4. Acquisitions and Other Significant Transactions

Acquisition of Emeritus

On July 31, 2014, the Company completed the merger contemplated by that certain Agreement and Plan of Merger, dated as of February 20, 2014, by and among Emeritus Corporation, a Washington corporation ("Emeritus"), the Company, and Broadway Merger Sub Corporation, a Delaware corporation and wholly-owned subsidiary of the Company, pursuant to which the subsidiary merged with and into Emeritus, with Emeritus continuing as the surviving corporation and a wholly-owned subsidiary of the Company. For accounting purposes, the merger was accounted for by the Company as a purchase. The results of Emeritus' operations have been included in the condensed consolidated financial statements subsequent to that date. Revenue and loss from operations of Emeritus included in the three months ended September 30, 2014 were $327.7 million and $51.3 million, respectively. Emeritus is a senior living service provider focused on operating residential style communities throughout the United States. Emeritus' assisted living and Alzheimer's and dementia care communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services. Many of Emeritus' communities offer independent living alternatives and, to a lesser extent, skilled nursing care. Emeritus also offers a range of outpatient therapy and home health services in Florida, Arizona and Texas. As of July 31, 2014, Emeritus owned 182 communities and leased 311 communities.

The aggregate acquisition-date fair value of the merger consideration transferred in the merger was approximately $3.0 billion which consisted of the issuance of 47.6 million shares of the Company's common stock with a fair value of approximately $1.6 billion upon the cancellation of all shares of Emeritus' common stock and stock options, as well as the Company's assumption of approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness of Emeritus. The fair value of the 47.6 million common shares issued was determined based on the closing market price of the Company's common shares on July 31, 2014, the effective date of the merger.

As a result of the acquisition of Emeritus, the Company acquired entities that are lessees under operating and capital leases covering 311 communities, as well as certain other leases such as office leases and leases associated with Emeritus' Nurse on Call business. The community leases contain customary terms, including assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants. In connection with the closing of the acquisition, the Company has entered into guarantees of certain of these leases.

The Company assumed approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness of Emeritus. The mortgage loans are collateralized by a total of 179 underlying communities, bear interest either at fixed rates at a weighted average of 6.06% per annum or at variable rates at a weighted average of 5.49% per annum (in each case, as of July 31, 2014), and had remaining maturities ranging from approximately three months to 33 years. The mortgage loans contain customary terms including assignment and change of control restrictions, acceleration provisions and financial covenants. In connection with the closing of the acquisition, the Company has entered into guarantees of certain of these debt arrangements.

On June 4, 2013, in Joan Boice et al. v. Emeritus Corporation et al., the Sacramento County Superior Court entered final judgment in favor of Joan Boice (deceased) and against Emeritus in the amount of $250,000 in compensatory damages and $23.0 million in punitive damages. Judgment was also entered in favor of Joan Boice's three adult children for $250,000 and the court awarded the plaintiffs' lawyer over $4.1 million in attorneys' fees. The judgment accrues interest at prescribed statutory rates. On July 8, 2013, Emeritus filed a Notice of Appeal challenging, among other things, the excessive nature of the punitive damages award. Emeritus was required to post a bond in connection with its appeal, and made a cash deposit in the amount of $20.9 million to collateralize the bond. The amount of the cash deposit and the reserve regarding the judgment have been contemplated in the preliminary purchase price allocation.

The allocation of the fair values of the assets acquired and liabilities assumed is subject to further adjustment due primarily to information not readily available at the acquisition date. The Company's assessment of the fair values and the allocation of the purchase price to the identified tangible and intangible assets is its current best estimate of fair value. The table below presents at the time of this filing a preliminary allocation of purchase price to the assets acquired and liabilities assumed (in millions):

Preliminary Allocation of Purchase Price
Cash and cash equivalents	$	28
Property, plant and equipment and leasehold intangibles		5,547
Goodwill		634
Other intangible assets, net		259
Other assets, net		304
Trade accounts payable and accrued expenses		(265	)
Long-term debt		(1,520	)
Capital and financing lease obligations		(2,736	)
Deferred tax liability		(367	)
Other liabilities		(234	)
Noncontrolling interest		(1	)
Fair value of Brookdale common stock issued	$	1,649

The goodwill of $634 million is primarily attributable to the synergies expected to arise after the acquisition. The retirement centers, assisted living and Brookdale Ancillary Services segments were allocated $20 million, $487 million and $127 million, respectively. The goodwill is not deductible for tax purposes.

