UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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 001-32641
BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-3068069 | ||
(State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
||
330 North Wabash
Avenue,
Suite 1400, Chicago,
Illinois
60611
(Address of principal executive offices)
Telephone: (312) 977-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 No
Indicate by a check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of November 8, 2006, 101,229,163 shares of the Registrant’s common stock, $0.01 par value, were outstanding.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BROOKDALE SENIOR LIVING INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share
amounts)
September
30, 2006 |
December
31, 2005 |
|||||||||||
(Unaudited) | ||||||||||||
Assets |
|
|
||||||||||
Current assets: |
|
|
||||||||||
Cash and cash equivalents | $ | 100,260 |
|
$ | 77,682 |
|
||||||
Cash and investments – restricted | 65,625 |
|
37,314 |
|
||||||||
Accounts receivable, net | 60,762 |
|
10,623 |
|
||||||||
Prepaid expenses and other, net | 47,681 |
|
20,258 |
|
||||||||
Total current assets | 274,328 |
|
145,877 |
|
||||||||
Property, plant and equipment and leasehold interests | 3,749,969 |
|
1,479,587 |
|
||||||||
Accumulated depreciation | (182,669 |
)
|
(70,855 |
)
|
||||||||
Property, plant and equipment, net | 3,567,300 |
|
1,408,732 |
|
||||||||
Cash and investments – restricted | 31,603 |
|
24,099 |
|
||||||||
Goodwill | 310,065 |
|
65,646 |
|
||||||||
Lease security deposits | 29,787 |
|
25,271 |
|
||||||||
Other intangible assets, net | 300,495 |
|
— |
|
||||||||
Other, net | 142,078 |
|
28,186 |
|
||||||||
Total assets | $ | 4,655,656 |
|
$ | 1,697,811 |
|
||||||
Liabilities and Stockholders’ Equity |
|
|
||||||||||
Current liabilities: |
|
|
||||||||||
Current portion of debt | $ | 50,012 |
|
$ | 132 |
|
||||||
Trade accounts payable | 13,292 |
|
9,253 |
|
||||||||
Accrued expenses | 159,675 |
|
85,392 |
|
||||||||
Refundable entrance fees | 199,904 |
|
30,693 |
|
||||||||
Tenant security deposits | 18,341 |
|
16,333 |
|
||||||||
Deferred revenue | 44,910 |
|
13,093 |
|
||||||||
Dividends payable | 41,306 |
|
16,547 |
|
||||||||
Total current liabilities | 527,440 |
|
171,443 |
|
||||||||
Long-term debt, less current portion | 1,674,230 |
|
754,169 |
|
||||||||
Deferred entrance fee revenue | 67,839 |
|
— |
|
||||||||
Deferred gains | 57,422 |
|
60,681 |
|
||||||||
Deferred lease liability | 35,856 |
|
19,234 |
|
||||||||
Deferred tax liability | 406,125 |
|
41,689 |
|
||||||||
Other | 41,858 |
|
20,156 |
|
||||||||
Total liabilities | 2,810,770 |
|
1,067,372 |
|
||||||||
Minority interests | 12,588 |
|
36 |
|
||||||||
Commitments and contingencies |
|
|
||||||||||
Stockholders’ Equity: |
|
|
||||||||||
Preferred stock, $.01 par value, 50,000,000 shares authorized at September 30, 2006 and December 31, 2005; no shares issued and outstanding, respectively | — |
|
— |
|
||||||||
Common stock, $.01 par value, 200,000,000 shares authorized at September 30, 2006 and December 31, 2005, respectively; 101,082,905 shares and 65,006,833 shares issued and outstanding, respectively | 1,011 |
|
650 |
|
||||||||
Additional paid-in-capital | 1,967,002 |
|
690,950 |
|
||||||||
Accumulated deficit | (133,356 |
)
|
(62,626 |
)
|
||||||||
Accumulated other comprehensive (loss) income | (2,359 |
)
|
1,429 |
|
||||||||
Total stockholders’ equity | 1,832,298 |
|
630,403 |
|
||||||||
Total liabilities and stockholders’ equity | $ | 4,655,656 |
|
$ | 1,697,811 |
|
||||||
See accompanying notes to condensed consolidated and combined financial statements.
2
BROOKDALE SENIOR LIVING INC.
CONDENSED
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited, in
thousands, except per share
data)
Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
Revenue |
|
|
|
|
||||||||||||||||||||
Resident fees | $ | 385,617 |
|
$ | 208,393 |
|
$ | 874,495 |
|
$ | 574,855 |
|
||||||||||||
Management fees | 1,426 |
|
859 |
|
3,158 |
|
2,675 |
|
||||||||||||||||
Total revenue | 387,043 |
|
209,252 |
|
877,653 |
|
577,530 |
|
||||||||||||||||
Expenses |
|
|
|
|
||||||||||||||||||||
Facility operating (excluding depreciation and amortization of $56,866, $13,557, $109,888 and $24,764, respectively) | 245,192 |
|
133,567 |
|
543,418 |
|
366,782 |
|
||||||||||||||||
General and administrative (including non-cash stock compensation expense of $5,852, $11,146, $12,625 and $11,146, respectively) | 29,248 |
|
31,025 |
|
73,458 |
|
54,006 |
|
||||||||||||||||
Facility lease expense | 63,623 |
|
47,259 |
|
155,980 |
|
140,852 |
|
||||||||||||||||
Depreciation and amortization | 60,883 |
|
13,794 |
|
114,129 |
|
28,039 |
|
||||||||||||||||
Total operating expenses | 398,946 |
|
225,645 |
|
886,985 |
|
589,679 |
|
||||||||||||||||
Loss from operations | (11,903 |
)
|
(16,393 |
)
|
(9,332 |
)
|
(12,149 |
)
|
||||||||||||||||
Interest income | 2,032 |
|
824 |
|
3,709 |
|
2,200 |
|
||||||||||||||||
Interest expense: |
|
|
|
|
||||||||||||||||||||
Debt | (29,287 |
)
|
(13,126 |
)
|
(68,521 |
)
|
(33,439 |
)
|
||||||||||||||||
Amortization of deferred financing costs | (1,141 |
)
|
(1,263 |
)
|
(3,179 |
)
|
(2,822 |
)
|
||||||||||||||||
Change in fair value of derivatives | (1,840 |
)
|
(67 |
)
|
(1,422 |
)
|
4,080 |
|
||||||||||||||||
Loss on extinguishment of debt | (1,414 |
)
|
— |
|
(2,748 |
)
|
(453 |
)
|
||||||||||||||||
Equity in loss of unconsolidated ventures | (1,649 |
)
|
(196 |
)
|
(2,286 |
)
|
(641 |
)
|
||||||||||||||||
Loss before income taxes | (45,202 |
)
|
(30,221 |
)
|
(83,779 |
)
|
(43,224 |
)
|
||||||||||||||||
Benefit for income taxes | 14,146 |
|
432 |
|
13,487 |
|
247 |
|
||||||||||||||||
Loss before minority interest | (31,056 |
)
|
(29,789 |
)
|
(70,292 |
)
|
(42,977 |
)
|
||||||||||||||||
Minority interest | (89 |
)
|
11,104 |
|
(438 |
)
|
16,575 |
|
||||||||||||||||
Loss before discontinued operations | (31,145 |
)
|
(18,685 |
)
|
(70,730 |
)
|
(26,402 |
)
|
||||||||||||||||
Loss on discontinued operations, net | — |
|
(205 |
)
|
— |
|
(128 |
)
|
||||||||||||||||
Net loss | $ | (31,145 |
)
|
$ | (18,890 |
)
|
$ | (70,730 |
)
|
$ | (26,530 |
)
|
||||||||||||
Basic and diluted loss per share | $ | (0.34 |
)
|
|
$ | (0.96 |
)
|
|
||||||||||||||||
Weighted
average shares used in computing basic and diluted loss per share |
91,640 |
|
|
73,999 |
|
|
||||||||||||||||||
Dividends declared per share at end of period | $ | 0.40 |
|
$ | 0.25 |
|
$ | 1.10 |
|
$ | 0.25 |
|
||||||||||||
See accompanying notes to condensed consolidated and combined financial statements.
