NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Description of Business
Care Capital Properties, Inc. (together with its consolidated subsidiaries, unless the context otherwise requires or indicates, “we,” “us,” “our,” “our company” or “CCP”) is a self-administered, self-managed real estate investment trust (“REIT”) with a diversified portfolio of skilled nursing facilities (“SNFs”) and other healthcare assets operated by private regional and local care providers. We generate our revenues primarily by leasing our properties to unaffiliated tenants under long-term triple-net leases, pursuant to which the tenants are obligated to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. In addition, we originate and manage a small portfolio of loans, made primarily to our SNF operators and other post-acute care providers.
Our company was originally formed in April 2015 to hold the post-acute/SNF portfolio of Ventas, Inc. (“Ventas”) and its subsidiaries operated by regional and local care providers (the “CCP Business”). On August 17, 2015, Ventas completed its spin-off of the CCP Business by distributing one share of our common stock for every four shares of Ventas common stock held as of the applicable record date, and, as a result, we began operating as an independent public company and our common stock commenced trading on the New York Stock Exchange under the symbol “CCP” as of August 18, 2015.
As of
March 31, 2017
, our portfolio consisted of
337
properties operated by
39
private regional and local care providers, spread across
36
states and containing a total of approximately
37,000
beds/units. We conduct all of our operations through our wholly owned operating partnership, Care Capital Properties, LP (“Care Capital LP”), and its subsidiaries.
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 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 considered necessary for a fair statement of results for the interim periods have been included. Operating results for the three months ended
March 31, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
. The accompanying consolidated financial statements and related notes should be read in conjunction with our audited combined consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2016
, filed with the SEC on March 1, 2017. Please refer to the Company's audited consolidated financial statements for the year ended December 31, 2016, as certain note disclosures contained in such audited consolidated financial statements have been omitted from these interim consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued or Adopted Relevant Accounting Standards
In 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (“ASU 2014-09”), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This new guidance is effective January 1, 2018, with early adoption permitted beginning January 1, 2017, and will replace existing revenue recognition standards. The sale of investment property and any non-lease components contained within lease agreements will be required to follow the new guidance; however, lease components of lease contracts will be excluded from this guidance. This pronouncement allows either a full or a modified retrospective method of adoption. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. While we anticipate additional disclosure, we do not expect the adoption of this pronouncement will have a material effect on our consolidated financial statements, as substantially all of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09; however, we will continue to evaluate this assessment until the guidance becomes effective. We are currently in the process of reviewing our revenue contracts and lease agreements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which, among other things, requires lessees to recognize most leases on the balance sheet and, therefore, will increase reported assets and liabilities of such lessees. This new guidance is effective January 1, 2019, with early adoption permitted, and will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
class of underlying asset to not recognize lease liabilities and lease assets. Under this new pronouncement, lessor accounting will be largely unchanged from existing GAAP. The pronouncement requires a modified retrospective method of adoption, with some optional practical expedients. Upon adoption, we will recognize a lease liability and a right-of-use asset for operating leases where we are the lessee, such as ground leases and office leases. We will continue to evaluate the impact of this guidance until it becomes effective.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which provides for an impairment model that is based on expected losses rather than incurred losses. Under ASU 2016-13, an entity recognizes as an allowance its estimate of expected credit losses. ASU 2016-13 is effective for us beginning January 1, 2020. We are continuing to evaluate this guidance; however, we do not expect its adoption will have a significant effect on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”),
that
addresses eight classification issues related to the statement of cash flows. ASU 2016-15 is effective for us for fiscal years beginning after December 15, 2017. We are continuing to evaluate the application of this guidance and its effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not considered a business and, thus, accounted for as an asset acquisition (or disposition) as opposed to a business combination. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not considered a business. We elected to early adopt ASU 2017-01 on a prospective basis as of January 1, 2017. Under this new guidance, we expect that most acquisitions of investment property will not meet the definition of a business and, thus will be accounted for as asset acquisitions. We allocate the purchase price of each acquired investment property that is accounted for as an asset acquisition based upon the relative fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market and (vi) the value of customer relationships. Asset acquisitions do not give rise to goodwill and the related transaction costs are capitalized and included with the allocated purchase price.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which simplifies the measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is effective for us for fiscal years beginning after December 15, 2019. We are continuing to evaluate the application of this guidance and its effect on our consolidated financial statements.
