WHEATON IL SENIOR HOLDINGS, LLC CONSOLIDATED FINANCIAL STATEMENTS PERIOD ENDED DECEMBER 31, 2015

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS

2 TABLE OF CONTENTS INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET 3 CONSOLIDATED STATEMENT OF OPERATIONS 4 CONSOLIDATED STATEMENT OF MEMBERS EQUITY 5 CONSOLIDATED STATEMENT OF CASH FLOWS 6 7

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4 The Board of Managers Wheaton IL Senior Holdings, LLC Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wheaton IL Senior Holdings, LLC as of December 31, 2015, and the results of its operations and its cash flows for the period then ended in accordance with the basis of accounting described in Note 1. Basis of Accounting We draw attention to Note 1 of the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared on the basis of accounting as described in Note 1, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. a CliftonLarsonAllen LLP West Des Moines, Iowa March 4, 2016 (2)

5 CONSOLIDATED BALANCE SHEET DECEMBER 31, 2015 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 7,234,284 Accounts Receivable 2,814,700 Prepaid Expenses and Other 682,367 Total Current Assets 10,731,351 Assets Limited as to Use or Restricted 1,800,000 Investment in Community 122,807,641 Total Assets $ 135,338,992 LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES Long-term Debt, Current Portion $ 1,676,000 Accounts Payable, Trade 593,220 Accounts Payable, Affiliates 24,814 Accrued Expenses 2,207,782 Refundable Resident Deposits 251,997 Contract Liabilities From Residents, Current Portion 313,884 Total Current Liabilities 5,067,697 Long-term Debt, Less Current Portion 45,760,100 Loans from Residents 21,745,980 Resident Contract Liability 21,683,818 Total Liabilities 94,257,595 COMMITMENTS AND CONTINGENCIES - MEMBERS' EQUITY 41,081,397 Total Liabilities and Members' Equity $ 135,338,992 See accompanying Notes to Consolidated Financial Statements. (3)

6 CONSOLIDATED STATEMENT OF OPERATIONS REVENUES Nonrefundable Entrance Payments $ 2,156,883 Apartment Revenues 10,045,644 Health Center Revenues 15,926,829 Other Revenues 16,575 Total Revenues 28,145,931 OPERATING EXPENSES General and Administrative 4,512,146 Plant 2,459,307 Housekeeping 1,211,291 Dietary 3,883,064 Medical and Resident Care 11,538,895 Total Operating Expenses 23,604,703 INCOME FROM OPERATIONS 4,541,228 OTHER INCOME (EXPENSES) Interest Income 1,654 Interest Expense (895,236) Gain on Disposal of Assets 1,000 Financing Costs (458,743) Acquisition Costs (1,195,889) Total Other Income (Expense) (2,547,214) NET INCOME 1,994,014 Change in Unrealized Appreciation of Investment in Community 6,229,444 Change in Unrealized Appreciation of Resident Loans and Resident Contract Liability 1,818,622 NET INCREASE IN MEMBERS' EQUITY RESULTING FROM OPERATIONS $ 10,042,080 See accompanying Notes to Consolidated Financial Statements. (4)

7 CONSOLIDATED STATEMENT OF MEMBERS EQUITY BALANCE - BEGINNING $ - Contributions from Members 31,039,317 Net Increase in Members' Equity Resulting from Operations 10,042,080 BALANCE - END OF YEAR $ 41,081,397 See accompanying Notes to Consolidated Financial Statements. (5)

