BROOKDALE SENIOR LIVING INC.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
BROOKDALE SENIOR LIVING INC.
See accompanying notes to condensed consolidated financial statements.
BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is the leadingan operator of senior living communities throughout the United States. The Company is committed to providing senior living solutions primarily within properties that are designed, purpose-built, and operated to provide quality service, care, and living accommodations for residents. The Company operates and manages independent living, assisted living, and dementia-care communitiesmemory care, and continuing care retirement centerscommunities ("CCRCs"). Through its ancillary services programs, theThe Company also offers a range of home health, hospice, and outpatient therapy services to residents of many of its communities and to seniors living outside of its communities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("US GAAP") for interim financial informationand pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position, results of operations, and cash flows of the Company as of September 30, 2018, and for all periods presented. The condensed consolidated financial statements are prepared on the accrual basis of accounting. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that theseThese interim financial statements should be read in conjunction with the audited financial statements and the notes thereto together with management's discussion and analysis of financial condition and results of operations, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 filed with the SEC on February 22, 2018.14, 2019. Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations.
Except for the changes for the impact of the recently adopted accounting pronouncements discussed in this Note, the Company has consistently applied its accounting policies to all periods presented in these condensed consolidated financial statements.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Brookdale and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.eliminated upon consolidation. Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence over governance and operation,operations, are accounted for by the equity method. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying condensed consolidated financial statements. Noncontrolling interest represents the share of consolidated entities owned by third parties. Noncontrolling interest is adjusted for the noncontrolling holder's share of additional contributions, distributions, and the proportionate share of the net income or loss of each respective entity.
The Company continually evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, Consolidation ("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this analysis on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Refer to Note 14 for more information about the Company's VIE relationships.
Revenue Recognition
Resident Fees
Resident fee revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are due from residents or third-party payors and include variable consideration for retroactive adjustments, if any, under reimbursement programs. Performance obligations are determined based on the nature of the services provided. Resident fee revenue is recognized as performance obligations are satisfied.
Under the Company's senior living residency agreements, which are generally for a contractual term of 30 days to one year, the Company provides senior living services to residents for a stated daily or monthly fee. The Company has elected the lessor practical expedient within Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") and recognizes, measures, presents, and discloses the revenue for housing services under the Company's senior living residency agreements for independent living and assisted living services in accordance withbased upon the provisionspredominant component, either the lease or nonlease component, of ASC 840, Leases ("ASC 840"). The Company recognizes revenue for assisted living care, skilled nursing residency and inpatient therapy services, ancillary services, and personalized health services in accordance with the provisions of ASC 606, Revenue from Contracts with Customers ("ASC 606").contracts. The Company has determined that the senior living services included under the daily or monthly feeCompany’s independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer and are a series of distinct services that are considered one performance obligation which is satisfied over time.transfer. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with Customers ("ASC 606") for its
Through its ancillary services programs,
independent living, assisted living, and memory care residency agreements for which it has estimated that the nonlease components of such residency agreements are the predominant component of the contract.
The Company enters into contracts to provide home health, hospice, and outpatient therapy services. The Company recognizes revenue for home health, hospice, and outpatient therapy services in accordance with the provisions of ASC 606. Each service provided under the contract is capable of being distinct, and thus, the services are considered individual and separate performance obligations. The performance obligations which are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives revenue for services under various third-party payor programs which include Medicare, Medicaid, and other third-party payors. Settlements with third-party payors for retroactive adjustments due to audits, reviews, or investigations are included in the determination of the estimated transaction price for providing services. The Company estimates the transaction price based on the terms of the contract with the payor, correspondence with the payor and historical payment trends, and retroactive adjustments that differ from the Company's estimates are recognized in future periods as final settlements are determined.
Management Services
The Company manages certain communities under contracts which provide periodic management fee payments to the Company. Management fees are generally determined by an agreed upon percentage of gross revenues (as defined in the management agreement). Certain management contracts also provide for an annual incentive fee to be paid to the Company upon achievement of certain metrics identified in the contract. The Company recognizes revenue for community management services in accordance with the provisions of ASC 606. Although there are various management and operational activities performed by the Company under the contracts, the Company has determined that all community operations management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company estimates the amount of incentive fee revenue expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided to the owners of the communities.provided.The Company’s estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the condensed consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed communities" on the condensed consolidated statements of operations.
Gain on Sale of Assets
The Company regularly enters into real estate transactions which may include the disposal of certain communities, including the associated real estate. The Company recognizes income from real estate sales under ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets ("ASC 610-20"). Under ASC 610-20, income is recognized when the transfer of control occurs and the Company applies the five-step model for recognition to determine the amount and timing of income to recognize for all real estate sales.
The Company accounts for the sale of equity method investments under ASC 860, Transfers and Servicing ("("ASC 860"). Under
ASC 860, income is recognized when the transfer of control of the equity interest occurs and the Company has no continuing involvement with the transferred financial assets.
Stock-Based Compensation
The Company follows ASC 718, Compensation - Stock Compensation ("ASC 718")in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date are recognized when incurred.
Certain of the Company’s employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance targets.
For all share-based awards with graded or cliff vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For graded-vesting awards with performance-based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of achievement. Performance goals are evaluated quarterly. If such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and DisclosuresMeasurement 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. 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 or liabilities in active markets.
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.
Cash and cash equivalents, marketable securities, and restricted cash are reflected in the accompanying condensed consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to the short maturity.
Marketable Securities
Investments in commercial paper and corporate bond instruments with original maturities of greater than three months are classified as marketable securities.
Goodwill and Intangible Assets
The Company follows ASC 350, Goodwill and Other Intangible Assets, and tests goodwill for impairment annually during the fourth quarteras of October 1 or whenever indicators of impairment arise. Factors the Company considers important in its analysis of whether an indicator of impairment exists include a significant decline in the Company's stock price or market capitalization for a sustained period since the last testing date, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. The Company is not required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value of a reporting unit is less than its carrying value. The fair values used in the quantitative goodwill impairment test are estimated using Level 3 inputs based upon discounted future cash flow projections for the reporting
unit. These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates, and discount rates. The Company also considers market based measures such as earnings multiples in its analysis of estimated fair values of its reporting units. If the quantitative goodwill impairment test results in a reporting unit's carrying value exceeding its estimated fair value, an impairment charge will be recorded based on the difference in accordance with ASU 2017-04, Intangibles - Goodwill and Other, with thedifference. The impairment charge is limited to the amount of goodwill allocated to the reporting unit.
Acquired intangibleLong-lived Asset Impairment
Long-lived assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and all intangible assets(including right-of-use assets) are reviewed for impairment if indicatorswhenever events or changes in circumstances indicate that the carrying amount of impairment arise. The evaluationan asset may not be recoverable. Recoverability of impairmentlong-lived assets held for definite-lived intangibles is based uponuse are assessed by a comparison of the carrying valueamount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset.asset, calculated utilizing the lowest level of identifiable cash flows. If estimated future undiscounted net cash flows are less than the carrying valueamount of the asset then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any shortfall fromamount in excess of fair value recognized as an expense in the current period.
Indefinite-lived intangible assets are not amortized but are tested for impairment annually during the fourth quarter or more frequently as required. The impairment test consists Undiscounted cash flow projections and estimates of a comparison of the estimated fair value amounts are based on a number of the indefinite-lived intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized for that difference.assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).
Amortization of the Company's definite-lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
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| | |
Asset Category | | Estimated
Useful Life
(in years)
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Trade names | | 2 – 5 |
Management contracts | | 3 – 9 |
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased, and managed communities under a master insurance program, the Company's current policies provide for deductibles for each and every claim. As a result, the Company is, in effect, self-insured for claims that are less than the deductible amounts. In addition, the Company maintains a high deductible workers compensation program and a self-insured employee medical program.
The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel, and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored, and estimates are updated as information becomes available.
During the nine months ended September 30, 2018 and 2017, the Company reduced its estimate for the amount of expected losses for general liability and professional liability and workers compensation claims, based on recent historical claims experience. The reduction in these accrued reserves decreased facility operating expense by $1.8 million and $9.3 million for the three and nine months ended September 30, 2018, respectively, and by $3.7 million and $9.3 million for the three and nine months ended September 30, 2017, respectively.
Lease Accounting
The following is the Company's lease accounting policy under ASC 842 subsequent to the adoption. Refer to Recently Adopted Accounting Pronouncements in this Note 2for significant changes that resulted from the adoption effective January 1, 2019. The Company, as lessee, recognizes a right-of-use asset and a lease liability on the Company’s condensed consolidated balance sheet for its community, office, and equipment leases. As of the commencement date of a lease, a lease liability and corresponding right-of-use asset is established on the Company’s condensed consolidated balance sheet at the present value of future minimum lease payments. The Company's community leases generally contain fixed annual rent escalators or annual rent escalators based on an index, such as the consumer price index. The future minimum lease payments recognized on the condensed consolidated balance sheet include fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate on the lease commencement date. The Company recognizes lease expense as incurred for additional variable payments. For the Company’s leases that do not contain an implicit rate, the Company utilizes its estimated incremental borrowing rate in determining the present value of lease payments based on information available at commencement of the lease, which reflects the fixed rate
at which the Company could borrow a similar amount for the same term on a collateralized basis. Leases with an initial term of 12 months or less are not recorded on the Company’s condensed consolidated balance sheet and instead are recognized as lease expense as incurred.
The Company, as lessee, makes a determination with respect to each of its community, office, and equipment leases as to whether each should be accounted for as an operating lease or capital lease.financing lease in accordance with the provisions of ASC 842. The classification criteria is based on estimates regarding the fair value of the leased community,asset, minimum lease payments, effective cost of funds, the economic life of the communityasset and certain other terms in the lease agreements. In a business combination, the Company assumes the lease classification previously determined by the prior lessee absent a modification, as determined by ASC 840 in the assumed lease agreement. Payments
For operating leases, payments made under operating leaseslease arrangements are accounted for in the Company's condensed consolidated statements of operations as operating lease expense for actual rent paid, generally plus or minus a straight-line adjustment for estimated minimum lease escalators if applicable. The right-of-use asset is generally reduced each period by an amount equal to the difference between the operating lease expense and amortizationthe amount of deferred gains in situations where sale-leaseback transactions have occurred.
For capital and financing lease obligation arrangements, a liability is establishedexpense on the Company's condensed consolidated balance sheet representinglease liability utilizing the present valueeffective interest method. Subsequent to the impairment of an operating lease right-of-use asset, the Company recognizes operating lease expense consisting of the future minimum lease payments andreduction of the right-of-use asset on a residual value for financing leases and a corresponding long-term asset is recorded in property, plant and equipment and leasehold intangibles in the condensed consolidated balance sheet. For capital lease assets, the asset is depreciatedstraight-line basis over the remaining lease term and the amount of expense on the lease liability utilizing the effective interest method.
For financing leases, the Company recognizes interest expense on the lease liability utilizing the effective interest method. Additionally, the right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term unless therethe lease contains an option to purchase the underlying asset that the Company is a bargain purchase optionreasonably certain to exercise in which case the asset is depreciated over the useful life. For financing lease assets, the asset is depreciated over the useful life of the underlying asset. Leasehold improvements purchased during the term of the lease are amortized over the shorter of their economic life or the lease term.
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. In addition, all rent-free or rent holiday periods are recognized in lease expense on a straight-line basis over the lease term, including the rent holiday period.
Sale-leaseback accounting is applied toFor transactions in which an owned community is sold and leased back from the buyer (sale-leaseback transactions), the Company recognizes an asset sale and lease accounting is applied if certain continuing involvement criteria are met. Under sale-leaseback accounting,the Company has transferred control of the community. For such transactions, the Company removes the community and related liabilitiestransferred assets from the condensed consolidated balance sheet. Gainsheet and a gain or loss on the sale is deferredrecognized for the difference between the carrying value of the asset and recognized as a reduction of facility lease expensethe transaction price for operating leases and a reduction of interest expense for capital leases. In cases of sale-leasebackthe sale transaction. For sale‑leaseback transactions in which the Company has continuing involvement, other than normal leasing activities,not transferred control of the underlying asset, the Company does not recordrecognize an asset sale or derecognize the saleunderlying asset until control is transferred. For such involvement terminates.
For leases in whichtransactions, the Company is involved withcontinues to depreciate the construction of a building,asset over its useful life. Additionally, the Company accounts for the leases during the construction period under the provisions of ASC 840. Ifany amounts received as a financing lease liability and the Company concludesrecognizes interest expense on the financing lease liability utilizing the effective interest method with the interest expense limited to an amount that it has substantively allis not greater than the cash payments on the financing lease liability over the term of the risks of ownership during construction of a leased property and therefore is deemedlease.
Refer to the ownerCompany’s revenue recognition policy for discussion of the projectaccounting policy for accounting purposes, it records an asset and related financing obligation for the amount of total project costs related to construction in progress. Once construction is complete, the Company considers the requirements under ASC subtopic 840-40. If the arrangement qualifies for sale-leaseback accounting, the Company removes the assets and related liabilities from the condensed consolidated balance sheet. If the arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation and depreciate the assets overresidency agreements, which include the lease term.of an asset.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business to assist companies in determining whether transactions should be accounted for as an asset acquisition or a business combination. Under ASU 2017-01, if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business and the transaction is accounted for as an asset acquisition. Transaction costs associated with asset acquisitions are capitalized while those associated with business combinations are expensed as incurred. The Company adopted ASU 2017-01 on a prospective basis on January 1, 2018. The Company anticipates that the changes to the definition of a business may result in future acquisitions of real estate, communities or senior housing operating companies being accounted for as asset acquisitions.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"). ASU 2016-18 intends to address the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-18 on January 1, 2018 and the changes required by ASU 2016-18 were applied retrospectively to all periods presented. The Company has identified that the inclusion of the change in restricted cash within the retrospective presentation of the statements of cash flows resulted in a $4.6 million and $6.3 million decrease to the amount of net cash used in investing activities for the three and nine months ended September 30, 2017, respectively.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented in the statement of cash flows. Among other clarifications on the classification of certain transactions within the statement of cash flows, the amendments in ASU 2016-15 provide that debt prepayment and extinguishment costs will be classified within financing activities within the statement of cash flows. ASU 2016-15 is effective for the Company for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-15 on January 1, 2018 and the changes in classification within the statement of cash flows were applied retrospectively to all periods presented. The Company's retrospective application resulted in a $10.6 million and $11.2 million increase to the amount of net cash provided by operating
activities and a $10.6 million and $11.2 million decrease to the amount of net cash used in financing activities for the three and nine months ended September 30, 2017, respectively.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The five step model defined by ASU 2014-09 requires the Company to (i) identify the contracts with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced disclosure of revenue arrangements. ASU 2014-09 may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). ASU 2014-09, as amended, is effective for the Company's fiscal year beginning January 1, 2018, and the Company adopted the new standard under the modified retrospective approach. Under the modified retrospective approach, the guidance is applied to the most current period presented, recognizing the cumulative effect of the adoption change as an adjustment to beginning retained earnings. The Company has determined that the adoption of ASU 2014-09 did not result in an adjustment to retained earnings as of January 1, 2018.
The Company has determined that there will be a change to the amounts of resident fee revenue and facility operating expense with no net impact to the amount of income from operations, for the impact of implicit price concessions on the estimation of the transaction price. The Company recognized $840.2 million and $2,642.4 million of resident fee revenue and $607.1 million and $1,866.5 million of facility operating expense for the three and nine months ended September 30, 2018, respectively. The impact to resident fee revenue and facility operating expense as a result of applying ASC 606 was a decrease of $2.1 million and $5.2 million for the three and nine months ended September 30, 2018, respectively.
The Company has determined that there will not be any significant change to the annual amount of revenue recognized for management fees under the Company’s community management agreements; however, the Company will recognize an estimated amount of incentive fee revenue earlier during the annual contract period. The Company has determined that there will be a change to the amounts presented for revenue recognized for reimbursed costs incurred on behalf of managed communities and reimbursed costs incurred on behalf of managed communities with no net impact to the amount of income from operations, as a result of the combination of all community operations management activities as a single performance obligation for each contract. The Company recognized $261.4 million and $765.8 million of revenue for reimbursed costs incurred on behalf of managed communities and $261.4 million and $765.8 million of reimbursed costs incurred on behalf of managed communities for the three and nine months ended September 30, 2018, respectively, in accordance with ASU 2014-09. The impact to revenue for reimbursed costs incurred on behalf of managed communities and reimbursed costs incurred on behalf of managed communities as a result of applying ASC 606 was an increase of $11.2 million and $34.9 million for the three and nine months ended September 30, 2018, respectively.
Additionally, real estate sales are within the scope of ASU 2014-09, as amended by ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the scope of subtopic 610-20 and adds guidance for partial sales of nonfinancial assets. Under ASU 2014-09 and ASU 2017-05, the income recognition for real estate sales is largely based on the transfer of control versus continuing involvement under the former guidance. As a result, more transactions may qualify as sales of real estate and gains or losses may be recognized sooner. The Company adopted ASU 2014-09, as amended by ASU 2017-5, under the modified retrospective approach as of January 1, 2018 and will apply the five step revenue model to all subsequent sales of real estate.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its condensed consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability on the condensed consolidated balance sheet for most leases. Additionally, ASU 2016-02 makes targeted changes to lessor accounting, including changes to align certain aspects with the revenue recognition model, and requires enhanced disclosure of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements(" ("ASU 2018-11"). ASU 2018-11 provides entities with a transition
method option to not restate comparative periods presented, but to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, ASU 2018-11 provides entities with a practical expedient allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. ASU 2016-02 and ASU 2018-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The Company plans to adoptadopted these lease accounting standards effective January 1, 2019 utilizing aand utilized the modified retrospective transition method with no adjustments to comparative periods presented. Additionally, the Company elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess, as of January 1, 2019, its prior conclusions on whether an existing contract contains a lease, lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs.
The Company anticipates that theCompany's adoption of ASU 2016-02 will resultresulted in the recognition of materialoperating lease liabilities of $1.6 billion and right-of useright-of-use assets of $1.3 billion on the condensed consolidated balance sheet for its existing community, office, and equipment operating leases and any previously unrecognized right-of use assets will be reviewed for impairment effectivebased on the remaining present value of the minimum lease payments as of January 1, 2019. The future minimum rental payments recognized on the condensed consolidated balance sheet included fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate as of January 1, 2019. Such right-of-use asset amounts were recognized based upon the amount of the recognized lease liabilities, adjusted for accrued lease payments, intangible assets, and the recognition of right-of-use asset impairments. As of December 31, 2018, the Company is unable to reasonably estimate such amounts at this time.had a net liability of $231.4 million
recognized on its condensed consolidated balance sheet for accrued lease payments and intangible assets for operating leases. Additionally, $58.1 million of previously unrecognized right-of-use asset impairments were recognized as a cumulative effect adjustment to beginning accumulated deficit as of January 1, 2019. As a result of the Company’s election of the package of practical expedients within ASU 2016-02, there were no changes to the classification of the Company’s existing operating, capital and financing leases as of January 1, 2019 and there were no changes to the amounts recognized on its condensed consolidated balance sheet for its existing capital and financing leases as of January 1, 2019.
Subsequent to the adoption of ASU 2016-02, lessors are required to separately recognize and measure the lease component of a contract with a customer utilizing the provisions of ASC 842 and the nonlease components utilizing the provisions of ASC 606. To separately account for the components, the transaction price is allocated among the components based upon the estimated stand alone selling prices of the components. Additionally, certain components of a contract which were previously included within the lease element recognized in accordance with ASC 840, Leases ("ASC 840") prior to the adoption of ASU 2016-02 (such as common area maintenance services, other basic services, and executory costs) are recognized as nonlease components subject to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. However, entities are permitted to elect the practical expedient under ASU 2018-11 allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. Entities that elect to utilize the lease/nonlease component combination practical expedient under ASU 2018-11 upon initial application of ASC 842 are required to apply the practical expedient to all new and existing transactions within a class of underlying assets that qualify for the expedient as of the initial application date.
For the year ended December 31, 2018, the Company recognized revenue for housing services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of the former lease accounting standard, ASC 840, and the Company recognized revenue for assistance with activities of daily living, memory care services, healthcare, and personalized health services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of ASC 606.
Upon adoption of ASU 2016-02 and ASU 2018-11, the Company anticipates that it will electelected the lessor practical expedient within ASU 2018-11 and will recognizerecognizes, measures, presents, and discloses the revenue for housing services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts rather than allocating the consideration and separately recognizingaccounting for it under ASC 842 and ASC 606.
The Company has concluded that the nonlease components of the Company’s independent living, assisted living, and memory care residency agreements are the predominant component of the contract for the Company’s existing agreements as of January 1, 2019. As a result of the Company's election of the package of practical expedients within ASU 2016-02, the Company continued to recognize revenue for existing contracts as of December 31, 2018 over the lease term. In addition, ASU 2016-02 has changed the definition of initial direct costs of a lease, with the initial direct costs that are initially deferred and recognized over the term of the lease limited to costs that are both incremental and direct. The Company concluded that the contract origination costs recognized on the condensed consolidated balance sheet as of December 31, 2018 were in excess of the initial direct costs that would have been deferred under the provisions of ASU 2016-02. As a result of the Company’s election of the package of practical expedients, the contract origination costs recognized on the condensed consolidated balance sheet as of December 31, 2018 continued to be amortized during 2019 over the lease term. Additionally, the Company concluded that certain costs previously deferred upon new contract origination are recognized within facility operating expense in 2019 as incurred.
In addition to the previously unrecognized right-of-use asset impairment of $58.1 million, the Company recognized cumulative effect adjustments to beginning accumulated deficit as of January 1, 2019 for the impact of the adoption of accounting standards by its equity method investees and the deferred tax impact of these adjustments. The recognition of the right-of-use assets and corresponding liabilities and the removal of the deferred tax position related to these leases as of December 31, 2018 had a $0.3 million impact on the Company's net deferred tax position. A deferred tax asset of $14.1 million and an increase to the valuation allowance of $13.8 million was recorded against accumulated deficit reflecting the tax impact of the previously unrecognized right-of-use asset impairments.
The adoption of the new accounting standards resulted in the following adjustments to the Company's condensed consolidated balance sheet as of January 1, 2019:
|
| | | |
| (in millions) | |
| Assets | |
| Prepaid expenses and other current assets, net | $ | 67 |
|
| Property, plant and equipment and leasehold intangibles, net | (11 | ) |
| Operating lease right-of-use assets | 1,329 |
|
| Investment in unconsolidated ventures | (2 | ) |
| Other intangible assets, net | (5 | ) |
| Other assets, net | (73 | ) |
| Total assets | $ | 1,305 |
|
| Liabilities and Equity | |
| Refundable fees and deferred revenue | $ | 43 |
|
| Operating lease obligations | 1,618 |
|
| Deferred liabilities | (257 | ) |
| Other liabilities | (43 | ) |
| Total liabilities | 1,361 |
|
| Total equity | (56 | ) |
| Total liabilities and equity | $ | 1,305 |
|
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivable and other financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company plans to adopt ASU 2016-13 effective January 1, 2020 and will recognize any cumulative effect of the adoption as an adjustment to beginning retained earnings with no adjustments to comparative periods presented. The Company is currently evaluating the impact the adoption of ASU 2018-112016-13 will have on its condensed consolidated financial statements and disclosures.
The Company is monitoring recent accounting standard setting activities of the FASB, and the Company continues to evaluate the impact that the adoption of ASU 2016-02 and ASU 2018-11 will have on its condensed consolidated financial statements and disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock equivalents include unvested restricted stock, unvested and vested restricted stock units, and convertible debt instruments and warrants.
During the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock, restricted stock units, and convertible debt instruments and warrants were antidilutive for each period and were not included in the computation of diluted weighted average shares. The weighted average restricted stock and restricted stock units excluded from the calculations of diluted net loss per share were 6.27.8 million and 5.36.2 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and 6.57.5 million and 5.36.6 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
For the ninethree and six months ended SeptemberJune 30, 2018, and 2017, the calculation of diluted weighted average shares excludes the impact of conversion of the principal amount of $316.3 million of the Company's 2.75% convertible senior notes which were repaid in cash at their maturity on June 15, 2018. Refer to Note 9 for more information about the Company's former convertible notes. As of September 30, 2017, the maximum number of shares issuable upon conversion of the notes was approximately 13.8 million (after giving effect to additional make-whole shares issuable upon conversion in connection with the occurrence of certain events). As of September 30, 2017, the maximum number of shares issuable upon conversion of the notes in excess of the amount of principal that would be settled in cash was approximately 3.0 million. In addition, the calculation of diluted weighted average shares excludes the impact of the exercise of warrants to acquire the Company's common stock. As of SeptemberJune 30, 2018, and 2017, the number of shares issuable upon exercise of the warrants was approximately 9.2 million and 10.8 million, respectively.million. During the three months ended March 31, 2019, the option to exercise the remaining outstanding warrants expired unexercised.
4. Acquisitions, Dispositions and Other Significant Transactions
During the period from January 1, 2018 through June 30, 2019, the Company disposed of 30 owned communities. The Company completed salesalso entered into agreements with Ventas, Inc. ("Ventas") and Welltower Inc. ("Welltower") and continued to execute on the transactions with HCP, Inc. ("HCP") announced in 2017, which together restructured a significant portion of sixthe Company's triple-net lease obligations with the Company's largest lessors. As a result of such transactions, as well as other lease expirations and terminations, the Company's triple-net lease obligations on 97 communities and termination of leases on 171 communitieswere terminated during the period from January 1, 2017 through September2018 to June 30, 2018. For2019. During this period, the 104Company also sold its ownership interests in five unconsolidated ventures and acquired six communities that the Company disposed through salespreviously leased or managed. As of June 30, 2019, the Company owned 336 communities, leased 335 communities, managed 17 communities on behalf of unconsolidated ventures, and lease terminations duringmanaged 121 communities on behalf of third parties.
The following table sets forth, for the period from July 1, 2017 through September 30, 2018,periods indicated, the amounts included within the Company's condensed consolidated financial statements include resident fee revenue of $15.0 million and $106.9 million, facility operating expenses of $11.2 million and $75.6 million, and cash lease payments of $4.8 million and $30.5 million for the three months ended September 30, 2018 and 2017, respectively. For the 177127 communities that the Companyit disposed through sales and lease terminations during the period from January 1, 20172018 to June 30, 2019 through the respective disposition dates (of which 124 communities were disposed through sales and lease terminations during the period from April 1, 2018 to June 30, 2019):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Resident fees | | | | | | | |
| Independent Living | $ | — |
| | $ | 29,241 |
| | $ | — |
| | $ | 60,871 |
|
| Assisted Living and Memory Care | 2,176 |
| | 86,151 |
| | 12,282 |
| | 178,267 |
|
| CCRCs | — |
| | 4,213 |
| | — |
| | 10,705 |
|
| Senior housing resident fees | $ | 2,176 |
| | $ | 119,605 |
| | $ | 12,282 |
| | $ | 249,843 |
|
| Facility operating expense | | | | | | | |
| Independent Living | $ | — |
| | $ | 17,016 |
| | $ | — |
| | $ | 35,668 |
|
| Assisted Living and Memory Care | 1,562 |
| | 60,854 |
| | 10,100 |
| | 125,423 |
|
| CCRCs | — |
| | 3,859 |
| | — |
| | 9,917 |
|
| Senior housing facility operating expense | $ | 1,562 |
| | $ | 81,729 |
| | $ | 10,100 |
| | $ | 171,008 |
|
| Cash facility lease payments | $ | 306 |
| | $ | 32,228 |
| | $ | 1,451 |
| | $ | 66,935 |
|
through September
2019 Completed and Planned Dispositions of Owned Communities
During the six months ended June 30, 2018,2019, the Company's condensed consolidated financial statements include resident fee revenueCompany completed the sale of $164.3eight owned communities for cash proceeds of $44.1 million, net of transaction costs, and $408.8 million, facility operating expensesrecognized a net gain on sale of $110.7 million and $287.7 million, and cash lease paymentsassets of $55.2 million and $115.3$1.6 million for the ninethree months ended SeptemberJune 30, 20182019 and 2017, respectively. The resultsa net gain on sale of operationsassets of $0.9 million for the 177six months ended June 30, 2019.
As of June 30, 2019, five communities were reportedclassified as held for sale, resulting in $46.3 million being recorded as assets held for sale and $18.5 million of mortgage debt being included in the following segmentscurrent portion of long-term debt within the condensed consolidated financial statements priorbalance sheet with respect to their disposition dates: Assisted Living (143 communities), Retirement Centers (20 communities) and CCRCs-Rental (14 communities). Additionally, the Company completed the acquisition of six communities during the nine months ended September 30, 2018 and the results of operations of these communities are reported in the following segments within the condensed consolidated financial statements: Assisted Living (three communities), Retirement Centers (two communities) and CCRCs-Rental (one community).
such communities. The closings of the various pending transactions and expected sales of assets described below are, or will be subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. However, thereThere can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
HCP Master Lease Transaction and RIDEA Ventures Restructuring2018 Completed Dispositions of Owned Communities
On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with HCP, Inc. ("HCP"). As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement ("HCP Master Lease") with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
Master Lease Transactions. The Company and HCP amended and restated triple-net leases covering substantially all of the communities the Company leased from HCP as of November 1, 2017 into the HCP Master Lease. During the nine monthsyear ended September 30,December 31, 2018, the Company acquired two communities formerly leased for an aggregate purchase price of $35.4 million and leases with respect to 16 communities were terminated, and such communities were removed from the HCP Master Lease. Leases with respect to 17 additional communities were terminated subsequent to September 30, 2018, and such communities were removed from the HCP Master Lease, which completed the terminationssale of leases on a total of 33 communities as provided in the HCP Master Lease. For22 owned communities for which HCP has not transitioned operations and/or managementcash proceeds of such communities to a third party, the Company continues to manage such communities on an interim basis. The Company continues to lease 43 communities pursuant to the terms$380.7 million, net of the HCP Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, the Company received a $2.5 million annual rent reduction for two communities. The HCP Master Lease also provides that the Company may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.
RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, HCP acquired the Company's 10% ownership interest in one of the Company's RIDEA ventures with HCP in December 2017 for $32.1 million (for which the Company recognized a $7.2 million gain on sale) and the Company's 10% ownership interest in the remaining RIDEA venture with HCP in March 2018 for $62.3 million (for which the Company recognized a $41.7 million gain on sale). The Company provided management services to 59 communities on behalf of the two RIDEA ventures as of November 1, 2017. Pursuant to the multi-part transaction agreement, the Company acquired one community for an aggregate purchase price of $32.1 million in January 2018 and three communities for an aggregate purchase price of $207.4 million in April 2018 and retained management of 18 of such communities. The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management of 37 of such communities. Management agreements for three and 20 such communities were terminated by HCP during the three and nine months ended September 30, 2018, respectively (for which the Company recognized a $0.6 million and $5.6 million non-cash management contract termination gain, respectively), and the Company expects the termination of management agreements on the remaining 17 communities to occur in stages throughout the next six months.
The Company financed the foregoing community acquisitions with non-recourse mortgage financing and proceeds from the sales of its ownership interest in the unconsolidated ventures. See Note 9 to the condensed consolidated financial statements for more information regarding the non-recourse mortgage financing.
In addition, the Company obtained future annual cash rent reductions and waived management termination fees in the multi-part transaction. As a result of the multi-part transaction, the Company reduced its lease liabilities by $9.7 million for the future annual cash rent reductionscosts, and recognized a $9.7 million deferred liability for the consideration received from HCP in advance of the termination of the management agreements for the 37 communities.
