Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our redefined strategy, including initiatives undertaken to execute on our strategic priorities and their intended effect on our results; our operational, sales, marketing and branding initiatives; our expectations regarding the economy, the senior living industry, senior housing construction, supply and competition, occupancy and pricing and the demand for senior housing; our expectations regarding our revenue, cash flow, operating income, expenses, capital expenditures, including expected levels and reimbursements and the timing thereof, expansion, redevelopment and repositioning opportunities, including Program Max opportunities, and their projected costs, cost savings and synergies, and our liquidity and leverage; our plans and expectations with respect to acquisition, disposition, development, lease restructuring and termination, financing, re-financing and venture transactions and opportunities (including assets held for sale, the pending transactions with HCP, Inc. and our plans to market in 2018 and sell approximately 30 owned communities), including the timing thereof and their effects on our results; our expectations regarding taxes, capital deployment and returns on invested capital, Adjusted EBITDA and Adjusted Free Cash Flow (as those terms are defined in this Quarterly Report on Form 10-Q); our expectations regarding returns to stockholders, our share repurchase program and the payment of dividends; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding changes in government reimbursement programs and their effect on our results; our plans to expand our offering of ancillary services; and our ability to anticipate, manage and address industry trends and their effect on our business. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "project," "predict," "continue," "plan," "target" or other similar words or expressions. These forward-looking statements are based on certain assumptions and expectations, and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the risk associated with the current global economic situation and its impact upon capital markets and liquidity; changes in governmental reimbursement programs; the risk of overbuilding, new supply and new competition; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term lease payments and to fund our planned capital projects; risks related to the implementation of our redefined strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; the effect of our indebtedness and long-term leases on our liquidity; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained therein) and the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; our determination from time to time to purchase any shares under our share repurchase program; our ability to fund any repurchases; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be able to expand, redevelop and reposition our communities in accordance with our plans; our ability to complete acquisition, disposition, lease restructuring and termination, financing, re-financing and venture transactions (including assets held for sale, the pending transactions with HCP, Inc. and our plans to market in 2018 and sell approximately 30 owned communities) on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing, and our ability to identify and pursue any such opportunities in the future; our ability to successfully integrate acquisitions; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewal of management agreements; increased competition for skilled personnel; increased wage pressure and union activity; departure of our key officers and potential disruption caused by changes in management; increases in market interest rates; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; unanticipated costs to comply with legislative or regulatory developments, including requirements to obtain emergency power generators for
our communities; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2017 and Part II, "Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements, and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Executive Overview
As of
March 31, 2018
, we are the largest operator of senior living communities in the United States based on total capacity, with
1,010
communities in
46
states and the ability to serve approximately
99,000
residents. We offer our residents access to a full continuum of services across the most attractive sectors of the senior living industry. We operate independent living, assisted living and dementia-care communities and continuing care retirement centers ("CCRCs"). Through our ancillary services programs, we also offer a range of home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities.
We believe that we operate in the most attractive sectors of the senior living industry, and our goal is to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer. Our community and service offerings combine housing, health care, hospitality, and ancillary services. Our senior living communities offer residents a supportive home-like setting, assistance with activities of daily living (ADL) such as eating, bathing, dressing, toileting and transferring/walking and, in certain communities, licensed skilled nursing services. We also provide ancillary services, including home health, hospice and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to "age-in-place," which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives. With our platform of a range of community and service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time.
Leadership and Our Strategy
During the first quarter of 2018, the Company's Board of Directors made several changes to our key leadership. Effective February 28, 2018, Lucinda M. Baier, who had served as our Chief Financial Officer since 2015, was appointed as our President and Chief Executive Officer and member of the Board of Directors, at which time the employment of our former President and Chief Executive Officer was terminated. In addition, the employment of our former Executive Vice President and Chief Administrative Officer was terminated effective March 9, 2018. Ms. Baier continued to serve as our principal financial officer until Teresa F. Sparks was appointed as our interim Chief Financial Officer effective March 28, 2018.
For 2018, we have re-evaluated and redefined our strategic priorities, which are now focused on our three primary stakeholders: our stockholders, our associates, and, always at our foundation, our residents, patients and their families. Through our redefined strategy, we intend to provide attractive long-term returns to our stockholders; attract, engage, develop and retain the best associates; and earn the trust and endorsements of our residents, patients and their families.
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Stockholders
. Our stockholders’ continued investment in us allows us to advance our mission to our residents and their families. Therefore we believe we must balance our mission with an emphasis on margin. With this strategic priority, we intend to take actions to provide long-term returns to our stockholders by focusing on growing RevPAR, Adjusted EBITDA and Adjusted Free Cash Flow.
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•
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Associates
. Brookdale’s culture is based on servant leadership, and our associates are the key to attracting and caring for residents and creating value for all of our stakeholders. Through this strategic priority, we intend to create a compelling value proposition for our associates in the areas of compensation, leadership, career growth and meaningful work. In 2017, we took the first corrective steps by investing in community leaders, and in 2018 we are extending this plan deeper in the communities.
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•
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Residents, Patients and Their Families
. Brookdale continues to be driven by its mission—to enrich the lives of those we serve with compassion, respect, excellence and integrity—and we believe this continued focus is essential to create value for all of our stakeholders. This strategic priority includes enhancing our organizational alignment to foster an environment where our
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associates can focus on providing valued, high quality care and personalized service. We intend to win locally through our targeted sales and marketing efforts by differentiating our community and service offerings based on quality, a portfolio of choices, and personalized service delivered by caring associates.
We believe that our successful execution on these strategic priorities will allow us to achieve our goal to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer.
As part of our redefined strategy, we plan to continue to evaluate and, where opportunities arise, pursue lease restructurings, development and acquisition opportunities, including selectively acquiring existing operating companies, senior living communities, and ancillary services companies. Any such restructurings or acquisitions may be pursued on our own, or through investments in ventures. In addition, we intend to continue to evaluate our owned and leased community portfolios for opportunities to dispose of owned communities and terminate leases. We plan to market in 2018 and sell approximately 30 owned communities (in addition to assets held for sale as of March 31, 2018), which we believe will generate more than $250 million of proceeds, net of associated debt and transaction costs.
Portfolio Optimization Update
During the year ended December 31, 2017, we completed sales of three communities (311 units) and termination of leases on 105 communities (10,014 units), we amended and restated triple-net leases covering substantially all the communities we lease from HCP, Inc. ("HCP") into a master lease, we sold our 10% interest in a RIDEA unconsolidated venture with HCP, and we invested
$8.8 million
on Program Max projects, net of
$8.1 million
of third party lessor reimbursements.
During the three months ended March 31, 2018, we completed the sales of
three
communities, we sold our 10% ownership interest in the remaining RIDEA venture with HCP, we acquired
one
community, and management agreements on
ten
communities were terminated.
Subsequent to the quarter end, we completed the acquisitions of five communities (858 units) and the terminations of our triple-net leases on four communities (493 units), and during the remainder of 2018, we expect to complete the dispositions of
14
owned communities (
1,272
units) classified as held for sale as of
March 31, 2018
, the terminations of our triple-net leases on 29 communities (2,630 units), and the terminations of management agreements on
27
communities (
4,584
units). In addition, we plan to market in 2018 and sell approximately 30 owned communities, which we believe will generate more than $250 million of proceeds, net of associated debt and transaction costs.
The closings of the expected sales of assets are subject (where applicable) to our successful marketing of such assets on terms acceptable to us. Further, the closings of the various pending transactions and expected sales of assets are, or will be, subject to the satisfaction of various conditions, including (where applicable) the receipt of regulatory approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
A summary of the foregoing completed and pending transactions (other than our planned marketing and sale of approximately 30 owned communities), and the impact of dispositions on our results of operations, are below.
HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, we announced that we had entered into a definitive agreement for a multi-part transaction with HCP. As part of such transaction, we entered into an Amended and Restated Master Lease and Security Agreement (“Master Lease”) with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
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•
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Master Lease Transactions.
We and HCP amended and restated triple-net leases covering substantially all of the communities we leased from HCP as of November 1, 2017 into the Master Lease. Pursuant to the agreements, following March 31, 2018, we acquired
two
communities (
208
units) for an aggregate purchase price of
$35.4 million
and leases with respect to four communities (493 units) were terminated, and at the closing such communities were removed from the Master Lease. Pursuant to the Master Lease, an additional 29 communities (2,630 units) will be removed from the Master Lease on or before November 1, 2018. However, if HCP has not transitioned operations and/or management of such communities to a third party prior to such date, we will continue to operate the foregoing communities on an interim basis and such communities will, from and after such time, be reported in the Management Services segment. In addition to the foregoing
35
communities, we continue to lease
43
communities pursuant to the terms of the Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, we received a
$2.5 million
annual rent reduction for
two
communities. The Master Lease also provides
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that we may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.