3
BROOKDALE SENIOR LIVING INC.
CONDENSED
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited, in
thousands)
Nine months ended September 30, | ||||||||||||
2006 | 2005 | |||||||||||
Cash Flows from Operating Activities |
|
|
||||||||||
Net loss | $ | (70,730 |
)
|
$ | (26,530 |
)
|
||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
||||||||||
Loss on extinguishment of debt | 2,748 |
|
453 |
|
||||||||
Depreciation and amortization | 117,308 |
|
30,861 |
|
||||||||
Minority interest | 438 |
|
(16,575 |
)
|
||||||||
Loss on sale of assets | 123 |
|
— |
|
||||||||
Equity in loss of unconsolidated ventures | 2,286 |
|
641 |
|
||||||||
Loss on discontinued operations | — |
|
128 |
|
||||||||
Amortization of deferred gain | (3,259 |
)
|
(6,786 |
)
|
||||||||
Amortization of entrance fees | (3,398 |
)
|
(18 |
)
|
||||||||
Proceeds from deferred entrance fee revenue | 4,329 |
|
700 |
|
||||||||
Deferred income taxes provision (benefit) | (14,457 |
)
|
(247 |
)
|
||||||||
Change in deferred lease liability | 16,622 |
|
17,857 |
|
||||||||
Change in fair value of derivatives | 1,422 |
|
(4,080 |
)
|
||||||||
Compensation expenses related to restricted stock grants | 12,625 |
|
11,146 |
|
||||||||
Changes in operating assets and liabilities: |
|
|
||||||||||
Accounts receivable, net | (24,131 |
)
|
(3,478 |
)
|
||||||||
Prepaid expenses and other assets, net | 1,419 |
|
703 |
|
||||||||
Accounts payable and accrued expenses | 18,665 |
|
5,192 |
|
||||||||
Tenant refundable fees and security deposits | 2,709 |
|
1,715 |
|
||||||||
Other | (11,042 |
)
|
(3,875 |
)
|
||||||||
Net cash provided by operating activities | 53,677 |
|
7,807 |
|
||||||||
Cash Flows from Investing Activities |
|
|
||||||||||
Decrease in lease security deposits and lease acquisition deposits, net | $ | 1,433 |
|
$ | 254 |
|
||||||
Decrease (increase) in cash and investments – restricted | 18,278 |
|
(8,266 |
)
|
||||||||
Net proceeds from sale of property, plant and equipment | — |
|
15,446 |
|
||||||||
Additions to property, plant and equipment, net of related payables | (39,580 |
)
|
(16,603 |
)
|
||||||||
Acquisition of assets, net of related payables and cash received | (1,799,115 |
)
|
(472,603 |
)
|
||||||||
Issuance of notes receivable, net | (2,331 |
)
|
— |
|
||||||||
Investment in joint venture | (637 |
)
|
— |
|
||||||||
Distributions received from investments | 1,355 |
|
— |
|
||||||||
Net cash used in investing activities | (1,820,597 |
)
|
(481,772 |
)
|
||||||||
Cash Flows from Financing Activities |
|
|
||||||||||
Proceeds from debt | $ | 739,221 |
|
$ | 468,756 |
|
||||||
Repayment of debt | (221,616 |
)
|
(182,558 |
)
|
||||||||
Proceeds from line of credit | 215,000 |
|
— |
|
||||||||
Repayment of line of credit | (215,000 |
)
|
— |
|
||||||||
Payment of dividends | (62,881 |
)
|
(20,000 |
)
|
||||||||
Payment of financing costs, net of related payables | (19,014 |
)
|
(3,425 |
)
|
||||||||
Refundable entrance fees: |
|
|
||||||||||
Proceeds from refundable entrance fees | 6,900 |
|
2,530 |
|
||||||||
Refunds of entrance fees | (4,540 |
)
|
(1,670 |
)
|
||||||||
Payment of swap termination | — |
|
(14,065 |
)
|
||||||||
Proceeds from issuance of common stock, net | 1,353,863 |
|
500 |
|
||||||||
Costs incurred related to follow-on equity offering | (2,435 |
)
|
— |
|
||||||||
Capital contributions from controlling shareholder | — |
|
196,790 |
|
||||||||
Net cash provided by financing activities | 1,789,498 |
|
446,858 |
|
||||||||
Net increase (decrease) in cash and cash equivalents | 22,578 |
|
(27,107 |
)
|
||||||||
Cash and cash equivalents at beginning of period | 77,682 |
|
86,858 |
|
||||||||
Cash and cash equivalents at end of period | $ | 100,260 |
|
$ | 59,751 |
|
||||||
4
BROOKDALE SENIOR LIVING
INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited, in
thousands)
Nine months ended September 30, | ||||||||||||
2006 | 2005 | |||||||||||
Supplemental Disclosure of Cash Flow Information: |
|
|
||||||||||
Interest paid | $ | 64,924 |
|
$ | 32,896 |
|
||||||
Income taxes paid | $ | 405 |
|
$ | 2,377 |
|
||||||
Write-off of fully amortized intangible asset | $ | — |
|
$ | 4,403 |
|
||||||
Write-off of deferred costs | $ | 5,001 |
|
$ | 453 |
|
||||||
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities: |
|
|
||||||||||
Consolidation of limited partnerships pursuant to EITF 04-5 on January 1, 2006: |
|
|
||||||||||
Property, plant and equipment, net | $ | 31,645 |
|
$ | — |
|
||||||
Accounts receivable | 1,409 |
|
— |
|
||||||||
Cash and investments-restricted | 1,205 |
|
— |
|
||||||||
Accrued expenses | (2,250 |
)
|
— |
|
||||||||
Tenant refundable fees and security deposits | (171 |
)
|
— |
|
||||||||
Debt | (19,723 |
)
|
— |
|
||||||||
Minority interest | (12,115 |
)
|
— |
|
||||||||
Net | $ | — |
|
$ | — |
|
||||||
Acquisitions: |
|
|
||||||||||
Cash and investments-restricted | $ | 50,059 |
|
$ | 10,799 |
|
||||||
Account receivables | 25,302 |
|
— |
|
||||||||
Property, plant and equipment and leasehold interests | 2,362,413 |
|
483,170 |
|
||||||||
Goodwill | 272,422 |
|
— |
|
||||||||
Other intangible assets | 306,531 |
|
— |
|
||||||||
Capital and financing lease obligations | (308,855 |
)
|
— |
|
||||||||
Debt obligations | (291,264 |
)
|
— |
|
||||||||
Deferred tax liability | (420,925 |
)
|
— |
|
||||||||
Other | (196,568 |
)
|
(21,366 |
)
|
||||||||
Net cash paid | $ | 1,799,115 |
|
$ | 472,603 |
|
||||||
See accompanying notes to condensed consolidated and combined financial statements.