Note 3—Triple-Net Lease Arrangements
Certain of our triple-net 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 generally 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.
We assess our rent receivables, including straight-line rent receivables, to determine whether an allowance is appropriate. We base our assessment of rent receivables (other than straight-line rent receivables) 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, including government reimbursement. If our evaluation of these factors indicates that we may not be able to recover the full value of the receivable, we provide an allowance against the portion of the receivable that we estimate may not be recovered. We also base our assessment of straight-line rent receivables 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, the type of property and government reimbursement. If our evaluation of these factors indicates that we may not be able to receive the increases in rent payments due in the future, we provide an allowance against the recognized straight-line rent receivable asset 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 the allowance to increase or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our remaining 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.
Our accounts receivable balance was
$2.5 million
and
$2.9 million
, net of allowances of
$5.0 million
and
$3.7 million
, respectively, as of
March 31, 2017
and
December 31, 2016
. We recognized charges for rental income allowances within rental income, net in our consolidated statements of income and comprehensive income of
$1.4 million
and
$1.9 million
, respectively, for the three months ended
March 31, 2017
and
2016
.
Our straight-line rent receivable balance was
$0.7 million
and
$0.7 million
, net of allowances of
$96.9 million
and
$97.1 million
, respectively, as of
March 31, 2017
and
December 31, 2016
. We recognized charges for straight-line rent allowances within rental income, net in our consolidated statements of income and comprehensive income of
$0.7 million
and
$7.3 million
, respectively, for the three months ended
March 31, 2017
and
2016
.
Note 4—Acquisitions of Real Estate Property
In March 2017, we completed the acquisition of
one
SNF from an existing operator for
$3.0 million
. The property was part of the
$39 million
sale-leaseback transaction with an existing operator that was partially consummated in December 2016. In December 2016, we completed the acquisition of
four
SNFs,
one
seniors housing communities and
one
campus (consisting of
one
SNF and
one
seniors housing community) from the operator for
$36.0 million
. As of March 31, 2017, the properties were held in an Internal Revenue Code of 1986, as amended (the “Code”), Section 1031 exchange escrow account with a qualified intermediary and reflected as restricted cash on our consolidated balance sheet.
Estimated Fair Value
We accounted for our 2017 and 2016 acquisitions under the acquisition method in accordance with ASC 805.
The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed during the three months ended March 31, 2017 (in thousands):
|
|
|
|
|
Land and improvements
|
$
|
175
|
|
Buildings and improvements
|
2,735
|
|
Acquired lease intangibles
|
90
|
|
Total assets acquired
|
3,000
|
|
Tenant deposits
|
64
|
|
Total liabilities assumed
|
64
|
|
Net assets acquired
|
$
|
2,936
|
|
The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed during 2016 (in thousands):
|
|
|
|
|
Land and improvements
|
$
|
2,240
|
|
Buildings and improvements
|
31,640
|
|
Acquired lease intangibles
|
2,120
|
|
Total assets acquired
|
36,000
|
|
Tenant deposits
|
765
|
|
Total liabilities assumed
|
765
|
|
Net assets acquired
|
$
|
35,235
|
|
Deal Costs
Effective January 1, 2017, we adopted ASU 2017-01 and will capitalize acquisition costs associated with completed asset acquisitions. For the three months ended
March 31, 2017
, deal costs consist of expenses associated with transactions that were not consummated or operator transitions. For the three months ended March 31, 2016, deal costs consist of expenses
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primarily related to transactions, whether consummated or not, and operator transitions. Deal costs were
$0.2 million
and
$1.2 million
for the three months ended March 31, 2017 and 2016, respectively.
