NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is an operator of senior living communities throughout the United States. The Company is committed to providing senior living solutions primarily within properties that are designed, purpose-built, and operated to provide quality service, care, and living accommodations for residents. The Company operates and manages independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). The Company also offers a range of home health, hospice, and outpatient therapy services to residents of many of its communities and to seniors living outside of its communities.
The Company has five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services; and Management Services.
2. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles ("GAAP"). Except for the changes for the impact of the recently adopted accounting pronouncements discussed in this Note, the Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements. The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and its consolidated subsidiaries. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation, and net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. The Company reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting.
The Company evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, Consolidation ("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this evaluation on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, other operating income, asset impairments, self-insurance reserves, performance-based compensation, the allowance for credit losses, depreciation and amortization, leasing transactions, income taxes, and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the original estimates.
Revenue Recognition
Resident Fees
Resident fee revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are due from residents or third-party payors and include variable consideration for retroactive adjustments from estimated reimbursements, if any, under reimbursement programs. Performance obligations are
determined based on the nature of the services provided. Resident fee revenue is recognized as performance obligations are satisfied.
Under the Company's senior living residency agreements, which are generally for a contractual term of 30 days to one year, the Company provides senior living services to residents for a stated daily or monthly fee. The Company has elected the lessor practical expedient within ASC 842, Leases ("ASC 842") and recognizes, measures, presents, and discloses the revenue for services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts. The Company has determined that the services included under the Company's independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with Customers ("ASC 606") for its independent living, assisted living, and memory care residency agreements for which it has estimated that the nonlease components of such residency agreements are the predominant component of the contract.
The Company enters into contracts to provide home health, hospice, and outpatient therapy services. Each service provided under the contract is capable of being distinct, and thus, the services are considered individual and separate performance obligations. The performance obligations are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives payment for services under various third-party payor programs which include Medicare, Medicaid, and other third-party payors. Estimates for settlements with third-party payors for retroactive adjustments from estimated reimbursements due to audits, reviews, or investigations are included in the determination of the estimated transaction price for providing services. The Company estimates the transaction price based on the terms of the contract with the payor, correspondence with the payor, and historical payment trends. Changes to these estimates for retroactive adjustments are recognized in the period the change or adjustment becomes known or when final settlements are determined.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid or withheld). Subsequent adjustments to these accrued amounts are recorded in net revenues when known.
Management Services
The Company manages certain communities under contracts which provide periodic management fee payments to the Company and reimbursement for costs and expense related to such communities. Management fees are generally determined by an agreed upon percentage of gross revenues (as defined in the management agreement). Certain management contracts also provide for an annual incentive fee to be paid to the Company upon achievement of certain metrics identified in the contract. The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company estimates the amount of incentive fee revenue expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided. The Company's estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed communities" on the consolidated statements of operations.
Government Grants
The Company recognizes income for government grants on a systematic and rational basis over the periods in which the Company recognizes the related expenses or loss of revenue for which the grants are intended to compensate when there is reasonable assurance that the Company will comply with the applicable terms and conditions of the grant and there is reasonable assurance that the grant will be received.
Lease Accounting
Refer to the Company's revenue recognition policy for discussion of the accounting policy for residency agreements, which include a lease component.
The following is the Company's lease accounting policy subsequent to the adoption of ASC 842 on January 1, 2019. Refer to Recently Adopted Accounting Pronouncements in this Note 2 for significant changes that resulted from the adoption. The Company, as lessee, recognizes a right-of-use asset and a lease liability on the Company's consolidated balance sheet for its community, office, and equipment leases. As of the commencement date of a lease, a lease liability and corresponding right-of-use asset is established on the Company's consolidated balance sheet at the present value of future minimum lease payments. The Company's community leases generally contain fixed annual rent escalators or annual rent escalators based on an index, such as the consumer price index. The future minimum lease payments recognized on the consolidated balance sheet include fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate on the lease commencement date. The Company recognizes lease expense as incurred for additional variable payments. For the Company's leases that do not contain an implicit rate, the Company utilizes its estimated incremental borrowing rate to determine the present value of lease payments based on information available at commencement of the lease. The Company's estimated incremental borrowing rate reflects the fixed rate at which the Company could borrow a similar amount for the same term on a collateralized basis. The Company elected the short-term lease exception policy which permits leases with an initial term of 12 months or less to not be recorded on the Company's consolidated balance sheet and instead to be recognized as lease expense as incurred.
The Company, as lessee, makes a determination with respect to each of its community, office, and equipment leases as to whether each should be accounted for as an operating lease or financing lease. The classification criteria is based on estimates regarding the fair value of the leased asset, minimum lease payments, effective cost of funds, economic life of the asset, and certain other terms in the lease agreements.
Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of right-of-use assets are assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset, calculated utilizing the lowest level of identifiable cash flows. If estimated future undiscounted net cash flows are less than the carrying amount of the asset then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the asset to its carrying amount, with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates and estimated lease coverage ratios (Level 3).
Operating Leases
The Company recognizes operating lease expense for actual rent paid, generally plus or minus a straight-line adjustment for estimated minimum lease escalators if applicable. The right-of-use asset is generally reduced each period by an amount equal to the difference between the operating lease expense and the amount of expense on the lease liability utilizing the effective interest method. Subsequent to the impairment of an operating lease right-of-use asset, the Company recognizes operating lease expense consisting of the reduction of the right-of-use asset on a straight-line basis over the remaining lease term and the amount of expense on the lease liability utilizing the effective interest method.
Financing Leases
Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold intangibles, net on the Company's consolidated balance sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term unless the lease contains an option to purchase the underlying asset that the Company is reasonably certain to exercise. If the Company is reasonably certain to exercise the purchase option, the asset is amortized over the useful life.
Sale-Leaseback Transactions
For transactions in which an owned community is sold and leased back from the buyer (sale-leaseback transactions), the Company recognizes an asset sale and lease accounting is applied if the Company has transferred control of the community. For such transactions, the Company removes the transferred assets from the consolidated balance sheet and a gain or loss on the sale is recognized for the difference between the carrying amount of the asset and the transaction price for the sale transaction.
For sale‑leaseback transactions in which the Company has not transferred control of the underlying asset, the Company does not recognize an asset sale or derecognize the underlying asset until control is transferred. For such transactions, the Company recognizes the underlying assets within assets under financing leases as a component of property, plant and equipment and leasehold intangibles, net on the consolidated balance sheets and continues to depreciate the assets over their useful lives.
Additionally, the Company accounts for any amounts received as a financing lease liability and the Company recognizes interest expense on the financing lease liability utilizing the effective interest method with the interest expense limited to an amount that is not greater than the cash payments on the financing lease liability over the term of the lease.
Gain (Loss) on Sale of Assets
The Company regularly enters into real estate transactions which may include the disposition of certain communities, including the associated real estate. The Company recognizes gain or loss from real estate sales when the transfer of control is complete.
The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete and the Company has no continuing involvement with the transferred financial assets.
Purchase Accounting
For the acquisition of assets that do not meet the definition of a business, the Company accounts for the transaction as an asset acquisition at the purchase price, including acquisition costs, allocated among the acquired assets and assumed liabilities, including identified intangible assets and liabilities, based upon the relative fair values using Level 3 inputs at the date of acquisition.
For acquisitions of a business, the Company accounts for the transaction as a business combination pursuant to the acquisition method and assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at fair value. In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities assumed, the Company makes estimates of fair value using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities, and/or independent appraisals.
In connection with a business combination, the excess of the fair value of liabilities assumed and common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred.
Deferred Financing Costs
Third-party fees and costs incurred to obtain debt are recorded as a direct adjustment to the carrying amount of debt and amortized on a straight-line basis, which approximates the effective yield method, over the term of the related debt. Unamortized deferred financing fees are written-off if the associated debt is retired before the maturity date. Upon the refinancing of mortgage debt or amendment of the line of credit, unamortized deferred financing fees and additional financing costs incurred are accounted for in accordance with ASC 470-50, Debt Modifications and Extinguishments.
Stock-Based Compensation
Measurement of the cost of employee services received in exchange for stock compensation is based on the grant-date fair value of the employee stock awards, which is based on the quoted price of the Company's common shares on the grant date for the majority of the Company's awards. Generally, this cost is recognized as compensation expense ratably over the employee's requisite service period. The Company recognizes forfeitures as they occur and any previously recognized compensation expense is reversed for forfeited awards. Awards that vest over a requisite service period, other than those with performance or market conditions, generally vest ratably in annual installments over a period of three to four years. Incremental compensation costs arising from subsequent modifications of awards after the grant date are recognized when incurred.
Certain of the Company's employee stock awards vest only upon the achievement of performance conditions. The Company recognizes compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance conditions. Performance conditioned awards that vest dependent upon attainment of various levels of performance that equal or exceed threshold levels generally vest based upon performance at the end of a three-year performance period. The number of shares that ultimately vest can range from 0% to 125% of the stock awards granted depending on the level of achievement of the performance criteria.
Certain of the Company's employee stock awards vest only upon the achievement of a market condition where the measurement period is three years and vesting of the awards is based on the Company's level of attainment of a specified total stockholder return relative to the percentage appreciation of a specified index of companies for the respective three-year measurement period. Compensation expense for awards with market conditions is recognized over the service period, which is generally four
years, and the actual achievement of the market condition does not impact expense recognition. The Company uses a Monte Carlo valuation model to estimate the grant date fair value of such awards. Depending on the results achieved during the three-year measurement period, the number of shares that ultimately vest may range from 0% to 150% of the stock awards granted. The expected volatility of the Company's common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period and the estimated expected weighted average volatility was 42.5% and 45.2% for awards granted in 2020 and 2019, respectively. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year measurement period and the estimated weighted average risk free interest rate was 1.4% and 2.4% for awards granted in 2020 and 2019, respectively.
For all share-based awards with graded vesting other than performance conditioned awards, the Company records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For performance conditioned awards, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance condition is deemed probable of achievement. Performance conditions are evaluated quarterly. If such conditions are not ultimately met or it is not probable the conditions will be achieved, no compensation expense for performance conditioned awards is recognized and any previously recognized compensation expense is reversed.
Income Taxes
The Company accounts for income taxes under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax basis of assets and liabilities using the tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. When it is determined that it is more likely than not that the Company will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset is made and reflected in income. This determination is made by considering various factors, including the reversal and timing of existing temporary differences, tax planning strategies, and estimates of future taxable income exclusive of the reversal of temporary differences.
Fair Value of Financial Instruments
Fair value measurements are based on a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 – quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Marketable Securities
Marketable securities are investments in commercial paper and short-term corporate bond instruments with maturities of greater than 90 days as of their acquisition date by the Company.
Accounts Receivable, Net
Accounts receivable are reported net of an allowance for credit losses to represent the Company's estimate of expected losses at the balance sheet date. The adequacy of the Company's allowance for credit losses is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, a review of specific accounts, as well as expected future economic conditions and market trends, and adjustments are made to the allowance as necessary.
Assets Held for Sale
The Company designates communities as held for sale when certain criteria are met, including when management has committed to a plan to sell the community and the sale is probable within one year of the reporting date. The Company records
these assets on the consolidated balance sheet at the lesser of the carrying amount and fair value less estimated selling costs. If the carrying amount is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it has changed. The long-lived assets are not depreciated while classified as held for sale.
Property, Plant and Equipment and Leasehold Intangibles, Net
Property, plant and equipment and leasehold intangibles, net are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
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Asset Category
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Estimated
Useful Life
(in years)
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Buildings and improvements
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40
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|
Furniture and equipment
|
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3 – 10
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Resident lease intangibles
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1 – 3
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Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements, which improve and/or extend the useful life of the asset, are capitalized and depreciated over the estimated useful life of the renovations or improvements. For communities subject to operating or financing leases, leasehold improvements are depreciated over the shorter of the estimated useful life of the assets or the term of the lease. For financing leases that have a purchase option the Company is reasonably certain to exercise, the leasehold improvements are depreciated over their estimated useful life. Facility operating expense excludes facility depreciation and amortization.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. Recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, the Company is required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value, with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods, and estimated capitalization rates (Level 3).
Investment in Unconsolidated Ventures
In accordance with ASC 810, Consolidation, the general partner or managing member of a venture consolidates the venture unless the limited partners or other members have either (1) the substantive ability to dissolve the venture or otherwise remove the general partner or managing member without cause or (2) substantive participating rights in significant decisions of the venture, including authorizing operating and capital decisions of the venture, including budgets, in the ordinary course of business.
The initial carrying amount of investments in unconsolidated ventures is based on the amount paid to purchase the investment interest contributed to the unconsolidated ventures. The Company's reported share of earnings of an unconsolidated venture is adjusted for the impact, if any, of basis differences between its carrying amount of the equity investment and its share of the venture's underlying assets.
Distributions received from an investee are recognized as a reduction in the carrying amount of the investment. If distributions are received from an investee that would reduce the carrying amount of an equity method investment below zero, the Company evaluates the facts and circumstances of the distributions to determine the appropriate accounting for the excess distribution, including an evaluation of the source of the proceeds and implicit or explicit commitments to fund the investee. The excess distribution is either recorded as a gain on investment, or in instances where the source of proceeds is from financing activities or the Company has a significant commitment to fund the investee, the excess distribution would result in an equity method liability and the Company would continue to record its share of the investee's earnings and losses.
The Company evaluates realization of its investment in ventures accounted for using the equity method if circumstances indicate that the Company's investment is other than temporarily impaired. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. If the Company determines that an equity method investment
is other than temporarily impaired, it is recorded at its fair value with an impairment charge recognized in asset impairment expense for the difference between its carrying amount and fair value based on Level 3 inputs.
Goodwill
The Company tests goodwill for impairment annually during the fourth quarter or more frequently if indicators of impairment arise. Factors the Company considers important in its analysis of whether an indicator of impairment exists include a significant decline in the Company's stock price or market capitalization for a sustained period since the last testing date, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If so, the Company performs a quantitative goodwill impairment test based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit's carrying amount. The fair values used in the quantitative goodwill impairment test are estimated using Level 3 inputs based upon discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates, and discount rates. The Company also considers market-based measures such as earnings multiples in its analysis of estimated fair values of its reporting units. If the quantitative goodwill impairment test results in a reporting unit's carrying amount exceeding its estimated fair value, an impairment charge will be recorded based on the difference, with the impairment charge limited to the amount of goodwill allocated to the reporting unit.
