Edgar Filing: AVIV REIT, INC.

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Smaller Reporting Company

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 001-35841 (Aviv REIT, Inc.)

Commission file number 333-173824 (Aviv Healthcare Properties Limited Partnership)

AVIV REIT, INC.

AVIV HEALTHCARE PROPERTIES LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in Its Charter)


Maryland (Aviv REIT, Inc.) Delaware (Aviv Healthcare Properties Limited Partnership)		27-3200673 (Aviv REIT, Inc.) 35-2249166 (Aviv Healthcare Properties Limited Partnership)
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

303 W. Madison Street, Suite 2400 Chicago, Illinois		60606
(Address of Principal Executive Offices)		(Zip Code)

(312) 855-0930

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 31, 2013, Aviv REIT, Inc. had 37,592,261 shares of common stock outstanding.

As of October 31, 2013, Aviv Healthcare Properties Limited Partnership had 11,665,182 limited partnership units outstanding that are redeemable for cash or, at Aviv REIT, Inc.’s option, shares of Aviv REIT, Inc. common stock.

EXPLANATORY NOTE

This combined Quarterly Report on Form 10-Q is being filed separately by Aviv REIT, Inc. (“Aviv REIT”) and Aviv Healthcare Properties Limited Partnership (the “Partnership”). Unless the context requires otherwise or except as otherwise noted, as used herein the words “we,” “company,” “us” and “our” refer to Aviv REIT, Inc. and Subsidiaries and Aviv Healthcare Properties Limited Partnership and Subsidiaries, as the operations of the two aforementioned entities are materially comparable for the periods presented.

TABLE OF CONTENTS


			Page

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Aviv REIT, Inc. and Subsidiaries
		Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (unaudited)		2
		Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)		3
		Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2013 (unaudited)		4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)		5
		Notes to Consolidated Financial Statements (unaudited)		7
		Aviv Healthcare Properties Limited Partnership and Subsidiaries
		Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (unaudited)		23
		Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)		24
		Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2013 (unaudited)		25
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)		26
		Notes to Consolidated Financial Statements (unaudited)		28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		54
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		64
	Item 4.	Controls and Procedures		64
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		65
	Item 1A.	Risk Factors		65
	Item 6.	Exhibits		65
SIGNATURES				67

Aviv REIT, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)


	September 30,			December 31,
	2013			2012
Assets
Real estate investments
Land	$	126,164,813		$	119,224,819
Buildings and improvements		1,003,196,438			968,074,506
Construction in progress		16,984,072			4,483,684
Assets under direct financing leases		11,143,290			11,049,120

		1,157,488,613			1,102,832,129
Less accumulated depreciation		(140,837,563	)		(119,371,113	)

Net real estate investments		1,016,651,050			983,461,016
Cash and cash equivalents		12,232,409			17,876,319
Straight-line rent receivable, net		39,099,641			36,101,861
Tenant receivables, net		5,567,256			3,483,534
Deferred finance costs, net		12,264,331			14,651,265
Secured loan receivables, net		31,216,884			32,638,780
Other assets		9,474,485			11,315,865

Total assets	$	1,126,506,056		$	1,099,528,640

Liabilities and equity
Senior notes payable and other debt	$	511,573,921		$	705,153,415
Accounts payable and accrued expenses		12,165,861			24,207,814
Tenant security and escrow deposits		19,258,814			18,278,172
Other liabilities		8,893,277			31,386,742

Total liabilities		551,891,873			779,026,143
Equity:
Stockholders’ equity
Common stock (par value $0.01; 37,273,877 and 21,653,813 shares issued and outstanding, respectively)		372,739			216,538
Additional paid-in-capital		519,115,062			375,029,917
Accumulated deficit		(84,504,865	)		(46,526,886	)
Accumulated other comprehensive loss		—			(2,151,670	)

Total stockholders’ equity		434,982,936			326,567,899
Noncontrolling interests		139,631,247			(6,065,402	)

Total equity		574,614,183			320,502,497

Total liabilities and equity	$	1,126,506,056		$	1,099,528,640

See accompanying notes to consolidated financial statements.

Aviv REIT, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues
Rental income	$	31,692,655		$	30,354,273		$	99,206,301		$	89,683,858
Interest on secured loans and financing lease		1,131,228			860,328			3,272,341			3,543,642
Interest and other income		49,114			1,058,580			128,027			1,126,890

Total revenues		32,872,997			32,273,181			102,606,669			94,354,390
Expenses
Interest expense		9,387,086			12,905,768			32,115,139			37,693,597
Depreciation and amortization		8,301,870			6,894,012			24,399,334			19,671,033
General and administrative		4,040,535			3,947,939			21,472,935			11,406,114
Transaction costs		1,036,461			1,286,425			1,583,184			3,507,057
Loss on impairment of assets		—			1,766,873			—			6,145,731
Reserve for uncollectible secured loans and other receivables		26,740			3,604,630			56,521			8,820,937
Loss (gain) on sale of assets, net		13,378			—			(25,799	)		—
Loss on extinguishment of debt		—			—			10,974,196			—
Other expenses		—			100,088			—			300,265

Total expenses		22,806,070			30,505,735			90,575,510			87,544,734

Income from continuing operations		10,066,927			1,767,446			12,031,159			6,809,656
Discontinued operations		—			—			—			4,586,692

Net income		10,066,927			1,767,446			12,031,159			11,396,348
Net income allocable to noncontrolling interests		(2,446,263	)		(637,162	)		(3,236,382	)		(4,451,239	)

Net income allocable to stockholders	$	7,620,664		$	1,130,284		$	8,794,777		$	6,945,109

Net income	$	10,066,927		$	1,767,446		$	12,031,159		$	11,396,348
Unrealized loss on derivative instruments		—			(39,482	)		—			(820,974	)

Total comprehensive income	$	10,066,927		$	1,727,964		$	12,031,159		$	10,575,374

Net income allocable to stockholders	$	7,620,664		$	1,130,284		$	8,794,777		$	6,945,109
Unrealized loss on derivative instruments, net of noncontrolling interest portion of $0, $14,233, $0, and $314,686, respectively		—			(25,249	)		—			(506,288	)

Total comprehensive income allocable to stockholders	$	7,620,664		$	1,105,035		$	8,794,777		$	6,438,821

Earnings per common share:
Basic:
Income from continuing operations allocable to stockholders	$	0.20		$	0.05		$	0.27		$	0.21
Discontinued operations, net of noncontrolling interests		—			—			—			0.14

Net income allocable to stockholders	$	0.20		$	0.05		$	0.27		$	0.35

Diluted:
Income from continuing operations allocable to stockholders	$	0.20		$	0.05		$	0.26		$	0.21
Discontinued operations, net of noncontrolling interests		—			—			—			0.14

Net income allocable to stockholders	$	0.20		$	0.05		$	0.26		$	0.35

Weighted average shares used in computing earnings per common share:
Basic		37,271,714			21,178,250			32,408,843			19,453,438
Diluted		50,838,556			21,307,401			42,101,101			19,582,589
Dividends declared per common share	$	0.36		$	0.33		$	0.744		$	1.03

See accompanying notes to consolidated financial statements.

Aviv REIT, Inc. and Subsidiaries

Consolidated Statement of Changes in Equity

Nine Months Ended September 30, 2013 (unaudited)


	Stockholders’ Equity
	Common Stock				Additional Paid-In-Capital			Accumulated Deficit			Accumulated Other			Total
	Shares		Amount		Additional Paid-In-Capital			Accumulated Deficit			Comprehensive Income (Loss)			Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance at January 1, 2013		21,653,813	$	216,538	$	375,029,917		$	(46,526,886	)	$	(2,151,670	)	$	326,567,899		$	(6,065,402	)	$	320,502,497
Non-cash stock-based compensation		—		—		10,041,169			—			—			10,041,169			888,400			10,929,569
Shares issued for settlement of board of directors and management vested stock units		440,064		4,401		8,337,831			—			—			8,342,232			—			8,342,232
Distributions to partners		—		—		—			—			—			—			(12,476,480	)		(12,476,480	)
Capital contributions		—		—		—			—			—			—			64,000			64,000
Initial public offering proceeds		15,180,000		151,800		303,448,200			—			—			303,600,000			—			303,600,000
Cost of raising capital		—		—		(25,379,370	)		—			—			(25,379,370	)		—			(25,379,370	)
Retirement of derivative instruments		—		—		—			—			2,151,670			2,151,670			1,621,662			3,773,332
Dividends to stockholders		—		—		—			(46,772,756	)		—			(46,772,756	)		—			(46,772,756	)
Reclassification of equity at initial public offering		—		—		(153,751,098	)		—			—			(153,751,098	)		153,751,098			—
Adjustment for noncontrolling interests ownership of operating partnership		—		—		1,388,413			—			—			1,388,413			(1,388,413	)		—
Net income		—		—		—			8,794,777			—			8,794,777			3,236,382			12,031,159

Balance at September 30, 2013		37,273,877	$	372,739	$	519,115,062		$	(84,504,865	)	$	—		$	434,982,936		$	139,631,247		$	574,614,183

See accompanying notes to consolidated financial statements.

Aviv REIT, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended September 30,
	2013			2012
Operating activities
Net income	$	12,031,159		$	11,396,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,399,334			19,705,142
Amortization of deferred financing costs		2,516,150			2,626,446
Accretion of debt premium		(376,918	)		(292,423	)
Straight-line rental income, net		(2,997,780	)		(5,922,684	)
Rental income from intangible amortization, net		(1,096,816	)		(1,149,423	)
Non-cash stock-based compensation		10,929,569			1,229,957
Gain on sale of assets, net		(25,799	)		(4,425,246	)
Non-cash loss on extinguishment of debt		5,160,614			13,264
Loss on impairment of assets		—			6,145,731
Reserve for uncollectible loans and other receivables		56,521			8,820,937
Accretion of earn-out provision for previously acquired real estate investments		—			300,265
Changes in assets and liabilities:
Tenant receivables		(3,785,413	)		(5,424,432	)
Other assets		1,058,131			(3,560,710	)
Accounts payable and accrued expenses		(9,468,421	)		(4,676,099	)
Tenant security deposits and other liabilities		1,600,122			(856,750	)

Net cash provided by operating activities		40,000,453			23,930,323
Investing activities
Purchase of real estate investments		(40,476,000	)		(133,998,037	)
Proceeds from sales of real estate investments		4,842,219			30,542,644
Capital improvements		(9,908,987	)		(10,458,200	)
Development projects		(11,979,968	)		(21,238,457	)
Secured loan receivables received from others		3,221,706			14,797,338
Secured loan receivables funded to others		(2,707,383	)		(17,146,086	)

Net cash used in investing activities		(57,008,413	)		(137,500,798	)

See accompanying notes to consolidated financial statements.

Aviv REIT, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(unaudited)


	Nine Months Ended September 30,
	2013			2012
Financing activities
Borrowings of debt	$	160,000,000		$	224,761,094
Repayment of debt		(353,202,576	)		(172,211,473	)
Payment of financing costs		(5,289,831	)		(5,143,395	)
Payment for swap termination		(3,606,000	)		—
Capital contributions		425,175			109,000,000
Deferred contribution		—			(35,000,000	)
Initial public offering proceeds		303,600,000			—
Cost of raising capital		(25,379,370	)		—
Cash distributions to partners		(16,275,919	)		(12,523,881	)
Cash dividends to stockholders		(48,907,429	)		(21,231,417	)

Net cash provided by financing activities		11,364,050			87,650,928

Net decrease in cash and cash equivalents		(5,643,910	)		(25,919,547	)
Cash and cash equivalents:
Beginning of period		17,876,319			40,862,023

End of period	$	12,232,409		$	14,942,476

Supplemental cash flow information
Cash paid for interest	$	39,644,968		$	41,967,088
Supplemental disclosure of noncash activity
Accrued dividends payable to stockholders	$	—		$	10,097,872
Accrued distributions payable to partners	$	—		$	4,052,974
Write-off of straight-line rent receivable, net	$	2,887,207		$	567,745
Write-off of in-place lease intangibles, net	$	—		$	48,554
Write-off of deferred financing costs, net	$	5,160,614		$	13,264
Assumed debt	$	—		$	11,459,794

See accompanying notes to consolidated financial statements.

AVIV REIT, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. Description of Operations and Formation

Aviv REIT, Inc., a Maryland corporation, and Subsidiaries (the REIT) is the sole general partner and majority owner of Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership, and Subsidiaries (the Partnership). In these footnotes, the Company refers generically to Aviv REIT, Inc., the Partnership, and their subsidiaries. The predecessor to the Partnership was formed in 2005 and, at September 30, 2013, the Partnership directly or indirectly owned or leased 263 properties, principally skilled nursing facilities, across the United States. The Company generates the majority of its revenues by entering into long-term triple-net leases with local, regional, and national operators. All operating and maintenance costs and related real estate taxes of the buildings are the responsibility of the operators. Substantially all depreciation expense reflected in the consolidated statements of operations and comprehensive income relates to the ownership of real estate properties. The Company manages its business as a single business segment as defined in Accounting Standards Codification (ASC) 280, Segment Reporting.

The Partnership is the general partner of Aviv Healthcare Properties Operating Partnership I, L.P. (the Operating Partnership), a Delaware limited partnership, and the sole member of Aviv OP Limited Partner, L.L.C., a Delaware limited liability company (the sole limited partner of the Operating Partnership), the sole member of Aviv Asset Management, L.L.C., a Delaware limited liability company, and the sole stockholder of Aviv Healthcare Capital Corporation, a Delaware corporation. The Operating Partnership has five wholly owned subsidiaries: Aviv Financing I, L.L.C. (Aviv Financing I), a Delaware limited liability company; Aviv Financing II, L.L.C. (Aviv Financing II), a Delaware limited liability company; Aviv Financing III, L.L.C. (Aviv Financing III), a Delaware limited liability company; Aviv Financing IV, L.L.C. (Aviv Financing IV), a Delaware limited liability company; and Aviv Financing V, L.L.C. (Aviv Financing V), a Delaware limited liability company.

On July 31, 2010, the predecessor to the Partnership entered into an agreement (the Merger Agreement), by and among the REIT, Aviv Healthcare Merger Sub LP (Merger Sub), a Delaware limited partnership of which the REIT is the general partner, Aviv Healthcare Merger Sub Partner LLC, a Delaware limited liability company and a wholly owned subsidiary of the REIT, and the predecessor to the Partnership. On September 17, 2010, pursuant to the terms of the Merger Agreement, the predecessor to the Partnership merged (the Merger) with and into Merger Sub, with Merger Sub continuing as the surviving entity with the identical name (the Surviving Partnership). Following the Merger, the REIT remains as the sole general partner of the Surviving Partnership and the Surviving Partnership, as the successor to the predecessor to the Partnership, became the general partner of the Operating Partnership.

