EXHIBIT 99.2

Combined Audited Financial Statements of NCT Portfolio

As of December 31, 2012 and 2011 and for each of the years in the three year period ended December 31, 2012, the 51 independent living senior housing communities acquired by Newcastle on December 23, 2013.

Report of Independent Auditors
Owners
NCT Portfolio

We have audited the accompanying combined financial statements of NCT Portfolio (the Company), which comprise the combined balance sheets as of December 31, 2012 and 2011, and the related combined statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2012, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 31, 2012 and 2011, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.

Ernst & Young
Chicago, Illinois
February 6, 2014

 
 

 

 
NCT Portfolio
 
Combined Balance Sheets
(In Thousands)
               
    December 31,  
    2012   2011  
Assets              
Investment in real estate:              
Land and land improvements   $ 121,563   $ 120,344  
Building and building improvements     804,124     799,513  
Equipment     44,703     41,103  
      970,390     960,960  
Less accumulated depreciation     (158,590 )   (132,958 )
      811,800     828,002  
Cash and cash equivalents     21     20  
Cash and escrow deposits – restricted     5,562     5,861  
Accounts receivable, net     1,054     3,294  
Prepaid expenses and other assets, net     9,118     10,356  
Resident lease and other intangibles, net     14,526     13,989  
Deferred loan costs, net     1,029     1,798  
Total assets   $ 843,110   $ 863,320  
               
Liabilities and equity              
Mortgage notes payable   $ 727,805   $ 723,662  
Accounts payable and accrued expenses     10,531     10,367  
Accrued interest payable     2,974     2,950  
Prepaid rent and deferred revenue     4,777     2,643  
Tenant security deposits     1,566     1,747  
Total liabilities     747,653     741,369  
               
Equity     95,457     121,951  
Total liabilities and equity   $ 843,110   $ 863,320  

See accompanying notes to combined financial statements.

 
 

NCT Portfolio

Combined Statements of Operations
(In Thousands)

                     
    Years Ended December 31,  
    2012   2011   2010  
Revenue                    
Resident fees   $ 139,718   $ 131,408   $ 121,473  
                     
Expenses                    
Facility operating expenses     74,285     70,628     65,663  
Property management fee     4,890     4,599     4,252  
Depreciation and amortization     26,274     29,413     30,972  
Total expenses     105,449     104,640     100,887  
                     
Operating income     34,269     26,768     20,586  
                     
Interest expense:                    
Interest incurred     (41,692 )   (41,447 )   (41,547 )
Amortization of deferred loan costs     (845 )   (830 )   (830 )
Net loss   $ (8,268 ) $ (15,509 ) $ (21,791 )

See accompanying notes to combined financial statements.

 
 

NCT Portfolio

Combined Statements of Changes in Equity

For the Years Ended December 31, 2012, 2011 and 2010
(In Thousands)

         
    Total
Equity		  
Balance at January 1, 2010   $ 168,211  
Net loss     (21,791 )
Distributions     (2,527 )
Balance at December 31, 2010     143,893  
Net loss     (15,509 )
Distributions     (6,433 )
Balance at December 31, 2011     121,951  
Net loss     (8,268 )
Distributions     (20,725 )
Contributions     2,499  
Balance at December 31, 2012   $ 95,457  

See accompanying notes to combined financial statements.

 
 

NCT Portfolio

Combined Statements of Cash Flows
(In Thousands)

                     
    Years Ended December 31,  
    2012   2011   2010  
Operating activities                    
Net loss   $ (8,268 ) $ (15,509 ) $ (21,791 )
Adjustments to reconcile net loss to net cash provided by                    
operating activities:                    
Depreciation and amortization     26,274     29,413     30,972  
Bad debt expense     1,051     578     331  
Amortization of deferred loan costs     845     830     830  
Gain on sale of assets                    
Amortization of resident incentives, net     1,303     (1,812 )   (2,535 )
Non-refundable community fees, deferred     1,171     (208 )   (1,173 )
Changes in operating assets and liabilities:                    
Cash and escrow deposits – restricted     299     592     (530 )
Accounts receivable, net     1,189     (2,639 )   (1,338 )
Prepaid expenses and other assets     (65 )   12     (20 )
Accounts payable and accrued expenses     188     281     1,591  
Tenant security deposits     (181 )   (572 )   (906 )
Prepaid rent     963     284     292  
Net cash provided by operating activities     24,769     11,250     5,723  
                     