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased, and managed communities under a master insurance program, the Company's current policies provide for deductibles for each and every claim. As a result, the Company is, in effect, self-insured for claims that are less than the deductible amounts. In addition, the Company maintains a high deductible workers compensation program and a self-insured employee medical program.
The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel, and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored, and estimates are updated as information becomes available.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted this standard effective January 1, 2020 and recognized the cumulative effect of the adoption as an immaterial adjustment to beginning accumulated deficit as of January 1, 2020.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which amends the former accounting principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability on the consolidated balance sheet for most leases. Additionally, ASU 2016-02 made targeted changes to lessor accounting, including changes to align certain aspects with the revenue recognition model, and enhanced disclosure of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements ("ASU 2018-11"), which provides entities with a transition method option to not restate comparative periods presented, but to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, and a practical expedient allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. The Company adopted these lease accounting standards effective January 1, 2019 and utilized the modified retrospective transition method with no adjustments to comparative periods presented. Additionally, the Company elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess, as of January 1, 2019, its
prior conclusions on whether an existing contract contains a lease, lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs. The Company did not elect the hindsight practical expedient which would have allowed it to revisit key assumptions, such as lease term, that were made when it originally entered into the lease.
The Company's adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $1.6 billion and right-of-use assets of $1.3 billion on the consolidated balance sheet for its existing community, office, and equipment operating leases based on the remaining present value of the minimum lease payments as of January 1, 2019. The future minimum lease payments recognized on the consolidated balance sheet included fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate as of January 1, 2019. Such right-of-use asset amounts were recognized based upon the amount of the recognized lease liabilities, adjusted for accrued lease payments, intangible assets, and the recognition of right-of-use asset impairments. As of December 31, 2018, the Company had a net liability of $231.4 million recognized on its consolidated balance sheet for accrued lease payments and intangible assets for operating leases. Additionally, $58.1 million of previously unrecognized right-of-use asset impairments were recognized as a cumulative effect adjustment to beginning accumulated deficit as of January 1, 2019. As a result of the Company's election of the package of practical expedients within ASU 2016-02, there were no changes to the classification of the Company's existing operating and financing leases as of January 1, 2019 and there were no changes to the amounts recognized on its consolidated balance sheet for its existing financing leases as of January 1, 2019. Additionally, the application of ASU 2016-02 resulted in a $10.2 million increase to the amount of asset impairment expense recognized for operating lease right-of-use assets for the year ended December 31, 2019.
Subsequent to the adoption of ASU 2016-02, lessors are required to separately recognize and measure the lease component of a contract with a customer utilizing the provisions of ASC 842 and the nonlease components utilizing the provisions of ASC 606. To separately account for the components, the transaction price is allocated among the components based upon the estimated stand-alone selling prices of the components. Additionally, certain components of a contract which were previously included within the lease element recognized in accordance with ASC 840, Leases ("ASC 840") prior to the adoption of ASU 2016-02 (such as common area maintenance services, other basic services, and executory costs) are recognized as nonlease components subject to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. However, entities are permitted to elect the practical expedient under ASU 2018-11 allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. Entities that elect to utilize the lease/nonlease component combination practical expedient under ASU 2018-11 upon initial application of ASC 842 are required to apply the practical expedient to all new and existing transactions within a class of underlying assets that qualify for the expedient as of the initial application date.
For the year ended December 31, 2018, the Company recognized revenue for housing services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of the former lease accounting standard, ASC 840, and the Company recognized revenue for assistance with activities of daily living ("ADLs"), memory care services, healthcare, and personalized health services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of ASC 606.
Upon adoption of ASU 2016-02 and ASU 2018-11, the Company elected the lessor practical expedient within ASU 2018-11 and recognizes, measures, presents, and discloses the revenue for housing services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC 842 and ASC 606.
The nonlease components of the Company's independent living, assisted living, and memory care residency agreements are the predominant component of the contract for the Company's existing agreements as of January 1, 2019. As a result of the Company's election of the package of practical expedients within ASU 2016-02, the Company continued to recognize revenue for existing contracts as of December 31, 2018 over the lease term. In addition, ASU 2016-02 has changed the definition of initial direct costs of a lease, with the initial direct costs that are initially deferred and recognized over the term of the lease limited to costs that are both incremental and direct. The Company concluded that the contract origination costs recognized on the consolidated balance sheet as of December 31, 2018 were in excess of the initial direct costs that would have been deferred under the provisions of ASU 2016-02. As a result of the Company's election of the package of practical expedients, the contract origination costs recognized on the consolidated balance sheet as of December 31, 2018 continued to be amortized during 2019 over the lease term. Additionally, the Company concluded that certain costs previously deferred upon new contract origination are recognized within facility operating expense in 2019 as incurred.
In addition to the previously unrecognized right-of-use asset impairment of $58.1 million, the Company recognized cumulative effect adjustments to beginning accumulated deficit as of January 1, 2019 for the impact of the adoption of accounting standards by its equity method investees and the deferred tax impact of these adjustments. The recognition of the right-of-use
assets and corresponding liabilities and the removal of the deferred tax position related to these leases as of December 31, 2018 had a $0.3 million impact on the Company's net deferred tax position. A deferred tax asset of $14.1 million and an increase to the valuation allowance of $13.8 million was recorded against accumulated deficit reflecting the tax impact of the previously unrecognized right-of-use asset impairments.
The adoption of the new accounting standards resulted in the following adjustments to the Company's consolidated balance sheet as of January 1, 2019:
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|
(in millions)
|
|
|
|
Assets
|
|
|
|
Prepaid expenses and other current assets, net
|
$
|
67
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
(11)
|
|
|
|
|
Operating lease right-of-use assets
|
1,329
|
|
|
|
|
Investment in unconsolidated ventures
|
(2)
|
|
|
|
|
Other intangible assets, net
|
(5)
|
|
|
|
|
Other assets, net
|
(73)
|
|
|
|
|
Total assets
|
$
|
1,305
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Refundable fees and deferred revenue
|
$
|
43
|
|
|
|
|
|
Operating lease obligations
|
1,618
|
|
|
|
|
Deferred liabilities
|
(257)
|
|
|
|
|
Other liabilities
|
(43)
|
|
|
|
|
Total liabilities
|
1,361
|
|
|
|
|
Total equity
|
(56)
|
|
|
|
|
Total liabilities and equity
|
$
|
1,305
|
|
|
|
|
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR"). The provisions of this standard are available for election through December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by this update.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's consolidated financial position or results of operations.
3. COVID-19 Pandemic
The COVID-19 pandemic has adversely impacted, and likely will continue to adversely impact the senior living industry and the Company's business. Due to the average age and prevalence of chronic medical conditions among the Company's residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. The Company continues to serve and care for seniors at its communities and their homes through the pandemic.
Upon confirmation of positive COVID-19 exposure at a community, the Company takes actions intended to minimize further exposure, including associates’ adhering to personal protection protocols, isolating residents or finding placement in an alternate care setting to best address their care needs, and in some cases, restricting new resident admissions as directed by local health authorities. Seeking to prevent the introduction of COVID-19 into the Company's communities, and to help control further exposure to infections within communities, in March 2020 the Company began restricting visitors at all its communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and requiring new residents and residents returning from a hospital or nursing home to
isolate in their apartment for fourteen days. The Company began easing restrictions on a community-by-community basis in July 2020. These restrictions may continue for some time, and the Company may revert to more restrictive measures if the pandemic worsens, as necessary to comply with regulatory requirements, or at the direction of local health authorities.
The pandemic, including the related restrictions at the Company's communities, have significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. The pandemic began to adversely impact the Company's occupancy and resident fee revenue during March 2020, as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. Further deterioration of the Company's resident fee revenue will result from lower move-in activity and the resident attrition inherent in its business, which may increase due to the impacts of COVID-19. The Company's home health average daily census also began to decrease in March 2020 due to lower occupancy in its communities and fewer elective medical procedures and hospital discharges.
Facility operating expense for the year ended December 31, 2020 includes $125.5 million of incremental direct costs to prepare for and respond to the pandemic, including costs for: acquisition of additional personal protective equipment ("PPE"), medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. The Company is not able to reasonably predict the total amount of costs it will incur related to the pandemic, and such costs may continue to be substantial. The Company also recorded non-cash impairment charges in its operating results of $105.6 million for the year ended December 31, 2020 for its operating lease right-of-use assets and property, plant and equipment and leasehold intangibles, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities with impaired assets.
The Company has taken, and continues to take, actions to enhance and preserve its liquidity in response to the pandemic. During the year ended December 31, 2020, the Company completed its financing plans in the regular course of business, including refinancing substantially all of its 2020 and 2021 maturities. In addition, on August 31, 2020, the Company terminated its $250 million revolving credit facility and obtained $266.9 million of non-recourse mortgage financing on 16 communities, most of which had secured the credit facility prior to its termination. See Note 9 for further information regarding the Company's financings. During the year ended December 31, 2020, the Company accepted $109.8 million of cash for grants under the Public Health and Social Services Emergency Fund ("Provider Relief Fund") and $87.5 million of accelerated/advanced Medicare payments, and it deferred $72.7 million of the employer portion of social security payroll taxes. These programs were created or expanded under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), as described below. The Company also delayed or canceled a number of elective capital expenditure projects and suspended repurchases under its existing share repurchase program. On July 26, 2020, the Company restructured its 120 community triple-net master lease with Ventas, Inc. ("Ventas") in a multipart transaction. The components included, among other things, reducing the Company's initial annual minimum rent to $100 million, representing a reduction of approximately $86 million over the twelve months ending June 30, 2021, and removal of the prior requirements that the Company satisfy financial covenants and maintain a security deposit with Ventas. The Company paid a $119.2 million one-time cash lease payment to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020. See Note 4 for more information about the Ventas lease restructuring.
As of December 31, 2020, the Company's total liquidity was $575.5 million, consisting of $380.4 million of unrestricted cash and cash equivalents, $172.9 million of marketable securities, and $22.2 million of availability on its secured credit facility. The Company continues to seek opportunities to enhance and preserve its liquidity, including through maintaining expense discipline, continuing to evaluate its financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic. There is no assurance that debt financing will continue to be available on terms consistent with the Company's expectations or at all, or that the Company's efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief.
The CARES Act, signed into law on March 27, 2020, and Paycheck Protection Program and Health Care Enhancement Act, signed into law on April 24, 2020, provide liquidity and financial relief to certain businesses, among other things. The impacts to the Company of certain provisions of the CARES Act are summarized below.
•During the year ended December 31, 2020, the Company accepted $109.8 million of cash for grants from the Provider Relief Fund, under which grants have been made available to eligible healthcare providers for healthcare related expenses or
lost revenues attributable to COVID-19. The accepted grants were made available pursuant to the following distributions from the Provider Relief Fund:
•$101.7 million pursuant to General Distributions, with the aggregate amount ultimately determined based on a percentage of the Company's year-over-year changes in patient care revenue and certain operating and other expenses for the first and second quarters of 2020.
•$4.6 million pursuant to the Skilled Nursing Facility Targeted Distribution, which generally related to the Company's certified skilled nursing facilities.
•$3.5 million pursuant to the Nursing Home Infection Control Distribution, including incentive payments, which related to the Company's skilled nursing care provided through its CCRCs.
Grants received from the Provider Relief Fund are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for healthcare related expenses or lost revenues that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. The permissible uses of grants from the Nursing Home Infection Control Distribution are further limited to certain infection control expenses. The program requires the Company to report to the U.S. Department of Health and Human Services ("HHS") on its use of the grants, and its reporting is subject to audit.
During the year ended December 31, 2020, the Company recognized $109.8 million of the grants as other operating income based upon its estimates of its satisfaction of the conditions of the grants during such period and the cash received for grants has been presented within net cash provided by operating activities within the Company's consolidated statement of cash flows.
•During the year ended December 31, 2020, the Company received $87.5 million under the Accelerated and Advance Payment Program administered by CMS, which was temporarily expanded by the CARES Act. Approximately $75.2 million related to the Company's Health Care Services segment and the remainder related to the Company's CCRCs segment. Under the program, the Company requested acceleration/advancement of 100% of its Medicare payment amount for a three-month period. The Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment terms for accelerated/advanced payments. As amended, recoupment of accelerated/advanced payments will begin one year after payments were issued. Payments will be recouped at a rate of 25% of Medicare payments for the first eleven months following the anniversary of issuance and at a rate of 50% of Medicare payments for the next six months. Any outstanding balance of accelerated/advanced payments will be due following such recoupment period. As of December 31, 2020, $44.6 million was included in refundable fees and deferred revenue and $42.9 million was included in other liabilities within the Company's consolidated balance sheets. The $87.5 million received has been presented within net cash provided by operating activities within the Company's consolidated statement of cash flows.
•Under the CARES Act, the Company has elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 through December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. As of December 31, 2020, the Company has deferred payment of $72.7 million under the program and has presented $36.3 million of this amount in accrued expenses and the remainder in other liabilities within the Company's consolidated balance sheets.
•The CARES Act temporarily suspended the 2% Medicare sequestration for the period May 1, 2020 to December 31, 2020, which primarily benefited the Company's Health Care Services segment. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended the sequestration suspension through March 31, 2021.
In addition to the grants described above, the Company has received and recognized $5.9 million of other operating income from grants from other government sources.
The Company cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on its business, results of operations, cash flow, and liquidity, and its response efforts may continue to delay or negatively impact its strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth of the pandemic and any resurgence of the disease; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in its markets; the development, availability, utilization, and efficacy of COVID-19 testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become
available to business and individuals, including its ability to qualify for and satisfy the terms and conditions of financial relief; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and the Company's ability to adapt its sales and marketing efforts to meet that demand; the impact of COVID-19 on its residents’ and their families’ ability to afford its resident fees, including due to changes in unemployment rates, consumer confidence, housing markets, and equity markets caused by COVID-19; changes in the acuity levels of its residents; the disproportionate impact of COVID-19 on seniors generally and those residing in its communities; the duration and costs of its response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, and other expenses; the impact of COVID-19 on its ability to complete financings, refinancings, or other transactions (including dispositions) or to generate sufficient cash flow to cover required interest and lease payments and to satisfy financial and other covenants in its debt and lease documents; increased regulatory requirements, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19; government action that may limit its collection or discharge efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or its response efforts.
