BROOKDALE SENIOR LIVING INC.
See accompanying notes to condensed consolidated financial statements.
BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is the leadingan operator of senior living communities throughout the United States. The Company is committed to providing senior living solutions primarily within properties that are designed, purpose-built, and operated to provide the highest quality service, care, and living accommodations for residents. The Company operates and manages independent living, assisted living, and dementia-care communitiesmemory care, and continuing care retirement centerscommunities ("CCRCs"). Through its ancillary services programs, theThe Company also offers a range of outpatient therapy, home health, hospice, and hospiceoutpatient therapy services to residents of many of its communities and to seniors living outside of its communities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position, results of operations, and cash flows of the Company as of September 30, 2017, and for all periods presented. The condensed consolidated financial statements are prepared on the accrual basis of accounting. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that theseThese interim financial statements should be read in conjunction with the audited financial statements and the notes thereto together with management's discussion and analysis of financial condition and results of operations, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 filed with the SEC on February 15, 2017.14, 2019. Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations.
Except for the changes for the impact of the recently adopted accounting pronouncements discussed in this Note, the Company has consistently applied its accounting policies to all periods presented in these condensed consolidated financial statements.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Brookdale and its wholly-ownedconsolidated subsidiaries. All significant intercompany balances and transactions have been eliminated.eliminated upon consolidation. Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence over governance and operation,operations, are accounted for by the equity method. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying condensed consolidated financial statements. Noncontrolling interest represents the share of consolidated entities owned by third parties. Noncontrolling interest is adjusted for the noncontrolling holder's share of additional contributions, distributions, and the proportionate share of the net income or loss of each respective entity.
The Company continually evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, Consolidation ("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this analysis on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Refer to Note 13 for more information about the Company's VIE relationships.
Revenue Recognition
Resident Fees
Resident fee revenue is recorded whenreported at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are rendereddue from residents or third-party payors and consistsinclude variable consideration for retroactive adjustments, if any, under reimbursement programs. Performance obligations are determined based on the nature of fees for basic housing and certain supportthe services and fees associated with additional services suchprovided. Resident fee revenue is recognized as assistedperformance obligations are satisfied.
Under the Company's senior living care, skilled nursing care, ancillary services and personalized health services. Residencyresidency agreements, which are generally for a contractual term of 30 days to one year, the Company provides senior living services to residents for a stated daily or monthly fee. The Company has elected the lessor practical expedient within Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") and recognizes, measures, presents, and discloses the revenue for services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts. The Company has determined that the services included under the Company’s independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with resident fees billed monthly in advance. RevenueCustomers ("ASC 606") for certain skilled nursingits
independent living, assisted living, and memory care residency agreements for which it has estimated that the nonlease components of such residency agreements are the predominant component of the contract.
The Company enters into contracts to provide home health, hospice, and outpatient therapy services. Each service provided under the contract is capable of being distinct, and thus, the services are considered individual and ancillary servicesseparate performance obligations. The performance obligations are satisfied and revenue is recognized as services are provided,provided.
The Company receives revenue for services under various third-party payor programs which include Medicare, Medicaid, and such feesother third-party payors. Settlements with third-party payors for retroactive adjustments due to audits, reviews, or investigations are billed monthlyincluded in arrears.the determination of the estimated transaction price for providing services. The Company estimates the transaction price based on the terms of the contract with the payor, correspondence with the payor and historical payment trends, and retroactive adjustments that differ from the Company's estimates are recognized in future periods as final settlements are determined.
Management FeesServices
The Company manages certain communities under contracts which provide periodic management fee payments to the Company. Management fees are generally determined by an agreed upon percentage of gross revenues (as defined) and are recorded monthly.defined in the management agreement). Certain management contracts also provide for an annual incentive fee to be paid to the Company upon achievement of certain metrics identified in the contract. Incentive fee revenue is recorded at the conclusion of the contract year at the amount due pursuant to the contractual arrangements.
Reimbursed Costs Incurred on Behalf of Managed Communities
The Company manages certain communities under contracts which provide periodic management fee payments to the Company plus reimbursements of certain operating expenses. Where the Company is the primary obligor with respect to any such operating expenses, the Company recognizes revenue whenfor community management services in accordance with the goods have been delivered or the service has been renderedprovisions of ASC 606. Although there are various management and operational activities performed by the Company under the contracts, the Company has determined that all community operations management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company estimates the amount of incentive fee revenue expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided.The Company’s estimate of the transaction price for management services also includes the amount of reimbursement due reimbursement.from the owners of the communities for services provided and related costs incurred. Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the condensed consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed communities" on the condensed consolidated statements of operations.
Deferred Financing CostsGain on Sale of Assets
Third-party feesThe Company regularly enters into real estate transactions which may include the disposal of certain communities, including the associated real estate. The Company recognizes income from real estate sales under ASC 610-20, Other Income - Gains and costs incurredLosses from Derecognition of Nonfinancial Assets ("ASC 610-20"). Under ASC 610-20, income is recognized when the transfer of control occurs and the Company applies the five-step model for recognition to obtain long-term debt are recorded as a direct adjustmentdetermine the amount and timing of income to recognize for all real estate sales.
The Company accounts for the carrying valuesale of debtequity method investments under ASC 860, Transfers and amortized on a straight-line basis, which approximatesServicing ("ASC 860"). Under
ASC 860, income is recognized when the effective yield method, over the termtransfer of control of the related debt. Unamortized deferred financing fees are written-off ifequity interest occurs and the associated debt is retired beforeCompany has no continuing involvement with 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.transferred financial assets.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Marketable Securities
Investments in commercial paper instruments with original maturities of greater than three months and remaining maturities of less than one year are classified as marketable securities.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and DisclosuresMeasurement establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Cash and cash equivalents, marketable securities, and restricted cash and escrow deposits – restricted are reflected in the accompanying condensed consolidated balance sheets at amounts considered by management to reasonably approximate fair value due to the short maturity.
Goodwill
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 (excluding capital and financing lease obligations) with a carrying value of approximately $3.9 billion and $3.6 billion as of September 30, 2017 and December 31, 2016, 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.
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.
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.
On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09")and changed its policy from estimating forfeitures to recording forfeitures when they occur. The Company’s adoption of ASU 2016-09 did not have a material impact on its condensed consolidated financial statements.
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company's current policies provide for deductibles for each and every claim. As a result, the Company is, in effect, self-insured for claims that are less than the deductible amounts. In addition, the Company maintains a high deductible workers compensation program and a self-insured employee medical program.
The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored, and estimates are updated as information becomes available.
During the nine months ended September 30, 2017 and September 30, 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. The reduction in these accrued reserves decreased facility operating expense by $3.7 million and $9.3 million for the three and nine months ended September 30, 2017, respectively, and by $13.9 million and $27.6 million for the three and nine months ended September 30, 2016, respectively.
Lease Accounting
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 condensed 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 capital and financing lease obligation arrangements, a liability is established on the Company's condensed consolidated balance sheet 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 condensed consolidated balance sheet. 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.
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 our 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 our 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.
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 condensed consolidated balance sheet. 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 a building, the Company accounts for the leases 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 Subtopic 840-40. If the arrangement qualifies for sale-leaseback accounting, the Company removes the assets and related liabilities from the condensed consolidated balance sheet. If the arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation and depreciate the assets over the lease term.
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. Under ASU 2017-04, if a reporting unit's carrying amount exceeds its fair value, an impairment charge will be recorded based on the difference, with the impairment charge limited to the amount of goodwill allocated to the reporting unit. The Company adopted ASU 2017-04 on a prospective basis on January 1, 2017. The Company applied the adoption of ASU 2017-04 to its goodwill analysis performed in the three months ended September 30, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business to assist companies in determining whether transactions should be accounted for as an asset acquisition or a business combination. Under ASU 2017-01, if substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business and the transaction is accounted for as an asset acquisition. Transaction costs associated with asset acquisitions are capitalized while those associated
with business combinations are expensed as incurred. The amendments are effective on a prospective basis for the Company's fiscal year beginning January 1, 2018 and early adoption is permitted, including within interim periods. Upon adoption, the Company anticipates that the changes to the definition of a business may result in acquisitions of real estate, communities or senior housing operating companies being accounted for as asset acquisitions.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"). ASU 2016-18 intends to address the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. Upon adoption, the changes required by ASU 2016-18 must be applied retrospectively to all periods presented. The Company plans to adopt ASU 2016-18 on January 1, 2018. The Company anticipates that the inclusion of the change in cash and escrow deposits restricted within the retrospective presentation of the statements of cash flows will result in a $6.3 million decrease to the amount of net cash used in investing activities for the nine months ended September 30, 2017.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented in the statement of cash flows. Among other clarifications on the classification of certain transactions within the statement of cash flows, the amendments in ASU 2016-15 provide that debt prepayment and debt extinguishment costs will be classified within financing activities within the statement of cash flows. ASU 2016-15 is effective for the Company for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company plans to adopt ASU 2016-15 on January 1, 2018. Upon adoption, the changes in classification within the statement of cash flows must be applied retrospectively to all periods presented. The Company has identified $11.2 million and $2.9 million of cash paid for debt modification and extinguishment costs for the nine months ended September 30, 2017 and 2016, respectively, that the Company anticipates will be retrospectively classified as cash flows from financing activities upon adoption of ASU 2016-15. The Company anticipates that the retrospective application will result in an $11.2 million increase to the amount of net cash provided by operating activities and an $11.2 million decrease to the amount of net cash provided by financing activities for the nine months ended September 30, 2017. The Company anticipates that the retrospective application will result in a $2.9 million increase to the amount of net cash provided by operating activities and a $2.9 million increase to the amount of amount net cash used in financing activities for the nine months ended September 30, 2016.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its condensed consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, which 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 Company adopted ASU 2016-09 on January 1, 2017 and changed its accounting policy from estimating forfeitures to recording forfeitures when they occur. The Company’s adoption of ASU 2016-09 did not have a material impact on its condensed consolidated financial statements. There was no current impact on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017 from the adoption of ASU 2016-09 as the Company is in a net operating loss position and any excess tax benefits require a full valuation allowance. See Note 12 for more information about the Company's deferred income taxes. The changes have been applied using a modified retrospective approach in accordance with ASU 2016-09 and prior periods have not been adjusted.
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. For the nine months ended September 30, 2017, the Company made cash lease payments of $275.5 million for long-term community leases accounted for as operating leases under ASC 840. The Company anticipates that the adoption of ASU 2016-02 will result in the recognition of material lease liabilities and right-of use assets on the condensed consolidated balance sheet for these community operating leases. The Company continues
to evaluate the impact that the adoption of ASU 2016-02 will have on its condensed consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The five step model defined by ASU 2014-09 requires the Company to (i) identify the contracts with the customer, (ii) identify the performance obligations in the 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 for contracts with customers. 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 condensed 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 ASU 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 periodic 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 periodic 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 continues to evaluate 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 continue to evaluate 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 are within the scope of ASU 2014-09, as amended by ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the scope of subtopic 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Under ASU 2014-09 and ASU 2017-05 the income recognition for real estate sales is largely based on the transfer of control versus continuing involvement under the current guidance. As a result, more transactions may qualify as sales of real estate and gains or losses may be recognized sooner. Upon adoption, the Company will apply the five step revenue model to all future sales of real estate. The Company may elect to adopt ASU 2014-09 and ASU 2017-05 for contracts with noncustomers utilizing either a full retrospective approach or a modified retrospective approach. The Company has deferred gains related to sales of real estate which may be recognized as a cumulative adjustment to retained earnings upon adoption if the full retrospective approach is elected for contracts with noncustomers. The Company continues to evaluate the impact the adoption of ASU 2014-09 and ASU 2017-05 will have on its condensed consolidated financial statements and disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's condensed consolidated financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock equivalents include unvested restricted stock, restricted stock units and convertible debt instruments and warrants.
During the three and nine months ended September 30, 2017 and September 30, 2016, the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock, restricted stock units and convertible debt instruments and warrants were antidilutive for each period and were not included in the computation of diluted weighted average shares. The weighted average restricted stock and restricted stock units excluded from the calculations of diluted net loss per share were 5.3 million for each of the three and nine months ended September 30, 2017, and 4.7 million and 4.6 million for the three and nine months ended September 30, 2016, 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 September 30, 2017 and September 30, 2016, 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 September 30, 2017 and September 30, 2016, the number of shares issuable upon exercise of the warrants was approximately 10.8 million.
4. Acquisitions, Dispositions and Other Significant Transactions
The Company completed dispositions, through sales and lease terminations, of 139 communities during the period from January 1, 2016 through September 30, 2017, including three communities disposed of prior to June 30, 2016. The Company's condensed consolidated financial statements include resident fee revenue of $4.0 million and $115.1 million, facility operating expenses of $3.3 million and $87.4 million, and cash lease payments of $0.9 million and $27.5 million for the 136 communities for the three months ended September 30, 2017 and September 30, 2016, respectively. The Company's condensed consolidated financial statements include resident fee revenue of $96.6 million and $361.1 million, facility operating expenses of $74.4 million and $272.6 million, and cash lease payments of $26.8 million and $82.4 million for the 139 communities for the nine months ended September 30, 2017 and September 30, 2016, respectively.
The foregoing transactions, and the Company's assets held for sale as of September 30, 2017, are described below.
Dispositions and Restructurings of Communities Leased from HCP
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 were contributed to an existing unconsolidated venture in which the Company holds an equity interest and 64 of which were acquired by the Blackstone Venture described below. In addition to the formation of the Blackstone Venture, the transactions included the following components with respect to 33 communities:
The Company and HCP, Inc. ("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 condensed consolidated financial statements through the respective disposition dates: Assisted Living (six communities), Retirement Centers (one community) and CCRCs-Rental (one community).
The Company and HCP agreed to terminate triple-net leases with respect to 25 communities. During the three months ended September 30, 2017, the triple-net leases with respect to two communities were terminated. The Company’s triple net lease obligations with respect to the remaining 23 communities either have been terminated, or are expected to be terminated, during the three months ended December 31, 2017. Following the termination of the Company’s triple net
lease obligations for these communities, the Company will continue to operate certain of these communities on an interim basis, and such communities will be reported in the Management Services segment from and after termination of such triple net lease obligations. The Company's condensed consolidated financial statements include resident fee revenue of $18.0 million and $18.1 million, facility operating expenses of $14.8 million and $14.6 million, and cash lease payments of $2.6 million and $4.9 million for the 25 communities for the three months ended September 30, 2017 and September 30, 2016, respectively. The Company's condensed consolidated financial statements include resident fee revenue of $54.9 million and $54.6 million, facility operating expenses of $44.7 million and $44.0 million, and cash lease payments of $8.1 million and $14.7 million for the 25 communities for the nine months ended September 30, 2017 and September 30, 2016, respectively.
Formation of Venture with Blackstone
On March 29, 2017, the Company and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the “Blackstone Venture”) that acquired 64 senior housing communities for a purchase price of $1.1 billion. The Company had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases, and the Company contributed its leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fund its share of closing costs. As of the formation date, the Company continued to operate two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a management agreement with the venture. The two remaining leases will be terminated, pending certain regulatory and other conditions, at which point the Company will manage the communities; however, there can be no assurance that the terminations will occur or, if they do, when the actual terminations will occur. Two of the communities are managed by a third party for the venture.
The results and financial position of the 62 communities for which leases were terminated were deconsolidated from the Company prospectively upon formation of the Blackstone Venture. The results of operations of the 62 communities for which leases were terminated were reported in the following segments within the condensed consolidated financial statements through the formation date: Assisted Living (47 communities), Retirement Centers (eight communities) and CCRCs-Rental (seven communities). The Company's interest in the venture is accounted for under the equity method of accounting. Under the terms of the venture agreement, the Company may be entitled to distributions which are less than or in excess of the Company's 15% equity interest based upon specified performance criteria.
Initially, the Company determined that the contributed carrying value of the Company's investment was $66.8 million, representing the amount by which the $179.2 million cash contribution exceeded the carrying value of the Company's liabilities under operating, capital and financing leases contributed by the Company net of the carrying value of the assets under such operating, capital and financing leases. However, the Company estimated the fair value of its 15% equity interest in the Blackstone Venture at inception to be $47.1 million. As a result, the Company recorded a $19.7 million charge within asset impairment expense for the three months ended March 31, 2017 for the amount of the contributed carrying value in excess of the estimated fair value of the Company's investment.
Additionally, these transactions related to the Blackstone Venture required the Company to record a significant increase to the Company's existing tax valuation allowance, after considering the change in the Company's future reversal of estimated timing differences resulting from these transactions, primarily due to removing the deferred positions related to the contributed leases. During the three months ended March, 31, 2017, the Company recorded a provision for income taxes to establish an additional $85.0 million of valuation allowance against its federal and state net operating loss carryforwards and tax credits as the Company anticipates these carryforwards and credits will not be utilized prior to expiration. See Note 12 for more information about the Company's deferred income taxes.
Dispositions of Owned Communities and Assets Held for Sale
The Company began 2017 with 16 of its owned communities classified as held for sale as of December 31, 2016. During the nine months ended September 30, 2017, the Company completed the sale of three communities, and during the three months ended September 30, 2017, the Company entered into an agreement to sell an additional community, which is classified as held for sale as of September 30, 2017. As of September 30, 2017, 15 communities were classified as held for sale.
As of September 30, 2017, $106.4 million was recorded as assets held for sale and $50.4 million of mortgage debt was included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to the 15 communities held for sale. 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 15 communities are reported in the following segments within the condensed consolidated financial statements:
Assisted Living (12 communities) and CCRCs-Rental (three communities). The 15 communities had resident fee revenue of $12.2 million and $12.8 million and facility operating expenses of $10.9 million and $11.0 million for the three months ended September 30, 2017 and September 30, 2016, respectively. The 15 communities had resident fee revenue of $37.6 million and $39.0 million and facility operating expenses of $33.2 million and $33.7 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
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 during 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.
Other Lease Terminations
During the nine months ended September 30, 2017, the Company terminated leases for 14 communities otherwise than in connection with the transactions with Blackstone and HCP described above. The Company recognized $4.9 million and $11.3 million net loss on facility lease termination for the three and nine months ended September 30, 2017, respectively, primarily from the write-off of assets subject to terminated lease agreements. The results of operations of the 14 communities are reported in the following segments with the condensed consolidated financial statements through the respective termination dates: Retirement Centers (one community), Assisted Living (12 communities), and CCRCs-Rental (one community).
5. Stock-Based Compensation
Current year grants of restricted stock 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, 2017 | 2,392 |
| | $ | 14.84 |
| | $ | 35,497 |
|
| Three months ended June 30, 2017 | 71 |
| | $ | 13.11 |
| | $ | 937 |
|
| Three months ended September 30, 2017 | 67 |
| | $ | 13.19 |
| | $ | 889 |
|
6. Goodwill and Other Intangible Assets, Net
The following is a summary of the carrying amount of goodwill as of September 30, 2017 and December 31, 2016 presented on an operating segment basis (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | 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 |
| | $ | (820 | ) | | $ | 27,321 |
|
| Assisted Living | 605,469 |
| | (253,817 | ) | | 351,652 |
| | 600,162 |
| | (48,817 | ) | | 551,345 |
|
| Brookdale Ancillary Services | 126,810 |
| | — |
| | 126,810 |
| | 126,810 |
| | — |
| | 126,810 |
|
| Total | $ | 760,420 |
| | $ | (254,637 | ) | | $ | 505,783 |
| | $ | 755,113 |
| | $ | (49,637 | ) | | $ | 705,476 |
|
The Company follows ASC 350, Goodwill and Other Intangible Assets, and tests goodwill for impairment annually during the fourth quarteras of October 1 or whenever indicators of impairment arise. Factors the Company considers important in its analysis of whether an indicator of impairment exists include a significant decline in the Company's stock price or market capitalization for a sustained period since the last testing date, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. The Company is not required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value of a reporting unit is less than its carrying amount.value. The fair values used in the quantitative goodwill impairment test are estimated using Level 3 inputs based upon discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates, and discount rates. The Company also considers market based measures such as earnings multiples in its analysis of estimated fair values of its reporting units. If the quantitative goodwill impairment test results in a reporting unit's carrying amountvalue exceeding its estimated fair value, an impairment charge will be recorded based on the difference in accordance with ASU 2017-04, with thedifference. The impairment charge is limited to the amount of goodwill allocated to the reporting unit.