All of the business, assets and operations are held by the Operating Partnership and its subsidiaries. The REIT’s equity interest in the Surviving Partnership is linked to future investments in the REIT, such that future equity issuances by the REIT (pursuant to the Surviving Partnership’s partnership agreement) will result in a corresponding increase in the REIT’s equity interest in the Surviving Partnership. The REIT is authorized to issue 300 million shares of common stock (par value $0.01) and 25 million shares of preferred stock (par value $0.01). As a result of the common control of the REIT (which was newly formed) and the predecessor to the Partnership, the Merger, for accounting purposes, did not result in any adjustment to the historical carrying value of the assets or liabilities of the Partnership. The REIT contributed the net proceeds of its capital raise to the Partnership in exchange for Class G Units in the Partnership. Periods prior to September 17, 2010 represent the results of operations and financial condition of the Partnership, as predecessor to the Company. Subsequent to September 17, 2010, and throughout 2011 and 2012, approximately 8.5 million additional shares of common stock were issued by the REIT in connection with $159 million equity contributions by one of the REIT’s stockholders.

On March 26, 2013, the REIT completed an initial public offering (IPO) of its common stock pursuant to a registration statement filed with the SEC, which became effective on March 20, 2013. The Company received net proceeds after underwriting discounts and commissions, of $282.3 million, exclusive of other costs of raising capital in consideration for the issuance and sale of approximately 15.2 million shares of common stock (which included approximately 2.0 million shares sold to the underwriters upon exercise of their option to purchase additional shares to cover over-allotments) at a price to the public of $20.00 per share. In connection with the IPO, the Partnership’s Class A, B, C, D, F and G Units were converted into a single class of limited partnership units, which are referred to as OP Units.

Immediately prior to the completion of the IPO, there were outstanding approximately 21.7 million shares of common stock of the REIT; limited partnership units of the Partnership which at the IPO were converted into approximately 11.9 million OP Units, and 125 shares of preferred stock of the REIT. On April 15, 2013, the 125 shares of preferred stock outstanding were redeemed. At September 30, 2013, there were approximately 37.3 million shares of common stock outstanding and 11.9 million OP Units outstanding which are redeemable for cash or, at the REIT’s option, for shares of common stock. The operating results of the Partnership are allocated based upon the REIT’s and the limited partners’ respective economic interests therein. The REIT’s ownership of the Partnership was 75.7% as of September 30, 2013, after giving effect to the IPO. The REIT’s weighted average economic ownership of the Partnership for the three and nine months ended September 30, 2013 and 2012 was 75.7%, 73.1%, 63.95% and 61.85%, respectively.

2. Summary of Significant Accounting Policies

Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the REIT, the Partnership, the Operating Partnership, and all controlled subsidiaries. The Company considers itself to control an entity if it is the majority owner of and has voting control over such entity or the power to control a variable interest entity. The portion of the net income or loss attributed to third parties is reported as net income allocable to noncontrolling interests on the consolidated statements of operations and comprehensive income, and such parties’ portion of the net equity in such subsidiaries is reported on the consolidated balance sheets as noncontrolling interests. All significant intercompany balances and transactions have been eliminated in consolidation.

Quarterly Reporting

The accompanying unaudited financial statements and notes of the Company as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 have been prepared in accordance with GAAP for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under GAAP have been condensed or omitted pursuant to GAAP quarterly reporting rules. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s balance sheets, statements of operations and comprehensive income, statement of changes in equity, and statements of cash flows have been included and are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the Company for the years ended December 31, 2012, 2011, and 2010. The consolidated statements of operations and comprehensive income and cash flows for the periods ended September 30, 2013 and 2012 are not necessarily indicative of full year results.

The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission.

Real Estate Investments

The Company periodically assesses the carrying value of real estate investments and related intangible assets in accordance with ASC 360, Property, Plant, and Equipment (ASC 360), to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. In the event estimated undiscounted cash flows indicate the carrying amount of the real estate investments will not be recovered in part or in whole, a provision will be recorded to reduce the carrying basis of the real estate investments and related intangibles to their estimated fair value. The estimated fair value of the Company’s real estate investments is determined by using customary industry standard methods that include discounted cash flow and/or direct capitalization analysis (Level 3) or estimated cash proceeds received upon the anticipated disposition of the asset from market comparables (Level 2). As part of the impairment evaluation for the three and nine months ended September 30, 2013, no impairments were recorded. As part of the impairment evaluation for the three and nine months ended September 30, 2012, the following impairments were recorded to reflect the estimated fair values (Level 2):


Three Months Ended September 30, 2012
Youngstown, AZ	$	1,076,704
Bremerton, WA		150,169
Zion, IL		540,000

	$	1,766,873


Nine Months Ended September 30, 2012
Youngstown, AZ	$	1,634,700
Fall River, MA		141,204
West Chester, OH		3,129,658
Cincinnati, OH		90,000
Zion, IL		1,000,000
Bremerton, WA		150,169

	$	6,145,731

Revenue Recognition

Rental income is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to straight-line rent receivable, net. Income recognized from this policy is titled straight-line rental income. Additional rents from expense reimbursements for insurance, real estate taxes, and certain other expenses are recognized in the period in which the related expenses are incurred and the net impact is reflected as rental income on the consolidated statements of operations and comprehensive income.

Below is a summary of the components of rental income for the respective periods:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Cash rental income, net	$	32,554,063		$	28,139,917	$	95,111,705	$	82,611,751
Straight-line rental income		(1,226,519	)		1,802,440		2,997,780		5,922,684
Rental income from intangible amortization		365,111			411,916		1,096,816		1,149,423

Total rental income	$	31,692,655		$	30,354,273	$	99,206,301	$	89,683,858

During the three and nine months ended September 30, 2013 and 2012, straight-line rental income includes a write-off of straight-line rent receivable of $2.9 million, $2.9 million, $0 and $0.6 million, respectively, due to the early termination of leases and replacement of operators.

The Company’s reserve for uncollectible operator receivables is included as a component of reserve for uncollectible secured loans and other receivables in the consolidated statements of operations and comprehensive income. The amount incurred during the three and nine months ended September 30, 2013 and 2012 was $0 million, $0.1 million, $0.7 million and $2.5 million, respectively.

Lease Accounting

The Company, as lessor, makes a determination with respect to each of its leases whether they should be accounted for as operating leases or direct financing leases. The classification criteria is based on estimates regarding the fair value of the leased facilities, minimum lease payments, effective cost of funds, the economic life of the facilities, the existence of a bargain purchase option, and certain other terms in the lease agreements. Payments received under the financing lease are bifurcated between interest income and principal amortization to achieve a consistent yield over the stated lease term using the interest method. Assets subject to operating leases are reported as real estate investments in the consolidated balance sheets. For facilities leased as direct financing arrangements, an asset equal to the Company’s net initial investment is established on the balance sheet titled assets under direct financing leases. Principal amortization (accretion) is reflected as an adjustment to the asset subject to a financing lease. Such accretion was $30,353, $94,171, $32,264 and $99,606 for the three and nine months ended September 30, 2013 and 2012, respectively.

All of the Company’s leases contain fixed or formula-based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease for operating leases.

Secured Loan Receivables

Secured loan receivables consist of capital improvement loans and secured loans to operators. Capital improvement loans represent the financing provided by the Company to the operator to acquire furniture, fixtures, and equipment while the operator is operating the facility. Secured loans to operators represent financing provided by the Company to operators for working capital needs. Secured loan receivables are carried at their principal amount outstanding. Management periodically evaluates outstanding loans and notes receivable for collectability on a loan-by-loan basis. When management identifies potential loan impairment indicators, such as nonpayment under the loan documents, impairment of the underlying collateral, financial difficulty of the operator, or other circumstances that may impair full execution of the loan documents, and management believes it is probable that all amounts will not be collected under the contractual terms of the loan, the loan is written down to the present value of the expected future cash flows. Loan impairment is monitored via a quantitative and qualitative analysis including credit quality indicators and it is reasonably possible that a change in estimate could occur in the near term. No other circumstances exist that would suggest that additional reserves are necessary at the balance sheet dates other than as disclosed in Footnote 4.

Stock-Based Compensation

The Company follows ASC 718, Stock Compensation (ASC 718), which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations and comprehensive income based on their grant date fair values. The non-cash stock-based compensation expense incurred by the Company through September 30, 2013 is summarized in Footnote 9.

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures (ASC 820), establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•

Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets

•

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

•

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement

The Company’s interest rate swaps are valued using models developed by the respective counterparty that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

Cash and cash equivalents and derivative financial instruments are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value. Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company had outstanding senior notes payable and other debt obligations with a carrying value of approximately $511.6 million and $705.2 million as of September 30, 2013 and December 31, 2012, respectively. The fair value of this debt was $537.4 million and $720.8 million as of September 30, 2013 and December 31, 2012, respectively, based upon interest rates available to the Company on similar borrowings (Level 3). Management estimates the fair value of its secured loan receivables using a discounted cash flow analysis based upon the Company’s current interest rates for secured loan receivables with similar maturities and collateral securing the indebtedness. The Company had outstanding secured loan receivables with a carrying value of $31.2 million and $32.6 million as of September 30, 2013 and December 31, 2012, respectively. The fair values of secured loan receivables as of September 30, 2013 and as of December 31, 2012 approximate their carrying values based upon interest rates available to the Company on similar borrowings.

Derivative Instruments

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company has implemented ASC 815, Derivatives and Hedging (ASC 815), which establishes accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded as either an asset or liability measured at their fair value unless they qualify for a normal purchase or normal sales exception. When specific hedge accounting criteria are not met, ASC 815 requires that changes in a derivative’s fair value be recognized currently in earnings. Changes in the fair market values of the Company’s derivative instruments are recorded in the consolidated statements of operations and comprehensive income if the derivative does not qualify for or the Company does not elect to apply hedge accounting. If the derivative is deemed to be eligible for hedge accounting, such changes are reported in accumulated other comprehensive income within the consolidated statement of changes in equity, exclusive of ineffectiveness amounts, which are recognized as adjustments to net income. All of the changes in the fair market values of our derivative instruments are recorded in the consolidated statements of operations and comprehensive income for our interest rate swaps that were terminated in September 2010. In November 2010, the Company entered into two interest rate swaps (which were settled at the IPO) and accounts for changes in fair value of such hedges through accumulated other comprehensive (loss) income in equity in its financial statements via hedge accounting. Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors. Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.

Income Taxes

For federal income tax purposes, the Company elected, with the filing of its initial 1120 REIT, U.S. Income Tax Return for Real Estate Investment Trusts, to be taxed as a Real Estate Investment Trust (REIT) effective at the time of the Merger. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. The Company currently is in compliance with these requirements and intends to maintain REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and

may not elect REIT status for four subsequent years. Even if the Company maintains REIT status, the Company may still be subject to federal excise tax. In addition, the Company may be subject to certain state and local income and franchise taxes. Historically, the Company and its predecessor have generally only incurred certain state and local income and franchise taxes, but these amounts were immaterial in each of the periods presented. Prior to the Merger, the Partnership was a limited partnership and the consolidated operating results were included in the income tax returns of the individual partners. No uncertain income tax positions exist as of September 30, 2013 and December 31, 2012.

Business Combinations

The Company applies ASC 805, Business Combinations (ASC 805), in determining how to account for and identify business combinations by allocating fair value to tangible and identified intangible assets acquired and liabilities assumed using market comparables and operating results (Level 3). Acquisition related costs are expensed as incurred.

Noncontrolling Interests

The carrying amount of the noncontrolling interests is adjusted to reflect the ownership percentage of the noncontrolling interests in the Company as of the balance sheet date and the changes of the underlying noncontrolling interests are recorded within additional paid-in-capital.

Discontinued Operations

In accordance with ASC 205-20, Presentation of Financial Statements—Discontinued Operations (ASC 205-20), the results of operations to the actual or planned disposition of real estate investments for operating assets are reflected in the consolidated statements of operations and comprehensive income as discontinued operations for all periods presented.

March 8, 2013 Increase in Authorized Shares and Stock Split

On March 7, 2013, the Board of Directors and stockholders of the Company approved an increase in the number of authorized REIT shares to 300,000,000 shares of common stock and a 60.37-for-one split of issued and outstanding common stock. The increase in the authorized shares and the stock split became effective on March 8, 2013 when the Company’s charter was amended for such increase in the number of authorized REIT shares and the stock split. The common share and per common share amounts in these consolidated financial statements and notes to consolidated financial statements have been retrospectively restated to reflect the 60.37-for-one split.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s consolidated financial position or results of operations.

3. Real Estate Investment Activity

The Company had the following rental property activity during the nine months ended September 30, 2013 as described below:

Acquisitions


Month of Acquisition	Property Type	Located in		Purchase Price
April	Traumatic Brain Injury		CA	$	779,000
April	Traumatic Brain Injury		CA		697,000
April	SNF		TX		2,400,000
April	Medical Office Building		IN		1,200,000
May	Senior Housing		CT		2,400,000
May	SNF		OH		14,350,000
June	SNF		OK		6,200,000
August	SNF		KY		9,000,000
September	SNF		TX		3,450,000

				$	40,476,000

The following table illustrates the effect on total revenues and net income as if we had consummated the acquisitions as of January 1, 2012 (unaudited):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Total revenues	$	33,512,292	$	33,719,123	$	105,786,595	$	98,692,216
Net income		11,020,692		2,937,860		15,177,519		14,920,725

During the three and nine months ended September 30, 2013, revenues attributable to the acquired assets were approximately $0.8 million and $1.2 million, respectively, and net income attributable to the acquired assets was approximately $0.2 million and $0.4 million, respectively, recognized in the consolidated statements of operations and comprehensive income.

Transaction-related costs are not expected to have a continuing significant impact on our financial results and therefore have been excluded from these proforma results. Related to the above business combinations, the Company incurred $0.6 million of transaction costs for the nine months ended September 30, 2013.

In accordance with ASC 805, the Company allocated the approximate purchase price paid for these properties acquired in 2013 as follows:


Land	$	7,414,180
Buildings and improvements		29,834,943
Furniture, fixtures, and equipment		3,226,877

Total	$	40,476,000

Dispositions

During the nine months ending September 30, 2013, the Company disposed of five properties, one vacant land parcel, and 108 bed licenses for a total sales price of $5.3 million and the Company recognized a net gain on sale of approximately $26,000. The total sales price and net gain are net of transaction costs incurred in relation to the closings at the time of disposition.

Construction in progress

The following summarizes the Company’s construction in progress at September 30, 2013 and December 31, 2012:


	September 30, 2013			December 31, 2012
Beginning balance, January 1, 2013 and 2012, respectively	$	4,483,684		$	28,293,083
Additions		14,251,136			25,334,504
Sold/withdrawn projects		—			(8,038,072	)
Placed in service		(1,750,748	)		(41,105,831	)

	$	16,984,072		$	4,483,684

During 2013 and 2012, the Company capitalized expenditures for improvements related to various construction and reinvestment projects. In 2013, the Company placed into service one completed investment project at one property located in California. In 2012, the Company placed into service three completed investment projects at three properties located in Washington and completed construction of two properties located in Connecticut. In accordance with ASC 835 Capitalization of Interest (ASC 835), the Company capitalizes interest based on the average cash balance of construction in progress for the period using the weighted-average interest rate on all outstanding debt, which approximated 6.7% for the three and nine months ended September 30, 2013. The balance of capitalized interest within construction in progress at September 30, 2013 and December 31, 2012 was $430,418 and $71,514, respectively. The amount capitalized during the three and nine months ended September 30, 2013, and 2012, relative to interest incurred, was $193,213, $402,200, $345,169 and $848,379, respectively.

