Summarized Financial Information of Equity Affiliates | 9 Months Ended |
Sep. 30, 2013 |
Summarized Financial Information of Equity Affiliates | ' |
(5) Summarized Financial Information of Equity Affiliates |
Our consolidated financial statements include the consolidated accounts of our controlled investments and those investments that meet the criteria of a variable interest entity where we are or were the primary beneficiary. In accordance with the Financial Accounting Standards Board’s (“FASB”) standards and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs which we do not control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied. |
At September 30, 2013, we have non-controlling equity investments or commitments in thirteen jointly-owned LLCs which own MOBs. As of September 30, 2013, we accounted for these LLCs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities. Palmdale Medical Properties was consolidated in our financial statements through June 30, 2013. As previously disclosed, the master lease with a wholly-owned subsidiary of UHS related to Palmdale Medical Properties expired effective as of July 1, 2013 and, as of that date, we began accounting for Palmdale Medical Properties under the equity method. The majority of these LLCs are joint-ventures between us and a non-related party that manages and holds minority ownership interests in the entities. Each LLC is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash fundings are typically advanced as equity or member loans. |
Palmdale Medical Properties had a master lease with a subsidiary of UHS through June 30, 2013. Additionally, UHS of Delaware, a wholly-owned subsidiary of UHS, serves as advisor to us under the terms of an advisory agreement and manages our day-to-day affairs. All of our officers are officers or employees of UHS (through UHS of Delaware, Inc.). As a result of our related-party relationship with UHS and the master lease, lease assurance or lease guarantee arrangements with subsidiaries of UHS, we have accounted for this LLC on a consolidated basis, since the fourth quarter of 2007 through June 30, 2013, since it was a variable interest entity and we were deemed to be the primary beneficiary. As of July 1, 2013, the master lease expired and this LLC is no longer considered a variable interest entity and we therefore began to account for this LLC on an unconsolidated basis pursuant to the equity method as of July 1, 2013. Although the expiration of the master lease will have an unfavorable impact on our net income and funds from operations, we do not believe the impact will be material to our financial condition or liquidity. |
At September 30, 2013, the LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to consolidation. As a result of master lease arrangements between UHS and various LLCs in which we hold majority non-controlling ownership interests, we have consolidated or deconsolidated these LLCs as required in accordance with the FASB’s standards and guidance. |
Rental income is recorded by our consolidated and unconsolidated MOBs relating to leases in excess of one year in length using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rent adjustments is dependent on many factors, including the nature and amount of any rental concessions granted to new tenants, scheduled rent increases under existing leases, as well as the acquisition and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-line adjustments to rental revenue may vary from period-to-period. |
The following property table represents the thirteen LLCs in which we own a noncontrolling interest and were accounted for under the equity method as of September 30, 2013: |
|
| | | | | | | | | | | | | | | | |
Name of LLC/LP | | Ownership | | | Property Owned by LLC | | | | | | | | | | |
DVMC Properties | | | 90 | % | | Desert Valley Medical Center | | | | | | | | | | |
Suburban Properties | | | 33 | % | | Suburban Medical Plaza II | | | | | | | | | | |
Santa Fe Scottsdale | | | 90 | % | | Santa Fe Professional Plaza | | | | | | | | | | |
Brunswick Associates | | | 74 | % | | Mid Coast Hospital MOB | | | | | | | | | | |
PCH Medical Properties | | | 85 | % | | Rosenberg Children’s Medical Plaza | | | | | | | | | | |
Arlington Medical Properties (b.) | | | 75 | % | | Saint Mary’s Professional Office Building | | | | | | | | | | |