Note 5—Assets Held For Sale and Dispositions of Real Estate Property
As of
March 31, 2017
and
December 31, 2016
, we classified
21
properties and
30
properties, respectively, as assets held for sale. The corresponding assets are included in other assets on our consolidated balance sheets and the corresponding liabilities are included in accounts payable and other liabilities on our consolidated balance sheets.
|
|
|
|
|
|
|
|
Rollforward of Assets Held For Sale
|
|
Number of Properties
|
Net Book Value
|
|
|
(In thousands)
|
December 31, 2016
|
30
|
|
$
|
66,871
|
|
Properties added
|
—
|
|
—
|
|
Properties sold
|
(9
|
)
|
(31,369
|
)
|
March 31, 2017
|
21
|
|
$
|
35,502
|
|
During the three months ended March 31, 2017, we sold
nine
SNFs for aggregate consideration of
$69.0 million
, of which
$4.0 million
is contingent consideration, and we recognized a total gain of
$32.2 million
on the dispositions. These
nine
SNFs were previously classified as held for sale. As of March 31, 2017, the net proceeds from these sales were held in a Code Section 1031 exchange escrow account with a qualified intermediary and reflected in restricted cash on our consolidated balance sheets.
In February 2016, we sold
seven
SNFs, which were previously classified as held for sale, for aggregate proceeds of
$5.4 million
. We recognized a loss on the sales of these assets of
$0.1 million
. In connection with the sale of
one
SNF, we made an
18
-month secured loan to the purchaser in the amount of
$4.5 million
. See “Note 6—Loans Receivable, Net.”
For the three months ended March 31, 2017, we did
no
t recognize any impairment charges. For the three months ended March 31, 2016, we recognized a
$5.5 million
impairment on real estate assets and goodwill as a result of our decision to pursue the sale or transition of certain properties in our portfolio. The fair value was estimated based on the intended purchase price of the property or based on a market approach and Level 3 inputs.
Note 6—Loans Receivable, Net
Below is a summary of our loans receivable as of
March 31, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
(In thousands)
|
Mortgage loans receivable, net
|
|
$
|
9,307
|
|
|
$
|
8,822
|
|
|
$
|
9,313
|
|
|
$
|
8,746
|
|
Other loans receivable, net
|
|
52,215
|
|
|
51,699
|
|
|
52,951
|
|
|
52,288
|
|
Total loans receivable, net
|
|
$
|
61,522
|
|
|
$
|
60,521
|
|
|
$
|
62,264
|
|
|
$
|
61,034
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Receivable, Net
Mortgage loans receivable, net represents
two
loans.
One
loan, with a principal amount of
$5.6 million
and a net carrying value of $
5.3 million
, is secured by
one
SNF, has a stated interest rate of
9.75%
per annum and matures in 2018. The other loan, with a principal amount of
$4.5 million
and a net carrying value of
$4.0 million
, is secured by
one
SNF, has a stated interest rate of
10.0%
per annum, and matures in 2017. This loan was made to the purchaser of a closed SNF in connection with the sale of the property in February 2016 and was cross-collateralized and cross-defaulted to our lease agreements with affiliates of the borrower. In February 2017, we converted the loan to a secured construction loan and committed funds up to approximately
$19.0 million
to finance the redevelopment of the SNF to a behavioral healthcare facility. The converted loan has a stated interest rate of
10.0%
per annum and matures in 2027. Interest on the loan represents unrecognized profit.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Loans Receivable, Net
In May 2016, we made a
four
-year mezzanine loan in the amount of
$25.0 million
and maturing in 2020 to an affiliate of the purchasers of
seven
properties we sold. The loan has a stated interest rate of
10.0%
per annum. It is secured by equity interests in subsidiaries of the borrower and cross-collateralized and cross-defaulted to our lease agreements with affiliates of the borrower.
In connection with operator transitions during the three months ended March 31, 2017, we made
three
working capital loans, of which
$2.7 million
principal amount was outstanding at March 31, 2017.
The remaining other loans receivable balance of
$24.5 million
consists of
ten
loans with various operators with interest rates ranging from
5.0%
to
11.3%
per annum and maturity dates through 2027.
Interest income for the three months ended March 31, 2017 and 2016 was $
1.3
million and $
0.6
million, respectively.
Fair value estimates as reflected in the table above are subjective in nature and based upon Level 3 inputs and several important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts we would realize in a current market exchange.
