NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is an 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, memory care, and continuing care retirement communities ("CCRCs"). The 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.
The Company has five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services; and Management Services.
2. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles ("GAAP"). 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 consolidated financial statements. The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and its consolidated subsidiaries. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation, and net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. The Company reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting.
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 6 for more information about the Company's VIE relationships.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, goodwill and asset impairments, self-insurance reserves, performance-based compensation, the allowance for credit losses, depreciation and amortization, leasing transactions, income taxes, and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the original estimates.
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 from estimated reimbursements, 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 ASC 842, Leases ("ASC 842") and recognizes, measures, presents, and discloses the revenue for services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts. The Company has determined that the services included under the Company's independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with Customers ("ASC 606") for its 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. 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 are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives payment for services under various third-party payor programs which include Medicare, Medicaid, and other third-party payors. Estimates for settlements with third-party payors for retroactive adjustments from estimated reimbursements 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. Changes to these estimates for retroactive adjustments are recognized in the period the change or adjustment becomes known or when final settlements are determined.
Management Services
The Company manages certain communities under contracts which provide periodic management fee payments to the Company and reimbursement for costs and expense related to such communities. 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 has determined that all community 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. 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 consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed communities" on the consolidated statements of operations.
Lease Accounting
Refer to the Company's revenue recognition policy for discussion of the accounting policy for residency agreements, which include a lease component.
The following is the Company's lease accounting policy subsequent to the adoption of ASC 842 on January 1, 2019. Refer to Recently Adopted Accounting Pronouncements in this Note 2 for significant changes that resulted from the adoption. The Company, as lessee, recognizes a right-of-use asset and a lease liability on the Company's 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 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 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 to determine the present value of lease payments based on information available at commencement of the lease. The Company's estimated incremental borrowing rate reflects the fixed rate at which the Company could borrow a similar amount for the same term on a collateralized basis. The Company elected the short-term lease exception policy which permits leases with an initial term of 12 months or less to not be recorded on the Company's consolidated balance sheet and instead to be 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 financing lease. The classification criteria is based on estimates regarding the fair value of the leased asset, minimum lease payments, effective cost of funds, economic life of the asset, and certain other terms in the lease agreements.
Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of right-of-use assets are assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset, calculated utilizing the lowest level of identifiable cash flows. If estimated future undiscounted net cash flows are less than the carrying amount 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 asset to its carrying amount, with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates and estimated lease coverage ratios (Level 3).
Operating Leases
The Company recognizes 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 the amount of expense on the lease liability utilizing the effective interest method. Subsequent to the impairment of an operating lease right-of-use asset, the Company recognizes operating lease expense consisting of the reduction of the right-of-use asset on a straight-line basis over the remaining lease term and the amount of expense on the lease liability utilizing the effective interest method.
Financing Leases
Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold intangibles, net on the Company's consolidated balance sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term unless the lease contains an option to purchase the underlying asset that the Company is reasonably certain to exercise. If the Company is reasonably certain to exercise the purchase option, the asset is amortized over the useful life.
Sale-Leaseback Transactions
For 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 the Company has transferred control of the community. For such transactions, the Company removes the transferred assets from the consolidated balance sheet and a gain or loss on the sale is recognized for the difference between the carrying amount of the asset and the transaction price for the sale transaction.
For sale‑leaseback transactions in which the Company has not transferred control of the underlying asset, the Company does not recognize an asset sale or derecognize the underlying asset until control is transferred. For such transactions, the Company continues to recognize the assets within property, plant and equipment and leasehold intangibles, net and continues to depreciate the asset over its useful life. Additionally, the Company accounts for any amounts received as a financing lease liability and the Company recognizes interest expense on the financing lease liability utilizing the effective interest method with the interest expense limited to an amount that is not greater than the cash payments on the financing lease liability over the term of the lease.
Gain (Loss) 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 gain or loss from real estate sales when the transfer of control is complete.
The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete and the Company has no continuing involvement with the transferred financial assets.
Purchase Accounting
For the acquisition of assets that do not meet the definition of a business, the Company accounts for the transaction as an asset acquisition at the purchase price, including acquisition costs, allocated among the acquired assets and assumed liabilities, including identified intangible assets and liabilities, based upon the relative fair values using Level 3 inputs at the date of acquisition.
For acquisitions of a business, the Company accounts for the transaction as a business combination pursuant to the acquisition method and assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at fair value. In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities assumed, the Company makes estimates of fair value using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities, and/or independent appraisals.
In connection with a business combination, the excess of the fair value of liabilities assumed and common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred. See "Recently Adopted Accounting Pronouncements" within this footnote for more information related to the adoption of ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01").
Deferred Financing Costs
Third-party fees and costs incurred to obtain debt are recorded as a direct adjustment to the carrying amount of debt and amortized on a straight-line basis, which approximates the effective yield method, over the term of the related debt. Unamortized deferred financing fees are written-off if the associated debt is retired before the maturity date. Upon the refinancing of mortgage debt or amendment of the line of credit, unamortized deferred financing fees and additional financing costs incurred are accounted for in accordance with ASC 470-50, Debt Modifications and Extinguishments.
Stock-Based Compensation
Measurement of the cost of employee services received in exchange for stock compensation is based on the grant-date fair value of the employee stock awards, which is based on the quoted price of the Company's common shares on the grant date for the majority of the Company's awards. Generally, this cost is recognized as compensation expense ratably over the employee's requisite service period. The Company recognizes forfeitures as they occur and any previously recognized compensation expense is reversed for forfeited awards. Awards that vest over a requisite service period, other than those with performance or market conditions, generally vest ratably in annual installments over a period of three to four years. 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 conditions. The Company recognizes 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 conditions. Performance conditioned awards that vest dependent upon attainment of various levels of performance that equal or exceed threshold levels generally vest based upon performance at the end of a three-year performance period. The number of shares that ultimately vest can range from 0% to 125% of the stock awards granted depending on the level of achievement of the performance criteria.
Certain of the Company's employee stock awards vest only upon the achievement of a market condition where the measurement period is three years and vesting of the awards is based on the Company's level of attainment of a specified total stockholder return relative to the percentage appreciation of a specified index of companies for the respective three-year measurement period. Compensation expense for awards with market conditions is recognized over the service period, which is generally four years, and the actual achievement of the market condition does not impact expense recognition. The Company uses a Monte Carlo valuation model to estimate the grant date fair value of such awards. Depending on the results achieved during the three-year measurement period, the number of shares that ultimately vest may range from 0% to 150% of the stock awards granted. The expected volatility of the Company's common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period and for awards granted in 2019, the expected weighted average volatility was 45.2%. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year measurement period, and for awards granted in 2019 the weighted average risk free interest rate was 2.4%.
For all share-based awards with graded vesting other than performance conditioned awards, 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 performance conditioned awards, 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 condition is deemed probable of achievement. Performance conditions are evaluated quarterly. If such conditions are not ultimately met or it is not probable the conditions will be achieved, no compensation expense for performance conditioned awards is recognized and any previously recognized compensation expense is reversed.
Income Taxes
The Company accounts for income taxes 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 using the tax rates in effect for the year in which the differences are expected to affect taxable income. 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. When it is determined that it is more likely than not that the Company will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset is made and reflected in income. This determination is made by considering various factors, including the reversal and timing of existing temporary differences, tax planning strategies, and estimates of future taxable income exclusive of the reversal of temporary differences.
Fair Value of Financial Instruments
Fair value measurements are based on 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 – quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 – quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to their short maturity of 90 days or less. Restricted cash consists principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and consists of the following:
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|
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|
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|
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December 31,
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|
(in thousands)
|
2019
|
|
2018
|
|
Current:
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|
|
|
|
|
|
Real estate tax and property insurance escrows
|
$
|
16,299
|
|
|
$
|
18,177
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|
|
Replacement reserve escrows
|
9,071
|
|
|
8,273
|
|
|
Resident deposits
|
475
|
|
|
489
|
|
|
Other
|
1,011
|
|
|
744
|
|
|
Subtotal
|
26,856
|
|
|
27,683
|
|
|
Long term:
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|
|
|
|
|
|
Insurance deposits
|
23,692
|
|
|
14,370
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|
|
CCRCs escrows
|
10,641
|
|
|
9,618
|
|
|
Debt service reserve
|
281
|
|
|
280
|
|
|
Subtotal
|
34,614
|
|
|
24,268
|
|
|
Total
|
$
|
61,470
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|
|
$
|
51,951
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|
Marketable Securities
Marketable securities are investments in commercial paper and short-term corporate bond instruments with maturities of greater than 90 days as of their acquisition date by the Company.
Accounts Receivable, Net
Accounts receivable are reported net of an allowance for credit losses to represent the Company's estimate of inherent losses at the balance sheet date. The allowance for credit losses was $7.8 million and $7.9 million as of December 31, 2019 and 2018,
respectively. The adequacy of the Company's allowance for credit losses is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid or withheld). Subsequent adjustments to these accrued amounts are recorded in net revenues when known. A reserve for estimated retroactive adjustments was $17.9 million and $16.9 million as of December 31, 2019 and 2018, respectively.
Assets Held for Sale
The Company designates communities as held for sale when certain criteria are met, including when management has committed to a plan to sell the community and the sale is probable within one year of the reporting date. The Company records these assets on the consolidated balance sheet at the lesser of the carrying amount and fair value less estimated selling costs. If the carrying amount is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it has changed. The long-lived assets are not depreciated while classified as held for sale.
Property, Plant and Equipment and Leasehold Intangibles, Net
Property, plant and equipment and leasehold intangibles, net are recorded at cost. Depreciation and amortization 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
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Estimated
Useful Life
(in years)
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|
Buildings and improvements
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|
40
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|
Furniture and equipment
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|
3 – 10
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|
Resident lease intangibles
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|
1 – 3
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Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements, which improve and/or extend the useful life of the asset, are capitalized and depreciated over the estimated useful life of the renovations or improvements. For communities subject to operating or financing leases, leasehold improvements are depreciated over the shorter of the estimated useful life of the assets or the term of the lease. For financing leases that have a purchase option the Company is reasonably certain to exercise, the leasehold improvements are depreciated over their estimated useful life. Facility operating expense excludes facility depreciation and amortization.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. Recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, the Company is required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value, with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods, and estimated capitalization rates (Level 3).