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•
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RIDEA Ventures Restructuring.
Pursuant to the multi-part transaction agreement, HCP acquired our
10%
ownership interest in one of our RIDEA ventures with HCP in December 2017 for
$32.1 million
(for which we recognized a
$7.2 million
gain on sale) and our 10% ownership interest in the remaining RIDEA venture with HCP in March 2018 for
$62.3 million
(for which we recognized a
$42.3 million
gain on sale). We provided management services to
59
communities (
9,585
units) on behalf of the
two
unconsolidated ventures as of November 1, 2017. Pursuant to the multi-part transaction agreement, we acquired one community (
137
units) for an aggregate purchase price of
$32.1 million
in January 2018 and three communities (
650
units) for an aggregate purchase price of
$207.4 million
during April 2018 and retained management
18
of such communities (
3,276
units). The amended and restated management agreements for such
18
communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP is entitled to sell or transition operations and/or management of
37
of such communities. Management agreements for
ten
such communities (938 units) were terminated by HCP during the three months ended March 31, 2018 (for which we recognized a
$2.2 million
non-cash management contract termination gain), and we expect the termination of management agreements on the remaining
27
communities (4,584 units) to occur in stages throughout 2018.
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We financed the foregoing community acquisitions with non-recourse mortgage financing and the proceeds from the sales of our ownership interest in the unconsolidated ventures. See Note 9 to the condensed consolidated financial statements contained in “Item 1. Financial Statements” for more information regarding the non-recourse first mortgage financing.
As a result of such transactions, during 2017 we reduced our lease liabilities by $9.7 million, recognized a $9.7 million deferred revenue liability, and reduced the carrying value of capital lease obligations and assets under capital leases by $145.6 million. The terminations of our triple-net lease obligations for 33 communities in 2018 may result in our recording a gain in fiscal 2018, primarily for 20 communities which were previously subject to sale-leaseback transactions in which we were deemed to have continuing involvement for accounting purposes. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Formation of Venture with Blackstone during 2017
On March 29, 2017, we and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the "Blackstone Venture") that acquired
64
senior housing communities for a purchase price of
$1.1 billion
. We had previously leased the
64
communities from HCP under long-term lease agreements with a remaining average lease term of approximately
12
years. At the closing, the Blackstone Venture purchased the
64
-community portfolio from HCP subject to the existing leases, and we contributed our leasehold interests for
62
communities and a total of
$179.2 million
in cash to purchase a
15%
equity interest in the Blackstone Venture, terminate leases, and fund our share of closing costs. As of the formation date, we continued to operate
two
of the communities under lease agreements and began managing
60
of the communities on behalf of the venture under a management agreement with the venture. The
two
remaining leases will be terminated, pending certain regulatory and other conditions, at which point we will manage the communities.
Two
of the communities are managed by a third party for the venture. As a result of such transactions, during 2017 we recorded a $19.7 million charge within goodwill and asset impairment expense and recorded a provision for income taxes to establish an additional $85.0 million of valuation allowance against our federal and state net operating loss carryforwards and tax credits as we expect these carryforwards and credits will not be utilized prior to expiration. See Note 4 to the condensed consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Dispositions of Owned Communities during 2018 and Assets Held for Sale
During the three months ended
March 31, 2018
, we completed the sale of
three
communities (
310
units) for net cash proceeds of
$12.8 million
. See Note 4 to the condensed consolidated financial statements contained in “Item 1. Financial Statements” for more information.
As of
March 31, 2018
,
14
communities were classified as held for sale, resulting in
$88.5 million
being recorded as assets held for sale and
$30.0 million
of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to such communities. This debt will either be repaid with the proceeds from the sales or be assumed by the prospective purchasers.
Dispositions of Owned Communities and Other Lease Terminations during 2017
During the year ended December 31, 2017, we completed the sale of three communities for net cash proceeds of $8.2 million, and we terminated leases for 43 communities otherwise than in connection with the transactions with HCP and Blackstone described above (including terminations of leases for 26 communities pursuant to the transaction with HCP announced in November 2016).
Summary of Impact of Dispositions
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial data for the
111
communities that we disposed through sales and lease terminations during the period from January 1, 2017 through March 31, 2018 through the respective disposition dates:
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Three Months Ended March 31, 2018
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(in thousands)
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Actual Results
|
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Amounts Attributable to Completed Dispositions
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Actual Results Less Amounts Attributable to Completed Dispositions
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Resident fees
|
|
|
|
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|
Retirement Centers
|
$
|
158,397
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|
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$
|
2
|
|
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$
|
158,395
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Assisted Living
|
532,280
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|
|
167
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532,113
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CCRCs-Rental
|
105,069
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|
1,986
|
|
|
103,083
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Senior housing resident fees
|
$
|
795,746
|
|
|
$
|
2,155
|
|
|
$
|
793,591
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Facility operating expense
|
|
|
|
|
|
Retirement Centers
|
$
|
93,975
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|
|
$
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(42
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)
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$
|
94,017
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|
Assisted Living
|
355,742
|
|
|
20
|
|
|
355,722
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|
CCRCs-Rental
|
80,406
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|
2,110
|
|
|
78,296
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|
Senior housing facility operating expense
|
$
|
530,123
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|
|
$
|
2,088
|
|
|
$
|
528,035
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Cash lease payments
|
$
|
130,255
|
|
|
$
|
—
|
|
|
$
|
130,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended March 31, 2017
|
(in thousands)
|
Actual Results
|
|
Amounts Attributable to Completed Dispositions
|
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Actual Results Less Amounts Attributable to Completed Dispositions
|
Resident fees
|
|
|
|
|
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Retirement Centers
|
$
|
172,620
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|
|
$
|
13,915
|
|
|
$
|
158,705
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Assisted Living
|
590,537
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|
|
55,574
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|
534,963
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CCRCs-Rental
|
141,798
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|
38,121
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|
|
103,677
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Senior housing resident fees
|
$
|
904,955
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|
|
$
|
107,610
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|
|
$
|
797,345
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|
Facility operating expense
|
|
|
|
|
|
Retirement Centers
|
$
|
98,618
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|
|
$
|
8,798
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|
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$
|
89,820
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Assisted Living
|
373,098
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|
41,013
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|
332,085
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CCRCs-Rental
|
106,483
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|
31,171
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|
|
75,312
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Senior housing facility operating expense
|
$
|
578,199
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|
|
$
|
80,982
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|
|
$
|
497,217
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Cash lease payments
|
$
|
155,555
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|
|
$
|
27,847
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|
|
$
|
127,708
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The following table sets forth the number of communities and units disposed of during the three months ended
March 31, 2018
and twelve months ended
December 31, 2017
:
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Three Months Ended March 31,
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Twelve Months Ended December 31,
|
|
2018
|
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2017
|
Number of communities
|
|
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|
Retirement Centers
|
—
|
|
|
10
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|
Assisted Living
|
2
|
|
|
86
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|
CCRCs-Rental
|
1
|
|
|
12
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Total
|
3
|
|
|
108
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Total units
|
|
|
|
Retirement Centers
|
—
|
|
|
2,078
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Assisted Living
|
74
|
|
|
5,858
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|
CCRCs-Rental
|
236
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|
|
2,389
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Total
|
310
|
|
|
10,325
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The results of operations of the
33
communities for which lease terminations have closed or are expected to close following March 31, 2018 and of the
14
communities held for sale as of
March 31, 2018
are reported in the following segments within the condensed consolidated financial statements: Assisted Living (
39
communities;
3,229
units), Retirement Centers (
five
communities;
783
units), and CCRCs-Rental (
three
communities;
383
units). The following table sets forth the amounts included within our consolidated financial data for these
47
communities for the three months ended
March 31, 2018
:
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(in thousands)
|
Amounts Attributable to Planned Dispositions
|
Resident fees
|
|
Retirement Centers
|
$
|
7,273
|
|
Assisted Living
|
33,695
|
|
CCRCs - Rental
|
3,926
|
|
Senior housing resident fees
|
$
|
44,894
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|
Facility operating expense
|
|
Retirement Centers
|
$
|
4,760
|
|
Assisted Living
|
23,803
|
|
CCRCs-Rental
|
3,960
|
|
Senior housing facility operating expense
|
$
|
32,523
|
|
Cash lease payments
|
$
|
11,760
|
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Program Max Initiative
During the
three
months ended
March 31, 2018
, we also made progress on our Program Max initiative under which we expand, renovate, redevelop and reposition certain of our existing communities where economically advantageous. For the
three
months ended
March 31, 2018
, we invested
$5.4 million
on Program Max projects, net of
$0.6 million
of third party lessor reimbursements. We currently have
11
Program Max projects that have been approved, most of which have begun construction and are expected to generate
74
net new units.