Investing activities                    
Cash paid for acquisition     (6,662 )   —     —  
Additions to investment in real estate     (3,947 )   (4,992 )   (3,417 )
Cash used in investing activities     (10,609 )   (4,992 )   (3,417 )
                     
Financing activities                    
Proceeds from mortgage note payable (acquisition)     4,178     —     —  
Repayment of principal on mortgage notes payable     (35 )   —     —  
Deferred financing costs paid                    
Deferred financing costs paid     (76 )   —     —  
Distributions     (20,725 )   (6,433 )   (2,527 )
Contributions     2,499     —     —  
Net cash used in financing activities     (14,159 )   (6,433 )   (2,527 )
                     
Net increase (decrease) in cash and cash equivalents     1     (175 )   (221 )
Cash and cash equivalents at beginning of year     20     195     416  
Cash and cash equivalents at end of year   $ 21   $ 20   $ 195  
                     
Supplemental disclosure of cash flow information                    
Cash paid for interest   $ 41,668   $ 41,447   $ 44,433  

See accompanying notes to combined financial statements.

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

December 31, 2012

1. Basis of Presentation

The NCT Portfolio (the Company) represents the 51 independent living senior housing communities (the Communities) acquired by Newcastle Investment Corp. (NCT) on December 23, 2013 (see Note 9) from certain wholly owned subsidiaries of Harvest Facility Holdings LP (Harvest). Harvest is owned by Holiday Acquisition Holdings LLC (Holiday Acquisition, a limited liability company and a wholly owned subsidiary of investment funds managed by affiliates of Fortress Investment Group LLC). As of December 31, 2012, the Communities consist of 5,744 apartment and townhouse units (unaudited), located in 24 states.

2. Summary of Significant Accounting Policies

The combined financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The significant accounting policies are summarized below.

Use of Estimates

The preparation of the combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the combined financial statements and accompanying notes. Estimates are used for, but not limited to, the allocation of purchase price to tangible and intangible assets and liabilities, the evaluation of asset impairments, insurance reserves, depreciation and amortization, allowance for doubtful accounts, and other contingencies. Actual results could differ from those estimates and assumptions.

Investment in Real Estate and Related Intangibles

In business combinations, the Company recognizes all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value. In addition, the Company is required to expense acquisition-related costs as incurred, value noncontrolling interests at fair value at the acquisition date and expense restructuring costs associated with an acquired business.

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

2. Summary of Significant Accounting Policies (continued)

The Company allocates the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, own internal analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

Identified net tangible and finite lived intangible assets are amortized over their estimated useful lives or contractual lives, which are as follows:

   
Asset Categories Estimated
Useful Life
(In Years)
   
Building and building improvements 15 – 40
Land improvements 15
Equipment 3 – 10
Resident lease and other intangibles 3 – 40

Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and upgrades that improve and/or extend the life of the assets are capitalized and depreciated over their estimated useful lives. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets held for use is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then the fair value of the asset is estimated. The impairment expense is determined by comparing the carrying value of the asset to its estimated fair value, with any excess carrying value recognized as an expense in the current period.

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

During the years ended December 31, 2012, 2011, and 2010, the Company evaluated all long-lived assets using an undiscounted cash flow approach and determined that the undiscounted cash flows exceeded the carrying value of the assets for all Communities. As a result, no impairment charges were recorded on the Company’s long-lived assets during the years ended December 31, 2012, 2011, and 2010. The cash flow projections are based on a number of estimates and assumptions, such as revenue and expense growth rates, capitalization rates and hold periods. Such assumptions are classified as Level 3 inputs in the valuation hierarchy.

