  
Repayment of debt
          (328,691 )     (206,500 )     (359,852 )           (895,043 )
Net change in intercompany debt
    981,494       84,585       (1,208,212 )     142,133              
Payment of deferred financing costs
                (1,519 )     (379 )           (1,898 )
Issuance of common stock, net
    299,926                               299,926  
Cash distribution (to) from affiliates
    (491,099 )     56,767       612,898       (178,566 )            
Cash distribution to common stockholders
    (354,932 )                             (354,932 )
Cash distribution to redeemable OP unitholders
                      (4,038 )           (4,038 )
Contributions from noncontrolling interest
                      2             2  
Distributions to noncontrolling interest
                      (1,997 )           (1,997 )
Other
    1,017                               1,017  
 
                                   
Net cash provided by (used in) financing activities
    436,406       (187,339 )     320,041       (134,318 )           434,790  
 
                                   
Net increase in cash and cash equivalents
    1,169       9,239       97       25,262             35,767  
Effect of foreign currency translation on cash and cash equivalents
                (97 )                 (97 )
Cash and cash equivalents at beginning of period
    1,083       15,659             5,070             21,812  
 
                                   
Cash and cash equivalents at end of period
  $ 2,252     $ 24,898     $     $ 30,332     $     $ 57,482  
 
                                   

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2010
                                                 
            Wholly                            
            Owned             Non-              
            Subsidiary     Ventas     Guarantor     Consolidated        
    Ventas, Inc.     Guarantors     Issuers     Subsidiaries     Elimination     Consolidated  
    (In thousands)  
 
                                               
Net cash (used in) provided by operating activities
  $ (864 )   $ 118,174     $ 179,105     $ 49,704     $     $ 346,119  
 
                                               
Net cash used in investing activities
          (57,096 )     (207,509 )     (3,871 )           (268,476 )
 
                                               
Cash flows from financing activities:
                                               
Net change in borrowings under revolving credit facilities
          102,004       131,000                   233,004  
Proceeds from debt
                200,000       1,237             201,237  
Repayment of debt
          (144,739 )     (178,139 )     (8,500 )           (331,378 )
Net change in intercompany debt
    48,748       (59,452 )     10,704                    
Payment of deferred financing costs
          (46 )     (1,826 )                 (1,872 )
Cash distribution from (to) affiliates
    199,706       50,104       (216,290 )     (33,520 )            
Cash distribution to common stockholders
    (251,921 )                             (251,921 )
Contributions from noncontrolling interest
                      818             818  
Distributions to noncontrolling interest
                      (6,633 )           (6,633 )
Other
    5,426                               5,426  
 
                                   
Net cash provided by (used in) financing activities
    1,959       (52,129 )     (54,551 )     (46,598 )           (151,319 )
 
                                   
Net increase (decrease) in cash and cash equivalents
    1,095       8,949       (82,955 )     (765 )           (73,676 )
Effect of foreign currency translation on cash and cash equivalents
                69                   69  
Cash and cash equivalents at beginning of period
          7,864       82,886       16,647             107,397  
 
                                   
Cash and cash equivalents at end of period
  $ 1,095     $ 16,813     $     $ 15,882     $     $ 33,790  
 
                                   

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Ventas, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our or our tenants’, operators’, managers’ or borrowers’ expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, operating metrics, capital expenditures, competitive positions, acquisitions, investment opportunities, dispositions, merger integration, growth opportunities, expected lease income, continued qualification as a real estate investment trust (“REIT”), plans and objectives of management for future operations and statements that include words such as “anticipate,” “if,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “could,” “should,” “will” and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and security holders must recognize that actual results may differ from our expectations. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.
Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the Securities and Exchange Commission (the “SEC”). These factors include without limitation:
    The ability and willingness of our tenants, operators, borrowers, managers and other third parties to meet and/or perform their obligations under their respective contractual arrangements with us, including, in some cases, their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;
    The ability of our tenants, operators, borrowers and managers to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities and other indebtedness;
    Our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions or investments, including the Nationwide Health Properties, Inc. (“NHP”) transaction and those in different asset types and outside the United States;
    Macroeconomic conditions such as a disruption of or lack of access to the capital markets, changes in the debt rating on U.S. government securities, default and/or delay in payment by the United States of its obligations, and changes in the federal budget resulting in the reduction or nonpayment of Medicare or Medicaid reimbursement rates;
    The nature and extent of future competition;
    The extent of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;
    Increases in our cost of borrowing as a result of changes in interest rates and other factors;
    The ability of our operators and managers, as applicable, to deliver high quality services, to attract and retain qualified personnel and to attract residents and patients;
    Changes in general economic conditions and/or economic conditions in the markets in which we may, from time to time, compete, and the effect of those changes on our revenues and our ability to access the capital markets or other sources of funds;
    Our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;
    Our ability and willingness to maintain our qualification as a REIT due to economic, market, legal, tax or other considerations;

 

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    Final determination of our taxable net income for the year ending December 31, 2011;
    The ability and willingness of our tenants to renew their leases with us upon expiration of the leases and our ability to reposition our properties on the same or better terms in the event such leases expire and are not renewed by our tenants or in the event we exercise our right to replace an existing tenant upon a default;
    Risks associated with our senior living operating portfolio, such as factors causing volatility in our operating income and earnings generated by our properties, including without limitation national and regional economic conditions, costs of materials, energy, labor and services, employee benefit costs, insurance costs and professional and general liability claims, and the timely delivery of accurate property-level financial results for those properties;
    The movement of U.S. and Canadian exchange rates;
    Year-over-year changes in the Consumer Price Index and the effect of those changes on the rent escalators, including the rent escalator for Master Lease 2 with Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”), and our earnings;
    Our ability and the ability of our tenants, operators, borrowers and managers to obtain and maintain adequate liability and other insurance from reputable and financially stable providers;
    The impact of increased operating costs and uninsured professional liability claims on the liquidity, financial condition and results of operations of our tenants, operators, borrowers and managers and the ability of our tenants, operators, borrowers and managers to accurately estimate the magnitude of those claims;
    Risks associated with our medical office building (“MOB”) portfolio and operations, including our ability to successfully design, develop and manage MOBs, to accurately estimate our costs in fixed fee-for-service projects and to retain key personnel;
    The ability of the hospitals on or near whose campuses our MOBs are located and their affiliated health systems to remain competitive and financially viable and to attract physicians and physician groups;
    Our ability to maintain or expand our relationships with our existing and future hospital and health system clients;
    Risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision-making authority and our reliance on our joint venture partners’ financial condition;
    The impact of market or issuer events on the liquidity or value of our investments in marketable securities; and
    The impact of any financial, accounting, legal or regulatory issues or litigation that may affect us or our major tenants, operators and managers.
Many of these factors are beyond our control and the control of our management.
Kindred, Brookdale Senior Living, Sunrise and Atria Information
Each of Kindred, Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”) and Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Kindred, Brookdale Senior Living or Sunrise, as the case may be, with the SEC or other publicly available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either through an independent investigation or by reviewing Kindred’s, Brookdale Senior Living’s or Sunrise’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s filings with the SEC can be found at the SEC’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior Living’s and Sunrise’s publicly available filings from the SEC.

 

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Atria Senior Living, Inc. (“Atria”) is not subject to the reporting requirements of the SEC. The information related to Atria contained or referred to in this Quarterly Report on Form 10-Q has been provided to us by Atria. We have not verified this information through an independent investigation. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate.
Company Overview
We are a REIT with a geographically diverse portfolio of seniors housing and healthcare properties in the United States and Canada. As of September 30, 2011, our portfolio consisted of 1,361 properties: 673 seniors housing communities, 398 skilled nursing facilities, 47 hospitals and 243 MOBs and other properties in 46 states, the District of Columbia and two Canadian provinces. We are a constituent member of the S&P 500® index, a leading indicator of the large cap U.S. equities market, with our headquarters located in Chicago, Illinois.
Our primary business consists of acquiring and owning seniors housing and healthcare properties and leasing those properties to unaffiliated tenants or operating those properties through independent third-party managers. Through our Lillibridge Healthcare Services, Inc. (“Lillibridge”) subsidiary and our ownership interest in PMB Real Estate Services LLC (“PMBRES”), which we acquired in July 2011 in connection with the NHP acquisition, we also provide management, leasing, marketing, facility development and advisory services to highly rated hospitals and health systems throughout the United States. In addition, from time to time, we make real estate loan and other investments relating to seniors housing and healthcare companies or properties.
As of September 30, 2011, we leased 927 of our properties (excluding MOBs) to healthcare operating companies under “triple-net” or “absolute-net” leases that obligate the tenants to pay all property-related expenses (including maintenance, utilities, repairs, taxes, insurance and capital expenditures), and we engaged independent third parties, such as Sunrise and Atria, to manage 199 of our seniors housing communities pursuant to long-term management agreements.
Our business strategy is comprised of three principal objectives: (1) generating consistent, reliable and growing cash flows; (2) maintaining a well-diversified portfolio; and (3) preserving our investment grade balance sheet and liquidity.
Access to external capital is critical to the success of our strategy as it impacts our ability to meet our existing commitments, including repaying maturing indebtedness, and to make future investments. Our access to and cost of capital depend on various factors, including general market conditions, interest rates, credit ratings on our securities, perception of our potential future earnings and cash distributions, and the market price of our common stock. Generally, we attempt to match the long-term duration of most of our investments with long-term fixed rate financing. At September 30, 2011, only 18.6% of our consolidated debt was variable rate debt.
Operating Highlights and Key Performance Trends
2011 Highlights
    Our Board of Directors declared the first and second quarterly installments of our 2011 dividend in the amount of $0.575 per share, which represents a 7.5% increase over our 2010 quarterly dividend. The first quarterly installment of the 2011 dividend was paid in cash on March 31, 2011 to stockholders of record on March 11, 2011. The second quarterly installment of the 2011 dividend was paid in cash on June 30, 2011 to stockholders of record on June 10, 2011. In connection with the NHP acquisition, on June 20, 2011, our Board of Directors declared a prorated third quarter dividend on our common stock in the amount of $0.1264 per share, which was paid in cash on July 12, 2011 to stockholders of record at the close of business on June 30, 2011. On August 19, 2011, our Board of Directors declared another prorated third quarter dividend on our common stock in the amount of $0.4486 per share, which was paid in cash on September 30, 2011 to stockholders of record on September 13, 2011. Together, these two prorated amounts equate to our regular quarterly dividend of $0.575 per share and constitute the third quarterly installment of our 2011 dividend.
    In February 2011, we completed the sale of 5,563,000 shares of our common stock in an underwritten public offering pursuant to our existing shelf registration statement. We received $300.0 million in aggregate proceeds from the sale, which we used to repay existing mortgage debt and for working capital and other general corporate purposes.