Long-lived Asset Impairment
Long-lived assets (including right-of-use 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).
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.
Lease Accounting
The following is the Company's lease accounting policy under ASC 842 subsequent to the adoption. Refer to Recently Adopted Accounting Pronouncements in this Note 2for significant changes that resulted from the adoption effective January 1, 2019. The Company, as lessee, recognizes a right-of-use asset and a lease liability on the Company’s condensed consolidated balance sheet for its community, office, and equipment leases. As of the commencement date of a lease, a lease liability and corresponding right-of-use asset is established on the Company’s condensed consolidated balance sheet at the present value of future minimum lease payments. The Company's community leases generally contain fixed annual rent escalators or annual rent escalators based on an index, such as the consumer price index. The future minimum lease payments recognized on the condensed consolidated balance sheet include fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate on the lease commencement date. The Company recognizes lease expense as incurred for additional variable payments. For the Company’s leases that do not contain an implicit rate, the Company utilizes its estimated incremental borrowing rate in determining the present value of lease payments based on information available at commencement of the lease, which reflects the fixed rate
at which the Company could borrow a similar amount for the same term on a collateralized basis. Leases with an initial term of 12 months or less are not recorded on the Company’s condensed consolidated balance sheet and instead are recognized as lease expense as incurred.
The Company, as lessee, makes a determination with respect to each of its community, office, and equipment leases as to whether each should be accounted for as an operating lease or financing lease in accordance with the provisions of ASC 842. The classification criteria is based on estimates regarding the fair value of the leased asset, minimum lease payments, effective cost of funds, the economic life of the asset and certain other terms in the lease agreements.
For operating leases, payments made under operating lease arrangements are accounted for in the Company's condensed consolidated statements of operations as operating lease expense for actual rent paid, generally plus or minus a straight-line adjustment for estimated minimum lease escalators if applicable. The right-of-use asset is generally reduced each period by an amount equal to the difference between the operating lease expense and the amount of expense on the lease liability utilizing the effective interest method. Subsequent to the impairment of an operating lease right-of-use asset, the Company recognizes operating lease expense consisting of the reduction of the right-of-use asset on a straight-line basis over the remaining lease term and the amount of expense on the lease liability utilizing the effective interest method.
For financing leases, the Company recognizes interest expense on the lease liability utilizing the effective interest method. Additionally, the right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term unless the lease contains an option to purchase the underlying asset that the Company is reasonably certain to exercise in which case the asset is depreciated over the useful life of the underlying asset.
For transactions in which an owned community is sold and leased back from the buyer (sale-leaseback transactions), the Company recognizes an asset sale and lease accounting is applied if the Company has transferred control of the community. For such transactions, the Company removes the transferred assets from the condensed consolidated balance sheet and a gain or loss on the sale is recognized for the difference between the carrying value of the asset and the transaction price for the sale transaction. For sale‑leaseback transactions in which the Company has not transferred control of the underlying asset, the Company does not recognize an asset sale or derecognize the underlying asset until control is transferred. For such transactions, the Company continues to depreciate the asset over its useful life. Additionally, the Company accounts for any amounts received as a financing lease liability and the Company recognizes interest expense on the financing lease liability utilizing the effective interest method with the interest expense limited to an amount that is not greater than the cash payments on the financing lease liability over the term of the lease.
Refer to the Company’s revenue recognition policy for discussion of the accounting policy for residency agreements, which include the lease of an asset.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability on the condensed consolidated balance sheet for most leases. Additionally, ASU 2016-02 makes targeted changes to lessor accounting, including changes to align certain aspects with the revenue recognition model, and requires enhanced disclosure of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements ("ASU 2018-11"). ASU 2018-11 provides entities with a transition method option to not restate comparative periods presented, but to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, ASU 2018-11 provides entities with a practical expedient allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. The Company adopted these lease accounting standards effective January 1, 2019 and utilized the modified retrospective transition method with no adjustments to comparative periods presented. Additionally, the Company elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess, as of January 1, 2019, its prior conclusions on whether an existing contract contains a lease, lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs.
The Company's adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $1.6 billion and right-of-use assets of $1.3 billion on the condensed consolidated balance sheet for its existing community, office, and equipment operating leases based on the remaining present value of the minimum lease payments as of January 1, 2019. The future minimum rental payments recognized on the condensed consolidated balance sheet included fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate as of January 1, 2019. Such right-of-use asset amounts were recognized based upon the amount of the recognized lease liabilities, adjusted for accrued lease payments, intangible assets, and the recognition of right-of-use asset impairments. As of December 31, 2018, the Company had a net liability of $231.4 million
recognized on its condensed consolidated balance sheet for accrued lease payments and intangible assets for operating leases. Additionally, $58.1 million of previously unrecognized right-of-use asset impairments were recognized as a cumulative effect adjustment to beginning accumulated deficit as of January 1, 2019. As a result of the Company’s election of the package of practical expedients within ASU 2016-02, there were no changes to the classification of the Company’s existing operating, capital and financing leases as of January 1, 2019 and there were no changes to the amounts recognized on its condensed consolidated balance sheet for its existing capital and financing leases as of January 1, 2019.
Subsequent to the adoption of ASU 2016-02, lessors are required to separately recognize and measure the lease component of a contract with a customer utilizing the provisions of ASC 842 and the nonlease components utilizing the provisions of ASC 606. To separately account for the components, the transaction price is allocated among the components based upon the estimated stand alone selling prices of the components. Additionally, certain components of a contract which were previously included within the lease element recognized in accordance with ASC 840, Leases ("ASC 840") prior to the adoption of ASU 2016-02 (such as common area maintenance services, other basic services, and executory costs) are recognized as nonlease components subject to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. However, entities are permitted to elect the practical expedient under ASU 2018-11 allowing lessors to not separate nonlease components from the associated lease components when certain criteria are met. Entities that elect to utilize the lease/nonlease component combination practical expedient under ASU 2018-11 upon initial application of ASC 842 are required to apply the practical expedient to all new and existing transactions within a class of underlying assets that qualify for the expedient as of the initial application date.
For the year ended December 31, 2018, the Company recognized revenue for housing services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of the former lease accounting standard, ASC 840, and the Company recognized revenue for assistance with activities of daily living, memory care services, healthcare, and personalized health services under independent living, assisted living, and memory care residency agreements in accordance with the provisions of ASC 606.
Upon adoption of ASU 2016-02 and ASU 2018-11, the Company elected the lessor practical expedient within ASU 2018-11 and recognizes, measures, presents, and discloses the revenue for housing services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC 842 and ASC 606.
The Company has concluded that the nonlease components of the Company’s independent living, assisted living, and memory care residency agreements are the predominant component of the contract for the Company’s existing agreements as of January 1, 2019. As a result of the Company's election of the package of practical expedients within ASU 2016-02, the Company continued to recognize revenue for existing contracts as of December 31, 2018 over the lease term. In addition, ASU 2016-02 has changed the definition of initial direct costs of a lease, with the initial direct costs that are initially deferred and recognized over the term of the lease limited to costs that are both incremental and direct. The Company concluded that the contract origination costs recognized on the condensed consolidated balance sheet as of December 31, 2018 were in excess of the initial direct costs that would have been deferred under the provisions of ASU 2016-02. As a result of the Company’s election of the package of practical expedients, the contract origination costs recognized on the condensed consolidated balance sheet as of December 31, 2018 continued to be amortized during 2019 over the lease term. Additionally, the Company concluded that certain costs previously deferred upon new contract origination are recognized within facility operating expense in 2019 as incurred.
In addition to the previously unrecognized right-of-use asset impairment of $58.1 million, the Company recognized cumulative effect adjustments to beginning accumulated deficit as of January 1, 2019 for the impact of the adoption of accounting standards by its equity method investees and the deferred tax impact of these adjustments. The recognition of the right-of-use assets and corresponding liabilities and the removal of the deferred tax position related to these leases as of December 31, 2018 had a $0.3 million impact on the Company's net deferred tax position. A deferred tax asset of $14.1 million and an increase to the valuation allowance of $13.8 million was recorded against accumulated deficit reflecting the tax impact of the previously unrecognized right-of-use asset impairments.
The adoption of the new accounting standards resulted in the following adjustments to the Company's condensed consolidated balance sheet as of January 1, 2019:
|
| | | |
| (in millions) | |
| Assets | |
| Prepaid expenses and other current assets, net | $ | 67 |
|
| Property, plant and equipment and leasehold intangibles, net | (11 | ) |
| Operating lease right-of-use assets | 1,329 |
|
| Investment in unconsolidated ventures | (2 | ) |
| Other intangible assets, net | (5 | ) |
| Other assets, net | (73 | ) |
| Total assets | $ | 1,305 |
|
| Liabilities and Equity | |
| Refundable fees and deferred revenue | $ | 43 |
|
| Operating lease obligations | 1,618 |
|
| Deferred liabilities | (257 | ) |
| Other liabilities | (43 | ) |
| Total liabilities | 1,361 |
|
| Total equity | (56 | ) |
| Total liabilities and equity | $ | 1,305 |
|
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivable and other financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company plans to adopt ASU 2016-13 effective January 1, 2020 and will recognize any cumulative effect of the adoption as an adjustment to beginning retained earnings with no adjustments to comparative periods presented. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its condensed consolidated financial statements and disclosures.
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. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock equivalents include unvested restricted stock, unvested and vested restricted stock units, and convertible debt instruments and warrants.
During the three and six months ended June 30, 2019 and 2018, the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock, restricted stock units, and convertible debt instruments and warrants were antidilutive for each period and were not included in the computation of diluted weighted average shares. The weighted average restricted stock and restricted stock units excluded from the calculations of diluted net loss per share were 7.8 million and 6.2 million for the three months ended June 30, 2019 and 2018, respectively, and 7.5 million and 6.6 million for the six months ended June 30, 2019 and 2018, respectively.
For the three and six months ended June 30, 2018, the calculation of diluted weighted average shares excludes the impact of conversion of the principal amount of $316.3 million of the Company's 2.75% convertible senior notes which were repaid in cash at their maturity on June 15, 2018. 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 June 30, 2018, the number of shares issuable upon exercise of the warrants was approximately 10.8 million. During the three months ended March 31, 2019, the option to exercise the remaining outstanding warrants expired unexercised.
4. Acquisitions, Dispositions and Other Significant Transactions
During the period from January 1, 2018 through June 30, 2019, the Company disposed of 30 owned communities. The Company also entered into agreements with Ventas, Inc. ("Ventas") and Welltower Inc. ("Welltower") and continued to execute on the transactions with HCP, Inc. ("HCP") announced in 2017, which together restructured a significant portion of the Company's triple-net lease obligations with the Company's largest lessors. As a result of such transactions, as well as other lease expirations and terminations, the Company's triple-net lease obligations on 97 communities were terminated during the period from January 1, 2018 to June 30, 2019. During this period, the Company also sold its ownership interests in five unconsolidated ventures and acquired six communities that the Company previously leased or managed. As of June 30, 2019, the Company owned 336 communities, leased 335 communities, managed 17 communities on behalf of unconsolidated ventures, and managed 121 communities on behalf of third quarterparties.
The following table sets forth, for the periods indicated, the amounts included within the Company's condensed consolidated financial statements for the 127 communities that it disposed through sales and lease terminations during the period from January 1, 2018 to June 30, 2019 through the respective disposition dates (of which 124 communities were disposed through sales and lease terminations during the period from April 1, 2018 to June 30, 2019):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Resident fees | | | | | | | |
| Independent Living | $ | — |
| | $ | 29,241 |
| | $ | — |
| | $ | 60,871 |
|
| Assisted Living and Memory Care | 2,176 |
| | 86,151 |
| | 12,282 |
| | 178,267 |
|
| CCRCs | — |
| | 4,213 |
| | — |
| | 10,705 |
|
| Senior housing resident fees | $ | 2,176 |
| | $ | 119,605 |
| | $ | 12,282 |
| | $ | 249,843 |
|
| Facility operating expense | | | | | | | |
| Independent Living | $ | — |
| | $ | 17,016 |
| | $ | — |
| | $ | 35,668 |
|
| Assisted Living and Memory Care | 1,562 |
| | 60,854 |
| | 10,100 |
| | 125,423 |
|
| CCRCs | — |
| | 3,859 |
| | — |
| | 9,917 |
|
| Senior housing facility operating expense | $ | 1,562 |
| | $ | 81,729 |
| | $ | 10,100 |
| | $ | 171,008 |
|
| Cash facility lease payments | $ | 306 |
| | $ | 32,228 |
| | $ | 1,451 |
| | $ | 66,935 |
|
2019 Completed and Planned Dispositions of Owned Communities
During the six months ended June 30, 2019, the Company completed the sale of eight owned communities for cash proceeds of $44.1 million, net of transaction costs, and recognized a net gain on sale of assets of $1.6 million for the three months ended June 30, 2019 and a net gain on sale of assets of $0.9 million for the six months ended June 30, 2019.
As of June 30, 2019, five communities were classified as held for sale, resulting in $46.3 million being recorded as assets held for sale and $18.5 million of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to such communities. The closings of the transactions are, or will be subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. There can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
2018 Completed Dispositions of Owned Communities
During the year ended December 31, 2018, the Company completed the sale of 22 owned communities for cash proceeds of $380.7 million, net of transaction costs, and recognized a net gain on sale of assets of $188.6 million. The Company utilized a portion of the cash proceeds from the asset sales to repay approximately $174.0 million of associated mortgage debt and debt prepayment penalties. These dispositions included the sale of three communities during the three months ended March 31, 2018 for which the Company received cash proceeds of $12.8 million, net of transaction costs, and recognized a net gain on sale of assets of $1.9 million. The Company did not complete any sales of owned communities during the three months ended June 30, 2018.
2018 Welltower Lease and RIDEA Venture Restructuring
In June 2018, the Company entered into definitive agreements with Welltower to terminate its triple-net lease obligations on 37 communities and to sell the Company's 20% equity interest in its Welltower RIDEA venture to Welltower. During the three months ended June 30, 2018, the Company paid Welltower an aggregate lease termination fee of $58.0 million, recognized a $22.6 million loss on lease termination, received net proceeds of $33.5 million for the sale of equity interest, and recognized a $14.7 million gain on sale of the RIDEA venture. The Company also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities). In addition, the parties separately agreed to allow the Company to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale of such communities, and the Company would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds.
2018 Ventas Lease Portfolio Restructuring
In April 2018, the Company and Ventas entered into a Master Lease and Security Agreement (the "Ventas Master Lease") in connection with the restructuring of a portfolio of 128 communities that it leased from Ventas. The Company estimated the fair value of each of the elements of the restructuring transactions. The fair value of the future lease payments was based upon historical and forecasted community cash flows and market data, including an implied management fee rate of 5% of revenue and a market supported lease coverage ratio (Level 3 inputs). The Company recognized a $125.7 million non-cash loss on lease modification during the three months ended June 30, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that were unfavorable to the Company given current market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
Pursuant to the Ventas Master Lease, the Company has exercised its right to direct Ventas to market for sale 28 communities. Ventas is obligated to use commercially reasonable, diligent efforts to sell such communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community is subject to Ventas' receiving a purchase price in excess of a mutually agreed upon minimum sale price and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received by Ventas multiplied by 6.25%. During the three months ended June 30, 2019, five of such communities were sold by Ventas and removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease was prospectively reduced by $1.5 million.
2017 HCP Master Lease Transaction and RIDEA Ventures Restructuring
Pursuant to transactions the Company entered into with HCP in November 2017, during the three months ended June 30, 2018, the Company acquired five communities from HCP, two of which the Company formerly leased, for an aggregate purchase price of $242.8 million, and during the three months ended March 31, 2018, the Company acquired one community for an aggregate purchase price of $32.1 million.
During the year ended December 31, 2018, leases with respect to 33 communities were terminated, and such communities were removed from the Company's master lease with HCP. Ten of such community leases were terminated in the three months ended June 30, 2018. During the three months ended June 30, 2018, the Company derecognized the $86.9 million carrying value of the assets under financing leases and the $93.5 million carrying value of financing lease obligations and recognized a $6.5 million non-cash gain on sale of assets for three communities which were previously subject to sale-leaseback transactions. Additionally, the Company recognized a $1.9 million non-cash gain on lease termination for seven communities under operating and capital leases during the three months ended June 30, 2018.
During the three months ended March 31, 2018, HCP acquired the Company's 10% ownership interest in a RIDEA venture with HCP for $62.3 million, and the Company recognized a $41.7 million gain on sale.
Management agreements for 35 communities with former unconsolidated ventures with HCP have been terminated by HCP since November of 2017. The Company has recognized a $9.3 million non-cash management contract termination gain, of which $0.3 million and $2.8 million were recognized during the three months ended June 30, 2019 and 2018, respectively, and $0.8 million and $5.1 million were recognized during the six months ended June 30, 2019 and 2018 respectively.
5. Fair Value Measurements
Marketable Securities
As of June 30, 2019, marketable securities of $58.8 million are stated at fair value based on valuation provided by third-party pricing services and are classified within Level 2 of the valuation hierarchy.
Debt
The Company had outstanding long-term debt with a carrying value of approximately $3.6 billion as of both June 30, 2019 and December 31, 2018. Fair value of the long-term debt approximates carrying value in all periods. The Company's fair value of long-term debt disclosure is classified within Level 2 of the valuation hierarchy.
Goodwill and Asset Impairment Expense
The following is a summary of goodwill and asset impairment expense.
|
| | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | | 2018 |
| Goodwill | $ | — |
| | $ | 351.7 |
|
| Property, plant and equipment and leasehold intangibles, net | 6.9 |
| | 47.7 |
|
| Investment in unconsolidated ventures | — |
| | 33.4 |
|
| Other intangible assets, net | — |
| | 1.7 |
|
| Assets held for sale | 9.2 |
| | 12.0 |
|
| Goodwill and asset impairment | $ | 16.1 |
| | $ | 446.5 |
|
Goodwill
During the three months ended March 31, 2018, the Company identified qualitative indicators of impairment, including a significant decline in the Company's stock price and market capitalization for a sustained period sinceduring the last testing date, significant underperformance relative to historical and projected operating results, and an increased competitive environment in the senior living industry.three months ended March 31, 2018. Based upon the Company's qualitative assessment, the Company performed a quantitative goodwill impairment test as of September 30, 2017,March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value.
In estimating Based on the fair valueresults of the reporting units for purposes of theCompany's quantitative goodwill impairment test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimatesrecorded a non-cash impairment charge of future cash flow projections necessarily involve predicting unknown future circumstances$351.7 million to goodwill and eventsasset impairment within the Assisted Living and require significant management judgmentsMemory Care operating segment for the three months ended March 31, 2018. See Note 2 for more information regarding the Company's policy for goodwill.