5
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
1. Organization
Formation Transactions
Brookdale Senior Living Inc. (‘‘BSL’’ or ‘‘Company’’) was formed as a Delaware corporation on June 28, 2005. Under the Certificate of Incorporation, the Company was initially authorized to issue up to 5,000,000 common shares and 5,000,000 preferred shares. On September 30, 2005, our Certification of Incorporation was amended and restated to authorize up to 200,000,000 common shares and 50,000,000 preferred shares. We provide services to the elderly through facilities located in urban and suburban areas of major markets in the United States.
On September 30, 2005, the holders of all equity shares or membership interests in Brookdale Living Communities, Inc. (‘‘BLC’’), Alterra Healthcare Corporation (‘‘Alterra’’), FIT REN LLC (‘‘FIT REN’’) and Fortress CCRC Acquisition LLC (‘‘Fortress CCRC’’) contributed their ownership interests to BSL for common shares of BSL. Simultaneously with the formation transaction, Fortress Investment Trust II (‘‘FIT-II’’), contributed its membership interest in FIT REN to FEBC, as defined below, in exchange for common shares of BSL. A summary of the common shares issued by BSL for the respective interests is as follows:
BLC |
|
20,000,000 |
|
|||||||||
Alterra | 18,000,000 |
|
|
|||||||||
FIT REN | 11,750,000 |
|
29,750,000 |
|
||||||||
Fortress CCRC |
|
8,250,000 |
|
|||||||||
|
58,000,000 |
|
||||||||||
On November 22, 2005, we consummated our initial public offering of 12,732,800 shares of common stock, par value $0.01 per share, consisting of 8,560,800 primary shares (including 1,660,800 shares pursuant to the option granted by us to the Underwriters to purchase up to an additional 1,660,800 shares of common stock to cover over-allotments) and 4,172,000 shares sold by the selling stockholders. We did not receive any proceeds from the shares sold by the selling stockholders. We received net proceeds of approximately $144.8 million, after deducting an aggregate of $16.9 million in underwriting discounts and commissions paid to the underwriters and an estimated $6.4 million in other direct expenses incurred in connection with the offering.
Prior to the merger transaction described above, funds managed by affiliates of Fortress Investment Group (‘‘FIG’’) controlled BLC, Alterra, FIT REN and Fortress CCRC through its ability to exercise voting, financial and investment control over each of the entities through contractual control relationships with and investment advisory agreements over the various entities that own the majority of BLC, Alterra, FIT REN and Fortress CCRC.
Ownership interests in BLC and Alterra representing all interests in the formation transaction not controlled by FIG (‘‘Non-FIG Shareholders’’, which owned approximately 10.1 million and 4.8 million shares of BLC and Alterra, respectively, collectively 14.9 million of the above shares of common stock representing 50.5% and 26.7% of BLC and Alterra, respectively, collectively 25.7% of the shares outstanding in BSL) were adjusted for financial reporting purposes to the fair value as if their ownership interests in BLC and Alterra were purchased by BSL as of September 30, 2005. This results in partial step-up to the fair value in the assets, liabilities and equity of BSL.
The combined 2005 financial statements for the three and nine months ended September 30, 2005 include the accounts of BLC, a wholly-owned subsidiary of Fortress Brookdale Acquisition LLC (‘‘FBA’’) and Alterra, a wholly-owned subsidiary of FEBC-ALT Investors LLC (‘‘FEBC’’). All entities were indirectly controlled by funds managed by affiliates of FIG and as such are presented on a combined basis due to their common control.
6
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
These combined statements are presented on a combined basis due to that fact that FIG controlled each of BLC and Alterra through its voting, financial and investment control over Fortress Registered Investment Trust (‘‘FRIT’’) and FIT II. FIG exercises control over FRIT and FIT II through contractual control relationships with, and investment advisory control over, each of FRIT and FIT II. FRIT and FIT II are wholly-owned subsidiaries of Fortress Investment Fund (‘‘FIF’’) and Fortress Investment Fund II (‘‘FIF II’’), respectively. As FIG controlled more than 50 percent of the voting ownership interest of BLC and Alterra, pursuant to EITF Opinion No. 02-5, Definition of ‘‘Common Control’’ in relation to FASB Statement No. 141, the Company is presenting combined financial statements.
Acquisition of American Retirement Corporation
On July 25, 2006, we completed the acquisition of American Retirement Corporation (‘‘ARC’’). Under the terms of the merger agreement, BSL acquired all outstanding shares of ARC for an aggregate purchase price of approximately $1.2 billion, or $33.00 per share in cash (the ‘‘ARC Merger’’). In connection with the ARC Merger, RIC Coinvestment Fund LP, a fund managed by an affiliate of FIG (‘‘Investor’’), committed to purchase up to $1.3 billion in aggregate of our common stock at a price of $36.93 per share. Prior to closing the ARC Merger, we exercised our right to reduce the Investor’s commitment to $650.0 million and on July 25, 2006, issued Investor 17,600,867 common shares at $36.93 per share for aggregate net proceeds of $650.0 million. The acquisition of ARC was recorded using the purchase method and the purchase price was allocated to ARC’s assets and liabilities based on their estimated fair values.
On July 25, 2006, we completed a follow-on equity offering, pursuant to which we issued and sold 17,721,519 primary shares, and an existing shareholder, Health Partners, which is an affiliate of Capital Z Partners, sold 4,399,999 shares (including 2,885,415 shares pursuant to the option granted by Health Partners to the underwriters to purchase up to an additional 2,885,415 shares of common stock to cover over-allotments). The shares were issued at a price of $39.50 per common share. We did not receive any proceeds from the shares sold by Health Partners. In connection with the acquisition of ARC, certain executives of ARC purchased 475,681 common shares at $38.07 per share. In connection with the follow-on equity offering, we received net proceeds of approximately $672.8 million, after deducting an aggregate of $24.5 million in underwriting discounts and commissions paid to the underwriters and $2.4 million in other direct expenses incurred in connection with the offering. Funds managed by affiliates of FIG, which beneficially owned over 65% of Brookdale’s common stock prior to the consummation of the offering, did not sell any shares in the offering and after completion of the offering continued to own approximately 60% of the outstanding shares of our common stock.
See Note 6 for further discussion of the ARC Merger and other acquisitions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements include all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the three and nine month periods ended September 30, 2006 and 2005 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles (‘‘GAAP’’) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated and combined financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2005. Operating results are not necessarily indicative of results that may be expected for the entire year ended December 31, 2006.
7
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Principles of Consolidation
In December 2003, the Financial Accounting Standards Board (‘‘FASB’’) issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (‘‘FIN 46R’’). This Interpretation addresses the consolidation by business enterprises of primary beneficiaries in variable interest entities (‘‘VIE’’) as defined in the Interpretation. A company that holds variable interests in an entity will need to consolidate the entity if its interest in the VIE is such that it will absorb a majority of the VIE’s losses and/or receive a majority of expected residual returns, if they occur. As of September 30, 2006 and 2005, we have two and two facilities, respectively, that are considered VIE’s and were consolidated pursuant to FIN 46R.