Ventas Lease Portfolio Restructuring
On April 26, 2018, we entered into definitive agreements to restructure our portfolio of 128 communities (10,567 units) leased from Ventas, Inc. ("Ventas"). See Note 17 to the condensed consolidated financial statements contained in “Item 1. Financial Statements” for details regarding the portfolio restructuring. As part of the restructuring, the parties agreed to waive and release any claims related to our previously disclosed disagreement regarding the calculation of a financial covenant.
Tax Reform
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (“Tax Act”) into law. The Tax Act reformed the United States corporate income tax code, including a reduction to the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also eliminated alternative minimum tax (AMT) and the 20-year carryforward limitation for net operating losses incurred after December 31, 2017, and imposes a limit on the usage of net operating losses incurred after such date equal to 80% of taxable income in any given year. The 80% usage limit will not have an economic impact on the Company until its current net operating losses are either utilized or expired. In addition, the Tax Act limits the annual deductibility of a corporation's net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business exception. The Company plans to elect the real property trade or business exception in 2018. 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 did not have a material effect for the three months ended
March 31, 2018
but will impact future tax depreciation deductions and may impact the Company’s valuation allowance. The Company is unable to estimate the impact of this change at this time. For the year ended
December 31, 2017
, reasonable estimates for our state and local provision were made based on our analysis of tax reform. These provisional amounts were not adjusted in the three months ended
March 31, 2018
but may be adjusted in future periods during 2018 when additional information is obtained. 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.
Competitive Developments
Beginning in 2016, we experienced an elevated rate of new openings, with significant new competition opening in several of our markets, which adversely affected our occupancy, revenues, and results of operations. We continue to address such competition through pricing initiatives based on the competitive market, current in-place rents and occupancy; focusing on operations, including ensuring high customer satisfaction, protecting key leadership positions and actively engaging district and regional management in community operations; local and national marketing efforts, including leveraging our industry leading name through enhanced digital, direct mail and local community outreach; and community segmentation through which we evaluate current community position relative to competition and reposition if necessary (e.g., price, services, amenities and programming). We expect the elevated rate of new openings and pressures on our occupancy and rate growth to continue through 2018.
Summary of Operating Results
The table below presents a summary of our operating results and certain other financial metrics for the
three
months ended
March 31, 2018
and
2017
and the amount and percentage of increase or decrease of each applicable item.
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Three Months Ended
March 31,
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Increase
(Decrease)
|
(in millions)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Total revenues
|
$
|
1,187.2
|
|
|
$
|
1,216.8
|
|
|
$
|
(29.6
|
)
|
|
(2.4
|
)%
|
Facility operating expense
|
$
|
632.3
|
|
|
$
|
674.5
|
|
|
$
|
(42.2
|
)
|
|
(6.3
|
)%
|
Net income (loss)
|
$
|
(457.2
|
)
|
|
$
|
(126.4
|
)
|
|
$
|
330.9
|
|
|
NM
|
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
$
|
(457.2
|
)
|
|
$
|
(126.3
|
)
|
|
$
|
330.9
|
|
|
NM
|
|
Adjusted EBITDA
(1)
|
$
|
130.0
|
|
|
$
|
198.3
|
|
|
$
|
(68.3
|
)
|
|
(34.4
|
)%
|
Net cash provided by operating activities
|
$
|
38.0
|
|
|
$
|
66.8
|
|
|
$
|
(28.8
|
)
|
|
(43.1
|
)%
|
Adjusted Free Cash Flow
(1)
|
$
|
5.5
|
|
|
$
|
63.5
|
|
|
$
|
(58.0
|
)
|
|
(91.4
|
)%
|
|
|
(1)
|
Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures we use to assess our operating performance and liquidity. See "Non-GAAP Financial Measures" below for important information regarding both measures.
|
During the
three
months ended
March 31, 2018
, total revenues were
$1.2 billion
, a decrease of
$29.6 million
, or
2.4%
, over our total revenues for the
three
months ended
March 31, 2017
. Resident fees for the
three
months ended
March 31, 2018
decreased
$110.7 million
, or
10.9%
, from the
three
months ended
March 31, 2017
. Management fees increased
$2.8 million
, or
17.5%
, from
the
three
months ended
March 31, 2017
, and reimbursed costs incurred on behalf of managed communities increased
$78.3 million
, or
42.6%
. The decrease in resident fees during the
three
months ended
March 31, 2018
was primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period. Weighted average occupancy at the
769
communities we owned or leased during both full
three
month periods decreased
130
basis points to
84.8%
. The decrease in resident fees at the
769
communities we owned or leased during both full
three
month periods was partially offset by a
1.0%
increase in senior housing average monthly revenue per occupied unit (RevPOR) compared to the prior year
three
month period.
During the
three
months ended
March 31, 2018
, facility operating expenses were
$632.3 million
, a decrease of
$42.2 million
, or
6.3%
, compared to the
three
months ended
March 31, 2017
. The decrease in facility operating expenses was primarily due to the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period. Facility operating expenses increased
$27.6 million
, or
5.8%
, at the
769
communities we owned or leased during both full
three
month periods, primarily due to an increase in salaries and wages arising from wage rate increases.
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders for the
three
months ended
March 31, 2018
was
$(457.2) million
, compared to net income (loss) attributable to Brookdale Senior Living Inc. common stockholders of
$(126.3) million
for the
three
months ended
March 31, 2017
. Net income (loss) for the
three
months ended
March 31, 2018
was
$(457.2) million
as compared to net income (loss) of
$(126.4) million
for the
three
months ended
March 31, 2017
. During the
three
months ended
March 31, 2018
, our Adjusted EBITDA was
$130.0 million
, a decrease of
34.4%
compared to the
three
months ended
March 31, 2017
. The decrease in Adjusted EBITDA is primarily due to disposition activity, through asset sales and lease terminations, since the beginning of the prior year period. Additionally, increases in community labor expenses and insurance expense at the communities operated during both full periods contributed to the decline in Adjusted EBITDA.
During the
three
months ended
March 31, 2018
, net cash provided by operating activities was
$38.0 million
, a decrease of
$28.8 million
, or
43.1%
, over our net cash provided by operating activities for the
three
months ended
March 31, 2017
. During the
three
months ended
March 31, 2018
, our Adjusted Free Cash Flow was
$5.5 million
, a decrease of
91.4%
when compared to the
three
months ended
March 31, 2017
.
Adjusted EBITDA and Adjusted Free Cash Flow include transaction and organizational restructuring costs of
$17.2 million
for the
three
months ended
March 31, 2018
and transaction and strategic project costs of
$7.7 million
for the
three
months ended
March 31, 2017
.
