Exhibit 99.1
Combined Statements of Revenues and Certain Expenses Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II For the Nine Months Ended September 30, 2009 (unaudited) and the Year Ended December 31, 2008 With Report of Independent Auditors |
INDEX TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II | ||
Report of Independent Auditors | 1 | |
Combined Statements of Revenues and Certain Expenses for the nine months ended September 30, 2009 (unaudited) and the year ended December 31, 2008 | 2 | |
Notes to the Combined Statements of Revenues and Certain Expenses | 3 |
REPORT OF INDEPENDENT AUDITORS
Management
CapitalSource Inc.
We have audited the accompanying combined statement of revenues and certain expenses of the Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II (the “Sale Properties”) for the year ended December 31, 2008. The combined statement of revenues and certain expenses is the responsibility of the Sale Properties' management. Our responsibility is to express an opinion on the combined statement of revenues and certain expenses based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined statement of revenues and certain expenses is free of material misstatement. We were not engaged to perform an audit of the Sale Properties’ internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Sale Properties’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined statement of revenues and certain expenses, assessing the accounting principles used and significant estimates made by management, and evaluating the overall presentation of the combined statement of revenues and certain expenses. We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in a registration statement and/or Form 8-K of Omega Healthcare Investors, Inc. as described in Note 1, and is not intended to be a complete presentation of the Sale Properties’ combined revenues and expenses.
In our opinion, the combined statement of revenues and certain expenses referred to above presents fairly, in all material respects, the revenues and certain expenses described in Note 1 of the Sale Properties for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic combined statement of revenues and certain expenses taken as a whole. The combining statement of revenues and certain expenses and other combining information appearing in conjunction with the combined statement of revenues and certain expenses are presented for purposes of additional analysis and are not a required part of the basic combined statement of revenues and certain expenses. Such information has been subjected to the auditing procedures applied in our audit of the basic combined statement of revenues and certain expenses and, in our opinion, is fairly stated in all material respects in relation to the basic combined statement of revenues and certain expenses taken as whole.
/s/ Ernst & Young LLP
McLean, Virginia
December 18, 2009
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
Combined Statements of Revenues and Certain Expenses
Nine Months Ended September 30, | Year Ended December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
($ in thousands) | ||||||||
Revenues: | ||||||||
Operating lease income | $ | 44,519 | $ | 59,467 | ||||
Certain expenses: | ||||||||
Interest | 7,010 | 14,342 | ||||||
Depreciation | 14,911 | 20,008 | ||||||
General and administrative | 3,799 | 4,766 | ||||||
Total expenses | 25,720 | 39,116 | ||||||
Revenues in excess of certain expenses | $ | 18,799 | $ | 20,351 |
See accompanying notes.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Note 1. Basis of Presentation
Presented herein are the combined statements of revenues and certain expenses of a significant portion of the healthcare-related assets and liabilities of CapitalSource Inc.’s (“CapitalSource”) direct real estate business owned by subsidiaries of CapitalSource Healthcare REIT (‘‘CHR’’) and CSE Mortgage LLC (“CSE Mortgage”), (collectively, the “Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II” or the “Sale Properties”) to be sold to Omega Healthcare Investors, Inc. (“OHI”), a publicly traded company, in consideration for shares of OHI, one or more notes receivable, assumption of debt and cash. The specific properties and terms of the sale are outlined in the Securities Purchase Agreement between CapitalSource and OHI. The Sale Properties will be sold to OHI in two closings, Closing I and Closing II, as outlined in the Securities Purchase Agreement. The composition of each closing is defined below.
These combined statements have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission and are not intended to be a complete presentation of the actual operations of the Sale Properties. Accordingly, the combined financial statements exclude certain expenses because they may not be comparable to those expected to be incurred in the future operations of the Sale Properties. Items excluded consist primarily of allocated income tax charges and asset impairment charges, which may not be comparable to future operations.
