Exhibit 99.1
Unaudited Combined Statement of Revenues and Certain Expenses | |
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II | |
For the Three Months Ended March 31, 2010 |
INDEX TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II | ||
Unaudited Combined Statement of Revenues and Certain Expenses for the three months ended March 31, 2010 | 1 | |
Notes to the Unaudited Combined Statement of Revenues and Certain Expenses | 2 |
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II
Combined Statement of Revenues and Certain Expenses
For the Three Months Ended March 31, 2010
(Unaudited)
($ in thousands)
Revenues: | ||||
Operating lease income | $ | 7,203 | ||
Other income | 29 | |||
Total revenues | 7,232 | |||
Certain expenses: | ||||
Interest | 2,926 | |||
General and administrative | 1,166 | |||
Total expenses | 4,092 | |||
Revenues in excess of certain expenses | $ | 3,140 |
See accompanying notes.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Note 1. Basis of Presentation
Presented herein is the unaudited combined statement of revenues and certain expenses of a portion of the healthcare-related assets and liabilities of CapitalSource Inc.’s (“CapitalSource”) direct real estate business owned by subsidiaries of CapitalSource Healthcare REIT (the “Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II” or the “Sale Properties”), to be sold to Omega Healthcare Investors, Inc. (“OHI”), a publicly traded company, in consideration for the 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 composition of the Sale Properties is defined below.
The combined statement has been prepared for the purpose of complying with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission and is not intended to be a complete presentation of the actual operations of the Sale Properties. Accordingly, the combined financial statement excludes certain expenses because they may not be comparable to those expenses expected to be incurred in the future operations of the Sale Properties. Items excluded consist primarily of allocated income tax charges, which may not be comparable to future operations. Consistent with CapitalSource’s treatment of the Sale Properties in its consolidated financial statements for the three months ended March 31, 2010, depreciation ceased on November 1, 2009 as a result of the Sale Properties being classified as held for sale and presented as discontinued operations therein.
The following table describes the composition of the Sale Properties:
Operating Property | Location | |
2055 Georgia St. East | Bartow, FL | |
755 Meadows Road | Boca Raton, FL | |
1902 59th Street West | Bradenton, FL | |
1111 South Highland Avenue | Clearwater, FL | |
1111 South Highland Avenue | Clearwater, FL | |
1270 Turner Street | Clearwater, FL | |
991 East New York Avenue | Deland, FL | |
545 West Euclid Avenue | Deland, FL | |
3250 Winkler Avenue | Ft. Myers, FL | |
114 3rd Street | Fort Walton Beach, FL | |
1414 59th Street | Gulfport, FL | |
13719 Dallas Drive | Hudson, FL | |
512 South 11th Street | Lake Wales, FL | |
610 East Bella Vista Drive | Lakeland, FL | |
1336 St. Andrews | Panama City, FL | |
401 East Sample Road | Pompano Beach, FL | |
51 West Sample Road | Pompano Beach, FL | |
950 Mellonville Avenue | Sanford, FL | |
1524 East Avenue South | Sarasota, FL | |
7045 Evergreen Woods Trail | Spring Hill, FL | |
7101 31st Street South | St. Petersburg, FL | |
4201 31st Street South | St. Petersburg, FL | |
550 62nd Street | St. Petersburg, FL | |
15002 Hutchinson Road | Tampa, FL | |
4411 North Habana Avenue | Tampa, FL | |
515 Chesapeake Drive | Tarpon Springs, FL | |
1705 Jess Parrish Court | Titusville, FL | |
300 15th Street | West Palm Beach, FL |
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Operating Property | Location | |
2629 Del Prado Boulevard | Cape Coral, FL | |
3387 Gulf Breeze Parkway | Gulf Breeze, FL | |
4343 Langley Avenue | Pensacola, FL | |
138 Sandestine Lane | Destin, FL | |
5951 Colonial Drive | Margate, FL | |
3107 North H Street | Pensacola, FL | |
103 Ruby Lane | Crestview, FL | |
6894 Pine Forest Road | Pensacola, FL | |
538 Menge Avenue | Pass Christian, MS | |
1199 Ocean Springs Road | Ocean Springs, MS | |
1304 Walnut Street | Waynesboro, MS | |
1530 Broad Avenue | Gulfport, MS |
In the combined statement, 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 May 17, 2010.
Use of Estimates
The preparation of the combined statement 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 statement reflects our combined accounts of the Sale Properties. All significant intercompany accounts and transactions have been eliminated.
Real Estate Investments
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 a re 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.: Closing II
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Operating Lease Income Recognition
Substantially all of 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 three months ended March 31, 2010, straight-line rental revenues totaling $0.4 million were recognized as a component of operating lease income in our combined statement 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 statement of revenues and certain expenses.
Note 3. Commitments and Contingencies
We 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 proceedings, if determined adversely to us, would have a material adverse effect on our combined statement of revenues and certain expenses.