The combined financial statements are presented on a combined basis, in accordance with GAAP for the period January 1, 2005 through September 30, 2005. For financial reporting purposes the non-controlling shareholders or members (ownership interests other than those controlled by FIG) have been presented as minority interest. Upon consummation of the formation transaction, the minority interests were consolidated as shareholders of BSL and their interest reflected at fair value in accordance with SFAS No. 141, ‘‘Business Combinations’’.
The results of facilities and companies acquired during the year are included in the condensed consolidated and combined financial statements from the effective date of the respective acquisition. All significant intercompany balances and transactions have been eliminated.
Purchase Price Accounting
In determining the allocation of the purchase price of companies and facilities to net tangible and identified intangible assets acquired and liabilities assumed, we make estimates of the fair value of the tangible and intangible assets and acquired liabilities using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. We allocate a portion of the purchase price to the value of leases acquired based on the difference between the facility valued with existing leases adjusted to market rental rates and the facility valued as if vacant. The determination of fair value of these assets utilizes cash flow projections that assume certain future revenue and cost levels, assumed capitalization and discount rates based upon current market conditions and other valuation factors, all of which involve the use of significant judgment and estimation.
Other Intangible Assets, Net
Other intangible assets, net were acquired as a result of the ARC Merger and include the following at September 30, 2006:
Amortization Period |
September
30, 2006 |
||||||||
Facility purchase options | Non-amortizable | $ | 147,682 |
|
|||||
Other intangible assets, net | 1-5 years | 152,813 |
|
||||||
Total other intangible assets, net | $ | 300,495 |
|
||||||
Investment in Unconsolidated Ventures
The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures that are not considered VIEs as we do not possess a controlling financial interest.
New Accounting Pronouncements
In June 2005, the FASB issued EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
8
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Partners Have Certain Rights (‘‘EITF 04-5’’). EITF 04-5 provides guidance in determining whether a general partner controls a limited partnership that is not a VIE and thus should consolidate the limited partnership. The effective date was June 29, 2005, for all new limited partnerships and existing limited partnerships for which the partnership agreements are modified and no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005 for all other limited partnerships. We adopted EITF 04-05 effective January 1, 2006, and as a result, consolidated the operations of three limited partnerships controlled by us. A summary of the impact on the financial position of the Company as of January 1, 2006 is presented in the Supplemental Schedules Non-cash Operating, Investing and Financing Activities.
In October 2005, the FASB issued FASB Staff Position (‘‘FSP’’) FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period. This FSP affects companies that are engaged in construction activities on buildings or grounds, which are accounted for as operating leases. The FSP required companies to expense rental costs associated with these leases starting on the date that the tenant is given control of the premises. As a result, companies must cease capitalizing rental costs during construction periods. The FSP is effective for the first reporting period beginning after December 15, 2005. The January 1, 2006 adoption of FAS 13-1 did not have a material effect on the Company’s financial position, results of operations or cash flows for the period, however, the accounting related to future development activity, if any, could be affected by the provisions of this statement.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (‘‘FIN 48’’). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this new pronouncement on its consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported and disclosures of contingent assets and liabilities in the consolidated balance sheet and accompanying notes. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Resident Fee Revenue
Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.
Entrance Fees
The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based upon an actuarial valuation. The refundable portion is
9
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
generally refundable upon the sale of the unit, or in certain agreements upon the resale of a comparable unit or 12 months after the resident vacates the unit. All refundable amounts due to residents at any time in the future are classified as current liabilities.
Certain entrance fee agreements entitle the resident to a refund of the original entrance fee paid plus a percentage of the appreciation of the unit upon resale.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes guidelines for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income includes net income and all other non-owner changes in shareholders’ equity during a period including unrealized gains and losses on equity securities classified as available-for-sale and unrealized fair value adjustments on certain derivative instruments net of any related income tax effect. Comprehensive loss for the three and nine months ended September 30, 2006 and 2005 was $44.3 million and $10.9 million and $74.5 million and $27.2 million, respectively.
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128, ‘‘Earnings Per Share’’. SFAS No. 128 requires companies to compute net income per share under two different methods, basic and diluted, and present per share data for all periods in which a statement of operations is presented. Basic earnings per share are computed by dividing net income/ (net loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding. Common stock equivalents consist of restricted stock grants applying the treasury stock method. Restricted stock grants are excluded from the computation of diluted earnings per share as their effect is anti-dilutive.
The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the Company for the three and nine months ended September 30, 2006:
Three
Months Ended September 30, 2006 |
Nine
Months Ended September 30, 2006 |
|||||||||||
Numerator: |
|
|
||||||||||
Net loss | $ | (31,145 |
)
|
$ | (70,730 |
)
|
||||||
Denominator: |
|
|
||||||||||
Basic and diluted loss per share: |
|
|
||||||||||
Weighted average common shares outstanding | 91,640 |
|
73,999 |
|
||||||||
Basic and diluted loss per share | $ | (0.34 |
)
|
$ | (0.96 |
)
|
||||||
We have excluded the earnings (loss) per share data for the three and nine months ended September 30, 2005. We believe these calculations are not meaningful to investors due to the different ownership and legal structures (e.g., corporation and limited liability companies) of the various entities prior to the combination transaction on September 30, 2005.
Restructuring Charges
In connection with the formation of the Company, certain home office functions were combined and we incurred costs of $1.3 million. For the three and nine months ended September 30, 2006, $ — million and $1.3 million, respectively, was expensed and included in general and administrative expense in the consolidated financial statements.
10
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Facility Leases
A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows:
Three
Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
Cash basis payment | $ | 58,585 |
|
$ | 43,577 |
|
$ | 142,617 |
|
$ | 129,781 |
|
||||||||||||
Straight-line expense | 6,124 |
|
5,882 |
|
16,622 |
|
17,857 |
|
||||||||||||||||
Amortization of deferred gain | (1,086 |
)
|
(2,200 |
)
|
(3,259 |
)
|
(6,786 |
)
|
||||||||||||||||
Facility lease expense | $ | 63,623 |
|
$ | 47,259 |
|
$ | 155,980 |
|
$ | 140,852 |
|
||||||||||||
Income Taxes
During the three and nine months ended September 30, 2006, we incurred a taxable loss which generated additional net operating losses. In accordance with SFAS No. 109, Accounting for Income Taxes, prior to the ARC Merger we established a valuation allowance equal to the net operating loss carryforward due to the uncertainty of future realization. As a result of the ARC Merger, the Company recorded a deferred tax liability which resulted from the difference in the book and tax basis of assets acquired. This resulted in a reduction in the valuation allowance from $47.5 million at December 31, 2005 to $6.0 million at September 30, 2006. Subsequent to the ARC Merger, the Company generated additional net operating losses and when evaluating the realization of these net operating losses concluded that for financial reporting purposes realization was more likely than not and recorded a tax benefit for such net operating losses, net of estimated state tax liability.
Dividends
On September 18, 2006, our board of directors declared a quarterly cash dividend of $0.40 per share of our common stock, or an aggregate of $41.3 million, for the quarter ended September 30, 2006. The $0.40 per share dividend was paid on October 16, 2006, to holders of record of our common stock on September 29, 2006.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on our consolidated financial position or results of operations.