 

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    In February 2011, we repaid in full mortgage loans outstanding in the aggregate principal amount of $307.2 million and recognized a loss on extinguishment of debt of $16.5 million in connection with this repayment in the first quarter of 2011.
    In April 2011, we received proceeds of $112.4 million for repayment of a first mortgage loan and recognized a gain of $3.3 million (included in income from loans and investments on our Consolidated Statements of Income) in connection with this repayment in the second quarter of 2011.
    In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750% senior notes due 2021, at a public offering price equal to 99.132% of par for total proceeds of $693.9 million, before the underwriting discount and expenses. We used a portion of the proceeds from the issuance to fund a senior unsecured term loan to NHP in the aggregate principal amount of $600.0 million, bearing interest at a fixed rate of 5.0% per annum and maturing in 2021. As of our acquisition date of NHP, this investment and related interest were eliminated in consolidation.
    In May 2011, we acquired substantially all of the real estate assets and working capital of privately-owned Atria Senior Living Group, Inc. (together with its affiliates, “Atria Senior Living”). See “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
    Effective May 13, 2011, Matthew J. Lustig, Chief Executive Officer and Managing Principal of Lazard Real Estate Partners LLC and Atria Chairman, was appointed to our Board of Directors.
    On July 1, 2011, we acquired NHP in a stock-for-stock transaction. At the time of acquisition, each outstanding share of NHP common stock (other than shares owned by us or any of our subsidiaries or any wholly owned subsidiary of NHP) was converted into the right to receive 0.7866 shares of our common stock, with cash paid in lieu of fractional shares. See “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
    On July 1, 2011, following approval by our stockholders, we amended our Amended and Restated Certificate of Incorporation, as previously amended, to increase the number of authorized shares of our capital stock to 610,000,000, comprised of 600,000,000 shares of common stock, par value $0.25 per share, and 10,000,000 shares of preferred stock, par value $1.00 per share.
    Also on July 1, 2011, we amended our Fourth Amended and Restated By-laws to increase the maximum number of directors allowed to serve on the Board of Directors at any one time from eleven to thirteen and appointed three former NHP directors to our Board: Douglas M. Pasquale, Richard I. Gilchrist and Robert D. Paulson.
    In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes. As a result, we paid a total of $206.5 million, plus accrued and unpaid interest, on the redemption date and recognized a loss on extinguishment of debt of $8.7 million during the third quarter of 2011.
    On July 15, 2011, we repaid in full, at par, $339.0 million principal amount then outstanding of NHP’s 6.50% senior notes due 2011 upon maturity.
    On August 22, 2011, the United States District Court for the Western District of Kentucky ruled that HCP, Inc. (“HCP”) could not further delay enforcement of our $101.6 million compensatory damages award. On August 23, 2011, HCP paid us $102.8 million for the judgment plus certain costs and interest. For the three and nine months ended September 30, 2011, we recorded approximately $85 million in net income as a result of this litigation, after accrual of certain unpaid fees and the contingent fee for our outside legal counsel and payment of a $3 million donation to the Ventas Charitable Foundation, which supports worthwhile causes important to our customers, our employees and our communities. See “Note 10-Litigation” of the Notes to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.

 

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    On October 18, 2011, we repaid all borrowings outstanding and terminated the commitments under our unsecured revolving credit facilities and entered into a new $2.0 billion unsecured revolving credit facility. The aggregate borrowing capacity under our new unsecured revolving credit facility may be increased, at our option subject to the satisfaction of certain conditions, to up to $2.5 billion. Borrowings under our new unsecured revolving credit facility mature on October 16, 2015, but may be extended, at our option subject to the satisfaction of certain conditions, for an additional period of one year. See “Note 8-Senior Notes Payable and Other Debt” of the Notes to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
    In October 2011, we invested approximately $150.3 million, including the assumption of $37.7 million in debt, in two MOBs and two seniors housing communities (one of which is being managed by Atria).
    In connection with the acquisition of NHP, we gained the benefit of additional liquidity from an $800 million term loan previously extended to NHP, priced at LIBOR plus 150 basis points. On November 1, 2011, we repaid all amounts outstanding under the term loan. The term loan matures in June 2012 and currently has $550 million of available borrowing capacity.
Concentration Risk
We use concentration ratios to understand the potential risks of economic downturns or other adverse events affecting our various asset types, geographic locations or tenants, operators and managers. We evaluate our concentration risk in terms of investment mix and operations mix. Investment mix measures the portion of our investments that consists of a certain asset type or that is operated or managed by a particular tenant, operator or manager. Operations mix measures the portion of our operating results that is attributed to a certain tenant or operator, geographic location or business model. The following tables reflect our concentration risk as of the dates and for the periods presented:
                 
    September 30, 2011     December 31, 2010  
 
               
Investment mix by asset type1:
               
Seniors housing communities
    66.2 %     70.2 %
Skilled nursing facilities
    16.7 %     11.7 %
MOBs
    12.7 %     10.8 %
Hospitals
    2.6 %     5.0 %
Loans receivable, net
    1.7 %     2.2 %
Other properties
    0.1 %     0.1 %
 
               
Investment mix by tenant, operator and manager1:
               
Atria
    18.7 %     N/A  
Sunrise
    14.4 %     37.9 %
Brookdale Senior Living
    13.0 %     19.7 %
Kindred
    5.0 %     13.1 %
All other
    48.9 %     29.3 %
1   Ratios are based on the gross book value of real estate investments as of each reporting date.

 

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    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Operations mix by tenant and operator and business model:
                               
Revenues1:
                               
Senior living operations2
    49.3 %     42.7 %     49.4 %     44.1 %
Kindred
    11.3 %     23.5 %     15.8 %     24.6 %
Brookdale Senior Living
    8.1 %     11.3 %     8.7 %     12.1 %
All others
    31.3 %     22.5 %     26.1 %     19.2 %
 
                               
Adjusted EBITDA3:
                               
Senior living operations2
    23.5 %     22.7 %     25.3 %     22.3 %
Kindred
    17.4 %     34.2 %     24.3 %     35.3 %
Brookdale Senior Living
    12.8 %     16.4 %     12.2 %     17.3 %
All others
    46.3 %     26.7 %     38.2 %     25.1 %
 
                               
NOI4:
                               
Senior living operations2
    24.8 %     21.9 %     25.6 %     21.9 %
Kindred
    18.3 %     34.8 %     25.6 %     36.2 %
Brookdale Senior Living
    13.1 %     16.8 %     14.1 %     17.8 %
All others
    43.8 %     26.5 %     34.7 %     24.1 %
 
                               
Operations mix by geographic location5:
                               
California
    14.4 %     11.6 %     13.4 %     12.2 %
New York
    9.9 %     3.4 %     8.1 %     3.5 %
Texas
    6.1 %     2.7 %     4.4 %     2.7 %
Illinois
    5.3 %     10.1 %     7.0 %     10.3 %
Massachusetts
    5.0 %     4.8 %     5.0 %     5.1 %
All others
    59.3 %     67.4 %     62.1 %     66.2 %
     
1   Total revenues includes medical office building and other services revenue, revenue from loans and investments and interest and other income. Revenues from properties sold or held for sale as of the reporting date are included in this presentation.
 
2   Amounts attributable to senior living operations managed by Atria for the nine months ended September 30, 2011 relate to the period from May 12, 2011, the date of the Atria Senior Living acquisition, through September 30, 2011.
 
3   “Adjusted EBITDA” is defined as earnings before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding net litigation proceeds, merger-related expenses and deal costs, gains or losses on sales of real property assets and changes in the fair value of financial instruments (including amounts in discontinued operations).
 
4   “NOI” represents net operating income, which is defined as total revenues, excluding interest and other income, less property-level operating expenses and medical office building services costs (including amounts in discontinued operations).
 
5   Ratios are based on total revenues for each period presented. Total revenues includes medical office building and other services revenue, revenue from loans and investments and interest and other income. Revenues from properties sold as of the reporting date are excluded from this presentation.
See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure and reconciliations of Adjusted EBITDA and NOI to our net income or total revenues, as applicable, as computed in accordance with U.S. generally accepted accounting principles (“GAAP”).

 

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Recent Developments Regarding Government Regulation
Medicare Reimbursement: Long-Term Acute Care Hospitals
On August 1, 2011, the Centers for Medicare & Medicaid Services (“CMS”) put on public display for August 18, 2011 publication its final rule updating the prospective payment system for long-term acute care hospitals (LTAC PPS) for the 2012 fiscal year (October 1, 2011 through September 30, 2012). Under the final rule, the LTAC PPS standard federal payment rate will increase by 1.8% in fiscal year 2012, reflecting a 2.9% increase in the market basket index, less a 1.0% productivity adjustment and an additional 0.1% negative adjustment mandated by the Patient Protection and Affordable Care Act and its reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). As a result, CMS estimates that net payments to long-term acute care hospitals in fiscal year 2012 under the final rule will increase relative to fiscal year 2011 by approximately $126 million, or 2.5%, due to area wage adjustments, as well as increases in high-cost and short-stay outlier payments and other policies adopted in the final rule.
We are currently analyzing the financial implications of the final rule issued by CMS on the operators of our long-term acute care hospitals. We cannot assure you that this rule or future updates to LTAC PPS or Medicare reimbursement for long-term acute care hospitals will not materially adversely affect our operators, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”).
Medicare Reimbursement: Skilled Nursing Facilities
On July 29, 2011, CMS put on public display for August 8, 2011 publication its final rule updating the prospective payment system for skilled nursing facilities (SNF PPS) for the 2012 fiscal year (October 1, 2011 through September 30, 2012). Under the final rule, the update to the SNF PPS standard federal payment rate includes a 2.7% increase in the market basket index, less a1.0% productivity adjustment mandated by the Affordable Care Act and a 12.6% “parity adjustment recalibration” to account for estimated overpayments under the RUG-IV classification model, resulting in a net 11.1% decrease in the SNF PPS standard federal payment rate for fiscal year 2012. The final rule also requires group therapy to be treated in the same manner as concurrent therapy (i.e., allocating therapy minutes among the group’s patients, rather than counting the same minutes for each patient), which may additionally affect net payments to skilled nursing facilities. CMS estimates that net payments to skilled nursing facilities as a result of the final rule will decrease by approximately $3.87 billion in fiscal year 2012. However, CMS has stated that “Even with the recalibration, the FY 2012 payment rates will be 3.4 percent higher than the rates established for FY 2010, the period immediately preceding the unintended spike in payment levels.”
We are currently analyzing the financial implications of the final rule issued by CMS on the operators of our skilled nursing facilities. We cannot assure you that this rule or future updates to SNF PPS or Medicare reimbursement for skilled nursing facilities will not materially adversely affect our operators, which, in turn, could have a Material Adverse Effect on us.
Debt Ceiling and Deficit Reduction Legislation
On August 2, 2011, President Obama and the U.S. Congress enacted legislation to lift the federal government’s borrowing authority (the so-called “debt ceiling”) and reduce the federal government’s projected operating deficit. To implement this legislation, President Obama and members of the U.S. Congress have proposed various spending cuts and tax reform initiatives, some of which could result in changes (including substantial reductions in funding) to Medicare, Medicaid or Medicare Advantage Plans. Under the agreement reached to allow the federal government to raise the debt ceiling in August, a twelve-member, bipartisan committee has been given a deadline of November 23, 2011 to develop recommendations for reducing the federal budget deficit by a total of at least $1.2 trillion over ten years. If the committee cannot agree on a plan, or if the U.S. Congress does not enact the committee’s recommendations by December 23, 2011, $1.2 trillion in automatic spending cuts, including potential reductions in Medicare provider payments, could take effect beginning in January 2013. These measures and any future federal legislation relating to the debt ceiling or deficit reduction could have a material adverse effect on our operators’ liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and which, in turn, could have a Material Adverse Effect on us.