4. Secured Loan Receivables, net

The following summarizes the Company’s secured loan receivables, net, at September 30, 2013:


	September 30, 2013
	Capital Improvement Loan Receivables			Secured Operator Loan Receivables			Total Secured Loan Receivables
Beginning balance, January 1, 2013	$	19,359,485		$	13,279,295		$	32,638,780
New loans issued		379,905			2,026,035			2,405,940
Reserve for uncollectible secured loans and loan write-offs		—			(11,000	)		(11,000	)
Loan amortization and repayments		(1,694,788	)		(2,122,048	)		(3,816,836	)

	$	18,044,602		$	13,172,282		$	31,216,884

Interest income on secured loans and financing leases for the respective periods is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Capital improvement loan receivable	$	483,274	$	354,089	$	1,280,345	$	1,024,727
Secured operator loan receivables		283,433		145,938		901,452		1,441,212
Direct financing lease		364,521		360,301		1,090,544		1,077,703

Total interest on secured loans and financing lease	$	1,131,228	$	860,328	$	3,272,341	$	3,543,642

The Company’s reserve on a loan-by-loan basis for uncollectible secured loan receivables balances at September 30, 2013 and December 31, 2012 was $0 million and $0.3 million, respectively, and any movement in the reserve is reflected in reserve for uncollectible secured loans and other receivables in the consolidated statements of operations and comprehensive income. The gross balance of secured loan receivables for which a reserve on a loan-by-loan basis for uncollectible secured loan receivables has been applied was approximately $0 million and $3.1 million at September 30, 2013 and December 31, 2012, respectively.

During 2013 and 2012, the Company funded loans for both working capital and capital improvement purposes to various operators. All loans held by the Company accrue interest and are recorded as interest income unless the loan is deemed impaired in accordance with Company policy. The payments received from the operator cover both interest accrued as well as amortization of the principal balance due. Any payments received from the operator made outside of the normal loan amortization schedule are considered principal prepayments and reduce the outstanding secured loan receivables balance.

5. Deferred Financing Costs

The following summarizes the Company’s deferred financing costs at September 30, 2013 and December 31, 2012:


	September 30, 2013			December 31, 2012
Gross amount	$	16,559,273		$	20,995,022
Accumulated amortization		(4,294,942	)		(6,343,757	)

Net	$	12,264,331		$	14,651,265

For the three and nine months ended September 30, 2013, the Company wrote-off deferred financing costs of $0 and $9.7 million, respectively, with $0 and $4.6 million of accumulated amortization associated with the Term Loan, Acquisition Credit Line, 2014 Revolver, and 2016 Revolver (see Footnote 7) pay down.

For the three and nine months ended September 30, 2012, the Company wrote-off deferred financing costs of $0 and $24,436, respectively, with $0 and $11,172 of accumulated amortization associated with the Construction Loan (see Footnote 7) pay down.

6. Lease Intangibles

The Company considers renewals on above or below market leases when ascribing value to the in-place lease intangibles at the date of a property acquisition. In those instances where the renewal lease rate pursuant to the terms of the lease does not adjust to a current market rent, the Company evaluates whether the stated renewal rate is above or below current market rates and considers the past and current operations of the property, the current rent coverage ratio of the operator, and the number of years until potential renewal option exercise. If renewal is considered probable based on these factors, an additional lease intangible is recorded at acquisition and amortized over the renewal period.

The following summarizes the Company’s lease intangibles classified as part of other assets or other liabilities at September 30, 2013 and December 31, 2012:


	Assets
	September 30, 2013							December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Above market leases	$	6,436,851	$	(3,335,442	)	$	3,101,409	$	6,641,851	$	(3,175,449	)	$	3,466,402
In-place lease assets		651,730		(114,053	)		537,677		651,730		(65,173	)		586,557
Operator relationship		212,416		(29,738	)		182,678		212,416		(16,993	)		195,423

	$	7,300,997	$	(3,479,233	)	$	3,821,764	$	7,505,997	$	(3,257,615	)	$	4,248,382


	Liabilities
	September 30, 2013							December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Below market leases	$	18,077,537	$	(10,125,348	)	$	7,952,189	$	25,695,395	$	(16,281,397	)	$	9,413,998

Amortization expense for in-place lease assets and operator relationship was $20,542, $61,625, $20,542 and $61,625 for the three and nine months ended September 30, 2013 and 2012, respectively, and is included as a component of depreciation and amortization in the consolidated statements of operations and comprehensive income. Amortization expense for the above market leases intangible asset for the three and nine months ended September 30, 2013 and 2012 was $120,327, $364,993, $146,445 and $439,336, respectively, and is included as a component of rental income in the consolidated statements of operations and comprehensive income. Accretion for the below market leases intangible liability for the three and nine months ended September 30, 2013 and 2012 was $485,581, $1,461,809, $515,199 and $1,540,206, respectively, and is included as a component of rental income in the consolidated statements of operations and comprehensive income.

For the nine months ended September 30, 2013 and 2012, the Company wrote-off above market leases of $205,000 and $0 with accumulated amortization of $205,000 and $0, respectively, and below market leases of $7,617,858 and $205,000 with accumulated accretion of $7,617,858 and $156,446, respectively, for a net recognition of $0 and $48,554, respectively, in rental income from intangible amortization. These write-offs were the result of fully amortized assets and fully accreted liabilities for the nine months ended September 30, 2013, and in connection with the anticipated termination of leases that were transitioned to new operators for the nine months ended September 30, 2012.

7. Senior Notes Payable and Other Debt

The Company’s senior notes payable and other debt consisted of the following at September 30, 2013 and December 31, 2012:


	September 30, 2013		December 31, 2012
2019 Notes (interest rate of 7.75% at September 30, 2013 and December 31, 2012), inclusive of $2.9 million and $3.2 million net premium balance at September 30, 2013 and December 31, 2012, respectively	$	402,862,222	$	403,180,433
Revolving Credit Facility (interest rate of 2.53% at September 30, 2013)		95,000,000		—
Term Loan (interest rate of 5.75% at December 31, 2012)		—		192,212,350
Acquisition Credit Line (interest rate of 5.75% at December 31, 2012)		—		18,925,200
2016 Revolver (interest rate of 5.25% at December 31, 2012)		—		69,368,589
Acquisition loans (interest rate of 6.00% at December 31, 2012)		—		7,584,974
HUD loan (interest rate of 5.00% at September 30, 2013 and December 31, 2012), inclusive of $2.4 million and $2.5 million premium balance at September 30, 2013 and December 31, 2012, respectively		13,711,699		13,881,869

Total	$	511,573,921	$	705,153,415

In conjunction with the IPO on March 26, 2013, the Company under Aviv Financing I repaid the outstanding balance of the Term Loan and the Acquisition Credit Line and under Aviv Financing V repaid the outstanding balance of the 2016 Revolver in the amounts of $191.2 million, $18.9 million, and $94.4 million, respectively. The Company paid $2.2 million in prepayment penalties which is included in loss on extinguishment of debt on the consolidated statements of operations and comprehensive income for the nine months ended September 30, 2013.

Senior Notes

On February 4, 2011, April 5, 2011, and March 28, 2012, Aviv Healthcare Properties Limited Partnership and Aviv Healthcare Capital Corporation (the Issuers) issued $200 million, $100 million, and $100 million, respectively, of 7.75% Senior Notes due 2019 (the 2019 Notes). The REIT is a guarantor of the Issuers’ 2019 Notes. The 2019 Notes are unsecured senior obligations of the Issuers and will mature on February 15, 2019. The 2019 Notes bear interest at a rate of 7.75% per annum, payable semiannually to holders of record at the close of business on the February 1 or the August 1 immediately preceding the interest payment date on February 15 and August 15 of each year. A premium of $2.75 million and $1.0 million was associated with the offering of the $100 million of 2019 Notes on April 5, 2011 and the $100 million of 2019 Notes on March 28, 2012, respectively. The premium will be amortized as an adjustment to the yield on the 2019 Notes over their term. The Company used the proceeds, amongst other things, to pay down approximately $87.7 million of the Acquisition Credit Line, $5.5 million of the 2016 Revolver and $6.1 million of the Construction Loan during 2012.

Revolving Credit Facility

On March 26, 2013, the Company, under Aviv Financing IV, entered into a $300 million secured revolving credit facility and $100 million term loan with Bank of America (collectively, the Revolving Credit Facility). On April 16, 2013, the Company converted the entire $100 million term loan into a secured revolving credit facility, thereby terminating the term loan and any availability thereunder and increasing the amount available under the secured revolving credit facility from $300 million to $400 million. On each payment date, the Company pays interest only in arrears on any outstanding principal balance of the Revolving Credit Facility. The interest rate under the Revolving Credit Facility is based on LIBOR plus a margin of 235 basis points to 300 basis points depending on the Company’s leverage ratio. The interest rate at September 30, 2013 was 2.53%. Additionally, an unused fee equal to 50 basis points per annum of the daily unused balance on the Revolving Credit Facility is payable quarterly in arrears. The initial term of the Revolving Credit Facility expires in March 2016 with a one year extension option. The Revolving Credit Facility had an outstanding balance of $95.0 million as of September 30, 2013.

Other Loans

On November 1, 2010, a subsidiary of Aviv Financing III entered into two acquisition loan agreements on the same terms that provided for borrowings of $7.8 million. Principal and interest payments are due monthly beginning on December 1, 2010 through the maturity date of December 1, 2015. Interest is a fixed rate of 6.00%. These loans are collateralized by a skilled nursing facility controlled by Aviv Financing III. These acquisition loans were paid off in full on May 15, 2013.

On June 15, 2012, a subsidiary of Aviv Financing III assumed a HUD loan with a balance of approximately $11.5 million. Interest is at a fixed rate of 5.00%. The loan originated in November 2009 with a maturity date of October 1, 2044, and is based on a 35-year amortization schedule. A premium of $2.5 million was associated with the assumption of debt and will be amortized as an adjustment to interest expense on the HUD loan over its term.

8. Partnership Equity and Incentive Program

Distributions accrued in accordance with declaration to the Partnership’s partners are summarized as follows for the three months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013	$	—	$	—	$	—	$	—	$	—	$	—	$	4,297,831
2012	$	2,068,318	$	532,817	$	799,225	$	—	$	553,761	$	7,177,586	$	—

Distributions accrued in accordance with declaration to the Partnership’s partners are summarized as follows for the nine months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013	$	2,797,315	$	97,288	$	145,931	$	—	$	553,761	$	6,520,893	$	8,882,184
2012	$	6,204,954	$	1,697,303	$	2,268,373	$	—	$	1,661,283	$	21,046,074	$	—

Weighted-average Units and shares outstanding are summarized as follows for the three months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units		REIT Shares
2013		—		—		—		—		—		—		11,938,420		37,271,714
2012		13,467,223		4,523,145		2		8,050		2,684,900		21,178,250		—		—

Weighted-average Units and shares outstanding are summarized as follows for the nine months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units		REIT Shares
2013		4,193,031		1,408,305		—		2,506		835,958		6,742,030		8,221,330		32,408,843
2012		13,467,223		4,523,145		2		8,050		2,684,900		19,453,438		—		—

Prior to the Merger, the Partnership had established an officer incentive program linked to its future value. Awards vest annually over a five-year period assuming continuing employment by the recipient. The awards settled on December 31, 2012 in Class C Units or, at the Company’s discretion, cash. For accounting purposes, expense recognition under the program commenced in 2008, and the related expense for the three and nine months ended September 30, 2012 was $101,500 and $304,500, respectively.

As a result of the Merger on September 17, 2010, such incentive program was modified such that 40% of the previously granted award settled immediately on the Merger date with another 20% vesting and settled on December 31, 2010. The remaining 40% vested 20% on December 31, 2011 and 20% on December 31, 2012, respectively, and will settle in 2018, subject to the terms and conditions of the amended incentive program agreement. In accordance with ASC 718, such incentive program was expensed through general and administrative expenses as non-cash compensation on the statements of operations and comprehensive income through the ultimate vesting date of December 31, 2012.

In connection with the IPO each class of limited partnership units of the Partnership were converted into an aggregate of 21,653,813 OP Units held by the REIT and 11,938,420 OP Units held by limited partners of the Partnership. As a result, the Partnership has a single class of limited partnership units as of March 26, 2013. The OP Units held by limited partners of the Partnership are redeemable for cash or, at the REIT’s election, unregistered shares of the REIT’s common stock on a one-for-one basis subject to certain restrictions on transfer for 180 days after the IPO.

The following table lists the cash dividends on common stock declared and paid by the Company during the nine months ended September 30, 2013:

Declaration Date

Record Date

Amount Per Share

Dividend Payment
Date

May 19, 2013

June 3, 2013

0.384

June 17, 2013

August 16, 2013

August 30, 2013

0.36

September 16, 2013

The above dividends represents a rate of $0.36 per share for the second and third quarter of 2013 and $0.024 per share for the period from the completion of the Company’s initial public offering on March 26, 2013 through March 31, 2013.

9. Restricted Stock Grants and Option Awards

Restricted Stock Grants

On March 26, 2013 the Company adopted the Aviv REIT, Inc. 2013 Long-Term Incentive Plan (the LTIP). The purposes of the LTIP are to attract and retain qualified persons upon whom, in large measure, the Company’s sustained progress, growth and profitability depend, to motivate the participants to achieve long-term Company goals and to align the participants’ interests with those of other stockholders by providing them with a proprietary interest in the Company’s growth and performance. The Company’s executive officers, employees, consultants and non-employee directors are eligible to participate in the LTIP. Under the plan, 2,000,000 shares of the Company’s common stock are available for issuance, of which 70,500 had been issued and 217,882 had been reserved for issuance as of September 30, 2013. For the three and nine months ended September 30, 2013, the Company recognized total non-cash stock-based compensation expense related to the LTIP of $534,814 and $598,434, the components of which are set forth below.

The Company’s non-employee directors (excluding Messrs. Dees, Goldberg and Triedman) each received an equity grant of 6,750 shares of restricted stock and 3,250 shares of unrestricted stock upon consummation of the IPO. The Company’s lead director received an unrestricted stock grant of 500 shares in connection with the IPO. The equity awards were made pursuant to the LTIP. The restricted stock awards vest in three equal installments, with the first installment vesting on May 15, 2014 and the second and third installments vesting on March 26, 2015 and 2016, respectively, subject to the director’s continued service on the board of directors. For the three and nine months ended September 30, 2013, the Company recognized $75,389 and $139,010 of non-cash stock-based compensation expense in relation to the board of directors restricted stock grant.

On July 11, 2013, the subcommittee of the Company’s compensation committee approved the issuance of 51,000 time-based restricted stock units to members of management and other key employees. The equity awards were made pursuant to the LTIP. One half of the time-based equity awards are scheduled to vest on December 31, 2014 and the other half to vest on December 31, 2015 subject to the employee’s continued employment with the Company. The restricted stock units carry dividend equivalent rights that are subject to the same vesting terms as the underlying restricted stock units. For the three and nine months ended September 30, 2013, the Company recognized $81,968 and $81,968 of non-cash stock-based compensation expense in relation to management’s time-based restricted stock unit grant.