3. Debt
Line of Credit Agreement
On February 10, 2006, we entered into a $330.0 million credit agreement, as amended in May 2006 and June 2006, consisting of a $250.0 million term loan available for acquisitions, a $20.0 million revolving loan, and a $60.0 million letters of credit commitment. The credit agreement bears interest at either base rate plus 0.50% or LIBOR plus 1.50%, at our election, and matures on February 10, 2007, subject to extension at our option for six months. In connection with the revolving loan we paid a commitment fee of 0.50% and are subject to a non-use fee on the term loan of 0.125% of the average daily amount of undrawn funds so long as we draw less than $150.0 million, 0.25% if we draw $150.0 million or more.
On July 25, 2006, we repaid the $195.0 million outstanding balance of the term portion of our credit agreement plus accrued interest and terminated the $250.0 million term loan portion of the credit agreement. As a result, we wrote off the deferred costs associated with the term loan portion of the credit agreement, which are included in loss on extinguishment of debt in the statement of operations.
11
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
As of September 30, 2006, $-0- was drawn on the revolving loan and $59.4 million of letters of credit have been issued under the credit agreement. An additional $21.7 million of letters of credit are outstanding as a result of the ARC Merger and will be reissued under the amended and restated credit agreement discussed in the following paragraph.
Long-term Debt, Capital Leases and Financing Obligations
Long-term debt, capital leases and financing obligations consist of the following:
September
30, 2006 |
December 31, 2005 |
|||||||||||
Mortgages payable due 2008 through 2013; weighted average interest at rates of 6.73% (weighted average interest rate 5.55% in 2005) | $ | 491,749 |
|
$ | 70,422 |
|
||||||
Mortgages payable, due from 2006 through 2037; weighted average interest rate of 9.12% (weighted average interest rate of 9.12% in 2005) | 74,577 |
|
74,704 |
|
||||||||
$150,000 Series A and $32,000 Series B (repaid in November 2005 using a portion of the proceeds from our initial public offering) notes payable, secured by five facilities, bearing interest at LIBOR plus 0.88% effective August 2006 (3.05% prior to that date), payable in monthly installments of interest only until August 2011 and payable in monthly installments of principal and interest through maturity in August 2013, and secured by a $7.0 million guaranty by BLC. | 150,000 |
|
150,000 |
|
||||||||
Mortgages payable due 2012, weighted average interest rate of 5.38%, payable interest only through June 2010 and payable in monthly installments of principal and interest through maturity in June 2012, secured by the Prudential Portfolio | 171,000 |
|
171,000 |
|
||||||||
Mortgages payable due 2010, bearing interest of LIBOR plus 2.25% effective May 1, 2006 (3.0% prior to that date), payable in monthly installments of interest only until April 2009 and payable in monthly installments of principal and interest through maturity in April 2010, secured by the Fortress CCRC Portfolio | 105,756 |
|
105,756 |
|
||||||||
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae, due 2032 secured by the Chambrel Portfolio, payable interest only until maturity | 100,841 |
|
100,841 |
|
||||||||
Capital and financing lease obligation payable through 2020; weighted average interest rate of 9.36% (weighted average interest rate of 11.48% in 2005) | 372,879 |
|
66,284 |
|
||||||||
Mortgage note, bearing interest at a variable rate of LIBOR plus 0.70%, payable interest only through maturity in August 2012. The note is secured by 13 of the Company’s facilities | 225,000 |
|
— |
|
||||||||
Mezzanine loan payable to Brookdale Senior Housing, LLC, a joint venture with respect to The Heritage at Gaines Ranch facility, payable to the extent of all available cash flow (as defined) | 12,739 |
|
12,739 |
|
||||||||
Mortgages payable due 2006-2010, weighted average interest rates of 7.9%, secured by the limited partnerships consolidated pursuant to EITF 04-5 ($10,633 payable concurrently) | 19,701 |
|
— |
|
||||||||
Serial and term revenue bonds repaid January 2006 | — |
|
2,555 |
|
||||||||
Total debt | 1,724,242 |
|
754,301 |
|
||||||||
Less current portion | 50,012 |
|
132 |
|
||||||||
Total long-term debt | $ | 1,674,230 |
|
$ | 754,169 |
|
||||||
12
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
The aggregated maturities of long-term debt obligations as of September 30, 2006 are as follows:
Amount | ||||||
2007 | $ | 50,012 |
|
|||
2008 | 125,436 |
|
||||
2009 | 314,978 |
|
||||
2010 | 148,138 |
|
||||
2011 | 256,378 |
|
||||
Thereafter | 829,300 |
|
||||
$ | 1,724,242 |
|
||||
On July 14, 2006, we refinanced the $150.0 million Series A notes payable. The new mortgage loan bears interest at LIBOR plus 0.88%, is payable in monthly installments of interest only through August 2011 and thereafter payable in installments of principal and interest through maturity in August 2013. The mortgage loan is additionally secured by a $7.0 million guaranty by BLC until the debt service coverage ratio is 1.35:1.00 for six months. In addition, BLC is required to have $3.0 million of cash availability until it secures its obligation with a $3.0 million letter of credit, no later than December 15, 2006.
On July 25, 2006, concurrent with the consummation of the ARC Merger, ARC obtained a $310.0 million first mortgage loan commitment, $225.0 million of which was funded at closing. The balance of the commitment expires in one year. The loan is secured by 13 facilities, bears interest at a variable rate of LIBOR plus 0.70%, and is payable interest only through maturity in August 2012. We entered into an interest rate swap to effectively convert the loan interest from floating to fixed. The swap is recorded as a cash flow hedge.
The following table summarizes our swap instruments at September 30, 2006:
Current notional balance | $ | 1,007,366 |
|
|||
Highest possible notional | $ | 1,007,366 |
|
|||
Lowest interest rate | 3.615 |
%
|
||||
Highest interest rate | 6.87 |
%
|
||||
Average fixed rate | 4.91 |
%
|
||||
Earliest maturity date | 2008 |
|
||||
Latest maturity date | 2012 |
|
||||
Weighted average original maturity | 5.25 years | |||||
Estimated net liability fair value (included in other liabilities at September 30, 2006) | $ | (6,152 |
)
|
|||
Estimated net asset fair value (included in other assets at September 30, 2006) | $ | 5,579 |
|
|||
The Company qualifies for hedge accounting pursuant to SFAS No.133, Accounting for Derivative Instruments and Certain Hedging Activities, with the effective portion of the change in fair value of the derivative recorded in other comprehensive income and the ineffective portion included in the change in fair value of derivatives in the statement of operations.