Sierra Medical Properties | | | 95 | % | | Sierra San Antonio Medical Plaza | | | | | | | | | | |
PCH Southern Properties | | | 95 | % | | Phoenix Children’s East Valley Care Center | | | | | | | | | | |
Sparks Medical Properties (a.) | | | 95 | % | | Vista Medical Terrace & The Sparks Medical Building | | | | | | | | | | |
Grayson Properties (a.)(c.) | | | 95 | % | | Texoma Medical Plaza | | | | | | | | | | |
3811 Bell Medical Properties | | | 95 | % | | North Valley Medical Plaza | | | | | | | | | | |
FTX MOB Phase II (d.) | | | 95 | % | | Forney Medical Plaza II | | | | | | | | | | |
Palmdale Medical Plaza (a.) (e.) | | | 95 | % | | Palmdale Medical Properties | | | | | | | | | | |
|
(a.) | Tenants of this medical office building include or will include subsidiaries of UHS. | | | | | | | | | | | | | | | |
(b.) | We have funded $5.2 million in equity as of September 30, 2013 and are committed to invest an additional $1.2 million, in exchange for a 75% non-controlling equity interest in an LLC that owns and operates the Saint Mary’s Professional Office Building. This LLC has a third-party term loan of $24.2 million, which is non-recourse to us, outstanding as of September 30, 2013. | | | | | | | | | | | | | | | |
(c.) | We have funded $2.1 million in equity as of September 30, 2013, and are committed to fund an additional $2.3 million. This building, which is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS, was completed and opened during the first quarter of 2010. This LLC has a third-party term loan of $12.6 million, which is non-recourse to us, outstanding as of September 30, 2013. | | | | | | | | | | | | | | | |
(d.) | During the third quarter of 2012, this limited partnership entered into an agreement to develop, construct, own and operate the Forney Medical Plaza II, which opened on April 1, 2013. We have committed to invest up to $2.5 million in equity and debt financing, of which $1.1 million has been funded as of September 30, 2013. This LLC has a third-party construction loan of $5.6 million, which is non-recourse to us, outstanding as of September 30, 2013. | | | | | | | | | | | | | | | |
(e.) | We have funded $6.0 million in equity and member loans as of September 30, 2013, and are committed to invest an additional $2.9 million, in exchange for a 95% non-controlling equity interest in an LLC that owns and operates the Palmdale Medical Plaza, which is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS. This LLC has a third-party term loan of $6.2 million, which is non-recourse to us, outstanding as of September 30, 2013. We began to account for this LLC on an unconsolidated basis pursuant to the equity method as of July 1, 2013, as discussed above. | | | | | | | | | | | | | | | |
Below are the condensed combined statements of income (unaudited) for the LLCs accounted for under the equity method at September 30, 2013 and 2012. The combined statements of income for the three and nine month periods ended September 30, 2012 include the prorated amounts for Canyon Springs Medical Plaza, which was divested in February, 2012, and Centinela Medical Building Complex, which was divested in October, 2012. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
September 30, | September 30, |
| | 2013(b.) | | | 2012 | | | 2013(b.) | | | 2012 | |
| | (amounts in thousands) | |
Revenues | | $ | 5,320 | | | $ | 5,514 | | | $ | 15,566 | | | $ | 16,499 | |
Operating expenses | | | 2,099 | | | | 2,327 | | | | 6,499 | | | | 6,992 | |
Depreciation and amortization | | | 985 | | | | 1,062 | | | | 2,969 | | | | 3,120 | |
Interest, net | | | 1,716 | | | | 1,545 | | | | 4,714 | | | | 4,716 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 520 | | | $ | 580 | | | $ | 1,384 | | | $ | 1,671 | |
| | | | | | | | | | | | | | | | |
Our share of net income (a.) | | $ | 515 | | | $ | 645 | | | $ | 1,545 | | | $ | 1,803 | |
| | | | | | | | | | | | | | | | |
Our share of gain on divestiture | | $ | — | | | $ | — | | | $ | — | | | $ | 7,375 | |
| | | | | | | | | | | | | | | | |
|
(a.) | Our share of net income includes interest income earned by us on various advances made to LLCs of approximately $511,000 and $438,000 for the three months ended September 30, 2013 and 2012, respectively, and $1.4 million and $1.3 million for the nine months ended September 30, 2013 and 2012, respectively. | | | | | | | | | | | | | | | |