As a result of the modification of the remaining lease term for communities subject to capital leases, the Company reduced the carrying value of capital lease obligations and assets under capital leases by $145.6 million in 2017. During the nine months ended September 30, 2018, the results and financial position of the 16 communities for which leases were terminated were deconsolidated from the Company prospectively upon termination of the lease obligations. The Company derecognized the $147.8 million carrying value of the assets under financing leases and the $160.8 million carrying value of financing lease obligations for six communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement. The Company recognized a sale for these six communities and recorded a non-cashnet gain on sale of assets of $6.1 million and $12.6 million for the three and nine months ended September 30, 2018, respectively. Additionally, the$188.6 million. The Company recognizedutilized a non-cash gain on lease termination of $1.8 million for the nine months ended September 30, 2018, for the derecognitionportion of the net carrying valuecash proceeds from the asset sales to repay approximately $174.0 million of associated mortgage debt and debt prepayment penalties. These dispositions included the Company's assets and liabilities under operating and capital leases at the lease termination date. The terminationssale of leases for the 17three communities subsequent to September 30, 2018 are anticipated to result in the Company recording a non-cash gain in fiscal 2018 for the amount by which the carrying value of the operating and capital and financing lease obligations for the 17 communities exceed the carrying value of the Company's assets under operating and capital and financing leases at the lease termination date. As of September 30, 2018, the $217.9 million carrying value of the lease obligations for the 17 communities exceed the $185.1 million carrying value of the assets under operating and capital and financing leases by approximately $32.8 million, primarily for 14 communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement for accounting purposes.
The results of operations for the 17 communities that were disposed through lease terminations subsequent to September 30, 2018
are reported within the following segments within the condensed consolidated financial statements: Retirement Centers (three communities), Assisted Living (13 communities), and CCRCs-Rental (one community). With respect to such 17 communities, the Company's condensed consolidated financial statements include resident fee revenue of $14.8 million and $15.1 million, facility operating expenses of $10.7 million and $10.6 million, and cash lease payments of $4.9 million and $5.4 million forduring the three months ended September 30,March 31, 2018 and 2017, respectively. The Company's condensed consolidated financial statements include resident fee revenue of $44.7 million and $46.0 million, facility operating expenses of $32.1 million and $30.7 million, and cash lease payments of $14.6 million and $16.1 million for the nine months ended September 30, 2018 and 2017, respectively.
For the 17 managed communities for which the Company's management may be terminated, the Company's condensed consolidated financial statements include management feesCompany received cash proceeds of $1.2$12.8 million, net of transaction costs, and $1.1 million forrecognized a net gain on sale of assets of $1.9 million. The Company did not complete any sales of owned communities during the three months ended SeptemberJune 30, 2018 and 2017, respectively. The Company's condensed consolidated financial statements include management fees of $3.5 million for each of the nine months ended September 30, 2018 and 2017.2018.
Ventas
2018 Welltower Lease Portfolioand RIDEA Venture Restructuring
On April 26,In June 2018, the Company entered into severaldefinitive agreements with Welltower to restructureterminate its triple-net lease obligations on 37 communities and to sell the Company's 20% equity interest in its Welltower RIDEA venture to Welltower. During the three months ended June 30, 2018, the Company paid Welltower an aggregate lease termination fee of $58.0 million, recognized a $22.6 million loss on lease termination, received net proceeds of $33.5 million for the sale of equity interest, and recognized a $14.7 million gain on sale of the RIDEA venture. The Company also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities). In addition, the parties separately agreed to allow the Company to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of 128 communities it leased from Ventas, Inc. and certain of its subsidiaries (collectively, "Ventas") aswith annual aggregate base rent up to $5.0 million upon Welltower's sale of such date, includingcommunities, and the Company would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds.
2018 Ventas Lease Portfolio Restructuring
In April 2018, the Company and Ventas entered into a Master Lease and Security Agreement (the "Ventas Master Lease") in connection with the restructuring of a portfolio of 128 communities that it leased from Ventas. The Company estimated the fair value of each of the elements of the restructuring transactions. The fair value of the future lease payments was based upon historical and forecasted community cash flows and market data, including an implied management fee rate of 5% of revenue and a market supported lease coverage ratio (Level 3 inputs). The Ventas Master Lease amendedCompany recognized a $125.7 million non-cash loss on lease modification during the three months ended June 30, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that were unfavorable to the Company given current market conditions on the amendment date in exchange for modifications to the change of control provisions and restated prior leases comprising an aggregate portfoliofinancial covenant provisions of 107 communities into the Ventas Master Lease. Undercommunity leases.
Pursuant to the Ventas Master Lease, and other agreements entered into on April 26, 2018, the 21 additional communities leased by the Company from Ventas pursuant to separate lease agreements have been or will be combined automatically into the Ventas Master Lease upon the first to occur of Ventas' election or the repayment of, or receipt of lender consent with respect to, mortgage debt underlying such communities. During the three months ended September 30, 2018, the community leases for 17 of such communities were combined into the Ventas Master Lease. The Company and Ventas agreed to observe, perform and enforce such separate leases as if they had been combined into the Ventas Master Lease effective April 26, 2018, to the extent not in conflict with any mortgage debt underlying such communities. The transaction agreements with Ventas further provide that the Ventas Master Lease and certain other agreements between the Company and Ventas will be cross-defaulted.
The initial term of the Ventas Master Lease ends December 31, 2025, with two 10-year extension options available to the Company. In the event of the consummation of a change of control transaction of the Company on or before December 31, 2025, the initial term of the Ventas Master Lease will be extended automatically through December 31, 2029. The Ventas Master Lease and separate lease agreements with Ventas, which are guaranteed at the parent level by the Company, provide for total rent in 2018 of $175.0 million for the 128 communities, including the pro-rata portion of an $8.0 million annual rent credit for 2018. The Company will receive an annual rent credit of $8.0 million in 2019, $7.0 million in 2020 and $5.0 million thereafter; provided, that if a change of control of the Company occurs prior to 2021, the annual rent credit will be reduced to $5.0 million. Effective on January 1, 2019, the annual minimum rent will be subject to an escalator equal to the lesser of 2.25% or four times the Consumer Price Index ("CPI") increase for the prior year (or zero if there was a CPI decrease).
The Ventas Master Lease requires the Company to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month period commencing with the 24-month period ending December 31, 2019 and thereafter each 24-month period ending December
31 during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the first extension term (if any). If a change of control of the Company occurs, the Company will be required, within 36 months following the closing of such transaction, to invest (or escrow with Ventas) an aggregate of $30.0 million in the communities for revenue-enhancing capital projects.
Under the definitive agreements with Ventas, the Company, at the parent level, must satisfy certain financial covenants (including tangible net worth and leverage ratios) and may consummate a change of control transaction without the need for consent of Ventas so long as certain objective conditions are satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas.
At the Company's option, which must behas exercised on or before April 26, 2019, the Company may provide notice to Ventas of the Company's electionits right to direct Ventas to market for sale one or more communities with up to approximately $30.0 million of annual minimum rent. Upon receipt of such notice,28 communities. Ventas will beis obligated to use commercially reasonable, diligent efforts to sell such communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community will beis subject to Ventas' receiving a purchase price in excess of a mutually agreed upon minimum sale price to be mutually agreed by the Company and Ventas and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received by Ventas multiplied by 6.25%.
The Company estimated During the fair value of each of the elements of the restructuring transactions. The fair value of the future lease payments is based upon historical and forecasted community cash flows and market data, including a management fee rate of 5% of revenue and a market supported lease coverage ratio. These assumptions are supported by independent market data and considered to be Level 3 measurements within the fair value hierarchy. The Company recognized a $125.7 million non-cash loss on lease modification in the ninethree months ended September 30, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that are unfavorable to the Company given current market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018 the Company announced that it had entered into definitive agreements with Welltower Inc. ("Welltower"). The components of the agreements include:
Lease Terminations. The Company and Welltower agreed to early termination of the Company's triple-net lease obligations on 37 communities effective June 30, 2018. The two lease portfolios were due to mature in 2028 (27 communities) and 2020 (10 communities). The Company paid Welltower an aggregate lease termination fee of $58.0 million. The Company will continue to manage the foregoing 37 communities on an interim basis until the communities are transitioned to new managers and such communities will be reported in the Management Services segment during such interim period. The Company recognized a $22.6 million loss on lease termination in the nine months ended September 30, 2018 for the amount by which the aggregate lease termination fee exceeded the net carrying value of the Company's assets and liabilities under operating and capital leases at the lease termination date.
Future Lease Terminations. The parties separately agreed to allow the Company to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale2019, five of such communities withwere sold by Ventas and removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease was prospectively reduced by $1.5 million.
2017 HCP Master Lease Transaction and RIDEA Ventures Restructuring
Pursuant to transactions the Company to receive a corresponding 6.25% rent credit on Welltower's disposition proceeds.
RIDEA Restructuring. The Company agreed to sell its 20% equity interestentered into with HCP in its existing Welltower RIDEA venture to Welltower, effective June 30, 2018, for net proceeds of $33.5 million (for which the Company recognized a $14.7 million gain on saleNovember 2017, during the ninethree months endedSeptember 30, 2018). As of September June 30, 2018, the Company provided management services to the 15 ventureacquired five communities and will continue to manage the communities until the communities are transitioned by Welltower to new managers.
The Company also elected not to renewfrom HCP, two master leases with Welltowerof which matured on September 30, 2018 (11 communities). After conclusion of the foregoing lease expirations, the Company continues to operate 74 communities under triple-net leases with Welltower, and the Company's remaining lease agreements with Welltower contain a change of control standard that allows the Company to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject to the satisfaction of certain conditions.
The results of operationsformerly leased, for the 48 communities that have been disposed through lease terminations are reported within the following segments within the condensed consolidated financial statements: Retirement Centers (eight communities), Assisted Living (39 communities) and CCRCs-Rental (one community). With respect to such 48 communities, the Company's condensed consolidated financial statements include resident fee revenue of $12.0 million and $54.7 million, facility operating expenses of $8.8 million and $35.4 million, and cash lease payments of $3.7 million and $18.6 million for the three months ended September 30, 2018 and 2017, respectively. The Company's condensed consolidated financial statements include resident fee revenue of $123.5 million and $166.6 million, facility operating expenses of $80.8 million and $104.6 million, and cash lease payments of $41.4 million and $55.4 million for the nine months endedSeptember 30, 2018 and 2017, respectively. For the 15 former venture communities for which the Company's management may be terminated, the Company's condensed consolidated financial statements include management fees of $1.1 million for each of the three months ended September 30, 2018 and 2017. The Company's condensed consolidated financial statements include management fees of $3.3 million for each of the nine months endedSeptember 30, 2018 and 2017.
Blackstone Venture
On March 29, 2017, the Company and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the "Blackstone Venture") that acquired 64 senior housing communities for aan aggregate purchase price of $1.1 billion. The Company had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases,$242.8 million, and the Company contributed its leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fund its share of closing costs. As of the formation date, the Company continued to operate two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a management agreement with the venture. Two of the communities are managed by a third party for the venture. The results and financial position of the 62 communities for which leases were terminated were deconsolidated from the Company prospectively upon formation of the Blackstone Venture. The Company accounted for the venture under the equity method of accounting.
Initially, the Company determined that the contributed carrying value of the Company's investment was $66.8 million, representing the amount by which the $179.2 million cash contribution exceeded the carrying value of the Company's liabilities under operating, capital and financing leases contributed by the Company net of the carrying value of the assets under such operating, capital and financing leases. However, the Company estimated the fair value of its 15% equity interest in the Blackstone Venture at inception to be $47.1 million. As a result, the Company recorded a $19.7 million charge within goodwill and asset impairment expense for the three months ended March 31, 2017 for the amount of the contributed carrying value in excess of the estimated fair value of the Company's investment. Duringduring the three months ended March 31, 2018, the Company recorded a $33.4acquired one community for an aggregate purchase price of $32.1 million.
During the year ended December 31, 2018, leases with respect to 33 communities were terminated, and such communities were removed from the Company's master lease with HCP. Ten of such community leases were terminated in the three months ended June 30, 2018. During the three months ended June 30, 2018, the Company derecognized the $86.9 million non-cash impairment charge within goodwill and asset impairment expense to reflect the amount by which the carrying value of the investment exceededassets under financing leases and the estimated fair value.
Additionally, these transactions related$93.5 million carrying value of financing lease obligations and recognized a $6.5 million non-cash gain on sale of assets for three communities which were previously subject to the Blackstone Venture requiredsale-leaseback transactions. Additionally, the Company to recordrecognized a significant increase to$1.9 million non-cash gain on lease termination for seven communities under operating and capital leases during the Company's existing tax valuation allowance, after considering the change in the Company's future reversal of estimated timing differences resulting from these transactions, primarily due to removing the deferred positions related to the contributed leases. three months ended June 30, 2018.
During the three months ended March 31, 2017, the Company recorded a provision for income taxes to establish an additional $85.0 million of valuation allowance against its federal and state net operating loss carryforwards and tax credits as the Company anticipates these carryforwards and credits will not be utilized prior to expiration. See Note 13 for more information about2018, HCP acquired the Company's deferred income taxes.
During the third quarter of 2018, leases10% ownership interest in a RIDEA venture with HCP for the two communities owned by the Blackstone Venture were terminated$62.3 million, and the Company sold its 15% equity interest in the Blackstone Venture to Blackstone. The Company paid Blackstone an aggregate fee of $2.0 million to complete the multi-part transaction and recognized a $3.8$41.7 million gain on salesale.
Management agreements for 35 communities with former unconsolidated ventures with HCP have been terminated by HCP since November of assets2017. The Company has recognized a $9.3 million non-cash management contract termination gain, of which $0.3 million and $2.8 million were recognized during the three months ended SeptemberJune 30, 2019 and 2018, forrespectively, and $0.8 million and $5.1 million were recognized during the amount by which the net carrying value of the Company's assets and liabilities disposed of exceeded the aggregate transaction cost.
Dispositions of Owned Communities During 2018 and Assets Held for Sale
The Company began 2018 with 15 of its owned communities classified as held for sale as of December 31, 2017. During the ninesix months ended SeptemberJune 30, 2018, the Company completed the sale of three communities, two of which were not previously included in assets held for sale, for net cash proceeds of $12.8 million2019 and recognized a net gain on sale of assets of $1.9 million. During the three months ended September 30, 2018 the Company entered into agreements to sell 18 additional communities, which are classified as held for sale as of September 30, 2018. The Company completed the disposition of one community on November 1, 2018 and received proceeds of approximately $144 million, net of associated debt and transaction costs. During the
three and nine months ended September 30, 2018, the Company recognized $3.0 million and $15.0 million, respectively, of impairment charges related to communities identified as held for sale, primarily due to changes in the estimated fair values.
As of September 30, 2018, 32 communities were classified as held for sale, resulting in $241.9 million being recorded as assets held for sale and $158.6 million of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to such communities. This debt will either be repaid with the proceeds from the sales or be assumed by the prospective purchasers. The results of operations of the 32 communities are reported in the following segments within the condensed consolidated financial statements: Retirement Centers (four communities), Assisted Living (26 communities) and CCRCs-Rental (two communities). The 32 communities had resident fee revenue of $26.4 million and $27.0 million and facility operating expenses of $20.0 million and $19.1 million for the three months ended September 30, 2018 and 2017, respectively. The 32 communities had resident fee revenue of $81.1 million and $81.7 million and facility operating expenses of $58.9 million and $56.6 million for the nine months ended September 30, 2018 and 2017, respectively.
Dispositions of Owned Communities and Other Lease Terminations During 2017
During the year ended December 31, 2017, the Company completed the sale of three communities for net cash proceeds of $8.2 million, and the Company terminated leases for 43 communities otherwise than in connection with the transactions with HCP and Blackstone described above (including terminations of leases for 26 communities pursuant to the transactions with HCP announced in November 2016).
5. Fair Value Measurements
Marketable Securities
During the nine months ended SeptemberAs of June 30, 2018, the Company sold $293.3 million of marketable securities. The Company recognized gains of $0.2 million for2019, marketable securities of $58.8 million are stated at fair value based on valuation provided by third-party pricing services and are classified within interest income onLevel 2 of the Company's condensed consolidated statements of operations for the three months ended September 30, 2017. The Company recognized gains of $1.4 million and $0.2 million for marketable securities within interest income on the Company's condensed consolidated statements of operations for the nine months ended September 30, 2018 and 2017, respectively.valuation hierarchy.
Debt
The Company estimates the fair value of its 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 long-term debt (excluding capital and financing lease obligations) with a carrying value of approximately $3.7 billion and $3.9$3.6 billion as of Septemberboth June 30, 20182019 and December 31, 2017, respectively.2018. Fair value of the long-term debt approximates carrying value in all periods. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy.
Goodwill and Asset Impairment Expense
The following is a summary of goodwill and asset impairment expense.
|
| | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | | 2018 |
| Goodwill | $ | — |
| | $ | 351.7 |
|
| Property, plant and equipment and leasehold intangibles, net | 6.9 |
| | 47.7 |
|
| Investment in unconsolidated ventures | — |
| | 33.4 |
|
| Other intangible assets, net | — |
| | 1.7 |
|
| Assets held for sale | 9.2 |
| | 12.0 |
|
| Goodwill and asset impairment | $ | 16.1 |
| | $ | 446.5 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Goodwill | $ | — |
| | $ | 205.0 |
| | $ | 351.7 |
| | $ | 205.0 |
|
| Property, plant and equipment and leasehold intangibles, net | 2.5 |
| | 149.9 |
| | 50.2 |
| | 152.4 |
|
| Investment in unconsolidated ventures | — |
| | — |
| | 33.4 |
| | 19.7 |
|
| Other intangible assets, net | — |
| | 13.7 |
| | 1.7 |
| | 13.7 |
|
| Assets held for sale (Note 4) | 3.0 |
| | — |
| | 15.0 |
| | — |
|
| Goodwill and asset impairment | $ | 5.5 |
| | $ | 368.6 |
| | $ | 452.0 |
| | $ | 390.8 |
|
Goodwill
During the three months ended March 31, 2018, the Company identified qualitative indicators of impairment, including a significant decline in the Company's stock price and market capitalization for a sustained period during the three months ended March 31,
2018. Based upon the Company's qualitative assessment, the Company performed a quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value.
In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at the cash flow projections, the Company considered its historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors. In using the income approach to estimate the fair value of reporting units for purposes of its goodwill impairment test, the Company made certain key assumptions. Those assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that the Company would receive upon a sale of the communities using estimated capitalization rates, all of which are considered Level 3 inputs in accordance with ASC 820. The Company corroborated the estimated capitalization rates used in these calculations with capitalization rates observable from recent market transactions. Future cash flows are discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The Company also considered market based measures such as earnings multiples in its analysis of estimated fair values of its reporting units.
Based on the results of the Company's quantitative goodwill impairment test, the Company determined that the carrying value of the Company's Assisted Living reporting unit exceeded its estimated fair value by more than the $351.7 million carrying value of goodwill as of March 31, 2018. As a result, the Company recorded a non-cash impairment charge of $351.7 million to goodwill and asset impairment within the Assisted Living and Memory Care operating segment for the three months ended March 31, 2018. Based on the results ofSee Note 2 for more information regarding the Company's quantitative goodwill impairment test, the Company determined that the estimated fair value of both the Company's Retirement Centers and Brookdale Ancillary Services reporting units exceeded their respective carrying values as of March 31, 2018.policy for goodwill.
Determining the fair value of the Company's reporting units involves the use of significant estimates and assumptions, which the Company believes to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include increases in interest rates, which could impact capitalization and discount rates, differences in the projected occupancy rates and changes in the cost structure of existing communities. Significant adverse changes in the Company’s future revenues and/or operating margins, significant changes in the market for senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances, including but not limited to increased competition and changing economic or market conditions, including market control premiums, could result in changes in fair value and the determination that additional goodwill is impaired.
Property, Plant and Equipment and Leasehold Intangibles
During the three and ninesix months ended SeptemberJune 30, 2018, and 2017, the Company evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying value of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets primarily due to an expectation that certain communities will be disposed of prior to their previously intended holding periods. As a result of this change in intent, the Company compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over estimated fair value. The estimates of fair values of the property, plant and equipment of these communities were determined based on valuations provided by third-party pricing services and are classified within Level 3 of the valuation hierarchy. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $2.5$6.9 million and $149.9$47.7 million for the three and six months ended SeptemberJune 30, 2018, and 2017, respectively. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $50.2 million and $152.4 million for the nine months ended September 30, 2018 and 2017, respectively, primarily within the Assisted Living and Memory Care segment.
Investment in Unconsolidated Ventures
The Company evaluates realization of its investment in ventures accounted for using the equity method if circumstances indicate that the Company's investment is other than temporarily impaired. During the ninethree months ended September 30,March 31, 2018, and 2017, the Company recorded non-cash impairment charges related to investments in unconsolidated ventures of $33.4 million and $19.7 million, respectively. Thesemillion. The impairment charges reflect the amount by which the carrying values of the investments exceeded their estimated fair value (using Level 3 inputs). The
Company did not record any impairment for the three months ended June 30, 2018 or for the three or six months ended June 30, 2019.
Right-of-Use Assets
The Company's adoption of ASU 2016-02 resulted in the recognition of the right-of-use assets for the operating leases for 25 communities to be recognized on the condensed consolidated balance sheet as of January 1, 2019 at the estimated fair value. Refer tovalue of $56.6 million as the Company determined that the long-lived assets of such communities were not recoverable as of such date. The fair value of the right-of-use assets was estimated utilizing a discounted cash flow approach based upon historical and projected community cash flows and market data, including management fees and a market supported lease coverage ratio (Level 3 inputs). The Company corroborated the estimated management fee rates and lease coverage ratios used in these estimates with lease coverage ratios observable from recent market transactions. The estimated future cash flows were discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. See Note 42 for more information aboutregarding the formation and impairmentrecognition of right-of-use assets for operating leases upon the Blackstone Venture during 2017.
adoption of ASU 2016-02.
6. Stock-Based Compensation
Grants of restricted shares under the Company's 2014 Omnibus Incentive Plan were as follows:
|
| | | | | | | | | | |
| (in thousands, except for per share amounts) | Shares Granted | | Weighted Average Grant Date Fair Value | | Total Value |
| Three months ended March 31, 2019 | 4,047 |
| | $ | 7.87 |
| | $ | 31,857 |
|
| Three months ended June 30, 2019 | 142 |
| | $ | 6.51 |
| | $ | 922 |
|
|
| | | | | | | | | | |
| (share amounts in thousands, except for per share amounts) | Shares Granted | | Weighted Average Grant Date Fair Value | | Total Value |
| Three months ended March 31, 2018 | 3,387 |
| | $ | 9.10 |
| | $ | 30,823 |
|
| Three months ended June 30, 2018 | 169 |
| | $ | 7.19 |
| | $ | 1,214 |
|
| Three months ended September 30, 2018 | 263 |
| | $ | 8.99 |
| | $ | 2,361 |
|
7. Goodwill and Other Intangible Assets, Net
The following isCompany's Independent Living and Health Care Services segments had a summary of the carrying value of goodwill by operating segment.of $27.3 million and $126.8 million, respectively, as of both June 30, 2019 and December 31, 2018.
|
| | | | | | | | | | | | | | | |
| (in thousands) | Retirement Centers | | Assisted Living | | Brookdale Ancillary Services | | Total |
| Balance at January 1, 2018 | $ | 27,321 |
| | $ | 351,652 |
| | $ | 126,810 |
| | $ | 505,783 |
|
| Impairment | — |
| | (351,652 | ) | | — |
| | (351,652 | ) |
| Balance at September 30, 2018 | $ | 27,321 |
| | $ | — |
| | $ | 126,810 |
| | $ | 154,131 |
|
Goodwill is tested for impairment annually with a test date of October 1 orand sooner if indicators of impairment are present. The Company determined no impairment was necessary for the three and six months ended SeptemberJune 30, 2018.2019. Factors the Company considers important in its analysis, which could trigger an impairment of such assets, include significant underperformance relative to historical or projected future operating results, significant negative industry or economic trends, a significant decline in the Company's stock price for a sustained period and a decline in its market capitalization below net book value. A change in anticipated operating results or the other metrics indicated above could necessitate further analysis of potential impairment at an interval prior to the Company's annual measurement date. Refer to Note 5 for information on impairment expense for goodwill.goodwill in 2018.
Other intangible assets as of June 30, 2019 and December 31, 2018 are summarized in the following tables:
|
| | | | | | | | | | | |
| | June 30, 2019 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Health care licenses | $ | 42,323 |
| | $ | — |
| | $ | 42,323 |
|
| Trade names | 27,800 |
| | (27,585 | ) | | 215 |
|
| Total | $ | 70,123 |
| | $ | (27,585 | ) | | $ | 42,538 |
|
The following is a summary of other intangible assets.
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Community purchase options | $ | 4,738 |
| | $ | — |
| | $ | 4,738 |
|
| Health care licenses | 42,323 |
| | — |
| | 42,323 |
|
| Trade names | 27,800 |
| | (26,295 | ) | | 1,505 |
|
| Management contracts | 9,610 |
| | (6,704 | ) | | 2,906 |
|
| Total | $ | 84,471 |
| | $ | (32,999 | ) | | $ | 51,472 |
|
|
| | | | | | | | | | | |
| | September 30, 2018 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Community purchase options | $ | 4,738 |
| | $ | — |
| | $ | 4,738 |
|
| Health care licenses | 49,701 |
| | — |
| | 49,701 |
|
| Trade names | 27,800 |
| | (25,650 | ) | | 2,150 |
|
| Management contracts | 9,610 |
| | (6,546 | ) | | 3,064 |
|
| Total | $ | 91,849 |
| | $ | (32,196 | ) | | $ | 59,653 |
|
|
| | | | | | | | | | | |
| | December 31, 2017 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Community purchase options | $ | 9,533 |
| | $ | — |
| | $ | 9,533 |
|
| Health care licenses | 50,927 |
| | — |
| | 50,927 |
|
| Trade names | 27,800 |
| | (23,714 | ) | | 4,086 |
|
| Management contracts | 11,360 |
| | (7,929 | ) | | 3,431 |
|
| Total | $ | 99,620 |
| | $ | (31,643 | ) | | $ | 67,977 |
|
Amortization expense related to definite-lived intangible assets for both the three months ended SeptemberJune 30, 2019 and 2018 and 2017 was $0.6$0.8 million and $0.9 million, respectively, and for the ninesix months ended SeptemberJune 30, 2019 and 2018 and 2017 was $2.3$1.6 million and $4.8$1.7 million, respectively.
Health care licenses were determined to be indefinite-lived The Company recognized $2.6 million of non-cash impairment charges on management contract intangible assets during the three and are not subject to amortization. The community purchase options are not currently amortized, but will be added tosix months ended June 30, 2019 for the cost basistermination of the related communities if the option is exercised, and will then be depreciated over the estimated useful life of the community.management contracts.
8. Property, Plant and Equipment and Leasehold Intangibles, Net
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, net property, plant and equipment and leasehold intangibles, which include assets under capital and financing leases, consisted of the following:
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Land | $ | 455,590 |
| | $ | 455,623 |
|
| Buildings and improvements | 4,791,438 |
| | 4,749,877 |
|
| Furniture and equipment | 834,496 |
| | 805,190 |
|
| Resident and leasehold operating intangibles | 319,179 |
| | 477,827 |
|
| Construction in progress | 86,104 |
| | 57,636 |
|
| Assets under financing leases and leasehold improvements | 1,810,335 |
| | 1,776,649 |
|
| Property, plant and equipment and leasehold intangibles | 8,297,142 |
| | 8,322,802 |
|
| Accumulated depreciation and amortization | (3,083,017 | ) | | (3,047,375 | ) |
| Property, plant and equipment and leasehold intangibles, net | $ | 5,214,125 |
| | $ | 5,275,427 |
|
|
| | | | | | | |
| (in thousands) | September 30, 2018 | | December 31, 2017 |
| Land | $ | 461,734 |
| | $ | 449,295 |
|
| Buildings and improvements | 4,952,807 |
| | 4,923,621 |
|
| Leasehold improvements | 123,765 |
| | 124,850 |
|
| Furniture and equipment | 1,037,947 |
| | 1,006,889 |
|
| Resident and leasehold operating intangibles | 522,851 |
| | 594,748 |
|
| Construction in progress | 47,325 |
| | 74,678 |
|
| Assets under capital and financing leases | 1,312,908 |
| | 1,742,384 |
|
| Property, plant and equipment and leasehold intangibles | 8,459,337 |
| | 8,916,465 |
|
| Accumulated depreciation and amortization | (3,052,207 | ) | | (3,064,320 | ) |
| Property, plant and equipment and leasehold intangibles, net | $ | 5,407,130 |
| | $ | 5,852,145 |
|
Assets under financing leases and leasehold improvements includes $0.7 billion of financing lease right-of-use assets, net of accumulated amortization, as of both June 30, 2019 and December 31, 2018. Refer to Note 10 for further information on the Company’s financing leases.
The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $93.2 million and $115.3 million for the three months ended June 30, 2019 and 2018, respectively, and $189.3 million and $228.7 million for the six months ended June 30, 2019 and 2018, respectively.
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. Refer to Note 5 for additional information on impairment expense for property, plant and equipment and leasehold intangibles.
The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $110.4 million and $116.7 million for the three months ended September 30, 2018 and 2017, respectively, and $339.0 million and $361.2 million for the nine months ended September 30, 2018 and 2017, respectively.
9. Debt
Long-term Debt and Capital and Financing Lease Obligations
Long-term debt as of June 30, 2019 and capital and financing lease obligations consistDecember 31, 2018 consists of the following:
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Mortgage notes payable due 2019 through 2047; weighted average interest rate of 4.88% for the six months ended June 30, 2019, less debt discount and deferred financing costs of $17.4 million and $18.6 million as of June 30, 2019 and December 31, 2018, respectively (weighted average interest rate of 4.75% in 2018) | $ | 3,504,957 |
| | $ | 3,579,931 |
|
| Other notes payable, weighted average interest rate of 5.58% for the six months ended June 30, 2019 (weighted average interest rate of 5.85% in 2018) and maturity dates ranging from 2019 to 2021 | 67,615 |
| | 60,249 |
|
| Total long-term debt | 3,572,572 |
| | 3,640,180 |
|
| Less current portion | 267,153 |
| | 294,426 |
|
| Total long-term debt, less current portion | $ | 3,305,419 |
| | $ | 3,345,754 |
|
|
| | | | | | | |
| (in thousands) | September 30, 2018 | | December 31, 2017 |
| Mortgage notes payable due 2018 through 2047; weighted average interest rate of 4.76% for the nine months ended September 30, 2018, less debt discount and deferred financing costs of $20.2 million and $16.6 million as of September 30, 2018 and December 31, 2017, respectively (weighted average interest rate of 4.59% in 2017) | $ | 3,633,919 |
| | $ | 3,497,762 |
|
| Capital and financing lease obligations payable through 2032; weighted average interest rate of 8.13% for the nine months ended September 30, 2018 (weighted average interest rate of 6.75% in 2017) | 932,918 |
| | 1,271,554 |
|
| Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount and deferred financing costs of $6.4 million as of December 31, 2017, interest at 2.75% per annum | — |
| | 309,853 |
|
| Other notes payable, weighted average interest rate of 5.69% for the nine months ended September 30, 2018 (weighted average interest rate of 5.98% in 2017) and maturity dates ranging from 2018 to 2021 | 66,122 |
| | 63,122 |
|
| Total long-term debt and capital and financing lease obligations | 4,632,959 |
| | 5,142,291 |
|
| Less current portion | 503,687 |
| | 602,501 |
|
| Total long-term debt and capital and financing lease obligations, less current portion | $ | 4,129,272 |
| | $ | 4,539,790 |
|
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the current portion of long-term debt within the Company's condensed consolidated financial statements includes $158.6$18.5 million and $30.1$31.2 million,, respectively, of mortgage notes payable secured by assets held for sale. This debt will be either assumed by the prospective purchasers oris expected to be repaid with the proceeds from the sales. Refer to Note 4 for more information about the Company's assets held for sale.