Property, Plant and estimates. In arriving atEquipment and Leasehold Intangibles
During the cash flow projections,three and six months ended June 30, 2018, the Company considered its historic operating results, approved budgetsevaluated property, plant and business plans,equipment and leasehold intangibles for impairment and identified properties with a carrying value of the assets in excess of the estimated future demographic factors,undiscounted net cash flows expected growth rates, and other factors. In usingto be generated by the income approachassets primarily due to estimatean expectation that certain communities will be disposed of prior to their previously intended holding periods. As a result of this change in intent, the Company compared the estimated fair value of reporting unitsthe assets to their carrying value for purposesthese identified properties and recorded an impairment charge for the excess of carrying value over estimated fair value. The estimates of fair values of the property, plant and equipment of these communities were determined based on valuations provided by third-party pricing services and are classified within Level 3 of the valuation hierarchy. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating results of $6.9 million and $47.7 million for the three and six months ended June 30, 2018, respectively, primarily within the Assisted Living and Memory Care segment.
Investment in Unconsolidated Ventures
The Company evaluates realization of its goodwill impairment test,investment in ventures accounted for using the equity method if circumstances indicate that the Company's investment is other than temporarily impaired. During the three months ended March 31, 2018, the Company made certain key assumptions. Those assumptions include future revenues, facilityrecorded non-cash impairment charges related to investments in unconsolidated ventures of $33.4 million. The impairment charges reflect the amount by which the carrying values of the investments exceeded their estimated fair value (using Level 3 inputs). The
Company did not record any impairment for the three months ended June 30, 2018 or for the three or six months ended June 30, 2019.
Right-of-Use Assets
The Company's adoption of ASU 2016-02 resulted in the recognition of the right-of-use assets for the operating expenses,leases for 25 communities to be recognized on the condensed consolidated balance sheet as of January 1, 2019 at the estimated fair value of $56.6 million as the Company determined that the long-lived assets of such communities were not recoverable as of such date. The fair value of the right-of-use assets was estimated utilizing a discounted cash flow approach based upon historical and projected community cash flows and market data, including sales proceeds that the Company would receive uponmanagement fees and a sale of the communities using estimated capitalization rates, all of which are considered Levelmarket supported lease coverage ratio (Level 3 inputs in accordance with ASC 820.inputs). The Company corroborated the estimated capitalizationmanagement fee rates and lease coverage ratios used in these calculationsestimates with capitalization rateslease coverage ratios observable from recent market transactions. FutureThe estimated future cash flows arewere discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The weighted average costSee Note 2 for more information regarding the recognition of capital is an estimateright-of-use assets for operating leases upon the adoption of the overall after-tax rateASU 2016-02.
6. Stock-Based Compensation
Grants of return required by equity and debt holders of a business enterprise.
Based on the results ofrestricted shares under the Company's quantitative2014 Omnibus Incentive Plan were as follows:
|
| | | | | | | | | | |
| (in thousands, except for per share amounts) | Shares Granted | | Weighted Average Grant Date Fair Value | | Total Value |
| Three months ended March 31, 2019 | 4,047 |
| | $ | 7.87 |
| | $ | 31,857 |
|
| Three months ended June 30, 2019 | 142 |
| | $ | 6.51 |
| | $ | 922 |
|
7. Goodwill and Other Intangible Assets, Net
The Company's Independent Living and Health Care Services segments had a carrying value of goodwill of $27.3 million and $126.8 million, respectively, as of both June 30, 2019 and December 31, 2018.
Goodwill is tested for impairment annually with a test thedate of October 1 and sooner if indicators of impairment are present. The Company determined that the carrying amount of the Company's Assisted Living reporting unit exceeded its estimated fair value by $205.0 million as of September 30, 2017. As a result, the Company recorded a non-cashno impairment charge of $205.0 million to goodwill recorded on the Assisted Living operating segmentwas necessary for the three and six months ended SeptemberJune 30, 2017. Based on2019. 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, ofsignificant negative industry or economic trends, a significant decline in the Company's quantitative goodwillstock 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 test, the Company determined that the estimated fair value of bothat an interval prior to the Company's Retirement Centers and Brookdale Ancillary Services reporting units exceeded their respective carrying values as of September 30, 2017.annual measurement date. Refer to Note 5 for information on impairment expense for goodwill in 2018.
Determining the fair value of the Company’s reporting units involves the use of significant estimates and assumptions, which the Company believes to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include increases in interest rates, which could impact capitalization and discount rates, differences in the projected occupancy rates and changes in the cost structure of existing communities. Significant adverse changes in the Company’s future revenues and/or operating margins, significant changes in the market for senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances, including but not limited to increased competition and changing economic or market conditions, including market control premiums, could result in changes in fair value and the determination that additional goodwill is impaired.
The following is a summary of otherOther intangible assets as of SeptemberJune 30, 20172019 and December 31, 2016 (in thousands):2018 are summarized in the following tables:
|
| | | | | | | | | | | |
| | June 30, 2019 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Health care licenses | $ | 42,323 |
| | $ | — |
| | $ | 42,323 |
|
| Trade names | 27,800 |
| | (27,585 | ) | | 215 |
|
| Total | $ | 70,123 |
| | $ | (27,585 | ) | | $ | 42,538 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Community purchase options | $ | 4,738 |
| | $ | — |
| | $ | 4,738 |
| | $ | 4,738 |
| | $ | — |
| | $ | 4,738 |
|
| Health care licenses | 51,825 |
| | — |
| | 51,825 |
| | 65,126 |
| | — |
| | 65,126 |
|
| Trade names | 27,800 |
| | (23,070 | ) | | 4,730 |
| | 27,800 |
| | (21,135 | ) | | 6,665 |
|
| Management contracts | 13,531 |
| | (9,947 | ) | | 3,584 |
| | 13,531 |
| | (7,053 | ) | | 6,478 |
|
| Total | $ | 97,894 |
| | $ | (33,017 | ) | | $ | 64,877 |
| | $ | 111,195 |
| | $ | (28,188 | ) | | $ | 83,007 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (in thousands) | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Community purchase options | $ | 4,738 |
| | $ | — |
| | $ | 4,738 |
|
| Health care licenses | 42,323 |
| | — |
| | 42,323 |
|
| Trade names | 27,800 |
| | (26,295 | ) | | 1,505 |
|
| Management contracts | 9,610 |
| | (6,704 | ) | | 2,906 |
|
| Total | $ | 84,471 |
| | $ | (32,999 | ) | | $ | 51,472 |
|
Amortization expense related to definite-lived intangible assets for both the three months ended SeptemberJune 30, 20172019 and September 30, 20162018 was $0.9$0.8 million and $1.5 million, respectively, and for the ninesix months ended SeptemberJune 30, 20172019 and September 30, 20162018 was $4.8$1.6 million and $8.3$1.7 million, respectively. The community purchase options are not currently amortized, but will be added to the cost basisCompany recognized $2.6 million of the related communities if the option is exercised, and will then be depreciated over the estimated useful life of the community.
Indefinite-livednon-cash impairment charges on management contract intangible assets are tested for impairment annually during the fourth quarter or whenever indicators of impairment arise. 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. Health care licenses were determined to be indefinite-lived intangible assetsthree and are not subject to amortization.
During the third quarter of 2017, the Company identified indicators of impairmentsix months ended June 30, 2019 for the Company’s home health care licenses in Florida, including significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare for home health care services, an increased competitive environment in the home health care industry, and disruption from the impacttermination of Hurricane Irma. The Company performed a quantitative impairment test as of September 30, 2017, which included a comparison of the estimated fair value of the Company’s home health care licenses to the carrying value. In estimating the fair value of the home health licenses for purposes of the quantitative impairment test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at the cash flow projections, the Company considered its historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors, all of which are considered Level 3 inputs in accordance with ASC 820.contracts.
Based on the results of the Company's quantitative impairment test, the Company determined that the carrying amount of certain of the Company's home health care licenses in Florida exceeded their estimated fair value by $13.7 million as of September 30, 2017. As a result, the Company recorded a non-cash impairment charge of $13.7 million to intangible assets within the Brookdale Ancillary Services segment for the three months ended September 30, 2017.
7.8. Property, Plant and Equipment and Leasehold Intangibles, Net
As of SeptemberJune 30, 20172019 and December 31, 2016,2018, net property, plant and equipment and leasehold intangibles, which include assets under capital and financing leases, consisted of the following (in thousands):following:
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Land | $ | 455,590 |
| | $ | 455,623 |
|
| Buildings and improvements | 4,791,438 |
| | 4,749,877 |
|
| Furniture and equipment | 834,496 |
| | 805,190 |
|
| Resident and leasehold operating intangibles | 319,179 |
| | 477,827 |
|
| Construction in progress | 86,104 |
| | 57,636 |
|
| Assets under financing leases and leasehold improvements | 1,810,335 |
| | 1,776,649 |
|
| Property, plant and equipment and leasehold intangibles | 8,297,142 |
| | 8,322,802 |
|
| Accumulated depreciation and amortization | (3,083,017 | ) | | (3,047,375 | ) |
| Property, plant and equipment and leasehold intangibles, net | $ | 5,214,125 |
| | $ | 5,275,427 |
|
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Land | $ | 449,295 |
| | $ | 455,307 |
|
| Buildings and improvements | 4,911,597 |
| | 5,053,204 |
|
| Leasehold improvements | 126,185 |
| | 126,325 |
|
| Furniture and equipment | 995,975 |
| | 974,516 |
|
| Resident and leasehold operating intangibles | 609,518 |
| | 705,000 |
|
| Construction in progress | 52,003 |
| | 69,803 |
|
| Assets under capital and financing leases | 2,038,476 |
| | 2,879,996 |
|
| | 9,183,049 |
| | 10,264,151 |
|
| Accumulated depreciation and amortization | (3,002,673 | ) | | (2,884,846 | ) |
| Property, plant and equipment and leasehold intangibles, net | $ | 6,180,376 |
| | $ | 7,379,305 |
|
Assets under financing leases and leasehold improvements includes $0.7 billion of financing lease right-of-use assets, net of accumulated amortization, as of both June 30, 2019 and December 31, 2018. Refer to Note 10 for further information on the Company’s financing leases.
The Company recognized depreciation and amortization expense on its property, plant and equipment and leasehold intangibles of $93.2 million and $115.3 million for the three months ended June 30, 2019 and 2018, respectively, and $189.3 million and $228.7 million for the six months ended June 30, 2019 and 2018, respectively.
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise. During the nine months ended September 30, 2017, the Company evaluatedRefer to Note 5 for additional information on impairment expense for property, plant and equipment and leasehold intangibles for impairmentintangibles.
9. Debt
Long-term debt as of June 30, 2019 and identified properties with a carrying amountDecember 31, 2018 consists of the following:
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Mortgage notes payable due 2019 through 2047; weighted average interest rate of 4.88% for the six months ended June 30, 2019, less debt discount and deferred financing costs of $17.4 million and $18.6 million as of June 30, 2019 and December 31, 2018, respectively (weighted average interest rate of 4.75% in 2018) | $ | 3,504,957 |
| | $ | 3,579,931 |
|
| Other notes payable, weighted average interest rate of 5.58% for the six months ended June 30, 2019 (weighted average interest rate of 5.85% in 2018) and maturity dates ranging from 2019 to 2021 | 67,615 |
| | 60,249 |
|
| Total long-term debt | 3,572,572 |
| | 3,640,180 |
|
| Less current portion | 267,153 |
| | 294,426 |
|
| Total long-term debt, less current portion | $ | 3,305,419 |
| | $ | 3,345,754 |
|
As of June 30, 2019 and December 31, 2018, the current portion of long-term debt within the Company's condensed consolidated financial statements includes $18.5 million and $31.2 million, respectively, of mortgage notes payable secured by assets in excess of the estimated future undiscounted net cash flowsheld for sale. This debt is expected to be generated byrepaid with the assets. The Company comparedproceeds from the estimated fair value ofsales. Refer to Note 4 for more information about the Company's assets to their carrying valueheld 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 $149.9 million and $152.4 million for the three and nine months ended September 30, 2017, respectively. The non-cash impairment charges reduced the carrying values of assets within the Assisted Living, CCRCs - Rental, and Retirement Centers segments by $133.7 million, $16.2 million, and $2.5 million, respectively. The fair values of the property, plant and equipment of these communities were determined utilizing a direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements are considered Level 3 measurements within the fair value hierarchy. The range of capitalization rates utilized was 6.5% to 9.0%, depending upon the property type, geographical location, and the quality of the respective community. The Company corroborated the estimated fair values with a sales comparison approach with information observable from recent market transactions. These impairment charges are primarily due to lower than expectedsale.
operating performance at these properties and reflect the amount by which the carrying values of the assets exceeded their estimated fair value.
8. Debt
Long-term Debt and Capital and Financing Lease Obligations
Long-term debt and capital and financing lease obligations consist of the following (in thousands):
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Mortgage notes payable due 2017 through 2047; weighted average interest rate of 4.58% for the nine months ended September 30, 2017, less debt discount and deferred financing costs of $15.6 million and $4.5 million as of September 30, 2017 and December 31, 2016, respectively (weighted average interest rate of 4.50% in 2016) | $ | 3,550,927 |
| | $ | 3,184,229 |
|
| Capital and financing lease obligations payable through 2032; weighted average interest rate of 7.95% for the nine months ended September 30, 2017 (weighted average interest rate of 8.08% in 2016) | 1,577,589 |
| | 2,485,520 |
|
| Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount and deferred financing costs of $10.1 million and $20.9 million as of September 30, 2017 and December 31, 2016, respectively, interest at 2.75% per annum, due June 15, 2018 | 306,145 |
| | 295,397 |
|
| Construction financing (weighted average interest rate of 8.00% in 2016) | — |
| | 3,644 |
|
| Notes payable issued to finance insurance premiums, weighted average interest rate of 2.94% for the nine months ended September 30, 2017, due 2017 | 4,347 |
| | — |
|
| Other notes payable, weighted average interest rate of 5.80% for the nine months ended September 30, 2017 (weighted average interest rate of 5.33% in 2016) and maturity dates ranging from 2018 to 2021 | 76,359 |
| | 76,377 |
|
| Total long-term debt and capital and financing lease obligations | 5,515,367 |
| | 6,045,167 |
|
| Less current portion | 646,504 |
| | 215,255 |
|
| Total long-term debt and capital and financing lease obligations, less current portion | $ | 4,868,863 |
| | $ | 5,829,912 |
|
Credit Facilities
On December 19, 2014,5, 2018, the Company entered into a FourthFifth Amended and Restated Credit Agreement with General Electric Capital Corporation (which has since assigned its interest to Capital One, Financial Corporation),National Association, as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto.thereto (the "Amended Agreement"). The agreement currentlyAmended Agreement amended and restated in its entirety the Company's Fourth Amended and Restated Credit Agreement dated as of December 19, 2014 (the "Original Agreement"). The Amended Agreement provides commitments for a total commitment amount of $400.0 million, comprised of a $400.0$250 million revolving credit facility (withwith a $50.0$60 million sublimit for letters of credit and a $50.0$50 million swingline featurefeature. The Company has a one-time right under the Amended Agreement to permit same day borrowing) and an option to increase commitments on the revolving credit facility by an additional $250.0$100 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The Amended Agreement provides the Company a one-time right to reduce the amount of the revolving credit commitments, and the Company may terminate the revolving credit facility at any time, in each case without payment of a premium or penalty. The Amended Agreement extended the maturity date isof the Original Agreement from January 3, 2020 to January 3, 2024 and amountsdecreased the interest rate payable on drawn amounts. Amounts drawn under the facility will continue to bear interest at 90-day LIBOR plus an applicable margin; however, the Amended Agreement reduced the applicable margin from a range of 2.50% to 3.50% to a range of 2.25% to 3.25%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50%2.25% margin at utilization equal to or lower than 35%, a 3.25%2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50%3.25% margin at utilization greater than 50%. TheA quarterly commitment fee continues to be payable on the unused portion of the facility isat 0.25% per annum when the outstanding amount of obligations (including revolving credit swingline and termswingline loans and letter of credit obligations) is greater than or equal to 50% of the totalrevolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the totalrevolving credit commitment amount.
Amounts drawn on the facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The credit facility is secured by a first priority mortgagemortgages on certain of the Company's communities. In addition, the agreementAmended Agreement permits the Company to pledge the equity interests in subsidiaries that own other communities and grant negative pledges in connection therewith (rather than mortgaging such communities), provided that loan availability from pledged assets cannot exceednot more than 10% of loan availabilitythe borrowing base may result from mortgaged assets. The availabilitycommunities subject to negative pledges. Availability under the linerevolving credit facility will vary from time to time as it is based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.credit facility and the Company’s consolidated fixed charge coverage ratio. In July of 2019 the Company added three communities to the borrowing base.
The agreementAmended Agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could
result in a default underAmounts drawn on the credit agreement, which would result in termination of all commitments under the agreement and all amounts owing under the agreement becoming immediately due and payable and/or could trigger cross default provisions in our other outstanding debt and lease agreements.facility may be used for general corporate purposes.
As of SeptemberJune 30, 2017,2019, no borrowings were outstanding on the revolving credit facility, and $38.5$41.2 million of letters of credit were outstanding, under thisand the revolving credit facility.facility had $163.5 million of availability. The Company also had a separate letter ofunsecured credit facilitiesfacility of up to $64.5$47.5 million in the aggregate as of SeptemberJune 30, 2017.2019. Letters of credit totaling $64.4$47.5 million had been issued under thesethe separate facilities
facility as of September 30, 2017.that date. After giving effect to the addition of the three communities to the borrowing base described above, availability under the secured credit facility is $180.8 million as of August 6, 2019.
20172019 Financings
In June 2017,On May 7, 2019, the Company obtained a $54.7 million non-recourse addition and borrow-up loan, secured by first mortgages on seven communities. The loan bears interest at a fixed rate of 4.69% and matures on March 1, 2022. Proceeds from the loan added to the Company's liquidity.
In July 2017, the Company completed the refinancing of two existing loan portfolios secured by the non-recourse first mortgages on 22 communities. The $221.3 million of proceeds from the refinancing were primarily utilized to repay $188.1 million and $13.6 million of mortgage debt maturing in April 2018 and January 2021, respectively. The mortgage facility has a 10 year term, and 70% of the principal amount bears interest at a fixed rate of 4.81% and the remaining 30% of the principal amount bears interest at a variable rate of 30-day LIBOR plus a margin of 244 basis points.
In August 2017, the Company obtained $975.0$111.1 million of debt secured by the non-recourse first mortgages on 5114 communities. Sixty percent of the principal amount bears interest at a fixed rate with one half of such amount bearing interest at 4.43% and maturing in 20244.52%, and the other one half bearing interest at 4.47% and maturing in 2027. Fortyremaining forty percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 241.5223 basis points andpoints. The debt matures in 2027.June 2029. The $975.0$111.1 million of proceeds from the refinancingfinancing along with cash on hand were primarily utilized to repay $389.9 million and $228.9$155.5 million of outstanding mortgage debt scheduledmaturing in 2019.
Financial Covenants
Certain of the Company’s debt documents contain restrictions and financial covenants, such as those requiring the Company to maturemaintain prescribed minimum net worth and stockholders’ equity levels and debt service ratios, and requiring the Company not to exceed prescribed leverage ratios, in August 2018 and May 2023, respectively. The net proceeds fromeach case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the refinancing activity addedCompany’s debt documents generally contain non-financial covenants, such as those requiring the Company to the Company's liquidity.comply with Medicare or Medicaid provider requirements.
The Company plansCompany’s failure to repaycomply with applicable covenants could constitute an event of default under the applicable debt maturingdocuments. Many of the Company’s debt documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Furthermore, the Company’s debt is secured by its communities and, in the upcoming year, including the $316.3 million outstanding principal amount of convertible senior notes due June 15, 2018, through current liquidity, future operating cash flows, and normal-course refinancings.