8 CONSOLIDATED STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Net Increase in Members' Equity Resulting from Operations $ 10,042,080 Adjustments to Reconcile to Members' Equity Resulting from Operations to Net Cash Provided by Operating Activities: Change in Unrealized Appreciation of Investment in Community (6,229,444) Change in Unrealized Appreciation of Resident Loans and Resident Contract Liability (1,818,622) Changes in Operating Assets and Liabilities: Accounts Receivable (3,037,937) Prepaid Expenses and Other (402,169) Accounts Payable, Trade and Affiliates 594,392 Accrued Expenses 2,207,782 Refundable Resident Deposits, Net 251,997 Net Cash Provided by Operating Activities 1,608,079 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Investment in Community (3,441,829) Increase in Assets Whose Use is Limited or Restricted (1,800,000) Net Cash (Used in) Investing Activities (5,241,829) CASH FLOWS FROM FINANCING ACTIVITIES Contributions from Members 10,000,000 Proceeds from Resident Loans 6,150,551 Repayment of Resident Loans (1,523,835) Repayment of Resident Contracts (2,544,782) Repayment of Long-Term Debt (1,213,900) Net Cash Provided by Financing Activities 10,868,034 NET INCREASE IN CASH AND CASH EQUIVALENTS 7,234,284 Cash and Cash Equivalents - Beginning of Year - CASH AND CASH EQUIVALENTS- END OF YEAR $ 7,234,284 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES Investment in Community, Paid Directly from Proceeds of Long-term Debt $ 48,650,000 Investment in Community, Paid Directly by Members $ 21,039,317 Investment in Community, Paid from the Assumption of Resident Loans and Resident Contract Liability $ 43,703,607 Prepaid Expenses and Other Assumed at Acquisition of the Investment in Community $ (280,198) Cash Paid During the Year for Interest $ 895,236 Redemption of Resident Loans and Resident Contract Liability in Satisfaction of Outstanding Accounts Receivable Balance $ 223,237 Additions to Investment in Community included in Accounts Payable, Trade $ 23,642 See accompanying Notes to Consolidated Financial Statements. (6)

9 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Wheaton IL Senior Holdings, LLC, a Delaware limited liability company (WSH), was formed on February 6, WSH owns a 100% interest in Wheaton IL SNF Property, LLC (SNF PropCo), a Delaware limited liability company, Wheaton IL Senior Property, LLC (PropCo), a Delaware limited liability company and Wyndemere Senior Care, LLC (OpCo), a Delaware limited liability company. LCS Wyndemere II LLC (LCSWII), an Iowa limited liability company, owns a 10% interest and ROC Seniors Housing Holdings, LLC (ROC), a Delaware limited liability company (the Managing Member), owns a 90% interest in WSH. LCSWII and ROC, collectively the Capital Balance Members, formed the Company to acquire, further develop, manage, own, and operate a continuing care retirement community in Wheaton, Illinois (the Community). The Community was acquired on March 2, 2015 from LCS Wyndemere LLC and Westminster-LCS LLC (the Former Owners), who had acquired the Community from Central Dupage Health in March Basis of Accounting The Company prepares its consolidated financial statements under the basis of accounting described in Accounting Standards Codification Topic 946 Financial Services Investment Companies (ASC 946). The Company does not qualify as an Investment Company in accordance with this standard; therefore the presentation is considered an other comprehensive basis of accounting. However, consistent with industry practice for real estate entities that are majority owned by entities that do qualify as Investment Companies, the Company has elected to present the accompanying consolidated financial statements using the basis of accounting discussed above. ASC 946 uses fair value accounting which requires the use of certain estimates and assessments by management that is not in management s control. Because of the inherent uncertainty of valuation, amounts ultimately realized may vary from their fair values presented and the difference could be material. Certain titles of statements and disclosures are not in line with the Investment Companies Audit Guide, but are deemed immaterial to the consolidated financial statements. Principals of Consolidation The accompanying consolidated financial statements include the accounts of WSH, SNF PropCo, PropCo, and OpCo, collectively, the Company. Intercompany transactions and balances have been eliminated in the preparation of the accompanying consolidated financial statements. Use of Estimates In preparing the consolidated financial statements in accordance with fair value basis of accounting, management makes estimates and assumptions which affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions. Certain estimates require an assessment of factors not within management s control. Amounts ultimately realized from the investment may vary significantly from fair values presented and the difference could be material to the consolidated financial statements. (7)

