Investments in Partially Owned Entities

9 Months Ended

Sep. 30, 2011

Investments in Partially Owned Entities [Abstract]

Investments in Partially Owned Entities

Note 5 —Investments in Partially Owned Entities

     The Company has two investments in partially owned entities: Cambridge Medical Office Building Portfolio and Senior Management Concepts Senior Living Portfolio as described below.

Cambridge Medical Office Building Portfolio

     In December of 2007, we acquired an 85% equity interest in eight (8) limited partnerships that own nine (9) Class A medical office buildings (the “Cambridge Portfolio”) developed and managed by Cambridge Holdings, Inc. (“Cambridge”) in exchange for a total investment of approximately $72.4 million consisting of approximately $61.9 million of cash, of which $2.8 million was held back to perform tenant improvements, and the commitment to issue to Cambridge 700,000 operating partnership units (the “OP Units”) in ERC Sub, L.P. (the limited partnership through which we hold our investment in the Cambridge portfolio) with a stated value of $10.5 million, subject to the properties achieving certain performance hurdles. Total rentable area is approximately 767,000 square feet. Eight (8) of the properties are located in Texas and one (1) property is located in Louisiana. The properties are situated on medical center campuses or adjacent to acute care hospitals or ambulatory surgery centers, and are affiliated with and/or occupied by hospital systems and doctor groups. Cambridge retained its ownership of the remaining 15% interest in each of the limited partnerships and continues to operate the underlying properties pursuant to long-term management contracts. Pursuant to the terms of our management agreements, Cambridge acts as the manager and leasing agent of each medical office building, subject to certain removal rights held by us. The properties were approximately 92% leased at September 30, 2011.

     On April 14, 2011 (effective as of April 15, 2011) we entered into an Omnibus Agreement (the “Omnibus Agreement”) with Cambridge and certain of its affiliates (the “Cambridge Parties”) regarding our investment in the Cambridge Portfolio. Pursuant to the Omnibus Agreement, we simultaneously entered into a settlement agreement with Cambridge in regard to the ongoing litigation between ourselves and Cambridge. The economic terms of our investment in the Cambridge Portfolio were amended by the Omnibus Agreement as follows:

• The number and terms of the OP Units were revised such that Cambridge retains rights to 200,000 OP Units. These OP Units are entitled to dividend equivalent payments equal to any ordinary dividend declared and paid by Care to its stockholders, but are no longer convertible into or redeemable for shares of common stock of Care and have limited voting rights in ERC Sub, L.P.;

• We issued a warrant (the “Warrant”) to Cambridge to purchase 300,000 shares of our common stock at $6.00 per share;

• Our obligation to fund up to approximately $0.9 million in additional tenant improvements in the Cambridge Portfolio was eliminated;

• Our aggregate interest in the Cambridge Portfolio was converted from a stated percentage interest of 85% to a fixed dollar investment of $40 million with a preferred return of 14%;

• Retroactive to January 1, 2011, we are to receive a preferential distribution of cash flow from operations with a target distribution rate of 12% on our $40 million fixed dollar investment with any cash flow from operations in excess of the target distribution rate being retained by Cambridge;

• We have a preference with regard to any distributions from special events, such as property sales, refinancings and capital contributions, equal to the sum of our outstanding fixed dollar investment plus our accrued but unpaid preferred return;

• Cambridge can purchase our interest in the Cambridge Portfolio at any time during the term of the Omnibus Agreement for an amount equal to the sum of our outstanding fixed dollar investment plus our accrued but unpaid preferred return plus a cash premium that increases annually as well as the return to Care of the OP Units, the Warrant and any Care stock acquired upon a cashless exercise of the Warrant (the “Redemption Price” as defined in the Omnibus Agreement);

• Cambridge is required to purchase our interest in the Cambridge Portfolio upon the earlier of: (i) the date when our fixed dollar investment has been reduced to zero or (ii) June 2, 2017, for an amount equal to the Redemption Price; and

• If prior to April 15, 2013, a medical office competitor, as defined in the Omnibus Agreement, acquires control of the Company, Cambridge may purchase our interest in the Cambridge Portfolio for a fixed dollar price, with no incremental premium, plus the return of the OP Units, the Warrant and any Care stock acquired upon a cashless exercise of the Warrant.