Effective July 11, 2013, members of the Company’s management and other key employees were awarded 81,774 performance-based restricted stock units that vest on the basis of Total Shareholder Return (“TSR”) on the Company’s stock compared to the TSR of its peer companies, as defined. The first installment of the awards is based on the companies comprising the NAREIT Equity Index and the companies comprising the Bloomberg Healthcare REIT Index for the performance period beginning on the date of the IPO and ending December 31, 2014. The second installment is based on the companies comprising the NAREIT Equity Index and the companies comprising the Bloomberg Healthcare REIT Index for the performance period beginning on the date of the IPO and ending December 31, 2015. If the service and performance conditions are met, approximately half of the restricted stock units will vest on December 31, 2014 and the remaining units will vest on December 31, 2015. The restricted stock units carry dividend equivalent rights that are subject to the same vesting terms as the underlying restricted stock units. For the three and nine months ended September 30, 2013, the Company recognized $377,457 and $377,457 of non-cash stock-based compensation expense in relation to management’s performance-based restricted stock unit grant.

Option Awards

On September 17, 2010, the Company adopted the 2010 Management Incentive Plan (the MIP) as part of the Merger transaction, which provides for the grant of option awards. Two thirds of the options granted under the MIP were performance based awards whose criteria for vesting is tied to a future liquidity event (as defined) and also contingent upon meeting certain return thresholds (as defined). The grant date fair value associated with all performance-based award options of the Company aggregated to approximately $7.4 million at the time of the IPO. One third of the options granted under the MIP were time based awards and the service period for these options is four years with shares vesting at a rate of 25% ratably from the grant date.

In connection with the IPO, all options outstanding under the MIP, representing options to purchase 5,870,258 shares with a weighted average exercise price of $17.47 per share, became fully-vested. In addition, recipients were entitled to receive dividend equivalents on their options awarded under the MIP. Dividend equivalents were paid on time-based options on (i) the date of vesting, with respect to any portion of a time-based option that was unvested on the date the dividend equivalent was accrued, and (ii) the last day of the calendar quarter in which such dividends were paid to stockholders, with respect to any portion of a time-based option vested as of the date the dividend equivalent was accrued. Dividend equivalents accrued and unpaid prior to the consummation of the IPO in the approximate amount of $14.8 million were paid in shares of common stock, net of applicable withholding of approximately $6.8 million, in an amount based on the IPO price of common stock. No dividend equivalents will be paid for any MIP options with respect to periods after the date of the IPO by the Company.

In connection with the IPO, the holders of option awards under the MIP received a new class of units of LG Aviv L.P., the legal entity through which Lindsay Goldberg holds its interest in the REIT, equal to the number of options held by such persons immediately prior to the consummation of the IPO. Under the limited partnership agreement of LG Aviv L.P., the units are entitled to receive an aggregate distribution amount equal to 14.9% of the dividend distributions declared and received by LG Aviv L.P. after the consummation of the IPO in respect of its shares of common stock. The distribution amount will be paid by LG Aviv L.P. ratably to each holder of such units on the distribution date in the proportion that the total number of units held by such holder bears to the total outstanding units of the same class. Any unit payments will be paid, if at all, on the earlier of (i) the last day of the calendar quarter in which dividends were paid to the Company stockholders and (ii) three business days following the holder’s termination of employment with the Company. For the nine months ended September 30, 2013, $2,400,455 was paid by LG Aviv L.P. to the holders of such units.

The following table represents the time and performance-based option awards activity for the nine months ended September 30, 2013 and 2012:


	Nine Months Ended
	September 30, 2013		September 30, 2012
Outstanding at beginning of period		1,956,833		1,417,246
Granted		—		701,560
Exercised		—		—
Awards vested at IPO		3,913,425		—
Cancelled/Forfeited		—		(161,973	)

Outstanding at end of period		5,870,258		1,956,833

Options exercisable at end of period		—		—
Weighted average fair value of options granted to date (per option)	$	2.20	$	2.21

The following table represents the time and performance based option awards outstanding cumulatively life-to-date for the nine months ended September 30, 2013 and 2012 as well as other MIP data:


	2013	2012
Range of exercise prices	$16.56 - $18.87	$16.56 - $18.85
Outstanding	5,870,258	1,956,833
Remaining contractual life (years)	7.55	8.55
Weighted average exercise price	$17.47	$17.43

The Company has used the Black-Scholes option pricing model to estimate the grant date fair value of the options. The following table includes the assumptions that were made in estimating the grant date fair value for options awarded for the nine months ended September 30, 2013 and 2012:


	2013 Grants		2012 Grants
Weighted average dividend yield		—		7.54	%
Weighted average risk-free interest rate		—		1.31	%
Weighted average expected life		—		7.0 years
Weighted average estimated volatility		—		38.24	%
Weighted average exercise price		—	$	18.80
Weighted average fair value of options granted (per option)		—	$	2.88

The Company recorded non-cash compensation expenses of $0, $9,012,270, $411,760 and $925,457 for the three and nine months ended September 30, 2013 and 2012, respectively, related to the time and performance based stock options accounted for as equity awards.

At September 30, 2013, the total compensation cost related to outstanding, non-vested time based and performance based equity awards that are expected to be recognized as compensation cost in the future aggregates to approximately $5,336,000, as follows:


Year Ended December 31,	Restricted Stock
2013	$	639,835
2014		2,845,139
2015		1,776,825
2016		74,031

Total	$	5,335,830

Dividend equivalent rights associated with the MIP amounted to $0, $15,400,270, $664,426, and $1,908,991 for the three and nine months ended September 30, 2013 and 2012, respectively, and are recorded as dividends to stockholders for the periods presented.

10. Related Parties

Related party receivables and payables represent amounts due from/to various affiliates of the Company, including amounts due to certain acquired companies and limited liability companies for transactions occurring prior to the formation of the Company, and various advances to entities controlled by affiliates of the Company’s management. There were no related party receivables or payables as of September 30, 2013 and December 31, 2012, other than amounts owed from the Partnership to the REIT for accrued distributions at December 31, 2012.

11. Derivatives

During the periods presented, the Company was party to two interest rate swaps, with identical terms of $100.0 million each, which were purchased to fix the variable interest rate on the denoted notional amount under the Term Loan. On March 26, 2013, in connection with the pay down of the Term Loan, the Company settled all interest rate swaps at a fair value of $3.6 million and such amount previously recorded in accumulated other comprehensive income (loss) was recorded within loss on extinguishment of debt in the consolidated statements of operations and comprehensive income. The interest rate swaps qualified for hedge accounting and as such the amounts previously recorded in accumulated other comprehensive income in the consolidated statement of changes in equity were reversed. For presentational purposes they are shown as one derivative due to the identical nature of their economic terms.


Total notional amount	$	200,000,000
Fixed rates		6.49% (1.99% effective swap base rate plus 4.5% spread per credit agreement)
Floor rate		1.25	%
Effective date		November 9, 2010
Termination date		September 17, 2015
Liability balance at September 30, 2013 (included in other liabilities)	$	—
Liability balance at December 31, 2012 (included in other liabilities)	$	(3,773,332	)

The derivative positions were valued using models developed by the respective counterparty that used as their basis readily observable market parameters (such as forward yield curves) and were classified within Level 2 of the valuation hierarchy. The Company considered its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives.

12. Commitments and Contingencies

During 2011, the Company entered into a contractual arrangement with an operator in one of its facilities to reimburse any liabilities, obligations or claims of any kind or nature resulting from the actions of the former operator in such facility, Brighten Health Care Group. The Company is obligated to reimburse the fees to the operator if and when the operator incurs such expenses associated with certain Indemnified Events, as defined therein. The total possible obligation for these fees is estimated to be $2.3 million, of which approximately $1.9 million has been paid to date. The remaining $0.4 million was accrued as a component of other liabilities in the consolidated balance sheets.

The Company is involved in various unresolved legal actions and proceedings, which arise in the normal course of our business. Although the outcome of a particular proceeding can never be predicted, the Company does not believe that the result of any of these other matters will have a material adverse effect on its business, operating results, or financial position.

13. Concentration of Credit Risk

As of September 30, 2013, the Company’s real estate investments included 263 healthcare facilities, located in 29 states and operated by 36 third party operators. At September 30, 2013, approximately 55.7% (measured as a percentage of total assets) were leased by five private operators: Saber Health Group (17.2%), Daybreak Healthcare (14.5%), EmpRes Healthcare (9.1%), Maplewood Senior Living (8.1%), and Sun Mar Healthcare (6.8%). No other operator represents more than 5.5% of total assets. The five states in which the Company had its highest concentration of total assets were Texas (17.3%), California (14.9%), Ohio (9.4%), Connecticut (8.1%) and Pennsylvania (6.8%) at September 30, 2013.

For the nine months ended September 30, 2013, the Company’s rental income from operations totaled approximately $99.2 million of which approximately $16.3 million was from Daybreak Healthcare (16.4%), $14.9 million was from Saber Health Group (15.0%), $9.2 million was from EmpRes Healthcare (9.3%), $8.1 million was from Preferred Care (8.2%), and $7.2 million was from SunMar Healthcare (7.3%). No other operator generated more than 7.2% of the Company’s rental income from operations for the nine months ended September 30, 2013.

14. Discontinued Operations

ASC 205-20 requires that the operations and associated gains and/or losses from the sale or planned disposition of components of an entity, as defined, be reclassified and presented as discontinued operations in the Company’s consolidated financial statements for all periods presented. In April 2012, the Company sold three properties in Arkansas and one property in Massachusetts to unrelated third parties. Below is a summary of the components of the discontinued operations for the respective periods:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Total revenues	$	—	$	—	$	—	$	269,932
Expenses:
Interest expense		—		—		—		(27,104	)
Amortization of deferred financing costs		—		—		—		(1,958	)
Gain on sale of assets, net		—		—		—		4,425,246
Loss on extinguishment of debt		—		—		—		(13,264	)
Other		—		—		—		(66,160	)

Total gains (expenses)		—		—		—		4,316,760

Discontinued operations		—		—		—		4,586,692
Discontinued operations allocation to noncontrolling interests		—		—		—		1,791,492

Discontinued operations allocation to controlling interests	$	—	$	—	$	—	$	2,795,200

15. Earnings Per Common Share

The following table shows the amounts used in computing basic and diluted earnings per common share.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Numerator for earnings per share - basic:
Income from continuing operations	$	10,066,927		$	1,767,446		$	12,031,159		$	6,809,656
Income from continuing operations allocable to noncontrolling interests		(2,446,263	)		(637,162	)		(3,236,382	)		(2,659,747	)

Income from continuing operations allocable to common stockholders, net of noncontrolling interests		7,620,664			1,130,284			8,794,777			4,149,909
Discontinued operations, net of noncontrolling interests		—			—			—			2,795,200

Numerator for earnings per share - basic	$	7,620,664		$	1,130,284		$	8,794,777		$	6,945,109

Numerator for earnings per share - diluted:
Numerator for earnings per share - basic	$	7,620,664		$	1,130,284		$	8,794,777		$	4,149,909
Income from continuing operations allocable to noncontrolling interests - OP Units		2,446,263			—			2,228,717			—

Subtotal		10,066,927			1,130,284			11,023,494			4,149,909
Discontinued operations, net of noncontrolling interests		—			—			—			2,795,200

Numerator for earnings per share - diluted	$	10,066,927		$	1,130,284		$	11,023,494		$	6,945,109

Denominator for earnings per share - basic and diluted:
Denominator for earnings per share - basic		37,271,714			21,178,250			32,408,843			19,453,438
Effect of dilutive securities:
Noncontrolling interests - OP Units		11,938,420			—			8,221,330			—
Stock options		1,599,329			129,151			1,454,759			129,151
Restricted stock units		29,093			—			16,169			—

Denominator for earnings per share - diluted		50,838,556			21,307,401			42,101,101			19,582,589

Basic earnings per share
Income from continuing operations allocable to common stockholders	$	0.20		$	0.05		$	0.27		$	0.21
Discontinued operations, net of noncontrolling interests		—			—			—			0.14

Net income allocable to common stockholders	$	0.20		$	0.05		$	0.27		$	0.35

Diluted earnings per share
Income from continuing operations allocable to common stockholders	$	0.20		$	0.05		$	0.26		$	0.21
Discontinued operations, net of noncontrolling interests		—			—			—			0.14

Net income allocable to common stockholders	$	0.20		$	0.05		$	0.26		$	0.35

16. Subsequent Events

On October 1, 2013, the Company sold a property in Michigan for a sale price of $2.5 million in cash.

On October 1, 2013, the Company acquired three properties in Ohio and one property in Indiana from an unrelated third party for a purchase price of $35.9 million.

On October 4, 2013, the Company acquired three properties in Florida from an unrelated third party for a purchase price of $13.0 million.

On November 1, 2013, the Company acquired four properties in Ohio for a purchase price of $41.0 million and one property in Arkansas for a purchase price of $1.2 million from unrelated third parties.

The following table illustrates the effect on total revenues and net income as if the Company had consummated the above two acquisitions, as well as those noted in Footnote 3, as of January 1, 2012 (unaudited):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Total revenues	$	35,784,261	$	35,991,092	$	112,602,501	$	105,508,122
Net income		12,674,449		4,591,617		20,138,791		19,881,997

On October 16, 2013, the Company, through its majority-owned subsidiaries Aviv Healthcare Properties Limited Partnership and Aviv Healthcare Capital Corporation (the “Issuers”), completed the offering of $250 million aggregate principal amount of the Issuers’ 6% Senior Notes due 2021. The Issuers received net proceeds from the offering of approximately $244.4 million, after deducting discounts, commissions and estimated expenses. On October 17, 2013, the Company used approximately $135.0 million of the net proceeds from the offering to repay all outstanding indebtedness under the Revolving Credit Facility. $42.2 million of the proceeds were used for acquisitions and the remaining proceeds of approximately $67.2 million will be used for general corporate purposes, including the potential acquisition of additional properties.

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Consolidated Balance Sheets

(unaudited)


	September 30,			December 31,
	2013			2012
Assets
Real estate investments
Land	$	126,164,813		$	119,224,819
Buildings and improvements		1,003,196,438			968,074,506
Construction in progress		16,984,072			4,483,684
Assets under direct financing leases		11,143,290			11,049,120

		1,157,488,613			1,102,832,129
Less accumulated depreciation		(140,837,563	)		(119,371,113	)

Net real estate investments		1,016,651,050			983,461,016
Cash and cash equivalents		11,986,129			15,534,373
Straight-line rent receivable, net		39,099,641			36,101,861
Tenant receivables, net		5,567,256			3,483,534
Deferred finance costs, net		12,264,331			14,651,265
Secured loan receivables, net		31,216,884			32,638,780
Other assets		9,474,485			11,315,865

Total assets	$	1,126,259,776		$	1,097,186,694

Liabilities and equity
Secured notes payable and other debt	$	511,573,921		$	705,153,415
Accounts payable and accrued expenses		12,165,861			24,207,814
Tenant security and escrow deposits		19,258,814			18,278,172
Other liabilities		8,893,277			29,045,796

Total liabilities		551,891,873			776,685,197
Equity:
Partners’ equity		574,367,903			324,274,829
Accumulated other comprehensive loss		—			(3,773,332	)

Total equity		574,367,903			320,501,497

Total liabilities and equity	$	1,126,259,776		$	1,097,186,694

See accompanying notes to the financial statements.

