Summarized Financial Information Of Equity Affiliates

9 Months Ended

Sep. 30, 2011

Summarized Financial Information Of Equity Affiliates [Abstract]

Summarized Financial Information Of Equity Affiliates

(5) Summarized Financial Information of Equity Affiliates

Our consolidated financial statements include the consolidated accounts of our controlled investments and those investments that meet the criteria of a variable interest entity where we are the primary beneficiary. In accordance with the FASB's standards and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs which we do not control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 99% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.

At September 30, 2011, we have non-controlling equity investments or commitments in thirty-two LLCs which own medical office buildings ("MOBs"). As of September 30, 2011, we accounted for: (i) thirty-one of these LLCs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities, and; (ii) one of these LLCs (Palmdale Medical Properties) on a consolidated basis, as discussed below, since it is considered to be variable interest entity where we are the primary beneficiary by virtue of its master lease with a subsidiary of Universal Health Services, Inc. ("UHS"), a related party to us.

The majority of these LLCs are joint-ventures between us and a non-related party that manages and holds minority ownership interests in the entities. Each LLC is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures and/or leasehold improvements and reductions and repayments of third-party debt. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash fundings are typically advanced as equity or short to intermediate term loans.

As a result of master lease arrangements between UHS and various LLCs in which we hold majority non-controlling ownership interests, we have consolidated or deconsolidated these LLCs as required in accordance with the FASB's standards and guidance.

Summerlin Medical Office Building II is located in Las Vegas, Nevada on the campus of Summerlin Hospital Medical Center. In connection with this MOB, which is owned by an LLC in which we hold a majority, non-controlling ownership interest, Summerlin Hospital Medical Center committed to a master lease agreement for a specified portion of the space. As a result of this master lease agreement, the LLC was considered a variable interest entity. Since we were the primary beneficiary, the financial results of this MOB were included in our financial statements on a consolidated basis prior to October 1, 2010. During the fourth quarter of 2010, the master lease arrangement expired and, as a result, this MOB is accounted for as an unconsolidated LLC under the equity method beginning on October 1, 2010. There was no material impact on our net income as a result of the deconsolidation of this LLC.

Palmdale Medical Properties has a master lease with a subsidiary of UHS. Additionally, UHS of Delaware, a wholly-owned subsidiary of UHS, serves as advisor to us under the terms of an advisory agreement and manages our day-to-day affairs. All of our officers are officers or employees of UHS. As a result of our related-party relationship with UHS and the master lease, lease assurance or lease guarantee arrangements with subsidiaries of UHS, we account for this LLC on a consolidated basis, since the fourth quarter of 2007, since it is a variable interest entity and we are deemed to be the primary beneficiary. The master lease threshold on this MOB has not yet been met and is not expected to be met in the near future.

The other LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to consolidation.

Rental income is recorded by our consolidated and unconsolidated MOBs relating to leases in excess of one year in length using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rent adjustments is dependent on many factors, including the nature and amount of any rental concessions granted to new tenants, scheduled rent increases under existing leases, as well as the acquisition and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-line adjustments to rental revenue may vary from period-to-period.

The following tables represent summarized financial and other information related to the thirty-one LLCs which were accounted for under the equity method as of September 30, 2011:

Name of LLC	Ownership	Property Owned by LLC
DSMB Properties(j.)	76%	Desert Samaritan Hospital MOBs
DVMC Properties(a.)	90%	Desert Valley Medical Center
Suburban Properties	33%	Suburban Medical Plaza II
Litchvan Investments(j.)	89%	Papago Medical Park
Paseo Medical Properties II(j.)	75%	Thunderbird Paseo Medical Plaza I & II
Willetta Medical Properties(a.)(j.)	90%	Edwards Medical Plaza
Santa Fe Scottsdale(a.)	90%	Santa Fe Professional Plaza
575 Hardy Investors(a.)	90%	Centinela Medical Building Complex

