NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Organization
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is the leading 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 the highest quality service, care and living accommodations for residents. The Company operates independent living, assisted living and dementia-care communities and continuing care retirement centers ("CCRCs"). Through its ancillary services programs, the Company also offers a range of outpatient therapy, home health and hospice services to residents of many of its communities and to seniors living outside its communities.
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"). The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence over governance and operation, are accounted for by the equity method. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying consolidated financial statements. Noncontrolling interest represents the share of consolidated entities owned by third parties. Noncontrolling interest is adjusted for the noncontrolling holder's share of additional contributions, distributions and the proportionate share of the net income or loss of each respective entity.
The Company continually evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board ("FASB") ASC 810,
Consolidation
("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this analysis on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Refer to Note 5 for more information about the Company's VIE relationships.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, goodwill and asset impairments, self-insurance reserves, performance-based compensation, the allowance for doubtful accounts, depreciation and amortization, 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 recorded when services are rendered and consists of fees for basic housing and support services and fees associated with additional services such as assisted living care, skilled nursing care, ancillary services and personalized health services. Residency agreements are generally for a term of
30 days to one year
, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary services is recognized as services are provided, and such fees are billed monthly in arrears.
Certain of the Company's communities have residency agreements which require the resident to pay an upfront entrance fee prior to moving into the community. The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation. The refundable portion of a resident's entrance fee is generally refundable within a certain number of months or days following contract termination or upon the resale of the unit. The refundable portion of the fee is not amortized and is included in refundable entrance fees. All refundable amounts due to residents at any time in the future are classified as current liabilities.
Management Fees
Management fee revenue is recorded as services are provided to the owners of the communities. Management fees are determined by an agreed upon percentage of gross revenues (as defined).
Reimbursed Costs Incurred on Behalf of Managed Communities
The Company manages certain communities under contracts which provide for payment to the Company of a monthly management fee plus reimbursement of certain operating expenses. Where the Company is the primary obligor with respect to any such operating expenses, the Company recognizes revenue when the goods have been delivered or the service has been rendered and the Company is due reimbursement. 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.
Purchase Accounting
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. The Company assigned the purchase prices for companies or communities to assets acquired and liabilities assumed based on their determined fair values in accordance with the provisions of ASC 805,
Business Combinations
("ASC 805"). The determination of fair value involves the use of significant judgment and estimation. The Company determines fair values as follows:
Working capital assets acquired and working capital liabilities assumed are valued on a carryover/cost basis which approximates fair value.
Property, plant and equipment are valued utilizing either a discounted cash flow projection of future revenue and costs and capitalization and discount rates using current market conditions, or a direct capitalization method. The Company allocates the fair values of buildings acquired on an as-if-vacant basis and depreciates the building values over the estimated remaining lives of the buildings, not to exceed 40 years. The Company determines the allocated values of other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon the replacement cost and depreciates such values over the assets' estimated remaining useful lives as determined at the applicable acquisition date. The Company determines the value of land either by considering the sales prices of similar properties in recent transactions or based on internal analysis of recently acquired and existing comparable properties within its portfolio.
In connection with a business combination, the Company may assume rights and obligations under certain lease agreements pursuant to which the Company becomes the lessee of a given property. The Company assumes the lease classification previously determined by the prior lessee absent a modification in the assumed lease agreement. The Company assesses assumed operating leases, including ground leases, to determine whether the lease terms are favorable or unfavorable to the Company given current market conditions on the acquisition date. To the extent the lease terms are favorable or unfavorable relative to market conditions on the acquisition date, the Company recognizes an intangible asset or liability at fair value. The Company amortizes any acquired lease-related intangibles to facility lease expense over the remaining life of the associated lease plus any assumed bargain renewal periods.
The fair value of acquired lease-related intangibles associated with the relationship with the Company's residents, if any, reflects the estimated value of in-place leases as represented by the cost to obtain residents and an estimated absorption period to reflect the value of the rent and recovery costs foregone during a reasonable lease-up period as if the acquired space was vacant. The Company amortizes any acquired in-place lease intangibles to depreciation and amortization expense over the average remaining length of stay of the residents, which is evaluated on an acquisition by acquisition basis but is generally estimated at 12 months.
The Company estimates the fair value of purchase option intangible assets by discounting the difference between the applicable property's acquisition date fair value and the stated or anticipated future option price.
The Company estimates the fair value of trade names using a royalty rate methodology and amortizes that value over the estimated useful life of the trade name.
Management contracts and other acquired contracts are valued at a multiple of management fees and operating income or are valued utilizing discounted cash flow projections that assume certain future revenues and costs over the remaining contract term. The assets are then amortized over the estimated term of the agreement.
The Company calculates the fair value of acquired long-term debt by discounting the remaining contractual cash flows of each instrument at the current market rate for those borrowings, which the Company approximates based on the rate at which the Company would expect to incur a replacement instrument on the date of acquisition, and recognizes any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
Capital lease assets are valued by the Company as a right-to-use asset. Financing lease assets are valued as if the Company owns the assets and thus are recorded at fair value. Capital and financing lease obligations are valued based on the present value of the estimated lease payments applying a discount rate equal to the Company's estimated incremental borrowing rate at the date of acquisition. Additionally, the valuation of financing lease obligations reflects a residual value component.
Preacquisition contingencies are valued when considered probable and reasonably estimable, and estimated legal fees are accrued for in accordance with the Company's existing policy. Self-insurance reserves including incurred but not reported liabilities are estimated by actuary analyses.
A deferred tax asset or liability is recognized at statutory rates for the difference between the book and tax bases of the acquired assets and liabilities. The tax bases of assets and liabilities in the Emeritus transaction were carried over at historical values.
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, which is not amortized by the Company.
Deferred Financing Costs
Third-party fees and costs incurred to obtain long-term debt are recorded as a direct adjustment to the carrying value 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
.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company has elected the "with-and-without approach" regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available.
Fair Value of Financial Instruments
ASC 820,
Fair Value Measurements and Disclosures
establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Cash and cash equivalents and cash and escrow deposits – restricted are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to the short maturity.
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 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 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 debt (including the Company's secured credit facility but excluding capital and financing lease obligations) with a carrying value of approxim
ately $3.6 billion and $3.9 billion
as of December 31, 2016 and 2015, respectively. Fair value of the debt approximates carrying value in all periods. The Company's fair value of debt disclosure is classified within Level 2 of the valuation hierarchy.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as cash and investments with maturities of 90 days or less when purchased.
Cash and Escrow Deposits – Restricted
Cash and escrow deposits – restricted consist principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and consist of the following (dollars in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Real estate tax and property insurance escrows
|
|
$
|
19,671
|
|
|
$
|
18,862
|
|
Replacement reserve escrows
|
|
|
6,970
|
|
|
|
8,011
|
|
Resident deposits
|
|
|
764
|
|
|
|
862
|
|
Other
|
|
|
5,459
|
|
|
|
4,835
|
|
Subtotal
|
|
|
32,864
|
|
|
|
32,570
|
|
Long term:
|
|
|
|
|
|
|
|
|
Insurance deposits
|
|
|
12,941
|
|
|
|
15,318
|
|
CCRC escrows
|
|
|
13,301
|
|
|
|
13,233
|
|
Debt service reserve
|
|
|
1,819
|
|
|
|
3,429
|
|
Letter of credit collateral
|
|
|
—
|
|
|
|
1,202
|
|
Other
|
|
|
—
|
|
|
|
200
|
|
Subtotal
|
|
|
28,061
|
|
|
|
33,382
|
|
Total
|
|
$
|
60,925
|
|
|
$
|
65,952
|
|
Accounts Receivable, net
Accounts receivable are reported net of an allowance for doubtful accounts, to represent the Company's estimate of the amount that ultimately will be realized in cash. The allowance for doubtful accounts was $27.0 million and $26.5 million as of December 31, 2016 and 2015, respectively. The adequacy of the Company's allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any, under reimbursement programs. 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.
Assets Held for Sale
The Company designates communities as held for sale when it is probable that the properties will be sold within one year. The Company records these assets on the consolidated balance sheet at the lesser of the carrying value and fair value less estimated selling costs. If the carrying value is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company allocates a portion of the goodwill of a reporting unit to the disposal if the disposal constitutes a business. The Company determines the fair value of the communities based primarily on purchase and sale agreements from prospective purchasers (Level 2 input). 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
Property, plant and equipment and leasehold intangibles, which include amounts recorded under capital and financing leases, 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:
Asset Category
|
|
Estimated
Useful Life
(in years)
|
Buildings and improvements
|
|
40
|
Furniture and equipment
|
|
3 – 7
|
Resident lease intangibles
|
|
1 – 3
|
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 their estimated useful life or if the renovations or improvements are made with respect to communities subject to an operating lease, over the shorter of the estimated useful life of the renovations or improvements, or the term of the operating lease. Assets under capital and financing leases and leasehold improvements are depreciated over the shorter of the estimated useful life of the assets or the term of the lease. Facility operating expense excludes depreciation and amortization directly attributable to the operation of the facility.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets held for use 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 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).
Goodwill and Intangible Assets
The Company follows ASC 350,
Goodwill and Other Intangible Assets
, and tests goodwill for impairment annually or whenever indicators of impairment arise. Factors the Company considers important in the analysis of whether an indicator of impairment exists, which could trigger an impairment of goodwill in the future, include a significant decline in the Company's stock price for a sustained period since the last testing date, a decline in the Company's market capitalization below net book value, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. The Company first assesses qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. The fair values used in this evaluation are estimated 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.
Acquired intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and all intangible assets are reviewed for impairment if indicators of impairment arise. The evaluation of impairment for definite-lived intangibles is based upon a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the asset, then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its carrying value, with any shortfall from fair value recognized as an expense in the current period.
Indefinite-lived intangible assets are not amortized but are tested for impairment annually during the fourth quarter or more frequently as required. The impairment test consists of a comparison of the estimated fair value of the indefinite-lived intangible asset with its carrying value. If the carrying amount exceeds its fair value, an impairment loss is recognized for that difference.
Amortization of the Company's definite-lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
Asset Category
|
|
Estimated
Useful Life
(in years)
|
Trade names
|
|
2 – 5
|
Other
|
|
3 – 9
|
Stock-Based Compensation
The Company follows ASC 718,
Compensation -
Stock Compensation
("ASC 718") in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee's requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date are recognized when incurred.
Certain of the Company's employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company's determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, the Company must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are updated as information is available.
For all share-based awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For graded-vesting awards with performance-based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of achievement. Performance goals are evaluated quarterly. If such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Convertible Debt Instruments
Convertible debt instruments are accounted for under ASC 470-20,
Debt – Debt
with Conversion and Other Options
. This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion, including partial cash settlement, to separately account for the liability (debt) and equity (conversion option) components of the instruments in a manner that reflects the issuer's estimated non-convertible debt borrowing rate.
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company's current policies provide for deductibles for each and every claim. As a result, the Company is, in effect, self-insured for claims that are less than the deductible amounts. In addition, the Company maintains a high deductible workers compensation program and a self-insured employee medical program.
The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored, and estimates are updated as information becomes available.
During the year ended December 31, 2016, the Company reduced its estimate for the amount of expected losses for general liability and professional liability and workers compensation claims, based on recent historical claims experience. As a result, the Company decreased the accrued reserves for general liability and professional liability and workers compensation claims by $22.7 million and $12.7 million, respectively, during the year ended December 31, 2016. The reduction in these accrued reserves decreased facility operating expense by $35.4 million for the year ended December 31, 2016.
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 Company has reviewed all ventures where it is the general partner or managing member and has determined that in all cases the limited partners or other members have substantive participating rights such as those set forth above and, therefore, none of these ventures are consolidated.
The initial carrying value of investments in unconsolidated ventures is based on the amount paid to purchase the investment interest or the carrying value of assets 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 value 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 dividends 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. When the Company does not have a significant requirement to contribute additional capital over and above the original capital commitment and the carrying value of the investment in unconsolidated venture is reduced to zero, the Company discontinues applying the equity method of accounting unless the venture has an expectation of an imminent return to profitability. If the venture subsequently reports net income, the equity method of accounting is resumed only after the Company's share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
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.
Community Leases
The Company, as lessee, makes a determination with respect to each of its community leases as to whether each should be accounted for as an operating lease or capital lease. The classification criteria is based on estimates regarding the fair value of the leased community, minimum lease payments, effective cost of funds, the economic life of the community and certain other terms in the lease agreements. In a business combination, the Company assumes the lease classification previously determined by the prior lessee absent a modification, as determined by ASC 840,
Leases
("ASC 840"), in the assumed lease agreement. Payments made under operating leases are accounted for in the Company's consolidated statements of operations as lease expense for actual rent paid plus or minus a straight-line adjustment for estimated minimum lease escalators and amortization of deferred gains in situations where sale-leaseback transactions have occurred.