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Revenues
Rental income	$	31,692,655	$	30,354,273		$	99,206,301		$	89,683,858
Interest on secured loans and financing lease		1,131,228		860,328			3,272,341			3,543,642
Interest and other income		49,114		1,058,580			128,027			1,126,890

Total revenues		32,872,997		32,273,181			102,606,669			94,354,390
Expenses
Interest expense		9,387,086		12,905,768			32,115,139			37,693,597
Depreciation and amortization		8,301,870		6,894,012			24,399,334			19,671,033
General and administrative		4,040,535		3,947,939			21,472,935			11,406,114
Transaction costs		1,036,461		1,286,425			1,583,184			3,507,057
Loss on impairment of assets		—		1,766,873			—			6,145,731
Reserve for uncollectible secured loans and other receivables		26,740		3,604,630			56,521			8,820,937
Loss (gain) on sale of assets, net		13,378		—			(25,799	)		—
Loss on extinguishment of debt		—		—			10,974,196			—
Other expenses		—		100,088			—			300,265

Total expenses		22,806,070		30,505,735			90,575,510			87,544,734

Income from continuing operations		10,066,927		1,767,446			12,031,159			6,809,656
Discontinued operations		—		—			—			4,586,692

Net income allocable to units	$	10,066,927	$	1,767,446		$	12,031,159		$	11,396,348

Net income allocable to units	$	10,066,927	$	1,767,446		$	12,031,159		$	11,396,348
Unrealized loss on derivative instruments		—		(39,482	)		—			(820,974	)

Total comprehensive income allocable to units	$	10,066,927	$	1,727,964		$	12,031,159		$	10,575,374

Earnings per unit:
Basic:
Income from continuing operations allocable to units	$	0.20	$	0.05		$	0.27		$	0.21
Discontinued operations		—		—			—			0.14

Net income allocable to units	$	0.20	$	0.05		$	0.27		$	0.35

Diluted:
Income from continuing operations allocable to units	$	0.20	$	0.05		$	0.26		$	0.21
Discontinued operations		—		—			—			0.14

Net income allocable to units	$	0.20	$	0.05		$	0.26		$	0.35

Weighted average units used in computing earnings per unit:
Basic		49,210,134		21,178,250			40,630,173			19,453,438
Diluted		50,838,556		21,307,401			42,101,101			19,582,589
Distributions declared per unit	$	0.36	$	0.33		$	0.744		$	1.03

See accompanying notes to the consolidated financial statements.

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Consolidated Statement of Changes in Equity

Nine Months Ended September 30, 2013 (unaudited)


				Accumulated Other
	Partners’			Comprehensive			Total
	Equity			Income (Loss)			Equity
Balance at January 1, 2013	$	324,274,829		$	(3,773,332	)	$	320,501,497
Non-cash stock-based compensation		10,929,569			—			10,929,569
Shares issued for settlement of board of directors and management vested stock units		8,342,232			—			8,342,232
Distributions to partners		(59,249,236	)		—			(59,249,236	)
Capital contributions		64,000						64,000
Initial public offering proceeds		303,354,720			—			303,354,720
Cost of raising capital		(25,379,370	)		—			(25,379,370	)
Retirement of derivative instruments		—			3,773,332			3,773,332
Net income		12,031,159			—			12,031,159

Balance at September 30, 2013	$	574,367,903		$	—		$	574,367,903

See accompanying notes to the consolidated financial statements.

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended September 30,
	2013			2012
Operating activities
Net income	$	12,031,159		$	11,396,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,399,334			19,705,142
Amortization of deferred financing costs		2,516,150			2,626,446
Accretion of debt premium		(376,918	)		(292,423	)
Straight-line rental income, net		(2,997,780	)		(5,922,684	)
Rental income from intangible amortization, net		(1,096,816	)		(1,149,423	)
Non-cash stock-based compensation		10,929,569			1,229,957
Gain on sale of assets, net		(25,799	)		(4,425,246	)
Non-cash loss on extinguishment of debt		5,160,614			13,264
Loss on impairment of assets		—			6,145,731
Reserve for uncollectible loans and other receivables		56,521			8,820,937
Accretion of earn-out provision for previously acquired real estate investments		—			300,265
Changes in assets and liabilities:
Tenant receivables		(3,785,413	)		(5,424,432	)
Other assets		1,058,131			(3,560,710	)
Accounts payable and accrued expenses		(9,468,421	)		(4,676,099	)
Tenant security deposits and other liabilities		3,695,788			(1,277,789	)

Net cash provided by operating activities		42,096,119			23,509,284
Investing activities
Purchase of real estate investments		(40,476,000	)		(133,998,037	)
Proceeds from sales of real estate investments		4,842,219			30,542,644
Capital improvements		(9,908,987	)		(10,458,200	)
Development projects		(11,979,968	)		(21,238,457	)
Secured loan receivables received from others		3,221,706			14,797,338
Secured loan receivables funded to others		(2,707,383	)		(17,146,086	)

Net cash used in investing activities		(57,008,413	)		(137,500,798	)

See accompanying notes to the consolidated financial statements.

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(unaudited)


	Nine Months Ended September 30,
	2013			2012
Financing activities
Borrowings of debt	$	160,000,000		$	224,761,094
Repayment of debt		(353,202,576	)		(172,211,473	)
Payment of financing costs		(5,289,831	)		(5,143,395	)
Payment for swap termination		(3,606,000	)		—
Capital contributions		425,175			109,000,000
Deferred contribution		—			(35,000,000	)
Initial public offering proceeds		303,600,000			—
Cost of raising capital		(25,379,370	)		—
Cash distributions to partners		(65,183,348	)		(33,755,298	)

Net cash provided by financing activities		11,364,050			87,650,928

Net decrease in cash and cash equivalents		(3,548,244	)		(26,340,586	)
Cash and cash equivalents:
Beginning of period		15,534,373			39,203,727

End of period	$	11,986,129		$	12,863,141

Supplemental cash flow information
Cash paid for interest	$	39,644,968		$	41,967,088
Supplemental disclosure of noncash activity
Accrued distributions payable to partners	$	—		$	14,150,846
Write-off of straight-line rent receivable, net	$	2,887,207		$	567,745
Write-off of in-place lease intangibles, net	$	—		$	48,554
Write-off of deferred financing costs, net	$	5,160,614		$	13,264
Assumed debt	$	—		$	11,459,794

See accompanying notes to the consolidated financial statements.

AVIV HEALTHCARE PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. Description of Operations and Formation

Aviv Healthcare Properties Limited Partnership, a Delaware limited partnership, and Subsidiaries (the Partnership) directly or indirectly owned or leased 263 properties, principally skilled nursing facilities, across the United States at September 30, 2013. The Partnership generates the majority of its revenues by entering into long-term triple-net leases with local, regional, and national operators. All operating and maintenance costs and related real estate taxes of the buildings are the responsibility of the operators. Substantially all depreciation expense reflected in the consolidated statements of operations and comprehensive income relates to the ownership of real estate properties. The Partnership manages its business as a single business segment as defined in Accounting Standards Codification (ASC) 280, Segment Reporting.

On July 31, 2010, the predecessor to the Partnership entered into an agreement (the Merger Agreement), by and among Aviv REIT, Inc. (the REIT), a Maryland corporation, Aviv Healthcare Merger Sub LP (Merger Sub), a Delaware limited partnership of which the REIT is the general partner, Aviv Healthcare Merger Sub Partner LLC, a Delaware limited liability company and a wholly owned subsidiary of the REIT, and the Partnership. On September 17, 2010, pursuant to the terms of the Merger Agreement, the predecessor to the Partnership merged (the Merger) with and into Merger Sub, with Merger Sub continuing as the surviving entity with the identical name (the Surviving Partnership). Following the Merger, the REIT remains as the sole general partner of the Surviving Partnership and the Surviving Partnership, as the successor to the predecessor to the Partnership, became the general partner of the Operating Partnership.

On March 26, 2013, the REIT completed an initial public offering (IPO) of its common stock pursuant to a registration statement filed with the SEC, which became effective on March 20, 2013. The REIT received net proceeds after underwriting discounts and commissions, of $282.3 million, exclusive of other costs of raising capital in consideration for the issuance and sale of approximately 15.2 million shares of common stock (which included approximately 2.0 million shares sold to the underwriters upon exercise of their option to purchase additional shares to cover over-allotments) at a price to the public of $20.00 per share. In connection with the IPO, the Partnership’s Class A, B, C, D, F and G Units were converted into a single class of limited partnership units, which are referred to as OP Units.

Immediately prior to the completion of the IPO, there were outstanding approximately 21.7 million shares of common stock of the REIT; limited partnership units of the Partnership which at the IPO were converted into approximately 11.9 million OP Units, and 125 shares of preferred stock of the REIT. On April 15, 2013, the 125 shares of preferred stock outstanding were redeemed. At September 30, 2013, there were approximately 37.3 million shares of common stock outstanding and 11.9 million OP Units outstanding which are redeemable for cash, or at the REIT’s option, for shares of common stock. The operating results of the Partnership are allocated based upon the REIT’s and the limited partners’ respective economic interests therein. The REIT’s ownership of the Partnership was 75.7% as of September 30, 2013, after giving effect to the IPO. The REIT’s weighted average economic ownership of the Partnership for the three and nine months ended September 30, 2013 and 2012 was 75.7%, 73.1%, 63.95% and 61.85%, respectively.

2. Summary of Significant Accounting Policies

Estimates

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Partnership, the Surviving Partnership, the Operating Partnership, and all controlled subsidiaries. The Partnership considers itself to control an entity if it is the majority owner of and has voting control over such entity or the power to control a variable interest entity. The portion of the net income or loss attributed to third parties is reported as net income allocable to noncontrolling interests on the consolidated statements of operations and comprehensive income, and such parties’ portion of the net equity in such subsidiaries is reported on the consolidated balance sheets as noncontrolling interests. All significant intercompany balances and transactions have been eliminated in consolidation.

Quarterly Reporting

The accompanying unaudited financial statements and notes of the Partnership as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 have been prepared in accordance with GAAP for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under GAAP have been condensed or omitted pursuant to GAAP quarterly reporting rules. In the opinion of management, all adjustments considered necessary for a fair presentation of the Partnership’s balance sheets, statements of operations and comprehensive income, statement of changes in equity, and statements of cash flows have been included and are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the Partnership for the years ended December 31, 2012, 2011, and 2010. The consolidated statements of operations and comprehensive income and cash flows for the periods ended September 30, 2013 and 2012 are not necessarily indicative of full year results.

The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission.

Real Estate Investments

The Partnership periodically assesses the carrying value of real estate investments and related intangible assets in accordance with ASC 360, Property, Plant, and Equipment (ASC 360), to determine if facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. In the event estimated undiscounted cash flows indicate the carrying amount of the real estate investments will not be recovered in part or in whole, a provision will be recorded to reduce the carrying basis of the real estate investments and related intangibles to their estimated fair value. The estimated fair value of the Partnership’s real estate investments is determined by using customary industry standard methods that include discounted cash flow and/or direct capitalization analysis (Level 3) or estimated cash proceeds received upon the anticipated disposition of the asset from market comparables (Level 2). As part of the impairment evaluation for the three and nine months ended September 30, 2013, no impairments were recorded. As part of the impairment evaluation for the three and nine months ended September 30, 2012, the following impairments were recorded to reflect the estimated fair value (Level 2):


Three Months Ended September 30, 2012
Youngstown, AZ	$	1,076,704
Bremerton, WA		150,169
Zion, IL		540,000

	$	1,766,873


Nine Months Ended September 30, 2012
Youngstown, AZ	$	1,634,700
Fall River, MA		141,204
West Chester, OH		3,129,658
Cincinnati, OH		90,000
Zion, IL		1,000,000
Bremerton, WA		150,169

	$	6,145,731

Revenue Recognition

Rental income is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to straight-line rent receivable, net. Income recognized from this policy is titled straight-line rental income. Additional rents from expense reimbursements for insurance, real estate taxes and certain other expenses are recognized in the period in which the related expenses are incurred and the net impact is reflected as rental income on the consolidated statements of operations and comprehensive income.

Below is a summary of the components of rental income for the respective periods:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Cash rental income, net	$	32,554,063		$	28,139,917	$	95,111,705	$	82,611,751
Straight-line rental income		(1,226,519	)		1,802,440		2,997,780		5,922,684
Rental income from intangible amortization		365,111			411,916		1,096,816		1,149,423

Total rental income	$	31,692,655		$	30,354,273	$	99,206,301	$	89,683,858

The Partnership’s reserve for uncollectible operator receivables is included as a component of reserve for uncollectible secured loans and other receivables in the consolidated statements of operations and comprehensive income. The amount incurred during the three and nine months ended September 30, 2013 and 2012 was $0 million, $0.1 million, $0.7 million and $2.5 million, respectively.

Lease Accounting

The Partnership, as lessor, makes a determination with respect to each of its leases whether they should be accounted for as operating leases or direct financing leases. The classification criteria is based on estimates regarding the fair value of the leased facilities, minimum lease payments, effective cost of funds, the economic life of the facilities, the existence of a bargain purchase option, and certain other terms in the lease agreements. Payments received under the financing lease are bifurcated between interest income and principal amortization to achieve a consistent yield over the stated lease term using the interest method. Assets subject to operating leases are reported as real estate investments in the consolidated balance sheets. For facilities leased as direct financing arrangements, an asset equal to the Partnership’s net initial investment is established on the balance sheet titled assets under direct financing leases. Principal amortization (accretion) is reflected as an adjustment to the asset subject to a financing lease. Such accretion was $30,353, $94,171, $32,264 and $99,606 for the three and nine months ended September 30, 2013 and 2012, respectively.

All of the Partnership’s leases contain fixed or formula-based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease for operating leases.

Secured Loan Receivables

Secured loan receivables consist of capital improvement loans and secured loans to operators. Capital improvement loans represent the financing provided by the Partnership to the operator to acquire furniture, fixtures, and equipment while the operator is operating the facility. Secured loans to operators represent financing provided by the Partnership to operators for working capital needs. Secured loan receivables are carried at their principal amount outstanding. Management periodically evaluates outstanding loans and notes receivable for collectability on a loan-by-loan basis. When management identifies potential loan impairment indicators, such as nonpayment under the loan documents, impairment of the underlying collateral, financial difficulty of the operator, or other circumstances that may impair full execution of the loan documents, and management believes it is probable that all amounts will not be collected under the contractual terms of the loan, the loan is written down to the present value of the expected future cash flows. Loan impairment is monitored via a quantitative and qualitative analysis including credit quality indicators and it is reasonably possible that a change in estimate could occur in the near term. No other circumstances exist that would suggest that additional reserves are necessary at the balance sheet dates other than as disclosed in Footnote 4.

Stock-Based Compensation

The Partnership follows ASC 718, Stock Compensation (ASC 718), which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations and comprehensive income based on their grant date fair values. The non-cash stock-based compensation expense incurred by the Partnership through September 30, 2013 is summarized in Footnote 9.