Convertible Debt
In June 2011,certain cases, a guaranty by the Company completed a registered offeringand/or one or more of $316.3 million aggregate principal amount of 2.75% convertible senior notes due June 15, 2018 (the "Notes"). As of September 30, 2017, the $306.1 million carrying value of the Notes was included in the current portion of long-term debt within the condensed consolidated balance sheet. 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.its subsidiaries.
As of SeptemberJune 30, 2017,2019, the Company is in compliance with the financial covenants of its outstandingdebt agreements.
10. Leases
As of June 30, 2019, the Company operated 335 communities under long-term leases (244 operating leases and 91 financing leases). The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. The Company typically guarantees the performance and lease payment obligations of its subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of such leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or the leased property revenue. The Company is responsible for all operating costs, including repairs, property taxes, and insurance. As of June 30, 2019, the weighted-average remaining lease term of the Company’s operating and financing leases was 7.3 and 8.8 years, respectively. The leases generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the Company to maintain prescribed minimum net worth and stockholders’ equity levels and lease coverage ratios, and not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis. In addition, the Company’s lease documents generally contain non-financial covenants, such as those requiring the Company to comply with Medicare or Medicaid provider requirements.
The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable lease documents. Many of the Company’s debt and lease agreements.documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors). Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the required covenant is not met. Furthermore, the Company’s leases are secured by its communities and, in certain cases, a guaranty by the Company and/or one or more of its subsidiaries.
As of June 30, 2019, the Company is in compliance with the financial covenants of its long-term leases.
A summary of operating and financing lease expense (including the respective presentation on the condensed consolidated statements of operations) and cash flows from leasing transactions is as follows:
|
| | | | | | | |
Operating Leases (in thousands) | Three Months Ended
June 30, 2019 | | Six Months Ended
June 30, 2019 |
| Facility operating expense | $ | 4,604 |
| | $ | 9,229 |
|
| Facility lease expense | 67,689 |
| | 136,357 |
|
| Operating lease expense | 72,293 |
| | 145,586 |
|
| Operating lease expense adjustment | 4,429 |
| | 8,812 |
|
| Operating cash flows from operating leases | $ | 76,722 |
| | $ | 154,398 |
|
| | | | |
| Non-cash recognition of right-of-use assets obtained in exchange for new operating lease obligations | $ | 2,623 |
| | $ | 3,981 |
|
|
| | | | | | | |
Financing Leases (in thousands) | Three Months Ended
June 30, 2019 | | Six Months Ended
June 30, 2019 |
| Depreciation and amortization | $ | 11,677 |
| | $ | 23,355 |
|
| Interest expense: financing lease obligations | 16,649 |
| | 33,392 |
|
| Financing lease expense | $ | 28,326 |
| | $ | 56,747 |
|
| | | | |
| Operating cash flows from financing leases | $ | 16,649 |
| | $ | 33,392 |
|
| Financing cash flows from financing leases | 5,500 |
| | 10,953 |
|
| Total cash flows from financing leases | $ | 22,149 |
| | $ | 44,345 |
|
As of June 30, 2019, the weighted-average discount rate of the Company’s operating and financing leases was 8.6% and 7.8%, respectively. As the Company's community leases do not contain an implicit rate, the Company utilized its incremental borrowing rate based on information available on January 1, 2019 to determine the present value of lease payments for operating leases that commenced prior to that date.
The aggregate amounts of future minimum lease payments, including community, office, and equipment leases recognized on the condensed consolidated balance sheet as of June 30, 2019 are as follows (in thousands):
|
| | | | | | | |
| Year Ending December 31, | Operating Leases | | Financing Leases |
| 2019 (six months) | $ | 152,768 |
| | $ | 44,087 |
|
| 2020 | 307,826 |
| | 89,003 |
|
| 2021 | 291,491 |
| | 90,243 |
|
| 2022 | 288,319 |
| | 91,633 |
|
| 2023 | 284,399 |
| | 93,104 |
|
| Thereafter | 783,498 |
| | 428,952 |
|
| Total lease payments | 2,108,301 |
| | 837,022 |
|
| Purchase option liability and non-cash gain on future sale of property | — |
| | 575,531 |
|
| Imputed interest and variable lease payments | (581,835 | ) | | (548,966 | ) |
| Total lease obligations | $ | 1,526,466 |
| | $ | 863,587 |
|
The aggregate amounts of future minimum operating lease payments, including community, office, and equipment leases not recognized on the condensed consolidated balance sheet under ASC 840 as of December 31, 2018 are as follows (in thousands):
|
| | | |
| Year Ending December 31, | Operating Leases |
| 2019 | $ | 310,340 |
|
| 2020 | 307,493 |
|
| 2021 | 290,661 |
|
| 2022 | 291,114 |
|
| 2023 | 285,723 |
|
| Thereafter | 786,647 |
|
| Total lease payments | $ | 2,271,978 |
|
9.11. Litigation
The Company has been and is currently involved in litigation and claims, including putative class action claims from time to time, incidental to the conduct of its business which are generally comparable to other companies in the senior living industry.and healthcare industries. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, the Company maintains general liability and professional liability insurance policies in amounts and with coverage and deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company's current policies provide for deductibles for each claim. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts and for claims or portions of claims that are not covered by such policies.
Similarly, the senior living industry isand healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement activities or litigation related to regulatory compliance matters. In addition, as a result of the Company's participation in the Medicare and Medicaid programs, the Company is subject to various governmental reviews, audits and investigations, including but not limited to audits under various government programs, such as the Recovery ActAudit Contractors (RAC) and, Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC) programs. The costs to respond to and defend such reviews, audits and investigations may be significant, and an adverse determination could result in the Company's refunding amounts the Company has been paid under such programs, the imposition
of fines, penaltiescitations, sanctions and other sanctions (includingcriminal or civil fines and penalties, the refund of overpayments, payment suspensions) on the Company, the Company's losssuspensions, termination of its right to participateparticipation in government reimbursementMedicare and Medicaid programs, and/or damage to the Company's business and reputation.
10.12. Supplemental Disclosure of Cash Flow Information
|
| | | | | | | |
| | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Interest paid | $ | 124,647 |
| | $ | 133,000 |
|
| Income taxes paid, net of refunds | 1,916 |
| | 1,421 |
|
| | | | |
| Capital expenditures, net of related payables | | | |
| Capital expenditures - non-development, net | $ | 121,066 |
| | $ | 89,417 |
|
| Capital expenditures - development, net | 10,623 |
| | 13,390 |
|
| Capital expenditures - non-development - reimbursable | 1,000 |
| | 1,764 |
|
| Capital expenditures - development - reimbursable | — |
| | 695 |
|
| Trade accounts payable | (10,392 | ) | | 15,192 |
|
| Net cash paid | $ | 122,297 |
| | $ | 120,458 |
|
| Acquisition of assets, net of related payables and cash received: | | | |
| Property, plant and equipment and leasehold intangibles, net | $ | — |
| | $ | 237,563 |
|
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| (in thousands) | 2017 | | 2016 |
| Supplemental Disclosure of Cash Flow Information: | | | |
| Interest paid | $ | 223,929 |
| | $ | 260,504 |
|
| Income taxes paid, net of refunds | $ | 1,595 |
| | $ | 2,195 |
|
| Additions to property, plant and equipment and leasehold intangibles, net: | |
| | |
|
| Property, plant and equipment and leasehold intangibles, net | $ | 139,734 |
| | $ | 230,837 |
|
| Accounts payable | 310 |
| | 33,113 |
|
| Net cash paid | $ | 140,044 |
| | $ | 263,950 |
|
| Acquisition of assets, net of related payables: | |
| | |
|
| Property, plant and equipment and leasehold intangibles, net | $ | — |
| | $ | 19,457 |
|
| Other intangible assets, net | 400 |
| | (7,300 | ) |
| Net cash paid | $ | 400 |
| | $ | 12,157 |
|
| Proceeds from sale of assets, net: | |
| | |
|
| Prepaid expenses and other assets | $ | (14,387 | ) | | $ | (1,036 | ) |
| Assets held for sale | (20,952 | ) | | (218,343 | ) |
| Property, plant and equipment and leasehold intangibles, net | (19,184 | ) | | — |
|
| Investments in unconsolidated ventures | (26,301 | ) | | — |
|
| Long-term debt | 7,552 |
| | — |
|
| Capital and financing lease obligations | 7,646 |
| | — |
|
| Refundable entrance fees and deferred revenue | 30,771 |
| | — |
|
| Other liabilities | 39 |
| | 2,034 |
|
| Loss (gain) on sale of assets, net | 1,408 |
| | — |
|
| (Gain) loss on lease termination | (1,162 | ) | | (2,126 | ) |
| Net cash received | $ | (34,570 | ) | | $ | (219,471 | ) |
| Formation of the Blackstone Venture: | | | |
| Prepaid expenses and other assets | $ | (8,173 | ) | | $ | — |
|
| Property, plant and equipment and leasehold intangibles, net | (768,897 | ) | | — |
|
| Investments in unconsolidated ventures | 66,816 |
| | — |
|
| Capital and financing lease obligations | 879,959 |
| | — |
|
| Deferred liabilities | 7,504 |
| | — |
|
| Other liabilities | 1,998 |
| | — |
|
| Net cash paid | $ | 179,207 |
| | $ | — |
|
| Supplemental Schedule of Non-cash Operating, Investing and Financing Activities: | |
| | |
|
| Assets designated as held for sale: | |
| | |
|
| Prepaid expenses and other assets | $ | 199 |
| | $ | (2,130 | ) |
| Assets held for sale | (29,544 | ) | | 280,604 |
|
| Property, plant and equipment and leasehold intangibles, net | 29,345 |
| | (261,639 | ) |
| Goodwill | — |
| | (28,568 | ) |
| Asset impairment | — |
| | 11,733 |
|
| Net | $ | — |
| | $ | — |
|
11. Facility Operating Leases
|
| | | | | | | |
| Other intangible assets, net | — |
| | (4,796 | ) |
| Financing lease obligations | — |
| | 36,120 |
|
| Other liabilities | — |
| | 2,433 |
|
| Net cash paid | $ | — |
| | $ | 271,320 |
|
| Proceeds from sale of assets, net: | | | |
| Prepaid expenses and other assets, net | $ | (5,798 | ) | | $ | (1,991 | ) |
| Assets held for sale | (41,882 | ) | | (18,758 | ) |
| Property, plant and equipment and leasehold intangibles, net | (688 | ) | | (87,864 | ) |
| Investments in unconsolidated ventures | (156 | ) | | (58,179 | ) |
| Financing lease obligations | — |
| | 93,514 |
|
| Refundable fees and deferred revenue | — |
| | 8,345 |
|
| Other liabilities | (1,762 | ) | | 789 |
|
| Gain on sale of assets, net | (2,144 | ) | | (66,753 | ) |
| Net cash received | $ | (52,430 | ) | | $ | (130,897 | ) |
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | — |
| | $ | (2,000 | ) |
| Property, plant and equipment and leasehold intangibles, net | — |
| | (52,920 | ) |
| Financing lease obligations | — |
| | 21,898 |
|
| Deferred liabilities | — |
| | 67,950 |
|
| Loss on facility lease termination and modification, net | — |
| | 22,260 |
|
Net cash paid (1) | $ | — |
| | $ | 57,188 |
|
| | | | |
| Supplemental Schedule of Non-cash Operating, Investing and Financing Activities: | | | |
| Assets designated as held for sale: | | | |
| Prepaid expenses and other assets, net | $ | (5 | ) | | $ | — |
|
| Assets held for sale | (4,928 | ) | | 58,445 |
|
| Property, plant and equipment and leasehold intangibles, net | 4,933 |
| | (58,445 | ) |
| Net | $ | — |
| | $ | — |
|
| Lease termination and modification, net: | | | |
| Prepaid expenses and other assets, net | $ | (648 | ) | | $ | (2,813 | ) |
| Property, plant and equipment and leasehold intangibles, net | (1,666 | ) | | 2,959 |
|
| Financing lease obligations | — |
| | (2,375 | ) |
| Operating lease right-of-use assets | (8,644 | ) | | — |
|
| Operating lease obligations | 9,289 |
| | — |
|
| Deferred liabilities | — |
| | (122,304 | ) |
| Other liabilities | (337 | ) | | 326 |
|
| Loss on facility lease termination and modification, net | 2,006 |
| | 124,207 |
|
| Net | $ | — |
| | $ | — |
|
| |
| (1) | The net cash paid to terminate community leases is presented within the condensed consolidated statement of cash flows based upon the lease classification of the terminated leases. Net cash paid of $46.6 million for the termination of operating leases is presented within net cash provided by (used in) operating activities and net cash paid of $10.5 million for the termination of capital leases is presented within net cash provided by (used in) financing activities for the six months ended June 30, 2018. |
A summary
During the three months ended June 30, 2019, the Company and its joint venture partner contributed cash in an aggregate amount of facility$13.3 million to a consolidated joint venture which owns three senior housing communities. The Company obtained a $6.6 million promissory note receivable from its joint venture partner secured by a 50% equity interest in the joint venture in a non-cash exchange for the Company funding the $13.3 million aggregate contribution in cash.
|
| | | | | | | |
| | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 |
| Notes receivable: | | | |
| Other assets, net | $ | 6,566 |
| | $ | — |
|
| Noncontrolling interest | (6,566 | ) | | — |
|
| Net | $ | — |
| | $ | — |
|
Refer to Note 2 for a schedule of the non-cash adjustments to the Company's condensed consolidated balance sheet as of January 1, 2019 as a result of the adoption of new accounting standards and Note 10 for a schedule of the non-cash recognition of right-of-use assets obtained in exchange for new operating lease expenseobligations.
Restricted cash consists principally of escrow deposits for real estate taxes, property insurance, and capital expenditures required by certain lenders under mortgage debt agreements and deposits as security for self-insured retention risk under workers' compensation programs and property insurance programs. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the impactcondensed consolidated balance sheets that sums to the total of straight-line adjustment and amortizationthe same such amounts shown in the condensed consolidated statements of (above) below market rents and deferred gains are as follows (in thousands):cash flows.
|
| | | | | | | |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Reconciliation of cash, cash equivalents and restricted cash: | | | |
| Cash and cash equivalents | $ | 255,999 |
| | $ | 398,267 |
|
| Restricted cash | 26,256 |
| | 27,683 |
|
| Long-term restricted cash | 42,704 |
| | 24,268 |
|
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 324,959 |
| | $ | 450,218 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cash basis payment | $ | 90,303 |
| | $ | 96,170 |
| | $ | 275,506 |
| | $ | 287,781 |
|
| Straight-line (income) expense | (3,078 | ) | | (859 | ) | | (9,204 | ) | | 2,553 |
|
| Amortization of (above) below market lease, net | (1,697 | ) | | (1,699 | ) | | (5,091 | ) | | (5,165 | ) |
| Amortization of deferred gain | (1,091 | ) | | (1,093 | ) | | (3,277 | ) | | (3,279 | ) |
| Facility lease expense | $ | 84,437 |
| | $ | 92,519 |
| | $ | 257,934 |
| | $ | 281,890 |
|
12.13. Income Taxes
The difference between the tax statutory rate and the Company's effective tax ratesrate for the three and ninesix months ended SeptemberJune 30, 20172019 and SeptemberJune 30, 20162018 was primarily due to the impactnon-deductible impairment of the changegoodwill that occurred in income tax valuation allowance in each period and the non-deductibility for income tax purposes of the goodwill impairment charge in 2017.
The valuation allowance during the three months ended September 30, 2017 reflects an additional allowance of $59.6 million established against the current period operating loss and is reflective of the Company's quarterly calculation of the reversal of existing tax assets and liabilitiesMarch 31, 2018 and the impact of the Company's acquisitions, dispositions, and other significant transactions.
The increaseadjustment from stock-based compensation, which was greater in the valuation allowance during the ninesix months ended SeptemberJune 30, 2017 is comprised of multiple components. The increase includes $85.0 million related2018 compared to the removal of future timing differences as a result of the formation of the Blackstone Venture and termination of leases associated therewith. In addition, the Company increased its valuation allowance by $48.5 million upon the adoption of ASU 2016-09. The $48.5 million offsets the increase to the Company's net operating loss carryforward position previously reflected in an additional paid-in capital pool, and accordingly, does not impact the current period income tax position. The remaining change of approximately $86.6 million for the ninesix months ended SeptemberJune 30, 2017 reflects the allowance established against the current period operating loss.2019.
The Company recorded an aggregate deferred federal, state, and local tax benefit of $91.3$13.0 million and $123.0$19.5 million for the three and six months ended June 30, 2019, respectively. The benefit includes $13.0 million and $21.2 million as a result of the operating losslosses for the three and ninesix months ended SeptemberJune 30, 2017, respectively, which2019, respectively. The benefit was reduced by a $1.7 million reduction in the deferred tax asset related to employee stock compensation for the six months ended June 30, 2019. The benefit for the three and six months ended June 30, 2019 is offset by an increaseincreases in the valuation allowance of $59.6$13.3 million and $86.6$20.0 million, respectively. The excess of the deferred federal, state and local tax benefit over the increasechange in the valuation allowance for the three and six months ended SeptemberJune 30, 20172019 is the result of the anticipated reversal of future tax liabilities offset by future tax deductions. In addition, the Company wrote down a deferred tax liability relating to an indefinite life intangible that was established in purchase accounting.deduction. The Company recorded an aggregate deferred federal, state, and local tax benefit of $18.9$46.4 million and $37.5$55.9 million as a result of the operating loss for the three and ninesix months ended SeptemberJune 30, 2016, respectively,2018, which was offset by an increase in the valuation allowance of $22.3$30.3 million and $39.5$54.9 million, respectively.
The Company evaluates its deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. The Company's valuation allowance as of SeptemberJune 30, 20172019 and December 31, 2016 is $484.52018 was $370.2 million and $264.3$336.4 million, respectively.
The increase in the valuation allowance during the six months ended June 30, 2019 is comprised of multiple components. The increase includes $13.8 million resulting from the adoption of ASC 842 and the related addition of future timing differences recorded in the three months ended March 31, 2019. An additional $21.7 million of allowance was established against the current operating loss incurred during the six months ended June 30, 2019. Offsetting the increases was a decrease of $1.7 million of
allowance as a result of removal of future timing differences related to employee stock compensation recorded in the three months ended March 31, 2019.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act ("Tax Act") into law. The Tax Act limits the annual deductibility of a corporation's net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business exception. The Company plans to elect the real property trade or business exception with the 2018 tax return. As such, the Company is required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified improvement property assets. This change impacts the current and future tax depreciation deductions and impacted the Company's valuation allowance accordingly. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on the Company's state and local income tax returns, state and local net operating losses, and corresponding valuation allowances.
The Company recorded interest charges related to its tax contingency reserve for cash tax positions for the ninethree and six months ended SeptemberJune 30, 20172019 and September 30, 20162018 which are included in income tax expense or benefit for the period. TaxAs of June 30, 2019, tax returns for years 20122014 through 20162017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
14. Revenue
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by payor source, as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. See details on a reportable segment basis in the tables below.
