News Column

AVIV HEALTHCARE PROPERTIES L.P. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 5, 2014

Special Note Regarding Forward-looking Statements

The information presented herein includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events, performance and underlying assumptions and other statements that are not historical facts. Examples of forward-looking statements include all statements regarding our expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, projected growth opportunities and potential acquisitions, plans and objectives of management for future operations, and compliance with and changes in governmental regulations. You can identify forward-looking statements by their use of forward-looking words, such as "may," "will," "anticipate," "expect," "believe," "estimate," "intend," "plan," "should," "seek" or comparable terms, or the negative use of those words, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements are made based on our current expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. Important factors, risks and uncertainties that could cause actual results to differ materially from our expectations include those disclosed under Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and elsewhere in filings made by us with the Securities and Exchange Commission, or the SEC. These factors include, among others: uncertainties relating to the operations of our operators, including those relating to reimbursement by government and other third-party payors, compliance with regulatory requirements and occupancy levels; our ability to successfully engage in strategic acquisitions and investments; competition in the acquisition and ownership of healthcare properties; our ability to monitor our portfolio; environmental liabilities associated with our properties; our ability to re-lease or sell any of our properties; the availability and cost of capital; changes in interest rates; the amount and yield of any additional investments; changes in tax laws and regulations affecting real estate investment trusts (REITs); and our ability to maintain our status as a REIT. There may be additional risks of which we are presently unaware or that we currently deem immaterial. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date as of which such statements are made. Forward-looking statements are not guarantees of future performance. Except as required by law, we do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date as of which such statements are made or to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained herein.



Overview

Aviv REIT, Inc., or AVIV, is a self-administered REIT, specializing in the ownership of post-acute and long-term care skilled nursing facilities, or SNFs. AVIV is the sole general partner of Aviv Healthcare Properties Limited Partnership, or the Partnership. Unless the context requires otherwise or except as otherwise noted, as used herein the words "we," the "Company," "us" and "our" refer to Aviv REIT, Inc., its controlled subsidiaries, Aviv Healthcare Properties Limited Partnership and its controlled subsidiaries collectively, as the operations of the two aforementioned entities are materially comparable for the periods presented. We have been in the business of investing in SNFs for over 30 years, including through our predecessors. Our properties are leased through triple-net leases to third-party operators who have responsibility for the operation of the facilities. We are entitled to a cash rental stream from these operators under our leases. Our management team has an extensive track record and knowledge of healthcare real estate. We believe that we own one of the largest and highest-quality SNF portfolios in the United States. As of June 30, 2014, our portfolio consisted of 304 properties in 29 states leased to 39 operators who represent many of the largest and most experienced operators in the industry. We have a geographically diversified portfolio, with no state representing more than 20.0% of our contractual rent as of June 30, 2014. Our properties are leased to a diversified group of operators, with no single operator representing more than 12.9% of our contractual rent as of June 30, 2014. When we refer to the contractual rent of our portfolio, we are referring to the total monthly rent due under all of our triple-net leases as of the date specified, calculated based on the first full month following the specified date. As a result of our many years of industry experience, we have developed strong relationships with, and triple-net lease our properties to, many of the largest and most experienced operators in the United States. We cultivate long-term relationships with our operators and, as of June 30, 2014, 65% of our properties are leased to operators with whom we have had a relationship for at least five years, and many of our properties are leased to operators with whom we have had a relationship for at least ten years. We believe we will continue to access potential new investment opportunities as a result of our relationships with existing operators and our network of other market-leading operators. 40



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We structure our triple-net leases to generate attractive returns on a long-term basis. Under our triple-net leases, our operators are responsible for all operating costs and expenses related to the property, including maintenance and repair obligations and other capital expenditures. Our leases typically have initial terms of 10 years or more and include annual rent escalators of approximately 2%. We often enter into lease extensions during the term of the lease in connection with additional acquisitions, reinvestment projects and other opportunities that arise. Leases representing 99.5% of our contractual rent as of June 30, 2014 are supported by personal and/or corporate guarantees and leases representing 87.1% of our contractual rent for the same period are master leases or leases with cross-default provisions, which master leases and cross-default provisions provide us with significant credit support for our rents. Our leases also typically require security deposits of several months' rent. As of June 30, 2014, 16.5% of our leases are scheduled to expire before 2019. We finance investments through borrowings under our credit facility, issuances of unsecured senior notes and equity securities, project-specific first mortgages or a combination of these methods. We compete with other public and private companies who provide lease and/or mortgage financing to operators of a variety of different types of healthcare properties. While the overall landscape for healthcare finance is competitive, we are disciplined and selective about the investments we make and have a strong track record of identifying qualified operators and attractive markets in which to invest. We have built a high-quality and strategically-diversified portfolio of operators and properties.