Credit Facilities
On December 19, 2014,5, 2018, the Company entered into a FourthFifth Amended and Restated Credit Agreement with General Electric Capital Corporation (which has since assigned its interest to Capital One, Financial Corporation),National Association, as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto.thereto (the "Amended Agreement"). The agreement currentlyAmended Agreement amended and restated in its entirety the Company's Fourth Amended and Restated Credit Agreement dated as of December 19, 2014 (the "Original Agreement"). The Amended Agreement provides commitments for a total commitment amount of $400.0 million, comprised of a $400.0$250 million revolving credit facility (withwith a $50.0$60 million sublimit for letters of credit and a $50.0$50 million swingline featurefeature. The Company has a one-time right under the Amended Agreement to permit same day borrowing) and an option to increase commitments on the revolving credit facility by an additional $250.0$100 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The Amended Agreement provides the Company a one-time right to reduce the amount of the revolving credit commitments, and the Company may terminate the revolving credit facility at any time, in each case without payment of a premium or penalty. The Amended Agreement extended the maturity date isof the Original Agreement from January 3, 2020 to January 3, 2024 and amountsdecreased the interest rate payable on drawn amounts. Amounts drawn under the facility will continue to bear interest at 90-day LIBOR plus an applicable margin; however, the Amended Agreement reduced the applicable margin from a range of 2.50% to 3.50% to a range of 2.25% to 3.25%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50%2.25% margin at utilization equal to or lower than 35%, a 3.25%2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50%3.25% margin at utilization greater than 50%. TheA quarterly commitment fee continues to be payable on the unused portion of the facility isat 0.25% per annum when the outstanding amount of obligations (including revolving credit swingline and termswingline loans and letter of credit obligations) is greater than or equal to 50% of the totalrevolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the totalrevolving credit commitment amount.
Amounts drawn on the facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The credit facility is secured by a first priority mortgagemortgages on certain of the Company's communities. In addition, the agreementAmended Agreement permits the Company to pledge the equity interests in subsidiaries that own other communities and grant negative pledges in connection therewith (rather than mortgaging such communities), provided that loan availability from pledged assets cannot exceednot more than 10% of loan availabilitythe borrowing base may result from mortgaged assets. The availabilitycommunities subject to negative pledges. Availability under the linerevolving credit facility will vary from time to time as it is based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.credit facility and the Company’s consolidated fixed charge coverage ratio. In July of 2019 the Company added three communities to the borrowing base.
The agreementAmended Agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could result in a default underAmounts drawn on the credit agreement, which would result in termination of all commitments under the agreement and allfacility may be used for general corporate purposes.
amounts owing under the agreement becoming immediately due and payable and/or could trigger cross default provisions in our other outstanding debt and lease agreements.
As of SeptemberJune 30, 2018,2019, no borrowings were outstanding on the revolving credit facility, and $41.7$41.2 million of letters of credit were outstanding, under thisand the revolving credit facility.facility had $163.5 million of availability. The Company also had a separate unsecured letter of credit facilitiesfacility of up to $66.2$47.5 million in the aggregate as of SeptemberJune 30, 2018.2019. Letters of credit totaling $66.1$47.5 million had been issued under thesethe separate facilities
facility as of September 30, 2018.that date. After giving effect to the addition of the three communities to the borrowing base described above, availability under the secured credit facility is $180.8 million as of August 6, 2019.
20182019 Financings
In April 2018,On May 7, 2019, the Company obtained $247.6$111.1 million of debt secured by the non-recourse first mortgages on 1114 communities. Sixty percent of the principal amount bears interest at a fixed rate of 4.55%4.52%, and the remaining forty percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 189223 basis points. The debt matures in May 2028.June 2029. The $247.6$111.1 million of proceeds from the financing along with cash on hand were primarily utilized to fund the acquisition of five communities from HCP and to repay $43.0$155.5 million of outstanding mortgage debt scheduled to maturematuring in May 2018. See Note 4 to the condensed consolidated financial statements for more information regarding the acquisitions of communities from HCP.2019.
Convertible Debt
In June 2011, the Company completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible senior notes due June 15, 2018 (the "Notes"). The Company repaid $316.3 million in cash to settle the Notes at their maturity on June 15, 2018.
Financial Covenants
Certain of the Company’s debt documents contain restrictions and financial covenants, such as those requiring the Company to maintain prescribed minimum net worth and stockholders’ equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company’s debt documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements.
The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable debt documents. Many of the Company’s debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, the Company’s debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of June 30, 2019, the Company is in compliance with the financial covenants of its debt agreements.
10. Leases
As of June 30, 2019, the Company operated 335 communities under long-term leases (244 operating leases and 91 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of such leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of June 30, 2019, the weighted-average remaining lease term of the Company’s operating and financing leases was 7.3 and 8.8 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum net worth and stockholders’ equity levels and lease coverage ratios, and not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company’s lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements.
The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company’s debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders orand lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company’s debt isleases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of SeptemberJune 30, 2018,2019, the Company is in compliance with the financial covenants of its outstanding debtlong-term leases.
A summary of operating and financing lease agreements.expense (including the respective presentation on the condensed consolidated statements of operations) and cash flows from leasing transactions is as follows:
|
| | | | | | | |
Operating Leases (in thousands) | Three Months Ended
June 30, 2019 | | Six Months Ended
June 30, 2019 |
| Facility operating expense | $ | 4,604 |
| | $ | 9,229 |
|
| Facility lease expense | 67,689 |
| | 136,357 |
|
| Operating lease expense | 72,293 |
| | 145,586 |
|
| Operating lease expense adjustment | 4,429 |
| | 8,812 |
|
| Operating cash flows from operating leases | $ | 76,722 |
| | $ | 154,398 |
|
| | | | |
| Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations | $ | 2,623 |
| | $ | 3,981 |
|
|
| | | | | | | |
Financing Leases (in thousands) | Three Months Ended
June 30, 2019 | | Six Months Ended
June 30, 2019 |
| Depreciation and amortization | $ | 11,677 |
| | $ | 23,355 |
|
| Interest expense: financing lease obligations | 16,649 |
| | 33,392 |
|
| Financing lease expense | $ | 28,326 |
| | $ | 56,747 |
|
| | | | |
| Operating cash flows from financing leases | $ | 16,649 |
| | $ | 33,392 |
|
| Financing cash flows from financing leases | 5,500 |
| | 10,953 |
|
| Total cash flows from financing leases | $ | 22,149 |
| | $ | 44,345 |
|
As of June 30, 2019, the weighted-average discount rate of the Company’s operating and financing leases was 8.6% and 7.8%, respectively. As the Company's community leases do not contain an implicit rate, the Company utilized its incremental borrowing rate based on information available on January 1, 2019 to determine the present value of lease payments for operating leases that commenced prior to that date.
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of June 30, 2019 are as follows (in thousands):
|
| | | | | | | |
| Year Ending December 31, | Operating Leases | | Financing Leases |
| 2019 (six months) | $ | 152,768 |
| | $ | 44,087 |
|
| 2020 | 307,826 |
| | 89,003 |
|
| 2021 | 291,491 |
| | 90,243 |
|
| 2022 | 288,319 |
| | 91,633 |
|
| 2023 | 284,399 |
| | 93,104 |
|
| Thereafter | 783,498 |
| | 428,952 |
|
| Total lease payments | 2,108,301 |
| | 837,022 |
|
| Purchase option liability and non-cash gain on future sale of property | — |
| | 575,531 |
|
| Imputed interest and variable lease payments | (581,835 | ) | | (548,966 | ) |
| Total lease obligations | $ | 1,526,466 |
| | $ | 863,587 |
|
The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases not recognized on the condensed consolidated balance sheet under ASC 840 as of December 31, 2018 are as follows (in thousands):
|
| | | |
| Year Ending December 31, | Operating Leases |
| 2019 | $ | 310,340 |
|
| 2020 | 307,493 |
|
| 2021 | 290,661 |
|
| 2022 | 291,114 |
|
| 2023 | 285,723 |
|
| Thereafter | 786,647 |
|
| Total lease payments | $ | 2,271,978 |
|
10.11. Litigation
The Company has been and is currently involved in litigation and claims, including putative class action claims from time to time, incidental to the conduct of its business which are generally comparable to other companies in the senior living and healthcare industries. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, the Company maintains general liability and professional liability insurance policies in amounts and with coverage and deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company's current policies provide for deductibles for each claim. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts and for claims or portions of claims that are not covered by such policies.
Similarly, the senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement activities or litigation related to regulatory compliance matters. In addition, as a result of the Company's participation in the Medicare and Medicaid programs, the Company is subject to various governmental reviews, audits and investigations, including but not limited to audits under various government programs, such as the Recovery ActAudit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC) programs. The costs to respond to and defend such reviews, audits and investigations may be significant, and an adverse determination could result in citations, sanctions and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and/or damage to the Company's business reputation.
11.12. Supplemental Disclosure of Cash Flow Information
|
| | | | | | | |
| | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Interest paid | $ | 124,647 |
| | $ | 133,000 |
|
| Income taxes paid, net of refunds | 1,916 |
| | 1,421 |
|
| | | | |
| Capital expenditures, net of related payables | | | |
| Capital expenditures - non-development, net | $ | 121,066 |
| | $ | 89,417 |
|
| Capital expenditures - development, net | 10,623 |
| | 13,390 |
|
| Capital expenditures - non-development - reimbursable | 1,000 |
| | 1,764 |
|
| Capital expenditures - development - reimbursable | — |
| | 695 |
|
| Trade accounts payable | (10,392 | ) | | 15,192 |
|
| Net cash paid | $ | 122,297 |
| | $ | 120,458 |
|
| Acquisition of assets, net of related payables and cash received: | | | |
| Property, plant and equipment and leasehold intangibles, net | $ | — |
| | $ | 237,563 |
|
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| (in thousands) | 2018 | | 2017 |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Interest paid | $ | 198,133 |
| | $ | 223,929 |
|
| Income taxes paid, net of refunds | $ | 1,542 |
| | $ | 1,595 |
|
| | | | |
| Additions to property, plant and equipment and leasehold intangibles, net: | |
| | |
|
| Property, plant and equipment and leasehold intangibles, net | $ | 154,249 |
| | $ | 139,734 |
|
| Trade accounts payable | 15,100 |
| | 310 |
|
| Net cash paid | $ | 169,349 |
| | $ | 140,044 |
|
| Acquisition of assets, net of related payables and cash received: | |
| | |
|
| Property, plant and equipment and leasehold intangibles, net | $ | 237,563 |
| | $ | — |
|
| Other intangible assets, net | (4,345 | ) | | 400 |
|
| Capital and financing lease obligations | 36,120 |
| | — |
|
| Other liabilities | 2,433 |
| | — |
|
| Net cash paid | $ | 271,771 |
| | $ | 400 |
|
| Proceeds from sale of assets, net: | |
| | |
|
| Prepaid expenses and other assets, net | $ | (3,006 | ) | | $ | (14,387 | ) |
| Assets held for sale | (18,758 | ) | | (20,952 | ) |
| Property, plant and equipment and leasehold intangibles, net | (91,778 | ) | | (19,184 | ) |
| Investments in unconsolidated ventures | (58,179 | ) | | (26,301 | ) |
| Long-term debt | — |
| | 7,552 |
|
| Capital and financing lease obligations | 93,514 |
| | 7,646 |
|
| Refundable entrance fees and deferred revenue | 8,345 |
| | 30,771 |
|
| Other liabilities | 2,690 |
| | 39 |
|
| (Gain) loss on sale of assets, net | (64,740 | ) | | 1,408 |
|
| Loss on facility lease termination and modification, net | — |
| | (1,162 | ) |
| Net cash received | $ | (131,912 | ) | | $ | (34,570 | ) |
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | (2,040 | ) | | $ | — |
|
| Property, plant and equipment and leasehold intangibles, net | (81,320 | ) | | — |
|
| Capital and financing lease obligations | 58,099 |
| | — |
|
| Deferred liabilities | 67,950 |
| | — |
|
| Gain on sale of assets, net | (5,761 | ) | | — |
|
| Loss on facility lease termination and modification, net | 22,260 |
| | — |
|
Net cash paid (1) | $ | 59,188 |
| | $ | �� |
|
| Formation of the Blackstone Venture: | | | |
| Prepaid expenses and other assets | $ | — |
| | $ | (8,173 | ) |
| Property, plant and equipment and leasehold intangibles, net | — |
| | (768,897 | ) |
| Investments in unconsolidated ventures | — |
| | 66,816 |
|
| Capital and financing lease obligations | — |
| | 879,959 |
|
| Deferred liabilities | — |
| | 7,504 |
|
| Other liabilities | — |
| | 1,998 |
|
| Net cash paid | $ | — |
| | $ | 179,207 |
|
| | | | |
|
| | | | | | | |
| Other intangible assets, net | — |
| | (4,796 | ) |
| Financing lease obligations | — |
| | 36,120 |
|
| Other liabilities | — |
| | 2,433 |
|
| Net cash paid | $ | — |
| | $ | 271,320 |
|
| Proceeds from sale of assets, net: | | | |
| Prepaid expenses and other assets, net | $ | (5,798 | ) | | $ | (1,991 | ) |
| Assets held for sale | (41,882 | ) | | (18,758 | ) |
| Property, plant and equipment and leasehold intangibles, net | (688 | ) | | (87,864 | ) |
| Investments in unconsolidated ventures | (156 | ) | | (58,179 | ) |
| Financing lease obligations | — |
| | 93,514 |
|
| Refundable fees and deferred revenue | — |
| | 8,345 |
|
| Other liabilities | (1,762 | ) | | 789 |
|
| Gain on sale of assets, net | (2,144 | ) | | (66,753 | ) |
| Net cash received | $ | (52,430 | ) | | $ | (130,897 | ) |
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | — |
| | $ | (2,000 | ) |
| Property, plant and equipment and leasehold intangibles, net | — |
| | (52,920 | ) |
| Financing lease obligations | — |
| | 21,898 |
|
| Deferred liabilities | — |
| | 67,950 |
|
| Loss on facility lease termination and modification, net | — |
| | 22,260 |
|
Net cash paid (1) | $ | — |
| | $ | 57,188 |
|
| | | | |
| Supplemental Schedule of Non-cash Operating, Investing and Financing Activities: | | | |
| Assets designated as held for sale: | | | |
| Prepaid expenses and other assets, net | $ | (5 | ) | | $ | — |
|
| Assets held for sale | (4,928 | ) | | 58,445 |
|
| Property, plant and equipment and leasehold intangibles, net | 4,933 |
| | (58,445 | ) |
| Net | $ | — |
| | $ | — |
|
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | (648 | ) | | $ | (2,813 | ) |
| Property, plant and equipment and leasehold intangibles, net | (1,666 | ) | | 2,959 |
|
| Financing lease obligations | — |
| | (2,375 | ) |
| Operating lease right-of-use assets | (8,644 | ) | | — |
|
| Operating lease obligations | 9,289 |
| | — |
|
| Deferred liabilities | — |
| | (122,304 | ) |
| Other liabilities | (337 | ) | | 326 |
|
| Loss on facility lease termination and modification, net | 2,006 |
| | 124,207 |
|
| Net | $ | — |
| | $ | — |
|
|
| | | | | | | |
| Supplemental Schedule of Non-cash Operating, Investing and Financing Activities: | |
| | |
|
| Assets designated as held for sale: | |
| | |
|
| Prepaid expenses and other assets, net | $ | (281 | ) | | $ | 199 |
|
| Assets held for sale | 162,157 |
| | (29,544 | ) |
| Property, plant and equipment and leasehold intangibles, net | (161,876 | ) | | 29,345 |
|
| Net | $ | — |
| | $ | — |
|
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | (4,783 | ) | | $ | — |
|
| Property, plant and equipment and leasehold intangibles, net | (106,264 | ) | | — |
|
| Capital and financing lease obligations | 112,267 |
| | — |
|
| Deferred liabilities | (122,304 | ) | | — |
|
| Other liabilities | 625 |
| | — |
|
| Gain on sale of assets, net | (6,085 | ) | | — |
|
| Loss on facility lease termination and modification, net | 126,544 |
| | — |
|
| Net | $ | — |
| | $ | — |
|
| |
| (1) | The net cash paid to terminate community leases is presented within the condensed consolidated statement of cash flows based upon the lease classification of the terminated leases. Net cash paid of $46.6 million for the termination of operating leases is presented within net cash provided by (used in) operating activities and net cash paid of $12.5$10.5 million for the termination of capital and financing leases is presented within net cash used inprovided by (used in) financing activities for the ninesix months ended SeptemberJune 30, 2018. |
During the three months ended June 30, 2019, the Company and its joint venture partner contributed cash in an aggregate amount of $13.3 million to a consolidated joint venture which owns three senior housing communities. The Company obtained a $6.6 million promissory note receivable from its joint venture partner secured by a 50% equity interest in the joint venture in a non-cash exchange for the Company funding the $13.3 million aggregate contribution in cash.
|
| | | | | | | |
| | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 |
| Notes receivable: | | | |
| Other assets, net | $ | 6,566 |
| | $ | — |
|
| Noncontrolling interest | (6,566 | ) | | — |
|
| Net | $ | — |
| | $ | — |
|
Refer to Note 2 for a schedule of the non-cash adjustments to the Company's condensed consolidated balance sheet as of January 1, 2019 as a result of the adoption of new accounting standards and Note 10 for a schedule of the non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations.
Restricted cash consists principally of escrow deposits for real estate taxes, property insurance, and capital expenditures required by certain lenders under mortgage debt agreements and deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated statement of cash flowsbalance sheets that sums to the total of the same such amounts shown in the condensed consolidated statementstatements of cash flows.
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Reconciliation of cash, cash equivalents and restricted cash: | | | |
| Cash and cash equivalents | $ | 255,999 |
| | $ | 398,267 |
|
| Restricted cash | 26,256 |
| | 27,683 |
|
| Long-term restricted cash | 42,704 |
| | 24,268 |
|
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 324,959 |
| | $ | 450,218 |
|
|
| | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| Reconciliation of cash, cash equivalents and restricted cash: | | | |
| Cash and cash equivalents | $ | 133,664 |
| | $ | 222,647 |
|
| Restricted cash | 41,676 |
| | 37,189 |
|
| Long-term restricted cash | 24,758 |
| | 22,710 |
|
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows | $ | 200,098 |
| | $ | 282,546 |
|
12. Facility Operating Leases
As of September 30, 2018, the Company operated 366 communities under long-term leases (258 operating leases and 108 capital and financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under master leases. Due to the nature of such master leases, it is difficult to restructure the composition of such leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum net worth and stockholders' equity levels and lease coverage ratios, and not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements.
The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of September 30, 2018, the Company is in compliance with the financial covenants of its long-term leases.
A summary of facility lease expense and the impact of straight-line adjustment and amortization of (above) below market rents and deferred gains are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| Cash basis payment | $ | 73,969 |
| | $ | 90,303 |
| | $ | 250,677 |
| | $ | 275,506 |
|
| Straight-line (income) expense | (1,815 | ) | | (3,078 | ) | | (10,410 | ) | | (9,204 | ) |
| Amortization of (above) below market lease, net | (672 | ) | | (1,697 | ) | | (4,246 | ) | | (5,091 | ) |
| Amortization of deferred gain | (1,090 | ) | | (1,091 | ) | | (3,269 | ) | | (3,277 | ) |
| Facility lease expense | $ | 70,392 |
| | $ | 84,437 |
| | $ | 232,752 |
| | $ | 257,934 |
|
13. Income Taxes
The difference between the statutory tax rate and the Company's effective tax ratesrate for the three and ninesix months ended SeptemberJune 30, 2019 and June 30, 2018 and September 30, 2017 reflects a decreasewas primarily due to the non-deductible impairment of goodwill that occurred in the Company's federal statutory tax rate from 35% to 21% as a result of the Tax Act and a decrease in the valuation allowance recorded in 2018 as compared to 2017. These decreases were offset by the elimination of deductibility for qualified performance-based compensation of covered employees in 2018 as a result of the Tax Act, the negative tax benefit on the vesting of restricted stock, a direct result of the Company's lower stock price inthree months ended March 31, 2018 and the non-deductible write-off of goodwill.
The valuation allowance duringadjustment from stock-based compensation, which was greater in the three and ninesix months ended SeptemberJune 30, 2018 reflects a reduction incompared to the allowance of $2.7 million and an additional allowance of $52.2 million, respectively, established against the current period operating loss and is reflective of the Company's quarterly calculation of the reversal of existing tax assets and liabilities and the impact of the Company's acquisitions, dispositions, and other significant transactions, including the impact of the Tax Act which allows for the unlimited carryover of net operating losses created in 2018 and beyond.
The increase in the valuation allowance during the ninesix months ended SeptemberJune 30, 2017 was comprised of multiple components. The increase included $85.0 million related to the removal of future timing differences as a result of the formation of the Blackstone Venture and termination of leases associated therewith. In addition, the Company increased its valuation allowance by $48.5 million upon the adoption of ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The $48.5 million offset the increase to the Company's net operating loss carryforward position previously reflected in an additional paid-in capital pool, and accordingly, did not impact the current period income tax position. The remaining change of approximately $86.6 million for the nine months ended September 30, 2017 reflects the allowance established against that period's operating loss.2019.
The Company recorded an aggregate deferred federal, state, and local tax benefit of $15.4$13.0 million and $71.3$19.5 million for the three and six months ended June 30, 2019, respectively. The benefit includes $13.0 million and $21.2 million as a result of the operating losslosses for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The benefit was reduced by a $1.7 million reduction in the deferred tax asset related to employee stock compensation for the six months ended June 30, 2019. The benefit for the three and six months ended SeptemberJune 30, 2018 includes a benefit from a decrease2019 is offset by increases in the valuation allowance of $2.7 million. The benefit for the nine months ended September 30, 2018 was offset by an increase in the valuation allowance of $52.2 million.$13.3 million and $20.0 million, respectively. The change in the valuation allowance for the three and ninesix months ended SeptemberJune 30, 20182019 is the result of the anticipated reversal of future tax liabilities offset by future tax deductions.deduction. The Company recorded an aggregate deferred federal, state, and local tax benefit of $91.3$46.4 million and $123.0$55.9 million as a result of the operating loss for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2018, which was offset by an increase in the valuation allowance of $59.6$30.3 million and $86.6$54.9 million, respectively.
The Company evaluates its deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company's valuation allowance as of SeptemberJune 30, 20182019 and December 31, 2017 is $388.32018 was $370.2 million and $336.1$336.4 million, respectively.
The increase in the valuation allowance during the six months ended June 30, 2019 is comprised of multiple components. The increase includes $13.8 million resulting from the adoption of ASC 842 and the related addition of future timing differences recorded in the three months ended March 31, 2019. An additional $21.7 million of allowance was established against the current operating loss incurred during the six months ended June 30, 2019. Offsetting the increases was a decrease of $1.7 million of
Forallowance as a result of removal of future timing differences related to employee stock compensation recorded in the yearthree months ended March 31, 2019.
On December 31,22, 2017, the Company estimated the impact ofPresident signed the Tax Cuts and Jobs Act on state income taxes reflected in its income tax benefit. Reasonable estimates for the Company's state and local provision continue to be made based on the Company's analysis of tax reform. These provisional amounts have not been adjusted for the three and nine months ended September 30, 2018 but may be adjusted in future periods during 2018 when additional information is obtained. In addition, the("Tax Act") into law. The Tax Act limits the annual deductibility of a corporation's net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business exception. The Company plans to elect the real property trade or business exception with the 2018 tax return. As such, the Company will beis required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified improvement property assets. This change did not have a material effect forimpacts the threecurrent and nine months ended September 30, 2018 but will impact future tax depreciation deductions and may impactimpacted the Company's valuation allowance. The Company is unable to estimate the future impact of this change at this time.allowance accordingly. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on the Company's state and local income tax returns, state and local net operating losses, and corresponding valuation allowances.
The Company recorded interest charges related to its tax contingency reserve for cash tax positions for the three and ninesix months ended SeptemberJune 30, 20182019 and September 30, 20172018 which are included in income tax expense or benefit for the period. As of SeptemberJune 30, 2018,2019, tax returns for years 20132014 through 2017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
14. Variable Interest Entities
As of September 30, 2018, the Company has an equity interest in an unconsolidated VIE. The Company has determined that it does not have the power to direct the activities of the VIE that most significantly impact its economic performance and is not the primary beneficiary of the VIE in accordance with ASC 810. The Company's interests in the VIE are, therefore, accounted for under the equity method of accounting.
The Company holds a 51% equity interest, and HCP owns a 49% interest, in a venture that owns and operates entry fee CCRCs (the "CCRC Venture"). The CCRC Venture's opco has been identified as a VIE. The equity members of the CCRC Venture's opco share certain operating rights, and the Company acts as manager to the CCRC Venture opco. However, the Company does not consolidate this VIE because it does not have the ability to control the activities that most significantly impact this VIE's economic performance. The assets of the CCRC Venture opco primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable and cash and cash equivalents. The obligations of the CCRC Venture opco primarily consist of community lease obligations, mortgage debt, accounts payable, accrued expenses and refundable entrance fees.
The carrying value and classification of the related assets, liabilities and maximum exposure to loss as a result of the Company's involvement with this VIE are summarized below as of September 30, 2018 (in millions):
|
| | | | | | | | |
| VIE Type | Asset Type | Maximum Exposure to Loss | | Carrying Value |
| CCRC Venture opco | Investment in unconsolidated ventures | $ | 23.3 |
| | $ | 23.3 |
|
As of September 30, 2018, the Company is not required to provide financial support, through a liquidity arrangement or otherwise, to this unconsolidated VIE.
15. Revenue
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by payor source, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. See details on a reportable segment basis in the tabletables below.
| | | | Three Months Ended September 30, 2018 | Three Months Ended June 30, 2019 |
| (in thousands) | Retirement Centers | | Assisted Living | | CCRCs-Rental | | Brookdale Ancillary Services | | Total | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 143,963 |
| | $ | 464,719 |
| | $ | 73,567 |
| | $ | 159 |
| | $ | 682,408 |
| $ | 135,348 |
| | $ | 433,589 |
| | $ | 71,092 |
| | $ | 193 |
| | $ | 640,222 |
|
| Government reimbursement | 668 |
| | 18,406 |
| | 20,901 |
| | 89,100 |
| | 129,075 |
| 603 |
| | 16,636 |
| | 20,196 |
| | 91,614 |
| | 129,049 |
|
| Other third-party payor programs | — |
| | — |
| | 9,679 |
| | 19,017 |
| | 28,696 |
| — |
| | — |
| | 9,965 |
| | 22,627 |
| | 32,592 |
|
| Total resident fee revenue | $ | 144,631 |
| | $ | 483,125 |
| | $ | 104,147 |
| | $ | 108,276 |
| | $ | 840,179 |
| $ | 135,951 |
| | $ | 450,225 |
| | $ | 101,253 |
| | $ | 114,434 |
| | $ | 801,863 |
|
| | | | | | | | | | | |
| | | Three Months Ended June 30, 2018 |
| (in thousands) | | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | | $ | 158,405 |
| | $ | 503,806 |
| | $ | 73,392 |
| | $ | 157 |
| | $ | 735,760 |
|
| Government reimbursement | | 888 |
| | 18,221 |
| | 21,379 |
| | 90,605 |
| | 131,093 |
|
| Other third-party payor programs | | — |
| | — |
| | 10,025 |
| | 19,091 |
| | 29,116 |
|
| Total resident fee revenue | | $ | 159,293 |
| | $ | 522,027 |
| | $ | 104,796 |
| | $ | 109,853 |
| | $ | 895,969 |
|
| | | | | | | | | | | |
| | | Six Months Ended June 30, 2019 |
| (in thousands) | | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | | $ | 270,393 |
| | $ | 875,500 |
| | $ | 142,625 |
| | $ | 383 |
| | $ | 1,288,901 |
|
| Government reimbursement | | 1,252 |
| | 33,251 |
| | 41,683 |
| | 180,271 |
| | 256,457 |
|
| Other third-party payor programs | | — |
| | — |
| | 20,672 |
| | 45,312 |
| | 65,984 |
|
| Total resident fee revenue | | $ | 271,645 |
| | $ | 908,751 |
| | $ | 204,980 |
| | $ | 225,966 |
| | $ | 1,611,342 |
|
| | | | | | | | | | | |
| | | | Nine Months Ended September 30, 2018 | Six Months Ended June 30, 2018 |
| (in thousands) | Retirement Centers | | Assisted Living | | CCRCs-Rental | | Brookdale Ancillary Services | | Total | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 459,875 |
| | $ | 1,482,789 |
| | $ | 217,680 |
| | $ | 585 |
| | $ | 2,160,929 |
| $ | 315,912 |
| | $ | 1,018,070 |
| | $ | 144,113 |
| | $ | 426 |
| | $ | 1,478,521 |
|
| Government reimbursement | 2,446 |
| | 54,643 |
| | 65,986 |
| | 272,332 |
| | 395,407 |
| 1,778 |
| | 36,237 |
| | 45,085 |
| | 183,232 |
| | 266,332 |
|
| Other third-party payor programs | — |
| | — |
| | 30,346 |
| | 55,732 |
| | 86,078 |
| — |
| | — |
| | 20,667 |
| | 36,715 |
| | 57,382 |
|
| Total resident fee revenue | $ | 462,321 |
| | $ | 1,537,432 |
| | $ | 314,012 |
| | $ | 328,649 |
| | $ | 2,642,414 |
| $ | 317,690 |
| | $ | 1,054,307 |
| | $ | 209,865 |
| | $ | 220,373 |
| | $ | 1,802,235 |
|
The Company has not further disaggregated management fee revenues and revenue for reimbursed costs incurred on behalf of managed communities as the economic factors affecting the nature, timing, amount, and uncertainty of revenue and cash flows do not significantly vary within each respective revenue category.
Contract Balances
The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source, although terms generally include payment to be made within 30 days.
Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance.advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain ancillaryhealth care services is generally billed monthly in arrears. Additionally, non-refundable community fees are generally billed and collected in advance or upon move-in of a resident under residency agreements forthe Company's independent living, and assisted living, services.and memory care residency agreements. Amounts of revenue that are collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had total deferred revenue (included within refundable entrance fees and deferred revenue, deferred liabilities, and other liabilities within the condensed consolidated balance sheets) of $103.6$81.7 million and $112.4$106.4 million, including $45.8$32.0 million and $49.7$50.6 million of monthly resident fees billed and received in advance, as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. For the ninesix months ended SeptemberJune 30, 2019 and 2018, the Company recognized $76.2$72.7 million and $68.9 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2019 and 2018. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance obligations that have original expected durations of one year or less.
For the three and nine months ended September 30, 2018, the Company recognized $4.5 million and $13.4 million of charges within facility operating expenses within the condensed consolidated statement of operations for additions to the allowance for doubtful accounts.
16.15. Segment Information
As of September 30, 2018, theThe Company has five reportable segments: Retirement Centers;Independent Living; Assisted Living; CCRCs-Rental; Brookdale AncillaryLiving and Memory Care; CCRCs; Health Care Services; and Management Services. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is
available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
Retirement CentersIndependent Living. The Company's Retirement CentersIndependent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors generally age 75 and older who desire an upscale residential environment providing the highest quality of service. The majority of the Company's retirement centerindependent living communities consist of both independent living and assisted living units in a single community, which allows residents to "age-in-place"age-in-place by providing them with a continuum of senior independent and assisted living services.
Assisted Living.Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. Assisted living and memory care communities include both freestanding, multi-story communities and freestanding, single story communities. The Company also operatesprovides memory care services at freestanding memory care communities whichthat are freestanding assisted living communities specially designed for residents with Alzheimer's disease and other dementias.
CCRCs-Rental.CCRCs. The Company's CCRCs-RentalCCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of the Company's CCRCs have independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also include memory care and Alzheimer's units.services.