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| (in thousands) | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 135,348 |
| | $ | 433,589 |
| | $ | 71,092 |
| | $ | 193 |
| | $ | 640,222 |
|
| Government reimbursement | 603 |
| | 16,636 |
| | 20,196 |
| | 91,614 |
| | 129,049 |
|
| Other third-party payor programs | — |
| | — |
| | 9,965 |
| | 22,627 |
| | 32,592 |
|
| Total resident fee revenue | $ | 135,951 |
| | $ | 450,225 |
| | $ | 101,253 |
| | $ | 114,434 |
| | $ | 801,863 |
|
| | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| (in thousands) | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 158,405 |
| | $ | 503,806 |
| | $ | 73,392 |
| | $ | 157 |
| | $ | 735,760 |
|
| Government reimbursement | 888 |
| | 18,221 |
| | 21,379 |
| | 90,605 |
| | 131,093 |
|
| Other third-party payor programs | — |
| | — |
| | 10,025 |
| | 19,091 |
| | 29,116 |
|
| Total resident fee revenue | $ | 159,293 |
| | $ | 522,027 |
| | $ | 104,796 |
| | $ | 109,853 |
| | $ | 895,969 |
|
| | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| (in thousands) | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 270,393 |
| | $ | 875,500 |
| | $ | 142,625 |
| | $ | 383 |
| | $ | 1,288,901 |
|
| Government reimbursement | 1,252 |
| | 33,251 |
| | 41,683 |
| | 180,271 |
| | 256,457 |
|
| Other third-party payor programs | — |
| | — |
| | 20,672 |
| | 45,312 |
| | 65,984 |
|
| Total resident fee revenue | $ | 271,645 |
| | $ | 908,751 |
| | $ | 204,980 |
| | $ | 225,966 |
| | $ | 1,611,342 |
|
| | | | | | | | | | |
13. Variable Interest Entities
As of September 30, 2017, the Company has equity interests in unconsolidated VIEs. |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| (in thousands) | Independent Living | | Assisted Living and Memory Care | | CCRCs | | Health Care Services | | Total |
| Private pay | $ | 315,912 |
| | $ | 1,018,070 |
| | $ | 144,113 |
| | $ | 426 |
| | $ | 1,478,521 |
|
| Government reimbursement | 1,778 |
| | 36,237 |
| | 45,085 |
| | 183,232 |
| | 266,332 |
|
| Other third-party payor programs | — |
| | — |
| | 20,667 |
| | 36,715 |
| | 57,382 |
|
| Total resident fee revenue | $ | 317,690 |
| | $ | 1,054,307 |
| | $ | 209,865 |
| | $ | 220,373 |
| | $ | 1,802,235 |
|
The Company has determinednot further disaggregated management fee revenues and revenue for reimbursed costs incurred on behalf of managed communities as the economic factors affecting the nature, timing, amount, and uncertainty of revenue and cash flows do not significantly vary within each respective revenue category.
Contract Balances
Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance under the Company's independent living, assisted living, and memory care residency agreements. Resident fee revenue for standalone or certain health care services is generally billed monthly in arrears. Additionally, non-refundable community fees are generally billed and collected in advance or upon move-in of a resident under the Company's independent living, assisted living, and memory care residency agreements. Amounts of revenue that itare collected from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had total deferred revenue (included within refundable fees and deferred revenue, deferred liabilities, and other liabilities within the condensed consolidated balance sheets) of $81.7 million and $106.4 million, including $32.0 million and $50.6 million of monthly resident fees billed and received in advance, as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019 and 2018, the Company recognized $72.7 million and $68.9 million, respectively, of revenue that was included in the deferred revenue balance as of January 1, 2019 and 2018. The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance obligations that have the power to direct the activitiesoriginal expected durations 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.one year or less.
The Company holds a 51% equity interest, and HCP owns a 49% interest, in a venture that owns and operates entry fee CCRCs (the "CCRC Venture"). The CCRC Venture's opco has been identified as a VIE. The equity members of the CCRC Venture's opco share certain operating rights, and the Company acts as manager to the CCRC Venture opco. However, the Company does not consolidate this VIE because it does not have the ability to control the activities that most significantly impact this VIE's economic performance. The assets of the CCRC Venture opco primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable and cash and cash equivalents. The obligations of the CCRC Venture opco primarily consist of community lease obligations, mortgage debt, accounts payable, accrued expenses and refundable entrance fees.
The 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 September 30, 2017, the Company's equity ownership interest is 10% for each of 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 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 Company holds a 15% equity ownership interest in the Blackstone Venture. The Blackstone Venture has been identified as a VIE due to the Company lacking substantive participation rights in the management of the venture and the Company lacking kick-out rights over the managing member. The equity members of the Blackstone Venture share certain operating rights and the Company acts as manager to 60 communities owned by the Blackstone Venture. However, the Company does not consolidate this VIE because it does not have the ability to control the activities that most significantly impact the economic performance of the VIE. The assets of the Blackstone Venture primarily consist of senior housing communities, resident fees receivable and cash and cash equivalents. The obligations of the Blackstone Venture primarily consist of long-term mortgage debt, accounts payable and accrued expenses. In addition to $636.2 million of long-term mortgage debt, the Blackstone Venture initially obtained $66.8 million of mortgage debt that was payable in 2017. In the event that refinancing proceeds for the $66.8 million of mortgage debt were insufficient to repay the debt principal amount, the Company may have been required to lend the amount of the shortfall, up to $12.0 million, to the Blackstone Venture. In June 2017, the Blackstone Venture completed the refinancing of the $66.8 million mortgage debt payable in 2017 and the Company was not required to lend any amounts to the Blackstone Venture. As of September 30, 2017, the Company leases two communities from the Blackstone Venture with annual lease payments of approximately $2.5 million. Under the terms of the lease agreements, the Company may be required to purchase the two leased communities for an amount equal to the greater of the fair market value of the communities or $33.8 million if there is an event of default under the lease agreement. See Note 4 for more information about the Company's entry into the Blackstone Venture.
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 as of September 30, 2017 (in millions):
|
| | | | | | | | |
| VIE Type | Asset Type | Maximum Exposure to Loss | | Carrying Amount |
| CCRC Venture opco | Investment in unconsolidated ventures | $ | 47.2 |
| | $ | 47.2 |
|
| RIDEA Ventures | Investment in unconsolidated ventures | $ | 73.9 |
| | $ | 73.9 |
|
| Blackstone Venture | Investment in unconsolidated ventures | $ | 40.4 |
| | $ | 40.4 |
|
As of September 30, 2017, the Company is not required to provide financial support, through a liquidity arrangement or otherwise, to its unconsolidated VIEs.
14.15. Segment Information
As of September 30, 2017, theThe Company has five reportable segments: Retirement Centers;Independent Living; Assisted Living; CCRCs-Rental; Brookdale AncillaryLiving and Memory Care; CCRCs; Health Care Services; and Management Services. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
During the three months ended March 31, 2017, one community moved from the CCRCs-Rental segment to the Retirement Centers segment to more accurately reflect the underlying product offering of the community in the current period given changes to the community. The movement did not change the Company's reportable segments, but it did impact the revenues, expenses and assets reported within the two segments. Revenue and expenses for the three and nine months ended September 30, 2016 and total assets for the period ended December 31, 2016 have not been recast.
Retirement CentersIndependent Living. The Company's Retirement CentersIndependent Living segment includes owned or leased communities that are primarily designed for middle to upper income seniors generally age 75 and older who desire an upscale residential environment providing the highest quality of service. The majority of the Company's retirement centerindependent living communities consist of both independent living and assisted living units in a single community, which allows residents to "age-in-place"age-in-place by providing them with a continuum of senior independent and assisted living services.
Assisted Living.Living and Memory Care. The Company's Assisted Living and Memory Care segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents. Assisted living and memory care communities include both freestanding, multi-story communities and freestanding, single story communities. The Company also operatesprovides memory care services at freestanding memory care communities whichthat are freestanding assisted living communities specially designed for residents with Alzheimer's disease and other dementias.
CCRCs-Rental.CCRCs. The Company's CCRCs-RentalCCRCs segment includes large owned or leased communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health. Most of the Company's CCRCs have independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also include memory care and Alzheimer's units.services.
Brookdale AncillaryHealth Care Services. The Company's Brookdale AncillaryHealth Care Services segment includes outpatient therapy,the home health, hospice, and hospiceoutpatient therapy services, as well as education and wellness programs, provided to residents of many of the Company's communities and to seniors living outside of the Company's communities. The Brookdale AncillaryHealth Care Services segment does not include the skilled nursing and inpatient therapyhealthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs-RentalCCRCs segment.
Management Services. The Company's Management Services segment includes communities operated by the Company pursuant to management agreements. In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a venture structure in which the Company has an ownership interest. Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of expenses it incurs on behalf of the owners.
The accounting policies of the Company's reportable segments are the same as those described in the summary of significant accounting policies in Note 2.
The following table sets forth selected segment financial and operating data (in thousands):data:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenue | | | | | | | |
Retirement Centers (1) | $ | 161,986 |
| | $ | 170,706 |
| | $ | 496,854 |
| | $ | 510,122 |
|
Assisted Living (1) | 542,227 |
| | 607,345 |
| | 1,680,194 |
| | 1,837,632 |
|
CCRCs-Rental (1) | 108,075 |
| | 147,517 |
| | 364,075 |
| | 448,002 |
|
Brookdale Ancillary Services (1) | 110,604 |
| | 117,263 |
| | 332,766 |
| | 362,791 |
|
Management Services (2) | 255,096 |
| | 203,295 |
| | 707,337 |
| | 609,565 |
|
| | $ | 1,177,988 |
| | $ | 1,246,126 |
| | $ | 3,581,226 |
| | $ | 3,768,112 |
|
Segment Operating Income (3) | |
| | |
| | |
| | |
|
| Retirement Centers | $ | 65,907 |
| | $ | 73,112 |
| | $ | 207,206 |
| | $ | 222,315 |
|
| Assisted Living | 173,576 |
| | 217,878 |
| | 577,936 |
| | 672,773 |
|
| CCRCs-Rental | 22,932 |
| | 32,996 |
| | 82,591 |
| | 102,059 |
|
| Brookdale Ancillary Services | 9,823 |
| | 14,624 |
| | 38,555 |
| | 48,174 |
|
| Management Services | 18,138 |
| | 15,532 |
| | 56,474 |
| | 50,498 |
|
| | 290,376 |
| | 354,142 |
| | 962,762 |
| | 1,095,819 |
|
| General and administrative (including non-cash stock-based compensation expense) | 63,779 |
| | 63,425 |
| | 196,429 |
| | 246,741 |
|
| Transaction costs | 1,992 |
| | 659 |
| | 12,924 |
| | 1,950 |
|
| Facility lease expense | 84,437 |
| | 92,519 |
| | 257,934 |
| | 281,890 |
|
| Depreciation and amortization | 117,649 |
| | 130,783 |
| | 366,023 |
| | 391,314 |
|
| Goodwill and asset impairment | 368,551 |
| | 19,111 |
| | 390,816 |
| | 26,638 |
|
| Loss on facility lease termination | 4,938 |
| | — |
| | 11,306 |
| | — |
|
| Income (loss) from operations | $ | (350,970 | ) | | $ | 47,645 |
| | $ | (272,670 | ) | | $ | 147,286 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue: | | | | | | | |
Independent Living (1) | $ | 135,951 |
| | $ | 159,293 |
| | $ | 271,645 |
| | $ | 317,690 |
|
Assisted Living and Memory Care (1) | 450,225 |
| | 522,027 |
| | 908,751 |
| | 1,054,307 |
|
CCRCs (1) | 101,253 |
| | 104,796 |
| | 204,980 |
| | 209,865 |
|
Health Care Services (1) | 114,434 |
| | 109,853 |
| | 225,966 |
| | 220,373 |
|
Management Services (2) | 217,594 |
| | 259,231 |
| | 450,159 |
| | 540,199 |
|
| Total revenue | $ | 1,019,457 |
| | $ | 1,155,200 |
| | $ | 2,061,501 |
| | $ | 2,342,434 |
|
Segment operating income: (3) | | | | | | | |
| Independent Living | $ | 51,459 |
| | $ | 65,134 |
| | $ | 104,335 |
| | $ | 129,556 |
|
| Assisted Living and Memory Care | 133,144 |
| | 169,737 |
| | 273,843 |
| | 346,275 |
|
| CCRCs | 17,847 |
| | 23,819 |
| | 39,484 |
| | 48,482 |
|
| Health Care Services | 9,167 |
| | 10,203 |
| | 17,340 |
| | 18,521 |
|
| Management Services | 15,449 |
| | 17,071 |
| | 31,192 |
| | 35,752 |
|
| Total segment operating income | 227,066 |
| | 285,964 |
| | 466,194 |
| | 578,586 |
|
| General and administrative expense (including non-cash stock-based compensation expense) | 57,576 |
| | 62,907 |
| | 113,887 |
| | 144,342 |
|
| Facility operating lease expense | 67,689 |
| | 81,960 |
| | 136,357 |
| | 162,360 |
|
| Depreciation and amortization | 94,024 |
| | 116,116 |
| | 190,912 |
| | 230,371 |
|
| Goodwill and asset impairment | 3,769 |
| | 16,103 |
| | 4,160 |
| | 446,466 |
|
| Loss on facility lease termination and modification, net | 1,797 |
| | 146,467 |
| | 2,006 |
| | 146,467 |
|
| Income (loss) from operations | $ | 2,211 |
| | $ | (137,589 | ) | | $ | 18,872 |
| | $ | (551,420 | ) |
|
| | | | | | | |
| | As of |
| | September 30, 2017 | | December 31, 2016 |
| Total assets | | | |
| Retirement Centers | $ | 1,275,250 |
| | $ | 1,452,546 |
|
| Assisted Living | 4,830,074 |
| | 5,831,434 |
|
| CCRCs-Rental | 696,964 |
| | 935,389 |
|
| Brookdale Ancillary Services | 261,919 |
| | 280,530 |
|
| Corporate and Management Services | 1,027,959 |
| | 717,788 |
|
| Total assets | $ | 8,092,166 |
| | $ | 9,217,687 |
|
|
| | | | | | | |
| | As of |
| (in thousands) | June 30, 2019 | | December 31, 2018 |
| Total assets: | | | |
| Independent Living | $ | 1,469,683 |
| | $ | 1,104,774 |
|
| Assisted Living and Memory Care | 4,293,648 |
| | 3,684,170 |
|
| CCRCs | 792,344 |
| | 707,819 |
|
| Health Care Services | 270,496 |
| | 254,950 |
|
| Corporate and Management Services | 633,311 |
| | 715,547 |
|
| Total assets | $ | 7,459,482 |
| | $ | 6,467,260 |
|
| |
| (1) | All revenue is earned from external third parties in the United States. |
| |
| (2) | Management services segment revenue includes management fees and reimbursements 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 expensesexpense (excluding depreciation and amortization) and costs incurred on behalf of managed communities. |
15. Impact From Hurricanes
During the three months ended September 30, 2017, the Company’s operations in Texas and Florida were impacted by Hurricanes Harvey and Irma. The Company recorded $5.3 million of operating costs within facility operating expense on the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, which include incremental costs related to evacuations, repairs and maintenance, and security.
16. Subsequent Event
HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with HCP. As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement (“Master Lease”) with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
Master Lease Transactions. The Company and HCP amended and restated triple-net leases covering substantially all of the communities it leases from HCP into the Master Lease. The Company will acquire two communities for an aggregate purchase price of $35 million, upon which time the two communities will be removed from the Master Lease. In addition, 32 communities will be removed from the Master Lease on or before November 1, 2018. However, if HCP has not transitioned operations and/or management of such communities to a third party prior to such date, the Company will continue to operate such 32 communities on an interim basis and such communities will, from and after such time, be reported in the Management Services segment. In addition to the foregoing 34 communities, the Company continues to lease 44 communities pursuant to the terms of the Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, the Company will receive a $5 million annual rent reduction for three communities. The Master Lease also provides that the Company may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.
RIDEA Ventures Restructuring. Pursuant to the Company's agreement with HCP, HCP will acquire the Company's 10% ownership interest in two of the Company's existing RIDEA Ventures with HCP for $99 million. The Company provides management services to 59 communities on behalf of the two RIDEA Ventures. The Company will acquire four of such communities for an aggregate purchase price of $239 million and will retain management of 18 of such communities. The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management of 37 of such communities.
The Company expects to fund its acquisition of the six communities with the proceeds from the sale of its RIDEA Venture interests, cash on hand and non-recourse mortgage financing on the acquired communities.
The Company expects the disposition of its ownership interest in the two RIDEA Ventures and its acquisition of the six communities to occur in the next three to six months, and expects the terminations of its triple net leases and management agreements on 69 communities to occur in stages throughout 2018.
The closings of the various transactions referenced above 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 results of operations for the 32 communities to be disposed through lease terminations are reported within the following segments within the condensed consolidated financial statements: Retirement Centers (five communities) and Assisted Living (27 communities). With respect to such 32 communities and the 37 managed communities for which the Company's management will be terminated, the Company's condensed consolidated financial statements include resident fee revenue of $33.2 million and $35.0 million, management fees of $2.5 million and $2.6 million, facility operating expenses of $22.4 million and $21.0 million, and cash lease payments of $11.1 million and $10.3 million for the three months ended September 30, 2017 and September 30, 2016, respectively; and include resident fee revenue of $101.3 million and $105.5 million, management fees of $7.6 million and $8.2 million, facility operating expenses of $64.6 million and $62.9 million, and cash lease payments of $33.2 million and $30.7 million for the nine months ended September 30, 2017 and September 30, 2016.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to the creation and enhancement of stockholder value, the evaluation of options and alternatives to create and enhance stockholder value, our strategy, our operational, sales, marketing and branding initiatives, our portfolio optimization and growth initiatives and our expectations regarding their effect on our results; our expectations regarding the economy, the senior living industry, senior housing construction, supply and competition, occupancy and pricing and the demand for senior housing; our expectations regarding our revenue, cash flow, operating income, expenses, capital expenditures, including expected levels and reimbursements and the timing thereof, development, expansion, renovation, redevelopment and repositioning opportunities, including Program Max opportunities, and their projected costs, cost savings and synergies, and our liquidity and leverage; our plans and expectations with respect to disposition, lease restructuring, financing, re-financing and venture transactions and opportunities (including assets currently held for sale and the pending transactions with HCP, Inc.), including the timing thereof and their effects on our results; our expectations regarding taxes, capital deployment and returns on invested capital, Adjusted EBITDA and Adjusted Free Cash Flow (as those terms are defined in this Quarterly Report on Form 10-Q); our expectations regarding returns to stockholders, our share repurchase program and the payment of dividends; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding changes in government reimbursement programs and their effect on our results; our plans to expand our offering of ancillary services (therapy, home health and hospice); our plans to acquire additional operating companies, senior housing communities and ancillary services companies (including home health agencies); our expectations relating to the amount and timing of the financial impact of Hurricanes Harvey and Irma and the California wildfires; and our ability to anticipate, manage and address industry trends and their effect on our business.expectations. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "project," "predict," "continue," "plan," "target" or other similar words or expressions. TheseAlthough these forward looking statements are based on certain assumptions and expectations and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Althoughthat we believe that expectations reflected in any forward-looking statements are based on reasonable, assumptions, we can give no assurance that our assumptions or expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the risk associated with the current global economic situation and its impact upon capital markets and liquidity; changes in governmental reimbursement programs; the risk of overbuilding and new supply; our inability to extend (or refinance) debt (including our credit and letter of credit facilities and our outstanding convertible notes) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees and entrance fees, including downturns in the economy, national or entrance fees; the conditions oflocal housing markets, consumer confidence or the equity markets and unemployment among family members; changes in certain geographic areas;reimbursement rates, methods or timing under governmental reimbursement programs including the Medicare and Medicaid programs; the impact of ongoing healthcare reform efforts; the effects of continued new senior housing construction and development, oversupply and increased competition; disruptions in the financial markets that affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; the risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, interest rates and tax rates; our ability to generate sufficient cash flow to cover required interest and long-term lease payments;payments and to fund our planned capital projects; the effect of our indebtedness and long-term leases on our liquidity; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained therein), including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements and the risk of loss of our property pursuantsecuring leases and indebtedness due to any resulting lease terminations and foreclosure actions; the effect of our mortgage debtborrowing base calculations and long-term lease obligations; the possibilities thatour consolidated fixed charge coverage ratio on availability under our revolving credit facility; increased competition for or a shortage of personnel, wage pressures resulting from increased competition, low unemployment levels, minimum wage increases and changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; our determination from time to time to purchase any shares under our share repurchase program; our ability to fund any repurchases; our ability to effectively manage our growth; our abilityovertime laws, and union activity; failure to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be ablesecurity and functionality of our information systems or to expand, redevelop and reposition our communities in accordance with our plans;prevent a cybersecurity attack or breach; our ability to complete acquisition,pending or expected disposition lease restructuring, financing, re-financing and ventureor other transactions (including assets currently held for sale and the pending transactions with HCP, Inc.) on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing;closing, and our ability to identify and pursue any such opportunities in the future; our ability to obtain additional capital on terms acceptable to us; our ability to complete our capital expenditures in accordance with our plans; our ability to identify and pursue development, investment and acquisition opportunities and our ability to successfully integrate acquisitions; competition for the acquisition of assets; delays in obtaining regulatory approvals; risks associated with the lifecare benefits offered to residents of certain of our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns;entrance fee CCRCs; terminations, early or otherwise, or non-renewal of management agreements; conditions of housing markets, regulatory changes and acts of nature in certain geographic areas;areas where we are concentrated; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewaldepartures of management agreements; increased competition for skilled personnel; increased wage pressurekey officers and union activity; departurepotential disruption caused by changes in management; risks related to the implementation of our key officers; increasesstrategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; actions of activist stockholders; market conditions and capital allocation decisions that may influence our determination from time to time whether to purchase any shares under our existing share repurchase program and our ability to fund any repurchases; our ability to maintain consistent quality control; a decrease in market interest rates;the overall demand for senior housing; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; the risk that we could incur additional costs to respond to, and experience other financial impacts relatedadverse determinations resulting from, government reviews, audits and investigations; unanticipated costs to Hurricanes Harvey and Irma and the California wildfires;comply with legislative or regulatory developments; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 20162018 and Part II, "Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. When considering forward-looking statements, you should
keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements, and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Overview
As of SeptemberJune 30, 2017,2019, we are the largest operator of senior living communities in the United States based on total capacity, with 1,031809 communities in 4645 states and the ability to serve approximately 101,00077,000 residents. We offer our residents access to a full continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, and dementia-care communitiesmemory care, and continuing care retirement centerscommunities ("CCRCs"). Through our ancillary services programs, weWe also offer a range of outpatient therapy, home health, hospice, and hospiceoutpatient therapy services to residents of many of our communities and to seniors living outside of our communities.