Factors Affecting Our Business and the Business of Our Operators

The continued success of our business is dependent on a number of macroeconomic and industry trends. Many of these trends will influence our ongoing ability to find suitable investment properties while other factors will impact our operators' ability to conduct their operations profitably and meet their obligations to us.



Industry Trends

One of the primary trends affecting our business is the long-term increase in the average age of the U.S. population. This increase in life expectancy is expected to be a primary driver for growth in the healthcare and SNF industry. We believe this demographic trend is resulting in an increased demand for services provided to the elderly. We believe that the low cost healthcare setting of a SNF will benefit our operators and facilities in relation to higher-cost healthcare providers. We believe that these trends will support a growing demand for the services provided by SNF operators, which in turn will support a growing demand for our properties. The growth in demand for services provided to the elderly has resulted in an increase in healthcare spending. The Centers for Medicare and Medicaid Services, or CMS, and the Office of the Actuary forecast that U.S. healthcare expenditures will increase from approximately $2.7 trillion in 2011 to approximately $4.8 trillion in 2021. Furthermore, according to CMS, national expenditures for SNFs are expected to grow from approximately $151 billion in 2011 to approximately $255 billion in 2021, representing a compound annual growth rate, or CAGR, of 5.4%. On July 31, 2013, CMS issued its final rate for fiscal year 2014 Medicare payment rates for SNFs. Based on the changes contained in the final rule, CMS estimates that total Medicare payments to SNFs will increase by $470 million, or 1.3%, for fiscal year 2014, which began on October 1, 2013.



Liquidity and Access to Capital

Our single largest cost is the interest expense we incur on our debt obligations. In order to continue to expand and optimize our capital to expand our portfolio, we rely on access to the capital markets on an ongoing basis. We seek to balance this goal against maintaining ready access to funds to make investments at the time opportunities arise. We have extensive experience in and a successful track record of raising debt and equity capital over the past 30 years. Our indebtedness is comprised principally of the unsecured obligations under our 2019 Notes, our 2021 Notes and our Credit Facility, each described in further detail under " -Liquidity and Capital Resources-Indebtedness Outstanding". Substantially all of such indebtedness is scheduled to mature in 2016 or thereafter.



Factors Affecting Our Operators' Profitability

Our revenues are derived from rents we receive from triple-net leases with our operators. Certain economic factors present both opportunities and risks to our operators and, therefore, influence their ability to meet their obligations to us. Our operators' revenues are largely derived from third-party sources. Therefore, we indirectly rely on these same third-party sources to obtain our rents. The third-party payments include approximately 75%from the federal Medicare program and state Medicaid programs and approximately 25% from private insurance companies or private-pay residents. The sources and amounts of our operators' revenues are determined by a number of factors, including licensed bed capacity, occupancy rates, the healthcare needs of residents and the rate of reimbursement. Changes in the profile of the residents as well as the mix of payor types, including private pay, Medicare and Medicaid, may 41



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significantly affect our operators' profitability and, in turn, their ability to meet their obligations to us. Managing, billing and successfully collecting third-party payments is a relatively complex activity that requires significant experience and is critical to the successful operation of a SNF. We believe the portfolio occupancy, the quality mix of our portfolio and resulting reimbursement rates have remained relatively stable over recent years.



Results of Operations

This Quarterly Report on Form 10-Q contains unaudited financial statements and other financial data for each of AVIV and the Partnership. As noted above, AVIV is the sole general partner of the Partnership and, as of June 30, 2014, owned 80.5% of the economic interest in the Partnership. All of the Company's operations are conducted by the Partnership which is consolidated by AVIV for financial reporting purposes, and therefore the following information is the same for AVIV and the Partnership.



Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013

Revenues Revenues increased $8.2 million, or 23.3%, from $35.0 million for the three months ended June 30, 2013 to $43.2 million for the same period in 2014. The increase in revenue generally resulted from additional rent associated with the acquisitions and investments made during 2013 and 2014 and the factors set forth below. Revenues increased $15.4 million, or 22.0%, from $69.7 million for the six months ended June 30, 2013 to $85.1 million for the same period in 2014. The increase in revenue generally resulted from additional rent associated with the acquisitions and investments made during 2013 and 2014 and the factors set forth below.



Detailed changes in revenues for the three and six months ended June 30, 2014 compared to the same period in 2013 were as follows:

Rental income increased $7.5 million, or 22.3%, from $33.9 million for the

three months ended June 30, 2013 to $41.4 million for the same period in

2014. The increase is primarily due to additional cash rent of

approximately $8.8 million associated with acquisitions and investments

made during 2013 and 2014. There were no material changes to renewed

leases or rent increases associated with tenant improvements during the

quarter.



Rental income increased $14.4 million, or 21.3%, from $67.5 million for

the six months ended June 30, 2013 to $81.9 million for the same period in

2014. The increase is primarily due to additional cash rent of

approximately $15.2 million associated with acquisitions and investments

made during 2013 and 2014. There were no material changes to renewed

leases or rent increases associated with tenant improvements for the six

months ended June 30, 2014. Interest on secured loans remained materially consistent for the three

months ended June 30, 2013 compared to the same period in 2014. Interest on secured loans remained materially consistent for the six months ended June 30, 2013 compared to the same period in 2014.



Interest and other income increased $0.6 million from $0.08 million for

the three months ended June 30, 2013 to $0.7 million for the same period

in 2014. The increase is primarily due to non-recurring income from the

sale of bed licenses at a facility.



Interest and other income increased $0.9 million from $0.1 million for the

six months ended June 30, 2013 to $1.0 million for the same period in

2014. The increase is primarily due to non-recurring income from the sale

of bed licenses at two facilities.

Expenses

Expenses increased $13.1 million, or 60.6%, from $21.6 million for the three months ended June 30, 2013 to $34.7 million for the same period in 2014. The increase was primarily due to increases of $3.5 million in reserve for uncollectible loans and other receivables, $3.4 million in interest expense incurred and $2.8 million in general and administrative expenses. Expenses decreased $2.6 million, or 3.9%, from $67.8 million for the six months ended June 30, 2013 to $65.1 million for the same period in 2014. The decrease was primarily due to decreases of $10.5 million in loss on extinguishment of debt and $5.6 million in general and administrative expenses, offset by increases of $3.9 million in depreciation and amortization, $3.5 million in reserve for uncollectible loans and other receivables and $3.1 million in interest expense incurred. 42



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Detailed changes in our expenses for the three and six months ended June 30, 2014 compared to the same period in 2013 were as follows:

Interest expense incurred increased $3.4 million, or 39.8%, from $8.6

million for the three months ended June 30, 2013 to $12.0 million for the

same period in 2014. The increase was a result of an increase in interest

related to the bonds issued in the fourth quarter of 2013 offset by the decrease in interest related to the pay down of debt. Interest expense incurred increased $3.1 million, or 14.7%, from $21.0 million for the six months ended June 30, 2013 to $24.1 million for the same period in 2014. The increase was a result of an increase in interest related to the bonds issued in the fourth quarter of 2013 offset by the decrease in interest related to the pay down of debt.



Amortization of deferred financing costs remained materially consistent

for the three months ended June 30, 2013 compared to the same period in

2014.

Amortization of deferred financing costs remained materially consistent for the six months ended June 30, 2013 compared to the same period in 2014.

Depreciation and amortization expense increased $2.3 million, or 28.9%, from $8.1 million for the three months ended June 30, 2013 to $10.4 million for the same period in 2014. The increase was a result of an



increase in depreciation expense associated with newly acquired facilities

and facilities placed into service during 2013 and 2014.