Investment in Unconsolidated Ventures
In accordance with ASC 810, Consolidation, the general partner or managing member of a venture consolidates the venture unless the limited partners or other members have either (1) the substantive ability to dissolve the venture or otherwise remove the general partner or managing member without cause or (2) substantive participating rights in significant decisions of the venture, including authorizing operating and capital decisions of the venture, including budgets, in the ordinary course of business.
The initial carrying amount of investments in unconsolidated ventures is based on the amount paid to purchase the investment interest contributed to the unconsolidated ventures. The Company's reported share of earnings of an unconsolidated venture is
adjusted for the impact, if any, of basis differences between its carrying amount of the equity investment and its share of the venture's underlying assets.
Distributions received from an investee are recognized as a reduction in the carrying amount of the investment. If distributions are received from an investee that would reduce the carrying amount of an equity method investment below zero, the Company evaluates the facts and circumstances of the distributions to determine the appropriate accounting for the excess distribution, including an evaluation of the source of the proceeds and implicit or explicit commitments to fund the investee. The excess distribution is either recorded as a gain on investment, or in instances where the source of proceeds is from financing activities or the Company has a significant commitment to fund the investee, the excess distribution would result in an equity method liability and the Company would continue to record its share of the investee's earnings and losses.
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. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. If the Company determines that an equity method investment is other than temporarily impaired, it is recorded at its fair value with an impairment charge recognized in asset impairment expense for the difference between its carrying amount and fair value based on Level 3 inputs.
Goodwill and Intangible Assets
The Company tests goodwill for impairment annually during the fourth quarter or more frequently if 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 if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If so, the Company performs a quantitative goodwill impairment test 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 amount. 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 amount exceeding its estimated fair value, an impairment charge will be recorded based on the difference, with the impairment charge limited to the amount of goodwill allocated to the reporting unit.
Acquired intangible 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 are reviewed for impairment if indicators of impairment arise. The evaluation of impairment for definite-lived intangibles is based upon a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset (Level 3 input). If estimated future undiscounted net cash flows are less than the carrying amount 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 amount, with any shortfall from 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 if indicators of impairment arise. The impairment test consists of a comparison of the estimated fair value using Level 3 inputs of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment charge is recognized for that difference.
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.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which amends the former 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 consolidated balance sheet for most leases. Additionally, ASU 2016-02 made targeted changes to lessor accounting, including changes to align certain aspects with the revenue recognition model, and enhanced disclosure of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements ("ASU 2018-11"), which 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, and a practical expedient allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. The Company adopted these lease accounting standards effective January 1, 2019 and 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 did not elect the hindsight practical expedient which would have allowed it to revisit key assumptions, such as lease term, that were made when it originally entered into the lease.
The Company's adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $1.6 billion and right-of-use assets of $1.3 billion on the consolidated balance sheet for its existing community, office, and equipment operating leases based on the remaining present value of the minimum lease payments as of January 1, 2019. The future minimum lease payments recognized on the 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 had a net liability of $231.4 million recognized on its 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 and financing leases as of January 1, 2019 and there were no changes to the amounts recognized on its consolidated balance sheet for its existing financing leases as of January 1, 2019. Additionally, the application of ASU 2016-02 resulted in a $10.2 million increase to the amount of asset impairment expense recognized for operating lease right-of-use assets for the year ended December 31, 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 ("ADLs"), 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 elected the lessor practical expedient within ASU 2018-11 and recognizes, 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 accounting for it under ASC 842 and ASC 606.
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 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 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 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
|
|
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), which 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 changes to the definition of a business may result in certain 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"), which 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 $1.0 million increase to the amount of net cash used in investing activities for the year ended December 31, 2017.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which 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 an $11.7 million increase to the amount of net cash provided by operating activities and an $11.7 million decrease to the amount of net cash provided by financing activities for the year ended December 31, 2017.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which 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, was 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 the application of ASU 2014-09 resulted in 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 $3.4 billion of resident fee revenue and $2.5 billion of facility operating expense for the year ended December 31, 2018. The impact to resident fee revenue and facility operating expense as a result of applying ASC 606 was a decrease of $8.4 million for the year ended December 31, 2018.
The Company has determined that the application of ASU 2014-09 resulted in no significant change to the annual amount of revenue recognized for management fees under the Company's community management agreements; however, the Company recognizes an estimated amount of incentive fee revenue earlier during the annual contract period. The Company has determined that the application of ASU 2014-09 resulted in 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 $1.0 billion of revenue for reimbursed costs incurred on behalf of managed communities and $1.0 billion of reimbursed costs incurred on behalf of managed communities for the year ended December 31, 2018, 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 $46.1 million for the year ended December 31, 2018.
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"), which 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 2017-05, under the modified retrospective approach as of January 1, 2018 and now applies 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"), which 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 adopted 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 impact of the adoption of ASU 2016-13 did not have a material effect to its 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 consolidated financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income (loss) 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. 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, vested and unvested restricted stock units, and convertible debt instruments and warrants.
During the years ended December 31, 2019, 2018, and 2017, 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 year 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 7.5 million, 6.4 million, and 5.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
For the years ended December 31, 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 December 31, 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 December 31, 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 December 31, 2018 and 2017, the number of shares issuable upon exercise of the warrants was approximately 0.5 million and 10.8 million, respectively. The option to exercise the remaining outstanding warrants expired unexercised during 2019.
4. Acquisitions, Dispositions, and Other Significant Transactions
During 2017 through 2019, the Company disposed of an aggregate of 39 owned communities (3 in 2017, 22 in 2018, and 14 in 2019). The Company also entered into agreements with Welltower Inc. ("Welltower") and Ventas, Inc. ("Ventas") in 2018 and continued to execute on the transactions with Healthpeak Properties Inc. ("Healthpeak") (f/k/a HCP, Inc.) announced in 2016 and 2017, which together restructured a significant portion of the 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 204 communities were terminated from 2017 to 2019 (105 in 2017, 89 in 2018, and 10 in 2019). During this period the Company also sold its ownership interests in eight unconsolidated ventures and acquired six communities that it previously leased or managed. As of December 31, 2019, the Company owned 330 communities, leased 333 communities, managed 17 communities for which the Company had an equity interest, and managed 83 communities on behalf of third parties.
The following table sets forth the amounts included within the Company's consolidated financial statements for the 243 communities that it disposed through sales and lease terminations for the years ended December 31, 2019, 2018, and 2017 through the respective disposition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Resident fees
|
|
|
|
|
|
|
Independent Living
|
$
|
—
|
|
|
$
|
81,280
|
|
|
$
|
152,190
|
|
|
Assisted Living and Memory Care
|
20,891
|
|
|
256,038
|
|
|
476,677
|
|
|
CCRCs
|
33,189
|
|
|
53,215
|
|
|
113,493
|
|
|
Senior housing resident fees
|
54,080
|
|
|
390,533
|
|
|
742,360
|
|
|
Facility operating expense
|
|
|
|
|
|
|
Independent Living
|
—
|
|
|
48,154
|
|
|
90,134
|
|
|
Assisted Living and Memory Care
|
18,249
|
|
|
187,411
|
|
|
336,314
|
|
|
CCRCs
|
34,128
|
|
|
50,971
|
|
|
103,130
|
|
|
Senior housing facility operating expense
|
52,377
|
|
|
286,536
|
|
|
529,578
|
|
|
Cash lease payments
|
$
|
1,694
|
|
|
$
|
84,041
|
|
|
$
|
178,187
|
|
As of December 31, 2019, three owned communities were classified as held for sale, resulting in $42.7 million being recorded as assets held for sale and $28.9 million of mortgage debt being included in the current portion of long-term debt within the consolidated balance sheet with respect to such communities. Two of such communities are in the CCRCs segment and one is in the Assisted Living and Memory Care segment. The closings of the various pending and expected transactions described below 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.
Completed Dispositions of Owned Communities
During the year ended December 31, 2019, the Company completed the sale of 14 owned communities for cash proceeds of $85.4 million, net of transaction costs, and recognized a net gain on sale of assets of $5.5 million. The Company utilized a portion of the cash proceeds from the asset sales to repay approximately $5.1 million of associated mortgage debt and debt prepayment penalties.
During the year ended December 31, 2018, the Company completed the sale of 22 owned communities for cash proceeds of $380.7 million, net of transaction costs, and recognized a net gain on sale of assets of $188.6 million. The Company utilized a portion of the cash proceeds from the asset sales to repay approximately $174.0 million of associated mortgage debt and debt prepayment penalties.
During the year ended December 31, 2017, the Company completed the sale of three owned communities for cash proceeds of $8.2 million, net of transaction costs.
2019 Healthpeak CCRC Venture and Master Lease Transactions
On October 1, 2019, the Company entered into definitive agreements, including a Master Transactions and Cooperation Agreement (the "MTCA") and an Equity Interest Purchase Agreement (the "Purchase Agreement"), providing for a multi-part transaction with Healthpeak. The parties subsequently amended the agreements to include one additional entry fee CCRC community as part of the sale of the Company's interest in its unconsolidated entry fee CCRC Venture with Healthpeak (the "CCRC Venture") (rather than removing the CCRC from the CCRC Venture for joint marketing and sale). The components of the multi-part transaction include:
|
|
|
|
•
|
CCRC Venture Transaction. Pursuant to the Purchase Agreement, on January 31, 2020, Healthpeak acquired the Company's 51% ownership interest in the CCRC venture, which held 14 entry fee CCRCs for a total purchase price of $295.2 million (representing an aggregate valuation of $1.06 billion less portfolio debt, subject to a net working capital adjustment), which remains subject to a post-closing net working capital adjustment. At the closing, the parties terminated the Company's existing management agreements with the 14 entry fee CCRCs, Healthpeak paid the Company a $100.0 million management agreement termination fee, and the Company transitioned operations of the entry fee CCRCs to a new operator. Prior to the January 31, 2020 closing, the parties moved two entry fee CCRCs into a new unconsolidated
|
venture on substantially the same terms as the CCRC Venture to accommodate the sale of such two communities at a future date.
|
|
|
|
•
|
Master Lease Transactions. Pursuant to the MTCA, on January 31, 2020, the parties amended and restated the existing master lease pursuant to which the Company continues to lease 25 communities from Healthpeak, and the Company acquired 18 communities from Healthpeak, at which time the 18 communities were removed from the master lease. At the closing, the Company paid $405.5 million to acquire such communities and to reduce its annual rent under the amended and restated master lease. The Company funded the community acquisitions with $192.6 million of non-recourse mortgage financing and the proceeds from the multi-part transaction. In addition, Healthpeak has agreed to transition one leased community to a successor operator. With respect to the continuing 24 communities, the Company's amended and restated master lease: (i) has an initial term to expire on December 31, 2027, subject to two extension options at the Company's election for ten years each, which must be exercised with respect to the entire pool of leased communities; (ii) the initial annual base rent for the 24 communities is $41.7 million and is subject to an escalator of 2.4% per annum on April 1st of each year; and (iii) Healthpeak has agreed to make available up to $35 million for capital expenditures for a five-year period related to the 24 communities at an initial lease rate of 7.0%.
|
The Company expects the sales of the two remaining entry fee CCRCs to occur over the next 15 months; however, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur. Subsequent to these transactions, the Company will have exited substantially all of its entry fee CCRC operations.