 

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Medicaid Reimbursement: Skilled Nursing Facilities
In an effort to address their own budget shortfalls, many state legislatures have proposed or enacted widespread changes to their Medicaid programs that are anticipated to reduce future payments to healthcare providers, including skilled nursing facility operators. At this time, we cannot predict the impact such changes will have on our skilled nursing facility operators, nor can we predict whether significant Medicaid rate freezes, cuts or other program changes will be adopted by other states in the future. Severe and widespread rate cuts or freezes could adversely affect our skilled nursing facility operators’ ability to satisfy their obligations to us and, in turn, could have a Material Adverse Effect on us.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”). GAAP requires us to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and on various other assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, a different accounting treatment may have been applied, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. In addition to the policies outlined below, please refer to our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011, for further information regarding the critical accounting policies that affect our more significant estimates and assumptions used in the preparation of our Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Business Combinations
We account for acquisitions using the acquisition method and allocate the cost of the properties acquired among tangible and recognized intangible assets and liabilities based upon their estimated fair values as of the acquisition date. Recognized intangibles primarily include the value of in-place leases, acquired lease contracts, tenant and customer relationships, trade names/trademarks and goodwill. We do not amortize goodwill, which is included in other assets on our Consolidated Balance Sheets and represents the excess of the purchase price paid over the fair value of the net assets of the acquired business.
Our method for allocating the purchase price paid to acquire investments in real estate requires us to make subjective assessments for determining fair value of the assets acquired and liabilities assumed. This includes determining the value of the buildings and improvements, land and improvements, ground leases, tenant improvements, in-place leases, above and/or below market leases and any debt assumed. These estimates require significant judgment and in some cases involve complex calculations. These allocation assessments directly impact our results of operations, as amounts allocated to certain assets and liabilities have different depreciation or amortization lives. In addition, we amortize the value assigned to above and/or below market leases as a component of revenue, unlike in-place leases and other intangibles, which we include in depreciation and amortization in our Consolidated Statements of Income.
We estimate the fair value of buildings acquired on an as-if-vacant basis and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon the replacement cost and depreciate such value over the assets’ estimated remaining useful lives. We determine the value of land by considering the sales prices of similar properties in recent transactions or based on (i) internal analyses of recently acquired and existing comparable properties within our portfolio or (ii) real estate tax assessed values in relation to the total value of the asset. The fair value of acquired lease intangibles, if any, reflects (i) the estimated value of any above and/or below market leases, determined by discounting the difference between the estimated market rent and the in-place lease rent, the resulting intangible asset or liability of which is amortized to revenue over the remaining life of the associated lease plus any bargain renewal periods, and (ii) the estimated value of in-place leases related to the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, and an estimated value of the absorption period to reflect the value of the rent and recovery costs foregone during a reasonable lease-up period, as if the acquired space was vacant, which is amortized to amortization expense over the remaining life of the associated lease. We estimate the fair value of tenant or other customer relationships acquired, if any, by considering the nature and extent of existing business relationships with the tenant or customer, growth prospects for developing new business with the tenant or customer, the tenant’s credit quality, expectations of lease renewals with the tenant, and the potential for significant, additional future leasing arrangements with the tenant and amortize that value over the expected life of the associated arrangements or leases, including the remaining terms of the related leases and any expected renewal periods. We estimate the fair value of trade names/trademarks using a royalty rate methodology and amortize the value over the estimated useful life of the trade name/trademark.

 

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In connection with a business combination, we may assume the rights and obligations under certain lease agreements pursuant to which we become the lessee of a given property. We assume the lease classification previously determined by the prior lessee absent a modification in the assumed lease agreement. In connection with our recent acquisitions, all capital leases acquired or assumed contain bargain purchase options that we intend to exercise. Therefore, we recognized an asset based on the acquisition date fair value of the underlying property and a liability based on the acquisition date fair value of the capital lease obligation. Such assets recognized under capital leases that contain bargain purchase options are depreciated over the asset’s useful life. We assess assumed operating leases, including ground leases, to determine if the lease terms are favorable or unfavorable given current market conditions on the acquisition date. To the extent the lease arrangement is favorable or unfavorable relative to market conditions on the acquisition date, we recognize an intangible asset or liability at fair value. The recognized asset or liability (excluding purchase option intangibles) for these leases is amortized to interest or rental expense over the applicable lease term and is included in our Consolidated Statements of Income. All lease-related intangible assets are included within acquired lease intangibles and all lease-related intangible liabilities are included within accounts payable and other liabilities on our Consolidated Balance Sheets.
For loans receivable acquired in connection with a business combination, we determine fair value by discounting the estimated future cash flows using current interest rates at which similar loans with the same maturities and same terms would be made to borrowers with similar credit ratings. The estimated future cash flows reflect our judgment regarding the uncertainty of those cash flows and, therefore, we do not establish a valuation allowance at the acquisition date. The difference between the acquisition date fair value and the total expected cash flows is recognized as interest income using an effective interest method over the life of the applicable loan. Subsequent to the acquisition date, we evaluate changes regarding the uncertainty of future cash flows and the need for a valuation allowance.
We calculate the fair value of long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which we approximate based on the rate we would expect to incur to replace the instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
We record a liability for contingent consideration at fair value as of the acquisition date (which is included in accounts payable and other liabilities on our Consolidated Balance Sheets) and reassess the fair value at the end of each reporting period, with any change being recognized in earnings. Increases or decreases in the fair value of the contingent consideration can result from changes in discount periods, discount rates and probabilities that contingencies will be met.
Fair Value
We follow FASB guidance that defines fair value and provides direction for measuring fair value and making the necessary related disclosures. The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).
Level one inputs utilize unadjusted quoted prices for identical assets or liabilities in active markets that the reporting entity has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are directly or indirectly observable for the asset or liability. Level two inputs may include quoted prices for similar assets and liabilities in active markets, as well as other inputs for the asset or liability, such as interest rates, foreign exchange rates and yield curves, that are observable at commonly quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based on the reporting entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. If an entity determines there has been a significant decrease in the volume and level of activity for an asset or liability relative to the normal market activity for such asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

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Recently Issued or Adopted Accounting Standards
In September 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”), which permits companies to first assess qualitative factors to determine the likelihood that the fair value of a reporting unit is less than its carrying amount, before performing the current two-step analysis. If a company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company must proceed with the two-step approach to evaluating impairment. The provisions of ASU 2011-08 will be effective for us beginning with the first quarter of 2012, but we do not expect ASU 2011-08 to have a significant impact on our Consolidated Financial Statements. Also, on January 1, 2011, we adopted ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 states that if a reporting unit has a carrying amount that is equal to or less than zero and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists, Step 2 of the goodwill impairment test must be performed. The adoption of ASU 2010-28 did not impact our Consolidated Financial Statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends current guidance found in ASC Topic 220, Comprehensive Income. ASU 2011-05 requires entities to present comprehensive income in either: (i) one continuous financial statement or (ii) two separate but consecutive statements that display net income and the components of other comprehensive income. Totals and individual components of both net income and other comprehensive income must be included in either presentation. The provisions of ASU 2011-05 will be effective for us beginning with the first quarter of 2012.
On January 1, 2011, we adopted ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), affecting public entities who enter into business combinations that are material on an individual or aggregate basis. ASU 2010-29 specifies that a public entity presenting comparative financial statements should disclose revenues and earnings of the combined entity as though the business combination(s) that occurred during the year had occurred at the beginning of the prior annual reporting period when preparing the pro forma financial information for both the current and prior reporting periods. This guidance, which is effective for business combinations consummated in reporting periods beginning after December 15, 2010, also requires that pro forma disclosures be accompanied by a narrative description regarding the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in reported pro forma revenues and earnings. We have presented supplementary pro forma information related to our acquisition of substantially all of the real estate assets and working capital of Atria Senior Living in May 2011 and our acquisition of NHP in July 2011 in “Note 4—Acquisitions of Real Estate Property” of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which expands required disclosures related to an entity’s fair value measurements. Certain provisions of ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and we adopted those provisions as of January 1, 2010. The remaining provisions, which are effective for interim and annual reporting periods beginning after December 15, 2010, require additional disclosures related to purchases, sales, issuances and settlements in an entity’s reconciliation of recurring level three investments. We adopted those provisions of ASU 2010-06 as of January 1, 2011. The adoption of ASU 2010-06 did not impact our Consolidated Financial Statements.
Results of Operations
As of September 30, 2011, we operated through three reportable business segments: triple-net leased properties, senior living operations and MOB operations. Our triple-net leased properties segment consists of acquiring and owning seniors housing and healthcare properties in the United States and leasing those properties to healthcare operating companies under “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our senior living operations segment consists of investments in seniors housing communities located in the United States and Canada for which we engage independent third parties, such as Sunrise and Atria, to manage the operations. Our MOB operations segment primarily consists of acquiring, owning, developing, leasing and managing MOBs. Information provided for “all other” includes revenues such as income from loans and investments and other miscellaneous income and various corporate-level expenses not directly attributable to our three reportable business segments. Assets included in all other consist primarily of corporate assets, including cash, restricted cash, deferred financing costs, loans receivable and miscellaneous accounts receivable.

 

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Three Months Ended September 30, 2011 and 2010
The table below shows our results of operations for the three months ended September 30, 2011 and 2010 and the effect on our income of changes in those results from period to period.
                                 
    For the Three Months     Increase (Decrease)  
    Ended September 30,     to Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI:
                               
Triple-Net Leased Properties
  $ 212,588     $ 117,906     $ 94,682       80.3 %
Senior Living Operations
    87,508       39,116       48,392       > 100  
MOB Operations
    39,908       16,954       22,954       > 100  
All Other
    10,072       4,014       6,058       > 100  
 
                         
Total segment NOI
    350,076       177,990       172,086       96.7  
 
                               
Interest and other income
    373       35       338       > 100  
Interest expense
    (73,756 )     (45,519 )     (28,237 )     (62.0 )
Depreciation and amortization
    (161,027 )     (52,104 )     (108,923 )     ( > 100 )
General, administrative and professional fees
    (20,624 )     (15,278 )     (5,346 )     (35.0 )
Loss on extinguishment of debt
    (8,685 )           (8,685 )   nm  
Litigation proceeds, net
    85,327             85,327     nm  
Merger-related expenses and deal costs
    (69,350 )     (5,142 )     (64,208 )     ( > 100 )
Other
    (14,436 )     419       (14,855 )     ( > 100 )
 
                         
Income before income (loss) from unconsolidated entities, income taxes, discontinued operations and noncontrolling interest
    87,898       60,401       27,497       45.5  
Income (loss) from unconsolidated entities
    182       (392 )     574       > 100  
Income tax benefit (expense)
    13,904       (1,657 )     15,561       > 100  
 
                         
Income from continuing operations
    101,984       58,352       43,632       74.8  
Discontinued operations
          542       (542 )   nm  
 
                         
Net income
    101,984       58,894       43,090       73.2  
Net (loss) income attributable to noncontrolling interest, net of tax
    (901 )     996       1,897       > 100  
 
                         
 
                               
Net income attributable to common stockholders
  $ 102,885     $ 57,898     $ 44,987       77.7 %
 
                         
nm — not meaningful
Segment NOI — Triple-Net Leased Properties
NOI for our triple-net leased properties reportable segment consists of rental income earned from these assets and other services revenue. We incur no direct operating expenses for this segment.
The increase in our triple-net leased properties reportable segment NOI for the three months ended September 30, 2011 over the same period in 2010 is attributed primarily to the properties we acquired in the NHP acquisition, $1.6 million of additional rent resulting from the annual escalators in the rent paid under our four master lease agreements with Kindred (the “Kindred Master Leases”) effective May 1, 2011, other services revenue directly attributable to the properties acquired in the NHP acquisition ($1.1 million), and various escalations in the rent paid on our other existing triple-net leased properties.

 

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Revenues related to our triple-net leased properties consist of fixed rental amounts (subject to annual escalations) received directly from our tenants based on the terms of the applicable leases and generally do not depend on the operating performance of our properties. Accordingly, occupancy information is relevant to the profitability of our tenants’ operations but does not directly impact our revenues or financial results. Average occupancy rates related to triple-net leased properties we owned at September 30, 2011, for the second quarter of 2011, which is the most recent information available to us from our tenants, are shown below.
                 
    Number of     Average Occupancy  
    Properties at     For the Three Months  
    September 30, 2011     Ended June 30, 2011  
 
               
Seniors Housing Communities
    454       85.7 %
Skilled Nursing Facilities
    384       82.4 %
Hospitals
    47       58.1 %
Segment NOI — Senior Living Operations
A summary of our senior living operations reportable segment NOI is as follows:
                                 
    For the Three Months     Increase (Decrease)  
    Ended September 30,     to Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI — Senior Living Operations:
                               
Total revenues
  $ 276,364     $ 113,182     $ 163,182       > 100 %
Less:
                               
Property-level operating expenses
    (188,856 )     (74,066 )     (114,790 )     ( > 100 )
 
                         
Segment NOI
  $ 87,508     $ 39,116     $ 48,392       > 100 %
 
                         
Revenues related to our senior living operations reportable segment are resident fees and services, which include all amounts earned from residents at our seniors housing communities, such as rental fees related to resident leases, extended health care fees and other ancillary service income. The increase in our senior living operations reportable segment revenues for the three months ended September 30, 2011 over the same period in 2010 is attributed primarily to the properties we acquired in the Atria Senior Living acquisition, an increase in average daily rates and a decrease in the average Canadian dollar exchange rate. Average occupancy rates related to our senior living operations reportable segment during the three months ended September 30, 2011 and 2010 were as follows:
                                 
                    Average Occupancy  
    Number of Properties     For the Three Months  
    at September 30,     Ended September 30,  
    2011     2010     2011     2010  
Stabilized Communities
    192       80       88.9 %     89.4 %
Lease-Up Communities
    7       2       74.7 %     78.1 %
 
                           
Total
    199       82       88.4 %     88.9 %
 
                           
 
                               
Same-Store Stabilized Communities
    80       80       90.3 %     89.4 %
Property-level operating expenses related to our senior living operations reportable segment include labor, food, utility, marketing, management and other property operating costs. Property-level operating expenses increased for the three months ended September 30, 2011 over the same period in 2010 primarily due to the properties we acquired in the Atria Senior Living acquisition and a decrease in the average Canadian dollar exchange rate, partially offset by a decrease in the management fees related to our seniors housing communities managed by Sunrise.