Depreciation and amortization expense increased $3.9 million, or 23.9%, from $16.1 million for the six months ended June 30, 2013 to $19.9 million for the same period in 2014. The increase was a result of an increase in depreciation expense associated with newly acquired facilities and facilities placed into service during 2013 and 2014.



General and administrative expense increased $2.8 million, or 82.0%, from

$3.4 million for the three months ended June 30, 2013 to $6.3 million for

the same period in 2014. This increase was primarily due to an increase in

non-cash stock-based compensation expense related to the 2013 Long-Term

Incentive Plan and an increase in salaries and bonuses as a result of the

hiring of additional employees.

General and administrative expense decreased $5.6 million, or 32.5%, from $17.3 million for the six months ended June 30, 2013 to $11.7 million for the same period in 2014. This decrease was primarily due to $9.7 million of non-cash stock-based compensation expense that was recorded as a result of the vesting of outstanding options in connection with the IPO in 2013 compared to $2.6 million of non-cash stock based compensation expense that was recorded in 2014 related to the 2013 Long-Term Incentive Plan offset by a $2.2 million increase in salaries and bonuses as a result of the hiring of additional employees.



Transaction costs increased $0.6 million from $0.5 million for the three

months ended June 30, 2013 to $1.0 million for the same period in 2014.

This increase was primarily due to the acquisition of 10 properties during

the six months ended June 30, 2014 compared to the acquisition of only eight properties during the same period in 2013. Transaction costs increased $1.9 million from $0.7 million for the six months ended June 30, 2013 to $2.6 million for the same period in 2014. This increase was primarily due to the acquisition of 24 properties during the six months ended June 30, 2014 compared to the acquisition of only eight properties during the same period in 2013.



There was no loss on impairment of assets expense for the three months

ended June 30, 2014 and 2013.

Loss on impairment of assets expense was $0.9 million and $0 for the six months ended June 30, 2014 and 2013 respectively. The increase was due to a non-cash loss on one facility in the first quarter of 2014 where a portion of the carrying value was not deemed recoverable. Reserve for uncollectible loan and accounts receivable increased $3.5 million from $16,000 for the three months ended June 30, 2013 to $3.5 million for the same period in 2014. This increase was primarily due to



additional expense incurred to reserve against outstanding loans and other

receivable balances related to two operators.

Reserve for uncollectible loan and accounts receivable increased $3.5 million from $30,000 for the six months ended June 30, 2013 to $3.5 million for the same period in 2014. This increase was primarily due to additional expense incurred to reserve against outstanding loans and other receivable balances related to two operators.



Loss (gain) on sale of assets, net, remained materially consistent for the

three months ended June 30, 2013 compared to the same period in 2014.

Loss (gain) on sale of assets, net, remained materially consistent for the six months ended June 30, 2013 compared to the same period in 2014.

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Loss on extinguishment of debt increased $0.5 million from $0 for the

three months ended June 30, 2013 to $0.5 million for the same period in

2014. The increase is due to the non-cash write-offs related to the

refinancing of the Revolving Credit Facility in 2014.

Loss on extinguishment of debt decreased $10.5 million, or 95.4%, from $11.0 million for the six months ended June 30, 2013 to $0.5 million for the same period in 2014. The decrease primarily relates to the non-cash write-offs related to debt that was settled in conjunction with the IPO in 2013.

Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings. We believe that the net cash provided by operations and availability under our Credit Facility, as defined below, will be adequate to fund our operating requirements, debt service and the payment of dividends in accordance with REIT requirements of the U.S. federal income tax laws for the next twelve months. We expect to meet our long-term liquidity requirements, such as scheduled debt maturities, property acquisitions, new construction and reinvestment projects, through long-term secured and unsecured borrowings, the issuance of additional equity securities or, in connection with acquisitions of additional properties, the issuance of OP units of the Partnership. We intend to repay indebtedness incurred under our Credit Facility from time to time, to provide capacity for acquisitions or otherwise, out of cash flow and from the proceeds of issuances of unsecured notes, additional shares of common stock of AVIV and other securities. We intend to invest in additional properties and portfolios as suitable opportunities arise and adequate sources of financing are available. We are currently evaluating additional potential investments consistent with the normal course of our business. These potential investments are in various stages of evaluation with both existing and new operators and include acquisitions, construction projects, capital reinvestment projects and other investment opportunities. There can be no assurance as to whether or when any portion of these investments will be completed. Our ability to complete investments is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with the counterparties and our ability to finance the purchase price. We may not be successful in identifying and consummating suitable acquisitions or investment opportunities, which may impede our growth and negatively affect our results of operations and may result in the use of a significant amount of management resources. We expect that future investments in properties will depend on and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of unsecured notes or shares of common stock of AVIV, or other securities or borrowings (including borrowings under our Credit Facility).