2018 Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018, the Company announced that it had entered into definitive agreements with Welltower. The components of the agreements include:
|
|
|
|
•
|
Lease Terminations. The Company and Welltower agreed to an early termination of the Company's triple-net lease obligations on 37 communities effective June 30, 2018. The communities were part of two lease portfolios due to mature in 2020 (10 communities) and 2028 (27 communities). The Company paid Welltower an aggregate lease termination fee of $58.0 million. The Company agreed to manage the foregoing 37 communities on an interim basis until the communities have been transitioned to new managers, and such communities are reported in the Management Services segment during such interim period. The Company recognized a $22.6 million loss on lease termination during the year ended December 31, 2018 for the amount by which the aggregate lease termination fee exceeded the net carrying amount of the Company's assets and liabilities under operating and financing leases as of 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 sale of such communities, and the Company would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds. As of December 31, 2019, no leases have been terminated in accordance with the agreement.
|
|
|
|
|
•
|
RIDEA Restructuring. The Company sold its 20% equity interest 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 sale). The Company agreed to continue to manage the communities in the venture on an interim basis until the communities have been transitioned to new managers, and such communities are reported in the Management Services segment during such interim period.
|
The Company also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities). 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.
2018 Ventas Lease Portfolio Restructuring
On April 26, 2018, the Company entered into several agreements to restructure a portfolio of 128 communities it leased from 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 into the Ventas Master Lease. Under 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, 18 of which have been and three will be 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 are subject to cross-default provisions.
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, provided 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 has received or 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 and in succeeding years, the annual minimum rent is 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 ended 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.
Pursuant to the Ventas Master lease, the Company has exercised its right to direct Ventas to market for sale certain 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 will be 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 2019, seven of such communities were sold by Ventas and removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease was prospectively reduced by $1.7 million.
The Company 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 (Level 3 inputs). The Company recognized a $125.7 million non-cash loss on lease modification in the year ended December 31, 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.
2017 Healthpeak Multi-Part Transaction
On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with Healthpeak. As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement ("Former Healthpeak Master Lease") with Healthpeak effective as of November 1, 2017. The components of the multi-part transaction include:
|
|
|
|
•
|
Master Lease Transactions. The Company and Healthpeak amended and restated triple-net leases covering substantially all of the communities the Company leased from Healthpeak as of November 1, 2017 into the Former Healthpeak Master Lease. During the year ended December 31, 2018, the Company acquired two communities formerly leased for an aggregate purchase price of $35.4 million and leases with respect to 33 communities were terminated, and such communities were removed from the Former Healthpeak Master Lease, which completed the terminations of leases as provided in the Former Healthpeak Master Lease. The Company agreed to manage communities for which leases were terminated on an interim basis until the communities were transitioned to new managers, and such communities are
|
reported in the Management Services segment during such interim period. As of December 31, 2019, the Company continued to lease 43 communities pursuant to the terms of the Former Healthpeak Master Lease, which had 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 Former Healthpeak Master Lease also provides that the Company may engage in certain change in control and other transactions without the need to obtain Healthpeak's consent, subject to the satisfaction of certain conditions.
|
|
|
|
•
|
RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, Healthpeak acquired the Company's 10% ownership interest in one of the Company's RIDEA ventures with Healthpeak 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 Healthpeak 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, Healthpeak was entitled to sell or transition operations and/or management of 37 of such communities. Management agreements for all 37 such communities were terminated by Healthpeak since November of 2017 (for which the Company recognized a $9.7 million non-cash management contract termination gain).
|
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 for more information regarding the non-recourse first 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 reductions and recognized a $9.7 million deferred liability for the consideration received from Healthpeak 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 leases (under ASC 840), the Company reduced the carrying amount of lease obligations and assets under leases by $145.6 million in 2017. During the year ended December 31, 2018, the results and financial position of the 33 communities for which leases were terminated were deconsolidated from the Company prospectively upon termination of the lease obligations. The Company derecognized the $332.8 million carrying amount of the assets under financing leases and the $378.3 million carrying amount of financing lease obligations for 20 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 20 communities and recorded a non-cash gain on sale of assets of $44.2 million for the year ended December 31, 2018. Additionally, the Company recognized a non-cash gain on lease termination of $1.5 million for the year ended December 31, 2018, for the derecognition of the net carrying amount of the Company's assets and liabilities under operating and financing leases at the lease termination date.
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 a purchase price of $1.1 billion. The Company had previously leased the 64 communities from Healthpeak 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 Healthpeak subject to the existing leases, 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 were 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 amount of the Company's investment was $66.8 million, representing the amount by which the $179.2 million cash contribution exceeded the carrying amount of the Company's liabilities under operating and financing leases contributed by the Company net of the carrying amount of the assets under such operating 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 (using Level 3 inputs). 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 amount in excess of the estimated fair value of the Company's investment.
During 2018, the Company recorded a $33.4 million non-cash impairment charge within goodwill and asset impairment expense to reflect the amount by which the carrying amount of the investment exceeded the estimated fair value (using Level 3 inputs).
Additionally, these transactions related to the Blackstone Venture required the Company to record a significant increase to 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. During 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 16 for more information about the Company's deferred income taxes.
During 2018, leases for the two communities owned by the Blackstone Venture were terminated 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 million gain on sale of assets for the amount by which the net carrying amount of the Company's assets and liabilities disposed of exceeded the aggregate transaction cost.
Additional Healthpeak Lease Terminations
During the year ended December 31, 2017, triple-net leases with respect to 26 communities were terminated pursuant to agreements we entered into with Healthpeak on November 1, 2016. As a result of such lease terminations, during 2017 the Company derecognized the $145.3 million carrying value of the assets under financing leases and the $156.7 million carrying value of financing lease obligations for 21 communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement for accounting purposes, and recorded an $11.4 million gain on sale of assets.
5. Fair Value Measurements
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to their short maturity of 90 days or less.
Marketable Securities
As of December 31, 2019, marketable securities of $68.6 million are stated at fair value based on valuations provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy.
Interest Rate Derivatives
The Company's derivative assets include interest rate caps that effectively manage the risk above certain interest rates for a portion of the Company's variable rate debt. The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily available observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. The Company considers the credit risk of its counterparties when evaluating the fair value of its derivatives. The following table summarizes the Company's interest rate cap instruments as of December 31, 2019:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Current notional balance
|
$
|
1,272,486
|
|
|
Weighted average fixed cap rate
|
4.70
|
%
|
|
Earliest maturity date
|
2020
|
|
|
Latest maturity date
|
2023
|
|
|
Estimated asset fair value (included in other assets, net at December 31, 2019)
|
$
|
6
|
|
|
Estimated asset fair value (included in other assets, net at December 31, 2018)
|
$
|
150
|
|
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 with a carrying amount of approximately $3.6 billion as of both December 31, 2019 and 2018. Fair value of the long-term debt approximates carrying amount in all periods presented. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Goodwill (Note 8)
|
$
|
—
|
|
|
$
|
351.7
|
|
|
$
|
205.0
|
|
|
Property, plant and equipment and leasehold intangibles, net (Note 7)
|
27.2
|
|
|
78.0
|
|
|
164.4
|
|
|
Operating lease right-of-use assets (Note 11)
|
10.2
|
|
|
—
|
|
|
—
|
|
|
Investment in unconsolidated ventures (Note 6)
|
—
|
|
|
33.4
|
|
|
25.8
|
|
|
Other intangible assets, net (Note 8)
|
10.2
|
|
|
9.1
|
|
|
14.6
|
|
|
Assets held for sale (Note 4)
|
1.3
|
|
|
15.6
|
|
|
—
|
|
|
Other assets
|
0.4
|
|
|
2.1
|
|
|
—
|
|
|
Goodwill and asset impairment
|
$
|
49.3
|
|
|
$
|
489.9
|
|
|
$
|
409.8
|
|
Goodwill
During the three months ended September 30, 2017, the Company identified qualitative indicators of impairment of goodwill, including a significant decline in the Company's 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. Based upon the Company's qualitative assessment, the Company 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 amount.
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 the valuation hierarchy. 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 amount of the Company's Assisted Living and Memory Care reporting unit exceeded its estimated fair value by $205.0 million as of September 30, 2017. As a result, the Company recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted Living and Memory Care segment for the three months ended September 30, 2017. The Company concluded that the remaining goodwill for all reporting units was not impaired as of October 1, 2017 (the Company's annual measurement date) and as of December 31, 2017.
During the three months ended March 31, 2018, the Company identified qualitative indicators of impairment of goodwill, 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. As a result, the Company 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 amount. 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. Based on the results of the Company's quantitative goodwill impairment test, the Company determined that the carrying amount of the Company's Assisted Living and Memory Care reporting unit exceeded its estimated fair value by more than the $351.7 million carrying amount as of March 31, 2018. As a result, the Company recorded a non-cash impairment charge of $351.7 million to goodwill within the Assisted Living and Memory Care segment for the three months ended March 31, 2018.
The Company concluded that the remaining goodwill for all reporting units was not impaired as of October 1, 2019 and 2018 (the Company's annual measurement date) and as of December 31, 2019 and 2018. Goodwill allocated to the Company's Independent Living and Health Care Services reporting units is approximately $27.3 million and $126.8 million, respectively, as of December 31, 2019 and 2018.