4. Acquisitions, Dispositions, and Other Significant Transactions
During 2018 through 2020, the Company acquired 33 communities that the Company formerly leased or managed, disposed of an aggregate of 43 owned communities (including the conveyance of five communities to Ventas), and sold substantially all of its ownership interests in unconsolidated ventures. The Company also entered into transactions with Ventas, announced on July 27, 2020, Healthpeak Properties, Inc. ("Healthpeak") announced on October 1, 2019, and Welltower Inc. ("Welltower") announced during 2018, which together restructured a significant portion of the Company's triple-net lease obligations with the Company's largest lessors. As a result of such transactions, as well as other lease expirations and terminations, the Company's triple-net lease obligations on 104 communities were terminated from 2018 to 2020 (89 in 2018, ten in 2019, and five in 2020). As of December 31, 2020, the Company owned 350 communities, leased 301 communities, and managed 75 communities.
The following table sets forth the amounts included within the Company's consolidated financial statements for the 147 communities that it disposed through sales, conveyances, and lease terminations for the years ended December 31, 2020, 2019, and 2018 through the respective disposition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Resident fees
|
|
|
|
|
|
|
Independent Living
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81,279
|
|
|
Assisted Living and Memory Care
|
14,080
|
|
|
50,775
|
|
|
284,627
|
|
|
CCRCs
|
20,495
|
|
|
64,791
|
|
|
84,186
|
|
|
Senior housing resident fees
|
$
|
34,575
|
|
|
$
|
115,566
|
|
|
$
|
450,092
|
|
|
Facility operating expense
|
|
|
|
|
|
|
Independent Living
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,161
|
|
|
Assisted Living and Memory Care
|
13,008
|
|
|
43,880
|
|
|
211,546
|
|
|
CCRCs
|
19,997
|
|
|
58,813
|
|
|
74,898
|
|
|
Senior housing facility operating expense
|
$
|
33,005
|
|
|
$
|
102,693
|
|
|
$
|
334,605
|
|
|
Cash lease payments
|
$
|
4,696
|
|
|
$
|
9,011
|
|
|
$
|
91,169
|
|
As of December 31, 2020, three communities were classified as held for sale, resulting in $16.1 million being recorded as assets held for sale within the consolidated balance sheet. Two of such communities are in the Assisted Living and Memory Care segment and one is in the CCRCs segment. The closings of the various pending and expected transactions are, or will be, subject to the satisfaction of various closing 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.
Completed Dispositions of Owned Communities
In addition to the conveyance of five communities to Ventas, during the year ended December 31, 2020, the Company completed the sale of two owned communities for cash proceeds of $38.1 million, net of transaction costs, and recognized a net gain on sale of assets of $2.7 million.
During the year ended December 31, 2019, the Company completed the sale of 14 owned communities for cash proceeds of $85.4 million, net of transaction costs, and recognized a net gain on sale of assets of $5.5 million. The Company utilized a portion of the cash proceeds from the asset sales to repay approximately $5.1 million of associated mortgage debt and debt prepayment penalties.
During the year ended December 31, 2018, the Company completed the sale of 22 owned communities for cash proceeds of $380.7 million, net of transaction costs, and recognized a net gain on sale of assets of $188.6 million. The Company utilized a portion of the cash proceeds from the asset sales to repay approximately $174.0 million of associated mortgage debt and debt prepayment penalties.
2020 Ventas Lease Restructuring
On July 26, 2020 (the "Effective Date"), the Company entered into definitive agreements with Ventas in connection with the restructuring of the Company’s lease arrangements with Ventas, including a Master Transaction Letter Agreement (the "Master Agreement"). Pursuant to the Master Agreement:
•On the Effective Date the parties entered into the Amended and Restated Master Lease and Security Agreement (the "Master Lease") and Amended and Restated Guaranty (the "Guaranty"), which amended and restated the prior Master Lease and Security Agreement and prior Guaranty, each dated as of April 26, 2018 and as amended from time to time. Pursuant to the Master Lease, the Company continues to lease 120 communities for an aggregate initial annual minimum rent of approximately $100 million, which reflects a reduction of approximately $83 million of annual minimum rent in effect prior to the transaction. Effective on January 1 of each lease year, beginning January 1, 2022, the annual minimum rent will be subject to a 3% escalator. The initial term of the Master Lease ends December 31, 2025, with two 10-year extension options available to the Company. The annual minimum rent for the initial lease year of any such renewal term will be the greater of the fair market rental of the communities or the increased annual minimum rent for such lease year applying the foregoing 3% escalator. The Master Lease removed the prior provision that would have automatically extended the initial term in the event of the consummation of a change of control transaction by the Company. The Master Lease requires the Company to spend (or escrow with Ventas) a minimum of $1,500 per unit on a community-level basis and $3,600 per unit on an aggregate basis of all communities, in each case per 24-month period ending December 31 during the lease term, commencing with the 24-month period ending December 31, 2021. In addition, Ventas has agreed to fund costs associated with certain pre-approved capital expenditure projects in the aggregate amount of up to $37.8 million. Upon disbursement of such expenditures, the annual minimum rent under the Master Lease will increase by the amount of the disbursement multiplied by 50% of the sum of the then current 10-year treasury note rate and 4.5%. The transaction agreements with Ventas further provide that the Master Lease and certain other agreements between the parties will be cross-defaulted.
The Company’s subsidiaries’ obligations under the Master Lease are guaranteed at the parent level pursuant to the Guaranty. The Guaranty removed the prior requirements that the Company satisfy, at the parent level, financial covenants and that the Company maintain a security deposit with Ventas. The Guaranty also removed the prior right of Ventas to terminate the Master Lease on the basis of parent level financial covenants. Pursuant to the terms of the Guaranty, the Company may consummate a change of control transaction without the need for consent of Ventas so long as certain objective conditions are satisfied, including the post-transaction guarantor’s maintaining a minimum tangible net worth of at least $600.0 million, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas. The Guaranty removed the prior provisions that would have required that such post-transaction guarantor satisfy a maximum leverage ratio level, that the Company fund additional capital expenditures, and that the Company extend the term upon the occurrence of the change in control transaction. Under the terms of the Guaranty, commencing January 1, 2024 (and until such time (if any) as the Company exercises its lease term extension option with respect to the Master Lease), Ventas shall have the right to terminate the Master Lease (with respect to one or more communities), provided that the trailing twelve month coverage ratio of each such community is less than 0.9x and provided further that the removal and termination of any such communities does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such removal and termination.
•On the Effective Date, the Company entered into a Second Amended and Restated Omnibus Agreement with Ventas, which provides that if a default occurs and is continuing under certain other material leases or under certain material financings and if the same continues beyond the permitted cure period or the applicable landlord or lender exercises any material remedies, Ventas shall have the right to transition all or a portion of the communities from the Master Lease to a management arrangement with the Company pursuant to a market management agreement (which is
terminable by either party). Notwithstanding the foregoing, Ventas may only transition one or more communities from the Master Lease to a management arrangement if such transition does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such transition.
•On the Effective Date, the Company conveyed five owned communities to Ventas in full release and satisfaction of $78.4 million principal amount of indebtedness secured by the communities. Upon closing, the parties entered into new terminable, market rate management agreements pursuant to which the Company manages the communities. The Company also paid to Ventas $115.0 million in cash, released all security deposits to Ventas under the former guaranty (which included the release of a $42.4 million deposit held by Ventas and the payment of $4.2 million in cash as settlement of the amount of letters of credit), and issued a $45.0 million unsecured interest-only promissory note to Ventas. The initial interest rate of the promissory note is 9.0% per annum and will increase by 0.50% on each anniversary of the date of issuance. The Company may prepay the outstanding principal amount in whole or in part at any time without premium or penalty. The promissory note matures on the earlier of December 31, 2025 or the occurrence of a change of control transaction (as defined in the Guaranty).
•On the Effective Date, the Company issued to Ventas a warrant (the "Warrant") to purchase 16.3 million shares of the Company’s common stock, $0.01 par value per share, at a price per share of $3.00. The Warrant is exercisable at Ventas' option at any time and from time to time, in whole or in part, until December 31, 2025. The exercise price and the number of shares issuable on exercise of the Warrant are subject to certain anti-dilution adjustments, including for cash dividends, stock dividends, stock splits, reclassifications, non-cash distributions, certain repurchases of common stock and business combination transactions. To the extent that the number of shares owned by Ventas (including shares underlying the Warrant) would be more than 9.6% of the total combined voting power of all the Company’s classes of capital stock or of the total value of shares of all the Company’s classes of capital stock (the "Ownership Cap") (other than as a result of actions taken by Ventas), the Company would generally be required to repurchase the number of shares necessary to avoid Ventas exceeding the Ownership Cap unless Ventas makes an election to require the Company to pay Ventas cash in lieu of issuing shares pursuant to the Warrant in excess of the Ownership Cap. The Warrant and the shares issuable upon exercise thereof have not been registered under the Securities Act of 1933, as amended, and were issued in a private placement pursuant to Section 4(a)(2) thereof. On the Effective Date, the parties entered into a Registration Rights Agreement, pursuant to which Ventas and its permitted transferees are entitled to certain registration rights. Pursuant to the terms of the agreement, the Company filed a shelf registration statement with the SEC with respect to the shares of common stock underlying the Warrant, which was declared effective on August 17, 2020. Ventas is entitled to customary underwritten offering, piggyback, and additional demand registration rights with respect to the shares underlying the Warrant.
As a result of the modification of the community leases with Ventas, the Company reduced the carrying amount of lease obligations and assets under leases by $370.0 million and $159.5 million, respectively, in the three months ended September 30, 2020. As the Company's community leases do not contain an implicit rate, the Company utilized its incremental borrowing rate based on information available on the Effective Date to determine the present value of remaining lease payments for the community leases with Ventas. Additionally, the results and financial position of the five communities conveyed to Ventas were deconsolidated from the Company's financial statements prospectively as of the Effective Date. As of the Effective Date, the Warrant was recognized as a component of stockholders’ equity at its estimated fair value of $22.9 million. The Company’s net cash provided by operating activities for the year ended December 31, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with its lease restructuring transaction effective July 26, 2020. See Note 19 for more information regarding the adjustments to the Company’s consolidated balance sheet as a result of this transaction.
2019 Healthpeak CCRC Venture and Master Lease Transactions
On October 1, 2019, the Company entered into definitive agreements, including a Master Transactions and Cooperation Agreement (the "MTCA") and an Equity Interest Purchase Agreement (the "Purchase Agreement"), providing for a multi-part transaction with Healthpeak. The parties subsequently amended the agreements to include one additional entry fee CCRC community as part of the sale of the Company's interest in its unconsolidated entry fee CCRC venture with Healthpeak (the "CCRC Venture") (rather than removing the community from the CCRC Venture for joint marketing and sale). The components of the multi-part transaction include:
•CCRC Venture Transaction. Pursuant to the Purchase Agreement, on January 31, 2020, Healthpeak acquired the Company's 51% ownership interest in the CCRC Venture, which held 14 entry fee CCRCs, for a total purchase price of $289.2 million, net of a $5.9 million post-closing net working capital adjustment paid to Healthpeak during the three months ended June 30, 2020 (representing an aggregate valuation of $1.06 billion less portfolio debt, subject to a
net working capital adjustment). The $289.2 million of cash received from Healthpeak is presented within net cash used in investing activities for the year ended December 31, 2020. The Company recognized a $369.8 million gain on sale of assets for the year ended December 31, 2020, and the Company derecognized the net equity method liability for the sale of the ownership interest in the CCRC Venture. At the closing, the parties terminated the Company's existing management agreements with the 14 entry fee CCRCs, Healthpeak paid the Company a $100.0 million management agreement termination fee, and the Company transitioned operations of the entry fee CCRCs to a new operator. The Company recognized $100.0 million of management fee revenue for the three months ended March 31, 2020 for the management termination fee. Prior to the January 31, 2020 closing, the parties moved the remaining two entry fee CCRCs into a new unconsolidated venture on substantially the same terms as the CCRC Venture to accommodate the sale of such two communities. Subsequent to these transactions, the Company will have exited substantially all of its entry fee CCRC operations.
•Master Lease Transactions. Pursuant to the MTCA, on January 31, 2020, the parties amended and restated the existing master lease pursuant to which the Company continued to lease 25 communities from Healthpeak, and the Company acquired 18 formerly leased communities from Healthpeak, at which time the 18 communities were removed from the master lease. At the closing, the Company paid $405.5 million to acquire such communities and to reduce its annual rent under the amended and restated master lease. The $405.5 million of cash paid to Healthpeak and $1.7 million of direct acquisition costs are presented within net cash used in investing activities for the year ended December 31, 2020. The Company funded the community acquisitions with $192.6 million of non-recourse mortgage financing and the proceeds from the multi-part transaction. In addition, Healthpeak agreed to terminate the lease for one leased community and the Company's triple-net lease obligation with respect to such community was terminated during December 2020. As a result of the lease termination, the Company recognized a $2.3 million gain on lease termination during the year ended December 31, 2020 for the amount by which the lease obligations exceeded the net carrying amount of the Company's assets under the operating lease as of the lease termination date. With respect to the continuing 24 communities, the Company's amended and restated master lease: (i) has an initial term to expire on December 31, 2027, subject to two extension options at the Company's election for ten years each, which must be exercised with respect to the entire pool of leased communities; (ii) the initial annual base rent for the 24 communities is $41.7 million and is subject to an escalator of 2.4% per annum on April 1st of each year; and (iii) Healthpeak has agreed to make available up to $35.0 million for capital expenditures for a five-year period related to the 24 communities at an initial lease rate of 7.0%. As a result of the community acquisition transaction, the Company recognized a $19.7 million gain on debt extinguishment during the year ended December 31, 2020 and derecognized the $105.1 million carrying amount of financing lease obligations for eight communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement. During March 2020, the Company obtained $30.0 million of additional non-recourse mortgage financing on the acquired communities.
2018 Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018, the Company announced that it had entered into definitive agreements with Welltower. The components of the agreements include:
•Lease Terminations. The Company and Welltower agreed to an early termination of the Company's triple-net lease obligations on 37 communities effective June 30, 2018. The communities were part of two lease portfolios due to mature in 2020 (10 communities) and 2028 (27 communities). The Company paid Welltower an aggregate lease termination fee of $58.0 million. The Company agreed to manage the foregoing 37 communities on an interim basis until the communities have been transitioned to new managers, and such communities are reported in the Management Services segment during such interim period. The Company recognized a $22.6 million loss on lease termination during the year ended December 31, 2018 for the amount by which the aggregate lease termination fee exceeded the net carrying amount of the Company's assets and liabilities under operating and financing leases as of the lease termination date.