10 NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates (continued) Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated values of the Investment in Community, Loans from Residents, and Resident Contract Liability are fairly stated as of December 31, Cash and Cash Equivalents The Company considers investments with maturities of three months or less when purchased to be cash equivalents. Concentration of Credit Risk The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. Accounts Receivable Accounts receivable are stated at net realizable value. Management determines the value by reviewing each account for its potential for collection. Assets Limited as to Use or Restricted The Company maintains an operating reserve escrow account required by the state of Illinois, equal to six months debt service (excluding balloon payments). Releases from the operating reserve require the approval of the Illinois Department of Public Health. The balance at December 31, 2015 was $1,800,000. Fair Value of Financial Instruments The fair value of financial instruments is determined by reference to market data and other valuation techniques, as appropriate. Investment in Community, Loans from Residents and Resident Contract Liability The Investment in Community, Loans from Residents and Resident Contract Liability are carried at fair value as described in Note 5. The change in the difference between cost and the fair value of the Investment in Community is reflected as Unrealized Appreciation on Investment in Community on the consolidated statement of operations. The change in the difference between cost and the fair value of Loans from Residents and the Resident Contract Liability is reflected as Unrealized Appreciation of Resident Loans and Resident Contract Liability on the consolidated statement of operations. The Company s investments are exposed to various market risks. It is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported. (8)

11 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company is not subject to income taxes. Each Member is taxed on its share of the Company s taxable income, whether or not distributed, and reports on its tax return, its share of any net income or loss of the Company. As a consequence, no provision is made in these consolidated financial statements for income taxes, or penalties and interest thereon. In accordance with the Income Taxes Topic of the FASB Accounting Standards Codification, management has evaluated their material tax positions and determined no income tax effects with respect to the consolidated financial statements. The Company has not been notified of any impending examinations by tax authorities, and no examinations are in process. Revenue and Expenses The residents pay an Entrance Payment, net of funds previously deposited, consisting of a First Person Fee (and Second Person Fee, if applicable) and a Loan. The First Person Fee (and Second Person Fee, if applicable) is recorded as Nonrefundable Entrance Payments revenue when received. Residents also pay a monthly fee, determined annually. The monthly fee may only be used for purposes specified in the Residency Agreements. Health Center Revenues The Community has agreements with third-party payors that provide for payments to the Company at amounts different from the Company s established rates. Payment arrangements include prospectively determined per diem payments and are not subject to retrospective adjustment. Health center revenues are reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered at the time the service is provided. See Note 7 for additional information on health center revenues. NOTE 2 RELATED PARTY TRANSACTIONS The Company has a client services agreement with Life Care Services LLC (affiliated through common ownership with LCSWII), to provide management services relating to the operations of the Community. Amounts expensed under this agreement amounted to $788,591 for the period ended December 31, At December 31, 2015, the Company had a payable due to Life Care Services LLC of $24,814. The Company has a client services agreement with LCS Reliance LLC (affiliated through common ownership with LCSWII), to provide Health Center billing services relating to the operations of the Community. Amounts expensed under this agreement amounted to $16,400 for the period ended December 31, (9)