Note 7—Intangible Assets and Liabilities and Goodwill
The following is a summary of our intangible assets and liabilities and goodwill as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Balance
|
|
Remaining
Weighted Average
Amortization
Period in Years
|
|
Balance
|
|
Remaining
Weighted Average
Amortization
Period in Years
|
|
(Dollars in thousands)
|
Intangible assets:
|
|
|
|
|
|
|
|
Above market lease intangibles
|
$
|
56,080
|
|
|
10.8
|
|
$
|
56,570
|
|
|
11.1
|
In-place lease intangibles
|
35,744
|
|
|
12.8
|
|
35,861
|
|
|
12.8
|
Tradename, technology and customer relationships
|
2,950
|
|
|
3.3
|
|
2,950
|
|
|
3.5
|
Accumulated amortization
|
(46,042
|
)
|
|
N/A
|
|
(44,511
|
)
|
|
N/A
|
Goodwill
|
123,884
|
|
|
N/A
|
|
123,884
|
|
|
N/A
|
Net intangible assets
|
$
|
172,616
|
|
|
11.4
|
|
$
|
174,754
|
|
|
11.5
|
Intangible liabilities:
|
|
|
|
|
|
|
|
Below market lease intangibles
|
$
|
165,915
|
|
|
14.8
|
|
$
|
167,789
|
|
|
15.0
|
Above market ground lease intangibles
|
1,907
|
|
|
51.7
|
|
1,907
|
|
|
51.9
|
Accumulated amortization
|
(74,341
|
)
|
|
N/A
|
|
(72,060
|
)
|
|
N/A
|
Purchase option intangibles
|
5,546
|
|
|
N/A
|
|
5,546
|
|
|
N/A
|
Net intangible liabilities
|
$
|
99,027
|
|
|
15.5
|
|
$
|
103,182
|
|
|
15.7
|
N/A—Not Applicable.
Above market lease intangibles and in-place lease intangibles are included in acquired lease intangibles within real estate investments on our consolidated balance sheets. Below market lease intangibles, above market ground lease intangibles and purchase option intangibles are included in lease intangible liabilities, net on our consolidated balance sheets. Tradename, technology and customer relationships are associated with our specialty valuation firm subsidiary and included in other assets on our consolidated balance sheets. For the
three
months ended
March 31, 2017
and
2016
, our net accretion related to all of these intangibles was
$1.0 million
and
$1.2 million
, respectively. The estimated net accretion related to these intangibles for the remainder of
2017
and the subsequent four years is as follows: remainder of
2017
-
$2.9 million
;
2018
-
$3.8 million
;
2019
-
$4.2 million
;
2020
-
$4.0 million
; and
2021
-
$2.5 million
.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the lease termination with respect to
two
properties, we recognized revenues of
$1.1 million
for the
three months ended March 31, 2017 due to the accelerated amortization of above and below-market rent intangibles, which is recorded in net gain on lease termination. In addition, for the same properties, depreciation and amortization increased by
$0.2 million
for the three months ended March 31, 2017 due to accelerated amortization of in-place lease intangibles.
Note 8—Other Assets
The following is a summary of our other assets as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Straight-line rent receivables, net
|
$
|
654
|
|
|
$
|
657
|
|
Deferred lease costs
|
6,150
|
|
|
5,471
|
|
Assets held for sale
|
38,582
|
|
|
70,103
|
|
Derivative fair value asset
|
12,472
|
|
|
10,476
|
|
Other assets, net
|
20,314
|
|
|
18,425
|
|
Total other assets
|
$
|
78,172
|
|
|
$
|
105,132
|
|
Note 9—Borrowing Arrangements
The following is a summary of our term loans, senior notes and other debt as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Unsecured revolving credit facility
|
|
$
|
86,000
|
|
|
$
|
24,000
|
|
Secured term loan due 2019
|
|
135,000
|
|
|
135,000
|
|
Unsecured term loan due 2020
|
|
474,000
|
|
|
474,000
|
|
Unsecured term loan due 2023
|
|
200,000
|
|
|
200,000
|
|
5.125% senior notes due 2026
|
|
500,000
|
|
|
500,000
|
|
5.38% senior notes due 2027
|
|
100,000
|
|
|
100,000
|
|
Total
|
|
1,495,000
|
|
|
1,433,000
|
|
Unamortized debt issuance costs
|
|
17,409
|
|
|
18,466
|
|
Term loans, senior notes and other debt
|
|
$
|
1,477,591
|
|
|
$
|
1,414,534
|
|
Revolving Credit Facility and Unsecured Term Loans
Our unsecured credit facility (the “Facility”) is comprised of a
$600 million
revolving credit facility (the “Revolver”), a
$600 million
term loan due 2017 (which has been repaid in full) and an
$800 million
term loan due 2020. Borrowings under the Facility bear interest at a fluctuating rate per annum equal to LIBOR plus an applicable margin based on Care Capital LP’s unsecured long-term debt ratings. At
March 31, 2017
, the applicable margin was
1.30%
for Revolver borrowings and
1.50%
for term loan borrowings, and we had approximately
$514 million
of unused borrowing capacity available under the Revolver. For the
three
months ended
March 31, 2017
and
2016
, we recognized interest expense of
$3.3 million
and
$7.1 million
, respectively, related to the Facility.