Cash Flows

Six months ended June 30, 2014 compared to six months ended June 30, 2013:

Cash provided by operations increased $23.3 million from $21.5 million for

the six months ended June 30, 2013 to $44.8 million for the same period in

2014. The increase was primarily due to a $16.1 million increase in cash

from rental income related to properties acquired during 2013 and 2014 and

a $5.6 million decrease in cash used for general and administrative

expenses in 2014 during the six months ended June 30, 2014 compared with

the same period in 2013. Cash used in investing activities increased $158.9 million from $41.8



million for the six months ended June 30, 2013 to $200.7 million for the

same period in 2014. This increase was primarily due to the increase in

funds used for the purchase of real estate investments in the six months ended June 30, 2014, as compared to the same period in 2013.



Cash provided by financing activities increased $136.5 million from $17.7

million for the six months ended June 30, 2013 to $154.1 million for the

same period in 2014. The increase was primarily due to a decrease of

$188.0 million in net debt borrowings and repayments, offset by a decrease

in net public offering proceeds of $67.0 million in 2014 as compared to

the same period in 2013. 44



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April 2014 Public Offering of Shares of Common Stock of AVIV

On April 9, 2014, AVIV priced its underwritten public offering of 8,000,000 shares of common stock at a public offering price of $24.10 per share. The underwriters had a 30-day option to purchase up to an additional 1,200,000 shares of common stock, which was exercised in full on April 10, 2014. The Company received net proceeds from the offering of approximately $211.3 million, after deducting discounts, commissions and other offering costs. On April 15, 2014, the Company used approximately $118.0 million of the net proceeds from the offering to repay all outstanding indebtedness under the Revolving Credit Facility (as defined below). The remaining proceeds of approximately $93.7 million were used for general corporate purposes, including the potential acquisition of additional properties.



Indebtedness Outstanding

Our indebtedness outstanding consists principally of borrowings under our 2019 Notes and 2021 Notes. We had total indebtedness of approximately $666.1 million (inclusive of our debt premium) outstanding as of June 30, 2014. Substantially all of such indebtedness is scheduled to mature in 2016 or thereafter. As of June 30, 2014, we were in compliance with all of the financial covenants of our outstanding debt and lease agreements and the indentures governing our 2019 Notes and 2021 Notes.



7 3/4% Senior Notes due 2019

In February 2011, April 2011, and March 2012, we, through the Partnership and Aviv Healthcare Capital Corporation, or the Issuers, issued an aggregate of $400 million of 7 3/4% Senior Notes due 2019, which we refer to as the 2019 Notes, in a series of private placements. The Issuers subsequently conducted exchange offers in which all of the 2019 Notes issued in the aforementioned private placements were exchanged for freely tradable notes that have been registered under the Securities Act. Each of the Issuers is a majority owned subsidiary of AVIV. The obligations under the 2019 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by AVIV and certain of our existing and, subject to certain exceptions, future subsidiaries. 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 dates of February 15 and August 15 of each year. Premiums of approximately $2.75 million and $1.0 million were associated with the offerings of the $100 million of 2019 Notes in April 2011 and the $100 million of 2019 Notes in March 2012, respectively. The premiums will be amortized as an adjustment to the yield on the 2019 Notes over their term. The 2019 Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after February 15, 2015, at the redemption prices set forth in the indenture governing the 2019 Notes, plus accrued and unpaid interest to the applicable redemption date. In addition, prior to February 15, 2015, the Issuers may redeem all or a portion of the 2019 Notes at a redemption price equal to 100% of the principal amount of the 2019 Notes redeemed, plus a "make-whole" premium, plus accrued and unpaid interest to the applicable redemption date. The indenture governing the 2019 Notes contains restrictive covenants that, among other things, restrict the ability of AVIV, the Issuers and their restricted subsidiaries to: (i) incur or guarantee additional unsecured indebtedness; (ii) incur or guarantee secured indebtedness; (iii) pay dividends or distributions on, or redeem or repurchase, their capital stock; (iv) make certain investments or other restricted payments; (v) sell assets; (vi) create liens on their assets; (vii) enter into transactions with affiliates; (viii) merge or consolidate or sell all or substantially all of their assets; and (ix) pay dividends or other amounts to AVIV. The indenture governing the 2019 Notes also provides for customary events of default, including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal of, the 2019 Notes, the failure to comply with certain covenants and agreements specified in the indenture governing the 2019 Notes for a period of time after notice has been provided, the acceleration of other indebtedness resulting from the failure to pay principal on such other indebtedness prior to its maturity and certain events of insolvency. If any event of default occurs, the principal of, premium, if any, and accrued interest on all of the then outstanding 2019 Notes may become due and payable immediately.