We intendOur goal is to be the leading provider offirst choice in senior living solutions,by being the nation’s most trusted and effective senior living provider and employer. With our range of community and service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time. We also believe that we operate in the most attractive sectors of the senior living industryOur community and service offerings combine housing with opportunities to increase our revenues through providing a combination of housing, hospitality services, ancillary services and health carehealthcare services. Our senior living communities offer residents a supportive home-like setting, assistance with activities of daily living (suchsuch as eating, bathing, dressing, toileting, and transferring/walking)walking and, in certain communities, licensed skilled nursing services. We also provide ancillary services, includinghome health, hospice, and outpatient therapy home health services and hospice services to residents of many of our residents.communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to "age-in-place" and therebyage-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives.
Our strategy is to achieve consistent operational excellence in our core businesses. Execution on our strategy is intended to maximize the value of our existing platform and to build the foundation for further growth. We have identified five key priorities for which we have developed initiatives and are developing initiatives to support our strategy and have created a transformation process to develop cross-functional initiatives directly tied to key priorities. These five priorities include enhancing our customer and associate experience, improving our marketing and sales processes, simplifying our organization, optimizing our portfolio and leveraging our scale, and innovating for growth. While our focus will be on executing on this strategy, we plan to continue to evaluate and, where opportunities arise, selectively purchase existing operating companies, senior living communities, including those that we currently lease or manage, and ancillary services companies. Such acquisitions may be pursued on our own, or through our investments in ventures. We believe that successful execution upon our strategy and the initiatives supporting our strategy will enable us to grow stockholder value and better fulfill our mission by satisfying more customers, building improved relationships between us, our associates and our customers, and by improving our occupancy, revenue, expenses, and liquidity, by increasing the quality and durability of our cash flow, and by reducing our debt and lease leverage.Community Portfolio
Portfolio Optimization Update
We continue to actively explore opportunities to optimize our portfolio through disposing of owned and leased communities, restructuring leases and investing in our Program Max initiative. As of SeptemberJune 30, 2017,2019, we owned 360336 communities (32,721(31,165 units), leased 460335 communities (36,954(24,044 units), managed 17 communities (7,306 units) on behalf of unconsolidated ventures, and provided management servicesmanaged 121 communities (14,145 units) on behalf of third parties. During the next 12 months, we expect to close on the dispositions of five owned communities (889 units) classified as held for sale as of June 30, 2019, which resulted in $46.3 million being recorded as assets held for sale and $18.5 million of mortgage debt being included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to 211such communities. This debt is expected to be repaid with the proceeds from the sales. Assets held for sale as of June 30, 2019 include five communities (31,527 units) forunder contract, and we continue to market several other communities, as part of our real estate strategy announced in 2018. During the next 12 months we also anticipate terminations of certain of our management arrangements with third parties oras we transition to new operators our interim management on formerly leased communities and our management on certain former unconsolidated ventures in which we have an ownershipsold our interest.
We completed dispositions, through sales and lease terminations, of 139 communities during the period from January 1, 2016 through September 30, 2017, including three communities disposed of prior to June 30, 2016. Our condensed consolidated financial statements include resident fee revenue of $4.0 million and $115.1 million, facility operating expenses of $3.3 million and $87.4 million, and cash lease payments of $0.9 million and $27.5 million for the 136 communities for the three months ended September 30, 2017 and September 30, 2016, respectively. Our condensed consolidated financial statements include resident fee revenue of $96.6 million and $361.1 million, facility operating expenses of $74.4 million and $272.6 million, and cash lease payments of $26.8 million and $82.4 million for the 139 communities for the nine months ended September 30, 2017 and September 30, 2016, respectively.
The foregoing transactions, and updates on our pending transactions and assets held for sale as of September 30, 2017, are described below.
HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, we announced that we had entered into a definitive agreement for a multi-part transaction with HCP, Inc. (“HCP”). As part of such transaction, we entered into an Amended and Restated Master Lease and Security Agreement (“Master Lease”) with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
Master Lease Transactions. We and HCP amended and restated triple-net leases covering substantially all of the communities we lease from HCP into the Master Lease. We will acquire two communities (208 units) for an aggregate purchase price of $35 million, upon which time the two communities will be removed from the Master Lease. In addition, 32 communities (2,962 units) will be removed from the Master Lease on or before November 1, 2018. However, if HCP has not transitioned operations and/or management of such communities to a third party prior to such date, we will continue to operate the foregoing 32 communities on an interim basis and such communities will, from and after such time, be reported in the Management Services segment. In addition to such 34 communities, we continue to lease 44 communities pursuant to the terms of the Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, we will receive a $5 million annual rent reduction for three communities. The Master Lease also provides that we may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.
RIDEA Ventures Restructuring. Pursuant to the Company's agreement with HCP, HCP will acquire our 10% ownership interest in two of our existing RIDEA Ventures with HCP for $99 million. We provide management services to 59 communities (9,585 units) on behalf of the two RIDEA Ventures. We will acquire four of such communities (787 units) for an aggregate purchase price of $239 million and will retain management of 18 of such communities (3,276 units). The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management of 37 of such communities (5,522 units).
We expect to fund our acquisition of the six communities with the proceeds from the sale of our RIDEA Venture interests, cash on hand and non-recourse mortgage financing on the acquired communities.
We expect the disposition of our ownership interest in the two RIDEA Ventures and our acquisition of the six communities to occur in the next three to six months, and expect the terminations of our triple net leases and management agreements on 69 communities to occur in stages throughout 2018.
The closings of the various pending and expected transactions referenced above are, or will be subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
The results
Completed Transactions and Impact of operationsDispositions on Results of Operations
During 2017 and 2018 we undertook an initiative to optimize our community portfolio under which we disposed of owned and leased communities and restructured leases. Further, in 2018 we evaluated our owned-community portfolio for opportunities to monetize select high-value communities. As a result of these initiatives, lease restructuring, expiration and termination activity, and other transactions, during the 32period of January 1, 2018 to June 30, 2019 we disposed of an aggregate of 30 owned communities to be disposed through lease terminations are reported within the following segments within the condensed consolidated financial statements: Retirement Centers (five communities; 783(2,534 units) and Assisted Living (27 communities; 2,179our triple-net lease obligations on an aggregate of 97 communities (9,636 units). With respect to such 32 were terminated. During this period we also sold our ownership interests in five unconsolidated ventures and acquired six communities and the 37 managed communities for which our management will be terminated, our condensed consolidated financial statements include resident fee revenue of $33.2 million and $35.0 million, management fees of $2.5 million and $2.6 million, facility operating expenses of $22.4 million and $21.0 million, and cash lease payments of $11.1 million and $10.3 million for the three months ended September 30, 2017 and September 30, 2016, respectively; and include resident fee revenue of $101.3 million and $105.5 million, management fees of $7.6 million and $8.2 million, facility operating expenses of $64.6 million and $62.9 million, and cash lease payments of $33.2 million and $30.7 million for the nine months ended September 30, 2017 and September 30, 2016.
Dispositions and Restructurings of Communities Leased from HCP
On November 1, 2016, we announced that we had entered into agreements to, among other things, terminate triple-net leases with respect to 97 communities, four of which were contributed to an existing unconsolidated venture in which we hold an equity interest and 64 of which were acquired by the Blackstone Venture described below. In addition to the formation of the Blackstone Venture, the transactions included the following components with respect to 33 communities:
previously leased or managed. We and HCP agreed to terminate triple-net leases with respect to eightmanage a number of formerly leased communities (867 units). HCP agreed to contribute immediately thereafter four of such communities, consisting of 527 units, toon an existing unconsolidated venture with HCP in which we have a 10% equity interest. During the three months ended December 31, 2016, the triple-net leases with respect to seven communities (773 units) were terminated and HCP contributed four ofinterim basis until the communities have been transitioned to the existing unconsolidated venture. The triple-net lease with respect to the remaining community was terminatednew managers, and during January 2017. The results of operations of the eightsuch interim periods those communities are reported in the following segments withinManagement Services segment.
Summaries of the significant transactions impacting the periods presented, and the impacts of dispositions of owned and leased communities on our results of operations, are included below. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for more details regarding the terms of such transactions, including transactions we entered into with Ventas, Inc. ("Ventas"), Welltower Inc. ("Welltower") and HCP, Inc. ("HCP") during 2017 and 2018, which together restructured a significant portion of our triple-net lease obligations with our largest lessors.
Summaries of Completed Transactions
| |
| • | Dispositions of Owned Communities. During the year ended December 31, 2018, we completed the sale of 22 owned communities (1,819 units) for cash proceeds of $380.7 million, net of transaction costs. These dispositions included the sale of three communities during the six months ended June 30, 2018 for cash proceeds of $12.8 million, net of associated debt and transaction costs, and for which we recognized a net gain on sale of assets of $1.9 million. During the six months ended |
June 30, 2019, we completed the sale of eight owned communities (715 units) for cash proceeds of $39.0 million, net of associated debt and transaction costs, and for which we recognized a net gain on sale of assets of $1.6 million and $0.9 million for the three and six months ended June 30, 2019, respectively.
| |
| • | Welltower. Pursuant to transactions we entered into with Welltower in June 2018, our triple-net lease obligations on 37 communities (4,095 units) were terminated effective June 30, 2018. We paid Welltower an aggregate lease termination fee of $58.0 million, and we recognized a $22.6 million loss on lease termination during the three months ended June 30, 2018. In addition, effective June 30, 2018, we sold our 20% equity interest in our Welltower RIDEA venture to Welltower for net proceeds of $33.5 million and for which we recognized a $14.7 million gain on sale during the three months ended June 30, 2018. We also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities; 1,128 units). In addition, the parties separately agreed to allow us to terminate leases with respect to, and to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon Welltower's sale of such communities, and we would receive a corresponding 6.25% rent credit on Welltower's disposition proceeds. |
| |
| • | Ventas. During the three months ended June 30, 2018, we recognized a $125.7 million non-cash loss on lease modification in connection with our restructuring a portfolio of 128 communities that we leased from Ventas into a Master Lease and Security Agreement (the "Ventas Master Lease"), primarily for the extension of the triple-net lease obligations for communities with lease terms that were unfavorable to us given market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases. Pursuant to the Ventas Master Lease, we have exercised our right to direct Ventas to market for sale 28 communities. Ventas is obligated to use commercially reasonable, diligent efforts to sell such communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community is subject to Ventas' receiving a purchase price in excess of a mutually agreed upon minimum sale price and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received by Ventas multiplied by 6.25%. During the three months ended June 30, 2019, five (306 units) of the 28 communities identified were sold by Ventas and removed from the Ventas Master Lease, and the annual minimum rent was prospectively reduced by $1.5 million. |
| |
| • | HCP. Pursuant to transactions we entered into with HCP in November 2017, during the three months ended June 30, 2018, we acquired five communities (858 units) from HCP, two of which we formerly leased, for an aggregate purchase price of $242.8 million, and during the three months ended March 31, 2018, we acquired one community (137 units) for an aggregate purchase price of $32.1 million. During the year ended December 31, 2018 leases with respect to 33 communities (3,123 units) were terminated, and such communities were removed from our master lease with HCP. In addition, during the three months ended March 31, 2018, HCP acquired our 10% ownership interest in our RIDEA venture with HCP for $62.3 million and for which we recognized a $41.7 million gain on sale. Management agreements for 35 communities with former unconsolidated ventures with HCP have been terminated by HCP since November 2017. We expect the termination of management agreements on two communities (190 units) to occur during the remainder of 2019, and we have recognized a $9.3 million non-cash management contract termination gain, of which $0.3 million and $2.8 million was recognized during the three months ended June 30, 2019 and 2018, respectively, and $0.8 million and $5.1 million was recognized during the six months ended June 30, 2019 and 2018 respectively. |
| |
| • | Blackstone. During the three months ended September 30, 2018, leases for two communities owned by a former unconsolidated venture with affiliates of Blackstone Real Estate Advisors VIII L.P. were terminated, and we sold our 15% equity interest in the venture. We paid an aggregate fee of $2.0 million to complete the multi-part transaction. |
condensedSummary of Financial Impact of Completed Dispositions
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial statementsdata for the 124 communities that we disposed through sales and lease terminations during the period from April 1, 2018 to June 30, 2019 through the respective disposition dates: Assisted Living (six communities; 514 units), Retirement Centers (one community; 109 units) and CCRCs-Rental (one community; 244 units).
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 135,951 |
| | $ | — |
| | $ | 135,951 |
|
| Assisted Living and Memory Care | 450,225 |
| | 2,176 |
| | 448,049 |
|
| CCRCs | 101,253 |
| | — |
| | 101,253 |
|
| Senior housing resident fees | $ | 687,429 |
| | $ | 2,176 |
| | $ | 685,253 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 84,492 |
| | $ | — |
| | $ | 84,492 |
|
| Assisted Living and Memory Care | 317,081 |
| | 1,562 |
| | 315,519 |
|
| CCRCs | 83,406 |
| | — |
| | 83,406 |
|
| Senior housing facility operating expense | $ | 484,979 |
| | $ | 1,562 |
| | $ | 483,417 |
|
| Cash facility lease payments | $ | 94,267 |
| | $ | 306 |
| | $ | 93,961 |
|
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 159,293 |
| | $ | 29,241 |
| | $ | 130,052 |
|
| Assisted Living and Memory Care | 522,027 |
| | 86,151 |
| | 435,876 |
|
| CCRCs | 104,796 |
| | 4,213 |
| | 100,583 |
|
| Senior housing resident fees | $ | 786,116 |
| | $ | 119,605 |
| | $ | 666,511 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 94,159 |
| | $ | 17,016 |
| | $ | 77,143 |
|
| Assisted Living and Memory Care | 352,290 |
| | 60,854 |
| | 291,436 |
|
| CCRCs | 80,977 |
| | 3,859 |
| | 77,118 |
|
| Senior housing facility operating expense | $ | 527,426 |
| | $ | 81,729 |
| | $ | 445,697 |
|
| Cash facility lease payments | $ | 125,228 |
| | $ | 32,228 |
| | $ | 93,000 |
|
We
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial data for the 127 communities that we disposed through sales and HCP agreedlease terminations during the period from January 1, 2018 to terminate triple-net leases with respect to 25June 30, 2019 through the respective disposition dates:
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 271,645 |
| | $ | — |
| | $ | 271,645 |
|
| Assisted Living and Memory Care | 908,751 |
| | 12,282 |
| | 896,469 |
|
| CCRCs | 204,980 |
| | — |
| | 204,980 |
|
| Senior housing resident fees | $ | 1,385,376 |
| | $ | 12,282 |
| | $ | 1,373,094 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 167,310 |
| | $ | — |
| | $ | 167,310 |
|
| Assisted Living and Memory Care | 634,908 |
| | 10,100 |
| | 624,808 |
|
| CCRCs | 165,496 |
| | — |
| | 165,496 |
|
| Senior housing facility operating expense | $ | 967,714 |
| | $ | 10,100 |
| | $ | 957,614 |
|
| Cash facility lease payments | $ | 189,514 |
| | $ | 1,451 |
| | $ | 188,063 |
|
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| (in thousands) | Actual Results | | Amounts Attributable to Completed Dispositions | | Actual Results Less Amounts Attributable to Completed Dispositions |
| Resident fees | | | | | |
| Independent Living | $ | 317,690 |
| | $ | 60,871 |
| | $ | 256,819 |
|
| Assisted Living and Memory Care | 1,054,307 |
| | 178,267 |
| | 876,040 |
|
| CCRCs | 209,865 |
| | 10,705 |
| | 199,160 |
|
| Senior housing resident fees | $ | 1,581,862 |
| | $ | 249,843 |
| | $ | 1,332,019 |
|
| Facility operating expense | | | | | |
| Independent Living | $ | 188,134 |
| | $ | 35,668 |
| | $ | 152,466 |
|
| Assisted Living and Memory Care | 708,032 |
| | 125,423 |
| | 582,609 |
|
| CCRCs | 161,383 |
| | 9,917 |
| | 151,466 |
|
| Senior housing facility operating expense | $ | 1,057,549 |
| | $ | 171,008 |
| | $ | 886,541 |
|
| Cash facility lease payments | $ | 255,483 |
| | $ | 66,935 |
| | $ | 188,548 |
|
The following table sets forth the number of communities (2,031 units). Duringand units in our senior housing segments disposed through sales and lease terminations during the threesix months ended SeptemberJune 30, 2017, the triple-net leases with respect to two communities were terminated. Our triple net lease obligations with respect to the remaining 23 communities either have been terminated, or are expected to be terminated, during the three2019 and twelve months ended December 31, 2017. Following2018:
|
| | | | | |
| | Six Months Ended
June 30, | | Twelve Months Ended December 31, |
| | 2019 | | 2018 |
| Number of communities | | | |
| Independent Living | — |
| | 17 |
|
| Assisted Living and Memory Care | 16 |
| | 91 |
|
| CCRCs | — |
| | 3 |
|
| Total | 16 |
| | 111 |
|
| Total units | | | |
| Independent Living | — |
| | 2,864 |
|
| Assisted Living and Memory Care | 1,322 |
| | 7,437 |
|
| CCRCs | — |
| | 547 |
|
| Total | 1,322 |
| | 10,848 |
|
Other Recent Developments
Impact of New Lease Accounting Standard
We adopted the terminationnew lease accounting standard (ASC 842) effective January 1, 2019. Adoption of our triple netthe new lease obligations for these communities, we will continuestandard and its application to operate certain of these communities on an interim basis,residency agreements and such communities will be reportedcosts related thereto resulted in the Management Services segment fromrecognition of additional non-cash resident fees and after terminationfacility operating expense for the three and six months ended June 30, 2019. The result was a non-cash net impact to net income (loss) and Adjusted EBITDA of such triple net lease obligations. Our condensed consolidated financial statements include resident fee revenue of $18.0negative $6.5 million and $18.1 million, facility operating expenses of $14.8 million and $14.6 million, and cash lease payments of $2.6 million and $4.9$13.0 million for the 25 communitiesthree and six months ended June 30, 2019, respectively. For the full year 2019, we expect the non-cash net impact of adoption of the new lease standard and application to our residency agreements and costs related thereto to be negative $27.0 million to net income (loss) and Adjusted EBITDA. Adoption of the new lease standard had no impact on the amount of net cash provided by (used in) operating activities and Adjusted Free Cash Flow for the three and six months ended SeptemberJune 30, 20172019 and September 30, 2016, respectively. Our condensed consolidated financial statements include resident fee revenue of $54.9 million and $54.6 million, facility operating expenses of $44.7 million and $44.0 million, and cash lease payments of $8.1 million and $14.7 millionis not expected to have any impact on such measures for the 25 communities for the nine months ended September 30, 2017full year.