The following table provides pro forma consolidated operational data as if the Company had acquired Emeritus on January 1, 2013 (in millions, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Total revenue	$	1,260		$	1,221		$	3,802		$	3,598
Net loss attributable to common shares		(34	)		(88	)		(66	)		(312	)

Basic and diluted net loss per share attributable to common shares	$	(0.19	)	$	(0.51	)	$	(0.38	)	$	(1.82	)

Weighted average shares used in computing basic and diluted net loss per share (in thousands)		175,037			171,712			173,258			171,041

The Company incurred $35.6 million and $49.9 million of transaction costs related to the acquisition of Emeritus for the three months and nine months ended September 30, 2014, respectively. Transaction costs are primarily comprised of transaction fees and direct acquisition costs, including legal, finance, consulting, and other professional fees. The pro forma consolidated operational data for the three and nine months ended September 30, 2014 excludes $35.6 million and $49.9 million of transaction costs as a non-recurring pro forma adjustment that was directly attributable to the acquisition of Emeritus. The pro forma consolidated operational data for the nine months ended September 30, 2013 includes $49.9 million of the transaction costs as a non-recurring pro forma adjustment that was directly attributable to the acquisition of Emeritus. On August 29, 2014 the Company completed the HCP Transactions (as described below). The pro forma consolidated operational data reflects the Company's full ownership interests and previously existing lease terms through the closing of the HCP Transactions on August 29, 2014 and reflects the Company's subsequent venture interests and amended lease terms for the remainder of the period.

The pro forma consolidated operational data is based on assumptions and estimates considered appropriate by the Company's management; however, these pro forma results are not necessarily indicative of the results of operations that would have been obtained had the Emeritus acquisition occurred at the beginning of the periods presented, nor do they purport to represent the consolidated results of operations for future periods. The pro forma consolidated operational data does not include the impact of any synergies that may be achieved in the acquisition or any strategies that management may consider in order to continue to efficiently manage operations.

On July 30, 2014, in connection with the acquisition of Emeritus, the Company's Certificate of Incorporation was amended to authorize up to 400 million shares of common stock.

HCP Transactions

On August 29, 2014, the Company completed the previously announced transactions contemplated by that certain Master Contribution and Transactions Agreement (the "Master Agreement"), dated as of April 23, 2014, by and between the Company and HCP, Inc., a Maryland corporation ("HCP"). At the closing of the transactions contemplated by the Master Agreement (the "Closing"), the Company and HCP entered into two venture transactions and amended the terms of certain existing agreements between the Company and HCP.

Venture Transactions

Each of the ventures contemplated by the Master Agreement uses a "RIDEA" structure, whereby at the Closing each of the Company and HCP invested in an "opco" venture and a "propco" venture. The propco owns most of the applicable communities and leases such communities to the opco pursuant to long-term leases entered into at the Closing. The opco owns the remainder of the applicable communities not owned by the propco, and at the Closing the opco engaged an affiliate of the Company to manage all of the owned and leased communities pursuant to management agreements with 15-year terms subject to certain extension options.

Venture Relating to the Company's and HCP's CCRC Entrance Fee Communities. At the Closing, the Company and HCP entered into a venture with respect to certain entry-fee CCRCs previously owned, leased and/or operated by the Company. The Company owns a 51% ownership interest, and HCP owns a 49% ownership interest, in each of the propco and opco. Pursuant to the terms of the Master Agreement, at the Closing the Company contributed to the venture eight wholly-owned entities (owning eight CCRC communities subject, in certain cases, to existing debt) and certain purchase options with respect to the HCP Communities (as defined below), and HCP contributed to the venture three wholly-owned entities (owning three properties in two CCRC communities (the "HCP Communities")). In addition, HCP contributed $323.5 million in cash and the venture completed the purchases of four communities managed by the Company for an aggregate purchase price of $323.5 million immediately following the Closing. Each of the communities in the venture is managed by the Company pursuant to market rate management agreements entered into at the Closing, and the Company has agreed to guarantee certain obligations of the manager under the applicable management agreements. Each of the propco and opco is governed by a board of managers consisting of six members, with three representatives each appointed by the Company and HCP.

The results and financial position of the CCRC communities were, in all material respects, deconsolidated from the Company prospectively upon formation of the CCRC ventures. The Company's interest in the CCRC ventures is accounted for under the equity method of accounting. The Company's investment basis in the CCRC ventures is based on the carrying values of the net assets it contributed to the ventures which is less than the Company's proportional share of underlying fair value of equity.