Brookdale AncillaryHealth Care Services. The Company's Brookdale AncillaryHealth Care Services segment includes the home health, hospice, and outpatient therapy services, as well as education and wellness programs, provided to residents of many of the Company's communities and to seniors living outside of the Company's communities. The Brookdale AncillaryHealth Care Services segment does not include the skilled nursing and inpatient therapyhealthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs-RentalCCRCs segment.
Management Services. The Company's Management Services segment includes communities operated by the Company pursuant to management agreements. In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a venture structure in which the Company has an ownership interest. Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of expenses it incurs on behalf of the owners.
The accounting policies of the Company's reportable segments are the same as those described in the summary of significant accounting policies in Note 2.
The following table sets forth selected segment financial and operating data:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| (in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| Revenue: | | | | | | | |
Retirement Centers (1) | $ | 144,631 |
| | $ | 161,986 |
| | $ | 462,321 |
| | $ | 496,854 |
|
Assisted Living (1) | 483,125 |
| | 542,227 |
| | 1,537,432 |
| | 1,680,194 |
|
CCRCs-Rental (1) | 104,147 |
| | 108,075 |
| | 314,012 |
| | 364,075 |
|
Brookdale Ancillary Services (1) | 108,276 |
| | 110,604 |
| | 328,649 |
| | 332,766 |
|
Management Services (2) | 279,883 |
| | 255,096 |
| | 820,082 |
| | 707,337 |
|
| | $ | 1,120,062 |
| | $ | 1,177,988 |
| | $ | 3,462,496 |
| | $ | 3,581,226 |
|
Segment Operating Income: (3) | |
| | |
| | |
| | |
|
| Retirement Centers | $ | 57,106 |
| | $ | 65,907 |
| | $ | 186,662 |
| | $ | 207,206 |
|
| Assisted Living | 144,701 |
| | 173,576 |
| | 490,976 |
| | 577,936 |
|
| CCRCs-Rental | 21,809 |
| | 22,932 |
| | 70,291 |
| | 82,591 |
|
| Brookdale Ancillary Services | 9,487 |
| | 9,823 |
| | 28,008 |
| | 38,555 |
|
| Management Services | 18,528 |
| | 18,138 |
| | 54,280 |
| | 56,474 |
|
| | 251,631 |
| | 290,376 |
| | 830,217 |
| | 962,762 |
|
| General and administrative (including non-cash stock-based compensation expense) | 57,309 |
| | 63,779 |
| | 194,333 |
| | 196,429 |
|
| Transaction costs | 1,487 |
| | 1,992 |
| | 8,805 |
| | 12,924 |
|
| Facility lease expense | 70,392 |
| | 84,437 |
| | 232,752 |
| | 257,934 |
|
| Depreciation and amortization | 110,980 |
| | 117,649 |
| | 341,351 |
| | 366,023 |
|
| Goodwill and asset impairment | 5,500 |
| | 368,551 |
| | 451,966 |
| | 390,816 |
|
| Loss on facility lease termination and modification | 2,337 |
| | 4,938 |
| | 148,804 |
| | 11,306 |
|
| Income (loss) from operations | $ | 3,626 |
| | $ | (350,970 | ) | | $ | (547,794 | ) | | $ | (272,670 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue: | | | | | | | |
Independent Living (1) | $ | 135,951 |
| | $ | 159,293 |
| | $ | 271,645 |
| | $ | 317,690 |
|
Assisted Living and Memory Care (1) | 450,225 |
| | 522,027 |
| | 908,751 |
| | 1,054,307 |
|
CCRCs (1) | 101,253 |
| | 104,796 |
| | 204,980 |
| | 209,865 |
|
Health Care Services (1) | 114,434 |
| | 109,853 |
| | 225,966 |
| | 220,373 |
|
Management Services (2) | 217,594 |
| | 259,231 |
| | 450,159 |
| | 540,199 |
|
| Total revenue | $ | 1,019,457 |
| | $ | 1,155,200 |
| | $ | 2,061,501 |
| | $ | 2,342,434 |
|
Segment operating income: (3) | | | | | | | |
| Independent Living | $ | 51,459 |
| | $ | 65,134 |
| | $ | 104,335 |
| | $ | 129,556 |
|
| Assisted Living and Memory Care | 133,144 |
| | 169,737 |
| | 273,843 |
| | 346,275 |
|
| CCRCs | 17,847 |
| | 23,819 |
| | 39,484 |
| | 48,482 |
|
| Health Care Services | 9,167 |
| | 10,203 |
| | 17,340 |
| | 18,521 |
|
| Management Services | 15,449 |
| | 17,071 |
| | 31,192 |
| | 35,752 |
|
| Total segment operating income | 227,066 |
| | 285,964 |
| | 466,194 |
| | 578,586 |
|
| General and administrative expense (including non-cash stock-based compensation expense) | 57,576 |
| | 62,907 |
| | 113,887 |
| | 144,342 |
|
| Facility operating lease expense | 67,689 |
| | 81,960 |
| | 136,357 |
| | 162,360 |
|
| Depreciation and amortization | 94,024 |
| | 116,116 |
| | 190,912 |
| | 230,371 |
|
| Goodwill and asset impairment | 3,769 |
| | 16,103 |
| | 4,160 |
| | 446,466 |
|
| Loss on facility lease termination and modification, net | 1,797 |
| | 146,467 |
| | 2,006 |
| | 146,467 |
|
| Income (loss) from operations | $ | 2,211 |
| | $ | (137,589 | ) | | $ | 18,872 |
| | $ | (551,420 | ) |
|
| | | | | | | |
| | As of |
| (in thousands) | September 30, 2018 | | December 31, 2017 |
| Total assets: | | | |
| Retirement Centers | $ | 1,295,001 |
| | $ | 1,266,076 |
|
| Assisted Living | 3,775,584 |
| | 4,535,114 |
|
| CCRCs-Rental | 716,815 |
| | 667,234 |
|
| Brookdale Ancillary Services | 254,781 |
| | 257,257 |
|
| Corporate and Management Services | 452,456 |
| | 949,768 |
|
| | $ | 6,494,637 |
| | $ | 7,675,449 |
|
|
| | | | | | | |
| | As of |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Total assets: | | | |
| Independent Living | $ | 1,469,683 |
| | $ | 1,104,774 |
|
| Assisted Living and Memory Care | 4,293,648 |
| | 3,684,170 |
|
| CCRCs | 792,344 |
| | 707,819 |
|
| Health Care Services | 270,496 |
| | 254,950 |
|
| Corporate and Management Services | 633,311 |
| | 715,547 |
|
| Total assets | $ | 7,459,482 |
| | $ | 6,467,260 |
|
| |
| (1) | All revenue is earned from external third parties in the United States. |
| |
| (2) | Management services segment revenue includes management fees and reimbursements of costs incurred on behalf of managed communities. |
| |
| (3) | Segment operating income is defined as segment revenues less segment facility operating expensesexpense (excluding depreciation and amortization) and costs incurred on behalf of managed communities. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our redefined strategy, including initiatives undertaken to execute on our strategic priorities and their intended effect on our results; our operational, sales, marketing and branding initiatives; our expectations regarding the economy, the senior living industry, senior housing construction, supply and competition, occupancy and pricing and the demand for senior housing; our expectations regarding our revenue, cash flow, operating income, expenses, capital expenditures, including expected levels and reimbursements and the timing thereof, expansion, redevelopment and repositioning opportunities, including Program Max opportunities, and their projected costs, cost savings and synergies, and our liquidity and leverage; our plans and expectations with respect to acquisition, disposition, development, lease restructuring and termination, financing, re-financing and venture transactions and opportunities (including assets held for sale and other pending and planned transactions), including the timing thereof and their effects on our results; our expectations regarding taxes, capital deployment and returns on invested capital, Adjusted EBITDA and Adjusted Free Cash Flow (as those terms are defined in this Quarterly Report on Form 10-Q); our expectations regarding returns to stockholders, the payment of dividends and our evaluation of opportunistically utilizing our existing share repurchase program; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding changes in government reimbursement programs and their effect on our results; our plans to expand our offering of ancillary services; and our ability to anticipate, manage and address industry trends and their effect on our business.expectations. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "project," "predict," "continue," "plan," "target" or other similar words or expressions. These forward-lookingAlthough these forward looking statements are based on certain assumptions and expectations and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Althoughthat we believe that expectations reflected in any forward-looking statements are based on reasonable, assumptions, we can give no assurance that our assumptions or expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the risk associated with the current global economic situation and its impact upon capital markets and liquidity; changes in governmental reimbursement programs; the risk of overbuilding, new supply and new competition; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our resident fees and entrance fees, including downturns in the economy, national or entrance fees; the conditions oflocal housing markets, consumer confidence or the equity markets and unemployment among family members; changes in certain geographic areas;reimbursement rates, methods or timing under governmental reimbursement programs including the Medicare and Medicaid programs; the impact of ongoing healthcare reform efforts; the effects of continued new senior housing construction and development, oversupply and increased competition; disruptions in the financial markets that affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; the risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, interest rates and tax rates; our ability to generate sufficient cash flow to cover required interest and long-term lease payments and to fund our planned capital projects; risks related to the implementation of our redefined strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; the effect of our indebtedness and long-term leases on our liquidity; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained therein) and, including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements;agreements and the risk of loss of our property pursuantsecuring leases and indebtedness due to any resulting lease terminations and foreclosure actions; the effect of our mortgage debtborrowing base calculations and long-term lease obligations; the possibilities thatour consolidated fixed charge coverage ratio on availability under our revolving credit facility; increased competition for or a shortage of personnel, wage pressures resulting from increased competition, low unemployment levels, minimum wage increases and changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; market conditionsovertime laws, and capital allocation decisions that may influence our determination from time to time whether to purchase any shares under our existing share repurchase program; our ability to fund any repurchases; our ability to effectively manage our growth; our abilityunion activity; failure to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be ablesecurity and functionality of our information systems or to expand, redevelop and reposition our communities in accordance with our plans;prevent a cybersecurity attack or breach; our ability to complete acquisition,pending or expected disposition lease restructuring and termination, financing, re-financing and ventureor other transactions (including assets held for sale and other pending and planned transactions) on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing, and our ability to identify and pursue any such opportunities in the future; our ability to obtain additional capital on terms acceptable to us; our ability to complete our capital expenditures in accordance with our plans; our ability to identify and pursue development, investment and acquisition opportunities and our ability to successfully integrate acquisitions; competition for the acquisition of assets; delays in obtaining regulatory approvals; risks associated with the lifecare benefits offered to residents of certain of our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns;entrance fee CCRCs; terminations, early or otherwise, or non-renewal of management agreements; conditions of housing markets, regulatory changes and acts of nature in certain geographic areas;areas where we are concentrated; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewaldepartures of management agreements; increased competition for skilled personnel; increased wage pressure and union activity; departure of our key officers and potential disruption caused by changes in management; increasesrisks related to the implementation of our strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; actions of activist stockholders; market conditions and capital allocation decisions that may influence our determination from time to time whether to purchase any shares under our existing share repurchase program and our ability to fund any repurchases; our ability to maintain consistent quality control; a decrease in market interest rates;the overall demand for senior housing; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations; unanticipated costs to comply with legislative or regulatory developments, including requirements to obtain emergency power generators for our communities;developments; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk
Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 20172018 and Part II, "Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements, and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Overview
As of SeptemberJune 30, 2018,2019, we are the largest operator of senior living communities in the United States based on total capacity, with 961809 communities in 4645 states and the ability to serve approximately 93,00077,000 residents. We offer our residents access to a full continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, and dementia-care communitiesmemory care, and continuing care retirement centerscommunities ("CCRCs"). Through our ancillary services programs, weWe also offer a range of home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities.
We believe that we operate in the most attractive sectors of the senior living industry, and ourOur goal is to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer. With our range of community and service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time. Our community and service offerings combine housing health care,with hospitality and ancillaryhealthcare services. Our senior living communities offer residents a supportive home-like setting, assistance with activities of daily living (ADL) such as eating, bathing, dressing, toileting, and transferring/walking and, in certain communities, licensed skilled nursing services. We also provide ancillary services, including home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to "age-in-place,"age-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives. With our platform of a range of community and service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time.
Leadership and Our StrategyCommunity Portfolio
During the first quarter of 2018, the Company's Board of Directors made several changes to our key leadership. Effective February 28, 2018, Lucinda M. Baier, who had served as our Chief Financial Officer since 2015, was appointed as our President and Chief Executive Officer and member of the Board of Directors, at which time the employment of our former President and Chief Executive Officer was terminated. In addition, the employment of our former Executive Vice President and Chief Administrative Officer was terminated effective March 9, 2018. Effective September 4, 2018, Steven E. Swain joined the Company as Executive Vice President and Chief Financial Officer, replacing Teresa F. Sparks who had served as interim Chief Financial Officer since March 28, 2018.
For 2018, we have re-evaluated and redefined our strategic priorities, which are now focused on our three primary stakeholders: our stockholders, our associates, and, always at our foundation, our residents, patients and their families. Through our redefined strategy, we intend to provide attractive long-term returns to our stockholders; attract, engage, develop and retain the best associates; and earn the trust and endorsements of our residents, patients and their families.
Stockholders. Our stockholders' continued investment in us allows us to advance our mission to our residents and their families. Therefore we believe we must balance our mission with an emphasis on margin. With this strategic priority, we intend to improve RevPAR, Adjusted EBITDA and Adjusted Free Cash Flow over time.
Associates. Brookdale's culture is based on servant leadership, and our associates are the key to attracting and caring for residents and creating value for all of our stakeholders. Through this strategic priority, we intend to create a compelling value proposition for our associates in the areas of compensation, leadership, career growth and meaningful work. In 2017, we took the first corrective steps by investing in community leaders, and in 2018 we have extended this plan deeper in the communities.
Residents, Patients and Their Families. Brookdale continues to be driven by its mission—to enrich the lives of those we serve with compassion, respect, excellence and integrity—and we believe this continued focus is essential to create value for all of our stakeholders. This strategic priority includes enhancing our organizational alignment to foster an environment where our associates can focus on providing valued, high quality care and personalized service. We intend to win locally through our
targeted sales and marketing efforts by differentiating our community and service offerings based on quality, a portfolio of choices, and personalized service delivered by caring associates.
We believe that our successful execution on these strategic priorities will allow us to achieve our goal to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer.
As part of our redefined strategy, we plan to continue to evaluate and, where opportunities arise, pursue lease restructurings, development and acquisition opportunities, including selectively acquiring existing operating companies, senior living communities, and ancillary services companies. Any such restructurings or acquisitions may be pursued on our own, or through investments in ventures. In addition, we intend to continue to evaluate our owned and leased community portfolios for opportunities to dispose of owned communities and terminate leases. As part of this evaluation, during 2018 we have entered into significant lease restructuring and termination transactions with two of our largest lessors. We also continue to execute on our plan to market in 2018 and sell 26 owned communities, 19 of which were under contract for sale and included in assets held for sale as of September 30, 2018. We believe the sale of these owned communities will generate more than $250 million of proceeds, net of associated debt and transaction costs.
Portfolio Optimization Update
During the year ended December 31, 2017, we completed sales of three communities (311 units) and termination of leases on 105 communities (10,014 units), we amended and restated triple-net leases covering substantially all the communities we lease from HCP, Inc. ("HCP") into a master lease, we sold our 10% interest in a RIDEA unconsolidated venture with HCP, and we invested $8.8 million on Program Max projects (an initiative under which we expand, renovate, redevelop and reposition certain of our existing communities where economically advantageous), net of $8.1 million of third party lessor reimbursements.
During the nine months ended September 30, 2018, we completed sales of three communities (310 units) and termination of triple-net leases on 66 communities (7,033 units), we sold our ownership interests in four unconsolidated ventures, we acquired six communities (995 units), and long-term management agreements on 20 communities were terminated. Subsequent to September 30, 2018, leases with respect to 17 additional communities (1,463 units) were terminated.
As of SeptemberJune 30, 2018, 322019, we owned 336 communities (2,693(31,165 units) were classified as held for sale, including 19, leased 335 communities under contract for sale as part(24,044 units), managed 17 communities (7,306 units) on behalf of our plan to market in 2018unconsolidated ventures, and sell 26 owned communities. We completedmanaged 121 communities (14,145 units) on behalf of third parties. During the disposition of Brookdale Battery Park on November 1, 2018 and received proceeds of approximately $144 million, net of associated debt and transaction costs. Wenext 12 months, we expect to completeclose on the dispositions of the remaining assetsfive owned communities (889 units) classified as held for sale as of SeptemberJune 30, 20182019, which resulted in $46.3 million being recorded as assets held for sale and $18.5 million of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to such communities. This debt is expected to be repaid with the proceeds from the sales. Assets held for sale as of June 30, 2019 include five communities under contract, and we continue to market several other communities, as part of our real estate strategy announced in 2018. During the next 12 months. Additionally,months we have completed or expectalso anticipate terminations of certain of our management arrangements with third parties as we transition to complete the termination of long-termnew operators our interim management agreements on approximately 40formerly leased communities (approximately 5,500 units) during the next six months.
The closings of the expected sales of assets are subject (where applicable) toand our successful marketing of such assetsmanagement on terms acceptable to us. Further, thecertain former unconsolidated ventures in which we sold our interest. The closings of the various pending transactions and expected sales of assetstransactions are, or will be subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
A summaryCompleted Transactions and Impact of the foregoing transactions,Dispositions on Results of Operations
During 2017 and the impact of dispositions on our results of operations, are below.
HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, we announced that we had entered into a definitive agreement for a multi-part transaction with HCP. As part of such transaction, we entered into an Amended and Restated Master Lease and Security Agreement ("HCP Master Lease") with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
Master Lease Transactions. We and HCP amended and restated triple-net leases covering substantially all of the communities we leased from HCP as of November 1, 2017 into the HCP Master Lease. During the nine months ended September 30, 2018 we acquired twoundertook an initiative to optimize our community portfolio under which we disposed of owned and leased communities formerly leased (208 units) for an aggregate purchase price of $35.4 million and leases with respect to 16 communities (1,660 units) were terminated, and such communities were removed from the HCP Master Lease. Pursuant to the HCP Master Lease, leases with respect to 17 additional communities (1,463 units) were terminated subsequent to September 30, 2018, and such communities were removed from the HCP Master Lease, which completed the terminations of leases on a total of 33 communities as providedrestructured leases. Further, in the HCP Master Lease. For communities for which HCP has not transitioned operations and/or management of such communities to a third party, we continue to manage such communities on an interim basis. We continue to lease 43 communities pursuant to the terms of the HCP Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior
instruments, except that effective January 1, 2018 we received a $2.5 million annual rent reductionevaluated our owned-community portfolio for twoopportunities to monetize select high-value communities. The HCP Master Lease also provides that we may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.
RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, HCP acquired our 10% ownership interest in one of our RIDEA ventures with HCP in December 2017 for $32.1 million (for which we recognized a $7.2 million gain on sale) and our 10% ownership interest in the remaining RIDEA venture with HCP in March 2018 for $62.3 million (for which we recognized a $41.7 million gain on sale). We provided management services to 59 communities (9,585 units) on behalf of the two RIDEA ventures as of November 1, 2017. Pursuant to the multi-part transaction agreement, we acquired one community (137 units) for an aggregate purchase price of $32.1 million in January 2018 and three communities (650 units) for an aggregate purchase price of $207.4 million in April 2018 and retained management of 18 of such communities (3,276 units). The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management of 37 of such communities. Management agreements for three and 20 such communities (422 and 2,789 units, respectively) were terminated by HCP during the three and nine months ended September 30, 2018 (for which we recognized a $0.6 million and $5.6 million non-cash management contract termination gain, respectively), and we expect the termination of management agreements on the remaining 17 communities (2,733 units) to occur in stages throughout the next six months.
We financed the foregoing community acquisitions with non-recourse mortgage financing and proceeds from the sales of our ownership interest in the unconsolidated ventures. See Note 9 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information regarding the non-recourse first mortgage financing.
In addition, we obtained future annual cash rent reductions and waived management termination fees in the multi-part transaction. As a result of the multi-part transaction, we reduced ourthese initiatives, lease liabilities by $9.7 million for the future annual cash rent reductionsrestructuring, expiration and recognized a $9.7 million deferred liability for the consideration received from HCP in advance of the termination of the management agreements for the 37 communities, and we reduced the carrying value of capital lease obligations and assets under capital leases by $145.6 million. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Ventas Lease Portfolio Restructuring
On April 26, 2018, we entered into several agreements to restructure a portfolio of 128 communities (10,567 units) we leased from Ventas, Inc. and certain of its subsidiaries (collectively, "Ventas") as of such date, including a Master Lease and Security Agreement (the "Ventas Master Lease"). The Ventas Master Lease amended and restated prior leases comprising an aggregate portfolio of 107 communities (8,459 units) into the Ventas Master Lease. Under the Ventas Master Leaseactivity, and other agreements entered into on April 26, 2018,transactions, during the 21 additional communities (2,107 units) leased by us from Ventas pursuant to separate lease agreements have been or will be combined automatically into the Ventas Master Lease upon the first to occurperiod of Ventas' election or the repayment of, or receipt of lender consent with respect to, mortgage debt underlying such communities. During the three months ended September 30, 2018, the community leases for 17 of such communities were combined into the Ventas Master Lease. We and Ventas agreed to observe, perform and enforce such separate leases as if they had been combined into the Ventas Master Lease effective April 26,January 1, 2018 to the extent not in conflict with any mortgage debt underlying such communities. The transaction agreements with Ventas further provide that the Ventas Master Lease and certain other agreements between us and Ventas will be cross-defaulted.
The initial termJune 30, 2019 we disposed of the Ventas Master Lease ends December 31, 2025, with two 10-year extension options available to us. In the event of the consummation of a change of control transaction of the Company on or before December 31, 2025, the initial term of the Ventas Master Lease will be extended automatically through December 31, 2029. The Ventas Master Lease and separate lease agreements with Ventas, which are guaranteed at the parent level by us, provide for total rent in 2018 of $175.0 million for the 128 communities, including the pro-rata portion of an $8.0 million annual rent credit for 2018. We will receive an annual rent credit of $8.0 million in 2019, $7.0 million in 2020 and $5.0 million thereafter; provided, that if a change of control of the Company occurs prior to 2021, the annual rent credit will be reduced to $5.0 million. Effective on January 1, 2019, the annual minimum rent will be subject to an escalator equal to the lesser of 2.25% or four times the Consumer Price Index ("CPI") increase for the prior year (or zero if there was a CPI decrease).
The Ventas Master Lease requires us to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month period commencing with the 24-month period ending December 31, 2019 and thereafter each 24-month period ending December 31 during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the first extension term (if any). If a change of control of the Company occurs, we will be required, within 36 months following the
closing of such transaction, to invest (or escrow with Ventas) an aggregate of $30.0 million in the30 owned communities for revenue-enhancing capital projects.
Under the definitive agreements with Ventas, we, at the parent level, must satisfy certain financial covenants (including tangible net worth(2,534 units) and leverage ratios) and may consummate a change of control transaction without the need for consent of Ventas so long as certain objective conditions are satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas.
At our option, which must be exercised on or before April 26, 2019, we may provide notice to Ventas of our election to direct Ventas to market for sale one or more communities with up to approximately $30.0 million of annual minimum rent. Upon receipt of such notice, Ventas will be obligated to use commercially reasonable, diligent efforts to sell such communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community will be subject to Ventas' receiving a purchase price in excess of a minimum sale price to be mutually agreed by us and Ventas and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received by Ventas multiplied by 6.25%.
We estimated the fair value of each of the elements of the restructuring transactions. The fair value of the future lease payments is based upon historical and forecasted community cash flows and market data, including a management fee rate of 5% of revenue and a market supported lease coverage ratio. We recognized a $125.7 million non-cash loss on lease modification in the nine months ended September 30, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that are unfavorable to us given current market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018 we announced that we had entered into definitive agreements with Welltower Inc. ("Welltower"). The components of the agreements include:
Lease Terminations. We and Welltower agreed to early termination of our triple-net lease obligations on 37 communities (4,095 units) effective June 30, 2018. The two lease portfolios were due to mature in 2028 (27 communities; 3,175 units) and 2020 (10 communities; 920 units). We paid Welltower an aggregate lease termination fee of $58.0 million.97 communities (9,636 units) were terminated. During this period we also sold our ownership interests in five unconsolidated ventures and acquired six communities that we previously leased or managed. We will continueagreed to manage the foregoing 37a number of formerly leased communities on an interim basis until the communities arehave been transitioned to new managers, and during such interim periods those communities will beare reported in the Management Services segment during such interim period. We recognized a $22.6 million losssegment.
Summaries of the significant transactions impacting the periods presented, and the impacts of dispositions of owned and leased communities on lease terminationour results of operations, are included below. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the nine monthsyear ended September 30,December 31, 2018 for more details regarding the amount by which the aggregate lease termination fee exceeded the net carrying value of our assets and liabilities under operating and capital leases at the lease termination date.
Future Lease Terminations. The parties separately agreed to allow us to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale of such communities, and we would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds.
RIDEA Restructuring. We agreed to sell our 20% equity interest in our existing Welltower RIDEA venture to Welltower, effective June 30, 2018, for net proceeds of $33.5 million (for which we recognized a $14.7 million gain on sale during the nine months ended September 30, 2018). As of September 30, 2018, we provided management services to the 15 venture communities and will continue to manage the communities until the communities are transitioned by Welltower to new managers.
We also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities; 1,128 units). After conclusion of the foregoing lease expirations, we continue to operate 74 communities (3,688 units) under triple-net leases with Welltower, and our remaining lease agreements with Welltower contain an objective change of control standard that allows us to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject to the satisfaction of certain conditions. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Blackstone Venture
On March 29, 2017, we and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the "Blackstone Venture") that acquired 64 senior housing communities for a purchase price of $1.1 billion. We had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases, and we contributed our leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fund our share of closing costs. As of the formation date, we continued to operate two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a management agreement with the venture.Two of the communities are managed by a third party for the venture. As a resultterms of such transactions, including transactions we entered into with Ventas, Inc. ("Ventas"), Welltower Inc. ("Welltower") and HCP, Inc. ("HCP") during 2017 we recordedand 2018, which together restructured a $19.7 million charge within goodwill and asset impairment expense and recorded a provision for income taxes to establish an additional $85.0 millionsignificant portion of valuation allowance against our federal and state net operating loss carryforwards and tax credits as we expect these carryforwards and credits will not be utilized prior to expiration. During the three months ended March 31, 2018, we recorded a $33.4 million non-cash impairment charge within goodwill and asset impairment expense to reflect the amount by which the carrying valuetriple-net lease obligations with our largest lessors.
Summaries of the investment exceeded the estimated fair value.Completed Transactions
| |
| • | Dispositions of Owned Communities. During the year ended December 31, 2018, we completed the sale of 22 owned communities (1,819 units) for cash proceeds of $380.7 million, net of transaction costs. These dispositions included the sale of three communities during the six months ended June 30, 2018 for cash proceeds of $12.8 million, net of associated debt and transaction costs, and for which we recognized a net gain on sale of assets of $1.9 million. During the six months ended |
During the third quarter of 2018, leases for the two communities owned by the Blackstone Venture were terminated and we sold our 15% equity interest in the Blackstone Venture to Blackstone. We paid Blackstone an aggregate fee of $2.0 million to complete the multi-part transaction. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Dispositions of Owned Communities During 2018 and Assets Held for Sale
During the nine months ended SeptemberJune 30, 2018,2019, we completed the sale of threeeight owned communities (310(715 units) for net cash proceeds of $12.8 million. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
As of September 30, 2018, 32 communities (2,693 units) were classified as held for sale, resulting in $241.9 million being recorded as assets held for sale and $158.6 million of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to such communities. This debt will either be repaid with the proceeds from the sales or be assumed by the prospective purchasers. Among the communities included in assets held for sale as of September 30, 2018 were 19 communities under contract for sale as part of our plan to market in 2018 and sell 26 owned communities. As part of this plan, during the three months ended September 30, 2018, we entered into a definitive agreement to sell Brookdale Battery Park to Ventas, and to manage the community following closing. We completed the disposition of Brookdale Battery Park on November 1, 2018 and received proceeds of approximately $144$39.0 million, net of associated debt and transaction costs. Additionally, duringcosts, and for which we recognized a net gain on sale of assets of $1.6 million and $0.9 million for the third quarter of 2018, we entered into a definitive agreement to sell 18 communities as part of this plan.three and six months ended June 30, 2019, respectively.
| |
| • | Welltower. Pursuant to transactions we entered into with Welltower in June 2018, our triple-net lease obligations on 37 communities (4,095 units) were terminated effective June 30, 2018. We paid Welltower an aggregate lease termination fee of $58.0 million, and we recognized a $22.6 million loss on lease termination during the three months ended June 30, 2018. In addition, effective June 30, 2018, we sold our 20% equity interest in our Welltower RIDEA venture to Welltower for net proceeds of $33.5 million and for which we recognized a $14.7 million gain on sale during the three months ended June 30, 2018. We also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities; 1,128 units). In addition, the parties separately agreed to allow us to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale of such communities, and we would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds. |
| |
| • | Ventas. During the three months ended June 30, 2018, we recognized a $125.7 million non-cash loss on lease modification in connection with our restructuring a portfolio of 128 communities that we leased from Ventas into a Master Lease and Security Agreement (the "Ventas Master Lease"), primarily for the extension of the triple-net lease obligations for communities with lease terms that were unfavorable to us given market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases. Pursuant to the Ventas Master Lease, we have exercised our right to direct Ventas to market for sale 28 communities. Ventas is obligated to use commercially reasonable, diligent efforts to sell such communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community is subject to Ventas' receiving a purchase price in excess of a mutually agreed upon minimum sale price and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received by Ventas multiplied by 6.25%. During the three months ended June 30, 2019, five (306 units) of the 28 communities identified were sold by Ventas and removed from the Ventas Master Lease, and the annual minimum rent was prospectively reduced by $1.5 million. |
| |
| • | HCP. Pursuant to transactions we entered into with HCP in November 2017, during the three months ended June 30, 2018, we acquired five communities (858 units) from HCP, two of which we formerly leased, for an aggregate purchase price of $242.8 million, and during the three months ended March 31, 2018, we acquired one community (137 units) for an aggregate purchase price of $32.1 million. During the year ended December 31, 2018 leases with respect to 33 communities (3,123 units) were terminated, and such communities were removed from our master lease with HCP. In addition, during the three months ended March 31, 2018, HCP acquired our 10% ownership interest in our RIDEA venture with HCP for $62.3 million and for which we recognized a $41.7 million gain on sale. Management agreements for 35 communities with former unconsolidated ventures with HCP have been terminated by HCP since November 2017. We expect the termination of management agreements on two communities (190 units) to occur during the remainder of 2019, and we have recognized a $9.3 million non-cash management contract termination gain, of which $0.3 million and $2.8 million was recognized during the three months ended June 30, 2019 and 2018, respectively, and $0.8 million and $5.1 million was recognized during the six months ended June 30, 2019 and 2018 respectively. |
| |
| • | Blackstone. During the three months ended September 30, 2018, leases for two communities owned by a former unconsolidated venture with affiliates of Blackstone Real Estate Advisors VIII L.P. were terminated, and we sold our 15% equity interest in the venture. We paid an aggregate fee of $2.0 million to complete the multi-part transaction. |
Dispositions of Owned Communities and Other Lease Terminations During 2017
During the year ended December 31, 2017, we completed the sale of three communities (311 units) for net cash proceeds of $8.2 million, and we terminated leases for 43 (4,201 units) communities otherwise than in connection with the transactions with HCP and Blackstone described above (including terminations of leases for 26 communities pursuant to the transactions with HCP announced in November 2016).