6% Senior Notes due 2021

In October 2013, the Issuers issued $250 million of 6% Senior Notes due 2021, or the 2021 Notes, and together with the 2019 Notes, the Senior Notes, in a private placement. The Issuers subsequently conducted an exchange offer in which all of the 2021 Notes issued in the aforementioned private placement were exchanged for freely tradable notes that have been registered under the Securities Act. The obligations under the 2021 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by AVIV and certain of our existing and, subject to certain exceptions, future subsidiaries. 45



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The 2021 Notes are unsecured senior obligations of the Issuers and will mature on October 15, 2021. The 2021 Notes bear interest at a rate of 6.00% per annum, payable semiannually to holders of record at the close of business on the April 1 or the October 1 immediately preceding the interest payment dates of April 15 and October 15 of each year. The 2021 Notes are redeemable at the option of the Issuers, in whole or in part, at any time, and from time to time, on or after October 15, 2017, at the redemption prices set forth in the indenture governing the 2021 Notes, plus accrued and unpaid interest to the applicable redemption date. In addition, prior to October 15, 2017, the Issuers may redeem all or a portion of the 2021 Notes at a redemption price equal to 100% of the principal amount of the 2021 Notes redeemed, plus a "make-whole" premium, plus accrued and unpaid interest to the applicable redemption date. At any time, or from time to time, on or prior to October 15, 2016, the Issuers may redeem up to 35% of the principal amount of the 2021 Notes, using the proceeds of specific kinds of equity offerings, at a redemption price of 106% of the principal amount to be redeemed, plus accrued and unpaid interest, if any, to the applicable redemption date. The indenture governing the 2021 Notes contains restrictive covenants that, among other things, restrict the ability of AVIV, the Issuers and their restricted subsidiaries to: (i) incur or guarantee additional unsecured indebtedness; (ii) incur or guarantee secured indebtedness; (iii) pay dividends or distributions on, or redeem or repurchase, their capital stock; (iv) make certain investments or other restricted payments; (v) sell assets; (vi) create liens on their assets; (vii) enter into transactions with affiliates; (viii) merge or consolidate or sell all or substantially all of their assets; and (ix) pay dividends or other amounts to AVIV. The indenture governing the 2021 Notes also provides for customary events of default, including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal of, the 2021 Notes, the failure to comply with certain covenants and agreements specified in the indenture governing the 2021 Notes for a period of time after notice has been provided, the acceleration of other indebtedness resulting from the failure to pay principal on such other indebtedness prior to its maturity, and certain events of insolvency. If any event of default occurs, the principal of, premium, if any, and accrued interest on all the then outstanding 2021 Notes may become due and payable immediately.