•Future Lease Terminations. The parties separately agreed to allow the Company to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale of such communities, and the Company would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds. As of December 31, 2020, no leases have been terminated in accordance with the agreement.
•RIDEA Restructuring. The Company sold its 20% equity interest in its existing Welltower RIDEA venture to Welltower, effective June 30, 2018 for net proceeds of $33.5 million (for which the Company recognized a $14.7
million gain on sale). The Company agreed to continue to manage the communities in the venture on an interim basis until the communities were transitioned to new managers, and such communities were reported in the Management Services segment during such interim period.
The Company also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities). The Company continues to operate 74 communities under triple-net leases with Welltower, and the Company's remaining lease agreements with Welltower contain a change of control standard that allows the Company to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject to the satisfaction of certain conditions.
2018 Ventas Lease Portfolio Restructuring
On April 26, 2018, the Company entered into several agreements to restructure a portfolio of 128 communities it leased from Ventas as of such date, including a Master Lease and Security Agreement (the "Former Ventas Master Lease"), which was subsequently amended and restated on July 26, 2020 as described above. The Former Ventas Master Lease amended and restated prior leases comprising an aggregate portfolio of 107 communities into the Former Ventas Master Lease, and the Company and Ventas agreed to observe, perform, and enforce separate leases for 21 additional communities as if they had been combined into the Former Ventas Master Lease effective April 26, 2018, to the extent not in conflict with any mortgage debt underlying such communities. The transaction agreements with Ventas further provided that the Former Ventas Master Lease and certain other agreements between the Company and Ventas were subject to cross-default provisions.
The Former Ventas Master Lease had an initial term ending December 31, 2025 and provided the Company with two 10-year extension options. The transaction agreements provided that if the Company had consummated a change of control transaction on or before December 31, 2025, the initial term of the Former Ventas Master Lease would be extended automatically through December 31, 2029. The Former Ventas Master Lease and separate lease agreements with Ventas, which were guaranteed at the parent level by the Company, provided for total rent in 2018 of $175.0 million for the 128 communities, including the pro-rata portion of an $8.0 million annual rent credit for 2018. The Company received an annual rent credit of $8.0 million in 2019 and an annual rent credit of $7.0 million in 2020 prior to giving effect to the reduction from the agreements on July 26, 2020 as described above. The annual minimum rent was subject to an escalator equal to the lesser of 2.25% or four times the Consumer Price Index ("CPI") increase for the prior year (or zero if there was a CPI decrease).
The Former Ventas Master Lease required the Company to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month period commencing with the 24-month period ended December 31, 2019 and thereafter each 24-month period ending December 31 during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the first extension term (if any), and provided that if the Company had consummated a change of control transaction, it would have been required within 36 months to invest (or escrow with Ventas) an aggregate of $30.0 million in the communities for revenue-enhancing capital projects.
Under the definitive agreements with Ventas, the Company, at the parent level, was required to satisfy certain financial covenants (including tangible net worth and leverage ratios) and may have consummated a change of control transaction without the need for consent of Ventas so long as certain objective conditions were satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas.
Pursuant to the Former Ventas Master Lease, the Company exercised its right to direct Ventas to use its commercially reasonable, diligent efforts to market for sale certain communities. During 2019, seven communities were sold by Ventas and removed from the Former Ventas Master Lease, and the annual minimum rent was prospectively reduced by $1.7 million. During 2020, one community was sold by Ventas and removed from the Former Ventas Master Lease, and the annual minimum rent was prospectively reduced by $0.1 million.
The Company estimated the fair value of each of the elements of the restructuring transactions. The fair value of the future lease payments was based upon historical and forecasted community cash flows and market data, including a management fee rate of 5% of revenue and a market supported lease coverage ratio (Level 3 inputs). The Company recognized a $125.7 million non-cash loss on lease modification during the year ended December 31, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that are unfavorable to the Company given market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
2017 Healthpeak Multi-Part Transaction
On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with Healthpeak. As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement ("Former Healthpeak Master Lease") with Healthpeak effective as of November 1, 2017. The components of the multi-part transaction include:
•Master Lease Transactions. The Company and Healthpeak amended and restated triple-net leases covering substantially all of the communities the Company leased from Healthpeak as of November 1, 2017 into the Former Healthpeak Master Lease. During the year ended December 31, 2018, the Company acquired two communities formerly leased for an aggregate purchase price of $35.4 million and leases with respect to 33 communities were terminated, and such communities were removed from the Former Healthpeak Master Lease, which completed the terminations of leases as provided in the Former Healthpeak Master Lease. The Company agreed to manage communities for which leases were terminated on an interim basis until the communities were transitioned to new managers, and such communities are reported in the Management Services segment during such interim period. As of December 31, 2019, the Company continued to lease 43 communities pursuant to the terms of the Former Healthpeak Master Lease, which had the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, the Company received a $2.5 million annual rent reduction for two communities. The Former Healthpeak Master Lease also provides that the Company may engage in certain change in control and other transactions without the need to obtain Healthpeak's consent, subject to the satisfaction of certain conditions.
•RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, Healthpeak acquired the Company's 10% ownership interest in one of the Company's RIDEA ventures with Healthpeak in December 2017 for $32.1 million (for which the Company recognized a $7.2 million gain on sale) and the Company's 10% ownership interest in the remaining RIDEA venture with Healthpeak in March 2018 for $62.3 million (for which the Company recognized a $41.7 million gain on sale). The Company provided management services to 59 communities on behalf of the two RIDEA ventures as of November 1, 2017. Pursuant to the multi-part transaction agreement, the Company acquired one community for an aggregate purchase price of $32.1 million in January 2018 and three communities for an aggregate purchase price of $207.4 million in April 2018 and retained management of 18 of such communities. The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, Healthpeak was entitled to sell or transition operations and/or management of 37 of such communities. Management agreements for all 37 such communities were terminated by Healthpeak since November of 2017 (for which the Company recognized a $9.7 million non-cash management contract termination gain).
The Company financed the foregoing community acquisitions with non-recourse mortgage financing and proceeds from the sales of its ownership interest in the unconsolidated ventures. See Note 9 for more information regarding the non-recourse first mortgage financing.
In addition, the Company obtained future annual cash rent reductions and waived management termination fees in the multi-part transaction. As a result of the multi-part transaction, the Company reduced its lease liabilities by $9.7 million for the future annual cash rent reductions and recognized a $9.7 million deferred liability for the consideration received from Healthpeak in advance of the termination of the management agreements for the 37 communities.
As a result of the modification of the remaining lease term for communities subject to leases (under ASC 840), the Company reduced the carrying amount of lease obligations and assets under leases by $145.6 million in 2017. During the year ended December 31, 2018, the results and financial position of the 33 communities for which leases were terminated were deconsolidated from the Company prospectively upon termination of the lease obligations. The Company derecognized the $332.8 million carrying amount of the assets under financing leases and the $378.3 million carrying amount of financing lease obligations for 20 communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement. The Company recognized a sale for these 20 communities and recorded a non-cash gain on sale of assets of $44.2 million for the year ended December 31, 2018. Additionally, the Company recognized a non-cash gain on lease termination of $1.5 million for the year ended December 31, 2018, for the derecognition of the net carrying amount of the Company's assets and liabilities under operating and financing leases at the lease termination date.
5. Fair Value Measurements
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to their short maturity of 90 days or less.
Marketable Securities
As of December 31, 2020, marketable securities of $172.9 million are stated at fair value based on valuations provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy.
Interest Rate Derivatives
The Company's derivative assets include interest rate caps that effectively manage the risk above certain interest rates for a portion of the Company's variable rate debt. The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily available observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. The Company considers the credit risk of its counterparties when evaluating the fair value of its derivatives. The following table summarizes the Company's interest rate cap instruments as of December 31, 2020:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Current notional balance
|
$
|
1,537,559
|
|
|
Weighted average fixed cap rate
|
4.53
|
%
|
|
Earliest maturity date
|
2021
|
|
|
Latest maturity date
|
2023
|
|
|
Estimated asset fair value (included in other assets, net at December 31, 2020)
|
$
|
22
|
|
|
Estimated asset fair value (included in other assets, net at December 31, 2019)
|
$
|
6
|
|
Debt
The Company estimates the fair value of its debt using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities and collateral securing the indebtedness. The Company had outstanding long-term debt with a carrying amount of approximately $3.9 billion and $3.6 billion as of December 31, 2020 and 2019, respectively. Fair value of the long-term debt approximates carrying amount in all periods presented. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy.
Warrant
On July 26, 2020, the Company issued to Ventas a warrant to purchase up to 16.3 million shares of the Company’s common stock, at a price per share of $3.00. The fair value of this warrant of $22.9 million as of July 26, 2020 was estimated using the Black-Scholes option-pricing model utilizing a stock price volatility assumption of 65% which is considered a Level 2 input of the valuation hierarchy.
Asset Impairment Expense
The following is a summary of asset impairment expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
|
Goodwill
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
351.7
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
29.3
|
|
|
27.2
|
|
|
78.0
|
|
|
Operating lease right-of-use assets
|
76.3
|
|
|
10.2
|
|
|
—
|
|
|
Investment in unconsolidated ventures
|
1.5
|
|
|
—
|
|
|
33.4
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
0.2
|
|
|
1.3
|
|
|
15.6
|
|
|
Other assets, net
|
—
|
|
|
10.6
|
|
|
11.2
|
|
|
Asset impairment
|
$
|
107.3
|
|
|
$
|
49.3
|
|
|
$
|
489.9
|
|
Although the Company cannot predict with reasonable certainty the ultimate impacts of the COVID-19 pandemic, the Company concluded that the impacts of the pandemic have adversely affected the Company’s projections of revenue, expense, and cash flow for its senior housing community long-lived assets and constitute an indicator of potential impairment. Accordingly, the Company assessed its long-lived assets for recoverability. Refer to Note 3 for additional information on the COVID-19 pandemic.
In estimating the recoverability of asset groups for purposes of the Company’s long-lived asset impairment testing during the year ended December 31, 2020, the Company utilized future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at the cash flow projections, the Company considers its estimates of the impacts of the pandemic, historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, estimated asset holding periods, and other factors.
As of December 31, 2020 there was a wide range of possible outcomes as a result of the pandemic, as there was a high degree of uncertainty about its ultimate impact. Management’s estimates of the impact of the pandemic are highly dependent on variables that are difficult to predict, as further described in Note 3. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments.
Goodwill
During the three months ended March 31, 2018, the Company identified qualitative indicators of impairment of goodwill, including a significant decline in the Company's stock price and market capitalization for a sustained period during the three months ended March 31, 2018. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying amount.
In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at the cash flow projections, the Company considered its historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors. In using the income approach to estimate the fair value of reporting units for purposes of its goodwill impairment test, the Company made certain key assumptions. Those assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that the Company would receive upon a sale of the communities using estimated capitalization rates, all of which are considered Level 3 inputs in the valuation hierarchy. The Company corroborated the estimated capitalization rates used in these calculations with capitalization rates observable from recent market transactions. Future cash flows are discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The Company also considered market based measures such as earnings multiples in its analysis of estimated fair values of its reporting units.
Based on the results of the Company's quantitative goodwill impairment test, the Company determined that the carrying amount of the Company's Assisted Living and Memory Care reporting unit exceeded its estimated fair value by more than the $351.7
million carrying amount as of March 31, 2018. As a result, the Company recorded a non-cash impairment charge of $351.7 million to goodwill within the Assisted Living and Memory Care segment for the three months ended March 31, 2018.
During 2020, the Company identified indicators of impairment of goodwill, including the COVID-19 pandemic and a significant decline in the Company's stock price and market capitalization for a sustained period. Refer to Note 3 for additional information on the COVID-19 pandemic. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2020. The Company’s quantitative goodwill impairment test as of March 31, 2020 included reduced estimates of projected future cash flows as a result of changes to significant assumptions using information known or knowable about the COVID-19 pandemic, including current industry and economic trends, changes in business plans, and changes in expected revenue and facility operating expense growth rates. Additionally, the Company considered the additional risk within the future cash flow estimates when selecting risk-adjusted discount rates. As of December 31, 2020, the Company also considered that the estimated Health Care Services reporting unit fair value, based upon the transaction price for the Health Care Services segment as described in Note 21, exceeds its carrying amount.
The Company concluded that the remaining goodwill for all reporting units was not impaired as of October 1, 2020 and 2019 (the Company's annual measurement date) and as of December 31, 2020 and 2019. Goodwill allocated to the Company's Independent Living and Health Care Services reporting units is approximately $27.3 million and $126.8 million, respectively, as of December 31, 2020 and 2019.
Determining the fair value of the Company's reporting units involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, changes in reimbursement rates from Medicare for healthcare services, and changes in healthcare reform. Significant adverse changes in the Company's future revenues and/or operating margins, significant changes in the market for healthcare services, senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances, including, but not limited to, increased competition, changes in reimbursement rates from Medicare for healthcare services, and changing economic or market conditions, including market control premiums, could result in changes in fair value and the determination that additional goodwill is impaired.
Property, Plant and Equipment and Leasehold Intangibles, Net
During the years ended December 31, 2020, 2019, and 2018, the Company evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. The Company compared the estimated fair value of the assets to their carrying amount for these identified properties and recorded an impairment charge for the excess of carrying amount over fair value. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $29.3 million, $27.2 million, and $78.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. The fair values of the assets of these communities were primarily determined utilizing a discounted cash flow approach or direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements are considered Level 3 measurements within the valuation hierarchy. The range of capitalization rates utilized was 6.5% to 9.0%, depending upon the property type, geographical location, and the quality of the respective community. The Company corroborated the estimated fair values with a sales comparison approach with information observable from recent market transactions. These impairment charges are primarily due to the COVID-19 pandemic, lower than expected operating performance at these properties, or the Company's decision to dispose of assets and reflect the amount by which the carrying amounts of the assets exceeded their estimated fair value.
