Accounting Policies | 9 Months Ended | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||
| ACCOUNTING POLICIES |
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.
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.
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.
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.
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.
We use the following methods and assumptions in estimating fair value of financial
instruments:
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 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.
|