Credit Facility

On May 14, 2014, we, through the Partnership and Aviv Healthcare Capital Corporation, with certain of our subsidiaries as guarantors, entered into a $600 million unsecured revolving credit facility with Bank of America, N.A. (as amended from time to time, the Credit Facility). The Credit Facility has an accordion feature that may allow us to increase the availability thereunder by an additional $200 million to a total availability of $800 million. The Credit Facility had an outstanding balance of $0 as of June 30, 2014. On each payment date, we pay interest only in arrears on any outstanding principal balance of the Credit Facility. The Credit Facility bears interest at the rate of LIBOR plus a margin of 170 basis points to 225 basis points, depending on our leverage ratio, and the applicable margin was 190 basis points as of June 30, 2014. If the Partnership achieves an investment grade rating on senior unsecured long-term debt from at least two of S&P, Fitch and Moody's, or investment grade status, then the margin reduces to 90 basis points to 170 basis points, depending on the quality of the investment grade rating. The initial term of the Credit Facility expires on May 14, 2018 with a one-year extension option provided that certain conditions precedent are satisfied. The proceeds from the Credit Facility are available for general corporate purposes. The Credit Facility may be repaid from time to time at our option, and amounts repaid under the Credit Facility may be redrawn. Prior to when the Partnership achieves investment grade status, an unused fee equal to 25 basis points to 35 basis points of the unused balance on the Credit Facility is due quarterly. When the Partnership achieves investment grade status, a facility fee equal to 12.5 basis points to 30 basis points on the aggregate committed amount under the Credit Facility is due quarterly.



The amount available for us to borrow and our ability to borrow under the Credit Facility is subject to our ongoing compliance with a number of customary restrictive covenants, including:

a leverage ratio (defined as consolidated total indebtedness to total

asset value) of less than 60%, an unencumbered leverage ratio (defined as consolidated total unsecured



indebtedness to total unencumbered asset value) of less than or equal to

60%, a consolidated secured leverage ratio (defined as consolidated total secured indebtedness to total asset value) of less than or equal to 30%, a consolidated unsecured interest coverage ratio (defined as net revenue



from unencumbered assets to interest expense on unsecured indebtedness)

equal to or greater than 2.00 to 1.00, a minimum fixed charge coverage ratio (defined as consolidated earnings



before interest, taxes, depreciation and amortization to consolidated

fixed charges) of 1.50:1.00, 46



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a minimum tangible net worth equal to at least $539.2 million plus 75% of

the net proceeds of any additional equity issuances, and



if the Partnership has not then achieved investment grade status, secured

recourse indebtedness less than or equal to 10% of the consolidated total

asset value.

Under the Credit Facility, our distributions may not exceed the greater of (i) 95% of our Adjusted Funds From Operations, as defined therein, or (ii) the amount required for us to qualify and maintain our status as a REIT. If a default or event of default occurs and is continuing, we may be precluded from making certain distributions. Other Loans In June 2012, a wholly-owned indirect subsidiary of AVIV assumed a HUD loan with a balance of approximately $11.5 million. Interest is 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. As of June 30, 2014, the balance of such loan was $11.1 million (excluding $2.4 million of net debt premium balance).



See Note 8, Debt, in the notes to the unaudited consolidated financial statements included in this report for additional information.

Contractual Obligations

The following table shows the amounts due in connection with the contractual obligations described below as of June 30, 2014 (including future interest payments): Payments Due by Period Less More than than 1 Year 1-3 Years 3-5 Years 5 Years Total (in thousands) Secured loans $ 716$ 1,431$ 1,431$ 18,127$ 21,705 6% Senior Notes Due 2021 (1) 15,000 30,000 30,000 283,750 358,750 7 3/4% Senior Notes due 2019 (2) 31,000 62,000 451,667 - 544,667 Total $ 46,716$ 93,431$ 483,098$ 301,877$ 925,122



(1) Reflects $250 million outstanding for our 2021 Notes.

(2) Reflects $400 million outstanding for our 2019 Notes.

Off-Balance Sheet Arrangements

As of June 30, 2014, the Company did not have any off-balance sheet arrangements.