For communities under capital lease and lease financing obligation arrangements, a liability is established on the Company's consolidated balance sheets representing the present value of the future minimum lease payments and a residual value for financing leases and a corresponding long-term asset is recorded in property, plant and equipment and leasehold intangibles in the consolidated balance sheets. For capital lease assets, the asset is depreciated over the remaining lease term unless there is a bargain purchase option in which case the asset is depreciated over the useful life. For financing lease assets, the asset is depreciated over the useful life of the asset. Leasehold improvements purchased during the term of the lease are amortized over the shorter of their economic life or the lease term.
All of the Company's leases contain fixed or formula-based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease. In addition, all rent-free or rent holiday periods are recognized in lease expense on a straight-line basis over the lease term, including the rent holiday period.
Sale-leaseback accounting is applied to transactions in which an owned community is sold and leased back from the buyer if certain continuing involvement criteria are met. Under sale-leaseback accounting, the Company removes the community and related liabilities from the consolidated balance sheets. Gain on the sale is deferred and recognized as a reduction of facility lease expense for operating leases and a reduction of interest expense for capital leases.
For leases in which the Company is involved with the construction of the building, the Company accounts for the lease during the construction period under the provisions of ASC 840. If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation for the amount of total project costs related to construction in progress. Once construction is complete, the Company considers the requirements under ASC 840-40. If the arrangement qualifies for sale-leaseback accounting, the Company removes the assets and related liabilities from the consolidated balance sheets. If the arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation and depreciate the assets over the lease term.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.
New Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 removes Step 2 from the goodwill impairment test. The amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations: Clarifying the Definition of a Business
("ASU 2017-01"). ASU 2017-01 provides a criteria to determine when an integrated set of assets and activities (a "set") is not a business and narrows the definition of the term output so that it is consistent with the description of outputs in Topic 606. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is only permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. The Company is currently evaluating the impact the adoption of ASU 2017-01 will have on its consolidated financial statements and disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging Issues Task Force
("ASU 2016-18"). ASU 2016-18 intends to address the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-18 will have on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including the accounting for income taxes and forfeitures, as well as the classification of awards and classification on the statement of cash flows. The updated guidance also requires the recognition of excess tax benefits within the provision for income taxes within the statements of operations rather than within stockholders' equity in the consolidated balance sheet. The Company will adopt this standard on January 1, 2017. The Company expects to adopt the new standard on a prospective basis and record a cumulative effect adjustment within the condensed consolidated statement of equity as of January 1, 2017. The Company has concluded that the adoption of ASU 2016-09 will not have an impact with regards to the application to the Company's accounting for income taxes on its consolidated balance sheet as of January 1, 2017. Additionally, upon adoption of ASU 2016-09, the Company will account for forfeitures as they occur and this will necessitate more non-cash stock-based compensation earlier in the life of a granted equity instrument and subsequent reversal of expense as forfeitures occur.
In February 2016, the FASB issued ASU 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 amends the existing accounting principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for most leases. Additionally, ASU 2016-02 makes targeted changes to lessor accounting. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and disclosures.
In February 2015, the FASB issued ASU 2015-02,
Consolidation: Amendments to the Consolidation Analysis
("ASU 2015-02"). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2015-02 on January 1, 2016, and it did not have a material impact on the Company's consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
("ASU 2014-15"). ASU 2014-15 defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. The Company adopted ASU 2014-15 during the fourth quarter of 2016, and it did not have a material impact on the Company's consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The five step model defined by ASU 2014-09 requires the Company to (i) identify the contracts with the customer, (ii) identify the performance obligations in the contact, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. ASU 2014-09 may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). ASU 2014-09, as amended, is effective for the Company's fiscal year beginning January 1, 2018, and, at that time, the Company expects to adopt the new standard under the modified retrospective approach. Under the modified retrospective approach, the guidance is applied to the most current period presented, recognizing the cumulative effect of the adoption change as an adjustment to beginning retained earnings. The Company continues to evaluate the impact the adoption of ASU 2014-09 will have on its consolidated financial statements and disclosures. The evaluation includes identifying revenue streams by like contracts to allow for ease of implementation. In addition, the Company is monitoring specific developments for the senior living industry and evaluating potential changes to our business processes, systems, and controls to support the recognition and disclosure under the new standard. Preliminary conclusions based upon procedures to-date include the following:
•
|
Resident Fees
: The Company does not anticipate that the adoption of 2014-09 will result in a significant change to the amount and timing of the recognition of resident fee revenue.
|
•
|
Management Fees and Reimbursed Costs Incurred on Behalf of Managed Communities
: The Company manages certain communities under contracts which provide for payment to the Company of a monthly management fee plus reimbursement of certain operating expenses. The Company does not anticipate that there will be any significant change to the amount and timing of revenue recognized for these monthly management fees. 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. Upon adoption of ASU 2014-09, the Company anticipates that incentive fee revenue may be recognized earlier during the annual contract period. The Company is still evaluating the performance obligations and assessing the transfer of control for each operating service identified in the contracts, which may impact the amount of revenue recognized for reimbursed costs incurred on behalf of managed communities with no net impact to the amount of income from operations.
|
•
|
Equity in Earnings (Loss) of Unconsolidated Ventures
: Certain of the Company's unconsolidated ventures accounted for under the equity method have residency agreements which require the resident to pay an upfront entrance fee prior to moving into the community and a portion of the upfront entrance fee is non-refundable. The Company's unconsolidated ventures are still evaluating the impact of the adoption of ASU 2014-09, which may impact the recognition of equity in earnings of unconsolidated ventures.
|
Additionally, real estate sales with customers are within the scope of ASU 2014-09. Under ASU 2014-09 the revenue recognition for real estate sales is largely based on the transfer of control versus continuing involvement under the current guidance. As a result, more transactions may qualify as sales of real estate and revenue may be recognized sooner. The Company will apply the five step revenue model to all future real estate transaction with customers.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's consolidated financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock equivalents include unvested restricted stock, restricted stock units and convertible debt instruments and warrants.
During the years ended December 31, 2016, 2015 and 2014, the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock, restricted stock units and convertible debt instruments and warrants were antidilutive for each year and were not included in the computation of diluted weighted average shares. The weighted average restricted stock and restricted stock units excluded from the calculations of diluted net loss per share were 4.3 million, 3.7 million and 3.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The calculation of diluted weighted average shares excludes the impact of conversion of the outstanding principal amount of $316.3 million of the Company's 2.75% convertible senior notes due June 15, 2018. As of December 31, 2016, 2015 and 2014, the maximum number of shares issuable upon conversion of the notes is approximately 13.8 million (after giving effect to additional make-whole shares issuable upon conversion in connection with the occurrence of certain events); however it is the Company's current intent and policy to settle the principal amount of the notes in cash upon conversion. The maximum number of shares issuable upon conversion of the notes in excess of the amount of principal that would be settled in cash is approximately 3.0 million.
In addition, the calculation of diluted weighted average shares excludes the impact of the exercise of warrants to acquire the Company's common stock. As of December 31, 2016, 2015 and 2014, the number of shares issuable upon exercise of the warrants was approximately 10.8 million. See Note 8 for more information about the 2.75% convertible notes and warrants.
4. Acquisitions, Dispositions and Other Significant Transactions
2016 Dispositions of Owned Communities
The Company began 2016 with 17 of its owned communities classified as held for sale as of December 31, 2015. During the year ended December 31, 2016, the Company entered into agreements to sell an additional 51 communities and completed the dispositions of 51 owned communities. These transactions are summarized below.
•
|
During the three months ended March 31, 2016, the Company sold seven of the 17 communities held for sale as of December 31, 2015 for an aggregate sales price of $46.7 million. The results of operations of these communities are reported in the Assisted Living and CCRCs – Rental segments within the consolidated financial statements through the respective disposition dates. The remaining 10 communities were classified as held for sale as of December 31, 2016.
|
•
|
During the three months ended June 30, 2016, the Company entered into an agreement with a third party to sell a 12-state portfolio of 44 owned communities for an aggregate sales price of $252.5 million. During the three months ended September 30, 2016, the Company sold 32 of these communities for an aggregate sales price of $177.5 million. During the three months ended December 31, 2016, the Company sold nine of these communities for an aggregate sales price of $47.7 million. The results of operations of these 41 communities are reported within the Assisted Living segment within the consolidated financial statements through the respective disposition dates. During the three months ended December 31, 2016, the agreement was amended to remove one community from the portfolio, and the aggregate sales price of the portfolio was decreased by $4.7 million. The remaining two communities within the portfolio were classified as held for sale as of December 31, 2016.
|
•
|
During 2016, the Company identified seven additional owned communities as held for sale. During the three months ended December 31, 2016, the Company sold three of these communities for an aggregate sales price of $33.0 million. The results of operations of these three communities are reported in the Assisted Living, CCRCs – Rental and Retirement Center segments through the respective disposition dates. The remaining four communities were classified as held for sale as of December 31, 2016.
|
As of December 31, 2016, $97.8 million was recorded as assets held for sale and $60.5 million of mortgage debt was included in the current portion of long-term debt within our consolidated balance sheet with respect to the 16 communities held for sale as of such date. This debt will either be repaid with the proceeds from the sales or be assumed by the prospective purchasers. The results of operations of the 16 communities are reported in the following segments within the consolidated financial statements: Assisted Living (13 communities) and CCRCs – Rental (three communities). The 16 communities had resident fee revenue of $47.2 million and facility operating expenses of $42.0 million for the year ended December 31, 2016. During the year ended December 31, 2016, the Company recognized $15.8 million of impairment expense related to assets held for sale, primarily due to the excess of carrying value, including allocated goodwill, over the estimated selling price less costs to dispose.
The closings of the sales of the unsold communities classified as held for sale are subject to receipt of regulatory approvals and satisfaction of other customary closing conditions, and are expected to occur in the next 12 months; however, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
2016 Dispositions and Restructurings of Leased Communities
On November 1, 2016, the Company announced that it had entered into agreements to, among other things, terminate triple-net leases with respect to 97 communities, four of which would be contributed to an existing unconsolidated venture in which the Company holds an equity interest and 64 of which would be owned by a venture in which the Company expects to acquire a non-controlling interest. The transactions include the following components:
•
|
HCP, Inc. ("HCP") and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") entered into an agreement pursuant to which HCP has agreed to sell 64 communities—which are currently leased to the Company and have a remaining average lease term of approximately 12 years—to Blackstone for a purchase price of $1.125 billion (the "HCP Sale Transaction"). Separately, the Company entered into an agreement with Blackstone pursuant to which the Company has agreed to form a venture (the "Blackstone Venture") into which Blackstone will contribute the 64 communities and into which the Company expects to contribute a total of approximately $170.0 million to purchase a 15% equity interest, terminate the leases, and fund its share of anticipated closing costs and working capital. Following closing, the Company will manage the communities on behalf of the venture. The Company expects the Blackstone Venture transactions to close during the three months ended March 31, 2017. The results of operations of the 64 communities are reported in the following segments within the consolidated financial statements: Assisted Living (48 communities), Retirement Centers (nine communities) and CCRCs-Rental (seven communities). The 64 communities had resident fee revenue of $264.7 million, facility operating expenses of $182.0 million and cash lease payments of $88.4 million for the year ended December 31, 2016.
|
•
|
The Company and HCP agreed to terminate triple-net leases with respect to eight communities. HCP agreed to contribute immediately thereafter four of such communities to an existing unconsolidated venture with HCP in which the Company has a 10% equity interest. During the three months ended December 31, 2016, the triple-net leases with respect to seven communities were terminated and HCP contributed four of the communities to the existing unconsolidated venture. The triple-net lease with respect to the remaining community was terminated during January 2017. The results of operations of the eight communities are reported in the following segments within the consolidated financial statements: Assisted Living (six communities), Retirement Centers (one community) and CCRCs-Rental (one community). The eight communities had resident fee revenue of $41.1 million, facility operating expenses of $30.6 million and cash lease payments of $11.3 million for the year ended December 31, 2016.
|
•
|
The Company and HCP agreed to terminate triple-net leases with respect to 25 communities, which the Company expects to occur in stages through the end of fiscal 2017 (the "HCP Termination Transactions"). During the three months ended December 31, 2016, the Company and HCP amended the leases with respect to these 25 communities to shorten the term of the leases to facilitate the HCP Termination Transactions, with the term with respect to each such community to end on the earlier of October 31, 2017 and the date on which such community is sold or the operations of such community are transferred, at the direction of HCP, to a third party tenant or operator. As a result of the agreement to amend and terminate the community lease agreements for these 25 communities, the Company recorded an $11.1 million loss on facility lease termination within the consolidated statement of operations for the year ended December 31, 2016. The results of operations of the 25 communities are reported in the following segments within the consolidated financial statements: Assisted Living (23 communities) and CCRCs-Rental (two communities). The 25 communities had resident fee revenue of $72.2 million, facility operating expenses of $58.6 million and cash lease payments of $18.9 million for the year ended December 31, 2016.
|
The closings of the various pending transactions with HCP and Blackstone are subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals; however, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
The transactions related to the Blackstone Venture may require the Company to record a significant charge in fiscal 2017 for the amount by which the initial carrying value of the investment in the Blackstone Venture exceeds its fair value. The initial carrying value of the investment in the Blackstone Venture would be based on the total of the approximately $170.0 million of cash expected to be contributed to purchase the equity interest and the carrying value of the Company's assets and liabilities under operating and capital and financing leases expected to be contributed by the Company and deconsolidated from the Company's consolidated financial statements. As of December 31, 2016, the carrying value of the lease obligations for the 64 communities exceed the carrying value of the assets under operating and capital and financing leases by approximately $107.0 million. In connection with these contributions, for accounting purposes, if the approximately $63.0 million net contribution amount exceeds the fair value of the Company's anticipated 15% interest in the Blackstone Venture, a charge may be required for the excess amount upon closing of the Blackstone Venture. Additionally, it is expected that these transactions related to the Blackstone Venture may require the Company to record a significant increase to the Company's existing tax valuation allowance, after considering the change in the Company's future reversal of estimated timing differences resulting from these transactions, mainly caused by removing the deferred positions related to the contributed leases. The Company has recorded valuation allowances of $264.3 million at December 31, 2016 against its $369.5 million of federal and state net operating carryforwards and tax credits as the Company anticipates these losses will not be utilized prior to expiration. The actual amount of charges related to the transactions related to the Blackstone Venture and the increase to the valuation allowance will be determined following the closing of the Blackstone Venture.