(b.) | As mentioned above, we began to account for Palmdale Medical Plaza on an unconsolidated basis pursuant to the equity method as of July 1, 2013. Prior to July 1, 2013, the financial results of this entity were accounted for on a consolidated basis. These amounts include the financial results for Palmdale Medical Plaza for the three months ended September 30, 2013. | | | | | | | | | | | | | | | |
Below are the condensed combined balance sheets (unaudited) for the LLCs accounted for under the equity method: |
|
| | | | | | | | | | | | | | | | |
| | September 30, | | | December 31, | | | | | | | | | |
2013 (a.) | 2012 | | | | | | | | |
| | (amounts in thousands) | | | | | | | | | |
Net property, including CIP | | $ | 119,948 | | | $ | 106,150 | | | | | | | | | |
Other assets | | | 10,207 | | | | 9,850 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 130,155 | | | $ | 116,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities | | $ | 5,870 | | | $ | 5,368 | | | | | | | | | |
Mortgage notes payable, non-recourse to us | | | 80,563 | | | | 77,511 | | | | | | | | | |
Advances payable to us | | | 22,461 | | | | 12,658 | | | | | | | | | |
Equity | | | 21,261 | | | | 20,463 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total liabilities and equity | | $ | 130,155 | | | $ | 116,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Our share of equity and advances to LLCs | | $ | 39,209 | | | $ | 28,636 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
(a.) | As mentioned above, we began to account for Palmdale Medical Plaza on an unconsolidated basis pursuant to the equity method as of July 1, 2013. Prior to July 1, 2013, the financial results of this entity were accounted for on a consolidated basis. | | | | | | | | | | | | | | | |
|
As of September 30, 2013, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands): |
|
| | | | | | | | | | | | | | | | |
2013 | | $ | 464 | | | | | | | | | | | | | |
2014 | | | 14,180 | | | | | | | | | | | | | |
2015 | | | 41,473 | | | | | | | | | | | | | |
2016 | | | 578 | | | | | | | | | | | | | |
2017 | | | 11,828 | | | | | | | | | | | | | |
Later | | | 12,040 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total | | $ | 80,563 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
Name of LLC | | Mortgage/ | | | Maturity Date | | | | | | | | | |
Construction | | | | | | | | |
Loan | | | | | | | | |
Balance(a.) | | | | | | | | |
Grayson Properties | | $ | 12,615 | | | | 2014 | | | | | | | | | |
Brunswick Associates | | | 7,979 | | | | 2015 | | | | | | | | | |
Arlington Medical Properties | | | 24,237 | | | | 2015 | | | | | | | | | |
Palmdale Medical Properties (c.) | | | 6,189 | | | | 2015 | | | | | | | | | |
DVMC Properties | | | 3,996 | | | | 2015 | | | | | | | | | |
FTX MOB Phase II(b.) | | | 5,596 | | | | 2017 | | | | | | | | | |
PCH Southern Properties | | | 6,645 | | | | 2017 | | | | | | | | | |
Sparks Medical Properties | | | 4,634 | | | | 2018 | | | | | | | | | |
PCH Medical Properties | | | 8,672 | | | | 2018 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | 80,563 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
(a.) | All mortgage loans, other than construction loans, require monthly principal payments through maturity and include a balloon principal payment upon maturity. | | | | | | | | | | | | | | | |
(b.) | Construction loan. | | | | | | | | | | | | | | | |
(c.) | Refinance options have been completed subsequent to September 30, 2013. The loan has been extended with a maturity date of October 31, 2015. | | | | | | | | | | | | | | | |
Pursuant to the operating agreements of the LLCs, the third-party member and the Trust, at any time, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member (“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 days of the acceptance by the Non-Offering Member. |
The LLCs in which we have invested maintain property insurance on all properties. Although we believe that generally our properties are adequately insured, two of the LLCs in which we own various non-controlling equity interests, own properties in California that are located in earthquake zones. These properties are not covered by earthquake insurance since earthquake insurance is no longer available at rates which are economical in relation to the risks covered. |