Presentation of Non-GAAP Financial Information

In addition to the results of operations presented above, we are presenting certain supplemental financial measures that are derived on the basis of methodologies other than in accordance with United States generally accepted accounting principles, or GAAP. The "non-GAAP" financial measures used herein include FFO, Normalized FFO, AFFO, EBITDA and Adjusted EBITDA. We derive these measures as follows:



FFO is defined by the National Association of Real Estate Investment

Trusts, or NAREIT, as net income (computed in accordance with GAAP),

excluding gains and losses from sales of property (net) and impairments of

depreciated real estate, plus real estate depreciation and amortization

(excluding amortization of deferred financing costs) and after adjustments

for unconsolidated partnerships and joint ventures. Applying the NAREIT definition to our financial statements results in FFO representing net



income before depreciation and amortization, loss on impairment, and gain

(loss) on sale of assets (net). Normalized FFO represents FFO before loss on extinguishment of debt, reserves for uncollectible loan receivables, transaction costs and severance costs. 47



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Table of Contents

AFFO represents Normalized FFO before amortization of deferred financing

costs, non-cash stock (unit)-based compensation, straight-line rental income (net) and rental income from intangible amortization (net).



EBITDA represents net income before interest expense (net), amortization

of deferred financing costs and depreciation and amortization.



Adjusted EBITDA represents EBITDA before impairment of assets, gain (loss)

on sale of assets (net), transaction costs, write off of straight-line

rents, non-cash stock-based compensation, loss on extinguishment of debt and reserves for uncollectible loan receivables. Our management uses FFO, Normalized FFO, AFFO, EBITDA and Adjusted EBITDA as important supplemental measures of our operating performance and liquidity. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. The term FFO was designed by the real estate industry to address this issue and as an indicator of a company's ability to incur and service debt. Because FFO, Normalized FFO, and AFFO exclude depreciation and amortization unique to real estate, impairment, gains and losses from property dispositions and extraordinary items and because EBITDA and Adjusted EBITDA exclude certain non-cash charges and adjustments and amounts spent on interest and taxes, they provide our management with performance measures that, when compared year over year or with other REITs, reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and, with respect to FFO, Normalized FFO, and AFFO, interest costs, in each case providing perspectives not immediately apparent from net income. In addition, we believe that FFO, Normalized FFO, AFFO, EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. We offer these measures to assist the users of our financial statements in assessing our financial performance and liquidity under GAAP, but these measures are non-GAAP measures and should not be considered measures of liquidity, alternatives to net income or indicators of any other performance measure determined in accordance with GAAP, nor are they indicative of funds available to fund our cash needs, including our ability to make payments on our indebtedness. In addition, our calculations of these measures are not necessarily comparable to similar measures as calculated by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors should not rely on these measures as a substitute for any GAAP measure, including net income, cash flows provided by operating activities or revenues. Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Other Information (in thousands) Net cash flows provided by operating activities $ 28,603$ 25,465$ 44,847$ 21,498 Net cash flows used in investing activities (90,061 ) (35,722 ) (200,694 ) (41,780 ) Net cash flows provided by (used in) financing activities 91,209 (21,725 ) 154,139 17,672 FFO (1) 18,908 21,728 40,739 18,023 Normalized FFO (1) 23,668 22,199 47,044 29,704 AFFO (1) 25,957 21,186 49,531 36,846 EBITDA (2) 31,865 30,886 65,932 40,790 Adjusted EBITDA (2) 39,525 31,621 77,124 62,824 48



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Table of Contents (1) The following table is a reconciliation of our net income to FFO, Normalized FFO, and AFFO: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Funds from Operations (in thousands) (in thousands) Net income $ 8,460$ 13,404$ 19,916$ 1,965 Depreciation and amortization 10,439 8,099 19,948 16,097 Loss on impairment - - 862 - Loss (gain) on sale of assets, net 9 225 13 (39 ) Funds from Operations 18,9087 21,728 40,739 18,023 Loss on extinguishment of debt 501 - 501 10,974 Reserve for uncollectible loan receivables 3,211 11 3,211 11 Transaction costs 1,048 460 2,593 696 Normalized Funds from Operations 23,668 22,199 47,044 29,704 Amortization of deferred financing costs 975 805 1,956 1,706 Non-cash stock-based compensation 1,511 39 2,632 10,392 Straight-line rental income, net (58 ) (1,491



) (1,694 ) (4,224 ) Rental income from intangible amortization, net (139 ) (366 ) (407 ) (732 )

Adjusted Funds from Operations $ 25,957$ 21,186



$ 49,531$ 36,846

The following table is a reconciliation of our cash flows provided by operating activities to FFO, Normalized FFO, and AFFO:


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