Operating Lease Right-of-Use Assets
During the years ended December 31, 2020 and 2019, the Company evaluated operating lease right-of-use assets for impairment and identified communities with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. The Company compared the estimated fair value of the assets to their carrying amount for these identified communities and recorded an impairment charge for the excess of carrying amount over fair value. The Company recognized the right-of-use assets for the operating leases for 35 communities on the consolidated balance sheet as of March 31, 2020 at the estimated fair value of $106.7 million. During the three months ended June 30, 2020, the Company recognized the right-of-use assets for the operating leases for nine communities on the consolidated balance sheet at the estimated fair value of $10.3 million. During the three months ended September 30, 2020, the Company recognized the right-of-use assets for the operating leases for two communities on the consolidated balance sheets as of September 30, 2020 at
the estimated fair value of $3.0 million. During the three months ended December 31, 2020, the Company recognized the right-of-use assets for the operating leases for five communities on the consolidated balance sheet at the estimated fair value of $2.3 million. In the aggregate, the Company recorded a non-cash impairment charge of $76.3 million and $10.2 million for the years ended December 31, 2020 and 2019, respectively, to operating lease right-of-use assets. These 2020 impairment charges are primarily due to the COVID-19 pandemic and the lower than expected operating performance at these communities and reflect the amount by which the carrying amounts of the assets exceeded their estimated fair value.
The Company's adoption of ASU 2016-02 resulted in the recognition of the right-of-use assets for the operating leases for 25 communities to be recognized on the consolidated balance sheet as of January 1, 2019 at the estimated fair value of $56.6 million, and $58.1 million of previously unrecognized right-of-use asset impairments were recognized as a cumulative effect adjustment to accumulated deficit as the Company determined that the long-lived assets of such communities were not recoverable as of such date. See Note 2 for more information regarding the recognition of right-of-use assets for operating leases upon the adoption of ASU 2016-02.
The fair values of the operating lease right-of-use assets were estimated utilizing a discounted cash flow approach based upon projected community cash flows and market data, including management fees and a market supported lease coverage ratio, all of which are considered Level 3 inputs within the valuation hierarchy. The estimated future cash flows were discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The range of discount rates utilized was 9.0% to 12.3%, depending upon the property type, geographical location, and the quality of the respective community.
Investment in Unconsolidated Ventures
The Company evaluates realization of its investment in ventures accounted for using the equity method if circumstances indicate that the Company's investment is other than temporarily impaired. During the years ended December 31, 2020 and 2018 the Company recorded $1.5 million and $33.4 million, respectively, of non-cash impairment charges for investments in unconsolidated ventures. These impairment charges are primarily due to lower than expected operating performance at the communities owned by the unconsolidated ventures and reflect the amount by which the carrying amounts of the investments exceeded their estimated fair value. During the year ended December 31, 2019, the Company did not record impairment expense for its investment in unconsolidated ventures.
Assets Held for Sale
During the years ended December 31, 2020, 2019, and 2018, the Company recognized $0.2 million, $1.3 million, and $15.6 million, respectively, of impairment charges for assets held for sale. These impairment charges are primarily due to the excess of carrying amount over the estimated selling price less costs to dispose. The Company determines the fair value of the communities based primarily on purchase and sale agreements from prospective purchasers (Level 2 input). Refer to Note 4 for more information about the Company's community dispositions and assets held for sale.
Other Assets
During the years ended December 31, 2019 and 2018, the Company identified indicators of impairment for the Company's home health care licenses, primarily due to significant underperformance relative to historical and projected operating results, the impact of lower reimbursement rates from Medicare for home health care services, and an increased competitive environment in the home health care industry. The Company performed a quantitative impairment test, which included a comparison of the estimated fair value of the Company's home health care licenses to the carrying amount. In estimating the fair value of the home health licenses for purposes of the quantitative impairment test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at the cash flow projections, the Company considered its historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors, all of which are considered Level 3 inputs in the valuation hierarchy. Based on the results of the Company's quantitative impairment test, the Company determined that the carrying amount of certain of the Company's home health care licenses exceeded their estimated fair value. As a result, the Company recorded a non-cash impairment charge of $7.6 million and $9.1 million for the years ended December 31, 2019 and 2018, respectively, to intangible assets within the Health Care Services segment.
6. Revenue
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by payor source as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Resident fee revenue by payor source and reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
(in thousands)
|
Independent Living
|
|
Assisted Living and Memory Care
|
|
CCRCs
|
|
Health Care Services
|
|
Total
|
|
Private pay
|
$
|
510,254
|
|
|
$
|
1,622,117
|
|
|
$
|
235,018
|
|
|
$
|
906
|
|
|
$
|
2,368,295
|
|
|
Government reimbursement
|
2,344
|
|
|
69,159
|
|
|
59,614
|
|
|
287,512
|
|
|
418,629
|
|
|
Other third-party payor programs
|
—
|
|
|
—
|
|
|
27,251
|
|
|
78,392
|
|
|
105,643
|
|
|
Total resident fee revenue
|
$
|
512,598
|
|
|
$
|
1,691,276
|
|
|
$
|
321,883
|
|
|
$
|
366,810
|
|
|
$
|
2,892,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
(in thousands)
|
Independent Living
|
|
Assisted Living and Memory Care
|
|
CCRCs
|
|
Health Care Services
|
|
Total
|
|
Private pay
|
$
|
542,112
|
|
|
$
|
1,748,364
|
|
|
$
|
281,197
|
|
|
$
|
753
|
|
|
$
|
2,572,426
|
|
|
Government reimbursement
|
2,446
|
|
|
67,574
|
|
|
81,054
|
|
|
357,963
|
|
|
509,037
|
|
|
Other third-party payor programs
|
—
|
|
|
—
|
|
|
39,924
|
|
|
88,544
|
|
|
128,468
|
|
|
Total resident fee revenue
|
$
|
544,558
|
|
|
$
|
1,815,938
|
|
|
$
|
402,175
|
|
|
$
|
447,260
|
|
|
$
|
3,209,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands)
|
Independent Living
|
|
Assisted Living and Memory Care
|
|
CCRCs
|
|
Health Care Services
|
|
Total
|
|
Private pay
|
$
|
596,852
|
|
|
$
|
1,923,676
|
|
|
$
|
288,682
|
|
|
$
|
693
|
|
|
$
|
2,809,903
|
|
|
Government reimbursement
|
3,125
|
|
|
72,175
|
|
|
87,028
|
|
|
359,881
|
|
|
522,209
|
|
|
Other third-party payor programs
|
—
|
|
|
—
|
|
|
40,698
|
|
|
76,401
|
|
|
117,099
|
|
|
Total resident fee revenue
|
$
|
599,977
|
|
|
$
|
1,995,851
|
|
|
$
|
416,408
|
|
|
$
|
436,975
|
|
|
$
|
3,449,211
|
|
Contract Balances
The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source, although terms generally include payment to be made within 30 days.
Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain healthcare services is generally billed monthly in arrears. A portion of the Company's reimbursement from Medicare for certain healthcare services is billed near the start of each period of care, and cash is generally received before all services are rendered. The amount of revenue recognized for periods of care which are incomplete at period end is based on the Company's historical average percentage of days complete on each period of care and any unearned amounts are deferred and recognized when the service is performed. Additionally, non-refundable community fees are generally billed and collected in advance or upon move-in of a resident under the Company's independent living, assisted living, and memory care residency agreements. Amounts of revenue that are collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had total deferred revenue (included within refundable fees and deferred revenue and other liabilities within the consolidated balance sheets) of $138.3 million and $72.5 million, including $21.1 million and $38.9 million of monthly resident fees billed and received in advance, as of December 31, 2020 and 2019, respectively. Such amount of total deferred revenue as of December 31, 2020 also includes $87.5 million received during the year ended December 31, 2020 under a temporary expansion of the Accelerated and Advance Payment Program administered by CMS. Refer to Note 3 for additional information on such program. For the years ended December 31, 2020, 2019, and 2018 the Company recognized $60.6 million, $94.6 million, and $82.1 million respectively, of revenue that was included in the deferred revenue balance as of January 1,
2020, 2019, and 2018, respectively. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance obligations that have original expected durations of one year or less.
The following table presents the changes in allowance for credit losses on accounts receivable for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in millions)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
7.8
|
|
|
$
|
7.9
|
|
|
$
|
9.8
|
|
|
Provision within facility operating expense
|
|
16.7
|
|
|
15.2
|
|
|
17.6
|
|
|
Write-offs
|
|
(16.2)
|
|
|
(19.5)
|
|
|
(22.3)
|
|
|
Recoveries and other
|
|
1.5
|
|
|
4.2
|
|
|
2.8
|
|
|
Balance at end of period
|
|
$
|
9.8
|
|
|
$
|
7.8
|
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2020 and 2019, net property, plant and equipment and leasehold intangibles, which include assets under financing leases, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Land
|
$
|
505,298
|
|
|
$
|
450,894
|
|
|
Buildings and improvements
|
5,215,460
|
|
|
4,790,769
|
|
|
Furniture and equipment
|
945,783
|
|
|
859,849
|
|
|
Resident and leasehold operating intangibles
|
307,071
|
|
|
317,111
|
|
|
Construction in progress
|
61,491
|
|
|
80,729
|
|
|
Assets under financing leases and leasehold improvements
|
1,523,055
|
|
|
1,847,493
|
|
|
Property, plant and equipment and leasehold intangibles
|
8,558,158
|
|
|
8,346,845
|
|
|
Accumulated depreciation and amortization
|
(3,490,098)
|
|
|
(3,237,011)
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
5,068,060
|
|
|
$
|
5,109,834
|
|
Assets under financing leases and leasehold improvements includes $0.4 billion and $0.6 billion of financing lease right-of-use assets, net of accumulated amortization, as of December 31, 2020 and 2019, respectively. Refer to Note 10 for further information on the Company's financing leases.
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. Refer to Note 5 for information on impairment expense for property, plant and equipment and leasehold intangibles.
For the years ended December 31, 2020, 2019, and 2018, the Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $359.2 million, $377.6 million, and $444.3 million, respectively.
8. Goodwill
The following is a summary of the carrying amount of goodwill presented on a reportable segment basis as of both December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Gross Carrying Amount
|
|
Dispositions and Other Reductions
|
|
Accumulated Impairment
|
|
Net
|
|
Independent Living
|
$
|
28,141
|
|
|
$
|
(820)
|
|
|
$
|
—
|
|
|
$
|
27,321
|
|
|
Assisted Living and Memory Care
|
605,469
|
|
|
(48,817)
|
|
|
(556,652)
|
|
|
—
|
|
|
Health Care Services
|
126,810
|
|
|
—
|
|
|
—
|
|
|
126,810
|
|
|
Total
|
$
|
760,420
|
|
|
$
|
(49,637)
|
|
|
$
|
(556,652)
|
|
|
$
|
154,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 5 for information on impairment expense for goodwill in 2018.
9. Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Fixed mortgage notes payable due 2021 through 2047; weighted average interest rate of 4.18% and 4.80% as of December 31, 2020 and 2019, respectively.
|
$
|
2,366,996
|
|
|
$
|
2,270,811
|
|
|
Variable mortgage notes payable due 2022 through 2030, weighted average interest rate of 2.49% and 4.10% as of December 31, 2020 and 2019, respectively.
|
1,529,935
|
|
|
1,242,921
|
|
|
Other notes payable due 2021 to 2025; weighted average interest rate of 8.98% and 5.77% as of December 31, 2020 and 2019, respectively.
|
46,557
|
|
|
58,388
|
|
|
Debt discount and deferred financing costs, net
|
(27,500)
|
|
|
(16,997)
|
|
|
Total long-term debt
|
3,915,988
|
|
|
3,555,123
|
|
|
Current portion
|
68,885
|
|
|
339,413
|
|
|
Total long-term debt, less current portion
|
$
|
3,847,103
|
|
|
$
|
3,215,710
|
|
As of December 31, 2020, 98.2%, or $3.8 billion of the Company's total debt obligations represented non-recourse property-level mortgage financings.
The annual aggregate scheduled maturities of long-term debt outstanding as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Long-term
Debt
|
Weighted Rate
|
|
2021
|
$
|
73,673
|
|
4.26
|
%
|
|
2022
|
352,366
|
|
3.57
|
%
|
|
2023
|
234,448
|
|
3.51
|
%
|
|
2024
|
304,239
|
|
4.29
|
%
|
|
2025
|
292,972
|
|
3.99
|
%
|
|
Thereafter
|
2,685,790
|
|
3.45
|
%
|
|
Total obligations
|
3,943,488
|
|
3.59
|
%
|
|
Less amount representing debt discount and deferred financing costs, net
|
(27,500)
|
|
|
|
|
|
|
|
Total
|
$
|
3,915,988
|
|
|
Credit Facilities
On August 31, 2020, the Company terminated its Fifth Amended and Restated Credit Agreement with Capital One, National Association, as administrative agent, lender, and swingline lender and the other lenders from time to time parties thereto (as amended, the ("Credit Agreement"). The Credit Agreement had a maturity date of January 3, 2024. Amounts drawn under the facility bore interest at 90-day LIBOR plus an applicable margin. The applicable margin varied based on the percentage of the total commitment drawn, with a 2.25% margin at utilization equal to or lower than 35%, a 2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.25% margin at utilization greater than 50%. The Credit Agreement had provided commitments for a $250.0 million revolving credit facility with a $60.0 million sublimit for letters of credit and a $50.0 million swingline feature. The credit facility was secured by first priority mortgages on certain of the Company's communities, and availability varied from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and the Company's consolidated fixed charge coverage ratio. The Credit Agreement was terminated in connection with the Company obtaining approximately $266.9 million of non-recourse mortgage financing on 16 communities on August 31, 2020, most of which had secured the Credit Agreement prior to its termination. At the closing, the Company repaid the $166.4 million outstanding principal amount under the Credit Agreement, together with accumulated interest, and without payment of any termination fee or penalty.
On December 11, 2020, the Company entered into a revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of $80 million which can be drawn in cash or as letters of credit. The agreement matures on January 15, 2024. Amounts drawn under the facility will bear interest at 30-day LIBOR plus an applicable margin which was 2.75% as of December 31, 2020. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of December 31, 2020. The revolving credit facility is currently secured by first priority mortgages and negative pledges on certain of the Company’s communities. Available capacity under the facility will vary from time to time based upon borrowing base calculations related to the appraised value and performance of the communities securing the credit facility.
As of December 31, 2020, no borrowings were outstanding on the revolving credit facility, $40.4 million of letters of credit were outstanding, and the revolving credit facility had $22.2 million of availability. The Company also had separate secured and unsecured letter of credit facilities of up to $51.6 million of letters of credit as of December 31, 2020 under which $40.3 million had been issued as of that date.