4. Litigation
In connection with the sale of certain facilities to Ventas Realty Limited Partnership (‘‘Ventas’’) in 2004, two legal actions have been filed. The first action was filed on September 15, 2005, by current and former limited partners in 36 investing partnerships in the United States District Court for the Eastern District of New York captioned David T. Atkins et al. v. Apollo Real Estate Advisors, L.P., et
13
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
al. (the ‘‘Action’’). On March 17, 2006, a third amended complaint was filed in the Action. The third amended complaint is brought on behalf of current and former limited partners in 14 investing partnerships. It names as defendants, among others, the Company, BLC, a subsidiary of the Company, GFB-AS Investors, LLC (‘‘GFB-AS’’), a subsidiary of BLC, the general partners of the 14 investing partnerships, which are alleged to be subsidiaries of GFB-AS, FIG, an affiliate of our largest stockholder, and our Chief Financial Officer. The nine count third amended complaint alleges, among other things, (i) that the defendants converted for their own use the property of the limited partners of 11 partnerships, including through the failure to obtain consents the plaintiffs contend were required for the sale of facilities indirectly owned by those partnerships to Ventas; (ii) that the defendants fraudulently persuaded the limited partners of three partnerships to give up a valuable property right based upon incomplete, false and misleading statements in connection with certain consent solicitations; (iii) that certain defendants, including GFB-AS, the general partners, and our Chief Financial Officer, but not including the Company, BLC, or FIG, committed mail fraud in connection with the sale of facilities indirectly owned by the 14 partnerships at issue in the Action to Ventas; (iv) that certain defendants, including GFB-AS and our Chief Financial Officer, but not including the Company, BLC, the general partners, or FIG, committed wire fraud in connection with certain communications with plaintiffs in the Action and another investor in a limited partnership; (v) that the defendants, with the exception of the Company, committed substantive violations of the Racketeer Influenced and Corrupt Organizations Act (‘‘RICO’’); (vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the general partners violated the partnership agreements of the 14 investing partnerships; (viii) that GFB-AS, the general partners, and our Chief Financial Officer breached fiduciary duties to the plaintiffs; and (ix) that the defendants were unjustly enriched. The plaintiffs have asked for damages in excess of $100.0 million on each of the counts described above, including treble damages for the RICO claims. We have filed a motion to dismiss the claims, and plan to continue to vigorously defend this Action. A putative class action lawsuit was also filed on March 22, 2006, by certain limited partners in four of the same partnerships involved in the Action in the Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. (the ‘‘Second Action’’). The putative class in the Second Action consists only of those limited partners in the four investing partnerships who are not plaintiffs in the Action. The Second Action names as defendants BLC and GFB-AS. The complaint alleges a claim for breach of fiduciary duty arising out of the sale of facilities indirectly owned by the investing partnerships to Ventas and the subsequent lease of those facilities by Ventas to subsidiaries of BLC. The plaintiffs seek, among other relief, an accounting, damages in an unspecified amount, and disgorgement of unspecified amounts by which the defendants were allegedly unjustly enriched. We also intend to vigorously defend this Second Action. Because these actions are in an early stage we cannot estimate the possible range of loss, if any.
In addition, we have been involved in other litigation and claims incidental to the conduct of our business and comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage claims and may require significant legal costs to defend and resolve. Similarly, our industry is always subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, we maintain insurance policies in amounts and with coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. We believe that the cost of defending any pending or future litigation or challenging any pending or future regulatory compliance matter will not have a material adverse effect on our business.
5. Employee Restricted Stock Plans and Omnibus Stock Incentive Plan
In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (‘‘SFAS No. 123R’’), which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains
14
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
employee services in share-based payment transactions. SFAS No. 123R is a revision to SFAS No. 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. We adopted SFAS 123R in connection with our initial grants of restricted stock effective August 2005, which were converted into BSL restricted stock on September 30, 2005.
On August 5, 2005, BLC and Alterra adopted employee restricted stock plans to attract, motivate, and retain key employees. The plans provide for the grant of restricted securities to those participants selected by our board of directors. At September 30, 2005, as a result of the formation transactions described in Note 1, these restricted shares were converted into a total of 2.6 million shares of restricted stock in BSL at a value of $19.00 per share. Pursuant to the plans, 25% to 50% of each individual’s award vested upon completion of the initial public offering on November 22, 2005. The remaining awards vest over a period of three to five years.
On October 14, 2005, we adopted a new equity incentive plan for our employees, the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (‘‘Incentive Plan’’), which was approved by our stockholders on October 14, 2005. A total of 2,000,000 shares of our common stock was initially reserved for issuance under the Incentive Plan; provided, however, that commencing on the first day of our fiscal year beginning in calendar year 2006, the number of shares reserved and available for issuance was increased by an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of our common stock on the last day of the immediately preceding fiscal year. When Section 162(m) of the Internal Revenue Code becomes applicable, the maximum aggregate number of shares that will be subject to stock options or stock appreciation rights that may be granted to any individual during any fiscal year may not exceed 400,000, and the maximum aggregate number of shares that will be subject to awards of restricted stock, deferred shares, unrestricted shares or other stock-based awards that may be granted to any individual during any fiscal year will be 400,000.
In connection with the ARC Merger, our board of directors approved an amendment to the Incentive Plan (the ‘‘Plan Amendment’’) to reserve an additional 2,500,000 shares of common stock for issuance thereunder to satisfy (i) obligations to provide for certain purchases of common stock by ARC officers and employees for purchase and (ii) obligations to make corresponding grants of restricted shares of common stock under the Incentive Plan to those ARC officers and employees who purchased such shares of common stock pursuant to employment agreements and optionee agreements entered into in connection with the ARC Merger, and for such other grants that may be made from time to time pursuant to the Incentive Plan. Upon completion of the ARC Merger, we issued 475,681 shares of common stock to certain officers of ARC at $38.07 per share for aggregate proceeds of $18.1 million and granted the officers 475,681 shares of restricted stock at $48.00 per share. On May 12, 2006, funds managed by affiliates of Fortress, which then held approximately 65% of our common stock, executed a written consent approving the Plan Amendment effective upon consummation of the ARC Merger. This consent constituted the consent of a majority of the total number of shares of our outstanding common stock and was sufficient to approve the Plan Amendment.
On June 15, 2006, we registered an additional 2,900,000 shares of common stock (2,500,000 shares of common stock in connection with the ARC Merger and 400,000 shares of common stock resulting from the automatic annual increase for fiscal year 2006), under the Incentive Plan. This registration of 2,900,000 shares of common stock increased the number of shares registered for issuance under the Incentive Plan to 4,900,000.
As a result of the formation transactions described in Note 1, the employee restricted stock plans described above were merged into the Incentive Plan. Additional grants of restricted shares under the
15
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Incentive Plan were as follows:
Grants | Value Per Share |
Total Value |
||||||||||||||||
As of December 31, 2005 | 554,000 |
|
$ | 19.00-28.75 |
|
$ | 10,743 |
|
||||||||||
Three months ended March 31, 2006 | 44,000 |
|
33.10 |
|
1,451 |
|
||||||||||||
Three months ended June 30, 2006 | 49,000 |
|
44.40 |
|
2,196 |
|
||||||||||||
Three months ended September 30, 2006 | 1,107,000 |
|
$ | 41.65-48.00 |
|
52,275 |
|
|||||||||||
Compensation expense of $5.9 million and $11.1 million and $12.6 million and $11.1 million in connection with the grant of restricted stock was recorded for the three and nine months ended September 30, 2006 and 2005, respectively, net of forfeitures estimated at 5% of the shares granted. The Company records compensation expense over the requisite service period in accordance with SFAS 123R.
6. Acquisitions and Financings
Our financial results are impacted by the timing, size and number of acquisitions and leases we complete in a period. During the three and nine months ended September 30, 2006, the number of facilities we owned or leased increased by 93 and 172, respectively, which resulted in an increase of approximately 16,909 and 23,143 units/beds, respectively, for an aggregate purchase price of approximately $1,277.9 million and $1,807.2 million, respectively.