Name of LLC	Ownership	Property Owned by LLC
Brunswick Associates	74%	Mid Coast Hospital MOB
Deerval Properties(d.)(j.)	90%	Deer Valley Medical Office II
PCH Medical Properties	85%	Rosenberg Children's Medical Plaza
Gold Shadow Properties(b.)(k.)	98%	700 Shadow Lane & Goldring MOBs
Arlington Medical Properties	75%	Saint Mary's Professional Office Building
ApaMed Properties(k.)	85%	Apache Junction Medical Plaza
Spring Valley Medical Properties(b.)(k.)	95%	Spring Valley Medical Office Building
Sierra Medical Properties(j.)	95%	Sierra San Antonio Medical Plaza
Spring Valley Medical Properties II(b.)(k.)	95%	Spring Valley Hospital Medical Office Building II
PCH Southern Properties	95%	Phoenix Children's East Valley Care Center
Centennial Medical Properties(b.)(k.)	95%	Centennial Hills Medical Office Building I
Canyon Healthcare Properties(j.)	95%	Canyon Springs Medical Plaza
653 Town Center Investments(b.)(c.)(k.)	95%	Summerlin Hospital Medical Office Building
DesMed(b.)(k.)	99%	Desert Springs Medical Plaza
Deerval Properties II(d.)(j.)	95%	Deer Valley Medical Office Building III
Cobre Properties(j.)	95%	Cobre Valley Medical Plaza
Sparks Medical Properties(b.)	95%	Vista Medical Terrace & The Sparks Medical Building
Auburn Medical Properties II(b.)(k.)	95%	Auburn Medical Office Building II
Grayson Properties(b.)(e.)	95%	Texoma Medical Plaza
BRB/E Building One(f.)(k.)	95%	BRB Medical Office Building
Banburry Medical Properties(b.)(g.)(k.)	95%	Summerlin Hospital MOB III
3811 Bell Medical Properties(h.)	95%	North Valley Medical Plaza
653 Town Center Phase II(b.)(i.)(k.)	98%	Summerlin Hospital MOB II

(a.) The membership interests of this entity are held by a master LLC in which we hold a 90% non-controlling ownership interest.

(b.) Tenants of this medical office building include or will include subsidiaries of UHS.

(c.) The membership interests of this entity are held by a master LLC in which we hold a 95% non-controlling ownership interest.

(d.) Deerval Parking Company, LLC, which owns the real property of a parking garage located near Deer Valley Medical Office Buildings II and III, is 50% owned by each of Deerval Properties and Deerval Properties II.

(e.) We have committed to invest up to $4.8 million in equity and debt financing, of which $1.2 million has been funded as of September 30, 2011. This building, which is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS, was completed and opened during the first quarter of 2010. This LLC has a third-party construction loan of $13.2 million, which is non-recourse to us, outstanding as of September 30, 2011.

(f.) We have committed to invest up to $3.0 million in equity and debt financing, $2.7 million of which has been funded as of September 30, 2011, in an LLC that owns and operates this MOB which was completed and opened during the fourth quarter of 2010. This LLC obtained a third-party construction loan commitment of $6.2 million, which is non-recourse to us, $6.1 million of which has been borrowed as of September 30, 2011.

(g.) We have committed to invest up to $5.5 million in equity and debt financing, of which $2.5 million has been funded as of September 30, 2011. The LLC has a third-party term loan of $12.7 million, which is non-recourse to us, outstanding as of September 30, 2011.

(h.) We have committed to invest up to $6.2 million in equity and debt financing, all of which has been funded as of September 30, 2011. This MOB was acquired during the first quarter of 2010.

(i.) This LLC has a third-party loan of $12.6 million, which is non-recourse to us, outstanding as of September 30, 2011. This facility was accounted for on a consolidated basis prior to October 1, 2010. During the fourth quarter of 2010, the master lease at this facility expired; therefore, this LLC is no longer deemed to be a variable interest entity and is accounted for on an unconsolidated basis pursuant to the equity method beginning October 1, 2010.

(j.) This entity/property is included in the Purchase and Sale Agreement, as discussed in Note 4.

(k.) This entity/property is included in the Membership Interest Purchase Agreement, as discussed in Note 4.

Below are the combined statements of income (unaudited) for the LLCs accounted for under the equity method at September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010 (b.)		2011		2010 (b.)
	(amounts in thousands)
Revenues	$	15,222	$	13,975	$	44,803	$	41,040
Operating expenses		6,882		6,436		19,986		18,171
Depreciation and amortization		3,284		3,204		10,009		9,215
Interest, net		4,599		4,445		13,619		12,807

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010 (b.)		2011		2010 (b.)
	(amounts in thousands)
Net income	$	457		($110)	$	1,189	$	847
Our share of net income (a.)	$	875	$	335	$	2,377	$	1,904

(a.) Our share of net income includes interest income earned by us on various advances made to LLCs of approximately $715,000 and $615,000 for the three months ended September 30, 2011 and 2010, respectively, and $2.0 million and $1.7 million for the nine months ended September 30, 2011 and 2010, respectively.