Note 4. Borrowings
Mortgage Debt
We had mortgage debt totaling $184.3 million as of March 31, 2010. As of March 31, 2010, our mortgage debt comprised eleven mortgage loans totaling $55.1 million assumed in 2006 and 2007 on the acquisition of certain of our real estate investment properties and guaranteed by the U.S. Department of Housing & Urban Development (“HUD”) and collateralized by eleven of our real estate investment properties. As of March 31, 2010, our mortgage debt also comprised an additional 18 new mortgage loans totaling $129.2 million guaranteed by HUD, collateralized by 29 of our real estate investment properties and which we entered into in December 2009. The weighted average interest rate as of March 31, 2010 on the assumed mortgage loans was 6.61% and on the new mortgage loans was 4.85%. The weighted average maturity as of March 31, 2 010 on the assumed mortgage loans was 27 years and on the new mortgage loans was 33 years. Interest expense on this debt for the three months ended March 31, 2010 was $2.5 million.
Subordinated Debt
In November 2006, in connection with the acquisition of eleven properties, 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 in December 2021, but only to the extent that all rent has been paid for the 15-year term of the debt. As of March 31, 2010, all rent had been paid in full. Interest expense on this debt for the three months ended March 31, 2010 was $0.4 million.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing II
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Note 5. Related Party Transactions
For the three months ended March 31, 2010, certain management, administrative and operational services of CapitalSource were shared between the Sale Properties and other CapitalSource operations. For purposes of financial statement presentation, the costs for these shared services have been allocated to the Sale Properties based on actual direct costs incurred and an allocation of indirect costs. CapitalSource’s management believes that the allocations are reasonable. However, actual expenses may be materially different from the allocated expenses if the Sale Properties had operated as an unaffiliated stand-alone entity.
Our combined statement of revenues and certain expenses for the three months ended March 31, 2010, includes the following related party income and expenses ($ in thousands):
Allocated interest income(1) | $ | 26 | ||
Allocated general and administrative expenses(2) | 685 |
(1) | Represents an allocation of interest income earned on cash held and managed by CapitalSource on our behalf. |
(2) | 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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Unaudited Combined Statement of Revenues and Certain Expenses | |
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III | |
For the Three Months Ended March 31, 2010 |
INDEX TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III | ||
Unaudited Combined Statement of Revenues and Certain Expenses for the three months ended March 31, 2010 | 1 | |
Notes to the Unaudited Combined Statement of Revenues and Certain Expenses | 2 |
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III
Combined Statement of Revenues and Certain Expenses
For the Three Months Ended March 31, 2010
(Unaudited)
($ in thousands)
Revenues: | ||||
Operating lease income | $ | 8,503 | ||
Other income | 23 | |||
Total revenues | 8,526 | |||
Certain expenses: | ||||
Interest | 1,587 | |||
Depreciation | 2,540 | |||
General and administrative | 1,106 | |||
Total expenses | 5,233 | |||
Revenues in excess of certain expenses | $ | 3,293 |
See accompanying notes.
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Note 1. Basis of Presentation
Presented herein is the unaudited combined statement of revenues and certain expenses of a portion of the healthcare-related assets and liabilities of CapitalSource Inc.’s (“CapitalSource”) direct real estate business owned by subsidiaries of CapitalSource Healthcare REIT, (the “Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III” or the “Sale Properties”) to be sold to Omega Healthcare Investors, Inc. (“OHI”), a publicly traded company. The sale is contingent on OHI’s exercise of a non-refundable option, for which CapitalSource received shares of OHI. The specific properties and terms of the sale are outlined in the Casablanca Option Agreement between CapitalSource and OHI. In April 2010, we received written notice that OHI is electing to exercise the option to acquire the properties, with a proposed closing date in June 2010. These assets were included in CapitalSource’s continuing operations through March 31, 2010 as they did not meet the criteria to be held for sale as of March 31, 2010. The composition of the Sale Properties is defined below.
The combined statement has been prepared for the purpose of complying with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission and is not intended to be a complete presentation of the actual operations of the Sale Properties. Accordingly, the combined financial statement excludes 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, which may not be comparable to future operations.