Summary of Financial Impact of Completed Dispositions
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial data for the 104124 communities that we disposed through sales and lease terminations during the period from JulyApril 1, 2017 through September2018 to June 30, 20182019 through the respective disposition dates:
|
| | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Retirement Centers | $ | 144,631 |
| | $ | — |
| | $ | 144,631 |
|
| Assisted Living | 483,125 |
| | 13,017 |
| | 470,108 |
|
| CCRCs-Rental | 104,147 |
| | 1,975 |
| | 102,172 |
|
| Senior housing resident fees | $ | 731,903 |
| | $ | 14,992 |
| | $ | 716,911 |
|
| Facility operating expense | | | | | |
| Retirement Centers | $ | 87,525 |
| | $ | — |
| | $ | 87,525 |
|
| Assisted Living | 338,424 |
| | 9,732 |
| | 328,692 |
|
| CCRCs-Rental | 82,338 |
| | 1,500 |
| | 80,838 |
|
| Senior housing facility operating expense | $ | 508,287 |
| | $ | 11,232 |
| | $ | 497,055 |
|
| Cash lease payments | $ | 105,530 |
| | $ | 4,821 |
| | $ | 100,709 |
|
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 135,951 |
| | $ | — |
| | $ | 135,951 |
|
| Assisted Living and Memory Care | 450,225 |
| | 2,176 |
| | 448,049 |
|
| CCRCs | 101,253 |
| | — |
| | 101,253 |
|
| Senior housing resident fees | $ | 687,429 |
| | $ | 2,176 |
| | $ | 685,253 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 84,492 |
| | $ | — |
| | $ | 84,492 |
|
| Assisted Living and Memory Care | 317,081 |
| | 1,562 |
| | 315,519 |
|
| CCRCs | 83,406 |
| | — |
| | 83,406 |
|
| Senior housing facility operating expense | $ | 484,979 |
| | $ | 1,562 |
| | $ | 483,417 |
|
| Cash facility lease payments | $ | 94,267 |
| | $ | 306 |
| | $ | 93,961 |
|
|
| | | | | | | | | | | |
| | Three Months Ended September 30, 2017 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Retirement Centers | $ | 161,986 |
| | $ | 22,933 |
| | $ | 139,053 |
|
| Assisted Living | 542,227 |
| | 74,882 |
| | 467,345 |
|
| CCRCs-Rental | 108,075 |
| | 9,107 |
| | 98,968 |
|
| Senior housing resident fees | $ | 812,288 |
| | $ | 106,922 |
| | $ | 705,366 |
|
| Facility operating expense | | | | | |
| Retirement Centers | $ | 96,079 |
| | $ | 14,037 |
| | $ | 82,042 |
|
| Assisted Living | 368,651 |
| | 53,211 |
| | 315,440 |
|
| CCRCs-Rental | 85,143 |
| | 8,362 |
| | 76,781 |
|
| Senior housing facility operating expense | $ | 549,873 |
| | $ | 75,610 |
| | $ | 474,263 |
|
| Cash lease payments | $ | 132,989 |
| | $ | 30,524 |
| | $ | 102,465 |
|
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 159,293 |
| | $ | 29,241 |
| | $ | 130,052 |
|
| Assisted Living and Memory Care | 522,027 |
| | 86,151 |
| | 435,876 |
|
| CCRCs | 104,796 |
| | 4,213 |
| | 100,583 |
|
| Senior housing resident fees | $ | 786,116 |
| | $ | 119,605 |
| | $ | 666,511 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 94,159 |
| | $ | 17,016 |
| | $ | 77,143 |
|
| Assisted Living and Memory Care | 352,290 |
| | 60,854 |
| | 291,436 |
|
| CCRCs | 80,977 |
| | 3,859 |
| | 77,118 |
|
| Senior housing facility operating expense | $ | 527,426 |
| | $ | 81,729 |
| | $ | 445,697 |
|
| Cash facility lease payments | $ | 125,228 |
| | $ | 32,228 |
| | $ | 93,000 |
|
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial data for the 177127 communities that we disposed through sales and lease terminations during the period from January 1, 2017 through September2018 to June 30, 20182019 through the respective disposition dates:
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Retirement Centers | $ | 462,321 |
| | $ | 32,327 |
| | $ | 429,994 |
|
| Assisted Living | 1,537,432 |
| | 124,141 |
| | 1,413,291 |
|
| CCRCs-Rental | 314,012 |
| | 7,879 |
| | 306,133 |
|
| Senior housing resident fees | $ | 2,313,765 |
| | $ | 164,347 |
| | $ | 2,149,418 |
|
| Facility operating expense | | | | | |
| Retirement Centers | $ | 275,659 |
| | $ | 19,302 |
| | $ | 256,357 |
|
| Assisted Living | 1,046,456 |
| | 84,556 |
| | 961,900 |
|
| CCRCs-Rental | 243,721 |
| | 6,836 |
| | 236,885 |
|
| Senior housing facility operating expense | $ | 1,565,836 |
| | $ | 110,694 |
| | $ | 1,455,142 |
|
| Cash lease payments | $ | 361,013 |
| | $ | 55,244 |
| | $ | 305,769 |
|
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 271,645 |
| | $ | — |
| | $ | 271,645 |
|
| Assisted Living and Memory Care | 908,751 |
| | 12,282 |
| | 896,469 |
|
| CCRCs | 204,980 |
| | — |
| | 204,980 |
|
| Senior housing resident fees | $ | 1,385,376 |
| | $ | 12,282 |
| | $ | 1,373,094 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 167,310 |
| | $ | — |
| | $ | 167,310 |
|
| Assisted Living and Memory Care | 634,908 |
| | 10,100 |
| | 624,808 |
|
| CCRCs | 165,496 |
| | — |
| | 165,496 |
|
| Senior housing facility operating expense | $ | 967,714 |
| | $ | 10,100 |
| | $ | 957,614 |
|
| Cash facility lease payments | $ | 189,514 |
| | $ | 1,451 |
| | $ | 188,063 |
|
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Retirement Centers | $ | 496,854 |
| | $ | 77,583 |
| | $ | 419,271 |
|
| Assisted Living | 1,680,194 |
| | 268,496 |
| | 1,411,698 |
|
| CCRCs-Rental | 364,075 |
| | 62,758 |
| | 301,317 |
|
| Senior housing resident fees | $ | 2,541,123 |
| | $ | 408,837 |
| | $ | 2,132,286 |
|
| Facility operating expense | | | | | |
| Retirement Centers | $ | 289,648 |
| | $ | 46,910 |
| | $ | 242,738 |
|
| Assisted Living | 1,102,258 |
| | 186,591 |
| | 915,667 |
|
| CCRCs-Rental | 281,484 |
| | 54,159 |
| | 227,325 |
|
| Senior housing facility operating expense | $ | 1,673,390 |
| | $ | 287,660 |
| | $ | 1,385,730 |
|
| Cash lease payments | $ | 421,888 |
| | $ | 115,294 |
| | $ | 306,594 |
|
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 317,690 |
| | $ | 60,871 |
| | $ | 256,819 |
|
| Assisted Living and Memory Care | 1,054,307 |
| | 178,267 |
| | 876,040 |
|
| CCRCs | 209,865 |
| | 10,705 |
| | 199,160 |
|
| Senior housing resident fees | $ | 1,581,862 |
| | $ | 249,843 |
| | $ | 1,332,019 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 188,134 |
| | $ | 35,668 |
| | $ | 152,466 |
|
| Assisted Living and Memory Care | 708,032 |
| | 125,423 |
| | 582,609 |
|
| CCRCs | 161,383 |
| | 9,917 |
| | 151,466 |
|
| Senior housing facility operating expense | $ | 1,057,549 |
| | $ | 171,008 |
| | $ | 886,541 |
|
| Cash facility lease payments | $ | 255,483 |
| | $ | 66,935 |
| | $ | 188,548 |
|
The following table sets forth the number of communities and units in our senior housing segments disposed ofthrough sales and lease terminations during the ninesix months ended SeptemberJune 30, 20182019 and twelve months ended December 31, 2017:2018:
|
| | | | | |
| | Nine Months Ended
September 30, | | Twelve Months Ended December 31, |
| | 2018 | | 2017 |
| Number of communities | | | |
| Retirement Centers | 10 |
| | 10 |
|
| Assisted Living | 57 |
| | 86 |
|
| CCRCs-Rental | 2 |
| | 12 |
|
| Total | 69 |
| | 108 |
|
| Total units | | | |
| Retirement Centers | 1,756 |
| | 2,078 |
|
| Assisted Living | 5,201 |
| | 5,858 |
|
| CCRCs-Rental | 386 |
| | 2,389 |
|
| Total | 7,343 |
| | 10,325 |
|
|
| | | | | |
| | Six Months Ended
June 30, | | Twelve Months Ended December 31, |
| | 2019 | | 2018 |
| Number of communities | | | |
| Independent Living | — |
| | 17 |
|
| Assisted Living and Memory Care | 16 |
| | 91 |
|
| CCRCs | — |
| | 3 |
|
| Total | 16 |
| | 111 |
|
| Total units | | | |
| Independent Living | — |
| | 2,864 |
|
| Assisted Living and Memory Care | 1,322 |
| | 7,437 |
|
| CCRCs | — |
| | 547 |
|
| Total | 1,322 |
| | 10,848 |
|
The results
Other Recent Developments
Impact of operationsNew Lease Accounting Standard
We adopted the new lease accounting standard (ASC 842) effective January 1, 2019. Adoption of the 17 communities (1,463 units) for whichnew lease terminations have closed following September 30, 2018standard and of the 32 communities (2,693 units) held for sale as of September 30, 2018 are reportedits application to residency agreements and costs related thereto resulted in the following segments within the condensed consolidated financial statements: Assisted Living (39 communities; 2,665 units), Retirement Centers (seven communities; 1,108 units),recognition of additional non-cash resident fees and CCRCs-Rental (three communities; 383 units). The following table sets forth the amounts included within our consolidated financial data for these 49 communitiesfacility operating expense for the three and ninesix months ended SeptemberJune 30, 2018:2019. The result was a non-cash net impact to net income (loss) and Adjusted EBITDA of negative $6.5 million and $13.0 million for the three and six months ended June 30, 2019, respectively. For the full year 2019, we expect the non-cash net impact of adoption of the new lease standard and application to our residency agreements and costs related thereto to be negative $27.0 million to net income (loss) and Adjusted EBITDA. Adoption of the new lease standard had no impact on the amount of net cash provided by (used in) operating activities and Adjusted Free Cash Flow for the three and six months ended June 30, 2019 and is not expected to have any impact on such measures for the full year.
|
| | | | | | | |
| (in thousands) | Three Months Ended
September 30, 2018 | | Nine Months Ended
September 30, 2018 |
| Resident fees | | | |
| Retirement Centers | $ | 14,098 |
| | $ | 42,643 |
|
| Assisted Living | 23,226 |
| | 71,558 |
|
| CCRCs - Rental | 3,881 |
| | 11,686 |
|
| Senior housing resident fees | $ | 41,205 |
| | $ | 125,887 |
|
| Facility operating expense | | | |
| Retirement Centers | $ | 8,650 |
| | $ | 24,954 |
|
| Assisted Living | 18,117 |
| | 54,370 |
|
| CCRCs-Rental | 3,945 |
| | 11,718 |
|
| Senior housing facility operating expense | $ | 30,712 |
| | $ | 91,042 |
|
| Cash lease payments | $ | 4,862 |
| | $ | 14,616 |
|
During and since 2016 we have experienced an elevated rate of competitive new openings, with significant new competition opening in several of our markets, which has adversely affected our occupancy, revenues, results of operations, and cash flow. We expect the elevated rate of competitive new openings and pressures on our occupancy and rate growth to continue through 2019. Such increased level of new openings and oversupply, as well as lower levels of unemployment, generally have also contributed to increased competition for community leadership and personnel and wage pressures. We continue to address new competition by focusing on operations with the objective to ensure high customer satisfaction, retain key leadership, and actively engage district and regional management in community operations; enhancing our local and national marketing and public relations efforts; and evaluating current community position relative to competition and repositioning if necessary (e.g., services, amenities, programming and price). We also continue to invest above industry to improve the total rewards program and performance management, training, and development program for our community leaders and staff.
Planned Capital Expenditures
During 2018 we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that our communities are in appropriate physical condition to support our strategy and determining what additional investments are needed to protect the value of our community portfolio. As a result of that review, we have budgeted to make significant additional near-term investments in our communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million. For 2019, this includes an increase of approximately $75 million in our community-level capital expenditures relative to 2018, primarily attributable to major building infrastructure projects. We anticipate that our 2019 capital expenditures will be funded from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility. We expect that our 2020 community-level capital expenditures will continue to be elevated relative to 2018, but lower than 2019.
Program Max Initiative
During the ninesix months ended SeptemberJune 30, 2018,2019, we also made continued progress on our Program Max initiative under which we expand, renovate, redevelop, and reposition certain of our existing communities where economically advantageous. For the nine months ended September 30, 2018,During such period, we invested $20.1$10.6 million on Program Max projects, net of $1.7 million of third party lessor reimbursements.projects. We currently have seven20 Program Max projects that have been approved, most of which have begun construction and are expected to generate 9188 net new units.
Tax Reform
On December 22, 2017, the President signed the Tax Cuts and Jobs Act ("Tax Act") into law. The Tax Act reformed the United States corporate income tax code, including a reduction to the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminated alternative minimum tax (AMT) and the 20-year carryforward limitation for net operating losses incurred after December 31, 2017, and imposes a limit on the usage of net operating losses incurred after such date equal to 80% of taxable income in any given year. The 80% usage limit will not have an economic impact on the Company until its
current net operating losses are either utilized or expired. In addition, the Tax Act limits the annual deductibility of a corporation's net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business exception. The Company plans to elect the real property trade or business exception with the 2018 tax return. As such, the Company will beis required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified improvement property assets. This change did not have a material effect forimpacts the nine months ended September 30, 2018 but will impactcurrent and future tax depreciation deductions and may impactimpacted the Company’sCompany's valuation allowance. The Company is unable to estimate the impact of this change at this time. For the year ended December 31, 2017, reasonable estimates for our state and local provision were made based on our analysis of tax reform. These provisional amounts were not adjusted in the nine months ended September 30, 2018 but may be adjusted in future periods during 2018 when additional information is obtained.allowance accordingly. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on the Company's state and local income tax returns, state and local net operating losses, and corresponding valuation allowances.
Results of Operations
Beginning in 2016, we experienced an elevated rate
As of new openings, with significant new competition opening in several of our markets, which adversely affected our occupancy, revenues, and results of operations. We continue to address such competition through pricing initiatives based on the competitive market, current in-place rents and occupancy; focusing on operations, including ensuring high customer satisfaction, protecting key leadership positions and actively engaging district and regional management in community operations; local and national marketing efforts, including leveraging our industry leading name through enhanced digital, direct mail and local community outreach; and community segmentation through which we evaluate current community position relative to competition and reposition if necessary (e.g., price, services, amenities and programming). We expect the elevated rate of new openings to continue to put pressures on our RevPAR growth for the majority of 2019.
Summary of Operating Results
The tables below present a summary of our operating results and certain other financial metrics for the three and nine months ended SeptemberJune 30, 2018 and 2017 and the amount and percentage of increase or decrease of each applicable item.
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Increase (Decrease) |
| (in millions) | 2018 | | 2017 | | Amount | | Percent |
| Total revenues | $ | 1,120.1 |
| | $ | 1,178.0 |
| | $ | (57.9 | ) | | (4.9 | )% |
| Facility operating expense | $ | 607.1 |
| | $ | 650.7 |
| | $ | (43.6 | ) | | (6.7 | )% |
| Net income (loss) | $ | (37.1 | ) | | $ | (413.9 | ) | | $ | (376.8 | ) | | (91.0 | )% |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (37.1 | ) | | $ | (413.9 | ) | | $ | (376.8 | ) | | (91.0 | )% |
Adjusted EBITDA(1) | $ | 124.9 |
| | $ | 141.8 |
| | $ | (16.9 | ) | | (11.9 | )% |
| Net cash provided by operating activities | $ | 71.9 |
| | $ | 93.8 |
| | $ | (21.9 | ) | | (23.3 | )% |
Adjusted Free Cash Flow(1) | $ | 6.2 |
| | $ | 16.4 |
| | $ | (10.2 | ) | | (62.3 | )% |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Increase (Decrease) |
| (in millions) | 2018 | | 2017 | | Amount | | Percent |
| Total revenues | $ | 3,462.5 |
| | $ | 3,581.2 |
| | $ | (118.7 | ) | | (3.3 | )% |
| Facility operating expense | $ | 1,866.5 |
| | $ | 1,967.6 |
| | $ | (101.1 | ) | | (5.1 | )% |
| Net income (loss) | $ | (659.9 | ) | | $ | (586.6 | ) | | $ | (73.3 | ) | | (12.5 | )% |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (659.8 | ) | | $ | (586.5 | ) | | $ | (73.3 | ) | | (12.5 | )% |
Adjusted EBITDA(1) | $ | 397.1 |
| | $ | 500.5 |
| | $ | (103.3 | ) | | (20.6 | )% |
| Net cash provided by operating activities | $ | 170.5 |
| | $ | 294.3 |
| | $ | (123.8 | ) | | (42.1 | )% |
Adjusted Free Cash Flow(1) | $ | 24.0 |
| | $ | 120.4 |
| | $ | (96.4 | ) | | (80.1 | )% |
| |
(1) | Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures we use to assess our operating performance and liquidity. See "Non-GAAP Financial Measures" below for important information regarding both measures. As described further below, amounts of Adjusted Free Cash Flow reflect an increase of $10.6 million and $11.2 million for the three and nine months ended September 30, 2017 as a result of our retrospective application of ASU 2016-15. |
During the nine months ended September 30, 2018, total revenues were $3.5 billion, a decrease of $118.7 million, or 3.3%, over2019 our total revenues for the nine months ended September 30, 2017. Resident fees for the nine months ended September 30, 2018 decreased $231.5 million, or 8.1%operations included 809 communities with a capacity to serve approximately 77,000 residents. As of that date we owned 336 communities (31,165 units), from the nine months ended September 30, 2017. Management fees decreased $2.2 million, or 3.9%leased 335 communities (24,044 units), from the nine months ended September 30, 2017, and reimbursed costs incurredmanaged 17 communities (7,306 units) on behalf of unconsolidated ventures, and managed 121 communities increased $114.9 million, or 17.7%. The decrease in resident fees during the nine months ended September 30, 2018 was primarily due to disposition activity, through sales and lease terminations, since the beginning(14,145 units) on behalf of the prior year period. Weighted average occupancy at the 712 communities we owned or leased during both full nine month periods decreased 100 basis points to 84.6%. The decrease in resident fees at the 712 communities we owned or leased during both full nine month periods was partially offset by a 1.0% increase in senior housing average monthly revenue per occupied unit (RevPOR) compared to the prior year nine month period.
During the nine months ended September 30, 2018, facility operating expense was $1.9 billion, a decrease of $101.1 million, or 5.1%, compared to the nine months ended September 30, 2017. The decrease in facility operating expense was primarily due to the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period. Facility operating expense increased $59.4 million, or 4.5%, at the 712 communities we owned or leased during both full nine month periods, primarily due to an increase in labor expense arising from wage rate increases.
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders for the nine months ended September 30, 2018 was $(659.8) million, compared to net income (loss) attributable to Brookdale Senior Living Inc. common stockholders of $(586.5) million for the nine months ended September 30, 2017. Net income (loss) for the nine months ended September 30, 2018 was $(659.9) million as compared to net income (loss) of $(586.6) million for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, our Adjusted EBITDA was $397.1 million, a decrease of 20.6% compared to the nine months ended September 30, 2017. The decrease in Adjusted EBITDA is primarily due to increases in community labor expense at the communities operated during both full periods and disposition activity, through asset sales and lease terminations, since the beginning of the prior year period.
During the nine months ended September 30, 2018, net cash provided by operating activities was $170.5 million, a decrease of $123.8 million, or 42.1%, over our net cash provided by operating activities for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, our Adjusted Free Cash Flow was $24.0 million, a decrease of 80.1% when compared to the nine months ended September 30, 2017.
Adjusted EBITDA and Adjusted Free Cash Flow include transaction and organizational restructuring costs of $25.4 million for the nine months ended September 30, 2018 and transaction and strategic project costs of $14.5 million for the nine months ended September 30, 2017.
Consolidated Results of Operations
Comparison of Three Months Ended September 30, 2018 and 2017
third parties. The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following datadiscussion should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period of January 1, 2018 to June 30, 2019 significantly affect the comparability of our results of operations, and summaries of such transactions and their impact on our results of operations are above under "Recent Transaction Activity and Impact to Results of Operations."
AsThis section uses the operating measures defined below. Our adoption and application of Septemberthe new lease accounting standard has impacted our results for the three and six months ended June 30, 20182019, and will impact our total operations included 961 communities withresults for the remaining 2019 periods, due to our recognition of additional resident fee revenue and facility operating expense, which is non-cash and is non-recurring in future years. To aid in comparability between periods, presentations of our results on a capacity to serve approximately 93,000 residents.
|
| | | | | | | | | | | | | | |
| (dollars in thousands, except Total RevPAR, RevPAR and RevPOR) | Three Months Ended
September 30, | | Increase (Decrease) |
| | 2018 | | 2017 | | Amount | | Percent (6) |
| Statement of Operations Data: | | | | | | | |
| Revenue | | | | | | | |
| Resident fees | | | | | | | |
| Retirement Centers | $ | 144,631 |
| | $ | 161,986 |
| | $ | (17,355 | ) | | (10.7 | )% |
| Assisted Living | 483,125 |
| | 542,227 |
| | (59,102 | ) | | (10.9 | )% |
| CCRCs-Rental | 104,147 |
| | 108,075 |
| | (3,928 | ) | | (3.6 | )% |
| Brookdale Ancillary Services | 108,276 |
| | 110,604 |
| | (2,328 | ) | | (2.1 | )% |
| Total resident fees | 840,179 |
| | 922,892 |
| | (82,713 | ) | | (9.0 | )% |
Management services (1) | 279,883 |
| | 255,096 |
| | 24,787 |
| | 9.7 | % |
| Total revenue | 1,120,062 |
| | 1,177,988 |
| | (57,926 | ) | | (4.9 | )% |
| Expense | |
| | |
| | |
| | |
|
| Facility operating expense | |
| | |
| | |
| | |
|
| Retirement Centers | 87,525 |
| | 96,079 |
| | (8,554 | ) | | (8.9 | )% |
| Assisted Living | 338,424 |
| | 368,651 |
| | (30,227 | ) | | (8.2 | )% |
| CCRCs-Rental | 82,338 |
| | 85,143 |
| | (2,805 | ) | | (3.3 | )% |
| Brookdale Ancillary Services | 98,789 |
| | 100,781 |
| | (1,992 | ) | | (2.0 | )% |
| Total facility operating expense | 607,076 |
| | 650,654 |
| | (43,578 | ) | | (6.7 | )% |
| General and administrative expense | 57,309 |
| | 63,779 |
| | (6,470 | ) | | (10.1 | )% |
| Transaction costs | 1,487 |
| | 1,992 |
| | (505 | ) | | (25.4 | )% |
| Facility lease expense | 70,392 |
| | 84,437 |
| | (14,045 | ) | | (16.6 | )% |
| Depreciation and amortization | 110,980 |
| | 117,649 |
| | (6,669 | ) | | (5.7 | )% |
| Goodwill and asset impairment | 5,500 |
| | 368,551 |
| | (363,051 | ) | | (98.5 | )% |
| Loss on facility lease termination and modification, net | 2,337 |
| | 4,938 |
| | (2,601 | ) | | (52.7 | )% |
| Costs incurred on behalf of managed communities | 261,355 |
| | 236,958 |
| | 24,397 |
| | 10.3 | % |
| Total operating expense | 1,116,436 |
| | 1,528,958 |
| | (412,522 | ) | | (27.0 | )% |
| Income (loss) from operations | 3,626 |
| | (350,970 | ) | | 354,596 |
| | 101.0 | % |
| Interest income | 1,654 |
| | 1,285 |
| | 369 |
| | 28.7 | % |
| Interest expense | (68,626 | ) | | (79,999 | ) | | (11,373 | ) | | (14.2 | )% |
| Debt modification and extinguishment costs | (33 | ) | | (11,129 | ) | | (11,096 | ) | | (99.7 | )% |
| Equity in loss of unconsolidated ventures | (1,340 | ) | | (6,722 | ) | | (5,382 | ) | | (80.1 | )% |
| Gain (loss) on sale of assets, net | 9,833 |
| | (233 | ) | | 10,066 |
| | NM |
|
| Other non-operating income | (17 | ) | | 2,621 |
| | (2,638 | ) | | (100.6 | )% |
| Income (loss) before income taxes | (54,903 | ) | | (445,147 | ) | | (390,244 | ) | | (87.7 | )% |
| Benefit for income taxes | 17,763 |
| | 31,218 |
| | (13,455 | ) | | (43.1 | )% |
| Net income (loss) | (37,140 | ) | | (413,929 | ) | | (376,789 | ) | | (91.0 | )% |
| Net (income) loss attributable to noncontrolling interest | 19 |
| | 44 |
| | (25 | ) | | (56.8 | )% |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (37,121 | ) | | $ | (413,885 | ) | | $ | (376,764 | ) | | (91.0 | )% |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Increase (Decrease) |
| | 2018 | | 2017 | | Amount | | Percent (6) |
| Selected Operating and Other Data: | | | | | | | |
| Total number of communities (period end) | 961 |
| | 1,031 |
| | (70 | ) | | (6.8 | )% |
Total units operated (2) | | | |
| | |
| | |
|
| Period end | 92,520 |
| | 101,202 |
| | (8,682 | ) | | (8.6 | )% |
| Weighted average | 93,841 |
| | 101,529 |
| | (7,688 | ) | | (7.6 | )% |
Owned/leased communities units (2) | | | |
| | |
| | |
|
| Period end | 60,009 |
| | 69,675 |
| | (9,666 | ) | | (13.9 | )% |
| Weighted average | 61,370 |
| | 70,112 |
| | (8,742 | ) | | (12.5 | )% |
Total RevPAR (3) | $ | 4,561 |
| | $ | 4,386 |
| | $ | 175 |
| | 4.0 | % |
RevPAR (4) | $ | 3,973 |
| | $ | 3,860 |
| | $ | 113 |
| | 2.9 | % |
| Owned/leased communities occupancy rate (weighted average) | 84.2 | % | | 84.8 | % | | (0.6 | )% | | (0.7 | )% |
RevPOR (5) | $ | 4,718 |
| | $ | 4,552 |
| | $ | 166 |
| | 3.6 | % |
| Selected Segment Operating and Other Data: | |
| | |
| | |
| | |
|
| Retirement Centers | | | |
| | |
| | |
|
| Number of communities (period end) | 75 |
| | 85 |
| | (10 | ) | | (11.8 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 13,550 |
| | 15,961 |
| | (2,411 | ) | | (15.1 | )% |
| Weighted average | 13,553 |
| | 16,061 |
| | (2,508 | ) | | (15.6 | )% |
RevPAR (4) | $ | 3,557 |
| | $ | 3,362 |
| | $ | 195 |
| | 5.8 | % |
| Occupancy rate (weighted average) | 89.5 | % | | 87.6 | % | | 1.9 | % | | 2.2 | % |
RevPOR (5) | $ | 3,973 |
| | $ | 3,836 |
| | $ | 137 |
| | 3.6 | % |
| Assisted Living | |
| | |
| | |
| | |
|
| Number of communities (period end) | 627 |
| | 705 |
| | (78 | ) | | (11.1 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 39,725 |
| | 46,520 |
| | (6,795 | ) | | (14.6 | )% |
| Weighted average | 40,933 |
| | 46,858 |
| | (5,925 | ) | | (12.6 | )% |
RevPAR (4) | $ | 3,934 |
| | $ | 3,857 |
| | $ | 77 |
| | 2.0 | % |
| Occupancy rate (weighted average) | 82.7 | % | | 84.2 | % | | (1.5 | )% | | (1.8 | )% |
RevPOR (5) | $ | 4,755 |
| | $ | 4,582 |
| | $ | 173 |
| | 3.8 | % |
| CCRCs-Rental | | | |
| | |
| | |
|
| Number of communities (period end) | 27 |
| | 30 |
| | (3 | ) | | (10.0 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 6,734 |
| | 7,194 |
| | (460 | ) | | (6.4 | )% |
| Weighted average | 6,884 |
| | 7,193 |
| | (309 | ) | | (4.3 | )% |
RevPAR (4) | $ | 5,024 |
| | $ | 4,989 |
| | $ | 35 |
| | 0.7 | % |
| Occupancy rate (weighted average) | 82.6 | % | | 82.6 | % | | — | % | | — | % |
RevPOR (5) | $ | 6,082 |
| | $ | 6,046 |
| | $ | 36 |
| | 0.6 | % |
| Management Services | | | |
| | |
| | |
|
| Number of communities (period end) | 232 |
| | 211 |
| | 21 |
| | 10.0 | % |
Total units (2) | | | |
| | |
| | |
|
| Period end | 32,511 |
| | 31,527 |
| | 984 |
| | 3.1 | % |
| Weighted average | 32,471 |
| | 31,417 |
| | 1,054 |
| | 3.4 | % |
| Occupancy rate (weighted average) | 84.0 | % | | 84.5 | % | | (0.5 | )% | | (0.6 | )% |
|
| | | | | | | | | | | | | | |
| Brookdale Ancillary Services | |
| | |
| | |
| | |
|
| Home Health average daily census | 14,890 |
| | 14,844 |
| | 46 |
| | 0.3 | % |
| Hospice average daily census | 1,411 |
| | 1,169 |
| | 242 |
| | 20.7 | % |
| Outpatient Therapy treatment codes | 168,569 |
| | 178,851 |
| | (10,282 | ) | | (5.7 | )% |
same community basis and RevPAR and RevPOR exclude the impact of the lease accounting standard.
| |
(1)• | Management services segmentOperating results and data presented on a same community basis reflect results and data of the same store communities (utilizing our methodology for determining same store communities) and, for the 2019 period, exclude the additional resident fee revenue includes management fees and reimbursementsfacility operating expense recognized as a result of costs incurred on behalfapplication of managed communities.the new lease accounting standard under ASC 842. |
| |
(2)• | Weighted average units operated represents the average units operated during the period. |
| |
(3) | Total RevPAR or average monthly resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding entrance fee amortization, for the Company for the period, divided by the weighted average number of available units in the Company's consolidated portfolio for the period, divided by the number of months in the period. |
| |
(4) | RevPAR,, or average monthly senior housing resident fee revenuesrevenue per available unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillaryrevenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the corresponding portfolio for2019 period, the period,additional resident fee revenue recognized as a result of the application of the new lease accounting standard under ASC 842), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(5)• | RevPOR, or average monthly senior housing resident fee revenuesrevenue per occupied unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillaryrevenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the corresponding portfolio for2019 period, the period,additional resident fee revenue recognized as a result of the application of the new lease accounting standard under ASC 842), divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. |
Resident FeesThis section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures. During the first quarter of 2019, we modified our definition of Adjusted EBITDA to exclude transaction and organizational restructuring costs, and amounts for all periods herein reflect application of the modified definition.
Resident fee
Comparison of Three Months Ended June 30, 2019 and 2018
Summary Operating Results
The following table summarizes our overall operating results for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2019 | | 2018 | | Amount | | Percent |
| Total revenue | $ | 1,019,457 |
| | $ | 1,155,200 |
| | $ | (135,743 | ) | | (11.8 | )% |
| Facility operating expense | 590,246 |
| | 627,076 |
| | (36,830 | ) | | (5.9 | )% |
| Net income (loss) | (56,055 | ) | | (165,509 | ) | | (109,454 | ) | | (66.1 | )% |
| Adjusted EBITDA | 104,036 |
| | 147,217 |
| | (43,181 | ) | | (29.3 | )% |
The decrease in total revenue decreased $82.7was primarily attributable to the disposition of 124 communities through sales of owned communities and lease terminations since the beginning of the prior year period, which resulted in $117.4 million or 9.0%,less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by a 1.9% increase in same community RevPAR at the 650 communities we owned or leased during both full periods, comprised of a 3.3% increase in same community RevPOR and a 110 basis points decrease in same community weighted average occupancy. Additionally, management services revenue, including management fees and reimbursed costs incurred on behalf of managed communities, decreased $41.6 million primarily due to terminations of management agreements subsequent to the beginning of the prior year period.