Consolidated Results of Operations
Comparison of
Three Months Ended March 31, 2018
and
2017
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As of
March 31, 2018
our total operations included
1,010
communities with a capacity to serve approximately
99,000
residents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except Total RevPAR, RevPAR and RevPOR)
|
Three Months Ended
March 31,
|
|
Increase (Decrease)
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
(6)
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
Resident fees
|
|
|
|
|
|
|
|
Retirement Centers
|
$
|
158,397
|
|
|
$
|
172,620
|
|
|
$
|
(14,223
|
)
|
|
(8.2
|
)%
|
Assisted Living
|
532,280
|
|
|
590,537
|
|
|
(58,257
|
)
|
|
(9.9
|
)%
|
CCRCs-Rental
|
105,069
|
|
|
141,798
|
|
|
(36,729
|
)
|
|
(25.9
|
)%
|
Brookdale Ancillary Services
|
110,520
|
|
|
111,972
|
|
|
(1,452
|
)
|
|
(1.3
|
)%
|
Total resident fees
|
906,266
|
|
|
1,016,927
|
|
|
(110,661
|
)
|
|
(10.9
|
)%
|
Management services
(1)
|
280,968
|
|
|
199,839
|
|
|
81,129
|
|
|
40.6
|
%
|
Total revenue
|
1,187,234
|
|
|
1,216,766
|
|
|
(29,532
|
)
|
|
(2.4
|
)%
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
Facility operating expense
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
93,975
|
|
|
98,618
|
|
|
(4,643
|
)
|
|
(4.7
|
)%
|
Assisted Living
|
355,742
|
|
|
373,098
|
|
|
(17,356
|
)
|
|
(4.7
|
)%
|
CCRCs-Rental
|
80,406
|
|
|
106,483
|
|
|
(26,077
|
)
|
|
(24.5
|
)%
|
Brookdale Ancillary Services
|
102,202
|
|
|
96,343
|
|
|
5,859
|
|
|
6.1
|
%
|
Total facility operating expense
|
632,325
|
|
|
674,542
|
|
|
(42,217
|
)
|
|
(6.3
|
)%
|
General and administrative expense
|
76,710
|
|
|
65,560
|
|
|
11,150
|
|
|
17.0
|
%
|
Transaction costs
|
4,725
|
|
|
7,593
|
|
|
(2,868
|
)
|
|
(37.8
|
)%
|
Facility lease expense
|
80,400
|
|
|
88,807
|
|
|
(8,407
|
)
|
|
(9.5
|
)%
|
Depreciation and amortization
|
114,255
|
|
|
127,487
|
|
|
(13,232
|
)
|
|
(10.4
|
)%
|
Goodwill and asset impairment
|
430,363
|
|
|
20,706
|
|
|
409,657
|
|
|
NM
|
|
Costs incurred on behalf of managed communities
|
262,287
|
|
|
183,945
|
|
|
78,342
|
|
|
42.6
|
%
|
Total operating expense
|
1,601,065
|
|
|
1,168,640
|
|
|
432,425
|
|
|
37.0
|
%
|
Income (loss) from operations
|
(413,831
|
)
|
|
48,126
|
|
|
(461,957
|
)
|
|
NM
|
|
Interest income
|
2,983
|
|
|
631
|
|
|
2,352
|
|
|
NM
|
|
Interest expense
|
(72,540
|
)
|
|
(93,069
|
)
|
|
(20,529
|
)
|
|
(22.1
|
)%
|
Debt modification and extinguishment costs
|
(35
|
)
|
|
(61
|
)
|
|
(26
|
)
|
|
(42.6
|
)%
|
Equity in (loss) earnings of unconsolidated ventures
|
(4,243
|
)
|
|
981
|
|
|
5,224
|
|
|
NM
|
|
Gain (loss) on sale of assets, net
|
43,431
|
|
|
(603
|
)
|
|
(44,034
|
)
|
|
NM
|
|
Other non-operating income
|
2,586
|
|
|
1,662
|
|
|
924
|
|
|
55.6
|
%
|
Income (loss) before income taxes
|
(441,649
|
)
|
|
(42,333
|
)
|
|
399,316
|
|
|
NM
|
|
Provision for income taxes
|
(15,585
|
)
|
|
(84,028
|
)
|
|
68,443
|
|
|
81.5
|
%
|
Net income (loss)
|
(457,234
|
)
|
|
(126,361
|
)
|
|
330,873
|
|
|
NM
|
|
Net (income) loss attributable to noncontrolling interest
|
46
|
|
|
57
|
|
|
(11
|
)
|
|
(19.3
|
)%
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
$
|
(457,188
|
)
|
|
$
|
(126,304
|
)
|
|
$
|
330,884
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Increase (Decrease)
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
(6)
|
Selected Operating and Other Data:
|
|
|
|
|
|
|
|
Total number of communities (period end)
|
1,010
|
|
|
1,052
|
|
|
(42
|
)
|
|
(4.0
|
)%
|
Total units operated
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
99,109
|
|
|
102,470
|
|
|
(3,361
|
)
|
|
(3.3
|
)%
|
Weighted average
|
100,256
|
|
|
102,564
|
|
|
(2,308
|
)
|
|
(2.3
|
)%
|
Owned/leased communities units
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
66,355
|
|
|
71,186
|
|
|
(4,831
|
)
|
|
(6.8
|
)%
|
Weighted average
|
66,557
|
|
|
76,862
|
|
|
(10,305
|
)
|
|
(13.4
|
)%
|
Total RevPAR
(3)
|
$
|
4,527
|
|
|
$
|
4,405
|
|
|
$
|
122
|
|
|
2.8
|
%
|
RevPAR
(4)
|
$
|
3,983
|
|
|
$
|
3,919
|
|
|
$
|
64
|
|
|
1.6
|
%
|
Owned/leased communities occupancy rate (weighted average)
|
84.4
|
%
|
|
85.3
|
%
|
|
(0.9
|
)%
|
|
(1.1
|
)%
|
RevPOR
(5)
|
$
|
4,717
|
|
|
$
|
4,597
|
|
|
$
|
120
|
|
|
2.6
|
%
|
Selected Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
|
|
|
|
|
|
|
|
|
Number of communities (period end)
|
84
|
|
|
86
|
|
|
(2
|
)
|
|
(2.3
|
)%
|
Total units
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
15,045
|
|
|
16,071
|
|
|
(1,026
|
)
|
|
(6.4
|
)%
|
Weighted average
|
15,045
|
|
|
17,108
|
|
|
(2,063
|
)
|
|
(12.1
|
)%
|
RevPAR
(4)
|
$
|
3,509
|
|
|
$
|
3,363
|
|
|
$
|
146
|
|
|
4.3
|
%
|
Occupancy rate (weighted average)
|
87.7
|
%
|
|
88.0
|
%
|
|
(0.3
|
)%
|
|
(0.3
|
)%
|
RevPOR
(5)
|
$
|
4,004
|
|
|
$
|
3,823
|
|
|
$
|
181
|
|
|
4.7
|
%
|
Assisted Living
|
|
|
|
|
|
|
|
|
|
|
|
Number of communities (period end)
|
681
|
|
|
720
|
|
|
(39
|
)
|
|
(5.4
|
)%
|
Total units
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
44,728
|
|
|
47,296
|
|
|
(2,568
|
)
|
|
(5.4
|
)%
|
Weighted average
|
44,773
|
|
|
50,540
|
|
|
(5,767
|
)
|
|
(11.4
|
)%
|
RevPAR
(4)
|
$
|
3,963
|
|
|
$
|
3,895
|
|
|
$
|
68
|
|
|
1.7
|
%
|
Occupancy rate (weighted average)
|
83.4
|
%
|
|
84.7
|
%
|
|
(1.3
|
)%
|
|
(1.5
|
)%
|
RevPOR
(5)
|
$
|
4,750
|
|
|
$
|
4,600
|
|
|
$
|
150
|
|
|
3.3
|
%
|
CCRCs-Rental
|
|
|
|
|
|
|
|
|
|
|
Number of communities (period end)
|
27
|
|
|
32
|
|
|
(5
|
)
|
|
(15.6
|
)%
|
Total units
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
6,582
|
|
|
7,819
|
|
|
(1,237
|
)
|
|
(15.8
|
)%
|
Weighted average
|
6,739
|
|
|
9,214
|
|
|
(2,475
|
)
|
|
(26.9
|
)%
|
RevPAR
(4)
|
$
|
5,172
|
|
|
$
|
5,086
|
|
|
$
|
86
|
|
|
1.7
|
%
|
Occupancy rate (weighted average)
|
84.1
|
%
|
|
83.5
|
%
|
|
0.6
|
%
|
|
0.7
|
%
|
RevPOR
(5)
|
$
|
6,160
|
|
|
$
|
6,091
|
|
|
$
|
69
|
|
|
1.1
|
%
|
Management Services
|
|
|
|
|
|
|
|
|
|
|
Number of communities (period end)
|
218
|
|
|
214
|
|
|
4
|
|
|
1.9
|
%
|
Total units
(2)
|
|
|
|
|
|
|
|
|
|
|
Period end
|
32,754
|
|
|
31,284
|
|
|
1,470
|
|
|
4.7
|
%
|
Weighted average
|
33,699
|
|
|
25,702
|
|
|
7,997
|
|
|
31.1
|
%
|
Occupancy rate (weighted average)
|
84.2
|
%
|
|
86.3
|
%
|
|
(2.1
|
)%
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookdale Ancillary Services
|
|
|
|
|
|
|
|
|
|
|
|
Home Health average daily census
|
15,497
|
|
|
15,370
|
|
|
127
|
|
|
0.8
|
%
|
Hospice average daily census
|
1,302
|
|
|
920
|
|
|
382
|
|
|
41.5
|
%
|
Outpatient Therapy treatment codes
|
167,170
|
|
|
193,853
|
|
|
(26,683
|
)
|
|
(13.8
|
)%
|
|
|
(1)
|
Management services segment revenue includes management fees and reimbursements of costs incurred on behalf of managed communities.
|
|
|
(2)
|
Weighted average units operated represents the average units operated during the period.
|
|
|
(3)
|
Total RevPAR, or average monthly resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period.
|
|
|
(4)
|
RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period.
|
|
|
(5)
|
RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period.
|
Resident Fees
Resident fee revenue decreased
$110.7 million
, or
10.9%
, compared to the prior year period primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period. Weighted average occupancy decreased
130
basis points at the
769
communities we owned or leased during both full periods, which reflects the impact of new competition in our markets. Additionally, Brookdale Ancillary Services segment revenue decreased
$1.5 million
, or
1.3%
, primarily due to a decline in volume for home health visits. The
111
communities disposed of subsequent to the beginning of the prior year period (including the
62
communities for which the financial results were deconsolidated from our financial statements prospectively upon formation of the Blackstone Venture on March 29, 2017) generated
$2.2 million
of revenue during the current year period compared to
$107.6 million
of revenue in the prior year period. The decrease in resident fee revenue was partially offset by a
1.0%
increase in RevPOR at the
769
communities we owned or operated during both full periods compared to the prior year period. Total RevPAR for the consolidated portfolio also increased by
2.8%
compared to the prior year period.