Seller | Acquisition Closing Date |
Purchase Price, Excluding Fees And Expenses ($ in millions) |
Type(s)
of Housing Facilities Acquired |
|||||||||
Orlando Madison Ivy, LLC | February 28, 2006 | $ | 13.0 |
|
AL | |||||||
Wellington Group LLC | March 28, 2006 | 79.5 |
|
AL | ||||||||
American Senior Living L.P. | March 31, 2006/ July 27, 2006 |
143.2 |
|
IL, AL, CCRC | ||||||||
Southern Assisted Living Inc. | April 7, 2006 | 82.9 |
|
AL | ||||||||
AEW Capital Management | April 28, 2006/ June 30, 2006/ August 31, 2006 |
209.4 |
|
IL, AL, CCRC | ||||||||
Southland Suites | May 1, 2006 | 24.0 |
|
AL | ||||||||
AEW II Corporation | June 30, 2006 | 37.8 |
|
AL | ||||||||
American Retirement Corp. | July 25,2006 | 1,217.4 |
|
IL, AL, CCRC | ||||||||
Total | $ | 1,807.2 |
|
|||||||||
On February 28, 2006, we acquired two facilities in Orlando, Florida with 114 units/beds from Orlando Madison Ivy, LLC for an aggregate purchase price of $13.0 million. In connection with the acquisition, we obtained an $8.8 million first mortgage loan, secured by the facilities, bearing interest at LIBOR plus 1.70%, payable interest only through maturity in December 2008, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge.
On March 28, 2006, we acquired 17 assisted living facilities with 852 units/beds from the Wellington Group LLC for $79.5 million. We refer to these facilities as the ‘‘Wellington Portfolio’’. On January 11, 2006, we signed a definitive agreement to acquire 18 facilities; however, the agreement to acquire one facility was terminated. The portfolio is located in Alabama, Florida, Georgia, Mississippi, and Tennessee and is divided into 13 owned and four leased facilities. In connection with the acquisition, we obtained a $52.6 million first mortgage loan, secured by the facilities, bearing interest at LIBOR plus 1.70%, payable interest only through maturity in March 2009, with two one-year
16
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is recorded as a cash flow hedge.
On March 31, 2006, we completed the acquisition of seven senior living facilities, all of which are owned, with 1,021 units/beds from American Senior Living L.P. for an aggregate purchase price of $92.1 million. We refer to these facilities as the ‘‘Liberty Owned Portfolio’’. The Liberty Owned Portfolio is located in Florida, Georgia and Tennessee. In connection with the acquisition, we obtained a $65.2 million first mortgage loan, bearing interest at LIBOR plus 1.75%, payable interest only through maturity in March 2011, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is recorded as a cash flow hedge. On July 27, 2006, we completed the acquisition of ten leasehold senior living facilities with 852 units/beds from American Senior Living L.P. for $51.1 million (the ‘‘Liberty II Portfolio’’). The Liberty II Portfolio is located in Alabama, California, Delaware, Florida, Louisiana, Ohio, Tennessee, Virginia and Washington. In connection with the transaction, we purchased five facilities from the lessor and obtained $33.0 million of first mortgage financing bearing interest at 9.8%, payable interest only until maturity in 2009.
On April 7, 2006, we completed the acquisition of Southern Assisted Living Inc. consisting of 41 leased facilities with 2,887 units/beds for $82.9 million. We refer to these facilities as the ‘‘SALI Portfolio’’. Also included in the transaction was one property managed by SALI for a third party with 155 independent and assisted living units/beds. We terminated the management contract on September 27, 2006. The SALI Portfolio is located in North Carolina, South Carolina and Virginia.
On April 28, 2006, we acquired five facilities with 821 units/beds for $179.5 million from AEW Capital Management. In connection with the acquisition, we obtained $124.5 million of first mortgage financing, bearing interest at LIBOR plus 1.50%, payable interest only through maturity in May 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. On September 30, 2006, we closed on an interim agreement with an affiliate of AEW Capital Management to (i) loan approximately $12.4 million to the affiliate pending lender approval of our acquiring one additional facility from AEW and our assuming the outstanding mortgage loan related to the facility and (ii) take over the management of the facility (84 units/beds). The loan is due the earlier of (i) June 30, 2007, or (ii) the date on which the lender approves the assumption of the existing mortgage loan by us. The loan bears interest in an amount equal to the facility’s net cash flow (as defined) or the maximum permissible by law. For financial reporting purposes, we evaluated our relationship with the entity that owns the facility pursuant to FIN 46R and determined that the entity is a VIE and we are the primary beneficiary and accordingly, consolidated the entity as of September 30, 2006. On August 31, 2006, we completed the acquisition of a skilled nursing component of one of the purchased facilities for $9.4 million. In connection with the acquisition, we obtained a $6.5 million first mortgage loan, bearing interest at LIBOR plus 2.50%, payable interest only through maturity in May 2009. We refer to these facilities together, as the ‘‘AEW Portfolio’’. The AEW Portfolio is located in California, Ohio and Washington and is comprised of six independent living, assisted living and CCRC facilities with a total of 1,025 units/beds.
On May 1, 2006, we completed the acquisition of four owned senior living facilities with 262 units/beds located in Florida from Southland Suites for $24.0 million. We refer to these facilities as the ‘‘Southland Portfolio’’. On May 18, 2006, we obtained $16.1 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through maturity in June 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the AEW-New Jersey Portfolio.
On June 30, 2006, we completed the acquisition of two facilities from AEW II Corporation for $37.8 million. We refer to these facilities, which are located in New Jersey as the ‘‘AEW-New Jersey
17
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Portfolio’’. Concurrent with the closing, we obtained $24.9 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through maturity in June 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the Southland Portfolio.
On July 25, 2006, we completed the acquisition of ARC. Under the terms of the merger agreement, Brookdale acquired all outstanding shares of ARC for an aggregate purchase price of $1.2 billion, or $33.00 per share in cash. In connection with the ARC Merger, a fund managed by an affiliate of FIG (‘‘Investor’’) committed to purchase up to $1.3 billion in aggregate of our common stock at a price of $36.93 per share. Prior to closing the ARC Merger, we exercised our right to reduce the Investor’s commitment to $650.0 million and on July 25, 2006, issued Investor 17,600,867 common shares at $36.93 per share for aggregate net proceeds of $650.0 million. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Current assets | $ | 88,101 |
|
|||
Property, plant and equipment and leasehold interests | 1,432,344 |
|
||||
Other intangible assets | 306,531 |
|
||||
Goodwill | 272,422 | |||||
Other assets | 273,185 |
|
||||
Current liabilities | (211,476 |
)
|
||||
Deferred tax liability | (405,289 |
)
|
||||
Other liabilities | (576,403 |
)
|
||||
Total purchase price – net of cash acquired | 1,179,415 |
|
||||
The above acquisitions were accounted for using the purchase method of accounting and the purchase prices were allocated to the assets and liabilities based on their estimated fair values.