Determining the fair value of the Company's reporting units involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense 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 differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, changes in reimbursement rates from Medicare for healthcare services, and changes in healthcare reform. 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, changes in reimbursement rates from Medicare for healthcare services, 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, Net
During the years ended December 31, 2019, 2018 and 2017, the Company 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. The Company compared the estimated fair value of the assets to their carrying amount for these identified properties and recorded an impairment charge for the excess of carrying amount over fair value. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $27.2 million, $78.0 million, and $164.4 million for the years ended December 31, 2019, 2018, and 2017, respectively, primarily within the Assisted Living and Memory Care segment.
The fair values of the property, plant and equipment of these communities were primarily determined utilizing a direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements are considered Level 3 measurements within the valuation hierarchy. The range of capitalization rates utilized was 6.5% to 9.0%, depending upon the property type, geographical location, and the quality of the respective community. The Company corroborated the estimated fair values with a sales comparison approach with information observable from recent market transactions. These impairment charges are primarily due to lower than expected operating performance at these properties or the Company's decision to dispose of assets, either through sales or lease terminations, and reflect the amount by which the carrying amounts of the assets exceeded their estimated fair value.
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 years ended December 31, 2018 and 2017, the Company recorded $33.4 million and $25.8 million, respectively, of non-cash impairment charges related to investments in unconsolidated ventures. These impairment charges are primarily due to lower than expected operating performance at the communities owned by the unconsolidated ventures and reflect the amount by which the carrying amounts of the investments exceeded their estimated fair value. Refer to Note 4 for more information about the impairment of the Blackstone Venture. During the year ended December 31, 2019, the Company did not record impairment expense related to its investment in unconsolidated ventures.
Other Intangible Assets
During the years ended December 31, 2019, 2018, and 2017, the Company identified indicators of impairment for the Company's home health care licenses, primarily due to significant underperformance relative to historical and projected operating results, the
impact of lower reimbursement rates from Medicare for home health care services, and an increased competitive environment in the home health care industry. The Company performed a quantitative impairment test, which included a comparison of the estimated fair value of the Company's home health care licenses to the carrying amount. In estimating the fair value of the home health licenses for purposes of the quantitative 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, all of which are considered Level 3 inputs in the valuation hierarchy. Based on the results of the Company's quantitative impairment test, the Company determined that the carrying amount of certain of the Company's home health care licenses exceeded their estimated fair value. As a result, the Company recorded a non-cash impairment charge of $7.6 million, $9.1 million, and $14.6 million for the years ended December 31, 2019, 2018, and 2017, respectively, to intangible assets within the Health Care Services segment.
Assets Held for Sale
During the years ended December 31, 2019 and 2018, the Company recognized $1.3 million and $15.6 million, respectively, of impairment charges related to assets held for sale. These impairment charges are primarily due to the excess of carrying amount over the estimated selling price less costs to dispose. The Company determines the fair value of the communities based primarily on purchase and sale agreements from prospective purchasers (Level 2 input). Refer to Note 4 for more information about the Company's community dispositions and assets held for sale.
Operating Lease Right-of-Use Assets
During the year ended December 31, 2019, the Company evaluated operating lease right-of-use assets for impairment and identified communities with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. The Company compared the estimated fair value of the assets to their carrying amount for these identified communities and recorded an impairment charge for the excess of carrying amount over fair value. As a result, the Company recorded a non-cash impairment charge of $10.2 million for the year ended December 31, 2019 to operating lease right-of-use assets, primarily within the Assisted Living and Memory Care segment.
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 consolidated balance sheet as of January 1, 2019 at the estimated fair value of $56.6 million, and $58.1 million of previously unrecognized right-of-use asset impairments were recognized as a cumulative effect adjustment to accumulated deficit 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, all of which are considered Level 3 inputs. The Company corroborated the estimated management fee rates and lease coverage ratios used in these estimates with management fee rates and 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 2 for more information regarding the recognition of right-of-use assets for operating leases upon the adoption of ASU 2016-02.
6. Investment in Unconsolidated Ventures
As of December 31, 2019, the Company held a 51% equity interest, and Healthpeak owned a 49% interest, in the CCRC Venture, which owned and operated sixteen entry fee CCRCs. The Company's interests in the CCRC Venture were accounted for under the equity method of accounting. Refer to Note 4 for information on the Company's sale of the equity interest in the CCRC Venture on January 31, 2020.
Summarized financial information of all unconsolidated ventures accounted for under the equity method was as follows (reflecting the period of the Company's ownership of an equity interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Years Ended December 31,
|
|
Statement of Operations Information
|
2019
|
|
2018
|
|
2017
|
|
Resident fee revenue
|
$
|
436
|
|
|
$
|
793
|
|
|
$
|
1,354
|
|
|
Facility operating expense
|
(330
|
)
|
|
(592
|
)
|
|
(946
|
)
|
|
Net income (loss)
|
$
|
(9
|
)
|
|
$
|
(39
|
)
|
|
$
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
As of December 31,
|
|
Balance Sheet Information
|
2019
|
|
2018
|
|
Current assets
|
$
|
68
|
|
|
$
|
66
|
|
|
Noncurrent assets
|
1,100
|
|
|
1,148
|
|
|
Current liabilities
|
537
|
|
|
563
|
|
|
Noncurrent liabilities
|
$
|
735
|
|
|
$
|
715
|
|
During the year ended December 31, 2016, the CCRC Venture obtained non-recourse mortgage financing on certain communities and received proceeds of $434.5 million. The CCRC Venture distributed the net proceeds to its investors and the Company received proceeds of $221.6 million. As a result of the distribution, the Company's carrying amount of its equity method investment in the CCRC Venture property company was reduced below zero and the Company has recorded a $66.2 million and $56.6 million equity method liability within other liabilities within the consolidated balance sheets as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the CCRC Venture's operating company ("Opco") was identified as a VIE. As of December 31, 2019, the equity members of the CCRC Venture's Opco shared certain operating rights, and the Company acted as manager to the CCRC Venture Opco. However, the Company did not consolidate this VIE because it did 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 consisted of the CCRCs that it owned and leased, resident fees receivable, notes receivable, and cash and cash equivalents. The obligations of the CCRC Venture Opco primarily consisted of community lease obligations, mortgage debt, accounts payable, accrued expenses, and refundable entrance fees.
The carrying amount of the Company's investment in unconsolidated venture and maximum exposure to loss as a result of the Company's involvement with the CCRC Venture's Opco was $14.3 million as of December 31, 2019. The Company is not required to provide financial support, through a liquidity arrangement or otherwise, to the CCRC Venture's Opco.
Refer to Note 5 for information on impairment expense for investments in unconsolidated ventures.
7. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2019 and 2018, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Land
|
$
|
450,894
|
|
|
$
|
455,623
|
|
|
Buildings and improvements
|
4,790,769
|
|
|
4,749,877
|
|
|
Furniture and equipment
|
859,849
|
|
|
805,190
|
|
|
Resident and leasehold operating intangibles
|
317,111
|
|
|
477,827
|
|
|
Construction in progress
|
80,729
|
|
|
57,636
|
|
|
Assets under financing leases and leasehold improvements
|
1,847,493
|
|
|
1,776,649
|
|
|
Property, plant and equipment and leasehold intangibles
|
8,346,845
|
|
|
8,322,802
|
|
|
Accumulated depreciation and amortization
|
(3,237,011
|
)
|
|
(3,047,375
|
)
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
5,109,834
|
|
|
$
|
5,275,427
|
|
Assets under financing leases and leasehold improvements includes $0.6 billion and $0.7 billion of financing lease right-of-use assets, net of accumulated amortization, as of December 31, 2019 and 2018, respectively. Refer to Note 11 for further information on the Company's financing leases.
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 information on impairment expense for property, plant and equipment and leasehold intangibles.
For the years ended December 31, 2019, 2018, and 2017, the Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $377.6 million, $444.3 million, and $479.4 million, respectively.
8. Goodwill and Other Intangible Assets, Net
The following is a summary of the carrying amount of goodwill presented on a reportable segment basis as of both December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Gross Carrying Amount
|
|
Dispositions and Other Reductions
|
|
Accumulated Impairment
|
|
Net
|
|
Independent Living
|
$
|
28,141
|
|
|
$
|
(820
|
)
|
|
$
|
—
|
|
|
$
|
27,321
|
|
|
Assisted Living and Memory Care
|
605,469
|
|
|
(48,817
|
)
|
|
(556,652
|
)
|
|
—
|
|
|
Health Care Services
|
126,810
|
|
|
—
|
|
|
—
|
|
|
126,810
|
|
|
Total
|
$
|
760,420
|
|
|
$
|
(49,637
|
)
|
|
$
|
(556,652
|
)
|
|
$
|
154,131
|
|
Refer to Note 5 for information on impairment expense for goodwill in 2018 and 2017.
The following is a summary of other intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
(in thousands)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Health care licenses
|
$
|
35,198
|
|
|
$
|
—
|
|
|
$
|
35,198
|
|
|
Trade names
|
27,800
|
|
|
(27,800
|
)
|
|
—
|
|
|
Total
|
62,998
|
|
|
(27,800
|
)
|
|
35,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2019, 2018, and 2017 was $1.8 million, $3.1 million, and $5.6 million, respectively. Health care licenses are indefinite-lived intangible assets and are not subject to amortization. Upon the adoption of ASC 842, the community purchase options were included within operating lease right-of-use assets in the consolidated balance sheets. Refer to Note 5 for information on impairment expense for other intangible assets.
9. Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Mortgage notes payable due 2020 through 2047; weighted average interest rate of 4.72% in 2019, less debt discount and deferred financing costs of $17.0 million and $18.6 million as of December 31, 2019 and 2018, respectively (weighted average interest rate of 4.75% in 2018)
|
$
|
3,496,735
|
|
|
$
|
3,579,931
|
|
|
Other notes payable, weighted average interest rate of 5.77% for the year ended December 31, 2019 (weighted average interest rate of 5.85% in 2018) and maturity dates ranging from 2020 to 2021
|
58,388
|
|
|
60,249
|
|
|
Total long-term debt
|
3,555,123
|
|
|
3,640,180
|
|
|
Current portion
|
339,413
|
|
|
294,426
|
|
|
Total long-term debt, less current portion
|
$
|
3,215,710
|
|
|
$
|
3,345,754
|
|
As of December 31, 2019 and 2018, the current portion of long-term debt within the Company's consolidated financial statements includes $28.9 million and $31.2 million, respectively, of mortgage notes payable secured by communities classified as held for sale. This debt is 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.