 

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Segment NOI — MOB Operations
A summary of our MOB operations reportable segment NOI is as follows:
                                 
    For the Three Months     Increase (Decrease)  
    Ended September 30,     to Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI — MOB Operations:
                               
Rental income
  $ 58,398     $ 22,817     $ 35,581       > 100 %
Medical office building services revenue
    8,162       6,711       1,451       21.6  
 
                         
Total revenues
    66,560       29,528       37,032       > 100  
Less:
                               
Property-level operating expenses
    (20,305 )     (7,941 )     (12,364 )     ( > 100 )
Medical office building services costs
    (6,347 )     (4,633 )     (1,714 )     (37.0 )
 
                         
Segment NOI
  $ 39,908     $ 16,954     $ 22,954       > 100 %
 
                         
nm — not meaningful
MOB operations reportable segment revenues and property-level operating expenses both increased for the three months ended September 30, 2011 over the same period in 2010 primarily due to the additional MOBs we acquired in the NHP acquisition. Occupancy rates related to our MOB operations reportable segment at September 30, 2011 and 2010 were as follows:
                                 
    Number of Properties        
    at September 30,     Occupancy at September 30,  
    2011     2010     2011     2010  
Stabilized MOBs
    169       57       91.6 %     94.4 %
Non-Stabilized MOBs
    8       7       73.6 %     73.8 %
 
                           
Total
    177       64       89.8 %     90.4 %
 
                           
 
                               
Same-Store Stabilized MOBs
    57       57       93.5 %     94.4 %
Medical office building services revenue and costs both increased for the three months ended September 30, 2011 over the same period in 2010 due to increased construction activity during 2011.
Segment NOI — All Other
All other NOI for the three months ended September 30, 2011 and 2010 consists solely of income from loans and investments. Income from loans and investments increased for the three months ended September 30, 2011 over the same period in 2010 due primarily to the loans receivable we acquired in the NHP acquisition, partially offset by decreased interest income related to loans receivable repayments we received subsequent to September 30, 2010.
Interest Expense
Total interest expense, including interest allocated to discontinued operations of $0 million and $0.2 million for the three months ended September 30, 2011 and 2010, respectively, increased $28.0 million for the three months ended September 30, 2011 over the same period in 2010. This difference is attributed primarily to a $49.5 million increase in interest due to higher loan balances and $2.2 million of interest related to capital leases due to acquisition activity, partially offset by a $25.1 million decrease in interest due to lower effective interest rates. Our effective interest rate, excluding activity related to our capital leases, was 4.5% for the three months ended September 30, 2011, compared to 6.3% for the same period in 2010. A decrease in the average Canadian dollar exchange rate had an unfavorable impact on interest expense of $0.1 million for the three months ended September 30, 2011, compared to the same period in 2010.

 

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Depreciation and Amortization
Depreciation and amortization increased $108.9 million for the three months ended September 30, 2011 over the same period in 2010 due primarily to the properties we acquired in the Atria Senior Living and NHP transactions.
General, Administrative and Professional Fees
General, administrative and professional fees increased $5.3 million for the three months ended September 30, 2011 over the same period in 2010 due primarily to our enterprise growth.
Loss on Extinguishment of Debt
The loss on extinguishment of debt for the three months ended September 30, 2011 relates solely to our redemption in July 2011 of $200.0 million principal amount of our 61/2% senior notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes. No similar transactions occurred during the three months ended September 30, 2010.
Litigation Proceeds, Net
Litigation proceeds, net for the three months ended September 30, 2011 reflects our receipt of $102.8 million in payment of the compensatory damages award from HCP, Inc. (“HCP”) arising out of our 2007 Sunrise Senior Living REIT acquisition, plus certain costs and interest, net of certain expenses and the contribution of $3 million to the Ventas Charitable Foundation. No similar transactions occurred during the three months ended September 30, 2010.
Merger-Related Expenses and Deal Costs
Merger-related expenses and deal costs for the three months ended September 30, 2011 and 2010 consisted of certain expenses relating to our favorable $101.6 million compensatory damages judgment against HCP and subsequent cross-appeals, transition and integration expenses related to consummated transactions and deal costs required by GAAP to be expensed rather than capitalized into the asset value. The transition and integration expenses and deal costs primarily consisted of certain fees and expenses incurred in connection with our Lillibridge, Atria Senior Living and NHP acquisitions.
Other
Other consists primarily of the fair value adjustment on interest rate swaps we acquired in connection with the Atria Senior Living and NHP acquisitions, partially offset by other expenses.
Income/Loss from Unconsolidated Entities
Income/loss from unconsolidated entities for the three months ended September 30, 2011 and 2010 relates to our noncontrolling interests in joint ventures we acquired as part of the NHP and Lillibridge acquisitions. At September 30, 2011, our ownership interests in these joint ventures, which comprised 58 MOBs, 20 seniors housing communities and fourteen skilled nursing facilities, ranged between 5% and 25%.
Income Tax Benefit/Expense
Income tax benefit for the three months ended September 30, 2011 was due primarily to the reduction of certain income tax contingency reserves, including interest, related to our 2007 U.S. federal income tax returns. Income tax expense for the three months ended September 30, 2010 represents amounts related to our taxable REIT subsidiaries as a result of the Sunrise Senior Living REIT acquisition.
Discontinued Operations
We had no assets classified as discontinued operations for the three months ended September 30, 2011. Discontinued operations for the three months ended September 30, 2010 includes the operations of two assets sold during 2010.

 

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Net Loss/Income Attributable to Noncontrolling Interest, Net of Tax
Net loss/income attributable to noncontrolling interest for the three months ended September 30, 2011 represents our partners’ joint venture interests in eleven MOBs and eighteen seniors housing communities. Net income attributable to noncontrolling interest, net of tax for the three months ended September 30, 2010 represents Sunrise’s share of net income from its previous ownership interests in 60 of our seniors housing communities, which we acquired during 2010, and our partners’ joint venture interests in six MOBs.
Nine Months Ended September 30, 2011 and 2010
The table below shows our results of operations for the nine months ended September 30, 2011 and 2010 and the effect on our income of changes in those results from period to period.
                                 
    For the Nine Months     Increase (Decrease) to  
    Ended September 30,     Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI:
                               
Triple-Net Leased Properties
  $ 451,320     $ 351,625     $ 99,695       28.4 %
Senior Living Operations
    189,642       111,733       77,909       69.7  
MOB Operations
    74,237       33,057       41,180       > 100  
All Other
    24,548       11,336       13,212       > 100  
 
                         
Total segment NOI
    739,747       507,751       231,996       45.7  
 
                               
Interest and other income
    529       420       109       26.0  
Interest expense
    (170,046 )     (133,449 )     (36,597 )     (27.4 )
Depreciation and amortization
    (293,541 )     (154,458 )     (139,083 )     (90.0 )
General, administrative and professional fees
    (51,010 )     (35,819 )     (15,191 )     (42.4 )
Loss on extinguishment of debt
    (25,211 )     (6,549 )     (18,662 )     ( > 100 )
Litigation proceeds, net
    85,327             85,327     nm  
Merger-related expenses and deal costs
    (131,606 )     (11,668 )     (119,938 )     ( > 100 )
Other
    (6,664 )     404       (7,068 )     ( > 100 )
 
                         
Income before loss from unconsolidated entities, income taxes, discontinued operations and noncontrolling interest
    147,525       166,632       (19,107 )     (11.5 )
Loss from unconsolidated entities
    (71 )     (392 )     321       81.9  
Income tax benefit (expense)
    23,310       (2,352 )     25,662       > 100  
 
                         
Income from continuing operations
    170,764       163,888       6,876       4.2  
Discontinued operations
          7,139       (7,139 )   nm  
 
                         
Net income
    170,764       171,027       (263 )     (0.2 )
Net (loss) income attributable to noncontrolling interest, net of tax
    (781 )     2,443       3,224       > 100  
 
                         
 
                               
Net income attributable to common stockholders
  $ 171,545     $ 168,584     $ 2,961       1.8 %
 
                         
nm — not meaningful
Segment NOI — Triple-Net Leased Properties
The increase in our triple-net leased properties reportable segment NOI for the nine months ended September 30, 2011 over the same period in 2010 is attributed primarily to the properties we acquired in the NHP acquisition, $2.7 million of additional rent resulting from the annual escalators in the rent paid under the Kindred Master Leases effective May 1, 2011, other services revenue directly attributable to the properties acquired in the NHP acquisition ($1.1 million), and various escalations in the rent paid on our other existing triple-net leased properties.

 

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Segment NOI — Senior Living Operations
A summary of our senior living operations reportable segment NOI is as follows:
                                 
    For the Nine Months     Increase (Decrease)  
    Ended September 30,     to Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI — Senior Living Operations:
                               
Total revenues
  $ 593,348     $ 331,535     $ 261,813       79.0 %
Less:
                               
Property-level operating expenses
    (403,706 )     (219,802 )     (183,904 )     (83.7 )
 
                         
Segment NOI
  $ 189,642     $ 111,733     $ 77,909       69.7 %
 
                         
The increase in senior living operations reportable segment revenues for the nine months ended September 30, 2011 over the same period in 2010 is attributed primarily to the properties we acquired in the Atria Senior Living acquisition on May 12, 2011, an increase in average daily rates and a decrease in the average Canadian dollar exchange rate. Average occupancy rates related to our senior living operations reportable segment during the nine months ended September 30, 2011 and 2010 were as follows:
                                 
    Number of Properties     Average Occupancy  
    at September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011 (1)     2010  
Stabilized Communities
    192       80       88.9 %     88.8 %
Lease-Up Communities
    7       2       72.6 %     82.6 %
 
                           
Total
    199       82       88.4 %     88.6 %
 
                           
 
                               
Same-Store Stabilized Communities
    79       79       89.7 %     88.8 %
(1)   Occupancy related to the seniors housing communities acquired in connection with the Atria Senior Living acquisition reflects activity from May 12, 2011, the date of the acquisition, through September 30, 2011.
Property-level operating expenses increased for the nine months ended September 30, 2011 over the same period in 2010 primarily due to the properties we acquired in the Atria Senior Living acquisition and a decrease in the average Canadian dollar exchange rate, partially offset by a decrease in the management fees related to our seniors housing communities managed by Sunrise.
Segment NOI — MOB Operations
A summary of our MOB operations reportable segment NOI is as follows:
                                 
    For the Nine Months     Increase (Decrease)  
    Ended September 30,     to Income  
    2011     2010     $     %  
    (Dollars in thousands)  
Segment NOI — MOB Operations:
                               
Rental income
  $ 106,392     $ 47,246     $ 59,146       > 100 %
Medical office building services revenue
    24,941       6,711       18,230       > 100  
 
                         
Total revenues
    131,333       53,957       77,376       > 100  
Less:
                               
Property-level operating expenses
    (37,259 )     (16,267 )     (20,992 )     ( > 100 )
Medical office building services costs
    (19,837 )     (4,633 )     (15,204 )     ( > 100 )
 
                         
Segment NOI
  $ 74,237     $ 33,057     $ 41,180       > 100 %
 
                         
nm — not meaningful

 