The following table describes the composition of the Sale Properties:
Closing I | ||||
Operating Property | Location | Number of Licensed Beds | ||
9100 Centennial Drive | Anchorage, AK | 90 | ||
6060 East Iliff Avenue | Denver, CO | 120 | ||
7723 Jasper Avenue | Jacksonville, FL | 100 | ||
1620 East Helvenston Street | Live Oak, FL | 180 | ||
1700 Monroe Avenue | Maitland, FL | 180 | ||
4294 3rd Avenue | Marianna, FL | 136 | ||
1415 South Hickory Street | Melbourne, FL | 138 | ||
1735 North Treasure Drive | North Bay Village, FL | 176 | ||
924 West 13th Street | Panama City, FL | 120 | ||
2202 West Oak Avenue | Plant City, FL | 120 | ||
3456 21st Avenue South | St. Petersburg, FL | 57 | ||
321 13th Avenue North | St. Petersburg, FL | 39 | ||
718 Lakeview Avenue South | St. Petersburg, FL | 74 | ||
3479 54th Avenue North | St. Petersburg, FL | - (*) | ||
1430 Pasadena Avenue South | St. Petersburg, FL | 126 | ||
202 Avenue O NE | Winter Haven, FL | 144 | ||
200 Short Street | Williamsport, IN | 96 | ||
184 Main Street | Fairhaven, MA | 100 | ||
340 Desoto Avenue | Clarksdale, MS | 66 | ||
1122 North Eshman Avenue | West Point, MS | 120 | ||
660 Desert Lane | Las Vegas, NV | 138 | ||
640 Desert Lane | Las Vegas, NV | 61 | ||
3215 East Cheyenne Avenue | N. Las Vegas, NV | 182 | ||
11239 Waterville Street | Whitehouse, OH | 90 | ||
905 Tower Road | Bristol, PA | 174 | ||
4400 West Girard Avenue | Philadelphia, PA | 180 | ||
181 Dunlap Road | Blountville, TN | 170 | ||
700 Nuckolls Road | Bolivar, TN | 134 |
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Operating Property | Location | Number of Licensed Beds | ||
197 Hospital Drive | Camden, TN | 150 | ||
635 High Street | Huntingdon, TN | 150 | ||
283 West Broadway Boulevard | Jefferson City, TN | 170 | ||
3909 Covington Pike | Memphis, TN | 233 | ||
118 Halliburton Road | Ripley, TN | 144 | ||
2322 Morgan Avenue | Corpus Christi, TX | 175 | ||
100 West Campus Drive | Crane, TX | 110 | ||
1405 Holland Avenue | Houston, TX | 148 | ||
8955 Long Point Road | Houston, TX | 106 | ||
1341 Blalock Road | Houston, TX | 240 | ||
2090 Bandera Highway | Kerrville, TX | 150 | ||
1008 Citizens Trail | Texarkana, TX | 123 | ||
50 Wolverton Avenue | Ripon, WI | 105 | ||
Closing II | ||||
Operating Property | Location | Number of Licensed Beds | ||
2055 Georgia St. East | Bartow, FL | 120 | ||
755 Meadows Road | Boca Raton, FL | 120 | ||
1902 59th Street West | Bradenton, FL | 240 | ||
4411 North Habana Avenue | Tampa, FL | 174 | ||
1111 South Highland Avenue | Clearwater, FL | 120 | ||
1111 South Highland Avenue | Clearwater, FL | 70 | ||
1270 Turner Street | Clearwater, FL | 120 | ||
991 East New York Avenue | Deland, FL | 60 | ||
545 West Euclid Avenue | Deland, FL | 60 | ||
3250 Winkler Avenue | Ft. Myers, FL | 120 | ||
114 3rd Street | Fort Walton Beach, FL | 120 | ||
1414 59th Street | Gulfport, FL | 120 | ||
13719 Dallas Drive | Hudson, FL | 103 | ||
512 South 11th Street | Lake Wales, FL | 120 | ||
610 East Bella Vista Drive | Lakeland, FL | 120 | ||
1336 St. Andrews | Panama City, FL | 160 | ||
401 East Sample Road | Pompano Beach, FL | 194 | ||
51 West Sample Road | Pompano Beach, FL | 127 | ||
950 Mellonville Avenue | Sanford, FL | 114 | ||
1524 East Avenue South | Sarasota, FL | 169 | ||
7045 Evergreen Woods Trail | Spring Hill, FL | 120 | ||
7101 31st Street South | St. Petersburg, FL | 152 | ||
4201 31st Street South | St. Petersburg, FL | 120 | ||
550 62nd. Street | St. Petersburg, FL | 120 | ||
15002 Hutchinson Road | Tampa, FL | 120 | ||
300 15th Street | West Palm Beach, FL | 99 | ||
515 Chesapeake Drive | Tarpon Springs, FL | 120 | ||
1705 Jess Parrish Court | Titusville, FL | 157 | ||
2629 Del Prado Boulevard | Cape Coral, FL | 120 | ||
3387 Gulf Breeze Parkway | Gulf Breeze, FL | 180 | ||
4343 Langley Avenue | Pensacola, FL | 120 | ||
138 Sandestine Lane | Destin, FL | 113 | ||
5951 Colonial Drive | Margate, FL | 170 |