12 NOTE 2 RELATED PARTY TRANSACTIONS (CONTINUED) The Company has an agreement with LCS Community Employment LLC to provide employment services for the Community. At December 31, 2015, the Company had no balance payable to LCS Community Employment LLC. During the acquisition in 2015, the Company paid acquisition related costs to Life Care Services LLC of $113,582 for financing services. The Company paid $646,250 for due diligence costs to ROC Seniors Housing Fund Manager LLC, an affiliate of ROC. In the normal course of operations, the Company purchases from affiliates of LCSWII services for group purchasing, insurance, computing technology and related ancillary matters. NOTE 3 RESIDENCY AGREEMENTS As part of the 2010 purchase of the Community, the Former Owners acquired existing resident contracts that were initiated prior to March Included in the resident contracts are multiple contract types with repayment of the Entrance Payment made at the time a new resident purchases their apartment. This Resident Contract Liability has been recorded at fair value as discussed in Note 5. As part of the 2015 purchase of the Community and subsequent to the 2015 purchase of the Community, the Company acquired and has entered into Residency Agreements that were initiated after March These Residency Agreements with occupants and prospective occupants of the Community provide for the lifetime use of a living unit, under certain conditions. The residents pay an Entrance Payment, net of funds previously deposited, consisting of a First Person Fee (and Second Person Fee, if applicable) and a Loan which bears no interest and shall be repaid per the terms of the Residency Agreements. The Loan is recorded at its fair value as discussed in Note 5 while the First Person Fee is recognized as revenue in the period received. The Agreements also provide for the occupants to pay a monthly fee. NOTE 4 INVESTMENT IN COMMUNITY On March 2, 2015, the Company purchased the Community for $69,500,000 exclusive of closing costs, prorations, and liabilities assumed. The Community contains a total of 211 apartments and 26 dwelling units (Wyndemere), a licensed 209 bed health center (Wynscape at Wyndemere), and a 65 bed assisted living facility (Westbridge at Wyndemere). Costs incurred related to the design, development and financing of improvements to the Community are added to the Investment in Community. (10)

13 NOTE 5 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company measures the fair value of financial instruments as required by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, using a fair value hierarchy consisting of three input levels, generally ranging from the most objective to the most subjective. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors specific to the investment. The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the period from February 6, 2015 to December 31, 2015, there were no such transfers. If the fair value of a financial instrument held cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value of such financial instrument is the discounted cash flow method. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on financial instrument, including assumed growth rate (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values. The valuation based on the inputs determined to be the most probably is used as the fair value of the instrument. The determination of fair value using these methodologies takes into account consideration of a range of factors, including but not limited to the price at which the financial instrument was acquired, the nature of the financial instrument, local market conditions, current and projected operating performance, current debt service, discount rates of replacement instruments and financing transactions subsequent to the acquisitions of the financial instrument. These valuation methodologies involve a significant degree of judgment by the Company. (11)

14 NOTE 5 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) A description of the valuation techniques applied to the Company s major categories of assets and liabilities measured at fair value on a recurring basis is as follows: Investment in Community The fair value is evaluated by the Company s Managing Member using the discounted cash flow method. In determining the projected cash flows, assumptions are determined using historical Community performance, projected Community performance and industry averages as provided by the National Investment Center for Seniors Housing & Care (NIC) and American Seniors Housing Association (ASHA). Loans from Residents and Resident Contract Liability The fair value is calculated by discounting the contract amounts to present value using a discount rate consistent with subordinate debt in a portfolio of Continuing Care Retirement Communities with a risk level similar to that of the Community. The following table represents the Company s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2015: Assets Level 3 Investment in Community 122,807,641 Liabilities Loans from Residents 21,745,980 Resident Contract Liability 21,997,702 43,743,682 Financial instruments classified as Level 3 in the fair value hierarchy represent the Company s investments in financial instruments in which the Company has used at least one significant unobservable input in the valuation model. (12)

15 NOTE 5 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents a reconciliation of activity for the Level 3 financial instruments: Investment in Community Acquisition on March 2, ,112,726 Fixed Asset Additions 3,465,471 Change in Unrealized Appreciation of Investment in Community 6,229,444 Balance, December 31, ,807,641 Resident Loans Acquisition on March 2, ,510,632 Proceeds from Resident Loans 6,150,551 Repayment of Resident Loans (1,523,835) Redemption of Resident Loans in Satisfaction of Outstanding Accounts Receivable Balance (25,390) Change in Unrealized Appreciation of Resident Loans (2,365,978) Balance, December 31, ,745,980 Resident Contract Liability Acquisition on March 2, ,192,975 Repayment of Resident Contracts (2,544,782) Redemption of Resident Contract Liability in Satisfaction of Outstanding Accounts Receivable Balance (197,847) Change in Unrealized Appreciation of Resident Contract Liability 547,356 Balance, December 31, ,997,702 In accordance with ASU , the following table summarizes information about the Company s Level 3 fair value measurements as of December 31, 2015: Fair Value as of Valuation Unobservable 12/31/2015 Technique Inputs Range Investment in Community 122,807,641 Discounted cash flow Discount rate 11.5% Rate Growth 3% Occupancy 91-93% Interest Rate 2-5% Loans from Residents 21,745,980 Discounted cash flow Discount rate 5% Average Life in Community 11 Years Resident Contract Liability 21,997,702 Discounted cash flow Discount rate 5% Average Life in Community 11 Years (13)