Venture Relating to Certain Emeritus / HCP Communities. At the Closing, the Company and HCP entered into a venture with respect to certain independent living, assisted living, memory care and/or skilled nursing care communities previously owned by HCP and leased and historically operated by Emeritus. The Company acquired the leases in the acquisition of Emeritus, recorded them at fair value at the acquisition date, and in this transaction effectively terminated the leases; therefore the Company has written off all of the recorded lease values in connection with this termination. The Company owns a 20% ownership interest, and HCP owns an 80% ownership interest, in each of the propco and opco. Pursuant to the terms of the Master Agreement, at the Closing an HCP affiliate made a loan to the Company in the original principal amount of approximately $68 million to fund the Company's initial capital contribution to the venture, at prevailing market rates. HCP contributed 49 communities to propco. At the Closing, propco leased the communities to opco. Each of the communities in the venture is managed by an affiliate of the Company, and the Company has agreed to guarantee certain obligations of the manager under the applicable market rate management agreements.

The results and financial position of the communities were, in all material respects, deconsolidated from the Company prospectively upon formation of the venture. The Company's interest in the venture is accounted for under the equity method of accounting.

Pursuant to the terms of the Master Agreement, the Company is required to pay HCP a fee related to the lease restructuring in the amount of $34 million, which fee is payable over a two year period beginning September 30, 2014. The elimination of the recorded lease values upon termination of the aforementioned leases approximated the $34 million liability to HCP.

Amendments to Existing Agreements (including Triple Net Leases)

At the Closing, the Company and HCP amended and restated (i) that certain Master Lease and Security Agreement, dated as of October 31, 2012, by and between Emeritus and certain affiliates of HCP, with respect to 112 communities, and (ii) certain other triple net leases between Emeritus and affiliates of HCP, with respect to 41 communities, together into a single master lease with the communities subject thereto separated into three pools (the "Master Lease"). The term of the Master Lease is 14 years for the pool 1 communities, 15 years for the pool 2 communities and 16 years for the pool 3 communities, with an average of approximately fifteen years, in each case subject to two extension options of approximately ten years each, and the Master Lease is guaranteed by the Company. The Master Lease provides for total base rent in 2014 of approximately $158 million, with lower future rent payments and escalations compared to the previously existing leases. HCP has agreed to make available up to $100 million for capital expenditures related to the communities during calendar years 2014 through 2017 at an initial lease rate of 7.0%. The Master Lease includes certain customary covenants, with respect to, among other things, capital expenditure requirements, restrictions on the ownership, operation and management of competing communities and transfer restrictions (including restrictions on changes of control of the Company). The Master Lease also includes customary events of default and remedies relating thereto. In addition, the Master Lease includes a purchase option in favor of the Company for up to ten communities at an aggregate purchase price not to exceed $60 million.

In connection with the transactions contemplated by the Master Agreement, at the Closing, (i) the parties terminated the purchase option rights granted by HCP to Emeritus pursuant to 49 of the previously existing Emeritus leases, (ii) the parties agreed to modify the existing term extension hurdle and incentive management fee structure applicable to an existing venture between the Company and HCP in respect of 20 independent living, assisted living, memory care and/or skilled nursing care communities, subject to obtaining the required lender consent and (iii) HCP released (and/or agreed to release, subject to obtaining the required lender consents) certain deposits and reserves posted by the Company and held by HCP or its affiliates in connection with existing leases between the parties. For accounting purposes, the amended leases were treated as new leases and classified as either capital or financing leases. The terminated purchase options were included in the determination of recorded capital or financing lease related balances.

Community Acquisitions

In July 2014, the Company acquired the underlying real estate associated with four communities that were previously leased for an aggregate purchase price of $51.4 million. The results of operations of three and one of these communities, prior and subsequent to the acquisition, are reported in the Retirement Centers and Assisted Living segments, respectively. The Company financed the transactions with $17.0 million of seller-financing secured by three of the communities. The balance of the purchase price was paid from cash on hand.

Equity Offering

In September 2014, the Company completed a public equity offering of 10,298,506 shares of common stock which yielded net proceeds of approximately $330.4 million. The Company has begun and intends to use the net proceeds to finance the exercise of purchase options on certain communities currently leased by the Company, to repay certain outstanding indebtedness with a weighted average interest rate of 7.3% and for other general corporate purposes, which may include additional debt repayments and the acceleration of capital investments in the Company's communities and corporate infrastructure platform.