Retirement Centers segment revenue decreased
$14.2 million
, or
8.2%
, primarily due to the impact of dispositions of
10
communities since the beginning of the prior year period, which generated no revenue during the current year period compared to
$13.9 million
of revenue in the prior year period. Retirement Centers segment revenue at the communities we operated during both full periods was
$150.1 million
during the current year period, a decrease of
$1.0 million
, or
0.7%
, over the prior year period, primarily due to a
70
basis point decrease in weighted average occupancy at these communities, partially offset by a
0.2%
increase in RevPOR at these communities.
Assisted Living segment revenue decreased
$58.3 million
, or
9.9%
, primarily due to the impact of dispositions of
88
communities since the beginning of the prior year period, which generated
$0.2 million
of revenue during the current year period compared to
$55.6 million
of revenue in the prior year period. Assisted Living segment revenue at the communities we operated during both full periods was
$516.5 million
during the current year period, a decrease of
$3.9 million
, or
0.7%
, over the prior year period, primarily due to a
170
basis point decrease in weighted average occupancy at these communities, partially offset by a
1.3%
increase in RevPOR at these communities.
CCRCs-Rental segment revenue decreased
$36.7 million
, or
25.9%
, primarily due to the impact of dispositions of
13
communities since the beginning of the prior year period, which generated
$2.0 million
of revenue during the current year period compared to
$38.1 million
of revenue in the prior year period. CCRCs-Rental segment revenue at the communities we operated during both
full periods was
$92.8 million
during the current year period, an increase of
$0.2 million
, or
0.2%
, over the prior year period, primarily due to a
0.4%
increase in RevPOR at these communities.
Brookdale Ancillary Services segment revenue decreased
$1.5 million
, or
1.3%
, primarily due to a decline in volume for home health visits, which was partially offset by an increase in volume for hospice services. For home health in 2018, CMS has implemented a net 0.4% reimbursement reduction, consisting of a 1.0% market basket inflation increase, less a 0.9% reduction to account for industry wide case-mix growth, and the sunset of the rural add-on provision. As a result, we expect our home health reimbursement to be reduced by approximately 0.8% in 2018 compared to 2017.
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed communities, increased
$81.1 million
, or
40.6%
, over the prior year period primarily due to our entry into management agreements with the Blackstone Venture on March 29, 2017. Management fees of
$18.7 million
for 2018 include $0.4 million of management fees attributable to communities for which our management agreements were terminated in 2018 and $3.8 million of management fees attributable to communities for which we expect the terminations of our management agreement to occur in stages throughout 2018.
Facility Operating Expense
Facility operating expense decreased
$42.2 million
, or
6.3%
, over the prior year period. The decrease in facility operating expense is primarily due to disposition activity, through sales and lease terminations, of
111
communities since the beginning of the prior year period, which incurred
$2.1 million
of facility operating expenses during the current year period compared to
$81.0 million
of facility operating expenses in the prior year period. These decreases were partially offset by an increase in employee compensation costs at the communities we operated during both full periods, reflecting the impact of our investment in salaries and benefits and a tight labor market during the current year period. Additionally, insurance expense increased related to positive changes in the prior year period to estimates in general liability and professional liability and workers compensation expenses. Additionally, Brookdale Ancillary Services segment facility operating expenses increased
$5.9 million
, or
6.1%
, primarily due to an increase in salaries and wages for the expansion of our hospice services.
Retirement Centers segment facility operating expenses decreased
$4.6 million
, or
4.7%
, primarily due to the impact of dispositions of
10
communities since the beginning of the prior year period, which incurred no expenses during the current year period compared to
$8.8 million
in the prior year period. This decrease was partially offset by an increase in employee compensation costs at the communities we operated during both full periods, reflecting the impact of our investment in salaries and benefits and a tight labor market during the current year period. Retirement Centers segment facility operating expenses at the communities we operated during both full periods were
$88.0 million
, an increase of
$3.3 million
, or
3.9%
, over the prior year period.
Assisted Living segment facility operating expenses decreased
$17.4 million
, or
4.7%
, primarily driven by the impact of dispositions of
88
communities since the beginning of the prior year period, which incurred no expenses during the current year period compared to
$41.0 million
in the prior year period. This decrease was partially offset by an increase in employee compensation costs at the communities we operated during both full periods, reflecting the impact of our investment in salaries and benefits and a tight labor market during the current year period. Assisted Living segment facility operating expenses at the communities we operated during both full periods were
$342.8 million
, an increase of
$21.5 million
, or
6.7%
, over the prior year period.
CCRCs-Rental segment facility operating expenses decreased
$26.1 million
, or
24.5%
, primarily driven by the impact of dispositions of
13
communities since the beginning of the prior year period, which incurred
$2.1 million
of expenses during the current year period compared to
$31.2 million
in the prior year period. CCRCs-Rental segment facility operating expenses at the communities we operated during both full periods were
$70.8 million
, an increase of
$2.7 million
, or
4.0%
, over the prior year period, primarily due to an increase in employee compensation costs, reflecting the impact of our investment in salaries and benefits and a tight labor market during the current year period.
Brookdale Ancillary Services segment operating expenses increased
$5.9 million
, or
6.1%
, primarily due to an increase in salaries and wages for the expansion of our hospice services.
General and Administrative Expense
General and administrative expense increased
$11.2 million
, or
17.0%
, over the prior year period primarily due to increased costs associated with organizational restructuring, including severance and retention costs related to our efforts to reduce general and administrative expense and senior leadership changes. During the current year period, general and administrative expense included severance costs and retention costs of $10.7 million and $1.7 million, respectively.
Transaction Costs
Transaction costs decreased
$2.9 million
to
$4.7 million
. Transaction costs in the current year period were primarily related to direct costs related to our assessment of options and alternatives to enhance stockholder value. Transaction costs in the prior year period were primarily related to direct costs related to the formation of the Blackstone Venture, our assessment of options and alternatives to enhance stockholder value, and community disposition activity.
Facility Lease Expense
Facility lease expense decreased
$8.4 million
, or
9.5%
, primarily due to lease termination activity since the beginning of the prior year period.
Depreciation and Amortization
Depreciation and amortization expense decreased
$13.2 million
, or
10.4%
, primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period.
Goodwill and Asset Impairment
During the current year period, we recorded
$430.4 million
of non-cash impairment charges. The impairment charges primarily consisted of
$351.7 million
of goodwill within the Assisted Living segment,
$40.8 million
of property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment and
$33.4 million
for our investments in unconsolidated ventures. Asset impairment expense in the prior year period was primarily related to the formation of the Blackstone Venture and termination of leases related thereto.
During the first quarter of 2018, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period during the three months ended March 31, 2018. As a result, we performed an interim quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying value of our Assisted Living segment exceeded its estimated fair value by more than the $351.7 million carrying value as of March 31, 2018. As a result, we recorded a non-cash impairment charge of $351.7 million to goodwill within the Assisted Living segment for the three months ended March 31, 2018.
During the three months ended March 31, 2018, we evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying value of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets, primarily due to an expectation that certain communities will be disposed of prior to their previously determined useful lives. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $40.8 million for the three months ended March 31, 2018, including $35.0 million within the Assisted Living segment.
During the three months ended March 31, 2018, we identified indicators of impairment for our investments in unconsolidated ventures. We compared the estimated fair value of investments in unconsolidated ventures to their carrying value for these identified investments and recorded a $33.4 million impairment charge for the excess of carrying value over fair value.
Estimating the fair values of our goodwill and other assets requires management to use significant estimates, assumptions and judgments regarding future circumstances and events that are unpredictable and inherently uncertain. Future circumstances and events may result in outcomes that are different from these estimates, assumptions and judgments, which could result in future impairments to our goodwill and other assets. See Note 5 to the condensed consolidated financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q for more information about our evaluations of goodwill and other assets for impairment and the related impairment charges.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased
$78.3 million
, or
42.6%
, primarily due to our entry into management agreements with the Blackstone Venture.
Interest Expense
Interest expense decreased by
$20.5 million
, or
22.1%
, primarily due to capital and financing lease termination activity since the beginning of the prior year period.
Equity in Loss of Unconsolidated Ventures
Equity in loss of unconsolidated ventures increased by
$5.2 million
over the prior year period. Equity in loss of unconsolidated ventures of
$4.2 million
in the current year period includes losses for the Blackstone Venture, which was formed during the prior year period.
Gain (Loss) on Sale of Assets, Net
Gain (loss) on sale of assets, net increased
$44.0 million
primarily due to a $42.2 million gain on sale of our investment in an unconsolidated venture and a $1.9 million gain on sale of three communities during the current year period.