16 NOTE 5 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The significant unobservable inputs used in the fair value measurements of Investment in Community are discount rate, rate growth, occupancy and interest. Changes in these rates can result in higher (lower) fair value measurement. The significant unobservable inputs used in the fair value measurement of Loans from Residents and Resident Contract Liability are date of maturity. Changes in this input can result in higher (lower) fair value measurement. The fair value of certain financial instruments approximates the carrying value because of the short-term maturity of these instruments, including cash and cash equivalents, accounts receivable, assets limited as to use or restricted, accounts payable, trade, accounts payable affiliate, and refundable resident deposits. The carrying value approximates the estimated fair value of long-term debt as interest rates are determined periodically based on prevailing market conditions. NOTE 6 LONG-TERM DEBT On March 2, 2015, the Company entered into a term loan of $48,650,000 which has a maturity date of February 27, Borrowings under the loan will bear interest at LIBOR plus 2.00% per annum. The interest rate on December 31, 2015 was 2.23%. The term loan has a limited guarantee by ROC and Life Care Companies (owner of LCSWII) and is secured by substantially all assets of the Company including Entrance Payments without limitation. The balance of the loan at December 31, 2015 was $47,436,100. As of December 31, 2015, approximate aggregate maturities of long-term debt are as follows: Year Ending December 31, Amount 2016 $1,676, ,744, ,015,800 Total $47,436,100 The debt agreement includes various restrictive covenants requiring adherence to be in compliance with the terms of the debt agreement. NOTE 7 HEALTH CENTER REVENUES The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. A summary of the payment arrangements with the major third-party payor follows: (14)

17 NOTE 7 HEALTH CENTER REVENUES (CONTINUED) Medicare Skilled nursing services rendered to Medicare program beneficiaries are paid at prospectively determined per diem rates. The prospective rate is based upon a classification system called Resource Utilization Groups (RUGS), with reimbursement based upon resident acuity. Health center revenues from the Medicare program accounted for approximately 49% of total health center revenues in Revenues from the Medicare program accounted for approximately 30% of total revenues in NOTE 8 EMPLOYEE RETIREMENT BENEFIT PLAN Available to all eligible employees of LCS Community Employment LLC, formerly employees of the Company, is a defined contribution employee retirement benefit plan (the Plan). The Company accrued matching contributions of approximately $37,000 in 2015, to be remitted to the Plan in Prior to March 2, 2015, matching contributions were equal to 50% of the participant s eligible contributions, up to 3% of the participant s compensation for the plan year. Upon transfer of the Community employees to LCS Community Employment LLC on March 2, 2015, matching contributions were changed to equal 100% of the first 3% of the participant s eligible contributions plus 50% of the next 2% of eligible contributions. NOTE 9 COMMITMENTS AND CONTINGENCIES The Company in the normal course of operations is exposed to risk and involvement in legal actions and proceedings. To the extent available at the costs believed reasonable by the Company, it maintains insurance coverage s for various types of risk. Based on the Company s past experience, management believes that any legal actions or proceedings will not have a material effect on the financial position of the Company. Because of the various regulations surrounding government reimbursed medical costs, there can be no assurance that the reimbursements will be equal to or exceed costs to provide such services. NOTE 10 SUBSEQUENT EVENTS The Company has evaluated subsequent events through March 4, 2016, the date which the consolidated financial statements were available to be issued. There were no subsequent events requiring accrual or disclosure. (15)