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MOB operations reportable segment revenues and property-level operating expenses both increased for the nine months ended September 30, 2011 over the same period in 2010 primarily due to the additional MOBs we acquired as part of the NHP and Lillibridge acquisitions.
Medical office building services revenue and costs both increased for the nine months ended September 30, 2011 over the same period in 2010 due to increased construction activity during 2011.
Segment NOI — All Other
All other NOI for the nine months ended September 30, 2011 and 2010 consists solely of income from loans and investments. Income from loans and investments increased for the nine months ended June 30, 2011 over the same period in 2010 due primarily to the loans receivable we acquired in the NHP acquisition and additional investments we made in loans receivable during 2010 and 2011, partially offset by decreased interest income related to loans receivable repayments we received subsequent to September 30, 2010.
Interest Expense
Total interest expense, including interest allocated to discontinued operations of $0 million and $0.9 million for the nine months ended September 30, 2011 and 2010, respectively, increased $35.7 million for the nine months ended September 30, 2011 over the same period in 2010. This difference is attributed primarily to a $67.6 million increase in interest due to higher loan balances and $5.4 million of interest related to the capital leases due to acquisition activity, partially offset by a $39.1 million decrease in interest due to lower effective interest rates. Our effective interest rate, excluding activity related to our capital leases, was 5.1% for the nine months ended September 30, 2011, compared to 6.5% for the same period in 2010. A decrease in the average Canadian dollar exchange rate had an unfavorable impact on interest expense of $0.2 million for the nine months ended September 30, 2011, compared to the same period in 2010.
Depreciation and Amortization
Depreciation and amortization increased $139.1 million for the nine months ended September 30, 2011 over the same period in 2010 due primarily to the properties we acquired in the NHP and Atria Senior Living transactions.
General, Administrative and Professional Fees
General, administrative and professional fees increased $15.2 million for the nine months ended September 30, 2011 over the same period in 2010 due primarily to our enterprise growth.
Loss on Extinguishment of Debt
The loss on extinguishment of debt for the nine months ended September 30, 2011 relates primarily to our early repayment of $307.2 million principal amount of existing mortgage debt in February 2011 and our redemption in July 2011 of $200.0 million principal amount of our 61/2% senior notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes. The loss on extinguishment of debt for the nine months ended September 30, 2010 relates primarily to our redemption in June 2010 of all $142.7 million principal amount then outstanding of our 71/8% senior notes due 2015, at a redemption price equal to 103.56% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes.
Litigation Proceeds, Net
Litigation proceeds, net for the nine months ended September 30, 2011 reflects our receipt of $102.8 million in payment of the compensatory damages award from HCP arising out of our 2007 Sunrise Senior Living REIT acquisition, plus certain costs and interest, net of certain expenses and the contribution of $3 million to the Ventas Charitable Foundation. No similar transactions occurred during the nine months ended September 30, 2010.

 

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Merger-Related Expenses and Deal Costs
Merger-related expenses and deal costs for the nine months ended September 30, 2011 and 2010 consisted of certain expenses relating to our favorable $101.6 million compensatory damages judgment against HCP and subsequent cross-appeals, transition and integration expenses related to consummated transactions and deal costs required by GAAP to be expensed rather than capitalized into the asset value. The transition and integration expenses and deal costs primarily consist of certain fees and expenses incurred in connection with our Lillibridge, Atria Senior Living and NHP acquisitions.
Other
Other consists primarily of the fair value adjustment on interest rate swaps we acquired in connection with the Atria Senior Living and NHP acquisitions, partially offset by other expenses.
Loss from Unconsolidated Entities
Loss from unconsolidated entities for the nine months ended September 30, 2011 and 2010 relates to our noncontrolling interests in joint ventures we acquired as part of the NHP and Lillibridge acquisitions. At September 30, 2011, our ownership interests in these joint ventures, which comprised 58 MOBs, 20 seniors housing communities and fourteen skilled nursing facilities, ranged between 5% and 25%.
Income Tax Benefit/Expense
Income tax benefit for the nine months ended September 30, 2011 was due primarily to the reduction of certain income tax contingency reserves, including interest, related to our 2007 U.S. federal income tax returns. Income tax expense for the nine months ended September 30, 2010 represents amounts related to our taxable REIT subsidiaries as a result of the Sunrise Senior Living REIT acquisition.
Discontinued Operations
We had no assets classified as discontinued operations for the nine months ended September 30, 2011. Discontinued operations for the nine months ended September 30, 2010 includes the operations of six assets sold during 2010.
Net Loss/Income Attributable to Noncontrolling Interest, Net of Tax
Net loss attributable to noncontrolling interest for the nine months ended September 30, 2011 represents our partners’ joint venture interests in eleven MOBs and eighteen seniors housing communities. We acquired 23 of these properties in connection with the NHP acquisition. Net income attributable to noncontrolling interest, net of tax for the nine months ended September 30, 2010 represents Sunrise’s share of net income from its previous ownership interests in 60 of our seniors housing communities, which we acquired during 2010, and our partners’ joint venture interests in six MOBs.
Non-GAAP Financial Measures
We believe that net income, as defined by GAAP, is the most appropriate earnings measurement. However, we consider certain non-GAAP financial measures to be useful supplemental measures of our operating performance. A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Set forth below are descriptions of the non-GAAP financial measures we consider relevant to our business and useful to investors, as well as reconciliations of these measures to our most directly comparable GAAP financial measures.
The non-GAAP financial measures we present herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income (determined in accordance with GAAP) as indicators of our financial performance or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. We believe that in order to facilitate a clear understanding of our consolidated historical operating results, these measures should be examined in conjunction with net income as presented in our Consolidated Financial Statements and data included elsewhere in this Quarterly Report on Form 10-Q.

 

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Funds From Operations and Normalized Funds From Operations
Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values, instead, have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. To overcome this problem, we consider Funds From Operations (“FFO”) and normalized FFO appropriate measures of operating performance of an equity REIT. Moreover, we believe that normalized FFO provides useful information because it allows investors, analysts and our management to compare our operating performance to the operating performance of other real estate companies and between periods on a consistent basis without having to account for differences caused by unanticipated items. We use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. We define normalized FFO as FFO excluding the following income and expense items (which may be recurring in nature): (a) gains and losses on the sales of real property assets; (b) merger-related costs and expenses, including amortization of intangibles and transition and integration expenses, and deal costs and expenses, including expenses and recoveries relating to our lawsuit against HCP, Inc. and the issuance of preferred stock or bridge loan fees; (c) the impact of any expenses related to asset impairment and valuation allowances, the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early debt retirement or payment of our debt; (d) the non-cash effect of income tax benefits or expenses; (e) the impact of future unannounced acquisitions or divestitures (including pursuant to tenant options to purchase) and capital transactions; (f) the reversal or incurrence of contingent consideration; (g) charitable donations made to the Ventas Charitable Foundation; and (h) gains and losses for non-operational foreign currency hedge agreements and changes in the fair value of financial instruments.
Our FFO and normalized FFO for the three and nine months ended September 30, 2011 and 2010 are summarized in the following table.
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
                               
Net income attributable to common stockholders
  $ 102,885     $ 57,898     $ 171,545     $ 168,584  
Adjustments:
                               
Real estate depreciation and amortization
    160,403       51,449       291,748       153,321  
Real estate depreciation related to noncontrolling interest
    (1,313 )     (1,627 )     (1,727 )     (5,033 )
Real estate depreciation related to unconsolidated entities
    2,247       1,275       4,213       1,275  
Discontinued operations:
                               
Gain on sale of real estate assets
          (168 )           (5,393 )
Depreciation on real estate assets
          96             464  
 
                       
FFO
    264,222       108,923       465,779       313,218  
Adjustments:
                               
Income tax (benefit) expense
    (13,904 )     1,044       (23,310 )     761  
Loss on extinguishment of debt
    8,685             25,211       6,549  
Litigation proceeds, net
    (85,327 )           (85,327 )      
Merger-related expenses and deal costs
    69,350       5,142       131,606       11,668  
Amortization of other intangibles
    256       338       767       338  
Change in fair value of financial instruments
    11,785             2,898        
 
                       
 
                               
Normalized FFO
  $ 255,067     $ 115,447     $ 517,624     $ 332,534  
 
                       

 

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Adjusted EBITDA
We consider Adjusted EBITDA an important supplemental measure to net income because it provides additional information with which to evaluate the performance of our operations and serves as another indication of our ability to service debt. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization (including non-cash stock-based compensation expense), excluding net litigation proceeds, merger-related expenses and deal costs, gains or losses on sales of real property assets and changes in the fair value of financial instruments (including amounts in discontinued operations). The following is a reconciliation of Adjusted EBITDA to net income (including amounts in discontinued operations) for the three and nine months ended September 30, 2011 and 2010:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
                               
Net income
  $ 101,984     $ 58,894     $ 170,764     $ 171,027  
Adjustments:
                               
Interest
    73,756       45,731       170,046       134,362  
Loss on extinguishment of debt
    8,685             25,211       6,549  
Taxes (including amounts in general, administrative and professional fees)
    (13,116 )     1,907       (21,937 )     3,102  
Depreciation and amortization
    161,027       52,200       293,541       154,922  
Non-cash stock-based compensation expense
    5,228       4,039       13,596       10,128  
Litigation proceeds, net
    (85,327 )           (85,327 )      
Merger-related expenses and deal costs
    69,350       5,142       131,606       11,668  
Gain on sale of real property assets
          (168 )           (5,393 )
Change in fair value of financial instruments
    11,785             2,898        
 
                       
Adjusted EBITDA
  $ 333,372     $ 167,745     $ 700,398     $ 486,365  
 
                       
NOI
We consider NOI an important supplemental measure to net income because it allows investors, analysts and our management to measure unlevered property-level operating results and to compare our operating results to the operating results of other real estate companies and between periods on a consistent basis. We define NOI as total revenues, excluding interest and other income, less property-level operating expenses and medical office building services costs (including amounts in discontinued operations). The following is a reconciliation of NOI to total revenues (including amounts in discontinued operations) for the three and nine months ended September 30, 2011 and 2010:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
                               
Total revenues
  $ 565,957     $ 264,665     $ 1,201,078     $ 748,873  
Less:
                               
Interest and other income
    373       35       529       420  
Property-level operating expenses
    209,161       82,007       440,965       236,069  
Medical office building services costs
    6,347       4,633       19,837       4,633  
 
                       
NOI (excluding amounts in discontinued operations)
    350,076       177,990       739,747       507,751  
Discontinued operations
          682             2,898  
 
                       
NOI (including amounts in discontinued operations)
  $ 350,076     $ 178,672     $ 739,747     $ 510,649  
 
                       

 