2020 Financings
On January 31, 2020, the Company obtained $238.2 million of debt secured by the non-recourse first mortgages on 14 communities, including $192.6 million of non-recourse first mortgage financing on 13 communities acquired from Healthpeak on such date. Seventy percent of the principal amount bears interest at a fixed rate of 3.62%, and the remaining thirty percent of the principal amount bears interest at a variable rate equal to 30-day LIBOR plus a margin of 209 basis points. The debt matures in February 2030. The proceeds from the financing were utilized to fund the acquisition of communities from Healthpeak and repay $33.1 million of outstanding mortgage debt maturing in 2020. Refer to Note 4 for more information about the Company's acquisition of communities from Healthpeak.
On March 19, 2020, the Company obtained $29.2 million of debt secured by the non-recourse first mortgages on seven communities, primarily communities acquired during the three months ended March 31, 2020. The loan bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 225 basis points and matures in April 2030.
On March 20, 2020, the Company obtained $30.0 million of debt secured by the non-recourse first mortgage on one community acquired from Healthpeak on January 31, 2020. The loan bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 250 basis points and matures in March 2022.
On March 31, 2020, the Company obtained $149.3 million of debt secured by the non-recourse first mortgages on 18 communities. Of the total principal, $73.1 million bears interest at a fixed rate of 3.55%, and the remaining $76.2 million bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 210 basis points. The debt matures in April 2030. The $149.3 million of proceeds from the financing were primarily utilized to repay $136.3 million of outstanding mortgage debt maturing in 2020.
On August 31, 2020, the Company obtained $266.9 million of debt secured by the non-recourse first mortgages on 16 communities, most of which secured the credit facility prior to its termination. Of the total principal, $191.3 million bears interest at a fixed rate of 2.89%, and the remaining $75.6 million bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 249 basis points. The debt matures in September 2030. The $266.9 million of proceeds from the financing
were primarily utilized to repay the outstanding principal amount under the Credit Agreement and to cash collateralize letters of credit.
On September 9, 2020, the Company obtained $220.5 million of debt secured by the non-recourse first mortgages on 27 communities. Of the total principal, $156.5 million bears interest at a fixed rate of 3.18%, and the remaining $64.0 million bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 254 basis points. The debt matures in October 2030. The $220.5 million of proceeds from the financing were primarily utilized to repay outstanding mortgage debt maturing in 2020 and 2021.
2019 Financings
During the second quarter of 2019, the Company obtained $111.1 million of debt secured by the non-recourse first mortgages on 14 communities. Sixty percent of the principal amount bears interest at a fixed rate of 4.52%, and the remaining forty percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 223 basis points. The debt matures in June 2029. The $111.1 million of proceeds from the financing along with cash on hand were utilized to repay $155.5 million of outstanding mortgage debt maturing in 2019.
During the third quarter of 2019, the Company obtained $160.3 million of debt secured by the non-recourse first mortgages on five communities. Seventy-five percent of the principal amount bears interest at a fixed rate of 3.35%, and the remaining twenty-five percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 217 basis points. The debt matures in September 2029. The $160.3 million of proceeds from the financing were utilized to repay $139.2 million of outstanding mortgage debt maturing in 2020 and 2023.
During the year ended December 31, 2019, the Company recorded $5.2 million of debt modification and extinguishment costs on the consolidated statement of operations, primarily related to third party fees directly related to debt modifications.
Financial Covenants
Certain of the Company's debt documents contain restrictions and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. In addition, the Company's debt documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
The Company's failure to comply with applicable covenants could constitute an event of default under the applicable debt documents. Many of the Company's debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, the Company's debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of December 31, 2020, the Company is in compliance with the financial covenants of its debt agreements.
10. Leases
As of December 31, 2020, the Company operated 301 communities under long-term leases (235 operating leases and 66 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. An event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of December 31, 2020, the weighted average remaining lease term of the Company's operating and financing leases was 6.7 and 6.3 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options. For accounting purposes, renewal or extension options are included in the lease term when it is reasonably certain that the Company will exercise the option. Generally, renewal or extension options are not included in the lease term for accounting purposes.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring the Company to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company's lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
The Company's failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company's debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company's leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of December 31, 2020, the Company is in compliance with the financial covenants of its long-term leases.
A summary of operating and financing lease expense (including the respective presentation on the consolidated statements of operations) and net cash paid from leasing transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Operating Leases (in thousands)
|
2020
|
|
2019
|
|
Facility operating expense
|
$
|
19,241
|
|
|
$
|
18,677
|
|
|
Facility lease expense
|
224,033
|
|
|
269,666
|
|
|
Operating lease expense
|
243,274
|
|
|
288,343
|
|
|
Operating lease expense adjustment (1)
|
136,276
|
|
|
19,453
|
|
|
Changes in operating lease assets and liabilities for lessor capital expenditure reimbursements
|
(22,242)
|
|
|
(31,305)
|
|
|
Operating cash flows from operating leases
|
$
|
357,308
|
|
|
$
|
276,491
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents the difference between the amount of cash operating lease payments and the amount of operating lease expense recognized in accordance with ASC 842. Operating cash flows from operating leases for the year ended December 31, 2020 includes the $119.2 million one-time cash lease payment made to Ventas in connection with the Company's lease restructuring transaction effective July 26, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Financing Leases (in thousands)
|
2020
|
|
2019
|
|
Depreciation and amortization
|
$
|
32,647
|
|
|
$
|
46,646
|
|
|
Interest expense: financing lease obligations
|
48,534
|
|
|
66,353
|
|
|
Financing lease expense
|
$
|
81,181
|
|
|
$
|
112,999
|
|
|
|
|
|
|
|
Operating cash flows from financing leases
|
$
|
48,534
|
|
|
$
|
66,353
|
|
|
Financing cash flows from financing leases
|
18,867
|
|
|
22,242
|
|
|
Changes in financing lease assets and liabilities for lessor capital expenditure reimbursement
|
(5,603)
|
|
|
(3,504)
|
|
|
Total cash flows from financing leases
|
$
|
61,798
|
|
|
$
|
85,091
|
|
|
|
|
|
|
|
|
|
|
|
A summary of facility lease expense and the impact of operating lease expense adjustment, under ASC 840, and deferred gains are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Year Ended December 31, 2018
|
|
Cash basis payment - operating leases
|
|
|
|
|
$
|
324,870
|
|
|
Operating lease expense adjustment
|
|
|
|
|
(17,218)
|
|
|
Amortization of deferred gain
|
|
|
|
|
(4,358)
|
|
|
Facility lease expense
|
|
|
|
|
$
|
303,294
|
|
As of December 31, 2020, the weighted average discount rate of the Company's operating and financing leases was 7.2% and 8.0%, respectively.
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases, recognized on the consolidated balance sheet as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating Leases
|
|
Financing Leases
|
|
2021
|
$
|
209,787
|
|
|
$
|
64,914
|
|
|
2022
|
192,771
|
|
|
65,521
|
|
|
2023
|
192,381
|
|
|
66,250
|
|
|
2024
|
191,991
|
|
|
67,460
|
|
|
2025
|
189,961
|
|
|
57,499
|
|
|
Thereafter
|
280,233
|
|
|
109,590
|
|
|
Total lease payments
|
1,257,124
|
|
|
431,234
|
|
|
Purchase option liability and non-cash gain on future sale of property
|
—
|
|
|
413,426
|
|
|
Imputed interest and variable lease payments
|
(291,469)
|
|
|
(281,353)
|
|
|
Total lease obligations
|
$
|
965,655
|
|
|
$
|
563,307
|
|
11. Supplemental Balance Sheet Information
Accrued expenses reflected within current liabilities on the Company’s consolidated balance sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Salaries and wages
|
$
|
65,310
|
|
|
$
|
86,476
|
|
|
Insurance reserves
|
64,633
|
|
|
63,230
|
|
|
Paid time off
|
37,848
|
|
|
37,415
|
|
|
Deferred payroll taxes (Note 3)
|
36,336
|
|
|
—
|
|
|
Real estate taxes
|
25,495
|
|
|
25,979
|
|
|
Interest
|
11,453
|
|
|
16,196
|
|
|
Accrued utilities
|
7,507
|
|
|
7,601
|
|
|
Taxes payable
|
3,806
|
|
|
1,360
|
|
|
|
|
|
|
|
Other
|
35,463
|
|
|
28,446
|
|
|
Total
|
$
|
287,851
|
|
|
$
|
266,703
|
|
Other assets, net reflected on the Company's consolidated balance sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Health care licenses(1)
|
$
|
34,060
|
|
|
$
|
35,198
|
|
|
Lease security deposit
|
3,180
|
|
|
49,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
19,019
|
|
|
34,431
|
|
|
Total
|
$
|
56,259
|
|
|
$
|
118,731
|
|
(1) Health care licenses are indefinite-lived intangible assets and are not subject to amortization.
Investment in Unconsolidated Ventures
As of December 31, 2019, the Company held a 51% equity interest, and Healthpeak owned a 49% interest, in the CCRC Venture, which owned and operated 16 entry fee CCRCs. The Company's ownership interests in the CCRC Venture were accounted for under the equity method of accounting. Refer to Note 4 for information on the Company's sale of the equity interest in the CCRC Venture on January 31, 2020 and movement of the remaining two entry fee CCRCs into a new unconsolidated venture. As a result of the recognition of the Company’s investment basis at the carrying amounts of the net assets contributed upon formation of the CCRC Venture and subsequent cash distributions, the Company's carrying amount of its equity method investment in the CCRC Venture property company was reduced below zero and the Company had recorded a $66.2 million equity method liability within other liabilities within the consolidated balance sheet as of December 31, 2019. As of December 31, 2020, other liabilities within the consolidated balance sheet included a $10.1 million equity method liability for the new unconsolidated venture which owns the remaining two entry fee CCRCs.
12. Commitments and Contingencies
Litigation
The Company has been and is currently involved in litigation and claims incidental to the conduct of its business, which it believes are generally comparable to other companies in the senior living and healthcare industries, including, but not limited to, putative class action claims from time to time regarding staffing at the Company’s communities and compliance with consumer protection laws and the Americans with Disabilities Act. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, the Company maintains general liability, professional liability, and other insurance policies in amounts and with coverage and deductibles the Company believes are appropriate, based on the nature and risks of its business, historical experience, availability, and industry standards. The Company's current policies provide for deductibles for each claim and contain various exclusions from coverage. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts and for claims or portions of claims that are not covered by such policies and/or exceed the policy limits.
Similarly, the senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement activities or litigation related to regulatory compliance matters. In addition, as a result of the Company's participation in the Medicare and Medicaid programs, the Company is subject to various governmental reviews, audits and investigations, including but not limited to audits under various government programs, such as the Recovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC) programs. The costs to respond to and defend such reviews, audits, and investigations may be significant, and an adverse determination could result in citations, sanctions and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and/or damage to the Company's business reputation.
In June 2020, the Company and several current and former executive officers were named as defendants in a putative class action lawsuit alleging violations of the federal securities laws filed in the federal court for the Middle District of Tennessee. The lawsuit asserts that the defendants made material misstatements and omissions concerning the Company's business, operational and compliance policies that caused the Company's stock price to be artificially inflated between August 2016 and April 2020. While the Company cannot predict with certainty the result of this or any other legal proceedings, the Company believes the allegations in the suit are without merit and does not expect this matter to have a material adverse effect on the Company's financial condition, results of operations, or cash flows. In October 2020, an alleged stockholder of the Company filed a stockholder derivative lawsuit in the federal court for the Middle District of Tennessee, asserting claims on behalf of the Company against certain current and former officers and directors for alleged breaches of duties owed to the Company. The complaint refers to the securities lawsuit described above and incorporates substantively similar allegations.
Other
The Company has employment or letter agreements with certain officers of the Company and has adopted policies to which certain officers of the Company are eligible to participate, which grant these employees the right to receive a portion or multiple of their base salary, pro-rata bonus, bonus, and/or continuation of certain benefits, for a defined period of time, in the event of certain terminations of the officers' employment, as described in those agreements and policies.
13. Self-Insurance
The Company obtains various insurance coverages, including general and professional liability and workers compensation programs, from commercial carriers at stated amounts as defined in the applicable policy. Losses related to deductible amounts are accrued based on the Company's estimate of expected losses plus incurred but not reported claims.
As of December 31, 2020 and 2019, the Company accrued reserves of $153.0 million and $155.8 million, respectively, under the Company's insurance programs, of which $88.4 million and $92.5 million is classified as long-term liabilities as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company accrued $18.0 million and $22.7 million, respectively, of estimated amounts receivable from the insurance companies under these insurance programs.
The Company has secured self-insured retention risk under workers' compensation programs with restricted cash deposits of $21.9 million and $24.0 million as of December 31, 2020 and 2019, respectively. Letters of credit securing the programs aggregated to $61.3 million and $55.6 million as of December 31, 2020 and 2019, respectively. In addition, the Company also had deposits of $7.7 million and $12.3 million, as of December 31, 2020 and 2019, respectively, to fund claims paid under a high deductible, collateralized insurance policy.
Effective December 31, 2020, the Company began using its wholly-owned captive insurance company for the purpose of insuring certain portions of its risk retention under its general and professional liability insurance programs.
14. Stock-Based Compensation
The following table sets forth information about the Company's restricted stock awards and restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except value per share and unit)
|
Number of Restricted Stock Units and Stock Awards
|
|
Weighted
Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on January 1, 2018
|
4,770
|
|
|
17.13
|
|
|
Granted
|
3,880
|
|
|
9.39
|
|
|
Vested
|
(1,579)
|
|
|
19.12
|
|
|
Cancelled/forfeited
|
(1,315)
|
|
|
13.19
|
|
|
Outstanding on December 31, 2018
|
5,756
|
|
|
11.78
|
|
|
Granted
|
4,381
|
|
|
7.81
|
|
|
Vested
|
(1,571)
|
|
|
13.71
|
|
|
Cancelled/forfeited
|
(1,314)
|
|
|
11.18
|
|
|
Outstanding on December 31, 2019
|
7,252
|
|
|
9.08
|
|
|
Granted
|
4,603
|
|
|
6.92
|
|
|
Vested
|
(2,073)
|
|
|
10.19
|
|
|
Cancelled/forfeited
|
(1,277)
|
|
|
8.83
|
|
|
Outstanding on December 31, 2020
|
8,505
|
|
|
7.68
|
|
As of December 31, 2020, there was $38.0 million of total unrecognized compensation cost related to outstanding, unvested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.4 years and is based on grant date fair value.