Asset Impairment
The following is a summary of the asset impairment expense (dollars in millions):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Property, plant and equipment and leasehold intangibles, net (Note 6)
|
|
$
|
166.2
|
|
|
$
|
23.4
|
|
|
$
|
10.0
|
|
Investment in unconsolidated ventures (Note 5)
|
|
|
36.8
|
|
|
|
—
|
|
|
|
—
|
|
Other intangible assets, net (Note 7)
|
|
|
29.7
|
|
|
|
0.9
|
|
|
|
—
|
|
Assets held for sale
|
|
|
15.8
|
|
|
|
33.6
|
|
|
|
—
|
|
Asset impairment
|
|
$
|
248.5
|
|
|
$
|
57.9
|
|
|
$
|
10.0
|
|
During the three months ended December 31, 2016, asset impairment expense includes $151.3 million of charges for property, plant and equipment and leasehold intangibles, $36.8 million of charges for investments in unconsolidated ventures, $29.7 million of charges for other intangible assets and $4.1 million of charges for assets held for sale.
2015 Community Acquisitions
On December 29, 2014, the Company exercised its purchase option under the Master Lease (as defined below) with HCP. As a result, the Company agreed to purchase the fee simple interest of nine communities previously leased to the Company for an aggregate purchase price of $60.0 million. On December 31, 2014, the Company paid the full purchase price of $51.4 million of cash as a deposit for the purchase of eight of the nine communities, and the Company took title to these eight communities at the closing on January 1, 2015. On May 1, 2015, the Company acquired the ninth community and paid the remainder of the purchase price of $8.6 million of cash. The results of operations of these communities are reported in the Assisted Living and CCRCs - Rental segments within the consolidated financial statements.
In February 2015, the Company acquired the underlying real estate associated with 15 communities that were previously leased for an aggregate purchase price of $268.6 million. The results of operations of these communities are reported in the Retirement Centers, Assisted Living, and CCRCs – Rental segments within the consolidated financial statements for the year ended December 31, 2015. The Company financed the transaction with cash on hand, amounts drawn on the secured credit facility and $20.0 million of seller financing. The $20.0 million note has a five year term and bears interest at a fixed rate of 8.0%. The fair value of the communities acquired was determined to approximate $187.2 million. The fair values of the property, plant and equipment of the acquired communities were determined utilizing a direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 3 measurements within the fair value hierarchy. The range of capitalization rates utilized was 6.25% to 8.75%, depending upon the property type, geographical location, and the quality of the respective community. The Company recorded the difference between the amount paid and the estimated fair value of the communities acquired ($76.1 million) as a loss on facility lease termination on the consolidated statement of operations for the year ended December 31, 2015, which includes the reversal of $5.3 million of deferred lease liabilities associated with the termination of the operating lease agreements. The payment for the termination of the lease agreements has been included within net cash provided by operating activities within the consolidated statement of cash flows for the year ended December 31, 2015.
In October 2015, the Company acquired the underlying real estate associated with five communities that were previously leased for an aggregate purchase price of $78.4 million. The results of operations of these communities are reported in the Assisted Living segment. The Company financed the transaction with seller-financing.
2015 Dispositions of Owned Communities
During the year ended December 31, 2015, the Company sold 17 communities for an aggregate selling price of $82.9 million. The results of operations of the communities are reported in the Retirement Centers, Assisted Living, and CCRCs - Rental segments within the consolidated financial statements through the respective disposition dates. As of December 31, 2015, the Company identified 17 communities as held for sale. As of December 31, 2015, $110.6 million was recorded as assets held for sale and $60.8 million of mortgage debt related to communities held for sale was included in the current portion of long-term debt within the Company's consolidated balance sheet. During the year ended December 31, 2015, the Company recognized $18.4 million of impairment expense related to communities sold in 2015 and $15.2 million of impairment expense related to communities identified as assets held for sale as of December 31, 2015, primarily due to the excess of carrying value, including allocated goodwill, over the estimated selling price less costs to dispose.
2014 Acquisition of Emeritus
On July 31, 2014, the Company completed the merger contemplated by that certain Agreement and Plan of Merger, dated as of February 20, 2015, by and among Emeritus Corporation ("Emeritus"), the Company, and Broadway Merger Sub Corporation, a wholly-owned subsidiary of the Company ("Merger Sub"), pursuant to which Merger Sub merged with and into Emeritus, with Emeritus continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the "Merger"). Prior to the Merger, Emeritus was a senior living service provider focused on operating residential style communities throughout the United States. As of July 31, 2014 Emeritus operated 493 communities, including assisted living and dementia care communities. Many of these communities offer independent living alternatives and, to a lesser extent, skilled nursing care. As of July 31, 2014, Emeritus owned 182 communities and leased 311 communities. Prior to the Merger, Emeritus also offered a range of outpatient therapy and home health services in Florida, Arizona and Texas.
For accounting purposes, the Merger was accounted for by the Company as a purchase. The results of Emeritus' operations have been included in the consolidated financial statements subsequent to July 31, 2014. Revenue and loss from operations of Emeritus included in the Company's consolidated statements of operations for the year ended December 31, 2014 were $785.5 million and $128.2 million, respectively.
The aggregate acquisition-date fair value of the consideration transferred in the Merger was approximately $3.0 billion which consisted of the issuance of 47.6 million shares of the Company's common stock with a fair value of approximately $1.6 billion upon the cancellation of all shares of Emeritus' common stock and stock options, as well as the Company's assumption of approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness of Emeritus. The fair value of the 47.6 million common shares issued was determined based on the closing market price of the Company's common shares on July 31, 2014, the effective date of the Merger.
As a result of the acquisition of Emeritus, the Company acquired, directly or indirectly, entities that were lessees under operating and capital leases covering 311 communities, as well as certain other leases such as office leases and leases associated with Emeritus' Nurse on Call home health business. The community leases contain customary terms, including assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants. In connection with the Merger, the Company entered into guarantees of certain of these leases.
The $1.4 billion aggregate principal amount of existing mortgage debt assumed, directly or indirectly, by the Company in the Merger was collateralized by a total of 179 underlying communities, bore interest either at fixed rates at a weighted average of 6.06% per annum or at variable rates at a weighted average of 5.49% per annum (in each case, as of July 31, 2014), and had remaining maturities ranging from approximately three months to 33 years. The mortgage loans contained customary terms including assignment and change of control restrictions, acceleration provisions and financial covenants. In connection with the Merger, the Company entered into guarantees of certain of these debt arrangements.
Emeritus maintained general and professional liability coverage for its owned, leased and managed communities under insurance policies that provided for self-insured retention. In certain historical periods Emeritus was uninsured for a subset of communities. In addition, it maintained a large-deductible workers compensation and a self-insured employee medical program. Emeritus accrued for claims under these three programs and therefore maintained reserves for liabilities related thereto. The Company acquired these liabilities as a result of the Merger, evaluated the adequacy of Emeritus' insurance reserves by reviewing historical claims, investigating claim files with assistance from Emeritus' third party administrators and other consultants, reviewing Emeritus' historical actuarial reports, and obtaining new actuarial valuations for claims incurred but not paid as of the date of the Merger. The Company also acquired tail insurance to provide coverage for general and professional liability claims incurred before the Merger date but made after, and maintains reserves for deductibles payable under the tail policies.
The fair values of the acquired property, plant and equipment, including communities and assets under capital and financing leases, were determined utilizing a direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 3 measurements within the fair value hierarchy. The range of capitalization rates utilized was 5.5% to 9.75%, depending upon the property type, geographical location, and the quality of the respective community.
The fair values of the acquired capital and financing lease obligations were determined utilizing a discounted cash flow approach considering the estimated contractual lease payments and a market discount rate. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 3 measurements within the fair value hierarchy. The range of discount rates utilized was 6.0% to 10.75%, depending upon the remaining lease term, property type, geographical location, and the quality of the respective community.
The fair values of the acquired long-term debt obligations were determined utilizing a discounted cash flow approach considering the estimated contractual long-term debt payments and a market discount rate. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 2 measurements within the fair value hierarchy. The range of discount rates utilized was 3.0% to 7.0%, depending upon the remaining debt term and collateral securing the indebtedness.
The table below presents the allocation of purchase price to the assets acquired and liabilities assumed (in millions):
|
|
|
|
Cash and cash equivalents
|
|
$
|
28
|
|
Property, plant and equipment and leasehold intangibles
|
|
|
5,506
|
|
Goodwill
|
|
|
645
|
|
Other intangible assets, net
|
|
|
259
|
|
Other assets, net
|
|
|
307
|
|
Trade accounts payable and accrued expenses
|
|
|
(297
|
)
|
Long-term debt
|
|
|
(1,516
|
)
|
Capital and financing lease obligations
|
|
|
(2,692
|
)
|
Deferred tax liability
|
|
|
(339
|
)
|
Other liabilities
|
|
|
(251
|
)
|
Noncontrolling interest
|
|
|
(1
|
)
|
Fair value of Brookdale common stock issued
|
|
$
|
1,649
|
|
The goodwill of $645.2 million was primarily attributable to the synergies expected to arise after the Merger. The Retirement Centers, Assisted Living and Brookdale Ancillary Services segments were allocated goodwill of $20.5 million, $497.9 million and $126.8 million, respectively. The goodwill is not deductible for tax purposes.
The following table provides the pro forma consolidated operational data as if the Company had acquired Emeritus on January 1, 2013 (unaudited, in millions, except share and per share data):
|
|
|
|
|
|
2014
|
|
Total revenue
|
|
$
|
5,055
|
|
Net income (loss) attributable to common stockholders
|
|
|
(103
|
)
|
|
|
|
|
|
Basic and diluted net income (loss) per share attributable to common stockholders
|
|
$
|
(0.59
|
)
|
Weighted average shares used in computing basic and diluted net income (loss) per share (in thousands)
|
|
|
175,823
|
|
The Company incurred $57.1 million of transaction costs related to the acquisition of Emeritus for the year ended December 31, 2014. Transaction costs are primarily comprised of transaction fees and direct acquisition costs, including legal, finance, consulting, professional fees and other third party costs. The proforma consolidated operational data for the year ended December 31, 2014 excludes $57.1 million of transaction costs that were directly attributable to the Merger. On August 29, 2014, the Company completed the HCP Transactions (as defined below). The pro forma consolidated operational data reflects the Company's full ownership interests and previously existing lease terms through the closing of the HCP Transactions on August 29, 2014 and reflects the Company's subsequent venture arrangements and amended lease terms for the remainder of the 2014 period.
The pro forma consolidated operational data is based on assumptions and estimates considered appropriate by the Company's management; however, these pro forma results are not necessarily indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the period presented, nor does it purport to represent the consolidated results of operations for future periods. The pro forma consolidated operational data does not include the impact of any synergies that have been, or may be, achieved from the acquisition of Emeritus or any strategies that management has implemented or considered or may implement or consider in order to continue to efficiently manage operations.
On July 30, 2014, in connection with the Merger, the Company's Certificate of Incorporation was amended to authorize up to 400 million shares of common stock.
2014 HCP Transactions
On August 29, 2014, the Company completed the transactions contemplated by that certain Master Contribution and Transactions Agreement (the "Master Agreement"), dated as of April 23, 2014, by and between the Company and HCP. At the closing of these transactions (the "Closing"), the Company and HCP entered into two ventures and amended the terms of certain existing agreements between the Company and HCP ("HCP Transactions").
Each of the ventures contemplated by the Master Agreement uses a "RIDEA" structure, whereby at the Closing each of the Company and HCP invested in an "opco" entity and a "propco" entity. The propco owns most of the applicable communities and leases such communities to the opco pursuant to long-term leases entered into at the Closing. The opco owns the remainder of the applicable communities not owned by the propco, and at the Closing the opco engaged an affiliate of the Company to manage all of the owned and leased communities pursuant to management agreements with 15-year terms subject to certain extension options.