Property sales or dispositions are recorded when title transfers to unrelated third parties, contingencies have been removed and sufficient cash consideration has been received by the Company. Upon disposition, the related costs and accumulated depreciation are removed from the respective accounts and any gain or loss on sale is recognized.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less from the date of purchase.

Harvest uses a centralized approach to cash management. All cash generated by the Communities is transferred to Harvest and Harvest funds operating and investing activities for the Communities as needed. Cash transfers from the 51 Communities to Harvest are treated as distributions in the accompanying combined financial statements.

Cash and Escrow Deposits – Restricted

Cash and escrow deposits – restricted consist principally of deposits required by certain lenders pursuant to the applicable debt agreement to fund future property expenditures, and certain resident security deposits held in trusts. A summary is as follows:

               
    December 31  
    2012   2011  
 
Property tax and other lender-required reserves   $ 5,031   $ 5,161  
Tenant/resident security deposits     531     700  
Total cash and escrow deposits-restricted   $ 5,562   $ 5,861  
 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

Allowance for Doubtful Accounts

Allowance for doubtful accounts are recorded by management based upon the Company’s historical write-off experience, analysis of accounts receivable aging, and historic resident payment trends.

Management reviews material past due balances on a monthly basis. Account balances are charged off against the allowance when management determines it is probable that the receivable will not be recovered. Allowance for doubtful accounts was $2,235 and $403 at December 31, 2012 and 2011, respectively.

Deferred Loan Costs

Deferred loan costs include direct costs to obtain financing. Such costs are deferred and amortized using the straight-line method, which approximates the level-yield method, over the terms of the underlying debt agreements.

Revenue Recognition

Resident fee revenue is recorded as it becomes due as provided for in the residents’ lease agreements. Residents’ agreements are generally for a term of 30 days with resident fees due monthly in advance.

Certain communities have residency agreements that require the resident to pay an upfront fee prior to occupying the community. Community fees are non-refundable after a stated period (typically 90 days) and are initially recorded as deferred revenue and recognized on a straight-line basis as part of resident fee revenue over an estimated three-year average stay of the residents in the communities. Deferred revenue totaled $2,772 and $1,600 at December 31, 2012 and 2011, respectively.

Certain residency agreements provide for free rent or incentives for a stated period of time. Incentives are initially recorded in other assets and recognized on a straight-line basis as a reduction of resident fee revenue over an estimated three-year average stay of the residents in the communities.

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

Income Taxes

All Communities within the combined portfolio are operated as limited partnerships or limited liability companies; thus, all federal and, substantially, all state income taxes are recorded by the owners. Accordingly, the Company does not provide for or record a provision for federal income taxes. Certain state and local jurisdictions may impose an income tax on the Company.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $1,831, $1,404, and $655 for the years ended December 31, 2012, 2011, and 2010, respectively, and are included in facility operating expenses in the combined statements of operations.

Fair Value of Financial Instruments

Cash and cash equivalents and cash and escrow deposits – restricted are reflected in the accompanying combined balance sheets at amounts considered by management to reasonably approximate fair value. Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company had outstanding debt with a carrying value of $727.8 million and $723.7 million as of December 31, 2012 and 2011, respectively (see Note 5). As of December 31, 2012 and 2011, the carrying value of debt approximated the fair value, based upon a Level 3 valuation.

The Company follows the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurement, when valuing its financial instruments. The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market-priced assumptions in fair value measurements, the statement establishes a fair value hierarchy that distinguishes between market-participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Level 1 and Level 2 of the hierarchy) and the reporting entity’s own assumptions about market-participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

3. Resident Lease and Other Intangibles, Net

At December 31, 2012 and 2011, resident lease and other intangibles, net were as follows:

         
    Resident
Lease and Other
Intangibles, Net		  
         
Balance at January 1, 2011   $ 14,471  
Amortization     (482 )
Balance at December 31, 2011     13,989  
Additions     1,179  
Amortization     (642 )
Balance at December 31, 2012   $ 14,526  
         

 

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

Future amortization expense related to the resident lease and other intangibles over the next five years and thereafter, is as follows:

