| ACQUISITIONS IN 2013 |
| 3. |
ACQUISITIONS IN 2013 |
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| A. |
Acquisitions of Senior Housing Properties |
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| (i) |
Managed Properties |
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During 2013, Newcastle completed the acquisitions of 21 senior housing properties in seven different portfolios for an aggregate purchase price of approximately $302.8 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 18 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 propertys effective gross income (as defined in the agreements) or (ii) 6% of the propertys effective gross income (as defined in the agreements) for the first two years and 7% thereafter. For the other 3 properties acquired, Newcastle has retained Blue Harbor to manage the properties. Pursuant to the agreements with Bl
ue Harbor, Newcastle pays management fees equal to 6% of the propertys effective gross income (as defined in the agreements) for the first two years and 7% thereafter. |
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| (ii) |
Holiday Portfolio |
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In addition to the acquisitions described in paragraph (i) above, on December 23, 2013,
Newcastle completed the acquisition of 51 independent living senior housing properties (the Holiday Portfolio)
from certain affiliates of Holiday for an aggregate purchase price of approximately $1.0 billion plus acquisition-related
costs. The Holiday Portfolio includes properties located across 24 states with 5,842 units in aggregate. 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. |
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On December 23, 2013 Newcastle also entered into two triple net master leases of the Holiday
Portfolio with certain affiliates of Holiday (collectively, the Master Tenants). Each lease has a 17-year term
and first-year rent equal to 6.5% of the purchase price with annual increases during the following three years of 4.5% and
up to 3.75% thereafter. Under each lease, the respective Master Tenant is responsible for (i) operating its portion of
the Holiday Portfolio 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. |
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Each master lease includes (i) a covenant requiring the Master Tenant to maintain a minimum lease coverage ratio, which the master lease defines as net operating income for the applicable trailing 12-month period for the Holiday Portfolio divided by the base rent for such trailing 12-month period, which steps up during the term of the lease and is subject to certain cure provisions, (ii) minimum capital expenditure requirements, (iii) customary operating covenants, events of default, and remedies, (iv) a non-compete clause restricting certain affiliates of the Master Tenant from developing or constructing new independent living properties within a specified radius of any property acquired by Newcastle in this transaction, and (v) restrictions on a change of control of the Master Tenants and Guarantor (as defined below), subject to certain exceptions. The master lease also required the Master Tenants to fund a security deposit in the amount of approximately $43.4 million, which serves as security for the Master Tenants performance of their respective obligations to Newcastle under the master leases. Additionally, the Master Tenants granted Newcastle a first priority security interest in certain personal property and receivables arising from the operations of the Holiday Portfolio, which security interest secures the Master Tenants obligations under the master leases. The Master Tenants obligations to Newcastle under the master leases are also guaranteed by Holiday AL Holdings LP, a subsidiary of Holiday (the Guarantor). The Guarantor is required to maintain a minimum net worth of $150 million, a minimum fixed charge coverage ratio of 1.10 and a maximum leverage ratio of 10 to 1. |
The following table summarizes the allocation
of the purchase price to the fair value of identifiable assets acquired and liabilities assumed at the date of acquisition, in
accordance with the acquisition method of accounting:
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At Acquisition |
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Managed |
|
Holiday |
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Properties |
|
Portfolio |
|
Total |
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| Allocation of Purchase Price (A)(B) |
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|
|
|
|
|
|
| Investments in Real Estate |
|
$ |
268,010 |
|
$ |
937,548 |
|
$ |
1,205,558 |
|
| Resident Lease Intangibles |
|
|
31,673 |
|
|
57,883 |
|
|
89,556 |
|
| Non-compete Intangibles |
|
|
1,000 |
|
|
|
|
|
1,000 |
|
| Land Lease Intangibles |
|
|
|
|
|
3,498 |
|
|
3,498 |
|
| PILOT Intangible |
|
|
3,700 |
|
|
|
|
|
3,700 |
|
| Other Intangibles |
|
|
500 |
|
|
1,546 |
|
|
2,046 |
|
| Assumed mortgage notes payable |
|
|
(43,128 |
) |
|
|
|
|
(43,128 |
) |
| Other Assets, net of other liabilities |
|
|
(2,157 |
) |
|
|
|
|
(2,157 |
) |
| Subtotal |
|
$ |
259,598 |
|
$ |
1,000,475 |
|
$ |
1,260,073 |
|
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|
|
|
|
|
|
|
|
|
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| Mortgage Notes Payable (C)
|
|
|
(175,871 |
) |