Venture Relating to Entry Fee CCRCs.
At the Closing, the Company and HCP entered into a venture with respect to certain entry fee CCRCs previously owned, leased and/or operated by the Company. The Company owns a 51% ownership interest, and HCP owns a 49% ownership interest, in each of the propco and opco (together, the "CCRC Venture"). Pursuant to the terms of the Master Agreement, at the Closing the Company contributed to the CCRC Venture eight wholly-owned entities (owning eight CCRCs subject, in certain cases, to existing debt) and certain purchase options with respect to the HCP Communities (as defined below), and HCP contributed to the CCRC Venture three wholly-owned entities (owning three properties in two CCRCs (the "HCP Communities")). In addition, HCP contributed $323.5 million in cash and the CCRC Venture completed the purchases of four communities managed by the Company for an aggregate purchase price of $323.5 million immediately following the Closing. Each of the CCRCs in the CCRC Venture is managed by the Company pursuant to market rate management agreements entered into at the Closing, and the Company agreed to guarantee certain obligations of the manager under the applicable management agreements. Each of the propco and opco is governed by a board of managers consisting of six members, with three representatives appointed by each of the Company and HCP.
The results of operations and financial position of the ten previously owned or leased entry fee CCRCs, including refundable entrance fee liabilities and deferred revenue, were in all material respects deconsolidated from the Company prospectively upon formation of the CCRC Venture. The Company's interest in the CCRC Venture is accounted for under the equity method of accounting. The Company's investment basis in the CCRC Venture is based on the carrying values of the net assets it contributed which is less than the Company's proportional share of underlying fair value of equity.
Venture Relating to Emeritus / HCP Communities.
At the Closing, the Company and HCP entered into a venture with respect to 49 independent living, assisted living, memory care and/or skilled nursing care communities previously owned by HCP and leased and historically operated by Emeritus. The Company acquired the leases in the Merger, recorded them at fair value at the acquisition date, and in this transaction effectively terminated the leases; therefore the Company has written off all of the recorded lease values in connection with this termination. As of the formation date, the Company owned a 20% ownership interest, and HCP owned an 80% ownership interest, in each of the propco and opco (together, the "HCP 49 Venture"). Pursuant to the terms of the Master Agreement, at the Closing an HCP affiliate made a loan to the Company at prevailing interest rates in the original principal amount of approximately $68.0 million to fund the Company's initial capital contribution to the HCP 49 Venture. HCP contributed 49 communities to propco. At the Closing, propco leased the communities to opco. Each of the communities in the HCP 49 Venture is managed by an affiliate of the Company, and the Company agreed to guarantee certain obligations of the manager under the applicable market rate management agreements. During the three months ended December 31, 2014, the Company repaid the $68.0 million loan from HCP primarily with the proceeds from the public equity offering completed during the third quarter of 2014.
The results and financial position of the communities were, in all material respects, deconsolidated from the Company prospectively upon formation of the HCP 49 Venture. The Company's interest in the venture is accounted for under the equity method of accounting.
Pursuant to the terms of the Master Agreement, the Company was required to pay HCP a fee related to the lease restructuring in the amount of $34 million, which was paid over a two-year period beginning September 30, 2014. The elimination of the recorded lease values upon termination of the aforementioned leases approximated the $34 million liability to HCP.
Amendments to Existing Agreements (including Triple Net Leases).
At the Closing, the Company and HCP amended and restated (i) that certain Master Lease and Security Agreement, dated as of October 31, 2012, by and between Emeritus and certain affiliates of HCP, with respect to 112 communities, and (ii) certain other triple net leases between Emeritus and affiliates of HCP, with respect to 41 communities, together into a single master lease with the communities subject thereto separated into three pools (the "Master Lease"). The term of the Master Lease is 14 years for the pool 1 communities, 15 years for the pool 2 communities and 16 years for the pool 3 communities, with an average of approximately 15 years, in each case subject to two extension options of approximately 10 years each, and the Master Lease is guaranteed by the Company. The Master Lease provided for total base rent in 2014 of approximately $158 million, with lower future rent payments and escalations compared to the previously existing leases. HCP agreed to make available up to $100 million for capital expenditures related to the communities during calendar years 2014 through 2017 at an initial lease rate of 7.0%. The Master Lease included certain customary covenants, with respect to, among other things, capital expenditure requirements, restrictions on the ownership, operation and management of competing communities and transfer restrictions (including restrictions on changes of control of the Company). The Master Lease also included customary events of default and remedies relating thereto. In addition, the Master Lease included a fair value purchase option in favor of the Company for up to ten communities at an aggregate purchase price not to exceed $60.0 million. On December 29, 2014 the Company exercised this purchase option and agreed to purchase nine communities for an aggregate purchase price of $60.0 million.
In connection with the transactions contemplated by the Master Agreement, at the Closing, (i) the parties terminated the purchase option rights granted by HCP to Emeritus pursuant to 49 of the previously existing Emeritus leases, (ii) the parties agreed to modify the existing term extension hurdle and incentive management fee structure applicable to an existing venture between the Company and HCP in respect of 20 independent living, assisted living, memory care and/or skilled nursing care communities, and (iii) HCP released certain deposits and reserves posted by the Company and held by HCP or its affiliates in connection with existing leases between the parties. For accounting purposes, the amended leases were treated as new leases and classified as either capital or financing leases. The terminated purchase options were included in the determination of recorded capital or financing lease related balances.
During the three months ended December 31, 2016, the Company and HCP entered into three amendments to the Master Lease effective November 1, 2016 to facilitate the HCP Termination Transactions and the HCP Sale Transaction. The amendments, among other things: (i) shortened the term of the Master Lease with respect to 19 communities to facilitate the HCP Termination Transactions, with the term with respect to each such community to end on the earlier of October 31, 2017 and the date on which such community is sold or the operations of such community are transferred, at the direction of HCP, to a third party tenant or operator; (ii) removed 57 communities from the Master Lease as of November 1, 2016, to facilitate the HCP Sale Transaction; and (iii) extended by one year the period during which the Company is permitted to undertake capital projects for which it is entitled to reimbursement by HCP. Simultaneously, the Company and HCP entered into a separate lease with HCP, with the Company as guarantor, covering the 57 communities removed from the Master Lease on terms that are substantially the same as those contained in the Master Lease. The Blackstone Venture is expected to acquire the 57 communities encumbered by such new lease, at which time the new lease will be terminated.
Equity Offering
In September 2014, the Company completed a public equity offering of 10,298,506 shares of common stock, which yielded net proceeds of approximately $330.4 million, net of approximately $0.4 million of costs related to the offering. During the three months ended December 31, 2014, the Company repaid $275.9 million of existing long-term debt with a weighted average interest rate of approximately 5.5%, financed primarily with the proceeds of the public equity offering, and the Company has used and is using net proceeds to finance the exercise of purchase options on certain communities currently leased by the Company and for other general corporate purposes, which may include additional debt repayments and the acceleration of capital investments in the Company's communities and corporate infrastructure platform.
5. Variable Interest Entities and Investment in Unconsolidated Ventures
Variable Interest Entities
At December 31, 2016, the Company has equity interests in unconsolidated VIEs. The Company has determined that it does not have the power to direct the activities of the VIEs that most significantly impact the VIEs' economic performance and is not the primary beneficiary of these VIEs in accordance with ASC 810. The Company's interests in the VIEs are, therefore, accounted for under the equity method of accounting.
The Company holds a 51% equity interest in the CCRC Venture. The CCRC Venture's opco has been identified as a VIE. The equity members of the CCRC Venture's opco share certain operating rights, and the Company acts as manager to the CCRC Venture opco. However, the Company does not consolidate this VIE because it does not have the ability to control the activities that most significantly impact this VIE's economic performance. The assets of the CCRC Venture opco primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable and cash and cash equivalents. The obligations of the CCRC Venture opco primarily consist of community lease obligations, mortgage debt, accounts payable, accrued expenses and refundable entrance fees. See Note 4 for more information about the Company's entry into the CCRC Venture.
The Company holds an equity ownership interest in each of the propco and opco of three ventures ("RIDEA Ventures") that operate senior housing communities in a RIDEA structure. As of December 31, 2016, the Company's equity ownership interest is 10% for two of the ventures and 20% for one venture. As of December 31, 2016, HCP owns the remaining 90% and 80% equity ownership interests in the RIDEA Ventures. The RIDEA Ventures have been identified as VIEs. The equity members of the RIDEA Ventures share certain operating rights, and the Company acts as a manager to the opcos of the RIDEA Ventures. However, the Company does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact the economic performance of these VIEs. The assets of the RIDEA Ventures primarily consist of the senior housing communities that the RIDEA Ventures own, resident fees receivable and cash and cash equivalents. The obligations of the RIDEA Ventures primarily consist of notes payable, accounts payable and accrued expenses.
The carrying value and classification of the related assets, liabilities and maximum exposure to loss as a result of the Company's involvement with these VIEs are summarized below at December 31, 2016 (in millions):
VIE
|
Asset
|
|
Maximum Exposure to Loss
|
|
|
Carrying Amount
|
|
|
|
|
|
|
|
|
|
CCRC Venture opco
|
Investment in unconsolidated ventures
|
|
$
|
50.1
|
|
|
$
|
50.1
|
|
RIDEA Ventures
|
Investment in unconsolidated ventures
|
|
$
|
92.1
|
|
|
$
|
92.1
|
|
As of December 31, 2016, the Company is not required to provide financial support, through a liquidity arrangement or otherwise, to its unconsolidated VIEs.
Investment in Unconsolidated Ventures
The Company owns interests in the following ventures that are accounted for under the equity method as of December 31, 2016:
Venture
|
Ownership Percentage
|
CCRC Venture
|
|
51%
|
HCP 49 Venture
|
|
20%
|
BKD-HCN venture opco and propco
|
|
20%
|
HCP 35 Venture
|
|
10%
|
S-H Twenty-One venture opco and propco
|
|
10%
|
Combined summarized financial information of the unconsolidated ventures accounted for under the equity method as of December 31, and for the years then ended are as follows (dollars in millions):
Statement of Operations Information
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total revenue
|
|
$
|
1,133
|
|
|
$
|
964
|
|
|
$
|
439
|
|
Facility operating expenses
|
|
|
(779
|
)
|
|
|
(679
|
)
|
|
|
(293
|
)
|
Net income (loss)
|
|
|
(4
|
)
|
|
|
(18
|
)
|
|
|
(10
|
)
|
Balance Sheet Information
|
|
2016
|
|
|
2015
|
|
Current assets
|
|
$
|
128
|
|
|
$
|
143
|
|
Noncurrent assets
|
|
|
3,932
|
|
|
|
4,156
|
|
Current liabilities
|
|
|
1,153
|
|
|
|
583
|
|
Noncurrent liabilities
|
|
|
2,215
|
|
|
|
2,294
|
|
During the year ended December 31, 2016, the CCRC Venture obtained non-recourse mortgage financing on certain communities and received proceeds of $434.5 million. The CCRC Venture distributed the net proceeds to its investors and the Company received proceeds of $221.6 million. As a result of the distribution, the Company's carrying value of its equity method investment in the CCRC Venture propco was reduced below zero and the Company has recorded a $60.2 million equity method liability within other liabilities within the consolidated balance sheet as of December 31, 2016.
In January 2017, the Company completed the sale of a 10% ownership interest in the HCP 49 Venture for $26.8 million of net cash proceeds. The Company retained a 10% ownership interest in the HCP 49 Venture.
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 2016, the Company recorded $36.8 million of non-cash impairment charges related to investments in unconsolidated ventures. These impairment charges are primarily due to lower than expected operating performance at the communities owned by the unconsolidated ventures and reflect the amount by which the carrying values of the investments exceeded their estimated fair value.
On June 30, 2015, the Company and HCP entered into a venture, which acquired 35 senior housing communities ("HCP 35 Venture") for $847 million. The venture uses a RIDEA structure, whereby the Company and HCP invested in an "opco" and a "propco". The Company contributed $30.3 million in cash to the HCP 35 Venture. The Company owns a 10% ownership interest, and HCP owns a 90% ownership interest, in each of the propco and opco. The Company had operated these communities under a management agreement since 2011 and continued to manage the communities under a market rate long-term management agreement with the venture as of the closing of the venture. The Company's interest in the venture is accounted for under the equity method of accounting.
6. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2016 and 2015, net property, plant and equipment and leasehold intangibles, which include assets under capital and financing leases, consisted of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
455,307
|
|
|
$
|
486,567
|
|
Buildings and improvements
|
|
|
5,053,204
|
|
|
|
5,260,826
|
|
Leasehold improvements
|
|
|
126,325
|
|
|
|
100,430
|
|
Furniture and equipment
|
|
|
974,516
|
|
|
|
895,447
|
|
Resident and leasehold operating intangibles
|
|
|
705,000
|
|
|
|
783,434
|
|
Construction in progress
|
|
|
69,803
|
|
|
|
138,054
|
|
Assets under capital and financing leases
|
|
|
2,879,996
|
|
|
|
2,909,653
|
|
|
|
|
10,264,151
|
|
|
|
10,574,411
|
|
Accumulated depreciation and amortization
|
|
|
(2,884,846
|
)
|
|
|
(2,543,035
|
)
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
7,379,305
|
|
|
$
|
8,031,376
|
|
During the years ended December 31, 2016, 2015 and 2014, 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 value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $166.2
million for the year ended December 31, 2016, primarily within the
Assisted Living and CCRCs - Rental segments, $24.3
million for the year ended December 31, 2015, primarily within the Assisted Living and CCRCs - Rental segments and $10.0 million for the year ended December 31, 2014, primarily within the CCRCs – Rental and Assisted Living segments. These impairment charges are primarily due to lower than expected operating performance at these properties and reflect the amount by which the carrying values of the assets exceeded their estimated fair value.
During the years ended December 31, 2016 and 2015, the Company recorded $15.8 million and $33.6 million, respectively, of non-cash impairment charges related to communities identified as held for sale, inclusive of the allocation of goodwill to the disposed communities. These impairment charges are primarily due to the excess of carrying value, including allocated goodwill, over the estimated selling price less costs to dispose. Refer to Note 4 for more information about the Company's community dispositions and assets held for sale.
For the years ended December 31, 2016, 2015 and 2014, the Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $514.2 million, $721.0 million and $529.1 million, respectively.
Future amortization expense for resident and leasehold operating intangibles is estimated to be as follows (dollars in thousands):
Year Ending December 31,
|
|
Future
Amortization
|
|
2017
|
|
$
|
9,664
|
|
2018
|
|
|
7,601
|
|
2019
|
|
|
6,209
|
|
2020
|
|
|
4,353
|
|
2021
|
|
|
2,731
|
|
Thereafter
|
|
|
9,958
|
|
Total
|
|
$
|
40,516
|
|
In connection with the acquisition of Emeritus, the Company recorded intangible assets for resident-in-place leases and below market operating lease intangibles. The Company is amortizing the resident-in-place leases and below market operating lease intangibles over their estimated weighted average useful lives of one and nine years, respectively.
7. Goodwill and Other Intangible Assets, Net
The following is a summary of the carrying amount of goodwill as of December 31, 2016 and December 31, 2015 presented on an operating segment basis (dollars in thousands):
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Dispositions and Other Reductions
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Dispositions and Other Reductions
|
|
|
Net
|
|
Retirement Centers
|
|
$
|
28,141
|
|
|
$
|
(820
|
)
|
|
$
|
27,321
|
|
|
$
|
28,141
|
|
|
$
|
(721
|
)
|
|
$
|
27,420
|
|
Assisted Living
|
|
|
600,162
|
|
|
|
(48,817
|
)
|
|
|
551,345
|
|
|
|
591,814
|
|
|
|
(20,348
|
)
|
|
|
571,466
|
|
Brookdale Ancillary Services
|
|
|
126,810
|
|
|
|
—
|
|
|
|
126,810
|
|
|
|
126,810
|
|
|
|
—
|
|
|
|
126,810
|
|
Total
|
|
$
|
755,113
|
|
|
$
|
(49,637
|
)
|
|
$
|
705,476
|
|
|
$
|
746,765
|
|
|
$
|
(21,069
|
)
|
|
$
|
725,696
|
|
The Company concluded that goodwill for all reporting units was not impaired as of October 1, 2016 (the Company's annual measurement date) and as of December 31, 2016. Factors the Company considers important in its analysis, which could trigger an impairment of such assets, include significant underperformance relative to historical or projected future operating results, significant negative industry or economic trends, a significant decline in the Company's stock price for a sustained period and a decline in its market capitalization below net book value. A change in anticipated operating results or the other metrics indicated above could necessitate further analysis of potential impairment at an interval prior to the Company's annual measurement date.
Approximately $28.5 million and $0.1 million of goodwill in the Assisted Living and Retirement Centers segments, respectively, was allocated to the communities identified as held for sale during 2016. Refer to Note 4 for more information about the Company's assets held for sale.
The following is a summary of other intangible assets at December 31, 2016 and 2015 (dollars in thousands):
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Community purchase options
|
|
$
|
4,738
|
|
|
$
|
—
|
|
|
$
|
4,738
|
|
|
$
|
40,270
|
|
|
$
|
—
|
|
|
$
|
40,270
|
|
Health care licenses
|
|
|
65,126
|
|
|
|
—
|
|
|
|
65,126
|
|
|
|
66,612
|
|
|
|
—
|
|
|
|
66,612
|
|
Trade names
|
|
|
27,800
|
|
|
|
(21,135
|
)
|
|
|
6,665
|
|
|
|
27,800
|
|
|
|
(14,209
|
)
|
|
|
13,591
|
|
Other
|
|
|
13,531
|
|
|
|
(7,053
|
)
|
|
|
6,478
|
|
|
|
13,531
|
|
|
|
(4,818
|
)
|
|
|
8,713
|
|
Total
|
|
$
|
111,195
|
|
|
$
|
(28,188
|
)
|
|
$
|
83,007
|
|
|
$
|
148,213
|
|
|
$
|
(19,027
|
)
|
|
$
|
129,186
|
|
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2016, 2015 and 2014 was $9.2 million, $12.2 million and $8.0 million, respectively. Health care licenses were determined to be indefinite-lived intangible assets and are not subject to amortization. The community purchase options are not currently amortized, but will be added to the cost basis of the related communities if the option is exercised, and will then be depreciated over the estimated useful life of the community. During the year ended December 31, 2016, the Company exercised one community purchase option and added the $7.3 million carrying value of the community purchase option intangible to the cost basis of the property, plant and equipment of the community. The Company is amortizing the trade names and management contract intangibles assets over their estimated weighted average useful lives of three years and nine years, respectively.
During 2016, the Company recorded $28.2 million and $1.5 million of non-cash impairment charges related to community purchase options and health care licenses, respectively. These impairment charges are primarily due to lower than expected operating performance at the communities subject to the community purchase options and reflect the amount by which the carrying values of the community purchase options exceeded their estimated fair value.
Future amortization expense for intangible assets with definite lives is estimated to be as follows (dollars in thousands):
Year Ending December 31,
|
|
Future
Amortization
|
|
2017
|
|
$
|
3,575
|
|
2018
|
|
|
3,565
|
|
2019
|
|
|
2,487
|
|
2020
|
|
|
982
|
|
2021
|
|
|
982
|
|
Thereafter
|
|
|
1,552
|
|
Total
|
|
$
|
13,143
|
|
8. Debt
Long-term Debt and Capital and Financing Lease Obligations
Long-term debt and capital and financing lease obligations consist of the following (dollars in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Mortgage notes payable due 2017 through 2047; weighted average interest rate of 4.50% in 2016, including net debt premium and deferred financing costs of $(4.5) million in 2016 and including net debt premium and deferred financing costs of $3.3 million in 2015 (weighted average interest rate of 4.51% in 2015)
|
|
$
|
3,184,229
|
|
|
$
|
3,246,513
|
|
Capital and financing lease obligations payable through 2032; weighted average interest rate of 8.08% in 2016 (weighted average interest rate of 8.11% in 2015)
|
|
|
2,485,520
|
|
|
|
2,489,588
|
|
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount and deferred financing costs of $20.9 million and $34.3 million in 2016 and 2015, respectively, interest at 2.75% per annum, due June 15, 2018
|
|
|
295,397
|
|
|
|
281,902
|
|
Construction financing due 2032; weighted average interest rate of 8.00% in 2016 (weighted average interest rate of 4.84% in 2015)
|
|
|
3,644
|
|
|
|
24,105
|
|
Other notes payable, weighted average interest rate of 5.33% in 2016 (weighted average interest rate of 5.16% in 2015) and maturity dates ranging from 2017 to 2020
|
|
|
76,377
|
|
|
|
80,305
|
|
Total long-term debt and capital and financing lease obligations
|
|
|
6,045,167
|
|
|
|
6,122,413
|
|
Less current portion
|
|
|
215,255
|
|
|
|
235,604
|
|
Total long-term debt and capital and financing lease obligations, less current portion
|
|
$
|
5,829,912
|
|
|
$
|
5,886,809
|
|
As of December 31, 2016 and 2015, the current portion of long-term debt within the Company's consolidated financial statements includes $60.5 million and $60.8 million, respectively, of mortgage notes payable secured by assets held for sale. This debt will either be assumed by the prospective purchasers or be repaid with the proceeds from the sales. Refer to Note 4 for more information about the Company's assets held for sale.
The annual aggregate scheduled maturities of long-term debt and capital and financing lease obligations outstanding as of December 31, 2016 are as follows (dollars in thousands):
Year Ending December 31,
|
|
Long-term
Debt
|
|
|
Capital and
Financing
Lease
Obligations
|
|
|
Total Debt
|
|
2017
|
|
$
|
154,114
|
|
|
$
|
416,239
|
|
|
$
|
570,353
|
|
2018
|
|
|
1,231,670
|
|
|
|
277,829
|
|
|
|
1,509,499
|
|
2019
|
|
|
135,169
|
|
|
|
256,539
|
|
|
|
391,708
|
|
2020
|
|
|
473,817
|
|
|
|
200,308
|
|
|
|
674,125
|
|
2021
|
|
|
332,866
|
|
|
|
186,342
|
|
|
|
519,208
|
|
Thereafter
|
|
|
1,257,549
|
|
|
|
3,230,311
|
|
|
|
4,487,860
|
|
Total obligations
|
|
|
3,585,185
|
|
|
|
4,567,568
|
|
|
|
8,152,753
|
|
Less amount representing debt discount and deferred financing costs, net
|
|
|
(25,538
|
)
|
|
|
—
|
|
|
|
(25,538
|
)
|
Less amount representing interest (weighted average interest rate of 8.08%)
|
|
|
—
|
|
|
|
(2,082,048
|
)
|
|
|
(2,082,048
|
)
|
Total
|
|
$
|
3,559,647
|
|
|
$
|
2,485,520
|
|
|
$
|
6,045,167
|
|
Credit Facilities
O
n December 19, 2014, the Company
entered into a Fourth Amended and Restated Credit Agreement with General Electric Capital Corporation (which has since assigned its interest to Capital One Financial Corporation), as administrative agent, lender and swingline lender, and the other lenders from time to time parties thereto. The agreement provides for a total commitment amount of $500.0 million, comprised of a $100.0 million term loan drawn at closing and a $400.0 million revolving credit facility (with a $50.0 million sublimit for letters of credit and a $50.0 million swingline feature to permit same day borrowing) and an option to increase the revolving credit facility by an additional $250.0 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The maturity date is January 3, 2020 and amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin from a range of 2.50% to 3.50%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50% margin at utilization equal to or lower than 35%, a 3.25% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50% margin at utilization greater than 50%. The quarterly commitment fee on the unused portion of the facility is 0.25% per annum when the outstanding amount of obligations (including revolving credit, swingline and term loans and letter of credit obligations) is greater than or equal to 50% of the total commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the total commitment amount. During the year ended December 31, 2016, the Company repaid the $100.0 million term loan balance, decreasing the total commitment amount to $400.0 million.
Amounts drawn on the facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The facility is secured by a first priority mortgage on certain of the Company's communities. In addition, the agreement permits the Company to pledge the equity interests in subsidiaries that own other communities (rather than mortgaging such communities), provided that loan availability from pledged assets cannot exceed 10% of loan availability from mortgaged assets. The availability under the line will vary from time to time as it is based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.
The agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the agreement and all amounts owing under the agreement becoming immediately due and payable and could trigger cross default provisions in our other outstanding debt and lease agreements.
As of December 31, 2016, there was no outstanding balance under this credit facility and there were $32.4 million of letters of credit outstanding under this credit facility. In addition to the sublimit for letters of credit on this credit facility, the Company also had separate letter of credit facilities of up to $64.5 million in the aggregate as of December 31, 2016. Letters of credit totaling $64.4 million had been issued under these separate facilities as of that date.
Convertible Debt Offering
In June 2011, the Company completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible senior notes due June 15, 2018 (the "Notes"). The Company received net proceeds of approximately $308.2 million after the deduction of underwriting commissions and offering expenses. The Company used a portion of the net proceeds to pay the Company's cost of the convertible note hedge transactions described below, taking into account the proceeds to the Company of the warrant transactions described below, and used the balance of the net proceeds to repay existing outstanding debt.
The Notes are senior unsecured obligations and rank equally in right of payment to all of the Company's other senior unsecured debt, if any. The Notes will be senior in right of payment to any of the Company's debt which is subordinated by its terms to the Notes (if any). The Notes are also structurally subordinated to all debt and other liabilities and commitments (including trade payables) of the Company's subsidiaries. The Notes are also effectively subordinated to the Company's secured debt to the extent of the assets securing the debt.