The annual aggregate scheduled maturities of long-term debt outstanding as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Long-term
Debt
|
|
2020
|
$
|
341,802
|
|
|
2021
|
335,541
|
|
|
2022
|
323,581
|
|
|
2023
|
233,159
|
|
|
2024
|
297,916
|
|
|
Thereafter
|
2,040,122
|
|
|
Total obligations
|
3,572,121
|
|
|
Less amount representing debt discount and deferred financing costs, net
|
(16,998
|
)
|
|
Total
|
$
|
3,555,123
|
|
Credit Facilities
On December 5, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement with Capital One, National Association, as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto (the "Credit Agreement"). The Credit Agreement provides commitments for a $250 million revolving credit facility with a $60 million sublimit for letters of credit and a $50 million swingline feature. The Company has a one-time right under the Credit Agreement to increase commitments on the revolving credit facility by an additional $100 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The Credit 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 Credit Agreement matures on January 3, 2024. Amounts drawn under the facility will bear interest at 90-day LIBOR plus an applicable margin. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.25% margin at utilization equal to or lower than 35%, a 2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.25% margin at utilization greater than 50%. A quarterly commitment fee is payable on the unused portion of the facility at 0.25% per annum when the outstanding amount of obligations (including revolving credit and swingline loans and letter of credit obligations) is greater than or equal to 50% of the revolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the revolving credit commitment amount.
The credit facility is secured by first priority mortgages on certain of the Company's communities. In addition, the Credit 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 not more than 10% of the borrowing base may result from communities subject to negative pledges. Availability under the revolving credit facility will vary from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and the Company's consolidated fixed charge coverage ratio. During 2019, the Company entered into an amendment to the Credit Agreement that provides for availability calculations to be made at additional consolidated fixed charge coverage ratio thresholds.
The Credit Agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. Amounts drawn on the credit facility may be used for general corporate purposes.
As of December 31, 2019, no borrowings were outstanding on the revolving credit facility, $41.9 million of letters of credit were outstanding, and the revolving credit facility had $172.5 million of availability. The Company also had a separate unsecured letter of credit facility providing for up to $47.5 million of letters of credit as of December 31, 2019 under which $47.5 million had been issued as of that date.
2019 Financings
During the second quarter of 2019, the Company obtained $111.1 million of debt secured by the non-recourse first mortgages on 14 communities. Sixty percent of the principal amount bears interest at a fixed rate of 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 223 basis points. The debt matures in June 2029. The $111.1 million of proceeds from the financing along with cash on hand were utilized to repay $155.5 million of outstanding mortgage debt maturing in 2019.
During the third quarter of 2019, the Company obtained $160.3 million of debt secured by the non-recourse first mortgages on five communities. Seventy-five percent of the principal amount bears interest at a fixed rate of 3.35%, and the remaining twenty-five percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 217 basis points. The debt matures in September 2029. The $160.3 million of proceeds from the financing were utilized to repay $139.2 million of outstanding mortgage debt maturing in 2020 and 2023.
During the year ended December 31, 2019, the Company recorded $5.2 million of debt modification and extinguishment costs on the consolidated statement of operations, primarily related to third party fees directly related to debt modifications.
2018 Financings
During the second quarter of 2018, the Company obtained $247.6 million of debt secured by the non-recourse first mortgages on 11 communities. Sixty percent of the principal amount bears interest at a fixed rate of 4.55%, 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 189 basis points. The debt matures in May 2028. The $247.6 million of proceeds from the financing were primarily utilized to fund the acquisition of five communities from Healthpeak and to repay $43.0 million of outstanding mortgage debt scheduled to mature in May 2018. See Note 4 for more information regarding the acquisitions of communities from Healthpeak.
During the fourth quarter of 2018, the Company obtained $327.0 million of debt secured by the non-recourse first mortgages on 28 communities. Sixty-five percent of the principal amount bears interest at a fixed rate of 5.08%, and the remaining thirty-five percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 216 basis points. The debt matures in December 2028. The $327.0 million of proceeds from the financing were utilized to repay $60.4 million of outstanding mortgage debt scheduled to mature on January 1, 2019.
During the fourth quarter of 2018, the Company repaid $307.4 million of outstanding principal balance on 11 existing loan portfolios. The Company repaid $171.4 million to facilitate the sale of communities classified as assets held for sale and the remaining repayments were primarily to facilitate the release of communities from their existing loan portfolios so that they could be added to the collateral pool for the Company's credit facility which was refinanced in December 2018.
During the year ended December 31, 2018, the Company recorded $11.7 million of debt modification and extinguishment costs on the consolidated statement of operations, primarily related to third party fees directly related to debt modifications.
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 or 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 December 31, 2019, the Company is in compliance with the financial covenants of its outstanding debt agreements.
10. Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Salaries and wages
|
$
|
86,476
|
|
|
$
|
88,425
|
|
|
Insurance reserves
|
63,230
|
|
|
61,150
|
|
|
Vacation
|
37,415
|
|
|
37,109
|
|
|
Real estate taxes
|
25,979
|
|
|
25,302
|
|
|
Interest
|
16,196
|
|
|
15,458
|
|
|
Accrued utilities
|
7,601
|
|
|
8,883
|
|
|
Taxes payable
|
1,360
|
|
|
2,782
|
|
|
Other
|
28,446
|
|
|
59,118
|
|
|
Total
|
$
|
266,703
|
|
|
$
|
298,227
|
|
11. Leases
As of December 31, 2019, the Company operated 333 communities under long-term leases (242 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. 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 December 31, 2019, the weighted average remaining lease term of the Company's operating and financing leases was 6.9 and 8.4 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes.
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 lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other lease and debt 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 December 31, 2019, the Company is in compliance with the financial covenants of its long-term leases.
A summary of operating and financing lease expense (including the respective presentation on the consolidated statements of operations) and cash flows from leasing transactions is as follows:
|
|
|
|
|
|
|
|
Operating Leases (in thousands)
|
Year Ended
December 31, 2019
|
|
Facility operating expense
|
$
|
18,677
|
|
|
Facility lease expense
|
269,666
|
|
|
Operating lease expense
|
288,343
|
|
|
Operating lease expense adjustment (1)
|
19,453
|
|
|
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements
|
(31,305
|
)
|
|
Operating cash flows from operating leases
|
$
|
276,491
|
|
|
|
|
|
Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations
|
$
|
28,846
|
|
(1) Represents the difference between cash paid and expense recognized. See Note 2 for the Company's accounting policy on the recognition of lease expense.
|
|
|
|
|
|
|
|
Financing Leases (in thousands)
|
Year Ended
December 31, 2019
|
|
Depreciation and amortization
|
$
|
46,646
|
|
|
Interest expense: financing lease obligations
|
66,353
|
|
|
Financing lease expense
|
$
|
112,999
|
|
|
|
|
|
Operating cash flows from financing leases
|
$
|
66,353
|
|
|
Financing cash flows from financing leases
|
22,242
|
|
|
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement
|
(3,504
|
)
|
|
Total cash flows from financing leases
|
$
|
85,091
|
|
A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Cash basis payment - operating leases
|
$
|
324,870
|
|
|
$
|
365,077
|
|
|
Operating lease expense adjustment
|
(17,218
|
)
|
|
(20,990
|
)
|
|
Amortization of deferred gain
|
(4,358
|
)
|
|
(4,366
|
)
|
|
Facility lease expense
|
$
|
303,294
|
|
|
$
|
339,721
|
|
As of December 31, 2019, the weighted average discount rate of the Company's operating and financing leases was 8.6% and 7.9%, 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 (the date of the adoption of ASC 842) 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 consolidated balance sheet as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating Leases
|
|
Financing Leases
|
|
2020
|
$
|
313,106
|
|
|
$
|
84,858
|
|
|
2021
|
298,505
|
|
|
85,917
|
|
|
2022
|
294,513
|
|
|
87,120
|
|
|
2023
|
290,175
|
|
|
88,460
|
|
|
2024
|
277,329
|
|
|
90,297
|
|
|
Thereafter
|
528,969
|
|
|
335,039
|
|
|
Total lease payments
|
2,002,597
|
|
|
771,691
|
|
|
Purchase option liability and non-cash gain on future sale of property
|
—
|
|
|
556,667
|
|
|
Imputed interest and variable lease payments
|
(531,832
|
)
|
|
(493,778
|
)
|
|
Total lease obligations
|
$
|
1,470,765
|
|
|
$
|
834,580
|
|
The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases, not recognized on the 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
|
291,113
|
|
|
2023
|
285,723
|
|
|
Thereafter
|
786,647
|
|
|
Total lease payments
|
$
|
2,271,977
|
|
12. Self-Insurance
The Company obtains various insurance coverages, including general and professional liability and workers compensation programs, from commercial carriers at stated amounts as defined in the applicable policy. Losses related to deductible amounts are accrued based on the Company's estimate of expected losses plus incurred but not reported claims.
As of December 31, 2019 and 2018, the Company accrued reserves of $155.8 million and $155.6 million, respectively, for these programs, of which $92.5 million and $94.5 million is classified as long-term liabilities as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company accrued $22.7 million and $13.1 million, respectively, of estimated amounts receivable from the insurance companies under these insurance programs. During the years ended December 31, 2019, 2018, and 2017, the Company reduced its estimate of the amount of accrued liabilities for these programs based on recent claims experience. The reduction in these accrued reserves decreased operating expenses by $11.3 million, $14.6 million, and $9.9 million, for the years ended December 31, 2019, 2018, and 2017, respectively.
The Company has secured self-insured retention risk under workers' compensation programs with restricted cash deposits of $24.0 million and $14.7 million as of December 31, 2019 and 2018, respectively. Letters of credit securing the programs aggregated to $55.6 million and $71.8 million as of December 31, 2019 and 2018, respectively. In addition, the Company also had deposits of $12.3 million and $13.7 million, as of December 31, 2019 and 2018, respectively, to fund claims paid under a high deductible, collateralized insurance policy.