     As stated above, certain provisions of the Omnibus Agreement are retroactive to January 1, 2011. The effects of the restructuring of the Cambridge investment are partially reflected in the carrying value of the investment. Those effects include an increase of approximately $0.2 million for the valuation of the Warrant, a decrease of approximately $1.8 million for the change in the value of the remaining restructured OP Units and a reduction of approximately $1.0 million for the cash distribution for the first quarter in 2011. In addition, as stated above, our obligation for tenant improvements related to the Cambridge properties of approximately $0.9 million was released as per the terms of the Omnibus Agreement. Entering into the Omnibus Agreement in and of itself did not effect our results of operations for the three and nine month periods ending September 30, 2011. Notwithstanding the foregoing, subsequent to entering into the Omnibus Agreement, we are no longer allocated 85% of the operating losses (income) from the Cambridge Portfolio. Instead, we increase our Cambridge Portfolio investment by our share of cash from operations represented by the current pay portion of the preferred return, which is included in income in investments from partially owned entities. Upon receipt of the current pay portion of our preferred return, we reduce our Cambridge Portfolio investment by a like amount. For the three and nine months ending September 30, 2011 we reported $0.9 million (received October 28, 2011) and $2.1 million, respectively, as the current pay portion of our preferred return.

     The Company used the Black-Scholes option pricing model to measure the fair value of the Warrant on April 15, 2011, the date of the issuance, in accordance with the Omnibus Agreement. The Black-Scholes model valued the Warrant using the following assumptions:

Volatility		53.3	%
Expected Dividend Yield		10.29	%
Risk-free Rate of Return		1.87	%
Market Price (Date of Issuance)	$	5.25
Strike Price	$	6.00
Term of warrant	6.0 years

     The table below provides information with respect to the Cambridge Portfolio as of September 30, 2011:

Weighted average rent per square foot	$	25.62
Average square foot per tenant		5,740
Weighted average remaining lease term	6.3 years
Largest tenant as percentage of total rental square feet		8.8	%

Lease Maturity Schedule:

							% of
	Number of				Annual Rent		Rental
Year	tenants		Square Ft		(in millions)		Sq Ft
2011		9		10,583	$	2.4		1.3	%
2012		18		57,263		1.3		7.3	%
2013		21		75,585		1.6		8.9	%
2014		10		37,338		0.7		3.7	%
2015		21		117,580		2.5		13.6	%
2016		25		112,024		2.2		12.0	%
2017		10		53,764		2.0		11.3	%
Thereafter		12		241,879		7.6		41.9	%
								100.0	%

     Prior to April 15, 2011, we included 85% of the operating losses from the Cambridge Portfolio in our statements of operations and reduced the value of our investment in the Cambridge Portfolio based on such losses and the receipt of cash distributions. Under the previous structure, credit support for our preferred return consisted of: (i) the cash flow otherwise attributable to Cambridge’s 15% stake in the entities; (ii) the ordinary dividend equivalent payments or distributions otherwise payable to Cambridge with respect to the OP Units currently held in escrow; and (iii) a reduction in the total number of OP Units (held in escrow) otherwise payable to Cambridge, when the cash flow attributable to our 85% stake in the entities was not sufficient to meet the preferred return. The sources of credit support for our preferred return described in the preceding sentence were utilized in the order presented. Accordingly, if our interest in the cash flow generated by the properties was not sufficient to fully fund our preferred return, we first looked to the cash flow otherwise allocable to Cambridge, subsequent to which we captured the distributions otherwise payable on the OP Units should a shortfall still exist, and finally, we reduced the number of OP Units otherwise payable to Cambridge in the future, to the extent required to fully fund our preferred return.

     The OP Units are accounted for as a derivative obligation on our balance sheet. Prior to April 15, 2011, the value of these OP Units was derived from our stock price (as each OP Unit was redeemable for one share of our common stock, or at the cash equivalent thereof, at our option), and the overall performance of the Cambridge Portfolio as the number of OP Units eventually payable to Cambridge was subject to reduction to the extent such OP Units were utilized as credit support for our preferred payment as described above. The modified OP Units are valued based on the expected dividend equivalent payments equal to expected ordinary dividends declared and paid on our common stock to be made during the expected term of the OP Units, discounted by a risk adjusted rate.