Income Taxes
The difference between the statutory tax rate and the Company's effective tax rates for the three months ended
March 31, 2018
and
March 31, 2017
reflects a decrease in the Company’s federal statutory tax rate from 35% to 21% as a result of the Tax Act and a decrease in the valuation allowance recorded in 2018 as compared to 2017. These decreases were offset by the elimination of deductibility for qualified performance-based compensation of covered employees in 2018 as a result of the Tax Act, the negative tax benefit on the vesting of restricted stock, a direct result of the Company's lower stock price in 2018, and the non-deductible write-off of goodwill. We recorded an aggregate deferred federal, state and local tax benefit of
$9.5 million
as a result of the operating loss for the three months ended
March 31, 2018
, which was offset by an increase in the valuation allowance of
$24.6 million
. The excess of the increase in the valuation allowance over the deferred federal, state and local benefit for the three months ended
March 31, 2018
is the result of the reversal of future tax liabilities offset by future tax deductions. We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of
March 31, 2018
and
December 31, 2017
was
$360.7 million
and
$336.1 million
, respectively.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the three months ended
March 31, 2018
and
March 31, 2017
which are included in provision for income tax for the period. Tax returns for years
2013
through
2016
are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Liquidity and Capital Resources
The following is a summary of cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Increase
(Decrease)
|
(in thousands)
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
Net cash provided by operating activities
|
$
|
37,964
|
|
|
$
|
66,773
|
|
|
$
|
(28,809
|
)
|
|
(43.1
|
)%
|
Net cash provided by (used in) investing activities
|
91,155
|
|
|
(199,743
|
)
|
|
290,898
|
|
|
NM
|
|
Net cash used in financing activities
|
(16,104
|
)
|
|
(23,561
|
)
|
|
(7,457
|
)
|
|
(31.6
|
)%
|
Net increase (decrease) in cash and cash equivalents and restricted cash and escrow deposits
|
113,015
|
|
|
(156,531
|
)
|
|
269,546
|
|
|
NM
|
|
Cash and cash equivalents and restricted cash and escrow deposits at beginning of period
|
282,546
|
|
|
277,322
|
|
|
5,224
|
|
|
1.9
|
%
|
Cash and cash equivalents and restricted cash and escrow deposits at end of period
|
$
|
395,561
|
|
|
$
|
120,791
|
|
|
$
|
274,770
|
|
|
227.5
|
%
|
The decrease in net cash provided by operating activities of
$28.8 million
was attributable primarily to the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period and an increase in facility operating expenses at the communities operated during both full periods.
The change in net cash provided by investing activities of
$290.9 million
was primarily attributable to sales of $118.3 million of marketable securities during the current year period, our contribution of
$179.2 million
in connection with the formation of the Blackstone Venture during the prior year period, and a decrease in net proceeds from the sale of assets. These changes were partially offset by increased acquisition and capital expenditure activity.
The decrease in net cash used in financing activities was primarily attributable to a decrease in repayment of debt and capital and financing lease obligations compared to the prior year period.
Our principal sources of liquidity have historically been from:
|
|
•
|
cash balances on hand, cash equivalents and marketable securities;
|
|
|
•
|
cash flows from operations;
|
|
|
•
|
proceeds from our credit facilities;
|
|
|
•
|
funds generated through unconsolidated venture arrangements;
|
|
|
•
|
proceeds from mortgage financing, refinancing of various assets or sale-leaseback transactions;
|
|
|
•
|
funds raised in the debt or equity markets; and
|
|
|
•
|
proceeds from the disposition of assets.
|
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.
Our liquidity requirements have historically arisen from:
|
|
•
|
operating costs such as employee compensation and related benefits, severance costs, general and administrative expense and supply costs;
|
|
|
•
|
debt service and lease payments;
|
|
|
•
|
acquisition consideration and transaction and integration costs;
|
|
|
•
|
capital expenditures and improvements, including the expansion, renovation, redevelopment and repositioning of our current communities and the development of new communities;
|
|
|
•
|
cash collateral required to be posted in connection with our financial instruments and insurance programs;
|
|
|
•
|
purchases of common stock under our share repurchase authorizations;
|
|
|
•
|
other corporate initiatives (including integration, information systems, branding and other strategic projects); and
|
|
|
•
|
prior to 2009, dividend payments.
|
Over the near-term, we expect that our liquidity requirements will primarily arise from:
|
|
•
|
operating costs such as employee compensation and related benefits, severance costs, general and administrative expense and supply costs;
|
|
|
•
|
debt service, including repayment of the
$316.3 million
outstanding principal amount of our
2.75%
convertible senior notes due
June 15, 2018
, and lease payments;
|
|
|
•
|
acquisition consideration and transaction costs;
|
|
|
•
|
capital expenditures and improvements, including the expansion, renovation, redevelopment and repositioning of our existing communities;
|
|
|
•
|
cash funding needs of our unconsolidated ventures for operating, capital expenditure and financing needs;
|
|
|
•
|
cash collateral required to be posted in connection with our financial instruments and insurance programs;
|
|
|
•
|
purchases of common stock under our share repurchase authorization; and
|
|
|
•
|
other corporate initiatives (including information systems and other strategic projects).
|
We are highly leveraged and have significant debt and lease obligations. As of
March 31, 2018
, we have three principal corporate-level debt obligations: our
$400.0 million
secured credit facility, our
$316.3 million
outstanding principal amount of
2.75%
convertible senior notes due
June 15, 2018
, and our separate unsecured letter of credit facilities providing for up to
$66.2 million
of letters of credit in the aggregate. As of
March 31, 2018
,
85.3%
, or
$3.3 billion
, of our total debt obligations represent non-recourse property-level mortgage financings.
As of
March 31, 2018
, we had
$3.9 billion
of debt outstanding excluding capital and financing lease obligations, at a weighted-average interest rate of
5.0%
(calculated using an imputed interest rate of
7.5%
for our
2.75%
convertible senior notes due
June 15, 2018
). No balance was drawn on our secured credit facility as of
March 31, 2018
. As of
March 31, 2018
, we had
$1.3 billion
of capital and financing lease obligations and
$106.3 million
of letters of credit had been issued under our secured credit facility and separate unsecured letter of credit facilities. For the twelve months ending
March 31,
2019 we will be required to make approximately
$129.9 million
and
$368.2 million
of cash payments in connection with our existing capital and financing leases and our operating leases, respectively (prior to giving effect to rent credits obtained and the extension of certain community leases as a result of the Ventas lease portfolio restructuring in April 2018).
Total liquidity of
$868.2 million
as of
March 31, 2018
included
$335.4 million
of unrestricted cash and cash equivalents (excluding cash and escrow deposits-restricted and lease security deposits of
$105.4 million
in the aggregate),
$174.6 million
of marketable securities, and
$358.2 million
of availability on our secured credit facility. We plan to market in 2018 and sell approximately 30 owned communities, which we believe will generate more than $250 million of proceeds, net of associated debt and transaction costs. However, the closings of the expected sales of assets are subject to our successful marketing of such assets on terms acceptable to us and will be subject to the satisfaction of various conditions, including (where applicable) the receipt of regulatory approvals. There can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
As of
March 31, 2018
, we had
$172.2 million
of negative working capital. Due to the nature of our business, it is not unusual to operate in the position of negative working capital because we collect revenues much more quickly, often in advance, than we are required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities. Our operations result in a very low level of current assets primarily stemming from our deployment of cash to pay down long-term liabilities, to fund capital expenditures, in connection with our portfolio optimization initiative, and to pursue strategic business development opportunities. As of
March 31, 2018
, the current portion of long-term debt was
$535.5 million
, which includes the carrying value of our
2.75%
convertible senior notes due
June 15, 2018
, the carrying value of
$61.7 million
of mortgage debt due in
January 2019
and
$30.0 million
of mortgage debt related to
14
communities classified as held for sale as of
March 31, 2018
. We estimate that we will have sufficient liquidity to settle the outstanding principal amount of
$316.3 million
of the convertible notes in cash at maturity.
Our capital expenditures are comprised of community-level, corporate and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence, including for unit turnovers (subject to a $500 floor)) and community renovations, apartment upgrades and other major building infrastructure projects. Corporate and other capital expenditures include those for information technology systems and equipment, the expansion of our support platform and ancillary services programs, the remediation or replacement of assets as a result of casualty losses and compliance with requirements to obtain emergency power generators at our communities. Development capital expenditures include community expansions and major community redevelopment and repositioning projects, including our Program Max initiative, and the development of new communities.
Through our Program Max initiative, we intend to expand, renovate, redevelop and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These Program Max projects include converting space from
one level of care to another, reconfiguration of existing units, the addition of services that are not currently present or physical plant modifications. We currently have
11
Program Max projects that have been approved, most of which have begun construction and are expected to generate
74
net new units.
