Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

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ACQUISITIONS
 9 Months Ended
Sep. 30, 2014
Business Combinations [Abstract]  
ACQUISITIONS
2.   ACQUISITIONS
 
Acquisitions of Senior Housing properties:
 
i.
Managed Properties
 
In the nine months ended September 30, 2014, Newcastle completed the acquisitions of nine senior housing properties in six different portfolios for an aggregate purchase price of approximately $116.2 million plus acquisition-related costs. Each of these acquisitions was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. For two of the properties, Newcastle has retained Holiday to manage the properties. Pursuant to the property management agreements with Holiday, Newcastle pays management fees equal to either (i) 5% of the property’s effective gross income (as defined in the agreements) or (ii) 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. For the other seven properties acquired, Newcastle has retained Blue Harbor to manage the properties. Pursuant to the agreements with Blue Harbor, Newcastle pays management fees equal to 6% of the property’s effective gross income (as defined in the agreements) for the first two years and 7% thereafter. In addition, Newcastle will reimburse Holiday and Blue Harbor for certain expenses, primarily the compensation expense associated with the on-site employees.
 
ii.
Triple Net Lease Properties
 
On June 30, 2014, Newcastle completed the acquisition of six senior housing properties for an aggregate purchase price of approximately $183.0 million plus acquisition-related costs. The acquisition was accounted for as a business combination, under which all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred.
 
On June 30, 2014, Newcastle also entered into a triple net lease of these properties with a third party (the “June 2014 Master Tenant”). The lease has a 15-year term with two five-year renewal options and first-year rent equal to approximately 7.6% of the purchase price with annual increases during each of the following three years of 3.75% to 2.5% thereafter. Under the lease, the June 2014 Master Tenant is responsible for (i) operating the properties and bearing the related costs, including maintenance, utilities, taxes, insurance, repairs and capital improvements, and (ii) complying with the terms of the mortgage financing documents.
 
As part of the June 2014 Master Tenant lease, Newcastle committed to making $6.5 million immediately available for capital improvements and other repairs to the properties under the lease agreement and also agreed to make available to the June 2014 Master Tenant an additional $9.0 million at certain intervals over the 15 year lease period to be used for further capital improvements. Upon funding the capital improvements, Newcastle will be entitled to a rent increase.
 
The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired and liabilities assumed in connection with these acquisitions, in accordance with the acquisition method of accounting:
 
Nine months ended September 30, 2014 Acquisitions
 
 
 
Managed Properties
 
Triple Net Lease Properties
 
Total
Allocation of Purchase Price
 
 
 
 
 
Investments in Real Estate
$
103,530

 
$
144,148

 
$
247,678

Resident Lease Intangibles
13,963

 
39,475

 
53,438

Other Intangibles
—

 
960

 
960

Other Liabilities, net of other Assets
(1,280
)
 
(1,552
)
 
(2,832
)
Total purchase price
$
116,213

 
$
183,031

 
$
299,244

 
 
 
 
 
 
Mortgage Notes Payable (A)
(80,145
)
 
—

 
(80,145
)
Net assets acquired
$
36,068

 
$
183,031

 
$
219,099

Total acquisition related costs (B)
$
2,149

 
$
980

 
$
3,129


 
(A)
See Note 10.
(B)
Acquisition-related costs are expensed as incurred and included within general and administrative expense on the consolidated statements of income.
 
The initial accounting for business combinations is incomplete for acquisitions that are within their respective measurement period and Newcastle continues to evaluate adjustments to the provisional amounts recognized in the financial statements, including fair values assigned to real estate property and intangible assets acquired. Therefore, the purchase price allocations are preliminary and are subject to change. Final fair value measurements may materially differ from the initial acquisition accounting.
 
During the three months ended September 30, 2014, measurement period adjustments were made based on the reclassification and valuation of assets acquired and liabilities assumed in the amounts of ($18.7) million, ($8.7) million, $15.3 million, ($2.2) million and $14.3 million for investments in senior housing real estate, investments in other real estate, intangibles, receivables and other assets and accounts payable, accrued expenses and other liabilities, respectively. None of the measurement period adjustments had a material impact on Necastle’s previously reported results of operations.