Increased Competitive Pressures
During and September 30,since 2016 respectively.
Formationwe have experienced an elevated rate of Venturecompetitive new openings, with Blackstone
On March 29, 2017, we and affiliatessignificant new competition opening in several of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the "Blackstone Venture") that acquired 64 senior housing communities for a purchase price of $1.1 billion. We had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases, and we contributed our leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fundmarkets, which has adversely affected our share of closing costs. As of the formation date, we continued to operate two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a management agreement with the venture. The two remaining leases will be terminated, pending certain regulatory and other conditions, at which point we will manage the communities; however, there can be no assurance that the terminations will occur or, if they do, when the actual terminations will occur. Two of the communities are managed by a third party for the venture.
The results and financial position of the 62 communities for which leases were terminated were deconsolidated from our financial statements prospectively upon formation of the Blackstone Venture. Theoccupancy, revenues, results of operations, and cash flow. We expect the elevated rate of competitive new openings and pressures on our occupancy and rate growth to continue through 2019. Such increased level of new openings and oversupply, as well as lower levels of unemployment, generally have also contributed to increased competition for community leadership and personnel and wage pressures. We continue to address new competition by focusing on operations with the 62objective to ensure high customer satisfaction, retain key leadership, and actively engage district and regional management in community operations; enhancing our local and national marketing and public relations efforts; and evaluating current community position relative to competition and repositioning if necessary (e.g., services, amenities, programming and price). We also continue to invest above industry to improve the total rewards program and performance management, training, and development program for our community leaders and staff.
Planned Capital Expenditures
During 2018 we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that our communities for which leases were terminated were reportedare in appropriate physical condition to support our strategy and determining what additional investments are needed to protect the following segments within the condensed consolidated financial statements through the formation date: Assisted Living (47 communities; 3,322 units), Retirement Centers (eight communities; 1,072 units) and CCRCs-Rental (seven communities; 1,416 units). Our interest in the venture is accounted for under the equity methodvalue of accounting.
our community portfolio. As a result of that review, we have budgeted to make significant additional near-term investments in our communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million. For 2019, this transaction,includes an increase of approximately $75 million in our total payment obligations forcommunity-level capital expenditures relative to 2018, primarily attributable to major building infrastructure projects. We anticipate that our 2019 capital expenditures will be funded from cash on hand, cash flows from operations, and, financing leases and operating leases due during the twelve months ending March 31,if necessary, amounts drawn on our secured credit facility. We expect that our 2020 community-level capital expenditures will continue to be elevated relative to 2018, decreased by $75.4 million and $16.6 million, respectively. Additionally, our capital and financing lease obligations within the condensed consolidated balance sheet were reduced by $880.0 million on the closing date. See Note 4 and Note 10 to the condensed consolidated financial statements for more information about the formation of the Blackstone Venture.but lower than 2019.
Dispositions of Owned Communities and Assets Held for Sale
We began 2017 with 16 of our owned communities (1,423 units) classified as held for sale as of December 31, 2016. During the nine months ended September 30, 2017, we completed the sale of three communities and during the three months ended September 30, 2017, we entered into an agreement to sell one additional community, which is classified as held for sale as of September 30, 2017. As of September 30, 2017, 15 communities were classified as held for sale.
As of September 30, 2017, $106.4 million was recorded as assets held for sale and $50.4 million of mortgage debt was included in the current portion of long-term debt within the condensed consolidated balance sheet with respect to the 15 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 15 communities are reported in the following segments within the condensed consolidated financial statements: Assisted Living (12 communities; 1,050 units) and CCRCs-Rental (three communities; 458 units). The 15 communities had resident fee revenue of $12.2 million and $12.8 million and facility operating expenses of $10.9 million and $11.0 million for the three months ended September 30, 2017 and September 30, 2016, respectively. The 15 communities had resident fee revenue of $37.6 million and $39.0 million and facility operating expenses of $33.2 million and $33.7 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
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 during 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.
Other Lease Terminations
During the nine months ended September 30, 2017, we terminated leases for 14 communities otherwise than in connection with the transactions with Blackstone and HCP described above. The results of operations of the 14 communities are reported in the following segments within the condensed consolidated financial statements through the respective disposition dates: Retirement Centers (one community; 103 units), Assisted Living (12 communities; 556 units), and CCRCs-Rental (one community; 466 units).
Program Max Initiative
During the ninesix months ended SeptemberJune 30, 2017,2019, we also made continued progress on our Program Max initiative under which we expand, renovate, redevelop, and reposition certain of our existing communities where economically advantageous. For the nine months ended September 30, 2017,During such period, we invested $7.2$10.6 million on Program Max projects, net of $5.7 million of third party lessor reimbursements.projects. We currently have 820 Program Max projects that have been approved, most of which have begun construction and are expected to generate 2788 net new units.
Competitive DevelopmentsTax Reform
InOn December 22, 2017, the third quarterPresident signed the Tax Cuts and Jobs Act ("Tax Act") into law. The Tax Act limits the annual deductibility of fiscal 2016, we began experiencing an elevated rate of new openings,a corporation's net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business exception. The Company plans to elect the real property trade or business exception with significant new competition opening in several of our markets. We continuethe 2018 tax return. As such, the Company is required to address such competition through more sophisticated pricing toolsapply the alternative depreciation system ("ADS") to all current and pricing initiatives basedfuture residential real property and qualified improvement property assets. This change impacts the current and future tax depreciation deductions and impacted the Company's valuation allowance accordingly. Additional information that may affect the Company's provisional amounts would include further clarification and guidance on how the Internal Revenue Service will implement tax reform and further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on the competitive market, current in-place rents and occupancy; focusing on operations, including ensuring high customer satisfaction, protecting key leadership positions and actively engaging district and regional management in community operations; additional marketing efforts, including leveraging our industry leading name through enhanced digital, direct mailCompany's state and local community outreach;income tax returns, state and community segmentation through which we evaluate current community position relative to competitionlocal net operating losses, and reposition if necessary (e.g., price, services, amenities and programming). We expect the elevated rate of new openings and pressures on our occupancy and rate growth to continue through 2018.corresponding valuation allowances.
Impacts of Hurricanes Harvey and Irma
During the three months ended September 30, 2017, Hurricanes Harvey and Irma made landfall in Texas and Florida, respectively. We operate 171 communities, serving approximately 19,000 residents, in areas impacted by these hurricanes. All but one of the impacted communities have returned to operation, though seven communities will experience some continuing disruption as storm damage is remediated. During the three months ended September 30, 2017, we incurred $5.3 million of operating expenses related to hurricane response and issued $0.4 million in rent credits. In addition, based on our preliminary assessments, we expect additional operating expense related to the hurricane response of $1.5 million for the three months ended December 31, 2017. We also estimate that our ancillary services revenue was negatively impacted by approximately $3.4 million during the three months ended September 30, 2017 and will be negatively impacted by approximately $1.5 million during the three months ended December 31, 2017. We estimate that we will incur an additional approximately $13.0 million to $14.0 million of capitalized costs for physical plant remediation, approximately $5.0 million to $6.0 million of which we expect to incur during the three months ended December 31, 2017 and the remainder of which we expect to incur during 2018. In addition, as a result of Hurricane Irma, the State of Florida issued an emergency order requiring skilled nursing homes and assisted living communities to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. The emergency order has been overturned, and that decision has been appealed. There are legislative and regulatory rulemaking actions in process to address generator requirements. We estimate we will incur $2.0 million to $3.0 million of costs during the three months ended December 31, 2017 as a result of the emergency order, and we are closely monitoring developments to determine what additional costs may be incurred to meet any new generator requirements. The foregoing estimates are presented net of expected reimbursement from our property and casualty and business interruption insurance policies and are preliminary estimates derived by management from the information available at this time. The actual amounts and timing of amounts may differ.
Impact of Wildfires
The Company continues to monitor the wildfires in California. Approximately 20 of the Company's California communities have been affected by the wildfires. The Company evacuated the residents of six communities, all of which have returned to full operation, and others hosted residents who were evacuated. So far, none of the communities have suffered major structural damage from the wildfires.
Summary of Operating Results
The tables below present a summary of our operating results and certain other financial metrics for the three and nine months ended September 30, 2017 and September 30, 2016 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Increase
(Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (2) |
| Total revenues | $ | 1,178.0 |
| | $ | 1,246.1 |
| | $ | (68.1 | ) | | (5.5 | )% |
| Facility operating expense | $ | 650.7 |
| | $ | 704.2 |
| | $ | (53.6 | ) | | (7.6 | )% |
| Net income (loss) | $ | (413.9 | ) | | $ | (51.7 | ) | | $ | 362.2 |
| | NM |
|
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (413.9 | ) | | $ | (51.7 | ) | | $ | 362.2 |
| | NM |
|
Adjusted EBITDA(1) | $ | 141.8 |
| | $ | 202.3 |
| | $ | (60.5 | ) | | (29.9 | )% |
| Net cash provided by operating activities | $ | 83.2 |
| | $ | 99.4 |
| | $ | (16.2 | ) | | (16.3 | )% |
Adjusted Free Cash Flow(1) | $ | 5.8 |
| | $ | 47.8 |
| | $ | (42.0 | ) | | (87.9 | )% |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (2) |
| Total revenues | $ | 3,581.2 |
| | $ | 3,768.1 |
| | $ | (186.9 | ) | | (5.0 | )% |
| Facility operating expense | $ | 1,967.6 |
| | $ | 2,113.2 |
| | $ | (145.6 | ) | | (6.9 | )% |
| Net income (loss) | $ | (586.6 | ) | | $ | (136.0 | ) | | $ | 450.6 |
| | NM |
|
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (586.5 | ) | | $ | (135.9 | ) | | $ | 450.6 |
| | NM |
|
Adjusted EBITDA(1) | $ | 500.5 |
| | $ | 586.6 |
| | $ | (86.1 | ) | | (14.7 | )% |
| Net cash provided by operating activities | $ | 283.1 |
| | $ | 277.3 |
| | $ | 5.8 |
| | 2.1 | % |
Adjusted Free Cash Flow(1) | $ | 109.2 |
| | $ | 120.6 |
| | $ | (11.4 | ) | | (9.4 | )% |
| |
(1) | Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures we use to assess our operating performance and liquidity. We changed our definition and calculation of Adjusted EBITDA when we reported results for the second quarter of 2016. Prior period amounts of Adjusted EBITDA included in this Quarterly Report on Form 10-Q have been recast to conform to the new definition. See "Non-GAAP Financial Measures" below for important information regarding both measures, including a description of the changes to the definition of Adjusted EBITDA. |
During the nine months ended September 30, 2017, total revenues were $3.6 billion, a decrease of $186.9 million, or 5.0%, over our total revenues for the nine months ended September 30, 2016. Resident fees for the nine months ended September 30, 2017 decreased $284.7 million, or 9.0%, from the nine months ended September 30, 2016. Management fees increased $6.0 million, or 11.8%, from the nine months ended September 30, 2016, and reimbursed costs incurred on behalf of managed communities increased $91.8 million, or 16.4%. The decrease in resident fees during the nine months ended September 30, 2017 was primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period. Weighted average occupancy at the 800 communities we owned or leased during both full nine-month periods decreased 130 basis points. The decrease in resident fees at the 800 communities we owned or leased during both full nine-month periods was partially offset by a 1.8% increase in senior housing average monthly revenue per occupied unit (RevPOR) compared to the prior year nine-month period.
During the nine months ended September 30, 2017, facility operating expenses were $2.0 billion, a decrease of $145.6 million, or 6.9%, compared to the nine months ended September 30, 2016. The decrease in facility operating expenses was primarily due to the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period. Facility operating expenses increased $51.0 million, or 3.5%, at the 800 communities we owned or leased during both full nine-month
periods. The increase in facility operating expenses was primarily due to an increase in salaries and wages arising from wage rate increases and an increase in insurance expense related to positive changes in the nine months ended September 30, 2016 to estimates in general liability and professional liability and workers compensation expenses.
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders for the nine months ended September 30, 2017 was $(586.5) million, compared to net income (loss) attributable to Brookdale Senior Living Inc. common stockholders of $(135.9) million for the nine months ended September 30, 2016. Net income (loss) for the nine months ended September 30, 2017 was $(586.6) million as compared to net income (loss) of ($136.0) million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, our Adjusted EBITDA was $500.5 million, a decrease of 14.7% compared to the nine months ended September 30, 2016. The decrease in Adjusted EBITDA is primarily due to disposition activity, through asset sales and lease terminations, since the beginning of the prior year period. Additionally, increases in community labor expenses and insurance expense at the communities operated during both full periods contributed to the decline in Adjusted EBITDA. Adjusted EBITDA includes transaction and strategic project costs of $14.5 million for the nine months ended September 30, 2017 and integration, transaction, transaction-related and strategic project costs of $44.2 million for the nine months ended September 30, 2016.
During the nine months ended September 30, 2017, net cash provided by operating activities was $283.1 million, an increase of $5.8 million, or 2.1%, over our net cash provided by operating activities for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, our Adjusted Free Cash Flow was $109.2 million, a decrease of 9.4% when compared to the nine months ended September 30, 2016. The decrease in Adjusted Free Cash Flow is primarily due to increases in community labor expenses and insurance expense at the communities operated during both full periods. The decrease was partially offset by a decrease in non-development capital expenditures, net of lessor reimbursements, of $56.8 million and a decrease in integration, transaction, transaction-related and strategic project costs of $21.3 million compared to the prior year period.
Consolidated Results of Operations
ComparisonAs of Three Months Ended SeptemberJune 30, 20172019 our total operations included 809 communities with a capacity to September 30, 2016
serve approximately 77,000 residents. As of that date we owned 336 communities (31,165 units), leased 335 communities (24,044 units), managed 17 communities (7,306 units) on behalf of unconsolidated ventures, and managed 121 communities (14,145 units) on behalf of third parties. The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following datadiscussion should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period of January 1, 2018 to June 30, 2019 significantly affect the comparability of our results of operations, and summaries of such transactions and their impact on our results of operations are above under "Recent Transaction Activity and Impact to Results of Operations."
DuringThis section uses the three months ended March 31, 2017, one community moved from the CCRCs-Rental segment to the Retirement Centers segment to more accurately reflect the underlying product offeringoperating measures defined below. Our adoption and application of the community given changes to the community. The movement did not changenew lease accounting standard has impacted our reportable segments, but it did impact the revenues, expenses and operating data reported within the two segments. Revenue, expenses and operating dataresults for the three and six months ended SeptemberJune 30, 2016 have not been recast.
As2019, and will impact our results for the remaining 2019 periods, due to our recognition of September 30, 2017additional resident fee revenue and facility operating expense, which is non-cash and is non-recurring in future years. To aid in comparability between periods, presentations of our total operations included 1,031 communities withresults on a capacity to serve 101,202 residents.