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Liquidity and Capital Resources
During the nine months ended September 30, 2011, our principal sources of liquidity were proceeds from the issuance of debt and equity securities, cash flows from operations, borrowings under our unsecured revolving credit facilities and term loans, proceeds from our loans receivable and marketable securities portfolios, proceeds related to our litigation with HCP and cash on hand. We funded the Atria Senior Living acquisition, including deal costs, through the issuance of 24.96 million shares of our common stock, cash on hand, borrowings under our unsecured revolving credit facilities and assumed mortgage financing. We funded the NHP acquisition, including deal costs, through the issuance of 99.8 million shares of our common stock, cash on hand, borrowings under our unsecured revolving credit facilities and the assumption of debt.
For the remainder of 2011 and 2012, our principal liquidity needs are to: (i) fund normal operating expenses; (ii) meet our debt service requirements; (iii) repay maturing mortgage and other debt, including our 37/8% convertible senior notes due 2011, our 9% senior notes due 2012, any borrowings under our term loan maturing in 2012 and the 81/4% senior notes due 2012 of NHP; (iv) fund capital expenditures for our senior living operations and MOB operations reportable segments; (v) fund acquisitions, investments and commitments and any development activities; and (vi) make distributions to our stockholders and unitholders, as required for us to continue to qualify as a REIT. We believe that these liquidity needs will be satisfied by cash flows from operations, cash on hand, debt assumptions and financings, issuances of debt and equity securities, proceeds from sales of assets and borrowings under our unsecured revolving credit facility and term loan. However, if these sources of capital are not available or if we engage in significant acquisition or investment activity, we may seek or require additional funding from debt assumptions and financings (including secured financings), dispositions of assets (in whole or in part through joint venture arrangements with third parties) and/or the issuance of secured or unsecured long-term debt or other securities.
As of September 30, 2011, we had a total of $57.5 million of unrestricted cash and cash equivalents, operating cash and cash related to our senior living operations and MOB operations reportable segments that is deposited and held in property-level accounts. Funds maintained in the property-level accounts are used primarily for the payment of property-level expenses and certain capital expenditures. As of September 30, 2011, we also had escrow deposits and restricted cash of $84.8 million.
Unsecured Revolving Credit Facilities and Term Loans
Our unsecured revolving credit facilities provided us with $1.0 billion of aggregate borrowing capacity as of September 30, 2011, all of which was scheduled to mature on April 26, 2012. Borrowings under our unsecured revolving credit facilities bore interest at a fluctuating rate per annum (based on U.S. or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate), plus an applicable percentage based on our consolidated leverage. At September 30, 2011, the applicable percentage was 2.80%. Our unsecured revolving credit facilities also had a 20 basis point facility fee. At September 30, 2011, we had $474.0 million of borrowings outstanding, $8.3 million of outstanding letters of credit and $517.7 million of unused borrowing capacity available under our unsecured revolving credit facilities, and we were in compliance with all covenants under the unsecured revolving credit facilities.
Effective October 18, 2011, we repaid all borrowings outstanding and terminated the commitments under our unsecured revolving credit facilities and entered into a new unsecured revolving credit facility (“Credit Facility”). The Credit Facility provides us with $2.0 billion of aggregate borrowing capacity, which may be increased, at our option subject to the satisfaction of certain conditions, to up to $2.5 billion, and includes sublimits of (i) up to $200 million for letters of credit, (ii) up to $200 million for swingline loans, (iii) up to $250 million for loans in certain alternative currencies, and (iv) up to 50% of the facility for certain negotiated rate loans. Borrowings under the Credit Facility bear interest at a fluctuating rate per annum (based on the applicable LIBOR for Eurocurrency rate loans and the higher of (i) the federal funds rate plus 0.50%, (ii) the administrative agent’s prime rate and (iii) the applicable LIBOR plus 1.0% for base rate loans, plus, in each case, an applicable percentage based on our senior unsecured long-term debt ratings). We also pay a facility fee ranging from 15 to 45 basis points per annum (based on our senior unsecured long-term debt ratings) on the aggregate revolving commitments under the Credit Facility. At October 18, 2011, the applicable percentage was 1.25% for Eurocurrency rate loans and 0.25% for base rate loans and the facility fee was 25 basis points. The Credit Facility matures on October 16, 2015, but may be extended, at our option subject to the satisfaction of certain conditions, for an additional period of one year.

 

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The Credit Facility imposes certain customary restrictions on us, including restrictions pertaining to: (i) liens; (ii) investments; (iii) the incurrence of additional indebtedness; (iv) mergers, sales of assets and dissolutions; (v) certain dividend, distribution and other payments; (vi) permitted businesses; (vii) transactions with affiliates; (viii) agreements limiting certain liens; and (ix) the maintenance of certain consolidated total leverage, secured debt leverage, unsecured leverage and fixed charge coverage ratios and minimum consolidated adjusted net worth, and contains customary events of default.
In connection with the NHP acquisition, on July 1, 2011, we acquired additional liquidity from an $800.0 million senior unsecured term loan (“Term Loan”) previously extended to NHP. At our option, borrowings under the Term Loan, which are available from time to time on a non-revolving basis, bear interest at the applicable LIBOR plus 1.50% (1.69% at September 30, 2011) or the “Alternate Base Rate” plus 0.50% (we had no base rate borrowings outstanding at September 30, 2011). We pay a facility fee of 10 basis points per annum on the unused commitments under the Term Loan agreement. Borrowings under the Term Loan mature on June 1, 2012. At September 30, 2011, we had $250.0 million of borrowings outstanding and $550.0 million of available borrowing capacity under the Term Loan, and we were in compliance with all covenants under the Term Loan. On November 1, 2011, we repaid the $250.0 million of borrowings outstanding and continue to have $550.0 million of available borrowing capacity under the Term Loan.
As of November 2, 2011, we had $727 million of borrowings outstanding under the Credit Facility and $0 outstanding under the Term Loan.
Mortgages
We assumed mortgage debt of $1.2 billion and $0.4 billion, respectively, in connection with the Atria Senior Living and NHP acquisitions.
In February 2011, we repaid in full mortgage loans outstanding in the aggregate principal amount of $307.2 million and recognized a loss on extinguishment of debt of $16.5 million in connection with this repayment during the first quarter of 2011.
Equity Offerings
In February 2011, we completed the sale of 5,563,000 shares of our common stock in an underwritten public offering pursuant to our existing shelf registration statement. We received $300.0 million in aggregate proceeds from the sale, which we used to repay existing mortgage debt and for working capital and other general corporate purposes.
On May 19, 2011, we filed a shelf registration statement relating to the resale by the selling stockholders of the shares of our common stock issued as partial consideration for the Atria Senior Living acquisition.
On July 1, 2011, following approval by our stockholders, we amended our Amended and Restated Certificate of Incorporation, as previously amended, to increase the number of authorized shares of our capital stock to 610,000,000, comprised of 600,000,000 shares of common stock, par value $0.25 per share, and 10,000,000 shares of preferred stock, par value $1.00 per share.
Senior Notes
In May 2011, we issued and sold $700.0 million aggregate principal amount of 4.750% senior notes due 2021, at a public offering price equal to 99.132% of par for total proceeds of $693.9 million, before the underwriting discount and expenses. We used a portion of the proceeds from the issuance to fund a senior unsecured term loan to NHP in the aggregate principal amount of $600.0 million, bearing interest at a fixed rate of 5.0% per annum and maturing in 2021. As a result of the NHP acquisition, this term loan and related interest are being eliminated in consolidation.
In July 2011, we redeemed $200.0 million principal amount of our outstanding 61/2% senior notes due 2016, at a redemption price equal to 103.25% of par, plus accrued and unpaid interest to the redemption date, pursuant to the call option contained in the indenture governing the notes. As a result, we paid a total of $206.5 million, plus accrued and unpaid interest, on the redemption date and recognized a loss on extinguishment of debt of $8.7 million during the third quarter of 2011.
As a result of the NHP acquisition, we assumed $991.6 million aggregate principal amount of outstanding unsecured senior notes. On July 15, 2011, we repaid in full, at par, $339.0 million principal amount then outstanding of NHP’s 6.50% senior notes due 2011 upon maturity. The remaining NHP senior notes outstanding bear interest at fixed rates ranging from 6.00% to 8.25% per annum and have maturity dates ranging from July 1, 2012 to July 7, 2038, subject in certain cases to earlier repayment at the option of the holder.

 

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Cash Flows
The following is a summary of our sources and uses of cash flows for the nine months ended September 30, 2011 and 2010:
                                 
    For the Nine Months        
    Ended September 30,     Change  
    2011     2010     $     %  
    (Dollars in thousands)  
 
                               
Cash and cash equivalents at beginning of period
  $ 21,812     $ 107,397     $ (85,585 )     (79.7 )%
Net cash provided by operating activities
    443,901       346,119       97,782       28.3  
Net cash used in investing activities
    (842,924 )     (268,476 )     (574,448 )     ( > 100 )
Net cash provided by (used in) financing activities
    434,790       (151,319 )     586,109       > 100  
Effect of foreign currency translation on cash and cash equivalents
    (97 )     69       (166 )     ( > 100 )
 
                         
 
                               
Cash and cash equivalents at end of period
  $ 57,482     $ 33,790     $ 23,692       70.1 %
 
                         
Cash Flows from Operating Activities
Cash flows from operating activities increased during the nine months ended September 30, 2011 over the same period in 2010 primarily due to higher NOI and proceeds related to our litigation with HCP, partially offset by higher general, administrative and professional fees, merger-related expenses and deal costs and interest expense.
Cash Flows from Investing Activities
Cash used in investing activities during the nine months ended September 30, 2011 and 2010 consisted primarily of our investments in real estate ($344.7 million and $239.2 million in 2011 and 2010, respectively), purchase of noncontrolling interests ($3.3 million in 2011), investments in loans receivable ($619.9 million and $38.7 million in 2011 and 2010, respectively), capital expenditures ($28.7 million and $11.6 million in 2011 and 2010, respectively), and development project expenditures ($23.2 million and $1.6 million in 2011 and 2010, respectively). These uses were offset by proceeds from real estate disposals ($15.0 million and $25.6 million in 2011 and 2010, respectively), proceeds from loans receivable ($138.9 million and $1.6 million in 2011 and 2010, respectively), and proceeds from the sale of marketable debt securities ($23.1 million in 2011).
Cash Flows from Financing Activities
Cash provided by financing activities during the nine months ended September 30, 2011 consisted primarily of $434.0 million of net borrowings under our unsecured revolving credit facilities, $957.8 million of proceeds from the issuance of debt and $299.9 million of net proceeds from the issuance of common stock. These cash inflows were partially offset by $895.0 million of debt repayments and $354.9 million of cash dividend payments to common stockholders.
Cash used in financing activities during the nine months ended September 30, 2010 consisted primarily of $331.4 million of debt repayments and $251.9 million of cash dividend payments to common stockholders. These uses were partially offset by $233.0 million of net borrowings under our unsecured revolving credit facilities and $201.2 million of proceeds from the issuance of debt.
Capital Expenditures
Our tenants generally bear the responsibility of maintaining and improving our triple-net leased properties. Accordingly, we do not expect to incur any major capital expenditures in connection with these properties. After the terms of the triple-net leases expire, or in the event that the tenants are unable or unwilling to meet their obligations under those leases, we anticipate funding any capital expenditures for which we may become responsible by cash flows from operations or through additional borrowings. With respect to our senior living operations and MOB operations reportable segments, we expect that capital expenditures will be funded by the cash flows from the properties or through additional borrowings. To the extent that unanticipated expenditures or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow additional funds may be restricted in certain circumstances by the terms of the instruments governing our outstanding indebtedness.

 

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Contractual Obligations
The following table summarizes the effect that minimum debt (which includes principal and interest payments) and other material noncancelable commitments are expected to have on our cash flow in future periods as of September 30, 2011:
                                         
            Less than 1                     More than 5  
    Total     year (4)     1-3 years (5)     3-5 years (6)     years (7)  
Long-term debt obligations (1)(2)
  $ 7,825,108     $ 1,553,800     $ 1,569,140     $ 1,685,205     $ 3,016,963  
Capital lease obligations
    213,440       9,415       19,209       19,715       165,101  
Acquisition commitments (3)
    205,662       205,662                    
Operating and ground lease obligations
    373,502       17,386       30,481       26,254       299,381  
 
                             
 
                                       
Total
  $ 8,617,712     $ 1,786,263     $ 1,618,830     $ 1,731,174     $ 3,481,445  
 
                             
 
     
(1)   Amounts represent contractual amounts due, including interest.
 
(2)   Interest on variable rate debt was based on forward rates obtained as of September 30, 2011.
 
(3)   Represents our commitments for the acquisitions of four seniors housing communities and two MOBs.
 
(4)   Includes $230.0 million outstanding principal amount of our 37/8% convertible senior notes due 2011, $474.0 million of borrowings outstanding under our unsecured revolving credit facilities that we repaid on October 18, 2011 (prior to entering into a new $2.0 billion unsecured revolving credit facility due 2015, subject to a one-year extension), $250.0 million outstanding under our unsecured term loan due 2012 that we repaid on November 1, 2011, $82.4 million outstanding principal amount of our 9% senior notes due 2012, and $73.0 million outstanding principal amount of NHP’s 81/4% senior notes due 2012.
 
(5)   Includes $200.0 million of borrowings under our unsecured term loan due 2013 and $269.9 million outstanding principal amount of NHP’s 6.25% senior notes due 2013.
 