In January 2016, Care Capital LP, as borrower, and CCP and Care Capital Properties GP, LLC (“Care Capital GP”), as guarantors, entered into a Term Loan and Guaranty Agreement with a syndicate of banks that provides for a
$200 million
unsecured term loan due
2023
at an interest rate of LIBOR plus an applicable margin based on Care Capital LP’s unsecured long-term debt ratings, which was
1.80%
at
March 31, 2017
. For the
three
months ended
March 31, 2017
and
2016
, we recognized interest expense of
$1.3 million
and
$0.8 million
, respectively, related to the $200 million Term Loan.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also in January 2016, we entered into agreements to swap a total of
$600 million
of indebtedness outstanding under our $200 million term loan and our $800 million term loan, effectively converting the interest on that debt from floating rates to fixed rates. The swap agreements have original terms of
4.6 years
and
seven
years.
Secured Term Loan
In July 2016, certain wholly owned subsidiaries of Care Capital LP, as borrowers (the “Borrowers”), entered into a Loan Agreement with a syndicate of banks providing for a
$135 million
term loan due 2019 that bears interest at a fluctuating rate per annum equal to LIBOR for a
one
-month interest period plus
1.80%
. The
$135 million
term loan is secured by first lien mortgages and assignments of leases and rents on 12 facilities owned by the Borrowers. The payment and performance of the Borrowers’ obligations under the
$135 million
term loan are guaranteed by CCP and Care Capital LP. For the
three
months ended
March 31, 2017
, we recognized interest expense of
$0.9 million
related to this loan.
Senior Notes
In July 2016, Care Capital LP issued and sold
$500 million
aggregate principal amount of
5.125%
Senior Notes due 2026 (the “Notes due 2026”) to qualified institutional buyers pursuant to Rule 144A and to certain persons outside of the United States pursuant to Regulation S, each under the Securities Act, for total proceeds of
$500 million
before the initial purchasers’ discount and expenses. The Notes due 2026 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by CCP and Care Capital GP. Care Capital LP may, at its option, redeem the Notes due 2026 at any time in whole or from time to time in part at a redemption price equal to
100%
of their principal amount, together with accrued and unpaid interest thereon, if any, to (but excluding) the date of redemption, plus, if redeemed prior to May 15, 2026, a make-whole premium. In February 2017, we completed an offer to exchange the Notes due 2026 with a new series of notes that are registered under the Securities Act of 1933, as amended (the “Securities Act”), and are otherwise substantially identical to the original Notes due 2026, except that certain transfer restrictions, registration rights and liquidated damages do not apply to the new notes. We did not receive any additional proceeds in connection with the exchange offer. For the
three
months ended
March 31, 2017
, we recognized interest expense of
$6.4 million
related to the Notes due 2026.
In May 2016, Care Capital LP issued and sold
$100.0 million
aggregate principal amount of
5.38%
Senior Notes due May 17, 2027 (the “Notes due 2027”) in a private placement exempt from registration under the Securities Act, for total proceeds of
$100.0 million
before expenses. The Notes due 2027 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by CCP and Care Capital GP. For the
three
months ended
March 31, 2017
, we recognized interest expense of
$1.3 million
related to the Notes due 2027.