The decrease in facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $80.2 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease was partially offset by a 5.5% increase in same community facility operating expense, which was primarily due to an increase in labor expense attributable to wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense of approximately $5.3 million and $11.8 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense excludes approximately $4.9 million and $11.0 million, respectively, of such additional revenue and expenses.
The improvement to net income (loss) was primarily attributable to a decrease in loss on facility lease termination and modification compared to the prior period, offset by a decrease in net gain on sale of assets and the revenue and facility operating expense factors noted above. We recognized a loss on lease termination and modification of $146.5 million for the three months ended June 30, 2018 primarily as a result of agreements with Ventas and Welltower. Net gain on sale of assets was $2.8 million for the three months ended June 30, 2019 compared to $23.3 million for the prior year period.
The decrease in Adjusted EBITDA was primarily attributable to the revenue and facility operating expense factors noted above, offset by lower cash facility operating lease payments of $15.0 million.
Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 687,429 |
| | $ | 786,116 |
| | $ | (98,687 | ) | | (12.6 | )% |
| Facility operating expense | $ | 484,979 |
| | $ | 527,426 |
| | $ | (42,447 | ) | | (8.0 | )% |
| | | | | | | | |
| Number of communities (period end) | 671 |
| | 748 |
| | (77 | ) | | (10.3 | )% |
| Number of units (period end) | 55,209 |
| | 61,709 |
| | (6,500 | ) | | (10.5 | )% |
| Number of units (weighted average) | 55,465 |
| | 66,342 |
| | (10,877 | ) | | (16.4 | )% |
| RevPAR | $ | 4,097 |
| | $ | 3,948 |
| | $ | 149 |
| | 3.8 | % |
| Occupancy rate (weighted average) | 83.5 | % | | 84.1 | % | | (60 | ) bps | | n/a |
|
| RevPOR | $ | 4,909 |
| | $ | 4,692 |
| | $ | 217 |
| | 4.6 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 642,708 |
| | $ | 631,016 |
| | $ | 11,692 |
| | 1.9 | % |
| Facility operating expense | $ | 446,065 |
| | $ | 422,647 |
| | $ | 23,418 |
| | 5.5 | % |
| | | | | | | | |
| Number of communities | 650 |
| | 650 |
| | — |
| | — | % |
| Total average units | 51,905 |
| | 51,930 |
| | (25 | ) | | — | % |
| RevPAR | $ | 4,125 |
| | $ | 4,048 |
| | $ | 77 |
| | 1.9 | % |
| Occupancy rate (weighted average) | 83.7 | % | | 84.8 | % | | (110 | ) bps | | n/a |
|
| RevPOR | $ | 4,930 |
| | $ | 4,773 |
| | $ | 157 |
| | 3.3 | % |
Independent Living Segment
The following table summarizes the operating results and data for our Independent Living segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 135,951 |
| | $ | 159,293 |
| | $ | (23,342 | ) | | (14.7 | )% |
| Facility operating expense | $ | 84,492 |
| | $ | 94,159 |
| | $ | (9,667 | ) | | (10.3 | )% |
| | | | | | | | |
| Number of communities (period end) | 68 |
| | 75 |
| | (7 | ) | | (9.3 | )% |
| Number of units (period end) | 12,460 |
| | 13,559 |
| | (1,099 | ) | | (8.1 | )% |
| Number of units (weighted average) | 12,440 |
| | 15,083 |
| | (2,643 | ) | | (17.5 | )% |
| RevPAR | $ | 3,592 |
| | $ | 3,520 |
| | $ | 72 |
| | 2.0 | % |
| Occupancy rate (weighted average) | 89.1 | % | | 88.1 | % | | 100 | bps | | n/a |
|
| RevPOR | $ | 4,033 |
| | $ | 3,993 |
| | $ | 40 |
| | 1.0 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 122,192 |
| | $ | 118,595 |
| | $ | 3,597 |
| | 3.0 | % |
| Facility operating expense | $ | 73,870 |
| | $ | 69,887 |
| | $ | 3,983 |
| | 5.7 | % |
| | | | | | | | |
| Number of communities | 63 |
| | 63 |
| | — |
| | — | % |
| Total average units | 11,335 |
| | 11,358 |
| | (23 | ) | | (0.2 | )% |
| RevPAR | $ | 3,593 |
| | $ | 3,481 |
| | $ | 112 |
| | 3.2 | % |
| Occupancy rate (weighted average) | 89.6 | % | | 89.1 | % | | 50 | bps | | n/a |
|
| RevPOR | $ | 4,009 |
| | $ | 3,905 |
| | $ | 104 |
| | 2.7 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 17 communities since the beginning of the prior year period, which resulted in $29.2 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.7% increase in same community RevPOR and a 50 basis points increase in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $17.0 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $1.9 million and $3.1 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $1.8 million and $2.8 million, respectively, of such additional revenue and expenses.
Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 450,225 |
| | $ | 522,027 |
| | $ | (71,802 | ) | | (13.8 | )% |
| Facility operating expense | $ | 317,081 |
| | $ | 352,290 |
| | $ | (35,209 | ) | | (10.0 | )% |
| | | | | | | | |
| Number of communities (period end) | 577 |
| | 645 |
| | (68 | ) | | (10.5 | )% |
| Number of units (period end) | 36,175 |
| | 41,266 |
| | (5,091 | ) | | (12.3 | )% |
| Number of units (weighted average) | 36,451 |
| | 44,403 |
| | (7,952 | ) | | (17.9 | )% |
| RevPAR | $ | 4,092 |
| | $ | 3,919 |
| | $ | 173 |
| | 4.4 | % |
| Occupancy rate (weighted average) | 82.1 | % | | 82.9 | % | | (80 | ) bps | | n/a |
|
| RevPOR | $ | 4,987 |
| | $ | 4,725 |
| | $ | 262 |
| | 5.5 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 431,283 |
| | $ | 423,557 |
| | $ | 7,726 |
| | 1.8 | % |
| Facility operating expense | $ | 297,836 |
| | $ | 282,838 |
| | $ | 14,998 |
| | 5.3 | % |
| | | | | | | | |
| Number of communities | 564 |
| | 564 |
| | — |
| | — | % |
| Total average units | 34,933 |
| | 34,934 |
| | (1 | ) | | — | % |
| RevPAR | $ | 4,115 |
| | $ | 4,041 |
| | $ | 74 |
| | 1.8 | % |
| Occupancy rate (weighted average) | 82.3 | % | | 83.8 | % | | (150 | ) bps | | n/a |
|
| RevPOR | $ | 5,003 |
| | $ | 4,822 |
| | $ | 181 |
| | 3.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 105 communities since the beginning of the prior year period, which resulted in $84.0 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 3.8% increase in same community RevPOR and a 150 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $59.3 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $2.7 million and $7.4 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $2.6 million and $7.0 million, respectively, of such additional revenue and expenses.
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 101,253 |
| | $ | 104,796 |
| | $ | (3,543 | ) | | (3.4 | )% |
| Facility operating expense | $ | 83,406 |
| | $ | 80,977 |
| | $ | 2,429 |
| | 3.0 | % |
| | | | | | | | |
| Number of communities (period end) | 26 |
| | 28 |
| | (2 | ) | | (7.1 | )% |
| Number of units (period end) | 6,574 |
| | 6,884 |
| | (310 | ) | | (4.5 | )% |
| Number of units (weighted average) | 6,574 |
| | 6,856 |
| | (282 | ) | | (4.1 | )% |
| RevPAR | $ | 5,081 |
| | $ | 5,079 |
| | $ | 2 |
| | — | % |
| Occupancy rate (weighted average) | 80.6 | % | | 83.0 | % | | (240 | ) bps | | n/a |
|
| RevPOR | $ | 6,305 |
| | $ | 6,115 |
| | $ | 190 |
| | 3.1 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 89,233 |
| | $ | 88,864 |
| | $ | 369 |
| | 0.4 | % |
| Facility operating expense | $ | 74,359 |
| | $ | 69,922 |
| | $ | 4,437 |
| | 6.3 | % |
| | | | | | | | |
| Number of communities | 23 |
| | 23 |
| | — |
| | — | % |
| Total average units | 5,637 |
| | 5,638 |
| | (1 | ) | | — | % |
| RevPAR | $ | 5,254 |
| | $ | 5,234 |
| | $ | 20 |
| | 0.4 | % |
| Occupancy rate (weighted average) | 80.5 | % | | 82.4 | % | | (190 | ) bps | | n/a |
|
| RevPOR | $ | 6,528 |
| | $ | 6,349 |
| | $ | 179 |
| | 2.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of two communities since the beginning of the prior year period, which resulted in $4.2 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.8% increase in same community RevPOR and a 190 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. The increase in facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $3.9 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $0.7 million and $1.3 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $0.6 million and $1.1 million, respectively, of such additional revenue and expenses.
Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health Care Services segment for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except census and treatment codes) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 114,434 |
| | $ | 109,853 |
| | $ | 4,581 |
| | 4.2 | % |
| Facility operating expense | $ | 105,267 |
| | $ | 99,650 |
| | $ | 5,617 |
| | 5.6 | % |
| | | | | | | | |
| Home health average daily census | 15,966 |
| | 15,238 |
| | 728 |
| | 4.8 | % |
| Hospice average daily census | 1,540 |
| | 1,337 |
| | 203 |
| | 15.2 | % |
| Outpatient therapy treatment codes | 169,924 |
| | 176,065 |
| | (6,141 | ) | | (3.5 | )% |
The increase in the segment’s resident fees was primarily attributable to an increase in volume for hospice services and an increase in home health average daily census, offset by unfavorable case-mix and community dispositions.
The increase in the segment’s facility operating expense was primarily attributable to an increase in labor costs arising from wage rate increases and the expansion of our hospice services.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, and occupancy) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Management fees | $ | 15,449 |
| | $ | 17,071 |
| | $ | (1,622 | ) | | (9.5 | )% |
| Reimbursed costs incurred on behalf of managed communities | $ | 202,145 |
| | $ | 242,160 |
| | $ | (40,015 | ) | | (16.5 | )% |
| | | | | | | | |
| Number of communities (period end) | 138 |
| | 240 |
| | (102 | ) | | (42.5 | )% |
| Number of units (period end) | 21,451 |
| | 33,176 |
| | (11,725 | ) | | (35.3 | )% |
| Number of units (weighted average) | 22,464 |
| | 30,422 |
| | (7,958 | ) | | (26.2 | )% |
| Occupancy rate (weighted average) | 82.8 | % | | 83.6 | % | | (80 | ) bps | | n/a |
|
The decrease in management fees was primarily attributable to the transition of management arrangements on 80 net communities since the beginning of the prior year period, generally for interim management arrangements on formerly leased or owned communities and management arrangements on certain former unconsolidated ventures in which we sold our interest. Management fees of $15.4 million for the three months ended June 30, 2019 include $1.6 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately $1.7 million of management fees attributable to approximately 35 communities that, as of June 30, 2019, we expect the terminations of our management agreements to occur in the next year, including interim management arrangements on formerly leased communities and management arrangements on certain former unconsolidated ventures in which we sold our interest.
The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating results for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| General and administrative expense | $ | 57,576 |
| | $ | 62,907 |
| | $ | (5,331 | ) | | (8.5 | )% |
| Facility operating lease expense | 67,689 |
| | 81,960 |
| | (14,271 | ) | | (17.4 | )% |
| Depreciation and amortization | 94,024 |
| | 116,116 |
| | (22,092 | ) | | (19.0 | )% |
| Goodwill and asset impairment | 3,769 |
| | 16,103 |
| | (12,334 | ) | | (76.6 | )% |
| Loss on facility lease termination and modification, net | 1,797 |
| | 146,467 |
| | (144,670 | ) | | (98.8 | )% |
| Costs incurred on behalf of managed communities | 202,145 |
| | 242,160 |
| | (40,015 | ) | | (16.5 | )% |
| Interest income | 2,813 |
| | 2,941 |
| | (128 | ) | | (4.4 | )% |
| Interest expense | (62,828 | ) | | (73,901 | ) | | (11,073 | ) | | (15.0 | )% |
| Debt modification and extinguishment costs | (2,672 | ) | | (9 | ) | | 2,663 |
| | NM |
|
| Equity in loss of unconsolidated ventures | (991 | ) | | (1,324 | ) | | (333 | ) | | (25.2 | )% |
| Gain on sale of assets, net | 2,846 |
| | 23,322 |
| | (20,476 | ) | | (87.8 | )% |
| Other non-operating income | 3,199 |
| | 5,505 |
| | (2,306 | ) | | (41.9 | )% |
| Benefit (provision) for income taxes | (633 | ) | | 15,546 |
| | (16,179 | ) | | NM |
|
General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to a decrease in transaction and organizational restructuring costs. Transaction and organizational restructuring costs decreased $4.4 million compared to the prior period, to $0.6 million for the three months ended June 30, 2019. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, our assessment of options and alternatives to enhance stockholder value, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance and retention costs. For the remainder of 2019 we expect to incur additional transaction costs related to stockholder relations advisory matters.
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to lease termination activity since the beginning of the prior year quarter.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity through sales and lease terminations of 104 communities, since the beginning of the prior year period, which generated $15.0 million of revenue duringquarter.
Goodwill and Asset Impairment. During the current year period, compared to $106.9we recorded $3.8 million of revenue in the prior year period. The increases to RevPAR and RevPORnon-cash impairment charges, primarily for the consolidated portfolio are primarily due to the disposition of communitiesmanagement contract intangible assets associated with lower RevPOR since the beginning of the prior year period. Weighted average occupancy decreased 90 basis points at the 714 communities we owned or leased during both full periods, which reflects the impact of new competition in our markets. RevPAR and RevPOR at the 714 communities we owned or leased during both full periods increased by 0.2% and 1.3%, respectively. Total RevPAR for the consolidated portfolio also increased by 4.0% compared toterminated contracts. During the prior year period, primarily due to fewer weighted average units.
Retirement Centers segment revenue decreased $17.4we recorded $16.1 million or 10.7%, primarily due to the impact of dispositions of 12 communities since the beginning of thenon-cash impairment charges. The prior year period which generated no revenue during the current year period compared to $22.9impairment charges primarily consisted of a $9.2 million of revenuedecrease in the prior year period. Retirement Centers segment revenue atestimated selling prices of assets held for sale and a $6.9 million impairment of property, plant and equipment and leasehold intangibles for certain communities, primarily in the communities we operated during both full periods was $133.0 million during the current year period, an increase of $1.8 million, or 1.4%, over the prior year period, primarily due to a 140 basis point increase in weighted average occupancy.
Assisted Living segment revenue decreased $59.1 million, or 10.9%, primarily due to the impact of dispositions of 88 communities since the beginning of the prior year period, which generated $13.0 million of revenue during the current year period compared to $74.9 million of revenue in the prior year period. Assisted Living segment revenue at the communities we operated during both full periods was $463.4 million during the current year period, a decrease of $0.6 million, or 0.1%, over the prior year period, primarily due to a 170 basis point decrease in weighted average occupancy at these communities, partially offset by a 2.0% increase in RevPOR at these communities.
CCRCs-Rental segment revenue decreased $3.9 million, or 3.6%, primarily due to the impact of dispositions of four communities since the beginning of the prior year period, which generated $2.0 million of revenue during the current year period compared to $9.1 million of revenue in the prior year period. CCRCs-Rental segment revenue at the communities we operated during both full periods was $90.3 million during the current year period, an increase of $0.2 million, or 0.2%, over the prior year period, primarily due to a 0.7% increase in RevPOR at these communities, partially offset by a 40 basis point decrease in weighted average occupancy at these communities.
Brookdale Ancillary Services segment revenue decreased $2.3 million, or 2.1%, primarily due to a decline in home health revenue and the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") on January 1, 2018 under the modified retrospective approach which resulted in a $1.5 million decrease to resident fee revenue and facility operating expense.Memory Care segment. See Note 25 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09. These decreases were partially offset by an increasethe impairment charges.
Loss on Facility Lease Termination and Modification, Net. During the current year period, we recorded a $1.8 million loss on facility lease termination and modification, net for the termination of leases for seven communities. The decrease in volume for hospice services. For home healthloss on facility lease termination and modification, net was primarily due to a $125.7 million loss on the restructuring of community leases with Ventas and a $22.6 million loss on lease termination activity with Welltower during the three months ended June 30, 2018.
Costs Incurred on Behalf of Managed Communities. The decrease in 2018, CMS has implemented a net 0.4% reimbursement reduction, consisting of a 1.0% market basket inflation increase, less a 0.9% reduction to account for industry wide case-mix growth, and the sunset of the rural add-on provision. As a result, we expect our home health reimbursement to be reduced by approximately 0.8% in 2018 compared to 2017.
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed communities increased $24.8 million, or 9.7%, overwas primarily due to terminations of management agreements subsequent to the beginning of the prior year periodperiod.
Interest Expense. The decrease in interest expense was primarily due to our entry into interim management agreements with HCPfinancing lease termination activity and Welltower for communities for which our leases were terminated subsequent to the prior year period. Additionally, Management Services segment revenue increased due to the impactrepayment of the adoption of ASU 2014-09 on January 1, 2018 under the modified retrospective approach. The impact to revenue for reimbursed costs incurred on behalf of managed communities and reimbursed costs incurred on behalf of managed communities as a result of applying ASU 2014-09 was an increase of $11.2 million for the three months ended September 30, 2018. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09. Management fees of $18.5 million for 2018 include $0.4 million of management fees attributable to communities for which our management agreements were terminated in 2018 and approximately $4.7 million of management fees attributable to approximately 90 communities for which we expect the terminations of our management agreements to occur in stages throughout the next six months, including management fee revenue of $2.2 million attributable to communities managed on an interim basis subsequent to lease terminations.
Facility Operating Expense
Facility operating expense decreased $43.6 million, or 6.7%, over the prior year period primarily due to disposition activity, through sales and lease terminations, of 104 communitiesdebt since the beginning of the prior year period, which incurred $11.2period.
Gain on Sale of Assets, Net. The decrease in gain on sale of assets, net was primarily due to a $16.9 million gain on sale of facility operating expenseour investments in unconsolidated ventures and a $6.5 million gain on sale of three communities during the current year period compared to $75.6 million of facility operating expense in the prior year period. These decreases were partially offset by an increase in labor expense at the communities we operated during both full periods, reflecting the impact of
Benefit (Provision) for Income Taxes. The difference between our investment in salaries and benefits and a tight labor market during the current year period. We expect that our labor investments will continue into 2019. Facility operating expense included costs related to our responses to hurricanes of $1.5 million in the current year period and $5.4 million in the prior year period.
Retirement Centers segment facility operating expense decreased $8.6 million, or 8.9%, primarily due to the impact of dispositions of 12 communities since the beginning of the prior year period, which incurred no expense during the current year period compared to $14.0 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. Retirement Centers segment facility operating expense at the communities we operated during both full periods was $79.5 million in the current period, an increase of $4.1 million, or 5.4%, over the prior year period.
Assisted Living segment facility operating expense decreased $30.2 million, or 8.2%, primarily driven by the impact of dispositions of 88 communities since the beginning of the prior year period, which incurred $9.7 million expense during the current year period compared to $53.2 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. Assisted Living segment facility operating expense at the communities we operated during both full periods was $321.4 million in the current period, an increase of $13.3 million, or 4.3%, over the prior year period.
CCRCs-Rental segment facility operating expense decreased $2.8 million, or 3.3%, primarily driven by the impact of dispositions of four communities since the beginning of the prior year period, which incurred $1.5 million expense during the current year period compared to $8.4 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. CCRCs-Rental segment facility operating expense at the communities we operating during both full periods was $72.8 million in the current period, an increase of $3.1 million, or 4.5%, over the prior year period.
Brookdale Ancillary Services segment operating expense decreased $2.0 million, or 2.0%, primarily due to the impact of the adoption of ASU 2014-09 on January 1, 2018 under the modified retrospective approach which resulted in a $1.5 million decrease to resident fee revenue and facility operating expense. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09.
General and Administrative Expense
General and administrative expense decreased $6.5 million, or 10.1%, over the prior year period primarily due to a decrease in salaries and wages expense as a result of a reduction in corporate associate headcount in the current year. During the current year period, general and administrative expense included retention costs of $1.6 million.
Transaction Costs
Transaction costs decreased $0.5 million to $1.5 million. Transaction costs in the current year period were primarily related to direct costs related to community leasing activity, including lease terminations and modifications. Transaction costs in the prior year period were primarily related to our assessment of options and alternatives to enhance stockholder value and community disposition activity.
Facility Lease Expense
Facility lease expense decreased $14.0 million, or 16.6%, primarily due to lease termination activity since the beginning of the prior year period.
Depreciation and Amortization
Depreciation and amortization expense decreased $6.7 million, or 5.7%, primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period.
Goodwill and Asset Impairment
During the current year period, we recorded $5.5 million of non-cash impairment charges. The impairment charges primarily consisted of a $3.0 million decrease in the estimated selling prices of assets held for sale and $2.5 million of property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment. Asset impairment expense in the prior year period was primarily related to goodwill and property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment.
During the third quarter of 2017, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period since the last testing date, significant underperformance relative to historical and projected operating results, and an increased competitive environment in the senior living industry. As a result, we performed an interim quantitative goodwill impairment test as of September 30, 2017, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying amount of our Assisted Living segment exceeded its estimated fair value by $205.0 million as of September 30, 2017. As a result, we recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted Living segmenteffective tax rate for the three months ended SeptemberJune 30, 2017.
During the three months ended September 30, 2017, we evaluated property, plant2019 and equipment and leasehold intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $149.9 million for the three months ended September 30, 2017, including $131.2 million within the Assisted Living segment.
Additionally, during the third quarter of 2017, we identified indicators of impairment for our home health care licenses in Florida, including significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare for home health care services, an increased competitive environment in the home health care industry, and disruption from the impact of Hurricane Irma. We performed an interim quantitative impairment test as of September 30, 2017 on the health care licenses. Based on the results of the quantitative impairment test, we determined that the carrying amount of certain of our home health care licenses in Florida exceeded their estimated fair value by $13.7 million as of September 30, 2017. As a result, we recorded $13.7 million of impairment charges for health care licenses within the Brookdale Ancillary Services segment for the three months ended September 30, 2017.
Estimating the fair values of our goodwill and other assets requires management to use significant estimates, assumptions and judgments regarding future circumstances and events that are unpredictable and inherently uncertain. Future circumstances and events may result in outcomes that are different from these estimates, assumptions and judgments, which could result in future impairments to our goodwill and other assets. See Note 5 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about our evaluations of goodwill and other assets for impairment and the related impairment charges.
Loss on Facility Lease Termination and Modification, Net
Loss on facility lease termination and modification, net decreased $2.6 million2018 was primarily due to lease termination activity.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $24.4 million, or 10.3%, primarily due to our entry into interim management agreements with HCP and Welltower for communities for which our leases were terminated subsequent to the prior year period. Additionally, costs incurred on behalf of managed communities increased due to the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers on January 1, 2018 under the modified retrospective approach. The impact to revenue for reimbursed costs incurred on behalf of managed communities and reimbursed costs incurred on behalf of managed communities as a result of applying ASC 606 was an increase of $11.2 million for the three months ended September 30, 2018. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09.
Interest Expense
Interest expense decreased by $11.4 million, or 14.2%, primarily due to capital and financing lease termination activity since the beginning of the prior year period.
Equity in Loss of Unconsolidated Ventures
Equity in loss of unconsolidated ventures decreased by $5.4 million over the prior year period primarily due to the sale of investments in unconsolidated ventures.
Gain (Loss) on Sale of Assets, Net
Gain (loss) on sale of assets, net increased $10.1 million, primarily due to gains recognized for the termination of financing leases during the current year period.
Income Taxes
The difference between the statutory tax rate and our effective tax rates for the three months ended September 30, 2018 and 2017 reflects a decrease in our federal statutory tax rate from 35% to 21% as a result of the Tax Act and a decrease in the full year valuation allowance recordedprojected in 20182019 as compared to 2017. These decreases were offset by the elimination of deductibility for qualified performance-based compensation of covered employees in 2018 as a result of the Tax Act. 2018.
We recorded an aggregate deferred federal, state, and local tax benefit of $15.4$13.0 million as a result of the operating loss for the three months ended SeptemberJune 30, 2018, and we reduced our2019, offset by an increase in the valuation allowance in the quarter by $2.7of $13.3 million. The reductionchange in the valuation allowance for the three months ended SeptemberJune 30, 2018 is the result of the2019 resulted from anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of $46.4 million as a result of the operating loss for the three months ended June 30, 2018, which was offset by an increase in the valuation allowance of $30.3 million.
We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of SeptemberJune 30, 20182019 and December 31, 20172018 was $388.3$370.2 million and $336.1$336.4 million, respectively.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the three months ended SeptemberJune 30, 20182019 and 20172018 which are included in provision for income tax for the period. Tax returns for years 20132014 through 2017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Operating Results - Unconsolidated Ventures
The Company’s proportionate share of Adjusted EBITDA of unconsolidated ventures was $10.9 million for the three months ended June 30, 2019, which represented a decrease of 22.9% from the three months ended June 30, 2018 primarily attributable to the sale of our interest in four unconsolidated ventures since the beginning of the prior year quarter.
Comparison of NineSix Months Ended SeptemberJune 30, 20182019 and 20172018
Summary Operating Results
The following table sets forth,summarizes our overall operating results for the periods indicated, statement of operations itemssix months ended June 30, 2019 and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period.
The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As of September 30, 2018 our total operations included 961 communities with a capacity to serve approximately 93,000 residents.2018.
|
| | | | | | | | | | | | | | |
| (dollars in thousands, except Total RevPAR, RevPAR and RevPOR) | Nine Months Ended September 30, | | Increase (Decrease) |
| | 2018 | | 2017 | | Amount | | Percent (6) |
| Statement of Operations Data: | | | | | | | |
| Revenue | | | | | | | |
| Resident fees | | | | | | | |
| Retirement Centers | $ | 462,321 |
| | $ | 496,854 |
| | $ | (34,533 | ) | | (7.0 | )% |
| Assisted Living | 1,537,432 |
| | 1,680,194 |
| | (142,762 | ) | | (8.5 | )% |
| CCRCs-Rental | 314,012 |
| | 364,075 |
| | (50,063 | ) | | (13.8 | )% |
| Brookdale Ancillary Services | 328,649 |
| | 332,766 |
| | (4,117 | ) | | (1.2 | )% |
| Total resident fees | 2,642,414 |
| | 2,873,889 |
| | (231,475 | ) | | (8.1 | )% |
Management services (1) | 820,082 |
| | 707,337 |
| | 112,745 |
| | 15.9 | % |
| Total revenue | 3,462,496 |
| | 3,581,226 |
| | (118,730 | ) | | (3.3 | )% |
| Expense | | | | | |
| | |
|
| Facility operating expense | | | | | |
| | |
|
| Retirement Centers | 275,659 |
| | 289,648 |
| | (13,989 | ) | | (4.8 | )% |
| Assisted Living | 1,046,456 |
| | 1,102,258 |
| | (55,802 | ) | | (5.1 | )% |
| CCRCs-Rental | 243,721 |
| | 281,484 |
| | (37,763 | ) | | (13.4 | )% |
| Brookdale Ancillary Services | 300,641 |
| | 294,211 |
| | 6,430 |
| | 2.2 | % |
| Total facility operating expense | 1,866,477 |
| | 1,967,601 |
| | (101,124 | ) | | (5.1 | )% |
| General and administrative expense | 194,333 |
| | 196,429 |
| | (2,096 | ) | | (1.1 | )% |
| Transaction costs | 8,805 |
| | 12,924 |
| | (4,119 | ) | | (31.9 | )% |
| Facility lease expense | 232,752 |
| | 257,934 |
| | (25,182 | ) | | (9.8 | )% |
| Depreciation and amortization | 341,351 |
| | 366,023 |
| | (24,672 | ) | | (6.7 | )% |
| Goodwill and asset impairment | 451,966 |
| | 390,816 |
| | 61,150 |
| | 15.6 | % |
| Loss on facility lease termination and modification, net | 148,804 |
| | 11,306 |
| | 137,498 |
| | NM |
|
| Costs incurred on behalf of managed communities | 765,802 |
| | 650,863 |
| | 114,939 |
| | 17.7 | % |
| Total operating expense | 4,010,290 |
| | 3,853,896 |
| | 156,394 |
| | 4.1 | % |
| Income (loss) from operations | (547,794 | ) | | (272,670 | ) | | 275,124 |
| | 100.9 | % |
| Interest income | 7,578 |
| | 2,720 |
| | 4,858 |
| | 178.6 | % |
| Interest expense | (215,067 | ) | | (249,544 | ) | | (34,477 | ) | | (13.8 | )% |
| Debt modification and extinguishment costs | (77 | ) | | (11,883 | ) | | (11,806 | ) | | (99.4 | )% |
| Equity in loss of unconsolidated ventures | (6,907 | ) | | (10,311 | ) | | (3,404 | ) | | (33.0 | )% |
| Gain (loss) on sale of assets, net | 76,586 |
| | (1,383 | ) | | 77,969 |
| | NM |
|
| Other non-operating income | 8,074 |
| | 6,519 |
| | 1,555 |
| | 23.9 | % |
| Income (loss) before income taxes | (677,607 | ) | | (536,552 | ) | | 141,055 |
| | 26.3 | % |
| Benefit (provision) for income taxes | 17,724 |
| | (50,075 | ) | | 67,799 |
| | NM |
|
| Net income (loss) | (659,883 | ) | | (586,627 | ) | | 73,256 |
| | 12.5 | % |
| Net (income) loss attributable to noncontrolling interest | 86 |
| | 151 |
| | (65 | ) | | (43.0 | )% |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (659,797 | ) | | $ | (586,476 | ) | | $ | 73,321 |
| | 12.5 | % |
|
| | | | | | | | | | | | | | |
| | Six Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2019 | | 2018 | | Amount | | Percent |
| Total revenue | $ | 2,061,501 |
| | $ | 2,342,434 |
| | $ | (280,933 | ) | | (12.0 | )% |
| Facility operating expense | 1,176,340 |
| | 1,259,401 |
| | (83,061 | ) | | (6.6 | )% |
| Net income (loss) | (98,661 | ) | | (622,743 | ) | | (524,082 | ) | | (84.2 | )% |
| Adjusted EBITDA | 220,619 |
| | 294,373 |
| | (73,754 | ) | | (25.1 | )% |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Increase (Decrease) |
| | 2018 | | 2017 | | Amount | | Percent (6) |
| Selected Operating and Other Data: | | | | | | | |
| Total number of communities (period end) | 961 |
| | 1,031 |
| | (70 | ) | | (6.8 | )% |
Total units operated (2) | | | |
| | |
| | |
|
| Period end | 92,520 |
| | 101,202 |
| | (8,682 | ) | | (8.6 | )% |
| Weighted average | 96,954 |
| | 102,096 |
| | (5,142 | ) | | (5.0 | )% |
Owned/leased communities units (2) | | | |
| | |
| | |
|
| Period end | 60,009 |
| | 69,675 |
| | (9,666 | ) | | (13.9 | )% |
| Weighted average | 64,757 |
| | 72,603 |
| | (7,846 | ) | | (10.8 | )% |
Total RevPAR (3) | $ | 4,532 |
| | $ | 4,394 |
| | $ | 138 |
| | 3.1 | % |
RevPAR (4) | $ | 3,968 |
| | $ | 3,885 |
| | $ | 83 |
| | 2.1 | % |
| Owned/leased communities occupancy rate (weighted average) | 84.3 | % | | 84.9 | % | | (0.6 | )% | | (0.7 | )% |
RevPOR (5) | $ | 4,709 |
| | $ | 4,577 |
| | $ | 132 |
| | 2.9 | % |
| Selected Segment Operating and Other Data: | |
| | |
| | |
| | |
|
| Retirement Centers | | | |
| | |
| | |
|
| Number of communities (period end) | 75 |
| | 85 |
| | (10 | ) | | (11.8 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 13,550 |
| | 15,961 |
| | (2,411 | ) | | (15.1 | )% |
| Weighted average | 14,561 |
| | 16,413 |
| | (1,852 | ) | | (11.3 | )% |
RevPAR (4) | $ | 3,528 |
| | $ | 3,364 |
| | $ | 164 |
| | 4.9 | % |
| Occupancy rate (weighted average) | 88.4 | % | | 87.6 | % | | 0.8 | % | | 0.9 | % |
RevPOR (5) | $ | 3,991 |
| | $ | 3,838 |
| | $ | 153 |
| | 4.0 | % |
| Assisted Living | |
| | |
| | |
| | |
|
| Number of communities (period end) | 627 |
| | 705 |
| | (78 | ) | | (11.1 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 39,725 |
| | 46,520 |
| | (6,795 | ) | | (14.6 | )% |
| Weighted average | 43,369 |
| | 48,215 |
| | (4,846 | ) | | (10.1 | )% |
RevPAR (4) | $ | 3,939 |
| | $ | 3,872 |
| | $ | 67 |
| | 1.7 | % |
| Occupancy rate (weighted average) | 83.0 | % | | 84.3 | % | | (1.3 | )% | | (1.5 | )% |
RevPOR (5) | $ | 4,743 |
| | $ | 4,595 |
| | $ | 148 |
| | 3.2 | % |
| CCRCs-Rental | | | |
| | |
| | |
|
| Number of communities (period end) | 27 |
| | 30 |
| | (3 | ) | | (10.0 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 6,734 |
| | 7,194 |
| | (460 | ) | | (6.4 | )% |
| Weighted average | 6,827 |
| | 7,975 |
| | (1,148 | ) | | (14.4 | )% |
RevPAR (4) | $ | 5,091 |
| | $ | 5,038 |
| | $ | 53 |
| | 1.1 | % |
| Occupancy rate (weighted average) | 83.2 | % | | 83.1 | % | | 0.1 | % | | 0.1 | % |
RevPOR (5) | $ | 6,119 |
| | $ | 6,069 |
| | $ | 50 |
| | 0.8 | % |
| Management Services | | | |
| | |
| | |
|
| Number of communities (period end) | 232 |
| | 211 |
| | 21 |
| | 10.0 | % |
Total units (2) | | | |
| | |
| | |
|
| Period end | 32,511 |
| | 31,527 |
| | 984 |
| | 3.1 | % |
| Weighted average | 32,197 |
| | 29,493 |
| | 2,704 |
| | 9.2 | % |
| Occupancy rate (weighted average) | 83.9 | % | | 85.1 | % | | (1.2 | )% | | (1.4 | )% |
|
| | | | | | | | | | | | | | |
| Brookdale Ancillary Services | |
| | |
| | |
| | |
|
| Home Health average daily census | 15,206 |
| | 15,010 |
| | 196 |
| | 1.3 | % |
| Hospice average daily census | 1,350 |
| | 1,042 |
| | 308 |
| | 29.6 | % |
| Outpatient Therapy treatment codes | 511,804 |
| | 563,322 |
| | (51,518 | ) | | (9.1 | )% |
| |
(1) | Management services segment revenue includes management fees and reimbursements of costs incurred on behalf of managed communities. |
| |
(2) | Weighted average units operated represents the average units operated during the period. |
| |
(3) | Total RevPAR, or average monthly resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding entrance fee amortization, for the Company for the period, divided by the weighted average number of available units in the Company's consolidated portfolio for the period, divided by the number of months in the period. |
| |
(4) | RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(5) | RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. |
Resident Fees
Resident feeThe decrease in total revenue decreased $231.5was primarily attributable to the disposition of 127 communities through sales of owned communities and lease terminations since the beginning of the prior year period, which resulted in $237.6 million or 8.1%,less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by a 1.8% increase in same community RevPAR at the 650 communities we owned or leased during both full periods, comprised of a 3.2% increase in same community RevPOR and a 120 basis points decrease in same community weighted average occupancy. Additionally, management services revenue, including management fees and reimbursed costs incurred on behalf of managed communities, decreased $90.0 million primarily due to terminations of management agreements subsequent to the beginning of the prior year period.