The Notes bear interest at 2.75% per annum, payable semi-annually in cash. The Notes are convertible at an initial conversion rate of 34.1006 shares of Company common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $29.325 per share), subject to adjustment. On and after March 15, 2018, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time. In addition, Holders may convert their Notes at their option under the following circumstances: (i) during any fiscal quarter if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on the last day of such preceding fiscal quarter; (ii) during the five business day period after any five consecutive trading day period (the "measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of that measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such day; or (iii) upon the occurrence of specified corporate event
s. As of December 31, 2016, the Notes are not convertible.
Unconverted Notes mature at par on June 15, 2018.
Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock at the Company's election. It is the Company's current intent and policy to settle the principal amount of the Notes (or, if less, the amount of the conversion obligation) in cash upon conversion.
In addition, following certain corporate transactions, the Company will increase the conversion rate for a holder who elects to convert in connection with such transaction by a number of additional shares of common stock as set forth in the supplemental indenture governing the Notes.
The Notes were issued in an offering registered under the Securities Act of 1933, as amended (Securities Act).
In accordance with FASB guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial settlement), the liability and equity components of the convertible debt are separated in a manner that will reflect the Company's non-convertible debt borrowing rate when interest expense is recognized in subsequent periods.
The Company is accreting the carrying value to the principal amount at maturity using an imputed interest rate of 7.5% (the estimated effective borrowing rate for nonconvertible debt at the time of issuance, Level 2) over its expected life of seven years.
As of December 31, 2016, the "if converted" value of the Notes does not exceed their principal amount.
The interest expense associated with the Notes (excluding amortization of the associated deferred financing costs) was as follows (dollars in thousands):
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
2014
|
|
Coupon interest
|
|
$
|
8,697
|
|
|
$
|
8,697
|
|
|
$
|
8,697
|
|
Amortization of discount
|
|
|
12,625
|
|
|
|
11,732
|
|
|
|
10,902
|
|
Interest expense related to convertible notes
|
|
$
|
21,322
|
|
|
$
|
20,429
|
|
|
$
|
19,599
|
|
In connection with the offering of the Notes, in June 2011, the Company entered into convertible note hedge transactions (the "Convertible Note Hedges") with certain financial institutions (the "Hedge Counterparties"). The Convertible Note Hedges cover, subject to customary anti-dilution adjustments, 10,784,315 shares of common stock. The Company also entered into warrant transactions with the Hedge Counterparties whereby the Company sold to the Hedge Counterparties warrants to acquire, subject to customary anti-dilution adjustments, up to 10,784,315 shares of common stock (the "Sold Warrant Transactions"). The warrants have a strike price of $40.25 per share, subject to customary anti-dilution adjustments.
The Convertible Note Hedges are expected to reduce the potential dilution with respect to common stock upon conversion of the Notes in the event that the price per share of common stock at the time of exercise is greater than the strike price of the Convertible Note Hedges, which corresponds to the initial conversion price of the Notes and is similarly subject to customary anti-dilution adjustments. If, however, the price per share of common stock exceeds the strike price of the Sold Warrant Transactions when they expire, there would be additional dilution from the issuance of common stock pursuant to the warrants.
The Convertible Note Hedges and Sold Warrant Transactions are separate transactions (in each case entered into by the Company and Hedge Counterparties), are not part of the terms of the Notes and will not affect the holders' rights under the Notes. Holders of the Notes do not have any rights with respect to the Convertible Note Hedges or the Sold Warrant Transactions.
These hedging transactions had a net cost of approximately $31.9 million, which was paid from the proceeds of the Notes and recorded as a reduction of additional paid-in capital. The Company has contractual rights, and, at execution of the related agreements, had the ability to settle its obligations under the conversion features of the Notes, the Convertible Note Hedges and Sold Warrant Transactions, with the Company's common stock. Accordingly, these transactions are accounted for as equity, with no subsequent adjustment for changes in the value of these obligations.
2016 Financings
In March 2016, the Company obtained a $100.0 million supplemental loan, secured by first mortgages on ten communities. The loan bears interest at a fixed rate of 4.20% and matures on January 1, 2023. Proceeds from the loan were utilized to pay down a portion of the outstanding balance of the secured credit facility.
In December 2016, the Company entered into a $105.0 million note, which bears interest at a fixed rate of 4.65%, and a $69.6 million note, which bears interest at a variable rate of 1-month LIBOR plus a margin of 258 basis points. The notes are secured by first mortgages on six communities and mature on January 1, 2027. Proceeds from the loan were primarily utilized to repay $164.4 million of mortgage debt.
During the year ended December 31, 2016, the Company recorded $9.2 million of debt modification and extinguishment costs on the consolidated statement of operations for that period, primarily related to prepayment penalties for debt extinguishments.
As of December 31, 2016, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.
2015 Financings
On March 31, 2015, the Company obtained a $63.0 million loan, secured by first mortgages on six communities. The loan bears interest at a variable rate equal to 90-day LIBOR plus a margin of 325 basis points and matures on April 1, 2020.
On April 30, 2015, the Company obtained a $65.3 million loan, secured by first mortgages on six communities. The loan bears interest at a fixed rate of 3.98% and matures on May 1, 2027.
On August 27, 2015, the Company obtained $226.4 million in loans secured by first mortgages on 21 communities. The mortgage facility has a ten year term and 75% of it bears interest at a variable rate of 30-day LIBOR plus a margin of 221 basis points and the remaining 25% bears interest at a fixed rate of 4.80%. Proceeds of the loans were used to refinance $209.9 million of fixed rate mortgage debt on 28 communities that was scheduled to mature in September 2017. In connection with the transaction, the Company paid a prepayment penalty of $17.9 million, of which $10.4 million was recorded against the existing debt premium, $6.3 million was recorded as a debt discount for the new loans, and $1.2 million was recorded as an extinguishment cost for the seven communities that became unencumbered.
On September 15, 2015, the Company obtained $140.4 million in loans secured by first mortgages on 18 communities. The mortgage facility has a seven year term and bears interest at a variable rate of one-month LIBOR plus a margin of 223 basis points. Proceeds of the loans were used to refinance $122.3 million of fixed rate mortgage debt that was scheduled to mature in May 2018. In connection with the transaction, the Company paid a prepayment penalty of $13.6 million, of which $7.6 million was recorded against the existing debt premium and $6.0 million was recorded as a debt discount for the new loans.
The financings that occurred during the three months ended September 30, 2015 were accounted for as debt modifications and $5.5 million of debt modification costs were recorded on the consolidated statement of operations for that period.
Interest Rate Caps
In the normal course of business, the Company has entered into certain interest rate protection agreements to effectively manage the risk above certain interest rates for a portion of the Company's variable rate debt. The following table summarizes the Company's interest rate cap instruments at December 31, 2016 (dollars in thousands):
Current notional balance
|
|
$
|
806,994
|
|
Weighted average fixed cap rate
|
|
|
4.66
|
%
|
Earliest maturity date
|
|
|
2017
|
|
Latest maturity date
|
|
|
2022
|
|
Estimated asset fair value (included in other assets, net at December 31, 2016)
|
|
$
|
127
|
|
Estimated asset fair value (included in other assets, net at December 31, 2015)
|
|
$
|
29
|
|
9. Accrued Expenses
Accrued expenses consist of the following components as of December 31, (in thousands):
|
|
2016
|
|
|
2015
|
|
Salaries and wages
|
|
$
|
102,025
|
|
|
$
|
80,291
|
|
Insurance reserves
|
|
|
71,123
|
|
|
|
94,948
|
|
Vacation
|
|
|
42,411
|
|
|
|
44,421
|
|
Real estate taxes
|
|
|
34,002
|
|
|
|
37,206
|
|
Interest
|
|
|
12,948
|
|
|
|
12,940
|
|
Lease payable
|
|
|
11,211
|
|
|
|
20,714
|
|
Accrued utilities
|
|
|
10,582
|
|
|
|
11,949
|
|
Taxes payable
|
|
|
2,818
|
|
|
|
3,265
|
|
Other
|
|
|
40,917
|
|
|
|
67,140
|
|
Total
|
|
$
|
328,037
|
|
|
$
|
372,874
|
|
10. Commitments and Contingencies
Facility Operating Leases
As of December 31, 2016 the Company operated 539 communities under long-term leases (315 operating leases and 224 capital and financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees its performance and the lease payments under the master lease.
The community leases contain customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial performance covenants, such as net worth and minimum lease coverage ratios. Failure to comply with these covenants could result in an event of default and/or trigger cross-default provisions in the Company's outstanding debt and other lease documents. Further, an event of default related to an individual property or limited number of properties within a master lease portfolio would result in a default on the entire master lease portfolio and could trigger cross-default provisions in the Company's other outstanding debt and lease documents. Certain leases contain cure provisions generally requiring the posting of an additional lease security deposit if the required covenant is not met.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index. The Company is responsible for all operating costs, including repairs, property taxes and insurance. The initial lease terms primarily vary from 10 to 20 years and generally include renewal options ranging from 5 to 30 years. The remaining base lease terms vary from less than one year to 16 years and generally provide for renewal or extension options and in some instances, purchase options.
A summary of facility lease expense and the impact of straight-line adjustment and amortization of (above) below market rents and deferred gains are as follows (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash basis payment
|
|
$
|
384,104
|
|
|
$
|
372,148
|
|
|
$
|
330,207
|
|
Straight-line (income) expense
|
|
|
767
|
|
|
|
6,956
|
|
|
|
1,439
|
|
Amortization of (above) below market rents, net
|
|
|
(6,864
|
)
|
|
|
(7,158
|
)
|
|
|
(3,444
|
)
|
Amortization of deferred gain
|
|
|
(4,372
|
)
|
|
|
(4,372
|
)
|
|
|
(4,372
|
)
|
Facility lease expense
|
|
$
|
373,635
|
|
|
$
|
367,574
|
|
|
$
|
323,830
|
|
The aggregate amounts of future minimum operating lease payments, including community and office leases, as of December 31, 2016 (prior to giving effect to the transactions with HCP and Blackstone pending as of December 31, 2016), are as follows (dollars in thousands):
Year Ending December 31,
|
|
Operating
Leases
|
|
2017
|
|
$
|
387,521
|
|
2018
|
|
|
377,521
|
|
2019
|
|
|
359,282
|
|
2020
|
|
|
317,654
|
|
2021
|
|
|
279,040
|
|
Thereafter
|
|
|
1,222,392
|
|
Total
|
|
$
|
2,943,410
|
|
As of December 31, 2016, the Company is in compliance with the financial covenants of its long-term leases.
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 that 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.
11. Self-Insurance
The Company obtains various insurance coverages 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, 2016 and 2015, the Company accrued reserves of $184.0 million and $248.4 million, respectively, for these programs of which $112.9 million and $153.5 million is classified as long-term liabilities as of December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company accrued $22.8 million and $41.5 million, respectively, of estimated amounts receivable from the insurance companies under these insurance programs. During 2016, the Company recorded a $35.4 million decrease in insurance expense from changes in estimates, due to general liability and professional liability and workers compensation claims experience.
The Company has secured self-insured retention risk under workers' compensation programs with cash deposits of $12.4 million and $15.6 million as of December 31, 2016 and 2015, respectively. Letters of credit securing the programs aggregated $59.5 million and $49.8 million as of December 31, 2016 and 2015, respectively. In addition, the Company also had deposits of $37.4 million as of December 31, 2016 to fund claims paid under a high deductible, collateralized insurance policy previously maintained by Emeritus.
12. Retirement Plans
The Company maintains a 401(k) Retirement Savings Plan for all employees that meet minimum employment criteria. The plan provides that the participants may defer eligible compensation on a pre-tax basis 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 the plan, up to a maximum of 4.0% of contributed compensation. An additional matching contribution of 12.5%, subject to the same limit on contributed compensation, may be made at the discretion of the Company, based upon the Company's performance. For the years ended December 31, 2016, 2015 and 2014, the Company's expense to the plan was $8.2 million, $6.6 million and $7.1 million, respectively.
13. Stock-Based Compensation
The following table sets forth information about the Company's restricted stock awards (excluding restricted stock units) (share amounts in thousands):
|
|
Number of Shares
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding on January 1, 2014
|
|
|
3,373
|
|
|
$
|
21.12
|
|
Granted
|
|
|
1,662
|
|
|
$
|
29.79
|
|
Vested
|
|
|
(1,185
|
)
|
|
$
|
19.58
|
|
Cancelled/forfeited
|
|
|
(298
|
)
|
|
$
|
21.02
|
|
Outstanding on December 31, 2014
|
|
|
3,552
|
|
|
$
|
25.70
|
|
Granted
|
|
|
1,698
|
|
|
$
|
32.75
|
|
Vested
|
|
|
(1,275
|
)
|
|
$
|
23.55
|
|
Cancelled/forfeited
|
|
|
(521
|
)
|
|
$
|
18.68
|
|
Outstanding on December 31, 2015
|
|
|
3,454
|
|
|
$
|
28.80
|
|
Granted
|
|
|
3,141
|
|
|
$
|
14.56
|
|
Vested
|
|
|
(1,242
|
)
|
|
$
|
26.79
|
|
Cancelled/forfeited
|
|
|
(745
|
)
|
|
$
|
24.75
|
|
Outstanding on December 31, 2016
|
|
|
4,608
|
|
|
$
|
20.29
|
|
As of December 31, 2016, there was $58.2 million of total unrecognized compensation cost related to outstanding, unvested share-based compensation awards. That cost is expected to be recognized over a weighted-average period of 2.5 years and is based on grant date fair value, net of forfeiture estimates. The compensation cost reflects an initial estimated cumulative forfeiture rate from 0% to 20% over the requisite service period of the awards. That estimate is revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.