       
    Estimated Amortization
of Resident Lease and
Other Intangibles, Net
Years:      
     2013   $ 802
     2014     802
     2015     645
     2016     487
     2017     487
Thereafter     11,303
Total   $ 14,526

4. Other Balance Sheet Data

Prepaid expenses and other assets, net consisted of the following as of December 31, 2012 and 2011:

               
    2012   2011  
               
Deferred rent incentives, net   $ 7,678   $ 8,981  
Other assets     1,440     1,375  
Total   $ 9,118   $ 10,356  
               

Accounts payable and accrued expenses consisted of the following as of December 31, 2012 and 2011:

               
    2012   2011  
               
Trade and accrued payables   $ 2,523   $ 2,695  
Salaries and benefits     2,279     2,247  
Property taxes     3,237     3,025  
Insurance reserves     2,405     2,288  
Other     87     112  
Total   $ 10,531   $ 10,367  

 

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

5. Debt

Debt consisted of the following as of December 31, 2012 and 2011:

               
Long-Term Debt   2012   2011  
Assumed Loan due February 2015; interest rate of 5.88%; payable interest and principal until maturity; secured by one facility   $ 4,143   $ —  
               
Loan due March 2014; interest rate of 6.05%; payable interest only until maturity; secured by one facility     15,000     15,000  
               
Loan Pool due March 2014; interest rate of 5.64%; payable interest only until maturity; secured by forty-nine facilities (1)     708,662     708,662  
Total debt   $ 727,805   $ 723,662  

 

(1) As of December 31, 2012 and 2011, Harvest was the debtor on two pooled mortgage note agreements totaling $3,528,268 and $3,711,173, respectively, collateralized by all Harvest owned facilities including the Communities. The debt allocated to the Communities and included in the combined financial statements was the portion of the two pooled mortgage notes where the underlying property owning entities for the Communities were the primary obligors.
   
  In September 2013, Harvest paid off a portion of the above pooled debt and as a result, the remaining obligation was reallocated to the remaining Harvest facilities which decreased the debt on the Communities by $69,448.
   
  In connection with the sale of the Communities (see Note 9) Harvest repaid a portion of the pooled loans discussed above which resulted in full satisfaction of all debt outstanding specific to the Communities and the Communities were released as collateral for the remaining Harvest outstanding pooled debt.

The Company remains in compliance with all of its debt and lease agreements (including the financial covenants contained therein).

The following is a schedule of principal due on debt obligations as of December 31, 2012:

         
Year ended December 31:        
2013   $ 55  
2014     723,717  
2015     4,033  
Total   $ 727,805  

 

 
 

NCT Portfolio

Notes to Combined Financial Statements
(In Thousands)

6. Insurance

Harvest obtains various insurance coverages from commercial carriers at stated amounts as defined in the applicable policies. Losses related to deductible amounts are accrued based on management’s estimate of expected losses plus incurred but not reported claims. As of December 31, 2012 and 2011, the Company accrued $2,405 and $2,228 for the expected future payment of deductible amounts specific to the NCT Portfolio, which is included in accounts payable and accrued expense in the accompanying combined balance sheets.

7. Management fees

Harvest charges the Communities a management fee equal to 3.5% of resident fees revenue covering employee and other overhead costs attributable to managing the Communities. Such fee is presented as property management fee expense in the accompanying combined statements of operations.

8. Commitments and Contingencies

In the normal course of business, the Company is involved in legal actions arising from the ownership and operation of the business. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the combined financial position, operations or liquidity of the Company.

9. Subsequent Events

The Company has evaluated its subsequent events through February 6, 2014, the date the Company’s combined financial statements were available for issuance.

On December 23, 2013, NCT acquired the Communities from Harvest for a purchase price totaling $1,000,475. The Communities were subsequently leased to subsidiaries of Holiday AL Holdings LP (the Partnership), a wholly owned subsidiary of Holiday Acquisition. The Partnership will operate the Communities pursuant to 17-year leases. The minimum lease payments are initially $65,031, and such amount is subject to certain defined increases throughout the lease terms.

End of Filing