(b.) Excludes Summerlin II MOB which was accounted for on a consolidated basis through September 30, 2010.

Below are the combined balance sheets (unaudited) for the LLCs accounted for under the equity method:

	September 30, 2011		December 31, 2010
	(amounts in thousands)
Net property, including CIP	$	330,863	$	334,757
Other assets		28,473		27,912
Total assets	$	359,336	$	362,669
Liabilities	$	11,333	$	12,852
Loans payable, non-recourse to us		268,074		271,693
Advances payable to us		34,911		29,082
Equity		45,018		49,042
Total liabilities and equity	$	359,336	$	362,669
Our share of equity and advances to LLCs	$	82,615	$	80,442

As of September 30, 2011, aggregate maturities of mortgage notes payable by the LLCs which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands):

2011	$	14,023
2012		40,672
2013		28,685
2014		42,471
2015		63,733
Thereafter		78,490
Total	$	268,074

Name of LLC	Mortgage Balance (b.)		Maturity Date
Banbury Medical Properties(a.)		12,726		12/31/2011
ApaMed Properties		2,659		01/01/2012
575 Hardy Investors		9,383		02/01/2012
Auburn Medical Properties		7,851		04/02/2012
Gold Shadow Properties		6,373		04/10/2012
BRB/E Building One(c.)		6,077		11/01/2012
Sierra Medical Properties		3,885		12/31/2012
Centennial Medical Properties		11,927		01/31/2013
Sparks Medical Properties		5,355		02/12/2013
Litchvan Investments		7,658		10/01/2013
Paseo Medical Properties II		17,000		06/08/2014
653 Town Center Investments		9,631		07/01/2014
Grayson Properties (c.)(d.)		13,197		07/01/2014
Brunswick Associates		8,259		01/01/2015
Spring Valley Medical Properties		5,539		02/10/2015

Name of LLC	Mortgage Balance (b.)		Maturity Date
DSMB Properties		24,396		09/10/2015
Arlington Medical Properties		25,634		10/10/2015
DVMC Properties		4,196		11/01/2015
Willetta Medical Properties		12,783		10/10/2016
Deerval Properties		9,565		09/01/2017
Deerval Properties II		16,426		09/01/2017
653 Town Center Phase II		12,625		10/01/2017
Cobre Properties		2,490		11/01/2017
Canyon Healthcare Properties		16,605		12/01/2017
PCH Southern Properties		6,879		12/01/2017
PCH Medical Properties		8,955		05/01/2018
	$	268,074

(a.) We believe the terms of this loan are within current market underwriting criteria. At this time, we expect to refinance this loan on or before the 2011 maturity date for a three to ten year term at the then current market interest rates. In the unexpected event that we are unable to refinance this loan on reasonable terms, we will explore other financing alternatives, including, among other things, potentially increasing our equity investment in the property utilizing funds borrowed under our revolving credit facility.

(b.) All mortgage loans, other than construction loans, require monthly principal payments through maturity and include a balloon principal payment upon maturity.

(c.) Construction loans.

(d.) This original construction loan automatically converted to a term loan commencing July 1, 2011 with a maturity date of July 1, 2014.

During 2008, we advanced $4.0 million to our third-party partners in a certain LLC in connection with a $4.0 million loan agreement. Interest on this non-amortizing loan is paid to us on a quarterly basis. The interest rate on this loan is: (i) 4.25% plus LIBOR, or; (ii) if information to determine LIBOR is not available, three hundred seventy-five basis points over the then existing borrowing cost. The loan has a stated maturity date of 2012, although it may be prepaid without penalty. It is secured by various forms of collateral, including personal guarantees from each of the partners to the loan, as well as their ownership interest in the LLC. The LLC on which this loan is collateralized is included in the Purchase and Sale Agreement as discussed in Note 4. Should that transaction be completed, this loan will be repaid to us at that time. Interest on this loan agreement has been paid to us through October 31, 2011.

Pursuant to the operating agreements of the LLCs, the third-party member and the Trust, at any time, have the right to make an offer ("Offering Member") to the other member(s) ("Non-Offering Member") in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member ("Offer to Sell") at a price as determined by the Offering Member ("Transfer Price"), or; (ii) purchase the entire ownership interest of the Non-Offering Member ("Offer to Purchase") at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 days of the acceptance by the Non-Offering Member.