During 2016, grants of restricted shares under the Company's 2014 Omnibus Incentive Plan were as follows (amounts in thousands except for value per share):
|
|
Shares Granted
|
|
|
Value Per Share
|
|
|
Total Value
|
|
Three months ended March 31, 2016
|
|
|
2,855
|
|
|
$
|
14.50 - 18.46
|
|
|
$
|
41,399
|
|
Three months ended June 30, 2016
|
|
|
111
|
|
|
$
|
15.68 - 18.03
|
|
|
$
|
2,001
|
|
Three months ended September 30, 2016
|
|
|
54
|
|
|
$
|
15.90 - 17.46
|
|
|
$
|
918
|
|
Three months ended December 31, 2016
|
|
|
121
|
|
|
$
|
9.75 - 11.93
|
|
|
$
|
1,405
|
|
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 eligible employee may elect to deduct up to 15% of his or her base pay each quarter. Subject to certain limitations specified in the plan, on the last trading date of each calendar quarter, the amount deducted from each participant's pay over the course of the quarter will be used to purchase whole shares of the Company's common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that date. The Company reserved 1,800,000 shares of common stock for issuance under the plan. The impact on the Company's consolidated financial statements is not material.
14. 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, which replaced the prior authorization approved by the Board in 2011 that had remaining availability of approximately $82.4 million at the time of termination. Purchases may be 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.
Pursuant to the new authorization, in 2016 the Company repurchased 750,000 shares at a weighted average price paid per share of $12.83, for an aggregate purchase price of approximately $9.6 million. As of December 31, 2016, approximately $90.4 million remains available under the new share repurchase authorization.
15. Income Taxes
The benefit (provision) for income taxes is comprised of the following (dollars in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(12
|
)
|
|
$
|
49
|
|
|
$
|
1,367
|
|
Deferred
|
|
|
(3,248
|
)
|
|
|
95,259
|
|
|
|
182,371
|
|
Total Federal
|
|
|
(3,260
|
)
|
|
|
95,308
|
|
|
|
183,738
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,118
|
)
|
|
|
(3,099
|
)
|
|
|
(2,433
|
)
|
Deferred (included in Federal above)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total State
|
|
|
(2,118
|
)
|
|
|
(3,099
|
)
|
|
|
(2,433
|
)
|
Total
|
|
$
|
(5,378
|
)
|
|
$
|
92,209
|
|
|
$
|
181,305
|
|
A reconciliation of the benefit (provision) for income taxes to the amount computed at the U.S. Federal statutory rate of 35% is as follows (dollars in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Tax benefit at U.S. statutory rate
|
|
$
|
139,657
|
|
|
$
|
192,390
|
|
|
$
|
115,603
|
|
State taxes, net of federal income tax
|
|
|
11,788
|
|
|
|
18,323
|
|
|
|
11,582
|
|
Tax credits
|
|
|
6,163
|
|
|
|
3,937
|
|
|
|
(2,222
|
)
|
Valuation allowance
|
|
|
(142,862
|
)
|
|
|
(111,797
|
)
|
|
|
64,155
|
|
Goodwill impairment
|
|
|
(10,789
|
)
|
|
|
(7,856
|
)
|
|
|
—
|
|
Stock compensation
|
|
|
(5,716
|
)
|
|
|
—
|
|
|
|
—
|
|
Other, net
|
|
|
(1,831
|
)
|
|
|
(1,626
|
)
|
|
|
(713
|
)
|
Return to provision
|
|
|
(920
|
)
|
|
|
(72
|
)
|
|
|
716
|
|
Meals and entertainment
|
|
|
(868
|
)
|
|
|
(1,090
|
)
|
|
|
(946
|
)
|
Non-deductible transaction costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,870
|
)
|
Total
|
|
$
|
(5,378
|
)
|
|
$
|
92,209
|
|
|
$
|
181,305
|
|
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Capital and financing lease obligations
|
|
$
|
862,038
|
|
|
$
|
872,002
|
|
Operating loss carryforwards
|
|
|
319,948
|
|
|
|
282,075
|
|
Accrued expenses
|
|
|
109,283
|
|
|
|
144,691
|
|
Deferred lease liability
|
|
|
93,358
|
|
|
|
94,105
|
|
Tax credits
|
|
|
49,550
|
|
|
|
40,974
|
|
Intangible assets
|
|
|
20,272
|
|
|
|
22,522
|
|
Deferred gain on sale leaseback
|
|
|
4,233
|
|
|
|
5,661
|
|
Prepaid revenue
|
|
|
2,626
|
|
|
|
2,415
|
|
Total gross deferred income tax asset
|
|
|
1,461,308
|
|
|
|
1,464,445
|
|
Valuation allowance
|
|
|
(264,305
|
)
|
|
|
(121,602
|
)
|
Net deferred income tax assets
|
|
|
1,197,003
|
|
|
|
1,342,843
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(1,209,595
|
)
|
|
|
(1,320,423
|
)
|
Investment in unconsolidated ventures
|
|
|
(66,678
|
)
|
|
|
(88,798
|
)
|
Other
|
|
|
(1,376
|
)
|
|
|
(2,673
|
)
|
Total gross deferred income tax liability
|
|
|
(1,277,649
|
)
|
|
|
(1,411,894
|
)
|
Net deferred tax liability
|
|
$
|
(80,646
|
)
|
|
$
|
(69,051
|
)
|
As of December 31, 2016 and 2015, the Company had federal net operating loss carryforwards of approximately $1.033 billion and $930.4 million, respectively, which are available to offset future taxable income through 2036. The Company determined that a valuation allowance was required due to the loss before income taxes in 2016, and in consideration of the Company's estimated future reversal of existing timing differences as of December 31, 2016. In 2016, the Company recorded a provision of approximately $142.9 million to reflect the necessary valuation allowance of $264.3 million as of December 31, 2016. The valuation allowance reflects that the Company's net operating losses will begin to expire in 2027. As described in Note 4 to the consolidated financial statements, it is expected that the transactions related to the Blackstone Venture may require the Company to record a significant increase to the Company's existing valuation allowance.
During 2015, the Company determined that a valuation allowance was required due to the loss before income taxes in 2015, combined with the Company's estimated reversal of future timing differences as of December 31, 2015. As a result, the Company has a valuation allowance of $121.6 million as of December 31, 2015. The valuation allowance reflects that our net operating losses will begin to expire in 2027, however, the Company would anticipate using tax planning strategies available to it in order to avoid a true expiration of those losses, should that issue arise. If the Company continues its trend of increasing losses before income taxes, the valuation allowance may be increased in future periods.
As a result of the acquisition of Emeritus on July 31, 2014, the Company recorded deferred tax liabilities in excess of deferred tax assets that reflect the difference between the fair market value of the acquired assets over the historical basis of the acquired assets. During the year ended December 31, 2014, the Company determined that it was more likely than not that its federal net operating loss carryforwards and a majority of its state net operating loss carryforwards, and the majority of its tax credits will be utilized in the future, based on the future reversal of these deferred tax liabilities. As a result, during the year ended December 31, 2014 the Company recorded an aggregate deferred federal, state and local income tax benefit of $64.2 million from the release of the valuation allowance against certain deferred tax assets. Additionally, the Company recorded an aggregate deferred federal, state and local tax benefit of $94.1 million as a result of the operating loss for the year ended December 31, 2014.
The Company has recorded valuation allowances of $218.1 million and $89.5 million at December 31, 2016 and 2015, respectively, against its federal and state net operating losses, as the Company anticipates these losses will not be utilized prior to expiration. The Company also recorded a valuation allowance against federal and state credits of $46.2 million and $32.1 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015, the Company had $126.7 million, included in its net operating loss carryforward relating to restricted stock grants. Under ASC 718-10, this loss will be recorded in additional paid-in capital in the period in which the loss is effectively used to reduce taxes payable.
The formation of the Company, the reorganization of a predecessor company and the acquisitions of several wholly-owned subsidiaries constituted ownership changes under Section 382 of the Internal Revenue Code, as amended. As a result, the Company's ability to utilize the net operating loss carryforward to offset future taxable income is subject to certain limitations and restrictions. Furthermore, the Company had an ownership change under Section 382 in May 2010 which resulted in an additional annual limitation to the utilization of the net operating loss in the amount of $92.8 million. The acquisition of Emeritus on July 31, 2014 resulted in an ownership change for Emeritus resulting in an annual limitation of $53.9 million on net operating losses acquired by the Company from Emeritus. The Company expects the net operating losses of the Company from prior to May 2010 and of Emeritus to be fully released before expiration and therefore does not anticipate a financial statement impact as a result of the limitations.
At December 31, 2016, the Company had gross tax affected unrecognized tax benefits of $29.1 million, which, if recognized, would result in an income tax benefit in accordance with ASC 805. 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 at December 31, 2016. Tax returns for years 2012 through 2015 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 2016 and prior years will significantly change in 2017.
A reconciliation of the unrecognized tax benefits for the years ended December 31, 2016 and 2015 is as follows (dollars in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at January 1,
|
|
$
|
30,236
|
|
|
$
|
30,195
|
|
Additions for tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
Additions for tax positions related to prior years
|
|
|
30
|
|
|
|
50
|
|
Reductions for tax positions related to prior years
|
|
|
(1,106
|
)
|
|
|
(9
|
)
|
Balance at December 31,
|
|
$
|
29,160
|
|
|
$
|
30,236
|
|
On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2015. The Company has evaluated these regulations and determined they will not have a material impact on the Company's consolidated results of operations, cash flows or financial position.
16. Supplemental Disclosure of Cash Flow Information
(dollars in thousands)
|
|
For the Years Ended
December 31,
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest paid
|
|
$
|
349,535
|
|
|
$
|
360,960
|
|
|
$
|
226,594
|
|
Income taxes paid
|
|
$
|
2,047
|
|
|
$
|
2,952
|
|
|
$
|
2,746
|
|
Additions to property, plant and equipment and leasehold improvements
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
300,113
|
|
|
$
|
448,682
|
|
|
$
|
304,245
|
|
Accounts payable
|
|
|
33,534
|
|
|
|
(37,631
|
)
|
|
|
—
|
|
Net cash paid
|
|
$
|
333,647
|
|
|
$
|
411,051
|
|
|
$
|
304,245
|
|
Acquisitions of assets, net of related payables and cash received, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and escrow deposits—restricted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid expenses and other assets, net
|
|
|
—
|
|
|
|
(53,405
|
)
|
|
|
(3,138
|
)
|
Property, plant and equipment and leasehold intangibles, net
|
|
|
19,457
|
|
|
|
198,558
|
|
|
|
80,330
|
|
Other intangible assets, net
|
|
|
(7,300
|
)
|
|
|
(7,294
|
)
|
|
|
(23,978
|
)
|
Accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt
|
|
|
—
|
|
|
|
(101,558
|
)
|
|
|
7,795
|
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
155,230
|
|
|
|
—
|
|
Other liabilities
|
|
|
—
|
|
|
|
(315
|
)
|
|
|
(20,568
|
)
|
Net cash paid
|
|
$
|
12,157
|
|
|
$
|
191,216
|
|
|
$
|
40,441
|
|
Proceeds from sale of assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
(289,452
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Prepaid expenses and other assets, net
|
|
|
(4,543
|
)
|
|
|
25,780
|
|
|
|
—
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
|
—
|
|
|
|
(82,953
|
)
|
|
|
—
|
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
8,907
|
|
|
|
—
|
|
Other liabilities
|
|
|
3,281
|
|
|
|
(960
|
)
|
|
|
—
|
|
Gain on sale of assets
|
|
|
(7,218
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash received
|
|
$
|
(297,932
|
)
|
|
$
|
(49,226
|
)
|
|
$
|
—
|
|
Formation of CCRC Venture:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(729,123
|
)
|
Investment in unconsolidated ventures
|
|
|
—
|
|
|
|
—
|
|
|
|
194,485
|
|
Other intangible assets, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(56,829
|
)
|
Other assets, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,137
|
)
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
170,416
|
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
27,085
|
|
Refundable entrance fees and deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
413,761
|
|
Other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,514
|
|
Net cash paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,172
|
|
Formation of HCP 49 Venture:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(525,446
|
)
|
Investment in unconsolidated ventures
|
|
|
—
|
|
|
|
—
|
|
|
|
71,656
|
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(67,640
|
)
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
538,355
|
|
Other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,034
|
)
|
Net cash paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,891
|
|
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Capital and financing leases:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
—
|
|
|
$
|
26,644
|
|
|
$
|
27,100
|
|
Other intangible assets, net
|
|
|
—
|
|
|
|
(5,202
|
)
|
|
|
—
|
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
(23,738
|
)
|
|
|
(27,100
|
)
|
Other liabilities
|
|
|
—
|
|
|
|
2,296
|
|
|
|
—
|
|
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Master Lease amendment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
385,696
|
|
Other intangible assets, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,012
|
)
|
Capital and financing lease obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
(217,022
|
)
|
Other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
5,338
|
|
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets designated as held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and leasehold intangibles, net
|
|
$
|
(262,711
|
)
|
|
$
|
(113,592
|
)
|
|
$
|
—
|
|
Assets held for sale
|
|
|
278,675
|
|
|
|
110,620
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
(3,195
|
)
|
|
|
—
|
|
|
|
—
|
|
Goodwill
|
|
|
(28,568
|
)
|
|
|
(12,200
|
)
|
|
|
—
|
|
Asset impairment
|
|
|
15,799
|
|
|
|
15,172
|
|
|
|
—
|
|
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contribution to CCRC venture:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
—
|
|
|
$
|
(25,717
|
)
|
|
$
|
—
|
|
Investment in unconsolidated ventures
|
|
|
—
|
|
|
|
7,422
|
|
|
|
—
|
|
Long-term debt
|
|
|
—
|
|
|
|
18,295
|
|
|
|
—
|
|
Net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
17. Litigation
The Company has been and is currently involved in litigation and claims incidental to the conduct of its business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, the Company maintains general liability and professional liability insurance policies in amounts and with coverage and deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company's current policies provide for deductibles for each claim. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts.