During 2020, grants of restricted stock units and stock awards under the Company's 2014 Omnibus Incentive Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for per share and unit amounts)
|
Restricted Stock Unit and Stock Award Grants
|
|
Weighted Average Grant Date Fair Value
|
|
Total Grant Date Fair Value
|
|
Three months ended March 31, 2020
|
4,438
|
|
|
$
|
7.06
|
|
|
$
|
31,341
|
|
|
Three months ended June 30, 2020
|
78
|
|
|
$
|
3.91
|
|
|
$
|
303
|
|
|
Three months ended September 30, 2020
|
52
|
|
|
$
|
2.78
|
|
|
$
|
144
|
|
|
Three months ended December 31, 2020
|
35
|
|
|
$
|
2.91
|
|
|
$
|
102
|
|
The Company has an employee stock purchase plan for all eligible employees. Under the plan, eligible employees of the Company can purchase shares of the Company's common stock on a quarterly basis at a discounted price through accumulated payroll deductions. Each participating employee may elect to deduct up to 15% of his or her base pay each quarter and no more than 200 shares may be purchased by a participating employee each quarter. Subject to certain limitations specified in the plan, on the last trading date of each calendar quarter, the amount deducted from each participant's pay over the course of the quarter will be used to purchase whole shares of the Company's common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that date. The Company reserved 1,800,000 shares of common stock for issuance under the plan.
15. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock equivalents include unvested restricted stock, restricted stock units, and convertible debt instruments and warrants.
The following table summarizes the computation of basic and diluted earnings (loss) per share amounts presented in the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(in thousands, except for per share amounts)
|
2020
|
|
2019
|
|
2018
|
|
Income attributable to common stockholders:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
82,019
|
|
|
$
|
(267,931)
|
|
|
$
|
(528,258)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
183,498
|
|
|
185,907
|
|
|
187,468
|
|
|
Effect of dilutive securities - Unvested restricted stock, restricted stock units, and warrants
|
888
|
|
|
—
|
|
|
—
|
|
|
Weighted average shares outstanding - diluted
|
184,386
|
|
|
185,907
|
|
|
187,468
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders
|
$
|
0.45
|
|
|
$
|
(1.44)
|
|
|
$
|
(2.82)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders
|
$
|
0.44
|
|
|
$
|
(1.44)
|
|
|
$
|
(2.82)
|
|
For the purposes of computing diluted EPS, weighted average shares outstanding do not include potentially dilutive securities that are anti-dilutive under the treasury stock method and performance-based equity awards are included based on the attainment of the applicable performance metrics as of the end of the reporting period. The following potentially dilutive securities were excluded from the computation of diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
(in millions)
|
2020
|
|
2019(1)
|
|
2018(1)
|
|
|
Non-performance-based restricted stock and restricted stock units
|
6.8
|
|
6.4
|
|
5.6
|
|
|
Performance-based restricted stock and restricted stock units
|
1.6
|
|
1.1
|
|
0.8
|
|
|
Warrants(2)
|
—
|
|
|
—
|
|
|
0.5
|
|
(1)As a result of the net loss reported for the period, all unvested restricted stock, restricted stock units, convertible debt instruments, and potential shares issuable under warrants were antidilutive for the period and as such were not included in the computation of diluted weighted average shares outstanding.
(2)The option to exercise the warrants to acquire the Company's common stock outstanding at December 31, 2018 expired unexercised in 2019.
For the year ended December 31, 2018, the calculation of diluted weighted average shares outstanding excludes the impact of conversion of the principal amount of $316.3 million of the Company's 2.75% convertible senior notes which were repaid in cash at their maturity on June 15, 2018.
16. Share Repurchase Program
On November 1, 2016, the Company announced that its Board of Directors had approved a share repurchase program that authorizes the Company to purchase up to $100.0 million in the aggregate of the Company's common stock. The share repurchase program is intended to be implemented through purchases made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or block trades, or by any combination of these methods, in accordance with applicable insider trading and other securities laws and regulations.
The size, scope, and timing of any purchases will be based on business, market, and other conditions and factors, including price, regulatory, and contractual requirements or consents, and capital availability. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended, modified, or discontinued at any time at the Company's discretion without prior notice. Shares of stock repurchased under the program will be held as treasury shares. As a precautionary measure in light of the COVID-19 pandemic, the Company temporarily suspended purchases under the share repurchase plan in March 2020.
Repurchases under the share repurchase program were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(amounts in thousands, except per share amounts)
|
2020
|
|
2019
|
|
2018
|
|
Total number of shares repurchased
|
3,063
|
|
|
3,005
|
|
|
1,281
|
|
|
Average price paid per share
|
$
|
5.92
|
|
|
$
|
6.56
|
|
|
$
|
6.64
|
|
|
Aggregate purchase price
|
$
|
18,123
|
|
|
$
|
19,710
|
|
|
$
|
8,500
|
|
As of December 31, 2020, approximately $44.0 million remains available under the share repurchase program.
17. Retirement Plans
The Company maintains a 401(k) retirement savings plan for all employees that meet minimum employment criteria. Such plan provides that the participants may defer eligible compensation subject to certain Internal Revenue Code maximum amounts. The Company makes matching contributions in amounts equal to 25.0% of the employee's contribution to such plan, for contributions up to a maximum of 4.0% of compensation. An additional matching contribution of 12.5%, subject to the same limit on compensation, may be made at the discretion of the Company based upon the Company's performance. For the years ended December 31, 2020, 2019, and 2018, the Company's expense for such plan was $6.2 million, $8.0 million, and $8.3 million, respectively.
18. Income Taxes
The benefit (provision) for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Federal:
|
|
|
|
|
|
|
Current
|
$
|
55
|
|
|
$
|
64
|
|
|
$
|
(113)
|
|
|
Deferred
|
5,840
|
|
|
2,654
|
|
|
52,367
|
|
|
Total federal
|
5,895
|
|
|
2,718
|
|
|
52,254
|
|
|
State:
|
|
|
|
|
|
|
Current
|
(11,247)
|
|
|
(449)
|
|
|
(2,798)
|
|
|
Deferred (included in federal above)
|
—
|
|
|
—
|
|
|
—
|
|
|
Total state
|
(11,247)
|
|
|
(449)
|
|
|
(2,798)
|
|
|
Total
|
$
|
(5,352)
|
|
|
$
|
2,269
|
|
|
$
|
49,456
|
|
A reconciliation of the benefit (provision) for income taxes to the amount computed at the U.S. Federal statutory rate of 21% is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Tax benefit (provision) at U.S. statutory rate
|
$
|
(18,348)
|
|
|
$
|
56,742
|
|
|
$
|
121,320
|
|
|
State taxes, net of federal income tax
|
(11,909)
|
|
|
10,423
|
|
|
21,576
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
27,913
|
|
|
(60,376)
|
|
|
5,713
|
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
(88,265)
|
|
|
Impact of the Tax Cuts and Jobs Act
|
—
|
|
|
—
|
|
|
(6,042)
|
|
|
Stock compensation
|
(2,118)
|
|
|
(2,639)
|
|
|
(4,717)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meals and entertainment
|
(169)
|
|
|
(416)
|
|
|
(493)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credits
|
—
|
|
|
(106)
|
|
|
688
|
|
|
Other
|
(721)
|
|
|
(1,359)
|
|
|
(324)
|
|
|
Total
|
$
|
(5,352)
|
|
|
$
|
2,269
|
|
|
$
|
49,456
|
|
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Deferred income tax assets:
|
|
|
|
|
Operating lease obligations
|
$
|
322,122
|
|
|
$
|
406,172
|
|
|
Financing lease obligations
|
90,011
|
|
|
156,913
|
|
|
Operating loss carryforwards
|
237,728
|
|
|
330,983
|
|
|
Accrued expenses
|
96,410
|
|
|
54,154
|
|
|
Intangible assets
|
60,069
|
|
|
11,160
|
|
|
Tax credits
|
50,356
|
|
|
50,356
|
|
|
Investment in unconsolidated ventures
|
5,105
|
|
|
—
|
|
|
Capital loss carryforward
|
2,263
|
|
|
40,723
|
|
|
Other
|
8,561
|
|
|
8,098
|
|
|
Total gross deferred income tax asset
|
872,625
|
|
|
1,058,559
|
|
|
Valuation allowance
|
(380,990)
|
|
|
(408,903)
|
|
|
Net deferred income tax assets
|
491,635
|
|
|
649,656
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Operating lease right-of-use assets
|
(277,489)
|
|
|
(328,100)
|
|
|
Property, plant and equipment
|
(223,703)
|
|
|
(303,853)
|
|
|
Investment in unconsolidated ventures
|
—
|
|
|
(33,100)
|
|
|
|
|
|
|
|
Total gross deferred income tax liability
|
(501,192)
|
|
|
(665,053)
|
|
|
Net deferred tax asset (liability)
|
$
|
(9,557)
|
|
|
$
|
(15,397)
|
|
As of December 31, 2020 and 2019, the Company had federal net operating loss carryforwards generated in 2017 and prior of approximately $812.0 million and $1.2 billion, respectively which are available to offset future taxable income from 2021 through 2037. Additionally, as of December 31, 2020 and 2019, the Company had federal net operating loss carryforwards generated after 2017 of $181.1 million and $174.9 million, respectively, which have an indefinite life, but with usage limited to 80% of taxable income in any given year. The Company had state capital loss carryforwards as of December 31, 2020, which are available to offset future capital gains through 2023. The Company determined that a valuation allowance was required after consideration of the Company's estimated future reversal of existing timing differences as of December 31, 2020 and 2019. The Company does not consider estimates of future taxable income in its determination due to the existence of cumulative historical operating losses. For the year ended December 31, 2020, the Company recorded a reduction of approximately $27.9 million to reflect the required valuation allowance of $381.0 million as of December 31, 2020.
A summary of the change in the Company's valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Increase (decrease) before consideration of adoption of ASC 842
|
$
|
(27,913)
|
|
|
$
|
60,376
|
|
|
Increase due to the adoption of ASC 842
|
—
|
|
|
13,790
|
|
|
Other decrease during the year
|
—
|
|
|
(1,680)
|
|
|
Total increase (decrease) in valuation allowance
|
$
|
(27,913)
|
|
|
$
|
72,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded valuation allowances of $328.4 million and $318.4 million against its federal and state net operating losses as of December 31, 2020 and 2019, respectively. The Company has recorded a valuation allowance against its state capital loss carryforward of $2.3 million as of December 31, 2020. The Company had recorded a valuation allowance against its federal and state capital loss carryforwards of $40.7 million as of December 31, 2019. The Company's sale of its ownership interest in the CCRC Venture in 2020 utilized all of the capital loss carryforward for federal tax purposes and a portion of its net operating losses. The Company recorded a decrease in the valuation allowance of $117.6 million for the year ended December 31, 2020 as a result of the Healthpeak transaction. The Company also recorded a valuation allowance against federal and state credits of $50.3 million as of both December 31, 2020 and 2019.
As of December 31, 2020 and 2019, the Company had gross tax affected unrecognized tax benefits of $18.4 million and $18.3 million, respectively, of which, if recognized, would result in an income tax benefit recorded in the consolidated statement of operations. Interest and penalties related to these tax positions are classified as tax expense in the Company's consolidated financial statements. Total interest and penalties reserved is $0.1 million as of both December 31, 2020 and 2019. As of December 31, 2020, the Company's tax returns for years 2016 through 2019 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination. The Company does not expect that unrecognized tax benefits for tax positions taken with respect to 2020 and prior years will significantly change in 2021.