(6)   Includes $400.0 million outstanding principal amount of our 3.125% senior notes due 2015, $234.4 million outstanding principal amount of NHP’s 6% senior notes due 2015, and $200.0 million outstanding principal amount of NHP’s 61/2% senior notes due 2016.
 
(7)   Includes $225.0 million outstanding principal amount of our 63/4% senior notes due 2017, $700.0 million outstanding principal amount of our 4.750% senior notes due 2021, $52.4 million outstanding principal amount of NHP’s 6.90% senior notes due 2037, and $23.0 million outstanding principal amount of NHP’s 6.59% senior notes due 2038.

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of our exposure to various market risks contains forward-looking statements that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to us. Nevertheless, because of the inherent unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking information.
We are exposed to market risk related to changes in interest rates on borrowings under our unsecured revolving credit facility and $800.0 million term loan, certain of our mortgage loans that are floating rate obligations, mortgage loans receivable and marketable debt securities. These market risks result primarily from changes in LIBOR rates or prime rates. We continuously monitor our level of floating rate debt with respect to total debt and other factors, including our assessment of the current and future economic environment.
Interest rate fluctuations generally do not affect our fixed rate debt obligations until they mature. However, changes in interest rates affect the fair value of our fixed rate debt. If interest rates have risen at the time our fixed rate debt matures or is refinanced, our future earnings and cash flows could be adversely affected by the additional borrowing costs. Conversely, lower interest rates at the time of maturity or refinancing may lower our overall borrowing costs.
To highlight the sensitivity of our fixed rate debt to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (“BPS”) in interest rates as of September 30, 2011 and December 31, 2010:
                 
    As of     As of  
    September 30, 2011     December 31, 2010  
    (In thousands)  
 
               
Gross book value
  $ 4,936,341     $ 2,771,696  
 
               
Fair value (1)
    5,263,326       2,900,143  
 
               
Fair value reflecting change in interest rates: (1)
               
-100 BPS
    5,486,646       3,008,630  
+100 BPS
    5,055,993       2,794,140  
 
(1)   The change in fair value of fixed rate debt was due primarily to overall changes in interest rates and the assumption of debt in connection with the Atria Senior Living and NHP acquisitions.

 

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The table below sets forth certain information with respect to our debt, excluding premiums, discounts and capital lease obligations.
                         
    As of     As of     As of  
    September 30,     December 31,     September 30,  
    2011     2010     2010  
    (Dollars in thousands)  
 
                       
Balance:
                       
Fixed rate:
                       
Senior notes and other
  $ 2,690,026     $ 1,537,433     $ 1,209,087  
Mortgage loans and other
    2,246,315       1,234,263       1,299,252  
Variable rate:
                       
Unsecured revolving credit facilities
    474,000       40,000       244,336  
Unsecured term loan
    250,000              
Mortgage loans and other
    405,515       115,258       167,080  
 
                 
Total
  $ 6,065,856     $ 2,926,954     $ 2,919,755  
 
                 
 
                       
Percent of total debt:
                       
Fixed rate:
                       
Senior notes and other
    44.4 %     52.5 %     41.4 %
Mortgage loans and other
    37.0 %     42.2 %     44.5 %
Variable rate:
                       
Unsecured revolving credit facilities
    7.8 %     1.4 %     8.4 %
Unsecured term loan
    4.1 %     0.0 %     0.0 %
Mortgage loans and other
    6.7 %     3.9 %     5.7 %
 
                 
Total
    100.0 %     100.0 %     100.0 %
 
                 
 
                       
Weighted average interest rate at end of period:
                       
Fixed rate:
                       
Senior notes and other
    5.2 %     5.1 %     5.8 %
Mortgage loans and other
    6.1 %     6.2 %     6.2 %
Variable rate:
                       
Unsecured revolving credit facilities
    3.0 %     3.1 %     3.4 %
Unsecured term loan
    1.8 %     N/A       N/A  
Mortgage loans and other
    2.1 %     1.5 %     1.6 %
Total
    5.0 %     5.4 %     5.5 %
The variable rate debt in the table above reflects, in part, the effect of $167.9 million notional amount of interest rate swaps with a maturity of February 1, 2013 that effectively convert fixed rate debt to variable rate debt. The increase in our outstanding variable rate debt from December 31, 2010 is primarily attributable to debt assumed in connection with the Atria Senior Living and NHP acquisitions and borrowings under our previous unsecured revolving credit facilities. Pursuant to the terms of certain leases with one of our tenants, if interest rates increase on certain variable rate debt that we have totaling $80.0 million as of September 30, 2011, our tenant is required to pay us additional rent (on a dollar-for-dollar basis) in an amount equal to the increase in interest expense resulting from the increased interest rates. Therefore, the increase in interest expense related to this debt is equally offset by an increase in additional rent due to us from the tenant. Assuming a 100 basis point increase in the weighted average interest rate related to our variable rate debt, and assuming no change in the outstanding balance as of September 30, 2011, interest expense for 2011 would increase by approximately $11.0 million, or $0.04 per diluted common share. The fair value of our fixed and variable rate debt is based on current interest rates at which we could obtain similar borrowings.

 

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We earn interest from investments in marketable debt securities on a fixed rate basis. We record these investments as available-for-sale at fair value, with unrealized gains and losses recorded as a component of stockholders’ equity. Interest rate fluctuations and market conditions will cause the fair value of these investments to change. As of September 30, 2011 and December 31, 2010, the aggregate fair value of our marketable debt securities held at September 30, 2011, which had an aggregate original cost of $37.8 million, was $42.8 million and $43.4 million, respectively. During the three months ended March 31, 2011, we sold marketable debt securities and received proceeds of approximately $23.1 million. As of September 30, 2011, the fair value of our secured and unsecured loans receivable was $367.8 million and was based on our estimates of currently prevailing rates for comparable loans.
We are subject to fluctuations in U.S. and Canadian exchange rates which may, from time to time, have an impact on our financial condition and results of operations. Increases or decreases in the value of the Canadian dollar will impact the amount of net income we earn from our senior living operations in Canada. Based on results for the nine months ended September 30, 2011, if the Canadian dollar exchange rate were to increase or decrease by $0.10, our results from operations would decrease or increase, as applicable, by approximately $0.1 million for the nine-month period. If we increase our international presence through investments in, or acquisitions or development of, seniors housing or healthcare assets outside the United States, we may also decide to transact additional business or borrow funds under our new unsecured revolving credit facility in currencies other than U.S. or Canadian dollars. Although we may decide to pursue hedging alternatives (including additional borrowings in local currencies) to protect against foreign currency fluctuations, we cannot assure you that any such fluctuations will not have a Material Adverse Effect on us.
We may engage in hedging strategies to manage our exposure to market risks in the future, depending on an analysis of the interest rate and foreign currency exchange rate environments and the costs and risks of such strategies. We do not use derivative financial instruments for speculative purposes.
ITEM 4.   CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2011, at the reasonable assurance level.
Internal Control Over Financial Reporting
On July 1, 2011, we acquired NHP in a stock-for-stock transaction which added 654 seniors housing and healthcare properties to our portfolio. We believe that we have implemented adequate procedures and controls to ensure that, during the initial transition period following this acquisition, which includes the remainder of 2011, financial information pertaining to these properties is materially correct and properly reflected in our Consolidated Financial Statements. However, we cannot provide absolute assurance that such information is materially correct in all respects.
Except as described above, during the third quarter of 2011, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
The information contained in “Note 10—Litigation” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1. Except as set forth therein, there have been no new material legal proceedings and no material developments in the legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 1A.   RISK FACTORS
The following risk factors reflect certain modifications of, or additions to, the risk factors continued in our Annual Report on Form 10-K for the year ended December 31, 2010 primarily as a result of our Atria Senior Living and NHP acquisitions.
The properties managed by Sunrise and Atria account for a significant portion of our revenues and operating income; Although Sunrise and Atria are managers, not tenants, in our properties, adverse developments in their business and affairs or financial condition could have a Material Adverse Effect on us.
As of September 30, 2011, Sunrise and Atria, collectively, managed 196 of our seniors housing communities pursuant to long-term management agreements. These properties represent a substantial portion of our portfolio, based on their gross book value, and account for a significant portion of our total revenues and operating income. Although we have various rights as owner under the Sunrise and Atria management agreements, we rely on Sunrise’s and Atria’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on Sunrise and Atria to set resident fees, to provide accurate property-level financial results for our properties in a timely manner and to otherwise operate those properties in accordance with the terms of our management agreements and in compliance with all applicable laws and regulations. For example, we depend on Sunrise’s and Atria’s ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of our seniors housing communities. A shortage of nurses or other trained personnel or general inflationary pressures may force Sunrise or Atria to enhance its pay and benefits package to compete effectively for such personnel, and Sunrise or Atria may not be able to offset such added costs by increasing the rates charged to residents. Any increase in labor costs and other property operating expenses, any failure by Sunrise or Atria to attract and retain qualified personnel, or changes in Sunrise’s or Atria’s senior management could adversely affect the income we receive from our seniors housing communities and have a Material Adverse Effect on us.
Because Sunrise and Atria do not lease properties from us, we are not directly exposed to credit risk with respect to those entities. However, any adverse developments in Sunrise’s or Atria’s business and affairs or financial condition could impair their ability to manage our properties efficiently and effectively and could have a Material Adverse Effect on us. If Sunrise or Atria experiences any significant financial, legal, accounting or regulatory difficulties due to the weakened economy or otherwise, such difficulties could result in, among other adverse events, acceleration of its indebtedness, impairment of its continued access to capital, the enforcement of default remedies by its counterparties or the commencement of insolvency proceedings by or against it under the U.S. Bankruptcy Code, any one or a combination of which indirectly could have a Material Adverse Effect on us.
The acquisition of NHP presents certain risks to our business and operations.
In July 2011, we acquired NHP in a stock-for-stock transaction. Pursuant to the terms and subject to the conditions set forth in the agreement and plan of merger dated as of February 27, 2011, at the effective time of the merger, each outstanding share of NHP common stock (other than shares owned by us or any of our subsidiaries or any wholly owned subsidiary of NHP) was converted into the right to receive 0.7866 shares of our common stock, with cash paid in lieu of fractional shares.
The NHP acquisition presents certain risks to our business and operations, including, among other things, that:
    we may be unable to successfully integrate our business and NHP’s business and realize the anticipated benefits of the merger or do so within the anticipated timeframe;
    we may not be able to effectively manage our expanded operations;

 

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    changes to the composition of our board of directors made upon completion of the merger may affect future decisions relating to our company;
    we may be unable to retain key employees;
    the market price of our common stock may decline; and
    we may be unable to continue paying dividends at the current rate.
We cannot assure you that we will be able to integrate NHP’s business without encountering difficulties or that any such difficulties will not have a Material Adverse Effect on us.
The weakened economy could adversely impact our operating income and earnings, as well as the results of operations of our tenants and operators, which could impair their ability to meet their obligations to us.
Continued concerns about the U.S. economy and the systemic impact of high unemployment, volatile energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a severely distressed real estate market have contributed to increased market volatility and weakened business and consumer confidence. This difficult operating environment could adversely affect our ability to generate revenues and/or increase our costs in our senior living and MOB operations, thereby reducing our operating income and earnings. It could also have an adverse impact on the ability of our tenants and operators to maintain occupancy and rates in our properties, which could harm their financial condition. These economic conditions could cause us to experience operating deficiencies in our senior living and MOB operations and/or cause our tenants and operators to be unable to meet their rental payments and other obligations due to us, which could have a Material Adverse Effect on us.
If the federal government’s borrowing authority is not increased as needed to meet its future obligations or if the debt rating on U.S. government securities is downgraded, our access to and cost of capital may be adversely affected; Any legislation to address the federal government’s borrowing authority or projected operating deficit could have a material adverse effect on our operators’ liquidity, financial condition or results of operations.
The amount of debt that the federal government is permitted to incur (the “debt ceiling”) is limited by statute and can be increased only by legislation adopted by the U.S. Congress. Prior to the passage of the Budget Control Act of 2011 (the “Budget Control Act”), the U.S. Department of the Treasury had indicated in public statements that, without an increase of the debt ceiling, the federal government would be unable to meet all of its financial commitments beginning in August 2011. Despite the legislation enacted on August 2, 2011 to lift the debt ceiling and reduce the federal government’s projected operating deficit, the federal government’s failure to further increase the debt ceiling as needed to meet its future financial commitments and/or a downgrade in the debt rating on U.S. government securities could lead to a weakened U.S. dollar, rising interest rates and constrained access to capital, which could materially adversely affect the U.S. and global economies, increase our costs of borrowing and have a Material Adverse Effect on us.
To implement the Budget Control Act, President Obama and members of the U.S. Congress have proposed various spending cuts and tax reform initiatives, some of which could result in changes (including substantial reductions in funding) to Medicare, Medicaid or Medicare Advantage Plans. Under the agreement reached to allow the federal government to raise the debt ceiling in August, a twelve-member, bipartisan committee has been given a deadline of November 23, 2011 to develop recommendations for reducing the federal budget deficit by a total of at least $1.2 trillion over ten years. If the committee cannot agree on a plan, or if the U.S. Congress does not enact the committee’s recommendations by December 23, 2011, $1.2 trillion in automatic spending cuts, including potential reductions in Medicare provider payments, could take effect beginning in January 2013. These measures and any future federal legislation relating to the debt ceiling or deficit reduction could have a material adverse effect on our operators’ liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and which, in turn, could have a Material Adverse Effect on us.