Debt Maturities
As of
March 31, 2017
, our indebtedness had the following maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount Due at Maturity
|
Revolver (1)
|
Total Maturities
|
|
(In thousands)
|
2017
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
2018
|
—
|
|
—
|
|
—
|
|
2019
|
135,000
|
|
86,000
|
|
221,000
|
|
2020
|
474,000
|
|
—
|
|
474,000
|
|
2021
|
—
|
|
—
|
|
—
|
|
Thereafter
|
800,000
|
|
—
|
|
800,000
|
|
Total Maturities
|
$
|
1,409,000
|
|
$
|
86,000
|
|
$
|
1,495,000
|
|
(1) As of
March 31, 2017
, we had
$17.9 million
of unrestricted cash, resulting in
$68.1 million
of net borrowings outstanding under the Revolver. The Revolver may be extended, at Care Capital LP’s option, for
two
additional
six
-month periods.
Fair Value of Debt
As of
March 31, 2017
, the fair value and carrying value of our term loans, senior notes and other debt totaled
$1.5 billion
.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10— Derivatives and Hedging Activities
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings. We recognized interest expense of
$0.8 million
and
$0.9 million
related to derivatives and hedging activities in the three months ended
March 31, 2017
and
2016
, respectively.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. As of
March 31, 2017
and
December 31, 2016
, we had
eight
outstanding interest rate swaps with a combined notional amount of
$600 million
that were designated as cash flow hedges of interest rate risk. During the
three
months ended
March 31, 2017
and
March 31, 2016
, these derivatives were used to hedge the variable cash flows associated with existing variable rate debt.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. During the next 12 months, we estimate that an additional
$0.4 million
will be reclassified as an increase to interest expense.
The table below presents the fair value of our derivative financial instruments, as well as their classification on our consolidated balance sheets as of
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Asset Derivative
|
Derivatives Designated as Hedging Instruments
|
Balance Sheet Location
|
March 31, 2017
Fair Value
|
December 31, 2016
Fair Value
|
Interest rate contracts
|
Other assets
|
$
|
12,472
|
|
$
|
10,476
|
|
As of
March 31, 2017
and
December 31, 2016
, we did not have any derivative instruments in a net liability position.
The table below presents the effect of our derivative financial instruments on our consolidated statements of income and comprehensive income for the
three
months ended
March 31, 2017
and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
|
Location of Gain/Loss Reclassified from AOCI into Income (Effective Portion)
|
Amount of Loss Reclassified from AOCI into Income (Effective Portion)
|
Three months ended March 31, 2017
|
|
|
|
Interest rate contracts
|
$
|
1,205
|
|
Interest expense
|
$
|
(790
|
)
|
Three months ended March 31, 2016
|
|
|
|
Interest rate contracts
|
$
|
(6,708
|
)
|
Interest expense
|
$
|
(917
|
)
|
Our derivatives were
100%
effective, and therefore, we did not record any hedge ineffectiveness in earnings during the three months ending
March 31, 2017
and 2016. We did not offset our derivative financial instrument asset against any derivative financial instrument liabilities as of
March 31, 2017
or
December 31, 2016
.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit-Risk-Related Contingent Features
Our agreements with each of our derivative counterparties provide that we could be in default on our derivative obligations if the underlying indebtedness is accelerated by the lender due to our default on that indebtedness.
Fair Value Disclosure of Derivative Financial Instruments
The valuation of our interest rate swaps is determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market forward interest rate curves.
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements (such as collateral postings, thresholds, mutual puts and guarantees).
The fair value of interest rate hedging instruments is the amount that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date. Our valuations of derivative instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative, and therefore fall into Level 2 of the fair value hierarchy. The valuations reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including forward curves. The fair values of interest rate hedging instruments also incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk.
The table below presents our derivative financial instrument asset measured at fair value on a recurring basis as of
March 31, 2017
, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Balance at March 31, 2017
|
Derivative financial instrument asset
|
$
|
—
|
|
$
|
12,472
|
|
$
|
—
|
|
$
|
12,472
|
|
The table below presents our derivative financial instrument asset measured at fair value on a recurring basis as of
December 31, 2016
, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Balance at December 31, 2016
|
Derivative financial instrument asset
|
$
|
—
|
|
$
|
10,476
|
|
$
|
—
|
|
$
|
10,476
|
|
Note 11—Income Taxes
We elected to be treated as a REIT under the Code, beginning with the taxable year ended December 31, 2015. So long as we qualify as a REIT under the Code, we generally will not be subject to federal income tax. We test our compliance with the REIT requirements on a quarterly and annual basis. We also review our distributions and projected distributions each year to ensure we have met and will continue to meet the annual REIT distribution requirements. However, as a result of our structure, we may be subject to income or franchise taxes in certain states and municipalities.