|
(719,350 |
) |
$ |
(895,221 |
) |
| Net assets acquired |
|
$ |
83,727 |
|
$ |
281,125 |
|
$ |
364,852 |
|
| Total acquisition related costs (D)
|
|
$ |
6,118 |
|
$ |
3,604 |
|
$ |
9,722 |
|
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(A) |
Due to the
timing of the acquisitions, for the November and December acquisitions,, Newcastle is still obtaining additional information relating to
the purchase price allocation. Therefore, the review process of the purchase price allocation is not
complete. Newcastle expects to complete this process within twelve months of the acquisition. |
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(B) |
Includes $1.5 million for the fair value of an earn-out payment to the seller if the aggregate EBITDA in one
of the portfolios acquired for any calendar years in which the third, fourth, fifth and/or sixth anniversary of the acquisition
date occurs is equal to or in excess of an earn-out threshold, as defined within the agreement. The undiscounted earn-out payment
is limited to $4.6 million, as per the agreement. |
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(C) |
See Note 14. |
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(D) |
Acquisition
related costs are expensed as incurred and included within general and administrative expense on the consolidated statements
of income. |
B. Restructuring and Spin-off of Media Investments
During 2013, Newcastle completed a restructuring
of its debt investment in GateHouse Media, Inc. (GateHouse), and formed Local Media Group Holdings LLC to acquire
Dow Jones Local Media Group (renamed Local Media Group Holdings LLC, or Local Media Group) from News Corp.
Newcastle completed the purchase of Local
Media Group on September 3, 2013 for an aggregate purchase price of approximately $86.9 million, including capitalized transaction
costs of approximately $4.3 million. Newcastle made a total equity investment of $53.9 million and financed the remainder of the
purchase price with $33.0 million of debt (the Local Media Group Acquisition).
As discussed in Note 14, the above $33.0
million of debt was drawn from a $43.0 million credit agreement that Local Media Group signed on September 3, 2013 with Credit
Suisse AG, Cayman Islands Branch and Credit Suisse Loan Funding LLC (collectively Credit Suisse).
The Local Media Group operations are
managed by GateHouse, pursuant to a management and advisory agreement. As a result of this agreement, management determined that
Local Media Group was a variable interest entity and that GateHouse was the primary beneficiary because it had both the power to
direct the activities that most significantly impact the economic performance of Local Media Group and it participated in the residual
returns of Local Media Group that could be significant to Local Media Group. Since Newcastle was not the primary beneficiary from
September 3, 2013 through November 25, 2013, it did not consolidate Local Media Group and recorded its investment in Local Media
Group as an equity method investment.
Newcastle sponsored a prepackaged plan of reorganization (as amended or supplemented, the Plan)
for GateHouse. Prior to entering into the Plan, Newcastle owned approximately 52.2% of GateHouses $1.2 billion of outstanding
debt. On September 27, 2013, GateHouse commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court for the
District of Delaware, and the court confirmed the Plan on November 6, 2013. GateHouses restructuring was completed
on November 26, 2013.
Pursuant to the Plan, (i) Newcastle formed
New Media Investment Group Inc. (New Media) as a wholly owned subsidiary of Newcastle, (ii) GateHouse and Local Media
Group became wholly owned subsidiaries of New Media, (iii) Newcastle offered to either purchase in cash the claims of other GateHouse
debt holders at 40% of the face amount of their claims or issue to other debt holders a pro rata share of the common stock of New
Media and the net cash proceeds, if any, from a new financing (the GateHouse Credit Facilities), and (iv) Newcastle
exchanged its debt claims for equity of New Media and net cash proceeds from the GateHouse Credit Facilities and, in accordance
with the elections made by other debt holders, purchased approximately $441.5 million of claims and issued approximately 15.4%
of New Medias common stock to certain third parties. As a result, and taking into account the value assigned to the contribution
of Local Media Group to New Media, Newcastle became the owner of approximately 84.6% of New Media.
Pursuant to the Plan, GateHouses
common stock was canceled and the holders received 1,362,479 warrants in New Media a then wholly owned subsidiary of Newcastle.
The warrants have a strike price of $46.35 per share and expire on November 26, 2023. As of February 13, 2014, New Medias
common stock had a closing trading price of $12.67 per share.
As part of the Plan, but not contingent
on the Plan, GateHouse entered into the GateHouse credit facilities in the aggregate amount of $165.0 million. For additional information
related to the GateHouse credit facilities, see Note 14.
Newcastle accounted for the transaction
as a business combination. The New Media assets acquired and liabilities assumed were recorded at their estimated fair values on
the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed
was allocated to goodwill.
Significant assumptions were as follows.