The following table describes the composition of the Sale Properties:
Operating Property | Location | |
404 Washington Street | Albany, KY | |
9 Medical Drive | Amarillo, TX | |
3864 Sweeten Creek Road | Arden, NC | |
5269 Asbury Road | Augusta, KY | |
50 Shepherd Lane | Bedford, KY | |
520 Glenburn Avenue | Cambridge, MD | |
2714 13th Street NW | Canton, OH | |
200 Clive Drive SW | Cedar Rapids, IA | |
40 Parkhurst Road | Chelmsford, MA | |
110 Beverly Drive | Chesterton, IN | |
590 South Indian Hill Boulevard | Claremont, CA | |
3185 West Arkansas Avenue | Denver, CO | |
1400 North San Antonio Avenue | Douglas, AZ | |
960 East Bowles | Dumas, AR | |
100 Laurel Drive | Elkton, MD | |
2940 North Clinton Street | Fort Wayne, IN | |
303 Highway 155 (Murchison Street) | Frankston, TX | |
102 Pocahontas Trail | Georgetown, KY | |
2961 St. Anthony Drive | Green Bay, WI | |
5471 Scioto Darby Road | Hilliard, OH | |
287 Baker Street | Huntsville, TN | |
344 South Ritter Avenue | Indianapolis, IN | |
8181 Harcourt Road | Indianapolis, IN | |
203 Sparks Avenue | Jeffersonville, IN | |
2700 Waters Edge Parkway | Jeffersonville, IN | |
115 White Road | King, NC | |
2035 Stonebrook Place | Kingsport, TN | |
1000 Tandal Place | Knightdale, NC | |
2400 South First Street | Lake City, FL |
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Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Operating Property | Location | |
4405 Lakewood Road | Lake Worth, FL | |
1432 Depew Street | Lakewood, CO | |
2301 Collins Drive | Las Vegas, NM | |
3051 Buffalo Road | Lawrenceburg, TN | |
2030 Harper Avenue | Lenoir, NC | |
21412 Great Mills Road | Lexington Park, MD | |
200 Kingston Circle Drive | Ligonier, IN | |
110 SE Lee Avenue | Live Oak, FL | |
1555 Commerce Street | Logansport, IN | |
710 Michigan Avenue | Lowell, IN | |
954 Navco Road | Mobile, AL | |
320 North Eastern Avenue | Moore, OK | |
500 South Grant Avenue | Omro, WI | |
833 Kingsley Avenue | Orange Park, FL | |
7950 Lake Underhill Road | Orlando, FL | |
1730 Lucerne Terrace | Orlando, FL | |
450 South 9th Street | Piggott, AR | |
1700 North Washington Street | Pilot Point, TX | |
1400 North Waverly Street | Ponca City, OK | |
1655 Southeast Walton Road | Port St. Lucie, FL | |
2050 Chester Boulevard | Richmond, IN | |
1933 Peppertree Drive | Safford, AZ | |
900 Elmhurst Boulevard | Salina, KS | |
1705 Boren Street | Seminole, OK | |
535 West Federal Street | Shawnee, OK | |
1215 South Western Road | Stillwater, OK | |
625 Taylorsville Road | Taylorsville, KY | |
6602 Memorial Drive | Texas City, TX | |
1564 South University Boulevard | Upland, IN | |
511 Windmill Street | Walnut Cove, NC | |
1801 North Lake Miriam Drive | Winter Haven, FL | |
1801 North Lake Miriam Drive | Winter Haven, FL | |
25 Reynolds Mountain Boulevard | Woodfin, NC | |
2000 Andrews Road | Yorktown, IN |
In the combined statement, 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 May 17, 2010.
Use of Estimates
The preparation of the combined statement 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.
3
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Principles of Combination
The accompanying financial statement reflects our combined accounts of the Sale Properties. All significant intercompany accounts and transactions have been eliminated.
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 a re amortized into operating lease income over the remaining non-cancelable term of each lease.
Deferred Financing Fees
Deferred financing fees represent fees and other direct incremental costs incurred in connection with our borrowings. These amounts are amortized into income as interest expense over the estimated life of the borrowing using the interest method.
Operating Lease Income Recognition
Substantially all of 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 three months ended March 31, 2010, straight-line rental revenues totaling $0.2 million were recognized as a component of operating lease income in our combined statement 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 statement of revenues and certain expenses.
4
Healthcare Real Estate Carve-out of CapitalSource Inc.: Closing III
NOTES TO THE UNAUDITED COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
Note 3. Commitments and Contingencies
We 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 proceedings, if determined adversely to us, would have a material adverse effect on our combined statement of revenues and certain expenses.
Note 4. Borrowings
Mortgage Debt
As of March 31, 2010, our mortgage debt consisted of a senior loan of $227.8 million and a mezzanine loan of $33.7 million collateralized by 63 real estate investment properties. Both loans mature on April 9, 2011 and have a one-year extension option exercisable at our option. The interest rate under the senior loan is one-month LIBOR plus 1.54%, and the interest rate under the mezzanine loan is one-month LIBOR plus 4%. As of March 31, 2010, the one-month LIBOR was 0.25%. Interest expense on this debt for the three months ended March 31, 2010 was $1.6 million, which included amortization of deferred financing fees of $0.2 million.
Note 5. Related Party Transactions
For the three months ended March 31, 2010, certain management, administrative and operational services of CapitalSource were shared between the Sale Properties and other CapitalSource operations. For purposes of financial statement presentation, the costs for these shared services have been allocated to the Sale Properties based on actual direct costs incurred and an allocation of indirect costs. CapitalSource’s management believes that the allocations are reasonable. However, actual expenses may be materially different from the allocated expenses if the Sale Properties had operated as an unaffiliated stand-alone entity.
Our combined statement of revenues and certain expenses for the three months ended March 31, 2010, includes the following related party income and expenses ($ in thousands):
Allocated interest income(1) | $ | 23 | ||
Allocated general and administrative expenses(2) | 1,052 |
(1) | Represents an allocation of interest income earned on cash held and managed by CapitalSource on our behalf. |
(2) | 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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