13. Retirement Plans
The Company maintains a 401(k) retirement savings plan for all employees that meet minimum employment criteria. Such plan provides that the participants may defer eligible compensation subject to certain Internal Revenue Code maximum amounts. The Company makes matching contributions in amounts equal to 25.0% of the employee's contribution to such plan, for contributions up to a maximum of 4.0% of compensation. An additional matching contribution of 12.5%, subject to the same limit on compensation, may be made at the discretion of the Company based upon the Company's performance. For the years ended December 31, 2019, 2018, and 2017, the Company's expense for such plan was $8.0 million, $8.3 million, and $10.1 million, respectively.
14. Stock-Based Compensation
The following table sets forth information about the Company's restricted stock awards (excluding restricted stock units):
|
|
|
|
|
|
|
|
|
|
|
(share amounts in thousands, except value per share)
|
Number of Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding on January 1, 2017
|
4,608
|
|
|
$
|
20.29
|
|
|
Granted
|
2,569
|
|
|
14.65
|
|
|
Vested
|
(1,276
|
)
|
|
22.20
|
|
|
Cancelled/forfeited
|
(1,131
|
)
|
|
18.95
|
|
|
Outstanding on December 31, 2017
|
4,770
|
|
|
17.13
|
|
|
Granted
|
3,880
|
|
|
9.39
|
|
|
Vested
|
(1,579
|
)
|
|
19.12
|
|
|
Cancelled/forfeited
|
(1,315
|
)
|
|
13.19
|
|
|
Outstanding on December 31, 2018
|
5,756
|
|
|
11.78
|
|
|
Granted
|
4,381
|
|
|
7.81
|
|
|
Vested
|
(1,571
|
)
|
|
13.71
|
|
|
Cancelled/forfeited
|
(1,314
|
)
|
|
11.18
|
|
|
Outstanding on December 31, 2019
|
7,252
|
|
|
9.08
|
|
As of December 31, 2019, there was $43.1 million of total unrecognized compensation cost related to outstanding, unvested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.5 years and is based on grant date fair value.
During 2019, grants of restricted shares under the Company's 2014 Omnibus Incentive Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(share amounts in thousands, except value per share)
|
Shares Granted
|
|
Value Per Share
|
|
Total Value
|
|
Three months ended March 31, 2019
|
4,047
|
|
|
$
|
7.87
|
|
|
$
|
31,857
|
|
|
Three months ended June 30, 2019
|
142
|
|
|
$
|
6.51
|
|
|
$
|
922
|
|
|
Three months ended September 30, 2019
|
136
|
|
|
$
|
7.55
|
|
|
$
|
1,028
|
|
|
Three months ended December 31, 2019
|
56
|
|
|
$
|
7.32
|
|
|
$
|
413
|
|
The Company has an employee stock purchase plan for all eligible employees. Under the plan, eligible employees of the Company can purchase shares of the Company's common stock on a quarterly basis at a discounted price through accumulated payroll deductions. Each participating employee may elect to deduct up to 15% of his or her base pay each quarter and no more than 200 shares may be purchased by a participating employee each quarter. Subject to certain limitations specified in the plan, on the last trading date of each calendar quarter, the amount deducted from each participant's pay over the course of the quarter will be used to purchase whole shares of the Company's common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that date. The Company reserved 1,800,000 shares of common stock for issuance under the plan. The impact on the Company's consolidated financial statements is not material.
15. Share Repurchase Program
On November 1, 2016, the Company announced that its Board of Directors had approved a share repurchase program that authorizes the Company to purchase up to $100.0 million in the aggregate of the Company's common stock. The share repurchase program is intended to be implemented through purchases made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or block trades, or by any combination of these methods, in accordance with applicable insider trading and other securities laws and regulations.
The size, scope, and timing of any purchases will be based on business, market, and other conditions and factors, including price, regulatory, and contractual requirements or consents, and capital availability. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended, modified, or discontinued at any time at the Company's discretion without prior notice. Shares of stock repurchased under the program will be held as treasury shares.
During the year ended December 31, 2019, the Company repurchased 3,005,554 shares at an average price paid per share of $6.56, for an aggregate purchase price of approximately $19.7 million. During the year ended December 31, 2018, the Company repurchased 1,280,802 shares at an average price paid per share of $6.64, for an aggregate purchase price of approximately $8.5 million. No shares were purchased pursuant to this authorization during the year ended December 31, 2017. As of December 31, 2019, approximately $62.1 million remains available under the share repurchase program.
16. Income Taxes
The benefit (provision) for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Federal:
|
|
|
|
|
|
|
Current
|
$
|
64
|
|
|
$
|
(113
|
)
|
|
$
|
2,200
|
|
|
Deferred
|
2,654
|
|
|
52,367
|
|
|
15,310
|
|
|
Total Federal
|
2,718
|
|
|
52,254
|
|
|
17,510
|
|
|
State:
|
|
|
|
|
|
|
Current
|
(449
|
)
|
|
(2,798
|
)
|
|
(995
|
)
|
|
Deferred (included in Federal above)
|
—
|
|
|
—
|
|
|
—
|
|
|
Total State
|
(449
|
)
|
|
(2,798
|
)
|
|
(995
|
)
|
|
Total
|
$
|
2,269
|
|
|
$
|
49,456
|
|
|
$
|
16,515
|
|
A reconciliation of the benefit (provision) for income taxes to the amount computed at the U.S. Federal statutory rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Tax benefit at U.S. statutory rate
|
$
|
56,742
|
|
|
$
|
121,320
|
|
|
$
|
205,777
|
|
|
State taxes, net of federal income tax
|
10,423
|
|
|
21,576
|
|
|
24,891
|
|
|
Valuation allowance
|
(60,376
|
)
|
|
5,713
|
|
|
(246,037
|
)
|
|
Goodwill impairment
|
—
|
|
|
(88,265
|
)
|
|
(78,515
|
)
|
|
Impact of the Tax Act
|
—
|
|
|
(6,042
|
)
|
|
114,716
|
|
|
Stock compensation
|
(2,639
|
)
|
|
(4,717
|
)
|
|
(4,093
|
)
|
|
Meals and entertainment
|
(416
|
)
|
|
(493
|
)
|
|
(726
|
)
|
|
Tax credits
|
(106
|
)
|
|
688
|
|
|
1,908
|
|
|
Other
|
(1,359
|
)
|
|
(324
|
)
|
|
(1,406
|
)
|
|
Total
|
$
|
2,269
|
|
|
$
|
49,456
|
|
|
$
|
16,515
|
|
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Deferred income tax assets:
|
|
|
|
|
Financing lease obligations
|
$
|
156,913
|
|
|
$
|
165,703
|
|
|
Operating lease obligations
|
406,172
|
|
|
—
|
|
|
Operating loss carryforwards
|
330,983
|
|
|
298,255
|
|
|
Deferred lease liability
|
—
|
|
|
63,263
|
|
|
Accrued expenses
|
54,154
|
|
|
61,309
|
|
|
Tax credits
|
50,356
|
|
|
50,462
|
|
|
Capital loss carryforward
|
40,723
|
|
|
41,413
|
|
|
Intangible assets
|
11,160
|
|
|
10,133
|
|
|
Other
|
8,098
|
|
|
2,872
|
|
|
Total gross deferred income tax asset
|
1,058,559
|
|
|
693,410
|
|
|
Valuation allowance
|
(408,903
|
)
|
|
(336,417
|
)
|
|
Net deferred income tax assets
|
649,656
|
|
|
356,993
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
(303,853
|
)
|
|
(334,145
|
)
|
|
Operating lease right-of-use assets
|
(328,100
|
)
|
|
—
|
|
|
Investment in unconsolidated ventures
|
(33,100
|
)
|
|
(41,219
|
)
|
|
Total gross deferred income tax liability
|
(665,053
|
)
|
|
(375,364
|
)
|
|
Net deferred tax liability
|
$
|
(15,397
|
)
|
|
$
|
(18,371
|
)
|
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("Tax Act"). 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 elected the real property trade or business exception with the 2018 tax return. As such, the Company will be required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified improvement property assets. This change impacts the current and future tax depreciation deductions and impacted the Company's valuation 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.
A summary of the effect of the Tax Act is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
For the Year Ended December 31, 2017
|
|
Rate change - decrease in net deferred tax assets
|
$
|
108,070
|
|
|
Rate change - decrease in valuation allowance
|
(172,235
|
)
|
|
Impact on net operating loss usage
|
(50,551
|
)
|
|
Reduction of deferred tax asset - AMT credits
|
2,361
|
|
|
Total impact of the Tax Act on the Company's deferred taxes position
|
(112,355
|
)
|
|
Realization of AMT credits
|
(2,361
|
)
|
|
Net impact of the Tax Act on the Company's effective tax rate
|
$
|
(114,716
|
)
|
As of both December 31, 2019 and 2018, the Company had federal net operating loss carryforwards generated in 2017 and prior of approximately $1.2 billion which are available to offset future taxable income from 2020 through 2037. Additionally, as of December 31, 2019 and 2018, the Company had federal net operating loss carryforwards generated after 2017 of $174.9 million and $33.5 million, respectively, which have an indefinite life, but with usage limited to 80% of taxable income in any given year. The Company had capital loss carryforwards of $161.6 million as of December 31, 2019, which is available to offset future capital gains through 2023. The Company determined that a valuation allowance was required after consideration of the Company's estimated future reversal of existing timing differences as of December 31, 2019 and 2018. The Company does not consider estimates of future taxable income in its determination due to the existence of cumulative historical operating losses. For the year ended December 31, 2019, the Company recorded a provision of approximately $60.4 million from operations to reflect the required valuation allowance of $408.9 million as of December 31, 2019.
A summary of the change in the Company's valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Increase in valuation allowance before consideration of the Tax Act
|
$
|
60,376
|
|
|
$
|
(5,713
|
)
|
|
Increase due to the adoption of ASC 842
|
13,790
|
|
|
—
|
|
|
Other decrease during the year
|
(1,680
|
)
|
|
—
|
|
|
Total increase (decrease) in valuation allowance before consideration of the Tax Act
|
72,486
|
|
|
(5,713
|
)
|
|
|
|
|
|
|
Impact of the Tax Act on net operating loss usage
|
—
|
|
|
6,042
|
|
|
Total increase (decrease) in valuation allowance
|
$
|
72,486
|
|
|
$
|
329
|
|
The Company has recorded valuation allowances of $318.4 million and $245.3 million as of December 31, 2019 and 2018, respectively, against its federal and state net operating losses. The Company has recorded a valuation allowance against its capital loss carryforward of $40.7 million and $41.4 million as of December 31, 2019 and 2018, respectively. In accordance with ASC 740, Income Taxes, the Company has not considered the impact of the multi-part transaction with Healthpeak, including the sale of the Company's equity interest in the CCRC Venture, when determining the amount of valuation allowance to record against its net operating losses and capital loss carryforward as of December 31, 2019. The Company anticipates that the sale of its CCRC Venture will utilize all or a portion of the capital loss carryforward and a portion of its net operating losses. The Company also recorded a valuation allowance against federal and state credits of $49.8 million as of both December 31, 2019 and 2018.