The decrease in facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $160.9 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease was partially offset by a 4.9% increase in same community facility operating expense, which was primarily due to an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense of approximately $8.1 million and $21.0 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense excludes approximately $7.4 million and $19.5 million, respectively, of such additional revenue and expenses.
The improvement to net income (loss) was primarily attributable to decreases in goodwill and asset impairment expense and in loss on facility lease termination and modification compared to the prior period, offset by a decrease in net gain on sale of assets and the revenue and facility operating expense factors noted above. Goodwill and asset impairment expense was $4.2 million for the six months ended June 30, 2019 compared to $446.5 million for the prior year period. We recognized a loss on lease termination and modification of $146.5 million for the six months ended June 30, 2018 primarily as a result of agreements with Ventas and Welltower. Net gain on sale of assets was $2.1 million for the six months ended June 30, 2019 compared to a net gain on sale of assets of $66.8 million for the prior year period.
The decrease in Adjusted EBITDA was primarily attributable to the revenue and facility operating expense factors noted above, offset by lower general and administrative expenses (excluding non-cash stock-based compensation expense and transaction and organizational restructuring costs) of $7.1 million and lower cash facility operating lease payments of $31.5 million.
Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the six months ended June 30, 2019 and 2018 including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 1,385,376 |
| | $ | 1,581,862 |
| | $ | (196,486 | ) | | (12.4 | )% |
| Facility operating expense | $ | 967,714 |
| | $ | 1,057,549 |
| | $ | (89,835 | ) | | (8.5 | )% |
| | | | | | | | |
| Number of communities (period end) | 671 |
| | 748 |
| | (77 | ) | | (10.3 | )% |
| Number of units (period end) | 55,209 |
| | 61,709 |
| | (6,500 | ) | | (10.5 | )% |
| Number of units (weighted average) | 55,963 |
| | 66,450 |
| | (10,487 | ) | | (15.8 | )% |
| RevPAR | $ | 4,100 |
| | $ | 3,965 |
| | $ | 135 |
| | 3.4 | % |
| Occupancy rate (weighted average) | 83.5 | % | | 84.3 | % | | (80 | ) bps | | n/a |
|
| RevPOR | $ | 4,909 |
| | $ | 4,705 |
| | $ | 204 |
| | 4.3 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 1,290,900 |
| | $ | 1,269,179 |
| | $ | 21,721 |
| | 1.7 | % |
| Facility operating expense | $ | 885,819 |
| | $ | 844,053 |
| | $ | 41,766 |
| | 4.9 | % |
| | | | | | | | |
| Number of communities | 650 |
| | 650 |
| | — |
| | — | % |
| Total average units | 51,901 |
| | 51,931 |
| | (30 | ) | | (0.1 | )% |
| RevPAR | $ | 4,143 |
| | $ | 4,071 |
| | $ | 72 |
| | 1.8 | % |
| Occupancy rate (weighted average) | 83.9 | % | | 85.1 | % | | (120 | ) bps | | n/a |
|
| RevPOR | $ | 4,938 |
| | $ | 4,785 |
| | $ | 153 |
| | 3.2 | % |
Independent Living Segment
The following table summarizes the operating results and data for our Independent Living segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 271,645 |
| | $ | 317,690 |
| | $ | (46,045 | ) | | (14.5 | )% |
| Facility operating expense | $ | 167,310 |
| | $ | 188,134 |
| | $ | (20,824 | ) | | (11.1 | )% |
| | | | | | | | |
| Number of communities (period end) | 68 |
| | 75 |
| | (7 | ) | | (9.3 | )% |
| Number of units (period end) | 12,460 |
| | 13,559 |
| | (1,099 | ) | | (8.1 | )% |
| Number of units (weighted average) | 12,435 |
| | 15,064 |
| | (2,629 | ) | | (17.5 | )% |
| RevPAR | $ | 3,597 |
| | $ | 3,515 |
| | $ | 82 |
| | 2.3 | % |
| Occupancy rate (weighted average) | 89.4 | % | | 87.9 | % | | 150 | bps | | n/a |
|
| RevPOR | $ | 4,023 |
| | $ | 3,998 |
| | $ | 25 |
| | 0.6 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 244,649 |
| | $ | 237,046 |
| | $ | 7,603 |
| | 3.2 | % |
| Facility operating expense | $ | 146,041 |
| | $ | 139,302 |
| | $ | 6,739 |
| | 4.8 | % |
| | | | | | | | |
| Number of communities | 63 |
| | 63 |
| | — |
| | — | % |
| Total average units | 11,331 |
| | 11,358 |
| | (27 | ) | | (0.2 | )% |
| RevPAR | $ | 3,599 |
| | $ | 3,479 |
| | $ | 120 |
| | 3.4 | % |
| Occupancy rate (weighted average) | 89.9 | % | | 88.9 | % | | 100 | bps | | n/a |
|
| RevPOR | $ | 4,003 |
| | $ | 3,912 |
| | $ | 91 |
| | 2.3 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 17 communities since the beginning of the prior year period, which resulted in $60.9 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.3% increase in same community RevPOR and a 100 basis points increase in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. Additionally, the decrease in resident fees was partially offset by $3.5 million of additional revenue for one community acquired subsequent to the beginning of the prior year period.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $35.7 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, the decrease in facility operating expense was partially offset by $2.0 million of additional facility operating expense for one community acquired subsequent to the beginning of the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $3.3 million and $5.7 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $3.0 million and $5.3 million, respectively, of such additional revenue and expenses.
Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 908,751 |
| | $ | 1,054,307 |
| | $ | (145,556 | ) | | (13.8 | )% |
| Facility operating expense | $ | 634,908 |
| | $ | 708,032 |
| | $ | (73,124 | ) | | (10.3 | )% |
| | | | | | | | |
| Number of communities (period end) | 577 |
| | 645 |
| | (68 | ) | | (10.5 | )% |
| Number of units (period end) | 36,175 |
| | 41,266 |
| | (5,091 | ) | | (12.3 | )% |
| Number of units (weighted average) | 36,964 |
| | 44,588 |
| | (7,624 | ) | | (17.1 | )% |
| RevPAR | $ | 4,081 |
| | $ | 3,941 |
| | $ | 140 |
| | 3.6 | % |
| Occupancy rate (weighted average) | 81.8 | % | | 83.2 | % | | (140 | ) bps | | n/a |
|
| RevPOR | $ | 4,987 |
| | $ | 4,738 |
| | $ | 249 |
| | 5.3 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 865,307 |
| | $ | 852,475 |
| | $ | 12,832 |
| | 1.5 | % |
| Facility operating expense | $ | 592,043 |
| | $ | 565,404 |
| | $ | 26,639 |
| | 4.7 | % |
| | | | | | | | |
| Number of communities | 564 |
| | 564 |
| | — |
| | — | % |
| Total average units | 34,933 |
| | 34,935 |
| | (2 | ) | | — | % |
| RevPAR | $ | 4,128 |
| | $ | 4,067 |
| | $ | 61 |
| | 1.5 | % |
| Occupancy rate (weighted average) | 82.4 | % | | 84.2 | % | | (180 | ) bps | | n/a |
|
| RevPOR | $ | 5,015 |
| | $ | 4,833 |
| | $ | 182 |
| | 3.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 107 communities since the beginning of the prior year period, which resulted in $166.0 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 3.8% increase in same community RevPOR and a 180 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets. Additionally, the decrease in resident fees was partially offset by $1.7 million of additional revenue for two communities acquired subsequent to the beginning of the prior year period.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $115.3 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, the decrease in facility operating expense was partially offset by $1.3 million of additional facility operating expense for two communities acquired subsequent to the beginning of the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $3.6 million and $12.8 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $3.4 million and $12.1 million, respectively, of such additional revenue and expenses.
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 204,980 |
| | $ | 209,865 |
| | $ | (4,885 | ) | | (2.3 | )% |
| Facility operating expense | $ | 165,496 |
| | $ | 161,383 |
| | $ | 4,113 |
| | 2.5 | % |
| | | | | | | | |
| Number of communities (period end) | 26 |
| | 28 |
| | (2 | ) | | (7.1 | )% |
| Number of units (period end) | 6,574 |
| | 6,884 |
| | (310 | ) | | (4.5 | )% |
| Number of units (weighted average) | 6,564 |
| | 6,798 |
| | (234 | ) | | (3.4 | )% |
| RevPAR | $ | 5,156 |
| | $ | 5,125 |
| | $ | 31 |
| | 0.6 | % |
| Occupancy rate (weighted average) | 81.7 | % | | 83.5 | % | | (180 | ) bps | | n/a |
|
| RevPOR | $ | 6,308 |
| | $ | 6,137 |
| | $ | 171 |
| | 2.8 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 180,944 |
| | $ | 179,658 |
| | $ | 1,286 |
| | 0.7 | % |
| Facility operating expense | $ | 147,735 |
| | $ | 139,347 |
| | $ | 8,388 |
| | 6.0 | % |
| | | | | | | | |
| Number of communities | 23 |
| | 23 |
| | — |
| | — | % |
| Total average units | 5,637 |
| | 5,638 |
| | (1 | ) | | — | % |
| RevPAR | $ | 5,327 |
| | $ | 5,291 |
| | $ | 36 |
| | 0.7 | % |
| Occupancy rate (weighted average) | 81.6 | % | | 83.1 | % | | (150 | ) bps | | n/a |
|
| RevPOR | $ | 6,531 |
| | $ | 6,366 |
| | $ | 165 |
| | 2.6 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of three communities since the beginning of the prior year period, which resulted in $10.7 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.6% increase in same community RevPOR and a 150 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets. Additionally, the decrease in resident fees was partially offset by $4.0 million of additional revenue for one community acquired subsequent to the beginning of the prior year period.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, there was $2.2 million of additional facility operating expense for one community acquired subsequent to the beginning of the prior year period. The increase in facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $9.9 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $1.1 million and $2.5 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $1.0 million and $2.1 million, respectively, of such additional revenue and expenses.
Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health Care Services segment for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except census and treatment codes) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 225,966 |
| | $ | 220,373 |
| | $ | 5,593 |
| | 2.5 | % |
| Facility operating expense | $ | 208,626 |
| | $ | 201,852 |
| | $ | 6,774 |
| | 3.4 | % |
| | | | | | | | |
| Home health average daily census | 15,935 |
| | 15,367 |
| | 568 |
| | 3.7 | % |
| Hospice average daily census | 1,485 |
| | 1,319 |
| | 166 |
| | 12.6 | % |
| Outpatient therapy treatment codes | 328,467 |
| | 343,325 |
| | (14,858 | ) | | (4.3 | )% |
The increase in the segment’s resident fees was primarily attributable to an increase in volume for hospice services. Home health revenue also increased due to higher average daily census, offset by unfavorable case-mix and community dispositions.
The increase in the segment’s facility operating expense was primarily attributable to an increase in labor costs arising from wage rate increases and the expansion of our hospice services.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, and occupancy) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Management fees | $ | 31,192 |
| | $ | 35,752 |
| | $ | (4,560 | ) | | (12.8 | )% |
| Reimbursed costs incurred on behalf of managed communities | $ | 418,967 |
| | $ | 504,447 |
| | $ | (85,480 | ) | | (16.9 | )% |
| | | | | | | | |
| Number of communities (period end) | 138 |
| | 240 |
| | (102 | ) | | (42.5 | )% |
| Number of units (period end) | 21,451 |
| | 33,176 |
| | (11,725 | ) | | (35.3 | )% |
| Number of units (weighted average) | 23,755 |
| | 32,060 |
| | (8,305 | ) | | (25.9 | )% |
| Occupancy rate (weighted average) | 82.9 | % | | 83.9 | % | | (100 | ) bps | | n/a |
|
The decrease in management fees was primarily attributable to the transition of management arrangements on 91 net communities since the beginning of the prior year period, generally for interim management arrangements on formerly leased or owned communities and management arrangements on certain former unconsolidated ventures in which we sold our interest. Management fees of $31.2 million for the six months ended June 30, 2019 include $3.9 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately $3.0 million of management fees attributable to approximately 35 communities that, as of June 30, 2019, we expect the terminations of our management agreements to occur in the next year, including interim management arrangements on formerly leased communities and management arrangements on certain former unconsolidated ventures in which we sold our interest.
The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating results for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| General and administrative expense | $ | 113,887 |
| | $ | 144,342 |
| | $ | (30,455 | ) | | (21.1 | )% |
| Facility operating lease expense | 136,357 |
| | 162,360 |
| | (26,003 | ) | | (16.0 | )% |
| Depreciation and amortization | 190,912 |
| | 230,371 |
| | (39,459 | ) | | (17.1 | )% |
| Goodwill and asset impairment | 4,160 |
| | 446,466 |
| | (442,306 | ) | | (99.1 | )% |
| Loss on facility lease termination and modification, net | 2,006 |
| | 146,467 |
| | (144,461 | ) | | (98.6 | )% |
| Costs incurred on behalf of managed communities | 418,967 |
| | 504,447 |
| | (85,480 | ) | | (16.9 | )% |
| Interest income | 5,897 |
| | 5,924 |
| | (27 | ) | | (0.5 | )% |
| Interest expense | (126,193 | ) | | (146,441 | ) | | (20,248 | ) | | (13.8 | )% |
| Debt modification and extinguishment costs | (2,739 | ) | | (44 | ) | | 2,695 |
| | NM |
|
| Equity in loss of unconsolidated ventures | (1,517 | ) | | (5,567 | ) | | (4,050 | ) | | (72.8 | )% |
| Gain on sale of assets, net | 2,144 |
| | 66,753 |
| | (64,609 | ) | | (96.8 | )% |
| Other non-operating income | 6,187 |
| | 8,091 |
| | (1,904 | ) | | (23.5 | )% |
| Benefit (provision) for income taxes | (1,312 | ) | | (39 | ) | | (1,273 | ) | | NM |
|
General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to a decrease in organizational restructuring costs and salaries and wages expense as a result of a reduction in our corporate associate headcount since the beginning of the prior year period as we scaled our general and administrative costs in connection with community dispositions. Transaction and organizational restructuring costs decreased $21.1 million compared to the prior period, to $1.1 million for the six months ended June 30, 2019.
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to lease termination activity since the beginning of the prior year quarter.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity through sales and lease terminations of 177 communities, since the beginning of the prior year period, which generated $164.3 million of revenue duringyear.
Goodwill and Asset Impairment. During the current year period, compared to $408.8we recorded $4.2 million of revenue in the prior year period. The increases to RevPAR and RevPORnon-cash impairment charges, primarily for the consolidated portfolio are primarily due to the disposition of communitiesmanagement contract intangible assets associated with lower RevPOR since the beginning of the prior year period. Weighted average occupancy decreased 100 basis points at the 712 communities we owned or leased during both full periods, which reflects the impact of new competition in our markets. RevPOR at the 712 communities we owned or operated during the both full periods increased by 1.0%. Total RevPAR for the consolidated portfolio also increased by 3.1% compared toterminated contracts. During the prior year period, primarily due to fewer weighted average units.
Retirement Centers segment revenue decreased $34.5we recorded $446.5 million or 7.0%, primarily due to the impact of dispositions of 20 communities since the beginning of thenon-cash impairment charges. The prior year period which generated $32.3impairment charges primarily consisted of $351.7 million of revenue duringgoodwill impairment within the current year period compared to $77.6Assisted Living and Memory Care segment, $47.7 million of revenueimpairment of property, plant and equipment and leasehold intangibles for certain communities, primarily in the prior year period. Retirement Centers segment revenue at the communities we operated during both full periods was $391.7 million during the current year period, an increase of $2.9 million, or 0.7%, over the prior year period, primarily due to an 80 basis point increase in weighted average occupancy at these communities.
Assisted Living and Memory Care segment, revenue decreased $142.8 million, or 8.5%, primarily due to the impact of dispositions of 143 communities since the beginning of the prior year period, which generated $124.1and $33.4 million of revenue during the current year period compared to $268.5 millionimpairment of revenueour investments in the prior year period. Assisted Living segment revenue at the communities we operated during both full periods was $1,393.3 million during the current year period, a decrease of $6.0 million, or 0.4%, over the prior year period, primarily due to a 160 basis point decrease in weighted average occupancy at these communities, partially offset by a 1.5% increase in RevPOR at these communities.
CCRCs-Rental segment revenue decreased $50.1 million, or 13.8%, primarily due to the impact of dispositions of 14 communities since the beginning of the prior year period, which generated $7.9 million of revenue during the current year period compared to $62.8 million of revenue in the prior year period. CCRCs-Rental segment revenue at the communities we operated during both full periods was $273.9 million during the current year period, a decrease of $1.1 million, or 0.4%, over the prior year period, primarily due to a 50 basis point decrease in weighted average occupancy and a 0.3% decrease in RevPAR at these communities.
Brookdale Ancillary Services segment revenue decreased $4.1 million, or 1.2%, primarily due to a decline in home health revenue and the impact of the adoption of ASU 2014-09 on January 1, 2018 under the modified retrospective approach which resulted in a $4.0 million decrease to resident fee revenue and facility operating expense.unconsolidated ventures. See Note 25 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09. These increases were partially offset by an increase in volume for hospice services. For home health in 2018, CMS has implemented a net 0.4% reimbursement reduction, consisting of a 1.0% market basket inflation increase, less a 0.9% reduction to account for industry wide case-mix growth, and the sunset of the rural add-on provision. As a result, we expect our home health reimbursement to be reduced by approximately 0.8% in 2018 compared to 2017.impairment charges.
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurredLoss on behalf of managed communities, increased $112.7 million, or 15.9%, over the prior year period primarily due to our entry into management agreements with the Blackstone Venture on March 29, 2017. Management fees of $54.3 million for 2018 include $3.8 million of management fees attributable to communities for which our management agreements were terminated in 2018 and approximately $10.5 million of management fees attributable to approximately 90 communities for which we expect the terminations of our management agreements to occur in stages throughout the next six months, including management fee revenue of $2.8 million attributable to communities managed on an interim basis subsequent to lease terminations.
Facility Operating Expense
Facility operating expense decreased $101.1 million, or 5.1%, over the prior year period primarily due to disposition activity, through sales and lease terminations, of 177 communities since the beginning of the prior year period, which incurred $110.7 million of facility operating expense during the current year period compared to $287.7 million of facility operating expense in the prior year period. These decreases were partially offset by an increase in labor expense at the communities we operated during both full periods, reflecting the impact of our investment in salaries and benefits and a tight labor market during the current year period. We expect that our labor investments will continue into 2019. Facility operating expense included costs related to our responses to hurricanes of $1.5 million in the current year period and $5.4 million in the prior year period.
Retirement Centers segment facility operating expense decreased $14.0 million, or 4.8%, primarily due to the impact of dispositions of 20 communities since the beginning of the prior year period, which incurred $19.3 million of expense during the current year period compared to $46.9 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. Retirement Centers segment facility operating expense at the communities we operated during both full periods was $230.2 million, an increase of $9.4 million, or 4.3%, over the prior year period.
Assisted Living segment facility operating expense decreased $55.8 million, or 5.1%, primarily driven by the impact of dispositions of 143 communities since the beginning of the prior year period, which incurred $84.6 million of expense during the current year period compared to $186.6 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. Assisted Living segment facility operating expense at the communities we operated during both full periods was $942.8 million, an increase of $43.6 million, or 4.8%, over the prior year period.
CCRCs-Rental segment facility operating expense decreased $37.8 million, or 13.4%, primarily driven by the impact of dispositions of 14 communities since the beginning of the prior year period, which incurred $6.8 million of expense during the current year period compared to $54.2 million in the prior year period. This decrease was partially offset by an increase in labor expense at the communities we operated during both full periods. CCRCs-Rental segment facility operating expense at the communities we operated during both full periods was $215.1 million, an increase of $6.4 million, or 3.1%, over the prior year period.
Brookdale Ancillary Services segment operating expense increased $6.4 million, or 2.2%, primarily due to an increase in labor costs arising from wage rate increases and the expansion of our hospice services. The increase was partially offset by the impact of the adoption of ASU 2014-09 on January 1, 2018 under the modified retrospective approach which resulted in a $4.0 million decrease to resident fee revenue and facility operating expense. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2014-09.
General and Administrative Expense
General and administrative expense decreased $2.1 million, or 1.1%, over the prior year period primarily due to a decrease in salaries and wages expense as a result of a reduction in corporate associate headcount in the current year. During the current year period, general and administrative expense included severance costs and retention costs of $11.2 million and $5.1 million, respectively.
Transaction Costs
Transaction costs decreased $4.1 million to $8.8 million. Transaction costs in the current year period were primarily related to direct costs related to our assessment of options and alternatives to enhance stockholder value and direct costs related to community leasing activity, including lease terminations and modifications. Transaction costs in the prior year period were primarily related to direct costs related to the formation of the Blackstone Venture, our assessment of options and alternatives to enhance stockholder value, and community disposition activity.
Facility Lease Expense
Facility lease expense decreased $25.2 million, or 9.8%, primarily due to lease termination activity since the beginning of the prior year period.
DepreciationTermination and Amortization
Depreciation and amortization expense decreased $24.7 million, or 6.7%, primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period.
Goodwill and Asset Impairment
Modification, Net. During the current year period, we recorded $452.0a $2.0 million of non-cash impairment charges. The impairment charges primarily consisted of $351.7 million of goodwill within the Assisted Living segment, $50.2 million of property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment, $33.4 million for our investments in unconsolidated ventures, and $15.0 million for assets held for sale. Asset impairment expense in the prior year period was primarily related to goodwill and property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment.
During 2018, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period during the three months ended March 31, 2018. As a result, we performed an interim quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying value of our Assisted Living segment exceeded its estimated fair value by more than the $351.7 million carrying value as of March 31, 2018. As a result, we recorded a non-cash impairment charge of $351.7 million to goodwill within the Assisted Living segment for the three months ended March 31, 2018.
During the nine months ended September 30, 2018, we evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying value of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets, primarily due to an expectation that certain communities will be disposed of prior to their previously determined useful lives. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $50.2 million for the nine months ended September 30, 2018, including $43.6 million within the Assisted Living segment.
During the three months ended March 31, 2018, we identified indicators of impairment for our investments in unconsolidated ventures. We compared the estimated fair value of investments in unconsolidated ventures to their carrying value for these identified investments and recorded a $33.4 million impairment charge for the excess of carrying value over fair value.
During the third quarter of 2017, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period since the last testing date, significant underperformance relative to historical and projected operating results, and an increased competitive environment in the senior living industry. As a result, we performed an interim quantitative goodwill impairment test as of September 30, 2017, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying amount of our Assisted Living segment exceeded its estimated fair
value by $205.0 million as of September 30, 2017. As a result, we recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted Living segment for the nine months ended September 30, 2017.
During the nine months ended September 30, 2017, we evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $152.4 million for the nine months ended September 30, 2017, including $133.7 million within the Assisted Living segment.
Additionally, during the third quarter of 2017, we identified indicators of impairment for our home health care licenses in Florida, including significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare for home health care services, an increased competitive environment in the home health care industry, and disruption from the impact of Hurricane Irma. We performed an interim quantitative impairment test as of September 30, 2017 on the health care licenses. Based on the results of the quantitative impairment test, we determined that the carrying amount of certain of our home health care licenses in Florida exceeded their estimated fair value by $13.7 million as of September 30, 2017. As a result, we recorded $13.7 million of impairment charges for health care licenses within the Brookdale Ancillary Services segment for the three months ended September 30, 2017.
Estimating the fair values of our goodwill and other assets requires management to use significant estimates, assumptions and judgments regarding future circumstances and events that are unpredictable and inherently uncertain. Future circumstances and events may result in outcomes that are different from these estimates, assumptions and judgments, which could result in future impairments to our goodwill and other assets. See Note 5 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about our evaluations of goodwill and other assets for impairment and the related impairment charges.
Loss on Facility Lease Termination and Modification, Net
Lossloss on facility lease termination and modification, net increased $137.5 millionfor the termination of leases for eight communities. The decrease in loss on facility lease termination and modification, net was primarily due to a $125.7 million loss on the restructuring of community leases with Ventas, and a $24.9$22.6 million loss on lease termination activity with Welltower partially offset by a $1.8 million gain on lease termination activity with HCP.during the three months ended June 30, 2018.
Costs Incurred on Behalf of Managed Communities
CostsCommunities. The decrease in costs incurred on behalf of managed communities increased $114.9 million, or 17.7%,was primarily due to our entry intoterminations of management agreements withsubsequent to the Blackstone Venture andbeginning of the transition of communities previously leased from HCP and Welltower into the management services segment.prior year period.
Interest Expense
InterestExpense. The decrease in interest expense decreased by $34.5 million, or 13.8%,was primarily due to capital and financing lease termination activity and the repayment of debt since the beginning of the prior year period.
Equity in Loss of Unconsolidated Ventures
EquityVentures. The decrease in equity in loss of unconsolidated ventures decreased by $3.4 million over the prior year periodwas primarily due to the sale of investments in unconsolidated ventures.ventures since the beginning of the prior year period.
Gain (Loss) on Sale of Assets, Net
Gain (loss)Net. The decrease in gain on sale of assets, net increased $78.0 million,was primarily due to gains recognized for the terminationa $59.1 million gain on sale of financing leasesour investments in unconsolidated ventures and an $8.4 million gain on sale of six communities during the currentprior year period.
Benefit (Provision) for Income Taxes
Taxes. The difference between the statutory tax rate and our effective tax ratesrate for the ninesix months ended SeptemberJune 30, 2019 and 2018 was primarily due to the non-deductible impairment of goodwill that occurred in the six months ended June 30, 2018 and 2017 reflects a decrease in our federal statutory tax ratethe adjustment from 35% to 21% as a result of the Tax Act and a decreasestock-based compensation which was greater in the valuation allowance recorded insix months ended June 30, 2018 as compared to 2017. These decreases were offset by the elimination of deductibility for qualified performance-based compensation of covered employees in 2018 as a result of the Tax Act, the negative tax benefit on the vestingsix months ended June 30, 2019.
of restricted stock, a direct result of our lower stock price in 2018, and the non-deductible write-off of goodwill. We recorded an aggregate deferred federal, state, and local tax benefit of $71.3$21.2 million as a result of the operating loss for the ninesix months ended SeptemberJune 30, 2019, offset by an increase in the valuation allowance of $21.7 million. The change in the valuation allowance for the six months ended June 30, 2019 resulted from anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of $55.9 million as a result of the operating loss for the six months ended June 30, 2018, which was offset by an increase in the valuation allowance of $52.2$54.9 million. The excess of the increase in the valuation allowance over the deferred federal, state and local benefit for the nine months ended September 30, 2018 is the result of the reversal of future tax liabilities offset by future tax deductions.
We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of SeptemberJune 30, 20182019 and December 31, 20172018 was $388.3$370.2 million and $336.1$336.4 million, respectively.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the ninethree months ended SeptemberJune 30, 20182019 and 20172018 which are included in provision for income tax for the period. Tax returns for years 20132014 through 2017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Operating Results - Unconsolidated Ventures
The Company’s proportionate share of Adjusted EBITDA of unconsolidated ventures was $22.2 million for the six months ended June 30, 2019, which represented a decrease of 28.1% from the six months ended June 30, 2018 primarily attributable to the sale of our interest in five unconsolidated ventures since the beginning of the prior year period.