     On October 19, 2011, we entered into an agreement with Cambridge to amend the Omnibus Agreement (the “First Amendment”). Pursuant to the First Amendment, Cambridge may purchase our interest in the Cambridge Portfolio at any time up to December 9, 2011 for an amount equal to the sum of our $40 million fixed dollar investment plus our accrued but unpaid preferred return (approximately $2.0 million). Subsequent to December 9, 2011, the purchase price reverts to that originally provided for in the Omnibus Agreement. As consideration for the First Amendment, Cambridge will forfeit all of its rights and interests in the Warrant and the OP Units upon the earlier of the closing of such purchase or December 9, 2011. In conjunction with the First Amendment, Cambridge agreed that it will not exercise the Warrant. Concurrently with the First Amendment, Cambridge stated its intent to exercise its purchase option, and to close the purchase on or before December 9, 2011. The Company is evaluating the impact of the amendment on its financial statements.

Summarized Financial Information for the Cambridge Portfolio

     Summarized financial information for the three and nine months ended September 30, 2011 and September 30, 2010 of the Cambridge Portfolio is as follows (amounts in millions):

	2011			2010
Revenue (nine months)	$	19.0		$	19.2
Expenses (nine months)		23.8			23.1
Net Loss before Preferred Return (nine months)		(3.4	)		(3.9	)
Net Loss after Preferred Return (nine months)		(4.8	)		(3.9	)
Revenue (three months)	$	6.4		$	6.4
Expenses (three months)		7.0			7.9
Net Loss before Preferred Return (three months)		(0.6	)		(1.5	)
Net Loss after Preferred Return (three months)		(2.0	)		(1.5	)

Note: The above table includes the results of operations of the Cambridge Portfolio.

Senior Management Concepts Senior Living Portfolio

     Until May 2011, we owned interests in four (4) independent and assisted living facilities located in Utah and operated by Senior Management Concepts, LLC (“SMC”), a privately held operator of senior housing facilities. The four (4) private pay facilities contain 408 units of which 243 are independent living units and 165 are assisted living units. Four (4) affiliates of SMC each entered into 15-year leases for the respective facilities that expire in 2022. We acquired our interest in the SMC portfolio in December 2007, paying approximately $6.8 million in exchange for 100% of the preferred equity interests and 10% of the common equity interests in the four (4) properties. At the time of our initial investment, we entered into an agreement with SMC that provides for payments to us of an annual cumulative preferred return of 15.0% on our investment. In addition, we are to receive a common equity return payable for up to ten (10) years equal to 10.0% of budgeted free cash flow after payment of debt service and the preferred return as well as 10% of the net proceeds from a sale of one or more of the properties. Subject to certain conditions being met, our preferred equity interest in the properties is subject to redemption at par beginning on January 1, 2010. If our preferred equity interest is redeemed, we have the right to put our common equity interests to SMC within 30 days after notice at fair market value as determined by a third-party appraiser. In addition, we have an option to put our preferred equity interest to SMC at par any time beginning on January 1, 2016, along with our common equity interests at fair market value as determined by a third-party appraiser.

     In May 2011, with our prior consent, SMC sold three (3) of the four (4) properties. At the time of closing, SMC was delinquent with respect to four (4) months of preferred and budgeted common equity payments totaling approximately $0.4 million, as well as default interest of approximately $50,000. At closing we received approximately $6.6 million of gross proceeds and $6.2 million of net proceeds (the offset corresponding to an approximately $0.4 million security deposit held by us) consisting of approximately $5.2 million representing a partial return of our preferred equity investment in the three (3) sold properties, approximately $0.9 million representing our 10% common equity interest in the sold properties and approximately $0.4 million for the outstanding delinquent and default interest payments. We received approximately $12,000 in excess of the cost basis of our investment on the sale of the three (3) properties, which was impacted by the Company’s election to utilize push-down accounting in conjunction with the Tiptree Transaction.

     As of September 30, 2011 and subsequent to the aforementioned sale, we retain our 100% preferred equity interest and 10% common equity interest in the remaining property, the Meadows, in St. George, Utah. This facility contains 120 units of senior living and the current occupancy is approximately 89%. Average occupancy during 2010 was approximately 92.5%.