As of December 31, 2019 and 2018, the Company had gross tax affected unrecognized tax benefits of $18.3 million and $18.5 million, respectively, of which, if recognized, would result in an income tax benefit recorded in the consolidated statement of operations. Interest and penalties related to these tax positions are classified as tax expense in the Company's consolidated financial statements. Total interest and penalties reserved is $0.1 million as of both December 31, 2019 and 2018. As of December 31, 2019, the Company's tax returns for years 2015 through 2018 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination. The Company does not expect that unrecognized tax benefits for tax positions taken with respect to 2019 and prior years will significantly change in 2020.
A reconciliation of the unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Balance at January 1,
|
$
|
18,507
|
|
|
$
|
18,461
|
|
|
Additions for tax positions related to the current year
|
—
|
|
|
80
|
|
|
Reductions for tax positions related to prior years
|
(181
|
)
|
|
(34
|
)
|
|
Balance at December 31,
|
$
|
18,326
|
|
|
$
|
18,507
|
|
17. Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the Years Ended December 31,
|
|
Supplemental Disclosure of Cash Flow Information:
|
2019
|
|
2018
|
|
2017
|
|
Interest paid
|
$
|
244,469
|
|
|
$
|
260,706
|
|
|
$
|
294,758
|
|
|
Income taxes paid, net of refunds
|
$
|
1,534
|
|
|
$
|
2,058
|
|
|
$
|
1,038
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of related payables
|
|
|
|
|
|
|
Capital expenditures - non-development, net
|
$
|
235,797
|
|
|
$
|
182,249
|
|
|
$
|
186,467
|
|
|
Capital expenditures - development, net
|
24,595
|
|
|
24,687
|
|
|
8,823
|
|
|
Capital expenditures - non-development - reimbursable
|
34,809
|
|
|
12,165
|
|
|
18,054
|
|
|
Capital expenditures - development - reimbursable
|
—
|
|
|
1,709
|
|
|
8,132
|
|
|
Trade accounts payable
|
8,891
|
|
|
4,663
|
|
|
(7,589
|
)
|
|
Net cash paid
|
$
|
304,092
|
|
|
$
|
225,473
|
|
|
$
|
213,887
|
|
|
Acquisition of assets, net of related payables and cash received:
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
44
|
|
|
$
|
237,563
|
|
|
$
|
—
|
|
|
Other intangible assets, net
|
453
|
|
|
(4,345
|
)
|
|
5,196
|
|
|
Financing lease obligations
|
—
|
|
|
36,120
|
|
|
—
|
|
|
Other liabilities
|
—
|
|
|
2,433
|
|
|
—
|
|
|
Net cash paid
|
$
|
497
|
|
|
$
|
271,771
|
|
|
$
|
5,196
|
|
|
Proceeds from sale of assets, net:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
(4,422
|
)
|
|
$
|
(4,950
|
)
|
|
$
|
(17,072
|
)
|
|
Assets held for sale
|
(79,054
|
)
|
|
(197,111
|
)
|
|
(20,952
|
)
|
|
Property, plant and equipment and leasehold intangibles, net
|
(379
|
)
|
|
(93,098
|
)
|
|
(155,723
|
)
|
|
Investments in unconsolidated ventures
|
(156
|
)
|
|
(58,179
|
)
|
|
(52,548
|
)
|
|
Long-term debt
|
—
|
|
|
—
|
|
|
8,547
|
|
|
Financing lease obligations
|
—
|
|
|
93,514
|
|
|
157,963
|
|
|
Refundable fees and deferred revenue
|
—
|
|
|
8,632
|
|
|
30,771
|
|
|
Other liabilities
|
(1,479
|
)
|
|
1,139
|
|
|
(1,058
|
)
|
|
Loss (gain) on sale of assets, net
|
(7,245
|
)
|
|
(249,754
|
)
|
|
(19,273
|
)
|
|
Loss (gain) on facility lease termination and modification, net
|
—
|
|
|
—
|
|
|
(1,162
|
)
|
|
Net cash received
|
$
|
(92,735
|
)
|
|
$
|
(499,807
|
)
|
|
$
|
(70,507
|
)
|
|
Lease termination and modification, net:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
—
|
|
|
$
|
(2,804
|
)
|
|
$
|
—
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
—
|
|
|
(87,464
|
)
|
|
—
|
|
|
Financing lease obligations
|
—
|
|
|
58,099
|
|
|
—
|
|
|
Deferred liabilities
|
—
|
|
|
70,835
|
|
|
—
|
|
|
Loss (gain) on sale of assets, net
|
—
|
|
|
(5,761
|
)
|
|
—
|
|
|
Loss (gain) on facility lease termination and modification, net
|
—
|
|
|
34,283
|
|
|
—
|
|
|
Net cash paid (1)
|
$
|
—
|
|
|
$
|
67,188
|
|
|
$
|
—
|
|
|
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
|
|
|
Financing lease obligations
|
—
|
|
|
—
|
|
|
879,959
|
|
|
Deferred liabilities
|
—
|
|
|
—
|
|
|
7,504
|
|
|
Other liabilities
|
—
|
|
|
—
|
|
|
1,998
|
|
|
Net cash paid
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
179,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Operating, Investing and Financing Activities:
|
|
Purchase of treasury stock:
|
|
|
|
|
|
|
Treasury stock
|
$
|
—
|
|
|
$
|
4,244
|
|
|
$
|
—
|
|
|
Accounts payable
|
—
|
|
|
(4,244
|
)
|
|
—
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Assets designated as held for sale:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
—
|
|
|
$
|
(517
|
)
|
|
$
|
199
|
|
|
Assets held for sale
|
28,608
|
|
|
198,445
|
|
|
(29,544
|
)
|
|
Property, plant and equipment and leasehold intangibles, net
|
(28,608
|
)
|
|
(197,928
|
)
|
|
29,345
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Lease termination and modification, net:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
(636
|
)
|
|
$
|
(248
|
)
|
|
$
|
—
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
(1,963
|
)
|
|
(132,733
|
)
|
|
(145,645
|
)
|
|
Financing lease obligations
|
—
|
|
|
165,918
|
|
|
147,886
|
|
|
Operating lease right-of-use assets
|
(10,698
|
)
|
|
—
|
|
|
—
|
|
|
Operating lease obligations
|
10,640
|
|
|
—
|
|
|
—
|
|
|
Deferred liabilities
|
—
|
|
|
(122,304
|
)
|
|
7,447
|
|
|
Other liabilities
|
(731
|
)
|
|
(620
|
)
|
|
(9,688
|
)
|
|
Loss (gain) on sale of assets, net
|
—
|
|
|
(37,731
|
)
|
|
—
|
|
|
Loss (gain) on facility lease termination and modification, net
|
3,388
|
|
|
127,718
|
|
|
—
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
The net cash paid to terminate community leases is presented within the consolidated statements of cash flows based upon the lease classification of the terminated leases. Net cash paid of $54.6 million for the termination of operating leases is presented within net cash provided by operating activities and net cash paid of $12.5 million for the termination of financing leases is presented within net cash used in financing activities for the year ended December 31, 2018.
|
During 2019, the Company and its venture partner contributed cash in an aggregate amount of $13.3 million to a consolidated venture which owns two senior housing communities, as of December 31, 2019. The Company obtained a $6.6 million promissory note receivable from its venture partner secured by a 50% equity interest in the venture in a non-cash exchange for the Company funding the $13.3 million aggregate contribution in cash. At the closing of the sale of a senior housing community during 2019 by the consolidated venture, the consolidated venture distributed $6.3 million to the partners with the Company receiving a $3.1 million repayment on the promissory note in a non-cash exchange.
Refer to Note 2 for a schedule of the non-cash adjustments to the Company's consolidated balance sheet as of January 1, 2019 as a result of the adoption of new accounting standards and Note 11 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 consolidated statement of cash flows that sums to the total of the same such amounts shown in the consolidated statement of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
Reconciliation of cash, cash equivalents, and restricted cash:
|
|
|
|
|
Cash and cash equivalents
|
$
|
240,227
|
|
|
$
|
398,267
|
|
|
Restricted cash
|
26,856
|
|
|
27,683
|
|
|
Long-term restricted cash
|
34,614
|
|
|
24,268
|
|
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
|
$
|
301,697
|
|
|
$
|
450,218
|
|
18. Commitments and Contingencies
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 Audit 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.
Other
The Company has employment or letter agreements with certain officers of the Company and has adopted policies to which certain officers of the Company are eligible to participate, which grant these employees the right to receive a portion or multiple of their base salary, pro-rata bonus, bonus, and/or continuation of certain benefits, for a defined period of time, in the event of certain terminations of the officers' employment, as described in those agreements and policies.