Subject to the limitation under the REIT asset test rules, we are permitted to own up to 100% of the stock of one or more TRSs. We have elected for
one
of our subsidiaries to be treated as a TRS, which is subject to federal, state and local income taxes. Our consolidated provision for income taxes for the
three
months ended
March 31, 2017
was an expense of
$0.2 million
. Our consolidated provision for income taxes for the three months ended
March 31, 2016
was an expense of
$0.4 million
.
As of
March 31, 2017
and
December 31, 2016
, we had
no
uncertain tax positions which would require us to record a tax exposure liability.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12—Stock-Based Compensation
In August 2015, we adopted the Care Capital Properties, Inc. 2015 Incentive Plan (the “Plan”), pursuant to which options to purchase common stock, shares of restricted stock or restricted stock units (“RSUs”), performance shares and other equity awards may be granted to our employees, directors and consultants. A total of
7,000,000
shares of our common stock was reserved initially for issuance under the Plan. During the three months ended March 31, 2017, we granted
140,845
shares of restricted stock and
34,886
performance-based RSUs to employees under the Plan having a grant date fair value of
$4.7 million
. During the three months ended March 31, 2016, we granted
134,416
shares of restricted stock,
496,859
options to purchase common stock and
41,626
performance-based RSUs to employees under the Plan having a grant date fair value of
$6.0 million
. The value of shares of restricted stock granted is the closing price of our common stock on the date of grant. Restricted stock and option awards granted to employees generally vest in
three
equal annual installments beginning on the date of grant or on the first anniversary of the date of grant. For shares with a graded vesting schedule that only require service, we recognize stock-based compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Performance-based RSUs granted to employees generally vest on the day on which our Compensation Committee meets to determine our level of achievement over the performance period.
Note 13—Concentration of Risk
Our properties were located in
36
states as of
March 31, 2017
, with properties in only
one
state (Texas) accounting for more than 10% of our total revenues for the three months then ended.
As of
March 31, 2017
, Senior Care Centers, LLC (together with its subsidiaries, “SCC”) and Avamere Group, LLC (together with its subsidiaries, “Avamere”) operated approximately
20.4%
and
10.9%
respectively, of our real estate investments based on gross book value.
For the three months ended
March 31, 2017
, approximately
17.3%
,
12.3%
and
11.6%
of our total revenues excluding net gain on lease termination were derived from our lease and loan agreements with SCC, Signature HealthCARE, LLC (together with its subsidiaries, “Signature”) and Avamere, respectively. For the three months ended
March 31, 2016
, approximately
16.4%
,
14.2%
and
10.7%
of our total revenues were derived from our lease and loan agreements with SCC, Signature and Avamere, respectively. Each of our leases with SCC, Avamere and Signature is a triple-net lease that obligates the tenant to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures. Our leases with SCC and Signature have guaranty and/or cross-default provisions tied to other leases with the same tenant or its affiliates, and our lease with Avamere is a pooled, multi-facility master lease.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14—Earnings Per Share
The following table shows the amounts used in computing our basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(In thousands, except per share amounts)
|
Numerator for basic and diluted earnings per share:
|
|
|
|
Net income attributable to common stockholders
|
$
|
64,909
|
|
|
$
|
29,766
|
|
Less: dividends on unvested restricted shares
|
(175
|
)
|
|
(191
|
)
|
Net income attributable to common stockholders
excluding dividends on unvested restricted shares
|
64,734
|
|
|
29,575
|
|
|
|
|
|
Denominator:
|
|
|
|
Denominator for basic earnings per share—weighted average shares
|
83,670
|
|
|
83,544
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
—
|
|
|
4
|
|
Restricted stock
|
129
|
|
|
72
|
|
Denominator for diluted earnings per share—adjusted weighted average shares
|
83,799
|
|
|
83,620
|
|
Basic earnings per share:
|
|
|
|
Net income attributable to common stockholders, excluding dividends on unvested restricted shares
|
$
|
0.77
|
|
|
$
|
0.35
|
|
Diluted earnings per share:
|
|
|
|
Net income attributable to common stockholders, excluding dividends on unvested restricted shares
|
$
|
0.77
|
|
|
$
|
0.35
|
|
Note 15—Stockholders’ Equity
In December 2016, we established an “at-the-market” (“ATM”) equity offering program through which we may sell from time to time up to an aggregate of
$250 million
of our common stock. During the three months ended March 31, 2017, we did not issue or sell any shares of common stock under the ATM program.