 

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We are exposed to various operational risks, liabilities and claims with respect to our operating assets that may adversely affect our ability to generate revenues and/or increase our costs and could have a Material Adverse Effect on us.
We are exposed to various operational risks, liabilities and claims with respect to our operating assets, including our third-party managed seniors housing communities and our MOBs, that may adversely affect our ability to generate revenues and/or increase our costs, thereby reducing our profitability. These risks include fluctuations in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent control regulations, increases in costs of materials, energy, labor (as a result of unionization or otherwise) and services, national and regional economic conditions, the imposition of new or increased taxes, capital expenditure requirements, professional and general liability claims and the availability and costs of professional and general liability insurance. Any one or a combination of these factors could result in operating deficiencies at our operating assets which could have a Material Adverse Effect on us.
We have only limited rights to terminate our management agreements with Sunrise and Atria, and we may be unable to replace Sunrise or Atria if our management agreements are terminated or not renewed.
We are parties to long-term management agreements with each of Sunrise and Atria pursuant to which Sunrise and Atria, collectively, provide comprehensive property management services with respect to 196 of our seniors housing communities.
Each management agreement with Sunrise has an original term of 30 years commencing as early as 2004, and each management agreement with Atria has a term of ten years, subject to successive automatic ten-year renewal periods. Each management agreement with Sunrise or Atria may be terminated by us upon the occurrence of an event of default by Sunrise or Atria, respectively, in the performance of a material covenant or term thereof (including, in certain circumstances, the revocation of any licenses or certificates necessary for operation), subject in most cases to Sunrise’s or Atria’s rights to cure such defaults. Each management agreement with Sunrise or Atria may also be terminated upon the occurrence of certain insolvency events relating to Sunrise or Atria, respectively. In addition, we may terminate each management agreement with Sunrise based on the failure to achieve certain net operating income targets or to comply with certain expense control covenants and each management agreement with Atria based on the failure to achieve certain net operating income targets. Under certain circumstances, we may also terminate each management agreement with Atria upon the payment of a fee. However, various legal and contractual considerations may limit or delay our exercise of any or all of these termination rights.
In the event that our management agreements with Sunrise or Atria are terminated for any reason or are not renewed upon expiration of their terms, we will have to find another manager for the properties covered by those agreements. We believe there are a number of qualified national and regional seniors care providers that would be interested in managing our seniors housing communities. However, we cannot assure you that we will be able to locate another suitable manager or, if we are successful in locating such a manager, that it will manage the properties effectively. Moreover, any such replacement manager would require approval by the applicable regulatory authority and, in most cases, the mortgage lender of the applicable property. We cannot assure you that such approvals would be granted or that, if granted, the process of seeking such approvals would not cause delay. Any inability or lengthy delay in replacing Sunrise or Atria as manager following termination or non-renewal of our management agreements could have a Material Adverse Effect on us.

Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.

As of September 30, 2011, we had controlling interests in eleven MOBs and eighteen seniors housing communities owned through joint ventures with third parties, and we had noncontrolling interests of between 5% and 25% in 58 MOBs, 20 seniors housing communities and fourteen skilled nursing facilities owned through joint ventures with third parties. These joint ventures involve risks not present with respect to our wholly owned properties, including the following:

    We may be prevented from taking actions that are opposed by our joint venture partners. Under certain of our joint venture arrangements, we may share decision-making authority with our joint venture partners regarding major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property. For joint ventures in which we have a noncontrolling interest our joint venture partners may take actions that we oppose;

    Our ability to transfer our interest in a joint venture to a third party may be restricted. Prior consent of our joint venture partners may be required for a sale or transfer to a third party of our interests in such joint ventures;

    Our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture;

    Our joint venture partners may have business interests or goals with respect to the property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

    Disputes may develop with our joint venture partners over decisions affecting the property or the joint venture, which may result in litigation or arbitration that could increase our expenses, distract our officers and/or directors from focusing their time and effort on our business and disrupt the day-to-day operations of the property, such as by delaying the implementation of important decisions until the conflict or dispute is resolved; and

    We may suffer losses as a result of the actions of our joint venture partners with respect to our joint venture investments.
Revenues from our senior living operations are dependent on private pay sources; Events which adversely affect the ability of seniors to afford our daily resident fees could cause our occupancy rates, resident fee revenues and results of operations to decline.
By and large, assisted and independent living services currently are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Hence, substantially all of the resident fee revenues generated by our senior living operations are derived from private pay sources consisting of income or assets of residents or their family members. In general, due to the expense associated with building new properties and the staffing and other costs of providing services at these properties, only seniors with income or assets meeting or exceeding the comparable median in the regions where our properties are located typically can afford to pay the daily resident and care fees. The current economic downturn and depressed housing market, as well as other events such as changes in demographics, could adversely affect the ability of seniors to afford these fees. If the managers of our seniors housing communities are unable to attract and retain seniors with sufficient income, assets or other resources required to pay the fees associated with assisted and independent living services, our occupancy rates, resident fee revenues and results of operations could decline, which, in turn, could have a Material Adverse Effect on us.

 

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Termination of resident lease agreements could adversely affect our revenues and earnings.
Applicable regulations governing assisted living communities generally require written resident lease agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident lease agreement for any reason on reasonable notice. Consistent with these regulations, the resident lease agreements signed by the managers of our seniors housing communities generally allow residents to terminate their lease agreements on 30 days’ notice. Thus, our managers cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements with terms of up to one year or longer. In addition, the resident turnover rate in our seniors housing communities may be difficult to predict. If a large number of resident lease agreements terminate at or around the same time, and if our units remained unoccupied, then our revenues and earnings could be adversely affected, which, in turn, could have a Material Adverse Effect on us.
Significant legal actions could subject us or our tenants, operators and managers to increased operating costs and substantial uninsured liabilities, which could materially adversely affect our or their liquidity, financial condition and results of operation.
From time to time, we may be directly involved in lawsuits and other legal proceedings. We may also be named as defendants in lawsuits arising out of alleged actions of our tenants, operators and managers for which such tenants, operators and managers have agreed to indemnify, defend and hold us harmless from and against certain claims and liabilities. An unfavorable resolution of pending or future litigation could have a Material Adverse Effect on us.
Our tenants, operators and managers continue to experience increases in both the frequency and severity of professional liability claims. In addition to large compensatory claims, plaintiffs’ attorneys continue to seek significant punitive damages and attorneys’ fees. Due to the historically high frequency and severity of professional liability claims against healthcare providers, the availability of professional liability insurance has been restricted and the premiums on such insurance coverage remain very high. As a result, the insurance coverage of our tenants, operators and managers might not cover all claims against them or continue to be available to them at a reasonable cost. If our tenants, operators and managers are unable to maintain adequate insurance coverage or are required to pay punitive damages, they may be exposed to substantial liabilities.
In addition, many healthcare providers are pursuing different organizational and corporate structures coupled with self-insurance programs that provide less insurance coverage. For example, Kindred insures its professional liability risks, in part, through a wholly owned, limited purpose insurance company, which insures initial losses up to specified coverage levels per occurrence with no aggregate coverage limit. Coverage for losses in excess of those per occurrence levels is maintained through unaffiliated commercial insurance carriers up to an aggregate limit, and all claims in excess of the aggregate limit are then insured by the limited purpose insurance company. Similarly, Sunrise maintains a self-insurance program to cover its general and professional liabilities. Our tenants, operators and managers, like Kindred and Sunrise, that insure any part of their general and professional liability risks through their own captive limited purpose entities generally estimate the future cost of general and professional liability through actuarial studies that rely primarily on historical data. However, due to the rise in the number and severity of professional claims against healthcare providers, these actuarial studies may underestimate the future cost of claims, and reserves for future claims may not be adequate to cover the actual cost of those claims.
As a result, the tenants, operators and managers of our properties could incur large funded and unfunded professional liability expense, which could materially adversely affect their liquidity, financial condition and results of operations, and, in turn, their ability to make rental payments under, or otherwise comply with the terms of, their leases with us or, in the case of our senior living operations, our results of operations, which could have a Material Adverse Effect on us.
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below summarizes repurchases of our common stock made during the quarter ended September 30, 2011:
                 
    Number of Shares     Average Price  
    Repurchased (1)     Per Share  
 
               
July 1 through July 31
    85,110     $ 53.74  
August 1 through August 31
        $  
September 1 through September 30
        $  
 
(1)   Repurchases represent shares withheld to pay taxes on the vesting of restricted stock or the exercise of options granted to employees. The value of the shares withheld is the closing price of our common stock on the date the vesting or exercise occurs.

 

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ITEM 6.   EXHIBITS
             
Exhibit        
Number   Description of Document   Location of Document
       
 
   
  10.1    
Credit and Guaranty Agreement, dated as of October 18, 2011, among Ventas Realty, Limited Partnership, Ventas SSL Ontario II, Inc. and Ventas SSL Ontario III, Inc., as borrowers, Ventas, Inc., as guarantor, the lenders identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender, L/C Issuer and Alternative Currency Fronting Lender.
  Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 24, 2011.
       
 
   
  12.1    
Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
  Filed herewith.
       
 
   
  31.1    
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  Filed herewith.
       
 
   
  31.2    
Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  Filed herewith.
       
 
   
  32.1    
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
  Filed herewith.
       
 
   
  32.2    
Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
  Filed herewith.
       
 
   
  101    
Interactive Data File.
  Filed herewith.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 7, 2011
         
  VENTAS, INC.
 
 
  By:   /s/ Debra A. Cafaro    
    Debra A. Cafaro   
    Chairman and Chief Executive Officer   
         
  By:   /s/ Richard A. Schweinhart    
    Richard A. Schweinhart   
    Executive Vice President and Chief Financial Officer   

 

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EXHIBIT INDEX
             
Exhibit        
Number   Description of Document   Location of Document
       
 
   
  10.1    
Credit and Guaranty Agreement, dated as of October 18, 2011, among Ventas Realty, Limited Partnership, Ventas SSL Ontario II, Inc. and Ventas SSL Ontario III, Inc., as borrowers, Ventas, Inc., as guarantor, the lenders identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender, L/C Issuer and Alternative Currency Fronting Lender.
  Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 24, 2011.
       
 
   
  12.1    
Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
  Filed herewith.
       
 
   
  31.1    
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  Filed herewith.
       
 
   
  31.2    
Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
  Filed herewith.
       
 
   
  32.1    
Certification of Debra A. Cafaro, Chairman and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
  Filed herewith.
       
 
   
  32.2    
Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
  Filed herewith.
       
 
   
  101    
Interactive Data File.
  Filed herewith.

 

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