19. 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. Resident fee revenue by payor source and reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
(in thousands)
|
Independent Living
|
|
Assisted Living and Memory Care
|
|
CCRCs
|
|
Health Care Services
|
|
Total
|
|
Private pay
|
$
|
542,112
|
|
|
$
|
1,748,364
|
|
|
$
|
281,197
|
|
|
$
|
753
|
|
|
$
|
2,572,426
|
|
|
Government reimbursement
|
2,446
|
|
|
67,574
|
|
|
81,054
|
|
|
357,963
|
|
|
509,037
|
|
|
Other third-party payor programs
|
—
|
|
|
—
|
|
|
39,924
|
|
|
88,544
|
|
|
128,468
|
|
|
Total resident fee revenue
|
$
|
544,558
|
|
|
$
|
1,815,938
|
|
|
$
|
402,175
|
|
|
$
|
447,260
|
|
|
$
|
3,209,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands)
|
Independent Living
|
|
Assisted Living and Memory Care
|
|
CCRCs
|
|
Health Care Services
|
|
Total
|
|
Private pay
|
$
|
596,852
|
|
|
$
|
1,923,676
|
|
|
$
|
288,682
|
|
|
$
|
693
|
|
|
$
|
2,809,903
|
|
|
Government reimbursement
|
3,125
|
|
|
72,175
|
|
|
87,028
|
|
|
359,881
|
|
|
522,209
|
|
|
Other third-party payor programs
|
—
|
|
|
—
|
|
|
40,698
|
|
|
76,401
|
|
|
117,099
|
|
|
Total resident fee revenue
|
$
|
599,977
|
|
|
$
|
1,995,851
|
|
|
$
|
416,408
|
|
|
$
|
436,975
|
|
|
$
|
3,449,211
|
|
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 under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain healthcare 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 independent living, assisted living, 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 fees and deferred revenue, deferred liabilities, and other liabilities within the consolidated balance sheets) of $72.5 million and $106.4 million, including $38.9 million and $50.6 million of monthly resident fees billed and received in advance, as of December 31, 2019 and 2018, respectively. For the years ended December 31, 2019 and 2018, the Company recognized $94.6 million and $82.1 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2019 and 2018, respectively. 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 years ended December 31, 2019 and 2018, the Company recognized $15.2 million and $17.6 million, respectively, of charges within facility operating expense within the consolidated statements of operations for additions to the allowance for credit losses.
20. Segment Information
The Company has five reportable segments: Independent Living; Assisted Living 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.
Independent Living. The Company's Independent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors who desire an upscale residential environment providing the highest quality of service. The majority of the Company's independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services.
Assisted 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 ADLs 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 provides memory care services at freestanding memory care communities that are specially designed for residents with Alzheimer's disease and other dementias.
CCRCs. The Company's CCRCs 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 services.
Health Care Services. The Company's Health 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 Health Care Services segment does not include the skilled nursing and inpatient healthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs 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 data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
Independent Living (1)
|
$
|
544,558
|
|
|
$
|
599,977
|
|
|
$
|
654,196
|
|
|
Assisted Living and Memory Care (1)
|
1,815,938
|
|
|
1,995,851
|
|
|
2,210,688
|
|
|
CCRCs (1)
|
402,175
|
|
|
416,408
|
|
|
468,994
|
|
|
Health Care Services (1)
|
447,260
|
|
|
436,975
|
|
|
446,262
|
|
|
Management Services (2)
|
847,157
|
|
|
1,082,215
|
|
|
966,976
|
|
|
Total revenue
|
$
|
4,057,088
|
|
|
$
|
4,531,426
|
|
|
$
|
4,747,116
|
|
|
Segment Operating Income (3):
|
|
|
|
|
|
|
Independent Living
|
$
|
203,741
|
|
|
$
|
240,609
|
|
|
$
|
271,417
|
|
|
Assisted Living and Memory Care
|
518,636
|
|
|
628,982
|
|
|
749,058
|
|
|
CCRCs
|
72,072
|
|
|
92,212
|
|
|
106,162
|
|
|
Health Care Services
|
24,987
|
|
|
34,080
|
|
|
51,348
|
|
|
Management Services
|
57,108
|
|
|
71,986
|
|
|
75,845
|
|
|
Total segment operating income
|
876,544
|
|
|
1,067,869
|
|
|
1,253,830
|
|
|
General and administrative (including non-cash stock-based compensation expense)
|
219,289
|
|
|
259,475
|
|
|
278,019
|
|
|
Facility lease expense:
|
|
|
|
|
|
|
Independent Living
|
81,680
|
|
|
93,496
|
|
|
117,131
|
|
|
Assisted Living and Memory Care
|
157,823
|
|
|
178,716
|
|
|
185,971
|
|
|
CCRCs
|
24,248
|
|
|
24,856
|
|
|
29,464
|
|
|
Corporate and Management Services
|
5,915
|
|
|
6,226
|
|
|
7,155
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Independent Living
|
81,745
|
|
|
91,899
|
|
|
95,226
|
|
|
Assisted Living and Memory Care
|
222,574
|
|
|
261,365
|
|
|
290,344
|
|
|
CCRCs
|
44,163
|
|
|
53,551
|
|
|
44,294
|
|
|
Health Care Services
|
2,247
|
|
|
3,201
|
|
|
3,723
|
|
|
Corporate and Management Services
|
28,704
|
|
|
37,439
|
|
|
48,490
|
|
|
Goodwill and asset impairment:
|
|
|
|
|
|
|
Independent Living
|
1,812
|
|
|
2,013
|
|
|
2,968
|
|
|
Assisted Living and Memory Care
|
32,229
|
|
|
436,892
|
|
|
342,788
|
|
|
CCRCs
|
4,983
|
|
|
6,669
|
|
|
18,083
|
|
|
Health Care Services
|
7,578
|
|
|
9,055
|
|
|
14,599
|
|
|
Corporate and Management Services
|
2,664
|
|
|
35,264
|
|
|
31,344
|
|
|
Loss (gain) on facility lease termination and modification, net
|
3,388
|
|
|
162,001
|
|
|
14,276
|
|
|
Income (loss) from operations
|
$
|
(44,498
|
)
|
|
$
|
(594,249
|
)
|
|
$
|
(270,045
|
)
|
|
|
|
|
|
|
|
|
Total interest expense:
|
|
|
|
|
|
|
Independent Living
|
$
|
46,713
|
|
|
$
|
58,783
|
|
|
$
|
55,436
|
|
|
Assisted Living and Memory Care
|
166,097
|
|
|
174,459
|
|
|
207,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCRCs
|
27,426
|
|
|
26,746
|
|
|
27,665
|
|
|
Health Care Services
|
—
|
|
|
—
|
|
|
892
|
|
|
Corporate and Management Services
|
8,105
|
|
|
20,281
|
|
|
34,300
|
|
|
|
$
|
248,341
|
|
|
$
|
280,269
|
|
|
$
|
326,154
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for property, plant and equipment, and leasehold intangibles:
|
|
|
|
|
|
|
Independent Living
|
$
|
78,831
|
|
|
$
|
51,510
|
|
|
$
|
47,309
|
|
|
Assisted Living and Memory Care
|
157,845
|
|
|
125,750
|
|
|
119,717
|
|
|
CCRCs
|
33,535
|
|
|
26,615
|
|
|
24,297
|
|
|
Health Care Services
|
484
|
|
|
902
|
|
|
755
|
|
|
Corporate and Management Services
|
24,506
|
|
|
16,033
|
|
|
29,398
|
|
|
|
$
|
295,201
|
|
|
$
|
220,810
|
|
|
$
|
221,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Total assets:
|
|
|
|
|
Independent Living
|
$
|
1,441,652
|
|
|
$
|
1,104,774
|
|
|
Assisted Living and Memory Care
|
4,157,610
|
|
|
3,684,170
|
|
|
CCRCs
|
742,809
|
|
|
707,819
|
|
|
Health Care Services
|
256,715
|
|
|
254,950
|
|
|
Corporate and Management Services
|
595,647
|
|
|
715,547
|
|
|
Total assets
|
$
|
7,194,433
|
|
|
$
|
6,467,260
|
|
|
|
|
|
(1)
|
All revenue is earned from external third parties in the United States.
|
|
|
|
|
(2)
|
Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of managed communities.
|
|
|
|
|
(3)
|
Segment operating income is defined as segment revenues less segment facility operating expenses (excluding facility depreciation and amortization) and costs incurred on behalf of managed communities.
|
21. Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for each of the fiscal quarters in 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
(in thousands, except per share amounts)
|
March 31,
2019
|
|
June 30,
2019
|
|
September 30,
2019
|
|
December 31,
2019
|
|
Revenues
|
$
|
1,042,044
|
|
|
$
|
1,019,457
|
|
|
$
|
1,008,949
|
|
|
$
|
986,638
|
|
|
Goodwill and asset impairment
|
391
|
|
|
3,769
|
|
|
2,094
|
|
|
43,012
|
|
|
Loss (gain) on facility lease termination and modification, net
|
209
|
|
|
1,797
|
|
|
—
|
|
|
1,382
|
|
|
Income (loss) from operations
|
16,661
|
|
|
2,211
|
|
|
(20,222
|
)
|
|
(43,148
|
)
|
|
Gain (loss) on sale of assets, net
|
(702
|
)
|
|
2,846
|
|
|
579
|
|
|
4,522
|
|
|
Income (loss) before income taxes
|
(41,927
|
)
|
|
(55,422
|
)
|
|
(80,308
|
)
|
|
(93,104
|
)
|
|
Net income (loss)
|
(42,606
|
)
|
|
(56,055
|
)
|
|
(78,508
|
)
|
|
(91,323
|
)
|
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
(42,595
|
)
|
|
(55,470
|
)
|
|
(78,458
|
)
|
|
(91,408
|
)
|
|
Weighted average basic and diluted income (loss) per share
|
$
|
(0.23
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
(in thousands, except per share amounts)
|
March 31,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
December 31,
2018
|
|
Revenues
|
$
|
1,187,234
|
|
|
$
|
1,155,200
|
|
|
$
|
1,120,062
|
|
|
$
|
1,068,930
|
|
|
Goodwill and asset impairment
|
430,363
|
|
|
16,103
|
|
|
5,500
|
|
|
37,927
|
|
|
Loss (gain) on facility lease termination and modification, net
|
—
|
|
|
146,467
|
|
|
2,337
|
|
|
13,197
|
|
|
Income (loss) from operations
|
(413,831
|
)
|
|
(137,589
|
)
|
|
3,626
|
|
|
(46,455
|
)
|
|
Gain (loss) on sale of assets, net
|
43,431
|
|
|
23,322
|
|
|
9,833
|
|
|
216,660
|
|
|
Income (loss) before income taxes
|
(441,649
|
)
|
|
(181,055
|
)
|
|
(54,903
|
)
|
|
99,799
|
|
|
Net income (loss)
|
(457,234
|
)
|
|
(165,509
|
)
|
|
(37,140
|
)
|
|
131,531
|
|
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
(457,188
|
)
|
|
(165,488
|
)
|
|
(37,121
|
)
|
|
131,539
|
|
|
Weighted average basic and diluted income (loss) per share
|
$
|
(2.45
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
0.70
|
|