Dividends
On January 5, 2017, we paid the fourth quarterly installment of our 2016 cash dividend in the amount of
$0.57
per share to the holders of record of our common stock on December 16, 2016.
On
March 31, 2017
, we paid a cash dividend in the amount of
$0.57
per share to the holders of record of our common stock as of March 10, 2017.
Note 16—Litigation
We are involved from time to time in various legal proceedings that arise in the ordinary course of our business, including, but not limited to commercial disputes, environmental matters, and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims and administrative proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable and the amount can be reasonably estimated.
Our tenants and, in some cases, their affiliates may be required by the terms of their leases and other agreements with us to indemnify, defend and hold us harmless against certain actions, investigations and claims arising in the ordinary course of their business and related to the operations of our properties. In addition, third parties from whom we acquired certain of our assets and, in some cases, their affiliates may be required by the terms of the related conveyance documents to indemnify, defend and hold us harmless against certain actions, investigations and claims related to the acquired assets and arising prior to our ownership or related to excluded assets and liabilities. In some cases, a portion of the purchase price consideration is held in escrow for a specified period of time as collateral for these indemnification obligations.
CARE CAPITAL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17—Summarized Condensed Consolidating and Combining Information
CCP and Care Capital GP fully and unconditionally guaranteed the obligation to pay principal and interest with respect to Care Capital LP’s outstanding Notes due 2026. CCP, as limited partner, owns a
99%
interest in Care Capital LP, and Care Capital GP, as general partner, owns a
1%
interest in Care Capital LP. CCP is the sole member of Care Capital GP and, as a result, Care Capital LP is indirectly
100%
owned by CCP. CCP consolidates Care Capital GP and Care Capital LP and Care Capital LP’s consolidated subsidiaries for financial reporting purposes and has no direct subsidiaries other than Care Capital GP and Care Capital LP. CCP’s assets and liabilities consist entirely of its investments in the General Partner and Care Capital LP, and CCP’s operations are conducted entirely through Care Capital LP. Therefore, the assets and liabilities of CCP and Care Capital LP are the same on their respective financial statements.
None of Care Capital LP’s subsidiaries are obligated with respect to the Notes due 2026. Under certain circumstances, however, contractual and legal restrictions, including those contained in the instruments governing Care Capital LP’s subsidiaries’ outstanding mortgage indebtedness, may restrict Care Capital LP’s ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including with respect to the Notes due 2026.
Note 18—Subsequent Events
On April 28, 2017, we completed the acquisition of
six
behavioral health hospitals from affiliates of Signature Healthcare Services, LLC (“SHS”). We funded a total of
$378.6 million
at closing and have a fair market value purchase option, exercisable beginning in October 2018, to purchase
one
additional building. We funded a portion of this transaction with restricted cash held in a Code Section 1031 exchange escrow account. Concurrent with the closing of the transaction, we entered into a long-term triple-net lease with affiliates of SHS to operate the acquired properties at an initial annual base rent of
$30.3 million
.
In April and May 2017, we transitioned
17
SNFs from existing tenants to replacement operators in consensual transactions.
On May 7, 2017, we entered into a definitive agreement with Sabra Health Care REIT, Inc. (“Sabra”) pursuant to which our two companies will combine in an all-stock transaction. Under the terms of the agreement, at the effective time of the merger, our stockholders will receive
1.123
shares of Sabra common stock for each share of our common stock they own. The transaction is subject to customary closing conditions, including receipt of the approval of both companies’ shareholders, and is expected to close during the third quarter of 2017.