The following unaudited pro forma condensed consolidated financial information sets forth the historical information for the three and nine months ended September 30, 2006 and 2005 derived from the historical financial statements, as adjusted to give effect to:
• | Pro forma adjustments to give effect to the Fortress CCRC Portfolio, the Prudential Portfolio, the Chambrel Portfolio, the Merrill Gardens Portfolio, Orlando, FL facilities, the Wellington Portfolio, the Liberty Owned Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio, the AEW-New Jersey Portfolio, the ARC and the Liberty II Portfolio acquisitions on the statement of operations as if these transactions closed on January 1, 2005; |
• | Pro forma adjustments to give effect to the September 30, 2005 step-up in basis of non-controlling ownership (ownership interests not controlled or owned by affiliates of Fortress Investment Group LLC, ‘‘Minority Shareholders’’) due to the exchanges of Brookdale Facility Group minority ownership for Company ownership as if the transaction was completed on January 1, 2005; |
• | Pro forma adjustments to give effect to the consolidation of three limited partnerships pursuant to EITF 04-5 on January 1, 2005; |
The unaudited pro forma condensed consolidated financial information is presented for informational purposes only, and we do not expect that this information will reflect our future results of operations. The unaudited pro forma adjustments are based on available information and upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that the transactions were completed as of January 1, 2005.
18
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Three
Months Ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
Revenues | $ | 426,576 |
|
$ | 395,766 |
|
$ | 1,260,334 |
|
$ | 1,169,209 |
|
||||||||||||
Loss from operations | (15,864 |
)
|
(43,684 |
)
|
(48,689 |
)
|
(96,084 |
)
|
||||||||||||||||
Loss before income taxes | (52,173 |
)
|
(76,586 |
)
|
(151,301 |
)
|
(191,533 |
)
|
||||||||||||||||
Loss from continuing operations | (48,212 |
)
|
(59,579 |
)
|
(148,348 |
)
|
(174,441 |
)
|
||||||||||||||||
Weighted average basic and diluted loss per share | $ | (0.53 |
)
|
$ | (0.92 |
)
|
$ | (2.00 |
)
|
$ | (2.68 |
)
|
||||||||||||
Weighted average shares used in computing basic and diluted loss per share | 91,640 |
|
65,007 |
|
73,999 |
|
65,007 |
|
||||||||||||||||
7. Segment Information
Pursuant to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (‘‘SFAS No. 131’’), we have seven reportable segments which we determined based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. In addition, the management approach focuses on financial information that an enterprise’s decision makers use to make decisions about the enterprise’s operating matters. We continue to evaluate the type of financial information necessary for the decision makers as we implement our growth strategies. Each of our facilities are considered separate operating segments because they each engage in business activities from which they earn revenues and incur expenses, their operating results are regularly reviewed by the Chief Operating Decision Makers (CODMS) to make decisions about resources to be allocated to the segment and assess its performance, and discrete financial information is available.
SFAS No. 131 permits aggregation of operating segments that share all common operating characteristics (similar products and services, similar methods used to deliver or provide their products and services, and similar type and class of customer for their products and services) and similar economic characteristics (revenue recognition and gross margin). We believe that each of our facilities provides similar services, delivers these services in a similar manner, and has a common type and class of customer. In addition, all of our facilities recognize and report revenue in a similar manner. However, our individual facility gross margins vary significantly. Therefore, we have aggregated our segments based upon the lowest common economic characteristic of each of our facilities, gross margin. The CODMS allocate resources in large part based on margin and analyze each of the facilities as having either (1) less than 20% operating margins, (2) more than 20% operating margins but less than 40% operating margins, or (3) greater than 40% operating margins. The CODMS believe that the margin is the primary, most significant and most useful indicator of the necessary allocation of resources to each individual facility because it is the best indicator of a facility’s operating performance and resource requirements. Accordingly, our operating segments are aggregated into six reportable segments based on comparable operating margins. We define our operating margin for each group of facilities as that group’s operating income divided by its revenue. Operating income represents revenue less operating expenses (excluding depreciation and amortization).
We also present a seventh reportable segment for management services because the economic and operating characteristics of these services are different from our facilities aggregated above.
Retirement Centers (IL/CCRC)
Our retirement centers operate independent living facilities and CCRCs that provide a continuum of services, including independent living, assisted living, Alzheimer’s care, dementia care and skilled nursing care. Our facilities include rental facilities and entrance fee facilities. We also provide various ancillary services to our residents and others, including extensive wellness programs, personal care and therapy services for all levels of care.
19
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Assisted Living Facilities
Our assisted living facilities provide specialized assisted living care to residents in a comfortable residential atmosphere. Most of our facilities provide specialized care, including Alzheimer’s and other dementia programs. These facilities are designed to provide care in a home-like setting, as opposed to a more institutional setting. We also provide various ancillary services, including therapy services to our residents.
Management Services
Our management services segment includes facilities owned by others and operated by us pursuant to management agreements. Under our management agreements for these facilities, we receive management fees and reimbursed expenses, which represent the reimbursement of certain expenses we incur on behalf of the owners.
The accounting policies of our reporting segments are the same as those described in the summary of significant accounting policies. The following table sets forth certain segment financial and operating data.
Three
Months Ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
Revenue(3): |
|
|
|
|
||||||||||||||||||||
Retirement Centers |
|
|
|
|
||||||||||||||||||||
Less than 20% operating margin | $ | 18,096 |
|
$ | 12,776 |
|
$ | 35,022 |
|
$ | 29,903 |
|
||||||||||||
20% – 40% operating margin | 86,506 |
|
41,659 |
|
169,754 |
|
102,269 |
|
||||||||||||||||
Greater than 40% operating margin | 100,452 |
|
47,426 |
|
229,069 |
|
129,228 |
|
||||||||||||||||
Total Retirement Centers | 205,054 |
|
101,861 |
|
433,845 |
|
261,400 |
|
||||||||||||||||
Assisted Living Facilities |
|
|
|
|
||||||||||||||||||||
Less than 20% operating margin | 13,198 |
|
11,919 |
|
32,090 |
|
38,773 |
|
||||||||||||||||
20% – 40% operating margin | 93,594 |
|
56,824 |
|
194,352 |
|
153,973 |
|
||||||||||||||||
Greater than 40% operating margin | 73,771 |
|
37,789 |
|
214,208 |
|
120,709 |
|
||||||||||||||||
Total Assisted Living Facilities | 180,563 |
|
106,532 |
|
440,650 |
|
313,455 |
|
||||||||||||||||
Management Services | 1,426 |
|
859 |
|
3,158 |
|
2,675 |
|
||||||||||||||||
Total revenue | $ | 387,043 |
|
$ | 209,252 |
|
$ | 877,653 |
|
$ | 577,530 |
|
||||||||||||
20
BROOKDALE
SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Unaudited, in thousands, except for share and
per share
amounts)
Segment Operating Income(1):
Retirement Centers
Less than 20% operating margin | $ | 1,911 |
|
$ | 1,702 |
|
$ | 4,398 |
|
$ | 3,727 |
|
||||||||||||
20% – 40% operating margin | 25,538 |
|
13,025 |
|
50,065 |
|
32,491 |
|
||||||||||||||||
Greater than 40% operating margin | 47,656 |
|
22,912 |
|
111,282 |
|
63,805 |
|
||||||||||||||||
Total Retirement Centers | 75,105 |
|
37,639 |
|
165,745 |
|
100,023 |
|
||||||||||||||||
Average Margin | 36.6 |
%
|
36.9 |
%
|
38.2 |
%
|
38.3 |
%
|
||||||||||||||||
Assisted Living Facilities |
|
|
|
|
||||||||||||||||||||
Less than 20% operating margin | 1,335 |
|
1,659 |
|