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Operating Property | Location | Number of Licensed Beds | ||
3107 North H Street | Pensacola, FL | 155 | ||
103 Ruby Lane | Crestview, FL | 60 | ||
6894 Pine Forest Road | Pensacola, FL | 120 | ||
538 Menge Avenue | Pass Christian, MS | 60 | ||
1199 Ocean Springs Road | Ocean Springs, MS | 115 | ||
1304 Walnut Street | Waynesboro, MS | 93 | ||
1530 Broad Avenue | Gulfport, MS | 180 | ||
(*) The facility at this location is not currently in operation and, as such, there are no licensed beds associated with this facility.
In these combined financial statements, unless the context otherwise requires or indicates, references to ‘‘we,’’ ‘‘our,’’ and ‘‘us’’ refer to the Sale Properties.
Note 2. Summary of Significant Accounting Policies
Our financial reporting and accounting policies conform to U.S. generally accepted accounting principles (‘‘GAAP’’).
We have conducted our subsequent events review through December 18, 2009.
Use of Estimates
The preparation of the combined statements of revenues and certain expenses in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosure of revenues and certain expenses of the Sale Properties during the reporting period. Actual results could differ from those estimates.
Principles of Combination
The accompanying financial statements reflect our combined accounts of the Sale Properties. All significant intercompany accounts and transactions have been eliminated.
Unaudited Interim Combined Financial Statement
The combined statement of revenues and certain expenses for the nine months ended September 30, 2009 is unaudited. In the opinion of management, all adjustments and eliminations, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period’s revenues in excess of certain expenses are not necessarily indicative of the results that ultimately may be achieved for the year.
Real Estate Investments
Depreciation is computed on a straight-line basis over the estimated useful life of the asset, which ranges from 10 to 40 years for buildings and improvements. Furniture and equipment related to our real estate investments are depreciated over seven and five year periods, respectively.
In assessing lease intangibles, we recognize above-market and below-market in-place lease values for acquired operating leases based on the present value of the difference between: (1) the contractual amounts to be received pursuant to the leases negotiated and in-place at the time of acquisition of the facilities; and (2) management’s estimate of fair market lease rates for the facility or equivalent facility, measured over a period equal to the remaining non-cancelable term of the lease. Factors to be considered for lease intangibles also include estimates of carrying costs during hypothetical lease-up periods, market conditions, and costs to execute similar leases. The capitalized above-market or below-market lease values are classified as intangible lease assets, net and lease obligations, net, respectively, and are amortized into operating lease income over the remaining non-cancelable term of each lease.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Operating Lease Income Recognition
Our real estate investments are leased to unrelated third parties through long-term, triple-net operating leases that typically include fixed rental payments, subject to escalation over the life of the lease. We recognize operating lease income on a straight-line basis over the non-cancelable term of the lease when collectability is reasonably assured. For the nine months ended September 30, 2009 and the year ended December 31, 2008, straight-line rental revenues for Closing I totaling $1.8 million (unaudited) and $2.7 million, respectively, and for Closing II totaling $1.5 million (unaudited) and $2.7 million, respectively, were recognized as a component of operating lease income in our combined statements of revenues and certain expenses.