18. Segment Information
As of December, 31, 2016 the Company has five reportable segments: Retirement Centers; Assisted Living; CCRCs – Rental; Brookdale Ancillary 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.
Prior to August 29, 2014, the Company had an additional reportable segment, CCRCs - Entry Fee. On August 29, 2014, the Company contributed all but two of the legacy Brookdale entry fee CCRCs to the CCRC Venture, at which time the contributed CCRCs were deconsolidated. The results of the entry fee CCRCs contributed to the CCRC Venture are reported in the CCRCs - Entry Fee segment for the time periods prior to being contributed to the CCRC Venture. The results of the two legacy Brookdale CCRCs that were not contributed to the CCRC Venture are included in the CCRCs - Entry Fee segment for the six month period ended June 30, 2014 and the CCRCs - Rental segment for periods subsequent to June 30, 2014, based on how operating results are being reviewed by the chief operating decision maker following the creation of the CCRC Venture. The CCRC Venture is accounted for under the equity method of accounting. See Note 4 for more information about the Company's entry into the CCRC Venture.
Retirement Centers
. The Company's Retirement Centers segment includes owned or leased communities that are primarily designed for middle to upper income seniors generally age 75 and older who desire an upscale residential environment providing the highest quality of service. The majority of the Company's retirement center communities consist of both independent living and assisted living units in a single community, which allows residents to "age-in-place" by providing them with a continuum of senior independent and assisted living services.
Assisted Living.
The Company's Assisted Living segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. Assisted living communities include both freestanding, multi-story communities and freestanding single story communities. The Company also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer's disease and other dementias.
CCRCs - Rental.
The Company's CCRCs - Rental segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of the Company's CCRCs have independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also include memory care/Alzheimer's units. As of December 31, 2016, 2015 and 2014 the CCRCs - Rental segment also includes three entry fee CCRCs.
CCRCs - Entry Fee
. Prior to August 29, 2014, the Company had an additional reportable segment, CCRCs - Entry Fee. The communities in the Company's former CCRCs - Entry Fee segment are similar to rental CCRCs but allow for residents in the independent living apartment units to pay a one-time upfront entrance fee, which is partially refundable in certain circumstances. In addition to the initial entrance fee, residents under all entrance fee agreements also pay a monthly service fee, which entitles them to the use of certain amenities and services.
Brookdale Ancillary Services
. The Company's Brookdale Ancillary Services segment includes the outpatient therapy, home health and hospice services, as well as education and wellness programs, provided to residents of many of the Company's communities and to seniors living outside of the Company's communities. The Brookdale Ancillary Services segment does not include the inpatient therapy services provided in the Company's skilled nursing units, which are included in the Company's CCRCs - Rental and CCRCs - Entry Fee segments.
Management Services.
The Company's Management Services segment includes communities operated by the Company pursuant to management agreements. In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a venture structure in which the Company has an ownership interest. Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of expenses it incurs on behalf of the owners.
The accounting policies of the Company's reportable segments are the same as those described in the summary of significant accounting policies in Note 2.
The following table sets forth selected segment financial and operating data (dollars in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Retirement Centers
(1)
|
|
$
|
679,503
|
|
|
$
|
657,940
|
|
|
$
|
582,312
|
|
Assisted Living
(1)
|
|
|
2,419,459
|
|
|
|
2,445,457
|
|
|
|
1,685,563
|
|
CCRCs - Rental
(1)
|
|
|
592,826
|
|
|
|
604,572
|
|
|
|
493,173
|
|
CCRCs - Entry Fee
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
202,414
|
|
Brookdale Ancillary Services
(1)
|
|
|
476,833
|
|
|
|
469,158
|
|
|
|
337,835
|
|
Management Services
(2)
|
|
|
808,359
|
|
|
|
783,481
|
|
|
|
530,409
|
|
|
|
$
|
4,976,980
|
|
|
$
|
4,960,608
|
|
|
$
|
3,831,706
|
|
Segment Operating Income
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
$
|
294,530
|
|
|
$
|
285,257
|
|
|
$
|
248,883
|
|
Assisted Living
|
|
|
876,817
|
|
|
|
877,303
|
|
|
|
608,489
|
|
CCRCs - Rental
|
|
|
133,409
|
|
|
|
150,495
|
|
|
|
121,661
|
|
CCRCs - Entry Fee
|
|
|
—
|
|
|
|
—
|
|
|
|
48,433
|
|
Brookdale Ancillary Services
|
|
|
64,463
|
|
|
|
75,210
|
|
|
|
63,463
|
|
Management Services
|
|
|
70,762
|
|
|
|
60,183
|
|
|
|
42,239
|
|
|
|
|
1,439,981
|
|
|
|
1,448,448
|
|
|
|
1,133,168
|
|
General and administrative (including non-cash stock-based compensation expense)
|
|
|
313,409
|
|
|
|
370,579
|
|
|
|
280,267
|
|
Transaction costs
|
|
|
3,990
|
|
|
|
8,252
|
|
|
|
66,949
|
|
Facility lease expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
|
120,272
|
|
|
|
114,738
|
|
|
|
98,321
|
|
Assisted Living
|
|
|
193,670
|
|
|
|
197,452
|
|
|
|
162,575
|
|
CCRCs - Rental
|
|
|
51,727
|
|
|
|
47,937
|
|
|
|
51,523
|
|
CCRCs - Entry Fee
|
|
|
—
|
|
|
|
—
|
|
|
|
4,362
|
|
Brookdale Ancillary Services
|
|
|
—
|
|
|
|
—
|
|
|
|
890
|
|
Corporate and Management Services
|
|
|
7,966
|
|
|
|
7,447
|
|
|
|
6,159
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
|
94,049
|
|
|
|
104,063
|
|
|
|
86,188
|
|
Assisted Living
|
|
|
308,639
|
|
|
|
489,933
|
|
|
|
317,918
|
|
CCRCs - Rental
|
|
|
66,431
|
|
|
|
87,754
|
|
|
|
60,175
|
|
CCRCs - Entry Fee
|
|
|
—
|
|
|
|
—
|
|
|
|
37,524
|
|
Brookdale Ancillary Services
|
|
|
4,075
|
|
|
|
7,451
|
|
|
|
4,764
|
|
Corporate and Management Services
|
|
|
47,208
|
|
|
|
43,964
|
|
|
|
30,466
|
|
Asset impairment
|
|
|
248,515
|
|
|
|
57,941
|
|
|
|
9,992
|
|
Loss on facility lease termination
|
|
|
11,113
|
|
|
|
76,143
|
|
|
|
—
|
|
Income (loss) income from operations
|
|
$
|
(31,083
|
)
|
|
$
|
(165,206
|
)
|
|
$
|
(84,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
$
|
56,827
|
|
|
$
|
58,397
|
|
|
$
|
41,906
|
|
Assisted Living
|
|
|
249,449
|
|
|
|
250,116
|
|
|
|
140,001
|
|
CCRCs - Rental
|
|
|
39,824
|
|
|
|
39,502
|
|
|
|
28,418
|
|
CCRCs - Entry Fee
|
|
|
—
|
|
|
|
—
|
|
|
|
7,530
|
|
Brookdale Ancillary Services
|
|
|
1,461
|
|
|
|
1,354
|
|
|
|
823
|
|
Corporate and Management Services
|
|
|
38,056
|
|
|
|
39,395
|
|
|
|
29,510
|
|
|
|
$
|
385,617
|
|
|
$
|
388,764
|
|
|
$
|
248,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for property, plant and equipment, and leasehold intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Centers
|
|
$
|
59,978
|
|
|
$
|
161,986
|
|
|
$
|
76,285
|
|
Assisted Living
|
|
|
156,732
|
|
|
|
220,893
|
|
|
|
107,037
|
|
CCRCs - Rental
|
|
|
37,800
|
|
|
|
54,864
|
|
|
|
42,412
|
|
CCRCs - Entry Fee
|
|
|
—
|
|
|
|
—
|
|
|
|
36,575
|
|
Brookdale Ancillary Services
|
|
|
1,576
|
|
|
|
4,061
|
|
|
|
1,805
|
|
Corporate and Management Services
|
|
|
44,027
|
|
|
|
6,878
|
|
|
|
40,131
|
|
|
|
$
|
300,113
|
|
|
$
|
448,682
|
|
|
$
|
304,245
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total assets:
|
|
|
|
|
|
|
Retirement Centers
|
|
$
|
1,452,546
|
|
|
$
|
1,556,169
|
|
Assisted Living
|
|
|
5,831,434
|
|
|
|
6,354,415
|
|
CCRCs - Rental
|
|
|
935,389
|
|
|
|
1,037,384
|
|
Brookdale Ancillary Services
|
|
|
280,530
|
|
|
|
292,540
|
|
Corporate and Management Services
|
|
|
717,788
|
|
|
|
808,056
|
|
|
|
$
|
9,217,687
|
|
|
$
|
10,048,564
|
|
|
(1)
|
All revenue is earned from external third parties in the United States.
|
|
(2)
|
Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of managed communities.
|
|
(3)
|
Segment operating income is defined as segment revenues less segment facility operating expenses (excluding depreciation and amortization).
|
19. Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for each of the fiscal quarters in 2016 and 2015 (in thousands, except per share amounts):
|
|
For the Quarters Ended
|
|
|
|
March 31,
2016
|
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
December 31,
2016
|
|
Revenues
|
|
$
|
1,263,156
|
|
|
$
|
1,258,830
|
|
|
$
|
1,246,126
|
|
|
$
|
1,208,868
|
|
Asset impairment
|
|
|
3,375
|
|
|
|
4,152
|
|
|
|
19,111
|
|
|
|
221,877
|
|
Income (loss) from operations
|
|
|
41,354
|
|
|
|
58,287
|
|
|
|
47,645
|
|
|
|
(178,369
|
)
|
Income (loss) before income taxes
|
|
|
(47,152
|
)
|
|
|
(35,368
|
)
|
|
|
(47,569
|
)
|
|
|
(269,169
|
)
|
Net income (loss)
|
|
|
(48,817
|
)
|
|
|
(35,491
|
)
|
|
|
(51,728
|
)
|
|
|
(268,600
|
)
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
|
|
(48,775
|
)
|
|
|
(35,450
|
)
|
|
|
(51,685
|
)
|
|
|
(268,487
|
)
|
Weighted average basic and diluted income (loss) per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(1.45
|
)
|
|
|
For the Quarters Ended
|
|
|
|
March 31,
2015
|
|
|
June 30,
2015
|
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
Revenues
|
|
$
|
1,247,881
|
|
|
$
|
1,238,184
|
|
|
$
|
1,238,841
|
|
|
$
|
1,235,702
|
|
Asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,941
|
|
Income (loss) from operations
|
|
|
(116,873
|
)
|
|
|
(43,123
|
)
|
|
|
3,663
|
|
|
|
(8,873
|
)
|
Income (loss) before income taxes
|
|
|
(208,997
|
)
|
|
|
(137,400
|
)
|
|
|
(99,132
|
)
|
|
|
(104,835
|
)
|
Net income (loss)
|
|
|
(130,709
|
)
|
|
|
(84,807
|
)
|
|
|
(68,336
|
)
|
|
|
(174,303
|
)
|
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders
|
|
|
(130,451
|
)
|
|
|
(84,547
|
)
|
|
|
(68,220
|
)
|
|
|
(174,259
|
)
|
Weighted average basic and diluted income (loss) per share
|
|
$
|
(0.71
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.94
|
)
|