Fair Value of Financial Instruments

•

Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets

•

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement

The Partnership’s interest rate swaps are valued using models developed by the respective counterparty that use as their basis readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

Cash and cash equivalents and derivative financial instruments are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value. Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Partnership’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Partnership had outstanding senior notes payable and other debt obligations with a carrying value of approximately $511.6 million and $705.2 million as of September 30, 2013 and December 31, 2012, respectively. The fair value of this debt was $537.4 million and $720.8 million as of September 30, 2013 and December 31, 2012, respectively, based upon interest rates available to the Partnership on similar borrowings (Level 3). Management estimates the fair value of its secured loan receivables using a discounted cash flow analysis based upon the Partnership’s current interest rates for secured loan receivables with similar maturities and collateral securing the indebtedness. The Partnership had outstanding secured loan receivables with a carrying value of $31.2 million and $32.6 million as of September 30, 2013 and December 31, 2012, respectively. The fair values of secured loan receivables as of September 30, 2013 and as of December 31, 2012 approximate their carrying values based upon interest rates available to the Partnership on similar borrowings.

Derivative Instruments

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Partnership has implemented ASC 815, Derivatives and Hedging (ASC 815), which establishes accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded as either an asset or liability measured at their fair value unless they qualify for a normal purchase or normal sales exception. When specific hedge accounting criteria are not met, ASC 815 requires that changes in a derivative’s fair value be recognized currently in earnings. Changes in the fair market values of the Partnership’s derivative instruments are recorded in the consolidated statements of operations and comprehensive income if the derivative does not qualify for or the Partnership does not elect to apply hedge accounting. If the derivative is deemed to be eligible for hedge accounting, such changes are reported in accumulated other comprehensive income within the consolidated statement of changes in equity, exclusive of ineffectiveness amounts, which are recognized as adjustments to net income. All of the changes in the fair market values of our derivative instruments are recorded in the consolidated statements of operations and comprehensive income for our interest rate swaps that were terminated in September 2010. In November 2010, the Company entered into two interest rate swaps (which were settled at the IPO) and accounts for changes in fair value of such hedges through accumulated other comprehensive (loss) income in equity in its financial statements via hedge accounting. Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Partnership has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors. Under certain circumstances, the Partnership may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.

Income Taxes

As a limited partnership, the consolidated operating results are included in the income tax returns of the individual partners. Accordingly, the Partnership does not provide for federal income taxes. State income taxes were not significant in any of the periods presented. No uncertain income tax positions exist as of September 30, 2013 and December 31, 2012.

Business Combinations

The Partnership applies ASC 805, Business Combinations (ASC 805), in determining how to account for and identify business combinations by allocating fair value to tangible and identified intangible assets acquired and liabilities assumed using market comparables and operating results (Level 3). Acquisition related costs are expensed as incurred.

Discontinued Operations

March 8, 2013 Increase in Authorized Shares and Stock Split

On March 7, 2013, the Board of Directors and stockholders of the REIT approved an increase in the number of authorized REIT shares to 300,000,000 shares of common stock and a 60.37-for-one split of issued and outstanding common stock. The increase in the authorized shares and the stock split became effective on March 8, 2013 when the REIT’s charter was amended for such increase in the number of authorized REIT shares and the stock split. The common share and per common share amounts in these consolidated financial statements and notes to consolidated financial statements have been retrospectively restated to reflect the 60.37-for-one split.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Partnership’s consolidated financial position or results of operations.

3. Real Estate Investment Activity

The Partnership had the following rental property activity during the nine months ended September 30, 2013 as described below:

Acquisitions


Month of Acquisition	Property Type	Located in		Purchase Price
April	Traumatic Brain Injury		CA	$	779,000
April	Traumatic Brain Injury		CA		697,000
April	SNF		TX		2,400,000
April	Medical Office Building		IN		1,200,000
May	Senior Housing		CT		2,400,000
May	SNF		OH		14,350,000
June	SNF		OK		6,200,000
August	SNF		KY		9,000,000
September	SNF		TX		3,450,000

				$	40,476,000

The following table illustrates the effect on total revenues and net income as if we had consummated the acquisitions as of January 1, 2012 (unaudited):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Total revenues	$	33,512,292	$	33,719,123	$	105,786,595	$	98,692,216
Net income		11,020,692		2,937,860		15,177,519		14,920,725

Transaction-related costs are not expected to have a continuing significant impact on our financial results and therefore have been excluded from these proforma results. Related to the above business combinations, the Partnership incurred $0.6 million of transaction costs for the nine months ended September 30, 2013.

In accordance with ASC 805, the Partnership allocated the approximate purchase price paid for these properties acquired in 2013 as follows:


Land	$	7,414,180
Buildings and improvements		29,834,943
Furniture, fixtures, and equipment		3,226,877

Total	$	40,476,000

Dispositions

During the nine months ending September 30, 2013, the Partnership disposed of five properties, one vacant land parcel, and 108 bed licenses for a total sales price of $5.3 million and the Partnership recognized a net gain on sale of approximately $26,000. The total sales price and net gain are net of transaction costs incurred in relation to the closings at the time of disposition.

Construction in progress

The following summarizes the Partnership’s construction in progress at September 30, 2013 and December 31, 2012:


	September 30, 2013			December 31, 2012
Beginning balance, January 1, 2013 and 2012, respectively	$	4,483,684		$	28,293,083
Additions		14,251,136			25,334,504
Sold/withdrawn projects		—			(8,038,072	)
Placed in service		(1,750,748	)		(41,105,831	)

	$	16,984,072		$	4,483,684

During 2013 and 2012, the Partnership capitalized expenditures for improvements related to various construction and reinvestment projects. In 2013, the Partnership placed into service one completed investment project at one property located in California. In 2012, the Partnership placed into service three completed investment projects at three properties located in Washington and completed construction of two properties located in Connecticut. In accordance with ASC 835 Capitalization of Interest (ASC 835), the Partnership capitalizes interest based on the average cash balance of construction in progress for the period using the weighted-average interest rate on all outstanding debt, which approximated 6.7% for the three and nine months ended September 30, 2013. The balance of capitalized interest within construction in progress at September 30, 2013 and December 31, 2012 was $430,418 and $71,514, respectively. The amount capitalized during the three and nine months ended September 30, 2013, and 2012, relative to interest incurred, was $193,213, $402,200, $345,169 and $848,379, respectively.

4. Secured Loan Receivables, net

The following summarizes the Partnership’s secured loan receivables, net, at September 30, 2013:


	September 30, 2013
	Capital Improvement Loan Receivables			Secured Operator Loan Receivables			Total Secured Loan Receivables
Beginning balance, January 1, 2013	$	19,359,485		$	13,279,295		$	32,638,780
New loans issued		379,905			2,026,035			2,405,940
Reserve for uncollectible secured loans and loan write-offs		—			(11,000	)		(11,000	)
Loan amortization and repayments		(1,694,788	)		(2,122,048	)		(3,816,836	)

	$	18,044,602		$	13,172,282		$	31,216,884

Interest income on secured loans and financing leases for the respective periods is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Capital improvement loan receivable	$	483,274	$	354,089	$	1,280,345	$	1,024,727
Secured operator loan receivables		283,433		145,938		901,452		1,441,212
Direct financing lease		364,521		360,301		1,090,544		1,077,703

Total interest on secured loans and financing lease	$	1,131,228	$	860,328	$	3,272,341	$	3,543,642

The Partnership’s reserve on a loan-by-loan basis for uncollectible secured loan receivables balances at September 30, 2013 and December 31, 2012 was $0 million and $0.3 million, respectively and any movement in the reserve is reflected in reserve for uncollectible secured loans and other receivables in the consolidated statements of operations and comprehensive income. The gross balance of secured loan receivables for which a reserve on a loan-by-loan basis for uncollectible secured loan receivables has been applied was approximately $0 million and $3.1 million at September 30, 2013 and December 31, 2012, respectively.

During 2013 and 2012, the Partnership funded loans for both working capital and capital improvement purposes to various operators. All loans held by the Partnership accrue interest and are recorded as interest income unless the loan is deemed impaired in accordance with Partnership policy. The payments received from the operator cover both interest accrued as well as amortization of the principal balance due. Any payments received from the operator made outside of the normal loan amortization schedule are considered principal prepayments and reduce the outstanding secured loan receivables balance.

5. Deferred Financing Costs

The following summarizes the Partnership’s deferred financing costs at September 30, 2013 and December 31, 2012:


	September 30, 2013			December 31, 2012
Gross amount	$	16,559,273		$	20,995,022
Accumulated amortization		(4,294,942	)		(6,343,757	)

Net	$	12,264,331		$	14,651,265

For the three and nine months ended September 30, 2013, the Partnership wrote-off deferred financing costs of $0 and $9.7 million, respectively, with $0 and $4.6 million of accumulated amortization associated with the Term Loan, Acquisition Credit Line, 2014 Revolver and 2016 Revolver (see Footnote 7) pay down.

For the three and nine months ended September 30, 2012, the Partnership wrote-off deferred financing costs of $0 and $24,436, respectively, with $0 and $11,172 of accumulated amortization associated with the Construction Loan (see Footnote 7) pay down.

6. Lease Intangibles

The Partnership considers renewals on above or below market leases when ascribing value to the in-place lease intangibles at the date of a property acquisition. In those instances where the renewal lease rate pursuant to the terms of the lease does not adjust to a current market rent, the Partnership evaluates whether the stated renewal rate is above or below current market rates and considers the past and current operations of the property, the current rent coverage ratio of the operator, and the number of years until potential renewal option exercise. If renewal is considered probable based on these factors, an additional lease intangible is recorded at acquisition and amortized over the renewal period.

The following summarizes the Partnership’s lease intangibles classified as part of other assets or other liabilities at September 30, 2013 and December 31, 2012:


	Assets
	September 30, 2013							December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Above market leases	$	6,436,851	$	(3,335,442	)	$	3,101,409	$	6,641,851	$	(3,175,449	)	$	3,466,402
In-place lease assets		651,730		(114,053	)		537,677		651,730		(65,173	)		586,557
Operator relationship		212,416		(29,738	)		182,678		212,416		(16,993	)		195,423

	$	7,300,997	$	(3,479,233	)	$	3,821,764	$	7,505,997	$	(3,257,615	)	$	4,248,382


	Liabilities
	September 30, 2013							December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Below market leases	$	18,077,537	$	(10,125,348	)	$	7,952,189	$	25,695,395	$	(16,281,397	)	$	9,413,998

For the nine months ended September 30, 2013 and 2012, the Partnership wrote-off above market leases of $205,000 and $0 with accumulated amortization of $205,000 and $0, respectively, and below market leases of $7,617,858 and $205,000 with accumulated accretion of $7,617,858 and $156,446, respectively, for a net recognition of $0 and $48,554, respectively, in rental income from intangible amortization. These write-offs were the result of fully amortized assets and fully accreted liabilities for the nine months ended September 30, 2013, and in connection with the anticipated termination of leases that were transitioned to new operators for the nine months ended September 30, 2012.

7. Senior Notes Payable and Other Debt

The Partnership’s senior notes payable and other debt consisted of the following at September 30, 2013 and December 31, 2012:


	September 30, 2013		December 31, 2012
2019 Notes (interest rate of 7.75% at September 30, 2013 and December 31, 2012), inclusive of $2.9 million and $3.2 million net premium balance at September 30, 2013 and December 31, 2012, respectively	$	402,862,222	$	403,180,433
Revolving Credit Facility (interest rate of 2.53% at September 30, 2013)		95,000,000		—
Term Loan (interest rate of 5.75% at December 31, 2012)		—		192,212,350
Acquisition Credit Line (interest rate of 5.75% at December 31, 2012)		—		18,925,200
2016 Revolver (interest rate of 5.25% at December 31, 2012)		—		69,368,589
Acquisition loans (interest rate of 6.00% at December 31, 2012)		—		7,584,974
HUD loan (interest rate of 5.00% at September 30, 2013 and December 31, 2012), inclusive of $2.4 million and $2.5 million premium balance at September 30, 2013 and December 31, 2012, respectively		13,711,699		13,881,869

Total	$	511,573,921	$	705,153,415

In conjunction with the IPO of the REIT on March 26, 2013, the Partnership under Aviv Financing I repaid the outstanding balance of the Term Loan and the Acquisition Credit Line, and under Aviv Financing V repaid the outstanding balance of the 2016 Revolver in the amounts of $191.2 million, $18.9 million, and $94.4 million, respectively. The Partnership paid $2.2 million in prepayment penalties which is included in loss on extinguishment of debt on the consolidated statements of operations and comprehensive income for the nine months ended September 30, 2013.

Senior Notes

On February 4, 2011, April 5, 2011, and March 28, 2012, Aviv Healthcare Properties Limited Partnership and Aviv Healthcare Capital Corporation (the Issuers) issued $200 million, $100 million, and $100 million, respectively, of 7.75 % Senior Notes due 2019 (the 2019 Notes). The REIT is a guarantor of the Issuers’ 2019 Notes. The 2019 Notes are unsecured senior obligations of the Issuers and will mature on February 15, 2019. The 2019 Notes bear interest at a rate of 7.75% per annum, payable semiannually to holders of record at the close of business on the February 1 or the August 1 immediately preceding the interest payment date on February 15 and August 15 of each year. A premium of $2.75 million and $1.0 million was associated with the offering of the $100 million of 2019 Notes on April 5, 2011 and the $100 million of 2019 Notes on March 28, 2012, respectively. The premium will be amortized as an adjustment to the yield on the 2019 Notes over their term. The Partnership used the proceeds, amongst other things, to pay down approximately $87.7 million of the Acquisition Credit Line, $5.5 million of the 2016 Revolver and $6.1 million of the Construction Loan during 2012.

Revolving Credit Facility

On March 26, 2013, the Partnership, under Aviv Financing IV, entered into a $300 million secured revolving credit facility and $100 million term loan with Bank of America (collectively, the Revolving Credit Facility). On April 16, 2013, the Company converted the entire $100 million term loan into a secured revolving credit facility, thereby terminating the term loan and any availability thereunder and increasing the amount available under the secured revolving credit facility from $300 million to $400 million. On each payment date, the Partnership pays interest only in arrears on any outstanding principal balance of the Revolving Credit Facility. The interest rate under the Revolving Credit Facility is based on LIBOR plus a margin of 235 basis points to 300 basis points depending on the Partnership’s leverage ratio. The interest rate at September 30, 2013 was 2.53%. Additionally, an unused fee equal to 50 basis points per annum of the daily unused balance on the Revolving Credit Facility is payable quarterly in arrears. The initial term of the Revolving Credit Facility expires in March 2016 with a one year extension option. The Revolving Credit Facility had an outstanding balance of $95.0 million as of September 30, 2013.