We do not recognize any revenue on contingent rents until payments are received and all contingencies have been met.
Income Taxes
We expect that the Sale Properties will reside in a real estate investment trust under the Internal Revenue Code of 1986, and generally will not be subject to corporate income taxes to the extent it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying statements of revenues and certain expenses.
Note 3. Combining Statements of Revenue and Certain Expenses
The following represents the supplemental combining statements of revenue and certain expenses for the Sale Properties, which includes properties to be sold to OHI in two closings, Closing I and Closing II for the nine months ended September 30, 2009 and the year ended December 31, 2008 ($ in thousands):
Nine Months Ended September 30, 2009 (unaudited) | ||||||||||||
Closing I | Closing II | Total | ||||||||||
Revenues: | ||||||||||||
Operating lease income | $ | 22,665 | $ | 21,854 | $ | 44,519 | ||||||
Certain expenses: | ||||||||||||
Interest | 3,026 | 3,984 | 7,010 | |||||||||
Depreciation | 7,791 | 7,120 | 14,911 | |||||||||
General and administrative | 2,042 | 1,757 | 3,799 | |||||||||
Total expenses | 12,859 | 12,861 | 25,720 | |||||||||
Revenues in excess of certain expenses | $ | 9,806 | $ | 8,993 | $ | 18,799 |
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Year Ended December 31, 2008 | ||||||||||||
Closing I | Closing II | Total | ||||||||||
Revenues: | ||||||||||||
Operating lease income | $ | 30,280 | $ | 29,187 | $ | 59,467 | ||||||
Certain expenses: | ||||||||||||
Interest | 4,929 | 9,413 | 14,342 | |||||||||
Depreciation | 10,516 | 9,492 | 20,008 | |||||||||
General and administrative | 2,372 | 2,394 | 4,766 | |||||||||
Total expenses | 17,817 | 21,299 | 39,116 | |||||||||
Revenues in excess of certain expenses | $ | 12,463 | $ | 7,888 | $ | 20,351 |
Note 4. Lease Commitments
The leases on our real estate investments expire at various dates through 2024 and typically include fixed rental payments that are subject to escalation over the life of the lease. As of December 31, 2008, we expected to receive future minimum rental payments from our non-cancelable operating leases as follows ($ in thousands):
Closing I | Closing II | Total | ||||||||||
2009 | $ | 34,657 | $ | 20,168 | $ | 54,825 | ||||||
2010 | 35,488 | 20,749 | 56,237 | |||||||||
2011 | 36,146 | 21,347 | 57,493 | |||||||||
2012 | 36,696 | 21,962 | 58,658 | |||||||||
2013 | 37,491 | 22,595 | 60,086 | |||||||||
Thereafter | 202,497 | 67,727 | 270,224 | |||||||||
Total | $ | 382,975 | $ | 174,548 | $ | 557,523 |
Note 5. Commitments and Contingencies
We had identified conditional asset retirement obligations primarily related to the future removal and disposal of asbestos that is contained within certain of our real estate investment properties. The asbestos is appropriately contained, and we believe we are compliant with current environmental regulations. If these properties undergo major renovations or are demolished, certain environmental regulations are in place, which specify the manner in which asbestos must be handled and disposed.
From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our combined statement of revenues and certain expenses.