The following table summarizes our actual capital expenditures for the
three
months ended
March 31, 2018
for our consolidated business:
|
|
|
|
|
(in millions)
|
Three Months Ended
March 31, 2018
|
Community-level capital expenditures, net
(1)
|
$
|
33.9
|
|
Corporate
(2)
|
7.8
|
|
Non-development capital expenditures, net
(3)
|
$
|
41.7
|
|
|
|
Development capital expenditures, net
(4)
|
5.4
|
|
Total capital expenditures, net
|
$
|
47.1
|
|
|
|
(1)
|
Reflects the amount invested, net of lessor reimbursements of
$1.8 million
.
|
|
|
(2)
|
Includes
$1.8 million
of remediation costs at our communities resulting from Hurricanes Harvey and Irma and excludes reimbursement from our property and casualty insurance policies of approximately
$0.3 million
.
|
|
|
(3)
|
Amount is included in Adjusted Free Cash Flow.
|
|
|
(4)
|
Reflects the amount invested, net of lessor reimbursements of
$0.6 million
.
|
We expect our full-year 2018 non-development capital expenditures, net of lessor reimbursements, to be in the range of $170 million to $180 million, and our development capital expenditures, net of lessor reimbursements, to be approximately $40 million. Our expectations regarding full-year 2018 non-development capital expenditures include up to $25 million for remediation resulting from Hurricanes Harvey and Irma and the acquisition of emergency power generators at certain Florida communities. Following Hurricane Irma, legislation was adopted in the State of Florida in March 2018 that requires skilled nursing homes and assisted living communities in Florida to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. Communities must comply with the requirements by July 1, 2018, subject to extension in certain circumstances. We anticipate that our 2018 capital expenditures will be funded from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility.
Execution on our strategy and any identified lease restructuring, development or acquisition opportunities may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to forego, delay or abandon lease restructuring, development or acquisition opportunities that we identify.
We currently estimate that our existing cash flows from operations, together with cash on hand, amounts available under our secured credit facility and proceeds from anticipated dispositions of owned communities and financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming a relatively stable macroeconomic environment.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level of capital expenditures, general economic conditions and the cost of capital. Volatility in the credit and financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to maintain capital spending levels, to execute on our strategy or to pursue lease restructuring, development or acquisitions that we may identify. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing
to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us.
Credit Facilities
On December 19, 2014, we entered into a Fourth Amended and Restated Credit Agreement with General Electric Capital Corporation (which has since assigned its interest to Capital One Financial Corporation), as administrative agent, lender and swingline lender, and the other lenders from time to time parties thereto. The agreement currently provides for a total commitment amount of
$400.0 million
, comprised of a
$400.0 million
revolving credit facility (with a
$50.0 million
sublimit for letters of credit and a
$50.0 million
swingline feature to permit same day borrowing) and an option to increase the revolving credit facility by an additional
$250.0 million
, subject to obtaining commitments for the amount of such increase from acceptable lenders. The maturity date is
January 3, 2020
and amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin from a range of 2.50% to 3.50%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50% margin at utilization equal to or lower than 35%, a 3.25% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50% margin at utilization greater than 50%. The quarterly commitment fee on the unused portion of the facility is 0.25% per annum when the outstanding amount of obligations (including revolving credit, swingline and term loans and letter of credit obligations) is greater than or equal to 50% of the total commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the total commitment amount.
Amounts drawn on the facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The facility is secured by first priority mortgages on certain of our communities. In addition, the agreement permits us to pledge the equity interests in subsidiaries that own other communities (rather than mortgaging such communities), provided that loan availability from pledged assets cannot exceed 10% of loan availability from mortgaged assets. The availability under the line will vary from time to time as it is based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.
The agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the agreement and all amounts owing under the agreement becoming immediately due and payable and/or could trigger cross-default provisions in our other outstanding debt and lease documents.
As of
March 31, 2018
, no borrowings were outstanding on the revolving credit facility and $
41.8 million
of letters of credit were outstanding, resulting in
$358.2 million
of availability on our secured credit facility. We also had separate unsecured letter of credit facilities of up to $
66.2 million
in the aggregate as of
March 31, 2018
. Letters of credit totaling $
64.4 million
had been issued under these separate facilities as of that date.
Long-Term Leases
As of
March 31, 2018
, we have
434
communities operated under long-term leases (
290
operating lease and
144
capital and financing leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and the lease payment obligations of its subsidiary lessees under master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index. We are responsible for all operating costs, including repairs, property taxes and insurance. The initial lease terms primarily vary from
10
to
20
years and generally include renewal options ranging from
5
to
20
years. The remaining base lease terms vary from less than
one
year to
15
years and generally provide for renewal or extension options and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations and termination provisions and, as described below, financial covenants. In addition, our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or
Medicaid provider requirements. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met.
In addition, certain of our master leases and management agreements contain radius restrictions, which limit our ability to own, develop or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand or develop or acquire senior housing communities and operating companies.
For the three months ended
March 31, 2018
, our cash lease payments for our capital and financing leases and our operating leases were
$40.7 million
and
$89.6 million
, respectively. For the twelve months ending
March 31,
2019, we will be required to make approximately
$129.9 million
and
$368.2 million
of cash lease payments in connection with our existing capital and financing leases and our operating leases, respectively (prior to giving effect to rent credits obtained and the extension of certain community leases as a result of the Ventas lease portfolio restructuring in April 2018).
Debt and Lease Covenants
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum net worth and stockholders’ equity levels and debt service and lease coverage ratios, and requiring us not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. Net worth is generally calculated as stockholders' equity as calculated in accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. The debt service and lease coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or lease payment. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
As of March 31, 2018, we are in compliance with the financial covenants of our outstanding debt agreements and long-term leases.
Contractual Commitments
Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the "Contractual Commitments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
filed with the SEC on February 22, 2018.
There were no material changes outside the ordinary course of business in our contractual commitments during the
three
months ended
March 31, 2018
. In April 2018, we restructured a portfolio of 128 communities leased from Ventas, which included an extension of the initial lease term through December 31, 2025.
Off-Balance Sheet Arrangements
As of
March 31, 2018
, we do not have an interest in any "off-balance sheet arrangements" (as defined in Item 303(a)(4) of Regulation S-K) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
We own interests in certain unconsolidated ventures as described under Note 14 to the condensed consolidated financial statements. Except in limited circumstances, our risk of loss is limited to our investment in each venture. We also own interests in certain other unconsolidated ventures that are not considered variable interest entities. The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains financial measures utilized by management to evaluate our operating performance and liquidity that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). Each of these measures, Adjusted EBITDA and Adjusted Free Cash Flow, should not be considered in isolation from or as superior to or as a substitute for net income (loss), income (loss) from operations, net cash provided by (used in) operating activities, or other financial measures determined in accordance with GAAP. We use these non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
We strongly urge you to review the reconciliations of Adjusted EBITDA from our net income (loss), our Adjusted Free Cash Flow from our net cash provided by (used in) operating activities, and our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures from such ventures' net cash provided by (used in) operating activities, along with our condensed consolidated financial statements included herein. We also strongly urge you not to rely on any single financial measure to evaluate our business. We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner.
Adjusted EBITDA
Definition of Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before: provision (benefit) for income taxes; non-operating (income) expense items; depreciation and amortization (including non-cash impairment charges); (gain) loss on sale or acquisition of communities (including gain (loss) on facility lease termination and modification); straight-line lease expense (income), net of amortization of (above) below market rents; amortization of deferred gain; non-cash stock-based compensation expense; and change in future service obligation.
Management's Use of Adjusted EBITDA
We use Adjusted EBITDA to assess our overall operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current operating goals as well as achieve optimal operating performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
Adjusted EBITDA provides us with a measure of operating performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure. This metric measures our operating performance based on operational factors that management can impact in the short-term, namely revenues and the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the operating performance of the business on a regular basis. We believe that Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. Material limitations in making the adjustments to our net income (loss) to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:
|
|
•
|
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities (or facility lease termination and modification) and extinguishment of debt activities generally represent charges (gains), which may significantly affect our operating results; and
|
|
|
•
|
depreciation and amortization and asset impairment represent the wear and tear and/or reduction in value of our communities and other assets, which affects the services we provide to residents and may be indicative of future needs for capital expenditures.
|
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because it is helpful in identifying trends in our day-to-day performance since the items excluded have little or no significance to our day-to-day operations and it provides an assessment of our revenue and expense management.
The table below reconciles Adjusted EBITDA from net income (loss).