Other Loans

8. Partnership Equity and Incentive Program

Distributions accrued in accordance with declaration to the Partnership’s partners are summarized as follows for the three months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013	$	—	$	—	$	—	$	—	$	—	$	—	$	4,297,831
2012	$	2,068,318	$	532,817	$	799,225	$	—	$	553,761	$	7,177,586	$	—

Distributions accrued in accordance with declaration to the Partnership’s partners are summarized as follows for the nine months ended September 30:

	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013	$	2,797,315	$	97,288	$	145,931	$	—	$	553,761	$	6,520,893	$	8,882,184
2012	$	6,204,954	$	1,697,303	$	2,268,373	$	—	$	1,661,283	$	21,046,074	$	—

Weighted-average Units outstanding are summarized as follows for the three months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013		—		—		—		—		—		—		49,210,134
2012		13,467,223		4,523,145		2		8,050		2,684,900		21,178,250		—

Weighted-average Units outstanding are summarized as follows for the nine months ended September 30:


	Class A		Class B		Class C		Class D		Class F		Class G		OP Units
2013		4,193,031		1,408,305		—		2,506		835,958		6,742,030		40,630,173
2012		13,467,223		4,523,145		2		8,050		2,684,900		19,453,438		—

Prior to the Merger, the Partnership had established an officer incentive program linked to its future value. Awards vest annually over a five-year period assuming continuing employment by the recipient. The awards settled on December 31, 2012 in Class C Units or, at the Partnership’s discretion, cash. For accounting purposes, expense recognition under the program commenced in 2008, and the related expense for the three and nine months ended September 30, 2012 was $101,500 and $304,500, respectively.

The following table lists the cash dividends on common stock declared and paid by the Partnership during the nine months ended September 30, 2013:

Declaration Date

Record Date

Amount Per Share

Dividend Payment
Date

May 19, 2013

June 3, 2013

0.384

June 17, 2013

August 16, 2013

August 30, 2013

0.36

September 16, 2013

The above dividends represents a rate of $0.36 per share for the second and third quarter of 2013 and $0.024 per share for the period from the completion of the Partnership’s initial public offering on March 26, 2013 through March 31, 2013.

9. Restricted Stock Grants and Option Awards

Restricted Stock Grants

On March 26, 2013 the REIT adopted the Aviv REIT, Inc. 2013 Long-Term Incentive Plan (the LTIP). The purposes of the LTIP are to attract and retain qualified persons upon whom, in large measure, the REIT’s sustained progress, growth and profitability depend, to motivate the participants to achieve long-term REIT goals and to align the participants’ interests with those of other stockholders by providing them with a proprietary interest in the REIT’s growth and performance. The REIT’s executive officers, employees, consultants and non-employee directors are eligible to participate in the LTIP. Under the plan, 2,000,000 shares of the REIT’s common stock are available for issuance, of which 70,500 had been issued and 217,882 had been reserved for issuance as of September 30, 2013. For the three and nine months ended September 30, 2013, the REIT recognized total non-cash stock-based compensation expense related to the LTIP of $534,814 and $598,434, the components of which are set forth below.

The REIT’s non-employee directors (excluding Messrs. Dees, Goldberg and Triedman) each received an equity grant of 6,750 shares of restricted stock and 3,250 shares of unrestricted stock upon consummation of the IPO. The Company’s lead director received an unrestricted stock grant of 500 shares in connection with the IPO. The equity awards were made pursuant to the LTIP. The restricted stock awards vest in three equal installments, with the first installment vesting on May 15, 2014 and the second and third installments vesting on March 26, 2015 and 2016, respectively, subject to the director’s continued service on the board of directors. For the three and nine months ended September 30, 2013, the REIT recognized $75,389 and $139,010 of non-cash stock-based compensation expense in relation to the board of directors restricted stock grant.

On July 11, 2013 the subcommittee of the REIT’s compensation committee approved the issuance of 51,000 time-based restricted stock units to members of management and other key employees. The equity awards were made pursuant to the LTIP. One half of the time-based equity awards are scheduled to vest on December 31, 2014 and the other half to vest on December 31, 2015 subject to the employee’s continued employment with the REIT. The restricted stock units carry dividend equivalent rights that are subject to the same vesting terms as the underlying restricted stock units. For the three and nine months ended September 30, 2013, the REIT recognized $81,968and $81,968 of non-cash stock-based compensation expense in relation to management’s time-based restricted stock unit grant.

Effective July 11, 2013, members of the REIT’s management and other key employees were awarded 81,774 performance-based restricted stock units that vest on the basis of Total Shareholder Return (“TSR”) on the REIT’s stock compared to the TSR of its peer companies, as defined. The first installment of the awards is based on the companies comprising the NAREIT Equity Index and the companies comprising the Bloomberg Healthcare REIT Index for the performance period beginning on the date of the IPO and ending December 31, 2014. The second installment is based on the companies comprising the NAREIT Equity Index and the companies comprising the Bloomberg Healthcare REIT Index for the performance period beginning on the date of the IPO and ending December 31, 2015. If the service and performance conditions are met, approximately half of the restricted stock units will vest on December 31, 2014 and the remaining units will vest on December 31, 2015. The restricted stock units carry dividend equivalent rights that are subject to the same vesting terms as the underlying performance stock units. For the three and nine months ended September 30, 2013, the REIT recognized $377,457 and $377,457 of non-cash stock-based compensation expense in relation to management’s performance-based restricted stock unit grant.

Option Awards

On September 17, 2010, the REIT adopted the 2010 Management Incentive Plan (the MIP) as part of the Merger transaction, which provides for the grant of option awards. Two thirds of the options granted under the MIP were performance based awards whose criteria for vesting is tied to a future liquidity event (as defined) and also contingent upon meeting certain return thresholds (as defined). The grant date fair value associated with all performance-based award options of the REIT aggregated to approximately $7.4 million at the time of the IPO. One third of the options granted under the MIP were time based awards and the service period for these options is four years with shares vesting at a rate of 25% ratably from the grant date.

In connection with the IPO, the holders of option awards under the MIP received a new class of units of LG Aviv L.P., the legal entity through which Lindsay Goldberg holds its interest in the REIT, equal to the number of options held by such persons immediately prior to the consummation of the IPO. Under the limited partnership agreement of LG Aviv L.P., the units are entitled to receive an aggregate distribution amount equal to 14.9% of the dividend distributions declared and received by LG Aviv L.P. after the consummation of the IPO in respect of its shares of common stock. The distribution amount will be paid by LG Aviv L.P. ratably to each holder of such units on the distribution date in the proportion that the total number of units held by such holder bears to the total outstanding units of the same class. Any unit payments will be paid, if at all, on the earlier of (i) the last day of the calendar quarter in which dividends were paid to the REIT stockholders and (ii) three business days following the holder’s termination of employment with the REIT. For the nine months ended September 30, 2013, $2,400,455 was paid by LG Aviv L.P. to the holders of such units.

The following table represents the time and performance-based option awards activity for the nine months ended September 30, 2013 and 2012:


	Nine Months Ended
	September 30, 2013		September 30, 2012
Outstanding at beginning of period		1,956,833		1,417,246
Granted		—		701,560
Exercised		—		—
Awards vested at IPO		3,913,425		—
Cancelled/Forfeited		—		(161,973	)

Outstanding at end of period		5,870,258		1,956,833

Options exercisable at end of period		—		—
Weighted average fair value of options granted to date (per option)	$	2.20	$	2.21

The following table represents the time and performance based option awards outstanding cumulatively life-to-date for the nine months ended September 30, 2013 and 2012 as well as other MIP data:


	2013	2012
Range of exercise prices	$16.56 - $18.87	$16.56 - $18.85
Outstanding	5,870,258	1,956,833
Remaining contractual life (years)	7.55	8.55
Weighted average exercise price	$17.47	$17.43

The REIT has used the Black-Scholes option pricing model to estimate the grant date fair value of the options. The following table includes the assumptions that were made in estimating the grant date fair value for options awarded for the nine months ended September 30, 2013 and 2012:


	2013 Grants		2012 Grants
Weighted average dividend yield		—		7.54	%
Weighted average risk-free interest rate		—		1.31	%
Weighted average expected life		—		7.0 years
Weighted average estimated volatility		—		38.24	%
Weighted average exercise price		—	$	18.80
Weighted average fair value of options granted (per option)		—	$	2.88

The REIT recorded non-cash compensation expenses of $0, $9,012,270, $411,760 and $925,457 for the three and nine months ended September 30, 2013 and 2012, respectively, related to the time and performance based stock options accounted for as equity awards.


Year Ended December 31,	Restricted Stock
2013	$	639,835
2014		2,845,139
2015		1,776,825
2016		74,031

Total	$	5,335,830

10. Related Parties

Related party receivables and payables represent amounts due from/to various affiliates of the Partnership, including amounts due to certain acquired companies and limited liability companies for transactions occurring prior to the formation of the Partnership, and various advances to entities controlled by affiliates of the Partnership’s management. There were no related party receivables or payables as of September 30, 2013 and December 31, 2012, other than amounts owed from the Partnership to the REIT for accrued distributions at December 31, 2012.

11. Derivatives

During the periods presented, the Partnership was party to two interest rate swaps, with identical terms of $100.0 million each, which were purchased to fix the variable interest rate on the denoted notional amount under the Term Loan. On March 26, 2013, in connection with the pay down of the Term Loan, the Partnership settled all interest rate swaps at a fair value of $3.6 million and such amount previously recorded in accumulated other comprehensive income (loss) was recorded within loss on extinguishment of debt in the consolidated statements of operations and comprehensive income. The interest rate swaps qualified for hedge accounting and as such the amounts previously recorded in accumulated other comprehensive income in the consolidated statement of changes in equity were reversed. For presentational purposes they are shown as one derivative due to the identical nature of their economic terms.


Total notional amount	$	200,000,000
Fixed rates		6.49% (1.99% effective swap base rate plus 4.5% spread per credit agreement)
Floor rate		1.25	%
Effective date		November 9, 2010
Termination date		September 17, 2015
Liability balance at September 30, 2013 (included in other liabilities)	$	—
Liability balance at December 31, 2012 (included in other liabilities)	$	(3,773,332	)

The derivative positions were valued using models developed by the respective counterparty that used as their basis readily observable market parameters (such as forward yield curves) and were classified within Level 2 of the valuation hierarchy. The Partnership considered its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives.

12. Commitments and Contingencies

During 2011, the Partnership entered into a contractual arrangement with an operator in one of its facilities to reimburse any liabilities, obligations or claims of any kind or nature resulting from the actions of the former operator in such facility, Brighten Health Care Group. The Partnership is obligated to reimburse the fees to the operator if and when the operator incurs such expenses associated with certain Indemnified Events, as defined therein. The total possible obligation for these fees is estimated to be $2.3 million, of which approximately $1.9 million has been paid to date. The remaining $0.4 million was accrued as a component of other liabilities in the consolidated balance sheets.

The Partnership is involved in various unresolved legal actions and proceedings, which arise in the normal course of our business. Although the outcome of a particular proceeding can never be predicted, the Partnership does not believe that the result of any of these other matters will have a material adverse effect on its business, operating results, or financial position.

13. Concentration of Credit Risk

As of September 30, 2013, the Partnership’s real estate investments included 263 healthcare facilities, located in 29 states and operated by 36 third party operators. At September 30, 2013, approximately 55.7% (measured as a percentage of total assets) were leased by five private operators: Saber Health Group (17.2%), Daybreak Healthcare (14.5 %), EmpRes Healthcare (9.1%), Maplewood Senior Living (8.1%), and Sun Mar Healthcare (6.8%). No other operator represents more than 5.5% of total assets. The five states in which the Partnership had its highest concentration of total assets were Texas (17.3 %), California (14.9%), Ohio (9.4%), Connecticut (8.1%) and Pennsylvania (6.8%) at September 30, 2013.

For the nine months ended September 30, 2013, the Partnership’s rental income from operations totaled approximately $99.2 million of which approximately $16.3 million was from Daybreak Healthcare (16.4%), $14.9 million was from Saber Health Group (15.0%), $9.2 million was from EmpRes Healthcare (9.3%), $8.1 million was from Preferred Care (8.2%), and $7.2 million was from Sun Mar Healthcare (7.3%). No other operator generated more than 7.2% of the Partnership’s rental income from operations for the nine months ended September 30, 2013.

14. Discontinued Operations

ASC 205-20 requires that the operations and associated gains and/or losses from the sale or planned disposition of components of an entity, as defined, be reclassified and presented as discontinued operations in the Partnership’s consolidated financial statements for all periods presented. In April 2012, the Partnership sold three properties in Arkansas and one property in Massachusetts to unrelated third parties. Below is a summary of the components of the discontinued operations for the respective periods:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Total revenues	$	—	$	—	$	—	$	269,932
Expenses:
Interest expense		—		—		—		(27,104	)
Amortization of deferred financing costs		—		—		—		(1,958	)
Gain on sale of assets, net		—		—		—		4,425,246
Loss on extinguishment of debt		—		—		—		(13,264	)
Other		—		—		—		(66,160	)

Total gains (expenses)		—		—		—		4,316,760

Discontinued operations	$	—	$	—	$	—	$	4,586,692

15. Earnings Per Unit:

The following table shows the amounts used in computing the basic and diluted earnings per unit of the Partnership.


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2013		2012			2013			2012
Numerator for earnings per unit - basic:
Income from continuing operations	$	10,066,927	$	1,767,446		$	12,031,159		$	6,809,656
Income from continuing operations allocable to limited partners		—		(637,162	)		(1,007,665	)		(2,659,747	)

Income from continuing operations allocable to units		10,066,927		1,130,284			11,023,494			4,149,909
Discontinued operations, net of limited partners		—		—			—			2,795,200

Numerator for earnings per unit - basic:	$	10,066,927	$	1,130,284		$	11,023,494		$	6,945,109

Numerator for earnings per unit - diluted:
Income from continuing operations allocable to units	$	10,066,927	$	1,130,284		$	11,023,494		$	4,149,909
Discontinued operations, net of limited partners		—		—			—			2,795,200

Numerator for earnings per unit - diluted	$	10,066,927	$	1,130,284		$	11,023,494		$	6,945,109

Denominator for earnings per unit - basic and diluted:
Denominator for basic earnings per unit - basic		49,210,134		21,178,250			40,630,173			19,453,438
Effective dilutive securities:
Stock options		1,599,329		129,151			1,454,759			129,151
Restricted stock units		29,093		—			16,169			—

Denominator for earnings per unit - diluted		50,838,556		21,307,401			42,101,101			19,582,589

Basic earnings per unit:
Income from continuing operations allocable to units	$	0.20	$	0.05		$	0.27		$	0.21
Discontinued operations, net of limited partners		—		—			—			0.14

Net income allocable to units	$	0.20	$	0.05		$	0.27		$	0.35

Diluted earnings per unit:
Income from continuing operations allocable to units	$	0.20	$	0.05		$	0.26		$	0.21
Discontinued operations, net of limited partners		—		—			—			0.14

Net income allocable to units	$	0.20	$	0.05		$	0.26		$	0.35

16. Subsequent Events

On October 1, 2013, the Partnership sold a property in Michigan for a sale price of $2.5 million in cash.

On October 1, 2013, the Partnership acquired three properties in Ohio and one property in Indiana from an unrelated third party for a purchase price of $35.9 million.

On October 4, 2013, the Partnership acquired three properties in Florida from an unrelated third party for a purchase price of $13.0 million.

On November 1, 2013, the Partnership acquired four properties in Ohio for a purchase price of $41.0 million and one property in Arkansas for a purchase price of $1.2 million from unrelated third parties.