A reconciliation of the unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Balance at beginning of period
|
$
|
18,326
|
|
|
$
|
18,507
|
|
|
Additions for tax positions related to the current year
|
—
|
|
|
—
|
|
|
Additions (reductions) for tax positions related to prior years
|
59
|
|
|
(181)
|
|
|
Balance at end of period
|
$
|
18,385
|
|
|
$
|
18,326
|
|
19. Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the Years Ended December 31,
|
|
Supplemental Disclosure of Cash Flow Information:
|
2020
|
|
2019
|
|
2018
|
|
Interest paid
|
$
|
204,696
|
|
|
$
|
244,469
|
|
|
$
|
260,706
|
|
|
Income taxes paid, net of refunds
|
$
|
8,878
|
|
|
$
|
1,534
|
|
|
$
|
2,058
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of related payables:
|
|
|
|
|
|
|
Capital expenditures - non-development, net
|
$
|
139,592
|
|
|
$
|
235,797
|
|
|
$
|
182,249
|
|
|
Capital expenditures - development, net
|
13,667
|
|
|
24,595
|
|
|
24,687
|
|
|
Capital expenditures - non-development - reimbursable
|
27,846
|
|
|
34,809
|
|
|
12,165
|
|
|
Capital expenditures - development - reimbursable
|
—
|
|
|
—
|
|
|
1,709
|
|
|
Trade accounts payable
|
4,766
|
|
|
8,891
|
|
|
4,663
|
|
|
Net cash paid
|
$
|
185,871
|
|
|
$
|
304,092
|
|
|
$
|
225,473
|
|
|
|
|
|
|
|
|
|
Acquisition of communities from Healthpeak:
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
286,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating lease right-of-use assets
|
(63,285)
|
|
|
—
|
|
|
—
|
|
|
Financing lease obligations
|
129,196
|
|
|
—
|
|
|
—
|
|
|
Operating lease obligations
|
74,335
|
|
|
—
|
|
|
—
|
|
|
Loss (gain) on debt modification and extinguishment, net
|
(19,731)
|
|
|
—
|
|
|
—
|
|
|
Net cash paid
|
$
|
407,249
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Master Agreement with Ventas:
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
(66,444)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating lease right-of-use assets
|
(153,213)
|
|
|
—
|
|
|
—
|
|
|
Other assets, net
|
(42,354)
|
|
|
—
|
|
|
—
|
|
|
Long-term debt
|
34,053
|
|
|
—
|
|
|
—
|
|
|
Financing lease obligations
|
7,077
|
|
|
—
|
|
|
—
|
|
|
Operating lease obligations
|
362,944
|
|
|
—
|
|
|
—
|
|
|
Additional paid-in-capital
|
(22,883)
|
|
|
—
|
|
|
—
|
|
|
Net cash paid
|
$
|
119,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Acquisition of other assets, net of related payables and cash received:
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
684
|
|
|
$
|
44
|
|
|
$
|
237,563
|
|
|
Other intangible assets, net
|
—
|
|
|
453
|
|
|
(4,345)
|
|
|
Financing lease obligations
|
64,260
|
|
|
—
|
|
|
36,120
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
—
|
|
|
—
|
|
|
2,433
|
|
|
Net cash paid
|
$
|
64,944
|
|
|
$
|
497
|
|
|
$
|
271,771
|
|
|
Proceeds from sale of CCRC Venture, net:
|
|
|
|
|
|
|
Investments in unconsolidated ventures
|
$
|
(14,848)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current portion of long-term debt
|
34,706
|
|
|
—
|
|
|
—
|
|
|
Other liabilities
|
60,748
|
|
|
—
|
|
|
—
|
|
|
Loss (gain) on sale of assets, net
|
(369,831)
|
|
|
—
|
|
|
—
|
|
|
Net cash received
|
$
|
(289,225)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Proceeds from sale of other assets, net:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
(1,318)
|
|
|
$
|
(4,422)
|
|
|
$
|
(4,950)
|
|
|
Assets held for sale
|
(34,348)
|
|
|
(79,054)
|
|
|
(197,111)
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
(938)
|
|
|
(379)
|
|
|
(93,098)
|
|
|
Investments in unconsolidated ventures
|
—
|
|
|
(156)
|
|
|
(58,179)
|
|
|
|
|
|
|
|
|
|
Financing lease obligations
|
—
|
|
|
—
|
|
|
93,514
|
|
|
Refundable fees and deferred revenue
|
—
|
|
|
—
|
|
|
8,632
|
|
|
Other liabilities
|
(786)
|
|
|
(1,479)
|
|
|
1,139
|
|
|
Loss (gain) on sale of assets, net
|
(4,701)
|
|
|
(7,245)
|
|
|
(249,754)
|
|
|
Net cash received
|
$
|
(42,091)
|
|
|
$
|
(92,735)
|
|
|
$
|
(499,807)
|
|
|
Lease termination and modification, net:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,804)
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
—
|
|
|
—
|
|
|
(87,464)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing lease obligations
|
—
|
|
|
—
|
|
|
58,099
|
|
|
Deferred liabilities
|
—
|
|
|
—
|
|
|
70,835
|
|
|
Loss (gain) on sale of assets, net
|
—
|
|
|
—
|
|
|
(5,761)
|
|
|
Loss (gain) on facility lease termination and modification, net
|
—
|
|
|
—
|
|
|
34,283
|
|
|
Net cash paid (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
67,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
|
|
Purchase of treasury stock:
|
|
|
|
|
|
|
Treasury stock
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,244
|
|
|
Accounts payable
|
—
|
|
|
—
|
|
|
(4,244)
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Assets designated as held for sale:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(517)
|
|
|
Assets held for sale
|
7,935
|
|
|
28,608
|
|
|
198,445
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
(7,935)
|
|
|
(28,608)
|
|
|
(197,928)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Healthpeak master lease modification:
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
$
|
(57,462)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating lease right-of-use assets
|
88,044
|
|
|
—
|
|
|
—
|
|
|
Financing lease obligations
|
70,874
|
|
|
—
|
|
|
—
|
|
|
Operating lease obligations
|
(101,456)
|
|
|
—
|
|
|
—
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other non-cash lease transactions, net:
|
|
|
|
|
|
|
Prepaid expenses and other assets, net
|
$
|
—
|
|
|
$
|
(636)
|
|
|
$
|
(248)
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
10,707
|
|
|
(1,963)
|
|
|
(132,733)
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
(7,941)
|
|
|
18,148
|
|
|
—
|
|
|
Operating lease obligations
|
15,126
|
|
|
(18,206)
|
|
|
—
|
|
|
Financing lease obligations
|
(15,483)
|
|
|
—
|
|
|
165,918
|
|
|
Deferred liabilities
|
—
|
|
|
—
|
|
|
(122,304)
|
|
|
Other liabilities
|
(77)
|
|
|
(731)
|
|
|
(620)
|
|
|
Loss (gain) on sale of assets, net
|
—
|
|
|
—
|
|
|
(37,731)
|
|
|
Loss (gain) on facility lease termination and modification, net
|
(2,332)
|
|
|
3,388
|
|
|
127,718
|
|
|
Net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) The net cash paid to terminate community leases is presented within the consolidated statements of cash flows based upon the lease classification of the terminated leases. Net cash paid of $54.6 million for the termination of operating leases is presented within net cash provided by operating activities and net cash paid of $12.5 million for the termination of financing leases is presented within net cash used in financing activities for the year ended December 31, 2018.
During 2019, the Company and its venture partner contributed cash in an aggregate amount of $13.3 million to a consolidated venture which owns two senior housing communities as of December 31, 2020. The Company obtained a $6.6 million promissory note receivable from its venture partner secured by a 50% equity interest in the venture in a non-cash exchange for the Company funding the $13.3 million aggregate contribution in cash. At the closing of the sale of a senior housing community during 2019 by the consolidated venture, the consolidated venture distributed $6.3 million to the partners with the Company receiving a $3.1 million repayment on the promissory note in a non-cash exchange.
Refer to Note 2 for a schedule of the non-cash adjustments to the Company's consolidated balance sheet as of January 1, 2019 as a result of the adoption of new accounting standards.
Restricted cash consists principally of escrow deposits for real estate taxes, property insurance, and capital expenditures, debt service reserve accounts required by certain lenders under mortgage debt agreements, and deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs. The components of restricted cash are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Current:
|
|
|
|
|
Real estate tax and property insurance escrows
|
$
|
17,465
|
|
|
$
|
16,299
|
|
|
Replacement reserve escrows
|
9,465
|
|
|
9,071
|
|
|
Resident deposits
|
253
|
|
|
475
|
|
|
Other
|
876
|
|
|
1,011
|
|
|
Subtotal
|
28,059
|
|
|
26,856
|
|
|
Long term:
|
|
|
|
|
Insurance deposits
|
21,903
|
|
|
23,692
|
|
|
Debt service reserve
|
17,784
|
|
|
281
|
|
|
CCRCs escrows
|
15,329
|
|
|
10,641
|
|
|
Letters of credit collateral
|
1,653
|
|
|
—
|
|
|
|
|
|
|
|
Subtotal
|
56,669
|
|
|
34,614
|
|
|
Total
|
$
|
84,728
|
|
|
$
|
61,470
|
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sums to the total of the same such amounts shown in the consolidated statements of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Reconciliation of cash, cash equivalents, and restricted cash:
|
|
|
|
|
Cash and cash equivalents
|
$
|
380,420
|
|
|
$
|
240,227
|
|
|
Restricted cash
|
28,059
|
|
|
26,856
|
|
|
Long-term restricted cash
|
56,669
|
|
|
34,614
|
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
465,148
|
|
|
$
|
301,697
|
|
20. Segment Information
The Company has five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services; and Management Services. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
Independent Living. The Company's Independent Living segment includes owned or leased communities are primarily designed for middle to upper income seniors who desire to live in a residential setting that feels like home, without the efforts of ownership. The majority of the Company's independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services to accommodate their changing needs.
Assisted Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with ADLs for mid-acuity and frail elderly residents. The Company's assisted living and memory care communities include both freestanding, multi-story communities, as well as smaller, freestanding, single story communities. The Company also provides memory care services at freestanding memory care communities that are specially designed for residents with Alzheimer's disease and other dementias.
CCRCs. The Company's CCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate a broad spectrum of physical ability and healthcare needs. Most of the Company's
CCRCs have independent living, assisted living, memory care, and skilled nursing available on one campus or within the immediate area.
Health Care Services. The Company's Health Care Services segment includes the home health, hospice, and outpatient therapy services provided to residents of many of its communities and to seniors living outside its communities. The Health Care Services segment does not include the skilled nursing and inpatient healthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs segment.
Management Services. The Company's Management Services segment includes communities operated by the Company pursuant to management agreements. In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a venture structure in which the Company has an ownership interest. Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of expenses it incurs on behalf of the owners.
The accounting policies of the Company's reportable segments are the same as those described in the summary of significant accounting policies in Note 2.
The following table sets forth selected segment financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Revenue and other operating income:
|
|
|
|
|
|
|
Independent Living (1)(2)
|
$
|
524,421
|
|
|
$
|
544,558
|
|
|
$
|
599,977
|
|
|
Assisted Living and Memory Care (1)(2)
|
1,753,861
|
|
|
1,815,938
|
|
|
1,995,851
|
|
|
CCRCs (1)(2)
|
340,337
|
|
|
402,175
|
|
|
416,408
|
|
|
Health Care Services (1)(2)
|
389,697
|
|
|
447,260
|
|
|
436,975
|
|
|
Management Services (3)
|
531,879
|
|
|
847,157
|
|
|
1,082,215
|
|
|
Total revenue and other operating income
|
$
|
3,540,195
|
|
|
$
|
4,057,088
|
|
|
$
|
4,531,426
|
|
|
Segment operating income:(4)
|
|
|
|
|
|
|
Independent Living
|
$
|
182,813
|
|
|
$
|
203,741
|
|
|
$
|
240,609
|
|
|
Assisted Living and Memory Care
|
428,601
|
|
|
518,636
|
|
|
628,982
|
|
|
CCRCs
|
53,180
|
|
|
72,072
|
|
|
92,212
|
|
|
Health Care Services
|
1,863
|
|
|
24,987
|
|
|
34,080
|
|
|
Management Services
|
130,690
|
|
|
57,108
|
|
|
71,986
|
|
|
Total segment operating income
|
797,147
|
|
|
876,544
|
|
|
1,067,869
|
|
|
General and administrative (including non-cash stock-based compensation expense)
|
206,575
|
|
|
219,289
|
|
|
259,475
|
|
|
Facility operating lease expense:
|
|
|
|
|
|
|
Independent Living
|
60,445
|
|
|
81,680
|
|
|
93,496
|
|
|
Assisted Living and Memory Care
|
137,900
|
|
|
157,823
|
|
|
178,716
|
|
|
CCRCs
|
20,406
|
|
|
24,248
|
|
|
24,856
|
|
|
|
|
|
|
|
|
|
Corporate and Management Services
|
5,282
|
|
|
5,915
|
|
|
6,226
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Independent Living
|
70,803
|
|
|
81,745
|
|
|
91,899
|
|
|
Assisted Living and Memory Care
|
224,790
|
|
|
222,574
|
|
|
261,365
|
|
|
CCRCs
|
38,426
|
|
|
44,163
|
|
|
53,551
|
|
|
Health Care Services
|
749
|
|
|
2,247
|
|
|
3,201
|
|
|
Corporate and Management Services
|
24,458
|
|
|
28,704
|
|
|
37,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
|
Asset impairment:
|
|
|
|
|
|
|
Independent Living
|
31,317
|
|
|
1,812
|
|
|
2,013
|
|
|
Assisted Living and Memory Care
|
61,640
|
|
|
32,229
|
|
|
436,892
|
|
|
CCRCs
|
12,413
|
|
|
4,983
|
|
|
6,669
|
|
|
Health Care Services
|
—
|
|
|
7,578
|
|
|
9,055
|
|
|
Corporate and Management Services
|
1,938
|
|
|
2,664
|
|
|
35,264
|
|
|
Loss (gain) on facility lease termination and modification, net
|
(2,303)
|
|
|
3,388
|
|
|
162,001
|
|
|
Income (loss) from operations
|
$
|
(97,692)
|
|
|
$
|
(44,498)
|
|
|
$
|
(594,249)
|
|
|
|
|
|
|
|
|
|
Total interest expense:
|
|
|
|
|
|
|
Independent Living
|
$
|
44,682
|
|
|
$
|
46,713
|
|
|
$
|
58,783
|
|
|
Assisted Living and Memory Care
|
134,015
|
|
|
166,097
|
|
|
174,459
|
|
|
CCRCs
|
19,928
|
|
|
27,426
|
|
|
26,746
|
|
|
|
|
|
|
|
|
|
Corporate and Management Services
|
10,154
|
|
|
8,105
|
|
|
20,281
|
|
|
|
$
|
208,779
|
|
|
$
|
248,341
|
|
|
$
|
280,269
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for property, plant and equipment, and leasehold intangibles:
|
|
|
|
|
|
|
Independent Living
|
$
|
47,889
|
|
|
$
|
78,831
|
|
|
$
|
51,510
|
|
|
Assisted Living and Memory Care
|
90,354
|
|
|
157,845
|
|
|
125,750
|
|
|
CCRCs
|
18,709
|
|
|
33,535
|
|
|
26,615
|
|
|
Health Care Services
|
515
|
|
|
484
|
|
|
902
|
|
|
Corporate and Management Services
|
23,638
|
|
|
24,506
|
|
|
16,033
|
|
|
|
$
|
181,105
|
|
|
$
|
295,201
|
|
|
$
|
220,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
2020
|
|
2019
|
|
Total assets:
|
|
|
|
|
Independent Living
|
$
|
1,419,838
|
|
|
$
|
1,441,652
|
|
|
Assisted Living and Memory Care
|
3,787,611
|
|
|
4,157,610
|
|
|
CCRCs
|
738,121
|
|
|
742,809
|
|
|
Health Care Services
|
233,178
|
|
|
256,715
|
|
|
Corporate and Management Services
|
723,010
|
|
|
595,647
|
|
|
Total assets
|
$
|
6,901,758
|
|
|
$
|
7,194,433
|
|
(1)All revenue is earned from external third parties in the United States.
(2)The Independent Living, Assisted Living and Memory Care, CCRCs, and Health Care Services segments include $11.8 million, $62.6 million, $18.5 million, and $22.9 million, respectively, for the year ended December 31, 2020 of other operating income recognized for grants pursuant to the Provider Relief Fund described in Note 3 and other government sources. Allocations to the applicable segment generally reflect the segment's receipt and acceptance of the amounts or the segment's proportional utilization of the grant.
(3)Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of managed communities.
(4)Segment operating income is defined as segment revenues less segment facility operating expenses (excluding facility depreciation and amortization) and costs incurred on behalf of managed communities.
21. Subsequent Events
On February 24, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with affiliates of HCA Healthcare, Inc., providing for the sale of 80% of the Company’s equity in its Health Care Services segment for a purchase price of $400 million in cash, subject to certain adjustments set forth in the Purchase Agreement, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment, which were $75.2 million and $8.2 million, respectively, as of December 31, 2020. The Purchase Agreement also contains certain agreed upon indemnities for the benefit of the purchaser. The closing of the sale transaction is anticipated to occur in the late first half or early second half of 2021, subject to receipt of applicable regulatory approvals and satisfaction of other customary closing conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, at closing of the transaction, the Company will retain a 20% equity interest in the business. There can be no assurance that the transaction will close or, if it does, when the actual closing will occur.