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Intangibles The estimated fair values of the acquired subscriber relationships, advertiser relationships and customer relationships were determined based on an excess earnings approach, a form of the income approach, which values assets based upon associated estimated discounted cash flows. A static pool approach using historical attrition rates was used to estimate attrition rates of 5.0% to 7.5% for advertiser relationships, subscriber relationships and customer relationships. The growth rate was estimated to be 0.0% and the discount rates were estimated to range from 14.5% to 17.0% for advertiser relationships and 14.5% to 15.5% for subscriber and customer relationships. |
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Mastheads fair values were determined based on a relief from royalty method, an income approach. Key assumptions utilized in this valuation include revenue projections, royalty rates of 1.3% to 2.0%, a long term growth rate of 0.0% and discount rates of 14.0% to 25.0%. |
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Property, plant and equipment The estimated fair values for property, plant and equipment were determined under three approaches: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active market is available), and the income approach (used for intangibles). These approaches are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income. Useful lives range from 2 to 13 years for personal property and 10 to 30 years for real property. |
The following table summarizes the allocation
of the purchase price to the fair value of identifiable assets acquired and liabilities assumed at the date of acquisition, in
accordance with the acquisition method of accounting:
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As of November 26, 2013 |
|
| Cash and cash equivalents |
|
$ |
22,368 |
|
| Property, plant and equipment |
|
|
272,153 |
|
| Intangibles |
|
|
146,019 |
|
| Goodwill |
|
|
126,686 |
|
| Restricted cash |
|
|
6,295 |
|
| Receivables and other assets |
|
|
100,483 |
|
| Total assets acquired |
|
|
674,004 |
|
| Less: |
|
|
|
|
| Credit facilities |
|
|
182,000 |
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| Other liabilities |
|
|
102,910 |
|
| Net assets acquired |
|
$ |
389,094 |
|
See Note 20 related to the February 13, 2014 spin-off of New
Media.
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| C. |
Restructuring of Golf Investment |
In December 2013, Newcastle restructured
an investment in mezzanine debt issued by NGP Mezzanine, LLC (NGP), the indirect parent of NGP Realty Sub, L.P. (National
Golf). NGP owns 27 golf courses across 8 states, and leases these courses to American Golf Corporation (American
Golf), an affiliated operating company. American Golf also leases an additional 54 golf courses and manages 11 courses,
all owned by third parties. As part of the transacation, Newcastle acquired the equity of NGP and American Golfs indirect
parent, AGC Mezzanine Pledge LLC (AGC), and therefore consolidated these entities as of December 31, 2013.
In the original investment in 2006, Newcastle
invested approximately $110 million in mezzanine debt issued by NGP. At the time of the transaction, the mezzanine debt had an
outstanding face amount of approximately $68 million, which was valued at approximately $29.4 million.
On December 30, 2013, pursuant to an
agreement with the other senior creditors of National Golf, Newcastle and National Golfs senior lender entered into a new
senior debt facility with a principal amount of $109 million, of which Newcastle committed to fund $54.5 million (and have funded
$46.9 million to date). Newcastle also acquired the equity of NGP and AGC for $2.0 million and acquired the ground lease for an 18-hole
golf course, clubhouse and other related facilities and improvements (the Vineyard Property) for an additional $0.5
million (collectively, the Golf business). As a result of Newcastles consolidation of these entities, its
debt investments in these entities are eliminated in consolidation.
The acquisition was accounted for as
a business combination. The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities
assumed based on their fair values. Due to the timing of the acquisition, Newcastle is still obtaining additional information relating
to the purchase price allocation. Therefore, the review process of the purchase price allocation is not complete. Newcastle expects
to complete this process within twelve months of the acquisition.
The following table summarizes the allocation of the purchase
price to the fair value of identifiable assets acquired and liabilities assumed at the date of acquisition, in accordance with
the acquisition method of accounting:
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|
|
|
|
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As of December 30, 2013 |
|
| Cash |
|
$ |
19,378 |
|
|
| Investments in other real estate |
|
|
259,573 |
|
|
| Intangible assets |
|
|
98,866 |
|
|
| Restricted cash |
|
|
3,512 |
|
|
| Receivables and other assets |
|
|
34,898 |
|
|
| Total assets acquired |
|
$ |
416,227 |
|
|
| Less: |
|
|
|
|
|
| Credit facilities |
|
|
228,832 |
|
|
| Other liabilities |
|
|
184,529 |
|
|
| Noncontrolling interest |
|
|
366 |
|
|
| Net assets acquired |
|
$ |
2,500 |
|
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|