The following table illustrates the effect on total revenues and net income as if the Partnership had consummated the above two acquisitions, as well as those noted in Footnote 3, as of January 1, 2012 (unaudited):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Total revenues	$	35,784,261	$	35,991,092	$	112,602,501	$	105,508,122
Net income		12,674,449		4,591,617		20,138,791		19,881,997

On October 16, 2013, the Partnership through its majority-owned subsidiaries Aviv Healthcare Properties Limited Partnership and Aviv Healthcare Capital Corporation (the “Issuers”), completed the offering of $250 million aggregate principal amount of the Issuers’ 6% Senior Notes due 2021. The Issuers received net proceeds from the offering of approximately $244.4 million, after deducting discounts, commissions and estimated expenses. On October 17, 2013, the Partnership used approximately $135.0 million of the net proceeds from the offering to repay all outstanding indebtedness under the Revolving Credit Facility. $42.2 million of the proceeds were used for acquisitions and the remaining proceeds of approximately $67.2 million will be used for general corporate purposes, including the potential acquisition of additional properties.

17. Condensed Consolidating Information

The REIT and certain of the Partnership’s direct and indirect wholly owned subsidiaries (the Unencumbered Subsidiary Guarantors and Encumbered Subsidiary Guarantors) fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to our Senior Notes issued in February 2011, April 2011, March 2012 and October 2013. The Senior Notes were issued by Aviv Healthcare Properties Limited Partnership and Aviv Healthcare Capital Corporation (the Issuers). Separate financial statements of the guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the respective guarantor and non-guarantor subsidiaries. Other wholly owned subsidiaries (Non-Guarantor Subsidiaries) that were not included among the Unencumbered Subsidiary Guarantors or Encumbered Subsidiary Guarantors were not obligated with respect to the Senior Notes. The Non-Guarantor Subsidiaries are subject to mortgages. The following summarizes our condensed consolidating information as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012:

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Balance Sheet

As of September 30, 2013

(unaudited)


			Unencumbered			Encumbered		Non-
			Subsidiary			Subsidiary		Guarantor
	Issuers		Guarantors			Guarantors		Subsidiaries		Eliminations			Consolidated
Assets
Net real estate investments	$	55,351	$	724,472,453		$	193,939,622	$	98,183,624	$	—		$	1,016,651,050
Cash and cash equivalents		11,582,390		(683,413	)		277,510		809,642		—			11,986,129
Deferred financing costs, net		7,871,393		—			4,378,945		13,993		—			12,264,331
Other		12,832,932		54,495,909			14,290,748		3,738,677		—			85,358,266
Investment in and due from related parties, net		950,729,058		—			—		—		(950,729,058	)		—

Total assets	$	983,071,124	$	778,284,949		$	212,886,825	$	102,745,936	$	(950,729,058	)	$	1,126,259,776

Liabilities and equity
Secured notes payable and other debt	$	402,862,222	$	—		$	95,000,000	$	13,711,699	$	—		$	511,573,921
Due to related parties		—		—			—		—		—			—
Tenant security and escrow deposits		50,000		14,145,469			3,480,046		1,583,299		—			19,258,814
Accounts payable and accrued expenses		5,500,149		2,631,954			2,207,723		1,826,035		—			12,165,861
Other liabilities		290,850		7,718,300			864,427		19,700		—			8,893,277

Total liabilities		408,703,221		24,495,723			101,552,196		17,140,733		—			551,891,873
Total equity		574,367,903		753,789,226			111,334,629		85,605,203		(950,729,058	)		574,367,903

Total liabilites and equity	$	983,071,124	$	778,284,949		$	212,886,825	$	102,745,936	$	(950,729,058	)	$	1,126,259,776

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Balance Sheet

As of December 31, 2012

(unaudited)


			Unencumbered			Encumbered			Non-
			Subsidiary			Subsidiary			Guarantor
	Issuers		Guarantors			Guarantors			Subsidiaries		Eliminations			Consolidated
Assets
Net real estate investments	$	53,750	$	731,036,359		$	197,221,045		$	55,149,862	$	—		$	983,461,016
Cash and cash equivalents		16,869,495		(1,746,141	)		(68,241	)		479,260		—			15,534,373
Deferred financing costs, net		8,964,976		—			5,672,918			13,371		—			14,651,265
Other		15,737,837		50,372,586			14,120,937			3,308,680		—			83,540,040
Investment in and due from related parties, net		711,027,894		—			—			—		(711,027,894	)		—

Total assets	$	752,653,952	$	779,662,804		$	216,946,659		$	58,951,173	$	(711,027,894	)	$	1,097,186,694

Liabilities and equity
Secured notes payable and other debt	$	403,180,433	$	—		$	280,506,139		$	21,466,843	$	—		$	705,153,415
Due to related parties		7,542,333		—			5,912			—		—			7,548,245
Tenant security and escrow deposits		50,000		14,202,777			3,560,361			465,034		—			18,278,172
Accounts payable and accrued expenses		13,702,409		6,152,923			3,988,102			364,380		—			24,207,814
Other liabilities		7,677,280		9,090,462			4,729,809			—		—			21,497,551

Total liabilities		432,152,455		29,446,162			292,790,323			22,296,257		—			776,685,197
Total equity		320,501,497		750,216,642			(75,843,664	)		36,654,916		(711,027,894	)		320,501,497

Total liabilities and equity	$	752,653,952	$	779,662,804		$	216,946,659		$	58,951,173	$	(711,027,894	)	$	1,097,186,694

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income

For the Three Months Ended September 30, 2013

(unaudited)


				Unencumbered		Encumbered		Non-
				Subsidiary		Subsidiary		Guarantor
	Issuers			Guarantors		Guarantors		Subsidiaries		Eliminations			Consolidated
Revenues
Rental income	$	—		$	22,002,562	$	7,310,729	$	2,379,364	$	—		$	31,692,655
Interest on secured loans and financing lease		262,188			805,815		63,225		—		—			1,131,228
Interest and other income		298			33,863		14,909		44		—			49,114

Total revenues		262,486			22,842,240		7,388,863		2,379,408		—			32,872,997
Expenses
Interest expense		8,009,655			—		1,236,207		141,224		—			9,387,086
Depreciation and amortization		1,728			6,206,478		1,466,929		626,735		—			8,301,870
General and administrative		1,391,347			41,536		2,583,499		24,153		—			4,040,535
Transaction costs		536,221			144,098		2,746		353,396		—			1,036,461
Loss on impairment of assets		—			—		—		—		—			—
Reserve for uncollectible secured loan and other receivables		—			—		26,740		—		—			26,740
Gain on sale of assets, net		—			13,378		—		—		—			13,378
Loss on extinguishment of debt		—			—		—		—		—			—
Other expenses		—			—		—		—		—			—

Total expenses		9,938,951			6,405,490		5,316,121		1,145,508		—			22,806,070

(Loss) income from continuing operations		(9,676,465	)		16,436,750		2,072,742		1,233,900		—		$	10,066,927
Discontinued operations		—			—		—		—		—			—

Net (loss) income		(9,676,465	)		16,436,750		2,072,742		1,233,900		—		$	10,066,927

Equity in income (loss) of subsidiaries		19,743,392			—		—		—		(19,743,392	)		—

Net (loss) income allocable to common units	$	10,066,927		$	16,436,750	$	2,072,742	$	1,233,900	$	(19,743,392	)	$	10,066,927

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income

For the Three Months Ended September 30, 2012

(unaudited)


				Unencumbered		Encumbered			Non-
				Subsidiary		Subsidiary			Guarantor
	Issuers			Guarantors		Guarantors			Subsidiaries		Eliminations			Consolidated
Revenues
Rental income	$	—		$	22,266,480	$	7,101,910		$	985,883	$	—		$	30,354,273
Interest on secured loans and financing lease		67,493			707,884		84,951			—		—			860,328
Interest and other income		197			897,731		160,607			45		—			1,058,580

Total revenues		67,690			23,872,095		7,347,468			985,928		—			32,273,181
Expenses
Interest expense		8,017,628			—		4,653,667			234,473		—			12,905,768
Depreciation and amortization		—			5,246,017		1,406,502			241,493		—			6,894,012
General and administrative		1,340,358			63,662		2,522,663			21,256		—			3,947,939
Transaction costs		712,632			304,681		83,715			185,397		—			1,286,425
Loss on impairment of assets		—			1,766,873		—			—		—			1,766,873
Reserve for uncollectible secured loan and other receivables		2,833,419			725,112		46,099			—		—			3,604,630
Gain on sale of assets, net		—			—		—			—		—			—
Loss on extinguishment of debt		—			—		—			—		—			—
Other expenses		—			—		100,088			—		—			100,088

Total expenses		12,904,037			8,106,345		8,812,734			682,619		—			30,505,735

(Loss) income from continuing operations		(12,836,347	)		15,765,750		(1,465,266	)		303,309		—			1,767,446
Discontinued operations		—			—		—			—		—			—

Net (loss) income		(12,836,347	)		15,765,750		(1,465,266	)		303,309		—			1,767,446

Equity in income (loss) of subsidiaries		14,603,793			—		—			—		(14,603,793	)		—

Net income (loss) allocable to common units	$	1,767,446		$	15,765,750	$	(1,465,266	)	$	303,309	$	(14,603,793	)	$	1,767,446

Unrealized loss on derivative instruments		—			—		(39,482	)		—		—			(39,482	)

Total comprehensive income (loss)	$	1,767,446		$	15,765,750	$	(1,504,748	)	$	303,309	$	(14,603,793	)	$	1,727,964

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income

For the Nine Months Ended September 30, 2013

(unaudited)


				Unencumbered			Encumbered			Non-
				Subsidiary			Subsidiary			Guarantor
	Issuers			Guarantors			Guarantors			Subsidiaries		Eliminations			Consolidated
Revenues
Rental income	$	—		$	71,569,754		$	21,875,723		$	5,760,824	$	—		$	99,206,301
Interest on secured loans and financing lease		835,987			2,209,209			227,145			—		—			3,272,341
Interest and other income		4,625			107,112			16,163			127		—			128,027

Total revenues		840,612			73,886,075			22,119,031			5,760,951		—			102,606,669
Expenses
Interest expense		24,025,372			—			7,451,581			638,186		—			32,115,139
Depreciation and amortization		4,416			18,562,532			4,361,461			1,470,925		—			24,399,334
General and administrative		13,712,642			151,353			7,521,095			87,845		—			21,472,935
Transaction costs		717,918			378,482			3,795			482,989		—			1,583,184
Loss on impairment of assets		—			—			—			—		—			—
Reserve for uncollectible secured loan and other receivables		(9,594	)		(10,557	)		76,672			—		—			56,521
Gain on sale of assets, net		—			(25,799	)		—			—		—			(25,799	)
Loss on extinguishment of debt		—			—			10,974,196			—		—			10,974,196
Other expenses		—			—			—			—		—			—

Total expenses		38,450,754			19,056,011			30,388,800			2,679,945		—			90,575,510

(Loss) income from continuing operations		(37,610,142	)		54,830,064			(8,269,769	)		3,081,006		—			12,031,159
Discontinued operations		—			—			—			—		—			—

Net (loss) income		(37,610,142	)		54,830,064			(8,269,769	)		3,081,006		—			12,031,159

Equity in income (loss) of subsidiaries		49,641,301			—			—			—		(49,641,301	)		—

Net (loss) income allocable to common units	$	12,031,159		$	54,830,064		$	(8,269,769	)	$	3,081,006	$	(49,641,301	)	$	12,031,159

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Statement of Operations and Comprehensive Income

For the Nine Months Ended September 30, 2012

(unaudited)


				Unencumbered		Encumbered			Non-
				Subsidiary		Subsidiary			Guarantor
	Issuers			Guarantors		Guarantors			Subsidiaries		Eliminations			Consolidated
Revenues
Rental income	$	—		$	66,555,976	$	21,378,812		$	1,749,070	$	—		$	89,683,858
Interest on secured loans and financing lease		1,145,686			2,139,353		258,603			—		—			3,543,642
Interest and other income		3,480			961,690		161,675			45		—			1,126,890

Total revenues		1,149,166			69,657,019		21,799,090			1,749,115		—			94,354,390
Expenses
Interest expense		22,092,838			—		15,112,392			488,367		—			37,693,597
Depreciation and amortization		—			15,062,942		4,171,220			436,871		—			19,671,033
General and administrative		4,085,197			231,986		7,059,047			29,884		—			11,406,114
Transaction costs		1,722,927			1,290,141		272,672			221,317		—			3,507,057
Loss on impairment of assets		—			6,145,731		—			—		—			6,145,731
Reserve for uncollectible secured loan and other receivables		6,308,408			2,384,127		128,402			—		—			8,820,937
Gain on sale of assets, net		—			—		—			—		—			—
Loss on extinguishment of debt		—			—		—			—		—			—
Other expenses		—			—		300,265			—		—			300,265

Total expenses		34,209,370			25,114,927		27,043,998			1,176,439		—			87,544,734

(Loss) income from continuing operations		(33,060,204	)		44,542,092		(5,244,908	)		572,676		—			6,809,656
Discontinued operations		—			331,589		4,255,103			—		—			4,586,692

Net (loss) income		(33,060,204	)		44,873,681		(989,805	)		572,676		—			11,396,348

Equity in income (loss) of subsidiaries		44,456,552			—		—			—		(44,456,552	)		—

Net income (loss) allocable to common units	$	11,396,348		$	44,873,681	$	(989,805	)	$	572,676	$	(44,456,552	)	$	11,396,348

Unrealized loss on derivative instruments		—			—		(820,974	)		—		—			(820,974	)

Total comprehensive income (loss)	$	11,396,348		$	44,873,681	$	(1,810,779	)	$	572,676	$	(44,456,552	)	$	10,575,374

Aviv Healthcare Properties Limited Partnership and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2013

(unaudited)


				Unencumbered			Encumbered			Non-
				Subsidiary			Subsidiary			Guarantor
	Issuers			Guarantors			Guarantors			Subsidiaries			Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(220,414,791	)	$	15,720,931		$	195,716,059		$	51,073,920		$	—	$	42,096,119
Investing activities
Purchase of real estate investments		—			—			—			(40,476,000	)		—		(40,476,000	)
Sale of real estate investments		—			4,842,219			—			—			—		4,842,219
Capital improvements		(6,017	)		(8,265,292	)		(1,026,374	)		(611,304	)		—		(9,908,987	)
Development projects		—			(9,970,369	)		(50,777	)		(1,958,822	)		—		(11,979,968	)
Secured loan receivables received from others		2,041,110			917,053			263,543			—			—		3,221,706
Secured loan receivables funded to others		(369,864	)		(2,181,815	)		(155,704	)		—			—		(2,707,383	)

Net cash provided by (used in) investing activities		1,665,229			(14,658,204	)		(969,312	)		(43,046,126	)		—		(57,008,413	)
Financing activities
Borrowings of debt		—			—			160,000,000			—			—		160,000,000
Repayment of debt		—			—			(345,506,139	)		(7,696,437	)		—		(353,202,576	)
Payment of financing costs		—			—			(5,288,856	)		(975	)		—		(5,289,831	)
Payment for swap termination		—			—			(3,606,000	)		—					(3,606,000	)
Capital contributions		425,175			—			—			—					425,175
Initial public offering proceeds		303,600,000			—			—			—			—		303,600,000
Cost of raising capital		(25,379,370	)		—			—			—			—		(25,379,370	)
Cash distributions to partners		(65,183,348	)		—			—			—			—		(65,183,348	)

Net cash provided by (used in) financing activities