Note 6. Borrowings
Mortgage Debt
In connection with the property acquisition from REIT Solutions, Inc., we assumed mortgage debt with a total carrying value of $57.2 million as of the date of acquisition. The assumed debt agreements, which bear interest at a weighted average rate of 6.41%, are with Highland Mortgage Company (‘‘Highland’’) and are guaranteed by HUD. As of September 30, 2009 and December 31, 2008, the carrying amounts of this mortgage debt were $55.5 million and $56.0 million, including net premium balances of $1.7 million and $1.8 million, respectively. Interest expense on this debt for the nine months ended September 30, 2009 and the year ended December 31, 2008 was $2.6 million and $3.6 million, respectively for Closing II. There is no mortgage debt associated with Closing I.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Subordinated Debt
In November 2006, in connection with the property acquisition from REIT Solutions, Inc., we entered into an aggregate of $20 million junior subordinated unsecured seller notes. The term of the notes is 15 years, and interest is payable quarterly at a fixed rate of 9.0%. The interest on these notes is due and payable only to the extent that there is rent being received from the tenants of the acquired properties to cover the interest expense related to this debt. Principal is due at the end of the 15-year period only to the extent that all rent has been paid for the 15-year term of the debt. Interest expense on this debt for the nine months ended September 30, 2009 and the year ended December 31, 2008 was $1.4 million and $1.8 million, respectively for Closing II. There is no subordinated debt associated with Closing I.
Related Party Debt
In July 2006, we entered into promissory notes totaling $106.7 million with CSE Mortgage, $18.2 million related to Closing I and $88.5 million related to Closing II. Interest was payable quarterly at a variable rate of one-month LIBOR plus 3.00%, and principal was payable upon CSE Mortgage’s demand. In October 2008, we repaid all amounts outstanding under these notes.
In November 2007, we entered into 10-year mortgage loans totaling $59.4 million with CSE Mortgage. Interest is payable monthly at a variable rate of one-month LIBOR plus 2.30%. The one-month LIBOR is subject to a floor of 4.50%. Principal is payable at maturity in November 2017 and the loans are prepayable at our option and without penalty. This debt is related to the Closing I Sale Properties and remained outstanding as of September 30, 2009.
Note 7. Related Party Transactions
For all periods presented, certain management, administrative and operational services of CapitalSource were shared between the Sale Properties and other CapitalSource operations. For purposes of financial statement presentation, the costs for these shared services have been allocated to the Sale Properties based on actual direct costs incurred and an allocation of indirect costs. CapitalSource’s management believes that the allocations are reasonable. However, actual expenses may be materially different from the allocated expenses if the Sale Properties had operated as an unaffiliated stand-alone entity.
Our combined statements of revenues and certain expenses for the nine months ended September 30, 2009 and the year ended December 31, 2008 include the following related party income and expenses for Closing I and Closing II ($ in thousands):
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closings I & II
NOTES TO THE COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
Nine Months Ended September 30, 2009 (unaudited) | ||||||||||||
Closing I | Closing II | Total | ||||||||||
Allocated interest income(1) | $ | 47 | $ | 27 | $ | 74 | ||||||
Related party interest expense(2) | 3,026 | — | 3,026 | |||||||||
Allocated general and administrative expenses(3) | 1,561 | 1,423 | 2,984 |
(1) | Represents an allocation of interest income earned on cash held and managed by CapitalSource on our behalf. |
(2) | Includes interest expense on related party debt issued by CSE Mortgage. |
(3) | To facilitate operating efficiency, CapitalSource provides office space, equipment, certain administrative support, and other assistance to the Sale Properties. As a result, overhead expenses (including compensation and benefits) have been allocated to the Sale Properties at cost based on the relative value of its real estate assets to CapitalSource’s portfolio. |
Year Ended December 31, 2008 | ||||||||||||
Closing I | Closing II | Total | ||||||||||
Allocated interest income(1) | $ | 117 | $ | 56 | $ | 173 | ||||||
Related party interest expense(2) | 4,929 | 4,033 | 8,962 | |||||||||
Allocated general and administrative expenses(3) | 2,229 | 2,018 | 4,247 |
(1) | Represents an allocation of interest income earned on cash held and managed by CapitalSource on our behalf. |
(2) | Includes interest expense on related party debt issued by CSE Mortgage. |
(3) | To facilitate operating efficiency, CapitalSource provides office space, equipment, certain administrative support, and other assistance to the Sale Properties. As a result, overhead expenses (including compensation and benefits) have been allocated to the Sale Properties at cost based on the relative value of its real estate assets to CapitalSource’s portfolio. |
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