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Net income (loss)
|
$
|
(457,234
|
)
|
|
$
|
(126,361
|
)
|
Provision for income taxes
|
15,585
|
|
|
84,028
|
|
Equity in loss (earnings) of unconsolidated ventures
|
4,243
|
|
|
(981
|
)
|
Debt modification and extinguishment costs
|
35
|
|
|
61
|
|
(Gain) loss on sale of assets
|
(43,431
|
)
|
|
603
|
|
Other non-operating income
|
(2,586
|
)
|
|
(1,662
|
)
|
Interest expense
|
72,540
|
|
|
93,069
|
|
Interest income
|
(2,983
|
)
|
|
(631
|
)
|
Income (loss) from operations
|
(413,831
|
)
|
|
48,126
|
|
Depreciation and amortization
|
114,255
|
|
|
127,487
|
|
Goodwill and asset impairment
|
430,363
|
|
|
20,706
|
|
Straight-line lease (income) expense
|
(6,165
|
)
|
|
(3,007
|
)
|
Amortization of (above) below market lease, net
|
(1,938
|
)
|
|
(1,697
|
)
|
Amortization of deferred gain
|
(1,090
|
)
|
|
(1,093
|
)
|
Non-cash stock-based compensation expense
|
8,406
|
|
|
7,774
|
|
Adjusted EBITDA
(1)
|
$
|
130,000
|
|
|
$
|
198,296
|
|
|
|
(1)
|
For the
three
months ended
March 31, 2018
, the calculation of Adjusted EBITDA includes
$4.7 million
and
$12.4 million
of transaction and organizational restructuring costs, respectively. For the
three
months ended
March 31, 2017
, the calculation of Adjusted EBITDA includes
$7.6 million
and
$0.2 million
of transaction and strategic project costs, respectively. Transaction costs include third party costs directly related to acquisition and disposition activity, community financing and leasing activity, our assessment of options and alternatives to enhance stockholder value, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance and retention costs. Strategic project costs include costs associated with certain strategic projects related to refining our strategy, building out enterprise-wide capabilities (including the EMR roll-out project) and reducing costs and achieving synergies by capitalizing on scale.
|
Adjusted Free Cash Flow
Definition of Adjusted Free Cash Flow
We define Adjusted Free Cash Flow as net cash provided by (used in) operating activities before: changes in operating assets and liabilities; gain (loss) on facility lease termination and modification; and distributions from unconsolidated ventures from cumulative share of net earnings; plus: proceeds from refundable entrance fees, net of refunds; and property insurance proceeds; less: lease financing debt amortization and Non-Development CapEx. Non-Development CapEx is comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades and other major building infrastructure projects for our communities. Non-Development CapEx does not include capital expenditures for community expansions and major community redevelopment and repositioning projects, including our Program Max initiative, and the development of new communities. Amounts of Non-Development CapEx are presented net of lessor reimbursements received or anticipated to be received in the calculation of Adjusted Free Cash Flow.
Our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures is calculated based on our equity ownership percentage and in a manner consistent with the definition of Adjusted Free Cash Flow for our consolidated entities. Our investments in our unconsolidated ventures are accounted for under the equity method of accounting and, therefore, our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures does not represent cash available to our consolidated business except to the extent it is distributed to us.
We adopted ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15") on January 1, 2018 and have applied ASU 2016-15 retrospectively for all periods presented. Among other things, ASU 2016-15 provides that debt prepayment and extinguishment costs will be classified within financing activities in the statement of cash flows. We have identified
$7 thousand
of cash paid for debt modification and extinguishment costs for the
three
months ended
March 31, 2017
which we have retrospectively classified as cash flows from financing activities, resulting in a corresponding increase to the amount of net cash provided by operating activities for such period. We did not change our definition of Adjusted Free Cash Flow upon our adoption of ASU 2016-15. Following our adoption of ASU 2016-15, the amount of Adjusted Free Cash Flow for the
three
months ended
March 31, 2017
reflects an immaterial increase. See Note 2 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about ASU 2016-15.
Management's Use of Adjusted Free Cash Flow
We use Adjusted Free Cash Flow to assess our overall liquidity. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
Adjusted Free Cash Flow measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted Free Cash Flow is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding indebtedness, including our credit facilities, (ii) to review our ability to pay dividends to stockholders or engage in share repurchases, (iii) to review our ability to make capital expenditures, (iv) for other corporate planning purposes and/or (v) in making compensation determinations for certain of our associates (including our named executive officers).
Limitations of Adjusted Free Cash Flow
Adjusted Free Cash Flow has limitations as an analytical tool. Material limitations in making the adjustments to our net cash provided by (used in) operating activities to calculate Adjusted Free Cash Flow, and using this non-GAAP financial measure as compared to GAAP net cash provided by (used in) operating activities, include:
|
|
•
|
Adjusted Free Cash Flow does not represent cash available for dividends or discretionary expenditures, since we have mandatory debt service requirements and other non-discretionary expenditures not reflected in this measure; and
|
|
|
•
|
the cash portion of non-recurring charges related to gain (loss) on lease termination and modification and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results.
|
In addition, our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures has limitations as an analytical tool because such measure does not represent cash available directly for use by our consolidated business except to the extent actually distributed to us, and we do not have control, or we share control in determining, the timing and amount of distributions from our unconsolidated ventures and, therefore, we may never receive such cash.
We believe Adjusted Free Cash Flow is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders or engage in share repurchases, (3) our ability to make capital expenditures, and (4) the underlying value of our assets, including our interests in real estate.
We believe presentation of our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures is useful to investors since such measure reflects the cash generated by the operating activities of the unconsolidated ventures for the reporting period and, to the extent such cash is not distributed to us, it generally represents cash used or to be used by the ventures for the repayment of debt, investing in expansions or acquisitions, reserve requirements, or other corporate uses by such ventures, and such uses reduce our potential need to make capital contributions to the ventures of our proportionate share of cash needed for such items.
The table below reconciles our Adjusted Free Cash Flow from our net cash provided by (used in) operating activities.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
37,964
|
|
|
$
|
66,773
|
|
Net cash provided by (used in) investing activities
|
91,155
|
|
|
(199,743
|
)
|
Net cash used in financing activities
|
(16,104
|
)
|
|
(23,561
|
)
|
Net increase (decrease) in cash and cash equivalents and restricted cash and escrow deposits
|
$
|
113,015
|
|
|
$
|
(156,531
|
)
|
|
|
|
|
Net cash provided by operating activities
|
$
|
37,964
|
|
|
$
|
66,773
|
|
Changes in operating assets and liabilities
|
30,400
|
|
|
48,592
|
|
Proceeds from refundable entrance fees, net of refunds
|
223
|
|
|
(902
|
)
|
Lease financing debt amortization
|
(21,114
|
)
|
|
(17,248
|
)
|
Distributions from unconsolidated ventures from cumulative share of net earnings
|
(408
|
)
|
|
(439
|
)
|
Non-development capital expenditures, net
|
(41,736
|
)
|
|
(34,722
|
)
|
Property insurance proceeds
|
156
|
|
|
1,398
|
|
Adjusted Free Cash Flow
(1)
|
$
|
5,485
|
|
|
$
|
63,452
|
|
(1) For the
three
months ended
March 31, 2018
, the calculation of Adjusted Free Cash Flow includes
$4.7 million
and
$12.4 million
of transaction and organizational restructuring costs, respectively. For the
three
months ended
March 31, 2017
, the calculation of Adjusted Free Cash Flow includes
$7.6 million
and
$0.2 million
of transaction and strategic project costs, respectively.
The table below reconciles our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures from net cash provided by (used in) operating activities of such unconsolidated ventures. For purposes of this presentation, amounts for each line item represent the aggregate amounts of such line items for all of our unconsolidated ventures.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in thousands)
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
50,262
|
|
|
$
|
59,924
|
|
Net cash used in investing activities
|
(14,642
|
)
|
|
(1,144,115
|
)
|
Net cash (used in) provided by financing activities
|
(23,279
|
)
|
|
1,145,059
|
|
Net increase in cash and cash equivalents and restricted cash and escrow deposits
|
$
|
12,341
|
|
|
$
|
60,868
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
50,262
|
|
|
$
|
59,924
|
|
Changes in operating assets and liabilities
|
1,119
|
|
|
2,086
|
|
Proceeds from refundable entrance fees, net of refunds
|
(6,712
|
)
|
|
(4,365
|
)
|
Non-development capital expenditures, net
|
(20,061
|
)
|
|
(17,027
|
)
|
Property insurance proceeds
|
901
|
|
|
393
|
|
Adjusted Free Cash Flow of unconsolidated ventures
|
$
|
25,509
|
|
|
$
|
41,011
|
|
|
|
|
|
Brookdale weighted average ownership percentage
|
22.8
|
%
|
|
21.3
|
%
|
Brookdale's proportionate share of Adjusted Free Cash Flow of unconsolidated ventures
|
$
|
5,824
|
|
|
$
|
8,750
|
|