Liquidity and Capital Resources
This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures. During the first quarter of 2019, we modified our definition of Adjusted Free Cash Flow to no longer adjust net cash provided by (used in) operating activities for changes in working capital items other than prepaid insurance premiums financed with notes payable and lease liability for lease termination and modification. Amounts for all periods herein reflect application of the modified definition.
Liquidity and Indebtedness
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the condensed consolidated statements of cash flows:flows, and our Adjusted Free Cash Flow and proportionate share of Adjusted Free Cash Flow of unconsolidated ventures:
| | | | Nine Months Ended
September 30, | | Increase (Decrease) | Six Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2018 | | 2017 | | Amount | | Percent | 2019 | | 2018 | | Amount | | Percent |
| Net cash provided by operating activities | $ | 170,508 |
| | $ | 294,323 |
| | $ | (123,815 | ) | | (42.1 | )% | |
| Net cash used in investing activities | (13,027 | ) | | (523,378 | ) | | (510,351 | ) | | (97.5 | )% | |
| Net cash (used in) provided by financing activities | (239,929 | ) | | 310,552 |
| | (550,481 | ) | | NM |
| |
| Net cash provided by (used in) operating activities | | $ | 59,119 |
| | $ | 98,584 |
| | $ | (39,465 | ) | | (40.0 | )% |
| Net cash provided by (used in) investing activities | | (80,299 | ) | | 11,512 |
| | (91,811 | ) | | NM |
|
| Net cash provided by (used in) financing activities | | (104,079 | ) | | (201,980 | ) | | 97,901 |
| | 48.5 | % |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (82,448 | ) | | 81,497 |
| | (163,945 | ) | | NM |
| (125,259 | ) | | (91,884 | ) | | (33,375 | ) | | 36.3 | % |
| Cash, cash equivalents and restricted cash at beginning of period | 282,546 |
| | 277,322 |
| | 5,224 |
| | 1.9 | % | 450,218 |
| | 282,546 |
| | 167,672 |
| | 59.3 | % |
| Cash, cash equivalents and restricted cash at end of period | $ | 200,098 |
| | $ | 358,819 |
| | $ | (158,721 | ) | | (44.2 | )% | $ | 324,959 |
| | $ | 190,662 |
| | $ | 134,297 |
| | 70.4 | % |
| | | | | | | | | |
| Adjusted Free Cash Flow | | $ | (63,340 | ) | | $ | 27,392 |
| | $ | (90,732 | ) | | NM |
|
| Brookdale's proportionate share of Adjusted Free Cash Flow of unconsolidated ventures | | 12,342 |
| | 15,386 |
| | (3,044 | ) | | (19.8 | )% |
The decrease in net cash provided by (used in) operating activities of $123.8 million was attributable primarily to cash payments to terminate community operating leases during the current year period, an increase in facility operating expenses at the communities operated during both full periods, and the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period, an increase in facility operating expense at the communities operated during both full periods, lower revenue collected in advance due to quarter-end timing, and an increase in working capital liabilities paid during the current year period. These changes were partially offset by $46.6 million of cash paid to terminate community operating leases during the prior year period.
The decreasechange in net cash used inprovided by (used in) investing activities of $510.4 million was primarily attributable to a $218.3 million decrease in proceeds from sales of $293.3marketable securities, purchases of $98.1 million of marketable securities during the current year period, our contribution of $179.2 million in connection with the formation of the Blackstone Venture during the prior year period, sales of our interest in equity method investments, and a $78.5 million decrease in net proceeds from the sale of assets. These changes were partially offset by increased$271.3 million of cash paid for the acquisition of communities during the prior year period and capital expenditure activity.a $30.2 million increase in cash proceeds from notes receivable during the current period.
The change in net cash provided by (used in) provided by financing activities of $(550.5) million was primarily attributable to a $228.2 million decrease in repayment of debt and financing lease obligations compared to the prior year period, including the impact of our cash settlement of the aggregate principal amount of the $316.3 million of 2.75% convertible senior notes during June 2018, and $10.5 million of cash paid to terminate community financing leases during the prior year period. These changes were partially offset by a $121.7 million decrease in debt proceeds from debt compared to the prior year period.period and $18.4 million of cash paid during the current year period for share repurchases.
The decrease in Adjusted Free Cash Flow was primarily attributable to a $31.6 million increase in non-development capital expenditures, net, the impact of disposition activity, an increase in facility operating expense at the communities operated during both full periods, and changes in working capital. The decrease in our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures was primarily attributable to the sale of our interest in five unconsolidated ventures since the beginning of the prior year.
Our principal sources of liquidity have historically been from:
cash balances on hand, cash equivalents and marketable securities;
cash flows from operations;
proceeds from our credit facilities;
funds generated through unconsolidated venture arrangements;
proceeds from mortgage financing, refinancing of various assets or sale-leaseback transactions;
funds raised in the debt or equity markets; and
proceeds from the disposition of assets.
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.
Our liquidity requirements have historically arisen from:
working capital;
operating costs such as employee compensation and related benefits, severance costs, general and administrative expense, and supply costs;
debt service and lease payments;
acquisition consideration, lease termination and restructuring costs, and transaction and integration costs (including lease restructuring costs);costs;
capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our current communities, and the development of new communities;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
cash funding needs of our unconsolidated ventures for operating, capital expenditure and financing needs:
purchases of common stock under our share repurchase authorizations;
other corporate initiatives (including integration, information systems, branding, and other strategic projects); and
prior to 2009, dividend payments.
Over the near-term, we expect that our liquidity requirements will primarily arise from:
working capital;
operating costs such as employee compensation and related benefits, severance costs, general and administrative expense, and supply costs;
debt service and lease payments;
acquisition consideration, including the acquisition of certain leased communities under purchase option provisions;
transaction costs and transaction costs;expansion of our healthcare services;
capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our existing communities;
cash funding needs of our unconsolidated ventures for operating, capital expenditure, and financing needs;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
purchases of common stock under our share repurchase authorization; and
other corporate initiatives (including information systems and other strategic projects).
We are highly leveraged and have significant debt and lease obligations. As of SeptemberJune 30, 2018,2019, we havehad two principal corporate-level debt obligations: our $400.0 million secured credit facility providing commitments of $250.0 million and our separate unsecured letter of credit facilitiesfacility providing for up to $66.2$47.5 million of letters of credit in the aggregate. As of September 30, 2018, 94.1%, or $3.5 billion, of our total debt obligations represent non-recourse property-level mortgage financings.credit.
As of SeptemberJune 30, 2018,2019, we had $3.7$3.6 billion of debt outstanding, excluding capital and financing lease obligations, at a weighted-average interest rate of 4.80%4.89%. No balance was drawn on our secured credit facility as of September 30, 2018. As of September 30, 2018, we had $932.9 millionsuch date, 95.2% or $3.4 billion, of capital and financing leaseour total debt obligations and $107.8represented non-recourse property-level mortgage financings, $88.6 million of letters of credit had been issued under our secured credit facility and separate unsecured letter of credit facilities.facility, and no balance was drawn on our secured credit facility. As of June 30, 2019, the current portion of long-term debt was $267.2 million, including $18.5 million of mortgage debt related to five communities classified as held for sale as of June 30, 2019. As of June 30, 2019, $1.1 billion of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining $102.9 million of our long-term variable rate debt is not subject to any interest rate cap agreements.
As of June 30, 2019, we had $1.5 billion and $863.6 million of operating and financing lease obligations, respectively. For the twelve months ending SeptemberJune 30, 20192020 we will be required to make approximately $70.3$307.3 million and $303.9$88.7 million of cash payments in connection with our existing capitaloperating and financing leases, respectively. Additionally, we expect to exercise purchase options with respect to eight of our community leases (336 units) within the next twelve months. However, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising such purchase options. Furthermore, the terms of any such options that are based on fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending on the circumstances at the time of exercise. We expect to fund our operating leases, respectively.acquisition of such communities with the proceeds from non-recourse mortgage financing on the acquired communities and cash on hand.
Total liquidity of $458.6$478.3 million as of SeptemberJune 30, 20182019 included $133.7$256.0 million of unrestricted cash and cash equivalents (excluding restricted cash and lease security deposits of $116.5$117.3 million in the aggregate), $58.8 million of marketable securities, and $324.9$163.5 million of availability on our secured credit facility. Total liquidity as of June 30, 2019 decreased $114.2 million from total liquidity of $592.5 million as of December 31, 2018. The decrease was primarily attributable to the negative $63.3 million of Adjusted Free Cash Flow, repayment of debt of $227.1 million during the period, $18.4 million paid for share repurchases, an increase in restricted cash deposits on our insurance programs as we replaced letters of credit as collateral with restricted cash, and a lower
amount available on the secured credit facility. These decreases were partially offset by net cash proceeds of $52.4 million from asset sales, proceeds from debt of $158.2 million, and $31.6 million notes receivable during the current period. In July of 2019 we increased the availability under our secured credit facility to $180.8 million after giving effect to the addition of three communities to the borrowing base.
As of SeptemberJune 30, 2018, we had $326.12019, our current liabilities exceeded current assets by $313.7 million. Our current liabilities include $248.1 million of negative working capital. Dueoperating and financing lease obligations recognized on our condensed consolidated balance sheet, including $182.7 million for the current portion of operating lease obligations recognized on our condensed consolidated balance sheet as a result of the application of ASC 842. Additionally, due to the nature of our business, it is not unusual to operate in the position of negative working capital because we collect revenues much more quickly, often in advance, than we are required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities. Our operations generally result in a very low level of current assets primarily stemming from our deployment of cash to pay down long-term liabilities, to fund capital expenditures, in connection with our portfolio optimization initiative, and to pursue strategic business developmenttransaction opportunities. As of September 30, 2018, the current portion of long-term debt was $487.8 million, which includes the carrying value of $60.8 million of mortgage debt due in January 2019 and $158.6 million of mortgage debt related to 32 communities classified as held for sale as of September 30, 2018.
Over the near term, we expect to increase our cash and cash equivalents through disposing owned communities and obtaining debt secured by non-recourse mortgages on certain communities. We continue to execute on our plan to market in 2018 and sell 26 owned communities, 19 of which were under contract for sale and included in assets held for sale as of September 30, 2018. We believe the sale of these 26 owned communities will generate more than $250 million of proceeds, net of associated debt and transaction costs. As part of this plan, we completed the disposition of Brookdale Battery Park on November 1, 2018 and receivedCapital Expenditures
proceeds of approximately $144 million, net of associated debt and transaction costs. During the fourth quarter of 2018 we intend to complete mortgage financing and re-financing transactions for several communities and to obtain a new or amended secured credit facility with a reduced revolving line of credit.
The closings of the expected sales of assets are, or will be, subject to the satisfaction of various conditions, including (where applicable) the receipt of regulatory approvals and (where applicable) subject to our successful marketing of such assets on terms acceptable to us, and the closings of the foregoing financing plans are subject to our successful negotiation of such transactions. There can be no assurance that the transactions will close, or if they do, when the actual closings will occur.
Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence, including for unit turnovers (subject to a $500 floor)) and community renovations, apartment upgrades and other major building infrastructure projects. Corporate and other capital expenditures include those for information technology systems and equipment, the expansion of our support platform and ancillaryhealthcare services programs, and the remediation or replacement of assets as a result of casualty losses and compliance with requirements to obtain emergency power generators at our communities.losses. Development capital expenditures include community expansions and major community redevelopment and repositioning projects, including our Program Max initiative, and the development of new communities.
Through our Program Max initiative, we intend to expand, renovate, redevelop, and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These Program Max projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications. We currently have seven20 Program Max projects that have been approved, most of which have begun construction and are expected to generate 9188 net new units.
The following table summarizes our actual capital expenditures for the nine months ended September 30, 2018 for our consolidated business:
|
| | | |
| (in millions) | Nine Months Ended September 30, 2018 |
Community-level capital expenditures, net (1) | $ | 97.3 |
|
Corporate (2) | 33.4 |
|
Non-development capital expenditures, net (3) | 130.7 |
|
Development capital expenditures, net (4) | 20.1 |
|
| Total capital expenditures, net | $ | 150.8 |
|
| |
(1) | Reflects the amount invested, net of lessor reimbursements of $1.8 million. |
| |
(2) | Includes $9.3 million of remediation costs at our communities resulting from Hurricanes Harvey and Irma and for the acquisition of emergency power generators at our impacted Florida communities. Amounts exclude reimbursement from our property and casualty insurance policies of approximately $1.1 million. |
| |
(3) | Amount is included in Adjusted Free Cash Flow. |
| |
(4) | Reflects the amount invested, net of lessor reimbursements of $1.7 million. |
We expect our full-year 2018 non-development capital expenditures, net of lessor reimbursements, to be approximately $180 million, and our development capital expenditures, net of lessor reimbursements, to be approximately $30 million. Our expectations regarding full-year 2018 non-development capital expenditures include up to $25 million for remediation resulting from hurricanes and the acquisition of emergency power generators at certain Florida communities. Following Hurricane Irma in 2017, legislation was adopted in the State of Florida in March 2018 that requires skilled nursing homes and assisted living and memory care communities in Florida to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. Our impacted Florida communities must comply with the requirements bybe in compliance as of January 1, 2019, subject to extensionwhich has been extended in certain circumstances. We anticipate that our 2018To comply with this legislation, we made approximately $12.1 million and $3.0 million in capital expenditures will be funded from cash on hand, cash flows from operations,in 2018 and if necessary, amounts drawn onthe six months ended June 30, 2019, respectively. We expect to incur approximately $2.0 million of additional capital expenditures in the remainder of 2019 to comply with this legislation.
The following table summarizes our secured credit facility.capital expenditures for the six months ended June 30, 2019 for our consolidated business:
As part of our redefined strategy |
| | | |
| (in millions) | Six Months Ended June 30, 2019 |
Community-level capital expenditures, net (1) | $ | 103.2 |
|
Corporate (2) | 17.9 |
|
Non-development capital expenditures, net (3) | 121.1 |
|
| Development capital expenditures, net | 10.6 |
|
| Total capital expenditures, net | $ | 131.7 |
|
| |
| (1) | Reflects the amount invested, net of lessor reimbursements of $1.0 million. |
| |
| (2) | Includes $8.6 million of remediation costs at our communities resulting from hurricanes and for the acquisition of emergency power generators at our impacted Florida communities. |
| |
| (3) | Amount is included in Adjusted Free Cash Flow. |
During 2018 we recently completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that our communities are in appropriate physical condition to support our redefined strategy. As
part of the review, we also wanted to determinestrategy and determining what additional investments are needed to protect the value of our community portfolio. As a result of that review, and based on our preliminary 2019 budget decisions, we anticipate makinghave budgeted to make significant additional
near-term investments in our communities.communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million. For 2019, this includes increased spendan increase of approximately $75 million in our community-level capital expenditures relative to 2018, primarily attributable to major building infrastructure projects. A portion of these increasedWe also expect our full-year 2019 development capital expenditures, will be reimbursed by our lessors, and net of suchanticipated lessor reimbursements, weto be approximately $30 million. We anticipate that our non-development2019 capital expenditures will be upfunded from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility. With this additional investment in our communities, we expect our Adjusted Free Cash Flow to $75 million higherbe negative for 2019. In addition, we expect that our 2020 community-level capital expenditures will continue to be elevated relative to 2018, but lower than our 2018 spend. We intend to fund the anticipated increase with a portion of the net proceeds expected as a result of our disposition of owned communities and obtaining debt secured by non-recourse mortgages on certain communities.2019.
Execution on our strategy, including completing our capital expenditure plans and any identified lease restructuring, development or acquisition opportunitiespursuing expansion of our healthcare services, may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to forego,forgo, delay or abandon lease restructuring, development or acquisition opportunities that we identify.our plans.
We currently estimate that our existing cash flows from operations, together with cash on hand, amounts available under our secured credit facility and proceeds from anticipated dispositions of owned communities and financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming a relatively stable macroeconomic environment.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level of capital expenditures, general economic conditions, and the cost of capital. Volatility in the credit and financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to maintain capital spending levels, to execute on our strategy or to pursue lease restructuring, development, or acquisitions that we may identify. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us.
Credit Facilities
On December 19, 2014,5, 2018, we entered into a FourthFifth Amended and Restated Credit Agreement with General Electric Capital Corporation (which has since assigned its interest to Capital One, Financial Corporation),National Association, as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto.thereto (the "Amended Agreement"). The agreement currentlyAmended Agreement amended and restated in its entirety our Fourth Amended and Restated Credit Agreement dated as of December 19, 2014 (the "Original Agreement"). The Amended Agreement provides commitments for a total commitment amount of $400.0 million, comprised of a $400.0$250 million revolving credit facility (withwith a $50.0$60 million sublimit for letters of credit and a $50.0$50 million swingline featurefeature. We have a one-time right under the Amended Agreement to permit same day borrowing) and an option to increase commitments on the revolving credit facility by an additional $250.0$100 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The Amended Agreement provides us a one-time right to reduce the amount of the revolving credit commitments, and we may terminate the revolving credit facility at any time, in each case without payment of a premium or penalty. The Amended Agreement extended the maturity date isof the Original Agreement from January 3, 2020 to January 3, 2024 and amountsdecreased the interest rate payable on drawn amounts. Amounts drawn under the facility will continue to bear interest at 90-day LIBOR plus an applicable margin; however, the Amended Agreement reduced the applicable margin from a range of 2.50% to 3.50% to a range of 2.25% to 3.25%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50%2.25% margin at utilization equal to or lower than 35%, a 3.25%2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50%3.25% margin at utilization greater than 50%. TheA quarterly commitment fee continues to be payable on the unused portion of the facility isat 0.25% per annum when the outstanding amount of obligations (including revolving credit swingline and termswingline loans and letter of credit obligations) is greater than or equal to 50% of the totalrevolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the totalrevolving credit commitment amount.
Amounts drawn on the facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The credit facility is secured by first priority mortgages on certain of our communities. In addition, the agreementAmended Agreement permits us to pledge the equity interests in subsidiaries that own other communities and grant negative pledges in connection therewith (rather than mortgaging such communities), provided that loan availability from pledged assets cannot exceednot more than 10% of loan availabilitythe borrowing base may result from mortgaged assets. The availabilitycommunities subject to negative pledges. Availability under the linerevolving credit facility will vary from time to time as it is based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.credit facility and our consolidated fixed charge coverage ratio. In July of 2019 we added three communities to the borrowing base.
The agreementAmended Agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could
result in a default underAmounts drawn on the credit agreement, which would result in termination of all commitments under the agreement and all amounts owing under the agreement becoming immediately due and payable and/or could trigger cross-default provisions in our other outstanding debt and lease documents.
facility may be used for general corporate purposes.
As of SeptemberJune 30, 2018,2019, no borrowings were outstanding on the revolving credit facility, $41.7$41.2 million of letters of credit were outstanding, and the revolving credit facility had $324.9$163.5 million of availability. We also had a separate unsecured lettercredit facility providing for up to $47.5 million of letters of credit facilities of up to $66.2 million in the aggregate as of SeptemberJune 30, 2018. Letters2019 under which $47.5 million of letters of credit totaling $66.1 million had been issued under these separate facilities as of that date. After giving effect to the addition of the three communities to the borrowing base described above, availability under our secured credit facility is $180.8 million as of August 6, 2019.
Long-Term Leases
As of SeptemberJune 30, 2018,2019, we have 366operated 335 communities operated under long-term leases (258(244 operating leases and 108 capital and91 financing leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The CompanyWe typically guaranteesguarantee the performance and lease payment obligations of itsour subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of suchour leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index.index or the leased property revenue. We are responsible for all operating costs, including repairs, property taxes and insurance. As of June 30, 2019, the weighted-average remaining lease term of our operating and financing leases was 7.3 and 8.8 years, respectively. The initial lease terms primarily vary from 10 to 20 years and generally include renewal options ranging from 5 to 20 years. The remaining base lease terms vary from less than one year to 14 years and generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, and termination provisions, and financial covenants, such as those requiring us to maintain prescribed minimum net worth and stockholders' equity levels and lease coverage ratios, and not to exceed prescribed leverage ratios as further described below, financial covenants.below. In addition, our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met.
In addition, certain of our master leases and management agreements contain radius restrictions, which limit our ability to own, develop or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand or develop or acquire senior housing communities and operating companies.
For the three and six months ended SeptemberJune 30, 2018,2019, our cash lease payments for our capital and financing leases and our operating leases were $31.6$76.7 million and $74.0$154.4 million, respectively. For the nine months ended September 30, 2018, our cash lease paymentsrespectively, and for our capital and financing leases and our operating leases were $110.3$28.3 million and $250.7$56.7 million, respectively. For the twelve months ending SeptemberJune 30, 2019,2020, we will be required to make approximately $70.3$307.3 million and $303.9$88.7 million of cash lease payments in connection with our existing capitaloperating and financing leases, respectively. Our capital expenditure plans for 2019 include required minimum spend of approximately $12 million for capital expenditures under certain of our community leases, and our operating leases, respectively.thereafter we are required to spend an average of approximately $20 million per year under the initial lease terms of such leases.
Debt and Lease Covenants
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum net worth and stockholders’ equity levels and debt service and lease coverage ratios, and requiring us not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. Net worth is generally calculated as stockholders' equity as calculated in accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. The debt service and lease coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or annual lease payment.payments. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities, and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
As of SeptemberJune 30, 2018,2019, we are in compliance with the financial covenants of our outstanding debt agreements and long-term leases.
Contractual Commitments
Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the "Contractual Commitments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 filed with the SEC on February 22, 2018.
During the three months ended June 30, 2018, the Company restructured a portfolio of 128 communities leased from Ventas, which included an extension of the initial lease term through December 31, 2025, and the Company terminated the triple net leases with respect to 37 communities leased from Welltower. As a result, the Company's payment obligations decreased $36.4 million, $56.1 million and $9.4 million for the years ending December 31, 2018, 2019, and 2020 and increased $27.6 million, $41.4 million, and $74.1 million for each of the years ending December 31, 2021, 2022, and thereafter, respectively. See Note 4 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about the Ventas and Welltower transactions.
14, 2019. There werehave been no other material changes outside the ordinary course of business in our contractual commitments during the ninesix months ended SeptemberJune 30, 2018.2019.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2018,2019, we do not have an interest in any "off-balanceoff-balance sheet arrangements" (asarrangements as defined in Item 303(a)(4) of Regulation S-K)S-K that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
We own an interest in ancertain unconsolidated venture as described under Note 14 to the condensed consolidated financial statements.ventures. Except in limited circumstances, our risk of loss is limited to our investment in theeach venture. We also own interests in certain other unconsolidated ventures that are not considered variable interest entities. The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains the financial measures utilized by management to evaluate our operating performance and liquidity that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). Each of these measures Adjusted EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with GAAP. Presentations of these non-GAAP financial measures are intended to aid investors in better understanding the factors and trends affecting our performance and liquidity. However, investors should not be considered in isolation from or as superior to orconsider these non-GAAP financial measures as a substitute for financial measures determined in accordance with GAAP, including net income (loss), income (loss) from operations, or net cash provided by (used in) operating activities, or other financial measures determined in accordance with GAAP. We use these non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
We strongly urge you to review the reconciliations of Adjusted EBITDA from our net income (loss), our Adjusted Free Cash Flow from our net cash provided by (used in) operating activities, and our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures from such ventures' net cash provided by (used in) operating activities, along with our condensed consolidated financial statements included herein. We also strongly urge you not to rely on any single financial measure to evaluate our business.activities. We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA and Adjusted Free Cash Flowthese non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies calculate these non-GAAP measures in the same manner. We urge investors to review the reconciliations included below of these non-GAAP financial measures from the most comparable financial measures determined in accordance with GAAP.
Adjusted EBITDA
Definition of Adjusted EBITDA
We is a non-GAAP performance measure that we define Adjusted EBITDA as net income (loss) before: excluding: benefit/provision (benefit) for income taxes;taxes, non-operating (income) income/expense items;items, and depreciation and amortization (includingamortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges); (gain) charges, gain/loss on sale or acquisition of communities (including gain (loss) on facility lease termination and modification); straight-linemodification, operating lease expense (income), net of amortization of (above) below market rents;adjustment, amortization of deferred gain; non-cash stock-based compensation expense; andgain, change in future service obligation.obligation, non-cash stock-based compensation expense, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, our assessment of options and alternatives to enhance stockholder value, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance
Management's Use
and retention costs. During the first quarter of Adjusted EBITDA
We use2019, we modified our definition of Adjusted EBITDA to assessexclude transaction and organizational restructuring costs, and amounts for all periods herein reflect application of the modified definition.
Our proportionate share of Adjusted EBITDA of unconsolidated ventures is calculated based on our overall operating performance. equity ownership percentage and in a manner consistent with our definition of Adjusted EBITDA for our consolidated entities. Our investments in unconsolidated ventures are accounted for under the equity method of accounting, and therefore, our proportionate share of Adjusted EBITDA of unconsolidated ventures does not represent our equity in earnings or loss of unconsolidated ventures on our condensed consolidated statements of operations.
We believe this non-GAAPthat presentation of Adjusted EBITDA as a performance measure as we have definedis useful to investors because (i) it is helpful in identifying trends inone of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measureoperating decisions; (ii) it provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current operating goals as well as achieve optimal operating performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
Adjusted EBITDA provides us with a measure of operating performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure. This metric measures our operating performance based on operational factors that management can impact in the short-term, namely revenues and the controllable cost structure or expenses of the organization. Adjusted EBITDA is oneorganization, by eliminating items related to our financing and capital structure and other items that management does not consider as part of the metrics used by senior management and the board of directors to review theour underlying core operating performance and that management believes impact the comparability of the business on a regular basis. Weperformance between periods; and (iii) we believe that Adjusted EBITDAthis measure is also used by research analysts and investors to evaluate the performance ofour operating results and to value companies in our industry.
Limitations We believe that presentation of our proportionate share of Adjusted EBITDA of unconsolidated ventures is useful to investors for similar reasons with respect to the unconsolidated ventures.
Adjusted EBITDA has material limitations as an analytical tool. Material limitations in making the adjustments to our net income (loss) to calculate Adjusted EBITDA,a performance measure, including: (i) excluded interest and using this non-GAAP financial measure as compared to GAAP net income (loss), include:
the cash portion of interest expense, income tax (benefit) provisionare necessary to operate our business under our current financing and non-recurring charges related to gain (loss) on sale of communities (or facility lease termination and modification) and extinguishment of debt activities generally represent charges (gains), which may significantly affect our operating results; and
capital structure; (ii) excluded depreciation, and amortization, and asset impairment charges may represent the wear and tear and/or reduction in value of our communities, goodwill, and other assets which affects the services we provide to residents and may be indicative of future needs for capital expenditures.
We believe Adjusted EBITDA is usefulexpenditures; and (iii) we may incur income/expense similar to investors in evaluatingthose for which adjustments are made, such as gain (loss) on sale of assets or facility lease termination and modification, debt modification and extinguishment costs, non-cash stock-based compensation expense, and transaction and other costs, and such income/expense may significantly affect our operating performance because it is helpful in identifying trends in our day-to-day performance since the items excluded have little or no significance to our day-to-day operations and it provides an assessment of our revenue and expense management.results.
The table below reconciles our Adjusted EBITDA from our net income (loss).
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Net income (loss) | $ | (37,140 | ) | | $ | (413,929 | ) | | $ | (659,883 | ) | | $ | (586,627 | ) | $ | (56,055 | ) | | $ | (165,509 | ) | | $ | (98,661 | ) | | $ | (622,743 | ) |
| (Benefit) provision for income taxes | (17,763 | ) | | (31,218 | ) | | (17,724 | ) | | 50,075 |
| |
| Provision (benefit) for income taxes | | 633 |
| | (15,546 | ) | | 1,312 |
| | 39 |
|
| Equity in loss of unconsolidated ventures | 1,340 |
| | 6,722 |
| | 6,907 |
| | 10,311 |
| 991 |
| | 1,324 |
| | 1,517 |
| | 5,567 |
|
| Debt modification and extinguishment costs | 33 |
| | 11,129 |
| | 77 |
| | 11,883 |
| 2,672 |
| | 9 |
| | 2,739 |
| | 44 |
|
| (Gain) loss on sale of assets | (9,833 | ) | | 233 |
| | (76,586 | ) | | 1,383 |
| |
| Other non-operating (income) expense | 17 |
| | (2,621 | ) | | (8,074 | ) | | (6,519 | ) | |
| (Gain) loss on sale of assets, net | | (2,846 | ) | | (23,322 | ) | | (2,144 | ) | | (66,753 | ) |
| Other non-operating income | | (3,199 | ) | | (5,505 | ) | | (6,187 | ) | | (8,091 | ) |
| Interest expense | 68,626 |
| | 79,999 |
| | 215,067 |
| | 249,544 |
| 62,828 |
| | 73,901 |
| | 126,193 |
| | 146,441 |
|
| Interest income | (1,654 | ) | | (1,285 | ) | | (7,578 | ) | | (2,720 | ) | (2,813 | ) | | (2,941 | ) | | (5,897 | ) | | (5,924 | ) |
| Income (loss) from operations | 3,626 |
| | (350,970 | ) | | (547,794 | ) | | (272,670 | ) | 2,211 |
| | (137,589 | ) | | 18,872 |
| | (551,420 | ) |
| Depreciation and amortization | 110,980 |
| | 117,649 |
| | 341,351 |
| | 366,023 |
| 94,024 |
| | 116,116 |
| | 190,912 |
| | 230,371 |
|
| Goodwill and asset impairment | 5,500 |
| | 368,551 |
| | 451,966 |
| | 390,816 |
| 3,769 |
| | 16,103 |
| | 4,160 |
| | 446,466 |
|
| Loss on facility lease termination and modification, net | 2,337 |
| | 4,938 |
| | 148,804 |
| | 11,306 |
| 1,797 |
| | 146,467 |
| | 2,006 |
| | 146,467 |
|
| Straight-line lease (income) expense | (1,815 | ) | | (3,078 | ) | | (10,410 | ) | | (9,204 | ) | |
| Amortization of (above) below market lease, net | (672 | ) | | (1,697 | ) | | (4,246 | ) | | (5,091 | ) | |
| Operating lease expense adjustment | | (4,429 | ) | | (4,066 | ) | | (8,812 | ) | | (12,169 | ) |
| Amortization of deferred gain | (1,090 | ) | | (1,091 | ) | | (3,269 | ) | | (3,277 | ) | — |
| | (1,089 | ) | | — |
| | (2,179 | ) |
| Non-cash stock-based compensation expense | 6,035 |
| | 7,527 |
| | 20,710 |
| | 22,547 |
| 6,030 |
| | 6,269 |
| | 12,386 |
| | 14,675 |
|
| Transaction and organizational restructuring costs | | 634 |
| | 5,006 |
| | 1,095 |
| | 22,162 |
|
Adjusted EBITDA (1) | $ | 124,901 |
| | $ | 141,829 |
| | $ | 397,112 |
| | $ | 500,450 |
| $ | 104,036 |
| | $ | 147,217 |
| | $ | 220,619 |
| | $ | 294,373 |
|
Our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures is calculated based on our equity ownership percentage and in a manner consistent with theour definition of Adjusted Free Cash Flow for our consolidated entities. Our investments in our unconsolidated ventures are accounted for under the equity method of accounting and, therefore, our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures does not represent cash available to our consolidated business except to the extent it is distributed to us.
The table below reconciles our Adjusted Free Cash Flow from our net cash provided by (used in) operating activities.
The table below reconciles our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures from net cash provided by (used in) operating activities of such unconsolidated ventures. For purposes of this presentation, amounts for each line item represent the aggregate amounts of such line items for all of our unconsolidated ventures.