|
| | | | | | | | | | | | | | |
| (dollars in thousands, except Total RevPAR, RevPAR and RevPOR) | Three Months Ended
September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (6) |
| Statement of Operations Data: | | | | | | | |
| Revenue | | | | | | | |
| Resident fees | | | | | | | |
| Retirement Centers | $ | 161,986 |
| | $ | 170,706 |
| | $ | (8,720 | ) | | (5.1 | )% |
| Assisted Living | 542,227 |
| | 607,345 |
| | (65,118 | ) | | (10.7 | )% |
| CCRCs-Rental | 108,075 |
| | 147,517 |
| | (39,442 | ) | | (26.7 | )% |
| Brookdale Ancillary Services | 110,604 |
| | 117,263 |
| | (6,659 | ) | | (5.7 | )% |
| Total resident fees | 922,892 |
| | 1,042,831 |
| | (119,939 | ) | | (11.5 | )% |
Management services (1) | 255,096 |
| | 203,295 |
| | 51,801 |
| | 25.5 | % |
| Total revenue | 1,177,988 |
| | 1,246,126 |
| | (68,138 | ) | | (5.5 | )% |
| Expense | |
| | |
| | |
| | |
|
| Facility operating expense | |
| | |
| | |
| | |
|
| Retirement Centers | 96,079 |
| | 97,594 |
| | (1,515 | ) | | (1.6 | )% |
| Assisted Living | 368,651 |
| | 389,467 |
| | (20,816 | ) | | (5.3 | )% |
| CCRCs-Rental | 85,143 |
| | 114,521 |
| | (29,378 | ) | | (25.7 | )% |
| Brookdale Ancillary Services | 100,781 |
| | 102,639 |
| | (1,858 | ) | | (1.8 | )% |
| Total facility operating expense | 650,654 |
| | 704,221 |
| | (53,567 | ) | | (7.6 | )% |
| General and administrative expense | 63,779 |
| | 63,425 |
| | 354 |
| | 0.6 | % |
| Transaction costs | 1,992 |
| | 659 |
| | 1,333 |
| | NM |
|
| Facility lease expense | 84,437 |
| | 92,519 |
| | (8,082 | ) | | (8.7 | )% |
| Depreciation and amortization | 117,649 |
| | 130,783 |
| | (13,134 | ) | | (10.0 | )% |
| Goodwill and asset impairment | 368,551 |
| | 19,111 |
| | 349,440 |
| | NM |
|
| Loss on facility lease termination | 4,938 |
| | — |
| | 4,938 |
| | NM |
|
| Costs incurred on behalf of managed communities | 236,958 |
| | 187,763 |
| | 49,195 |
| | 26.2 | % |
| Total operating expense | 1,528,958 |
| | 1,198,481 |
| | 330,477 |
| | 27.6 | % |
| Income from operations | (350,970 | ) | | 47,645 |
| | (398,615 | ) | | NM |
|
| Interest income | 1,285 |
| | 809 |
| | 476 |
| | 58.8 | % |
| Interest expense | (79,999 | ) | | (96,482 | ) | | (16,483 | ) | | (17.1 | )% |
| Debt modification and extinguishment costs | (11,129 | ) | | (1,944 | ) | | 9,185 |
| | NM |
|
| Equity in (loss) earnings of unconsolidated ventures | (6,722 | ) | | (878 | ) | | 5,844 |
| | NM |
|
| (Loss) gain on sale of assets, net | (233 | ) | | (425 | ) | | (192 | ) | | (45.2 | )% |
| Other non-operating income | 2,621 |
| | 3,706 |
| | (1,085 | ) | | (29.3 | )% |
| Income (loss) before income taxes | (445,147 | ) | | (47,569 | ) | | 397,578 |
| | NM |
|
| Benefit (provision) for income taxes | 31,218 |
| | (4,159 | ) | | 35,377 |
| | NM |
|
| Net income (loss) | (413,929 | ) | | (51,728 | ) | | 362,201 |
| | NM |
|
| Net (income) loss attributable to noncontrolling interest | 44 |
| | 43 |
| | 1 |
| | 2.3 | % |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (413,885 | ) | | $ | (51,685 | ) | | $ | 362,200 |
| | NM |
|
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (6) |
| Selected Operating and Other Data: | | | | | | | |
| Total number of communities (period end) | 1,031 |
| | 1,077 |
| | (46 | ) | | (4.3 | )% |
Total units operated (2) | | | |
| | |
| | |
|
| Period end | 101,202 |
| | 104,545 |
| | (3,343 | ) | | (3.2 | )% |
| Weighted average | 101,529 |
| | 106,147 |
| | (4,618 | ) | | (4.4 | )% |
Owned/leased communities units (2) | | | |
| | |
| | |
|
| Period end | 69,675 |
| | 78,562 |
| | (8,887 | ) | | (11.3 | )% |
| Weighted average | 70,112 |
| | 80,059 |
| | (9,947 | ) | | (12.4 | )% |
Total RevPAR (3) | $ | 4,386 |
| | $ | 4,337 |
| | $ | 49 |
| | 1.1 | % |
RevPAR (4) | $ | 3,860 |
| | $ | 3,849 |
| | $ | 11 |
| | 0.3 | % |
| Owned/leased communities occupancy rate (weighted average) | 84.8 | % | | 86.2 | % | | (1.4 | )% | | (1.6 | )% |
RevPOR (5) | $ | 4,552 |
| | $ | 4,465 |
| | $ | 87 |
| | 1.9 | % |
| | | | | | | | |
| Selected Segment Operating and Other Data: | |
| | |
| | |
| | |
|
| Retirement Centers | | | |
| | |
| | |
|
| Number of communities (period end) | 85 |
| | 95 |
| | (10 | ) | | (10.5 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 15,961 |
| | 17,105 |
| | (1,144 | ) | | (6.7 | )% |
| Weighted average | 16,061 |
| | 17,105 |
| | (1,044 | ) | | (6.1 | )% |
RevPAR (4) | $ | 3,362 |
| | $ | 3,327 |
| | $ | 35 |
| | 1.1 | % |
| Occupancy rate (weighted average) | 87.6 | % | | 89.3 | % | | (1.7 | )% | | (1.9 | )% |
RevPOR (5) | $ | 3,836 |
| | $ | 3,727 |
| | $ | 109 |
| | 2.9 | % |
| Assisted Living | |
| | |
| | |
| | |
|
| Number of communities (period end) | 705 |
| | 783 |
| | (78 | ) | | (10.0 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 46,520 |
| | 51,494 |
| | (4,974 | ) | | (9.7 | )% |
| Weighted average | 46,858 |
| | 52,991 |
| | (6,133 | ) | | (11.6 | )% |
RevPAR (4) | $ | 3,857 |
| | $ | 3,820 |
| | $ | 37 |
| | 1.0 | % |
| Occupancy rate (weighted average) | 84.2 | % | | 85.6 | % | | (1.4 | )% | | (1.6 | )% |
RevPOR (5) | $ | 4,582 |
| | $ | 4,461 |
| | $ | 121 |
| | 2.7 | % |
| CCRCs-Rental | | | |
| | |
| | |
|
| Number of communities (period end) | 30 |
| | 43 |
| | (13 | ) | | (30.2 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 7,194 |
| | 9,963 |
| | (2,769 | ) | | (27.8 | )% |
| Weighted average | 7,193 |
| | 9,963 |
| | (2,770 | ) | | (27.8 | )% |
RevPAR (4) | $ | 4,989 |
| | $ | 4,896 |
| | $ | 93 |
| | 1.9 | % |
| Occupancy rate (weighted average) | 82.6 | % | | 84.0 | % | | (1.4 | )% | | (1.7 | )% |
RevPOR (5) | $ | 6,046 |
| | $ | 5,833 |
| | $ | 213 |
| | 3.7 | % |
| Management Services | | | |
| | |
| | |
|
| Number of communities (period end) | 211 |
| | 156 |
| | 55 |
| | 35.3 | % |
Total units (2) | | | |
| | |
| | |
|
| Period end | 31,527 |
| | 25,983 |
| | 5,544 |
| | 21.3 | % |
| Weighted average | 31,417 |
| | 26,088 |
| | 5,329 |
| | 20.4 | % |
| Occupancy rate (weighted average) | 84.5 | % | | 87.2 | % | | (2.7 | )% | | (3.1 | )% |
|
| | | | | | | | | | | | | | |
| | | | | | | | |
| Brookdale Ancillary Services | |
| | |
| | |
| | |
|
| Outpatient Therapy treatment codes | 178,851 |
| | 419,619 |
| | (240,768 | ) | | (57.4 | )% |
| Home Health average daily census | 14,844 |
| | 14,457 |
| | 387 |
| | 2.7 | % |
| Hospice average daily census | 1,169 |
| | 813 |
| | 356 |
| | 43.8 | % |
same community basis and RevPAR and RevPOR exclude the impact of the lease accounting standard.
| |
(1)• | Management services segmentOperating results and data presented on a same community basis reflect results and data of the same store communities (utilizing our methodology for determining same store communities) and, for the 2019 period, exclude the additional resident fee revenue includes management fees and reimbursements for which we arefacility operating expense recognized as a result of application of the primary obligor of costs incurred on behalf of managed communities.new lease accounting standard under ASC 842. |
| |
(2)• | Weighted average units operated represents the average units operated during the period. |
| |
(3) | Total RevPAR, or average monthly senior housing resident fee revenuesrevenue per available unit, is defined by the Company as resident fee revenues, excluding entrance fee amortization,revenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the 2019 period, the additional resident fee revenue recognized as a result of the application of the new lease accounting standard under ASC 842), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(4)• | RevPAR,RevPOR, or average monthly senior housing resident fee revenuesrevenue per availableoccupied unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillaryrevenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the corresponding portfolio for2019 period, the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(5) | RevPOR, or average monthly senior housingadditional resident fee revenues per occupied unit, is defined byrevenue recognized as a result of the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, forapplication of the corresponding portfolio for the period,new lease accounting standard under ASC 842), divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. |
Resident FeesThis section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures. During the first quarter of 2019, we modified our definition of Adjusted EBITDA to exclude transaction and organizational restructuring costs, and amounts for all periods herein reflect application of the modified definition.
Resident fee
Comparison of Three Months Ended June 30, 2019 and 2018
Summary Operating Results
The following table summarizes our overall operating results for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2019 | | 2018 | | Amount | | Percent |
| Total revenue | $ | 1,019,457 |
| | $ | 1,155,200 |
| | $ | (135,743 | ) | | (11.8 | )% |
| Facility operating expense | 590,246 |
| | 627,076 |
| | (36,830 | ) | | (5.9 | )% |
| Net income (loss) | (56,055 | ) | | (165,509 | ) | | (109,454 | ) | | (66.1 | )% |
| Adjusted EBITDA | 104,036 |
| | 147,217 |
| | (43,181 | ) | | (29.3 | )% |
The decrease in total revenue decreased $119.9was primarily attributable to the disposition of 124 communities through sales of owned communities and lease terminations since the beginning of the prior year period, which resulted in $117.4 million or 11.5%,less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by a 1.9% increase in same community RevPAR at the 650 communities we owned or leased during both full periods, comprised of a 3.3% increase in same community RevPOR and a 110 basis points decrease in same community weighted average occupancy. Additionally, management services revenue, including management fees and reimbursed costs incurred on behalf of managed communities, decreased $41.6 million primarily due to terminations of management agreements subsequent to the beginning of the prior year period.
The decrease in facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $80.2 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease was partially offset by a 5.5% increase in same community facility operating expense, which was primarily due to an increase in labor expense attributable to wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense of approximately $5.3 million and $11.8 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense excludes approximately $4.9 million and $11.0 million, respectively, of such additional revenue and expenses.
The improvement to net income (loss) was primarily attributable to a decrease in loss on facility lease termination and modification compared to the prior period, offset by a decrease in net gain on sale of assets and the revenue and facility operating expense factors noted above. We recognized a loss on lease termination and modification of $146.5 million for the three months ended June 30, 2018 primarily as a result of agreements with Ventas and Welltower. Net gain on sale of assets was $2.8 million for the three months ended June 30, 2019 compared to $23.3 million for the prior year period.
The decrease in Adjusted EBITDA was primarily attributable to the revenue and facility operating expense factors noted above, offset by lower cash facility operating lease payments of $15.0 million.
Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 687,429 |
| | $ | 786,116 |
| | $ | (98,687 | ) | | (12.6 | )% |
| Facility operating expense | $ | 484,979 |
| | $ | 527,426 |
| | $ | (42,447 | ) | | (8.0 | )% |
| | | | | | | | |
| Number of communities (period end) | 671 |
| | 748 |
| | (77 | ) | | (10.3 | )% |
| Number of units (period end) | 55,209 |
| | 61,709 |
| | (6,500 | ) | | (10.5 | )% |
| Number of units (weighted average) | 55,465 |
| | 66,342 |
| | (10,877 | ) | | (16.4 | )% |
| RevPAR | $ | 4,097 |
| | $ | 3,948 |
| | $ | 149 |
| | 3.8 | % |
| Occupancy rate (weighted average) | 83.5 | % | | 84.1 | % | | (60 | ) bps | | n/a |
|
| RevPOR | $ | 4,909 |
| | $ | 4,692 |
| | $ | 217 |
| | 4.6 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 642,708 |
| | $ | 631,016 |
| | $ | 11,692 |
| | 1.9 | % |
| Facility operating expense | $ | 446,065 |
| | $ | 422,647 |
| | $ | 23,418 |
| | 5.5 | % |
| | | | | | | | |
| Number of communities | 650 |
| | 650 |
| | — |
| | — | % |
| Total average units | 51,905 |
| | 51,930 |
| | (25 | ) | | — | % |
| RevPAR | $ | 4,125 |
| | $ | 4,048 |
| | $ | 77 |
| | 1.9 | % |
| Occupancy rate (weighted average) | 83.7 | % | | 84.8 | % | | (110 | ) bps | | n/a |
|
| RevPOR | $ | 4,930 |
| | $ | 4,773 |
| | $ | 157 |
| | 3.3 | % |
Independent Living Segment
The following table summarizes the operating results and data for our Independent Living segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 135,951 |
| | $ | 159,293 |
| | $ | (23,342 | ) | | (14.7 | )% |
| Facility operating expense | $ | 84,492 |
| | $ | 94,159 |
| | $ | (9,667 | ) | | (10.3 | )% |
| | | | | | | | |
| Number of communities (period end) | 68 |
| | 75 |
| | (7 | ) | | (9.3 | )% |
| Number of units (period end) | 12,460 |
| | 13,559 |
| | (1,099 | ) | | (8.1 | )% |
| Number of units (weighted average) | 12,440 |
| | 15,083 |
| | (2,643 | ) | | (17.5 | )% |
| RevPAR | $ | 3,592 |
| | $ | 3,520 |
| | $ | 72 |
| | 2.0 | % |
| Occupancy rate (weighted average) | 89.1 | % | | 88.1 | % | | 100 | bps | | n/a |
|
| RevPOR | $ | 4,033 |
| | $ | 3,993 |
| | $ | 40 |
| | 1.0 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 122,192 |
| | $ | 118,595 |
| | $ | 3,597 |
| | 3.0 | % |
| Facility operating expense | $ | 73,870 |
| | $ | 69,887 |
| | $ | 3,983 |
| | 5.7 | % |
| | | | | | | | |
| Number of communities | 63 |
| | 63 |
| | — |
| | — | % |
| Total average units | 11,335 |
| | 11,358 |
| | (23 | ) | | (0.2 | )% |
| RevPAR | $ | 3,593 |
| | $ | 3,481 |
| | $ | 112 |
| | 3.2 | % |
| Occupancy rate (weighted average) | 89.6 | % | | 89.1 | % | | 50 | bps | | n/a |
|
| RevPOR | $ | 4,009 |
| | $ | 3,905 |
| | $ | 104 |
| | 2.7 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 17 communities since the beginning of the prior year period, which resulted in $29.2 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.7% increase in same community RevPOR and a 50 basis points increase in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $17.0 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $1.9 million and $3.1 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $1.8 million and $2.8 million, respectively, of such additional revenue and expenses.
Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 450,225 |
| | $ | 522,027 |
| | $ | (71,802 | ) | | (13.8 | )% |
| Facility operating expense | $ | 317,081 |
| | $ | 352,290 |
| | $ | (35,209 | ) | | (10.0 | )% |
| | | | | | | | |
| Number of communities (period end) | 577 |
| | 645 |
| | (68 | ) | | (10.5 | )% |
| Number of units (period end) | 36,175 |
| | 41,266 |
| | (5,091 | ) | | (12.3 | )% |
| Number of units (weighted average) | 36,451 |
| | 44,403 |
| | (7,952 | ) | | (17.9 | )% |
| RevPAR | $ | 4,092 |
| | $ | 3,919 |
| | $ | 173 |
| | 4.4 | % |
| Occupancy rate (weighted average) | 82.1 | % | | 82.9 | % | | (80 | ) bps | | n/a |
|
| RevPOR | $ | 4,987 |
| | $ | 4,725 |
| | $ | 262 |
| | 5.5 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 431,283 |
| | $ | 423,557 |
| | $ | 7,726 |
| | 1.8 | % |
| Facility operating expense | $ | 297,836 |
| | $ | 282,838 |
| | $ | 14,998 |
| | 5.3 | % |
| | | | | | | | |
| Number of communities | 564 |
| | 564 |
| | — |
| | — | % |
| Total average units | 34,933 |
| | 34,934 |
| | (1 | ) | | — | % |
| RevPAR | $ | 4,115 |
| | $ | 4,041 |
| | $ | 74 |
| | 1.8 | % |
| Occupancy rate (weighted average) | 82.3 | % | | 83.8 | % | | (150 | ) bps | | n/a |
|
| RevPOR | $ | 5,003 |
| | $ | 4,822 |
| | $ | 181 |
| | 3.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 105 communities since the beginning of the prior year period, which resulted in $84.0 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 3.8% increase in same community RevPOR and a 150 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $59.3 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $2.7 million and $7.4 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $2.6 million and $7.0 million, respectively, of such additional revenue and expenses.
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the three months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 101,253 |
| | $ | 104,796 |
| | $ | (3,543 | ) | | (3.4 | )% |
| Facility operating expense | $ | 83,406 |
| | $ | 80,977 |
| | $ | 2,429 |
| | 3.0 | % |
| | | | | | | | |
| Number of communities (period end) | 26 |
| | 28 |
| | (2 | ) | | (7.1 | )% |
| Number of units (period end) | 6,574 |
| | 6,884 |
| | (310 | ) | | (4.5 | )% |
| Number of units (weighted average) | 6,574 |
| | 6,856 |
| | (282 | ) | | (4.1 | )% |
| RevPAR | $ | 5,081 |
| | $ | 5,079 |
| | $ | 2 |
| | — | % |
| Occupancy rate (weighted average) | 80.6 | % | | 83.0 | % | | (240 | ) bps | | n/a |
|
| RevPOR | $ | 6,305 |
| | $ | 6,115 |
| | $ | 190 |
| | 3.1 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 89,233 |
| | $ | 88,864 |
| | $ | 369 |
| | 0.4 | % |
| Facility operating expense | $ | 74,359 |
| | $ | 69,922 |
| | $ | 4,437 |
| | 6.3 | % |
| | | | | | | | |
| Number of communities | 23 |
| | 23 |
| | — |
| | — | % |
| Total average units | 5,637 |
| | 5,638 |
| | (1 | ) | | — | % |
| RevPAR | $ | 5,254 |
| | $ | 5,234 |
| | $ | 20 |
| | 0.4 | % |
| Occupancy rate (weighted average) | 80.5 | % | | 82.4 | % | | (190 | ) bps | | n/a |
|
| RevPOR | $ | 6,528 |
| | $ | 6,349 |
| | $ | 179 |
| | 2.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of two communities since the beginning of the prior year period, which resulted in $4.2 million less in resident fees during the three months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.8% increase in same community RevPOR and a 190 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. The increase in facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $3.9 million less in facility operating expense during the three months ended June 30, 2019 compared to the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $0.7 million and $1.3 million, respectively, during the second quarter of 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $0.6 million and $1.1 million, respectively, of such additional revenue and expenses.
Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health Care Services segment for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except census and treatment codes) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 114,434 |
| | $ | 109,853 |
| | $ | 4,581 |
| | 4.2 | % |
| Facility operating expense | $ | 105,267 |
| | $ | 99,650 |
| | $ | 5,617 |
| | 5.6 | % |
| | | | | | | | |
| Home health average daily census | 15,966 |
| | 15,238 |
| | 728 |
| | 4.8 | % |
| Hospice average daily census | 1,540 |
| | 1,337 |
| | 203 |
| | 15.2 | % |
| Outpatient therapy treatment codes | 169,924 |
| | 176,065 |
| | (6,141 | ) | | (3.5 | )% |
The increase in the segment’s resident fees was primarily attributable to an increase in volume for hospice services and an increase in home health average daily census, offset by unfavorable case-mix and community dispositions.
The increase in the segment’s facility operating expense was primarily attributable to an increase in labor costs arising from wage rate increases and the expansion of our hospice services.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, and occupancy) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Management fees | $ | 15,449 |
| | $ | 17,071 |
| | $ | (1,622 | ) | | (9.5 | )% |
| Reimbursed costs incurred on behalf of managed communities | $ | 202,145 |
| | $ | 242,160 |
| | $ | (40,015 | ) | | (16.5 | )% |
| | | | | | | | |
| Number of communities (period end) | 138 |
| | 240 |
| | (102 | ) | | (42.5 | )% |
| Number of units (period end) | 21,451 |
| | 33,176 |
| | (11,725 | ) | | (35.3 | )% |
| Number of units (weighted average) | 22,464 |
| | 30,422 |
| | (7,958 | ) | | (26.2 | )% |
| Occupancy rate (weighted average) | 82.8 | % | | 83.6 | % | | (80 | ) bps | | n/a |
|
The decrease in management fees was primarily attributable to the transition of management arrangements on 80 net communities since the beginning of the prior year period, generally for interim management arrangements on formerly leased or owned communities and management arrangements on certain former unconsolidated ventures in which we sold our interest. Management fees of $15.4 million for the three months ended June 30, 2019 include $1.6 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately $1.7 million of management fees attributable to approximately 35 communities that, as of June 30, 2019, we expect the terminations of our management agreements to occur in the next year, including interim management arrangements on formerly leased communities and management arrangements on certain former unconsolidated ventures in which we sold our interest.
The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating results for the three months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands) | Three Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| General and administrative expense | $ | 57,576 |
| | $ | 62,907 |
| | $ | (5,331 | ) | | (8.5 | )% |
| Facility operating lease expense | 67,689 |
| | 81,960 |
| | (14,271 | ) | | (17.4 | )% |
| Depreciation and amortization | 94,024 |
| | 116,116 |
| | (22,092 | ) | | (19.0 | )% |
| Goodwill and asset impairment | 3,769 |
| | 16,103 |
| | (12,334 | ) | | (76.6 | )% |
| Loss on facility lease termination and modification, net | 1,797 |
| | 146,467 |
| | (144,670 | ) | | (98.8 | )% |
| Costs incurred on behalf of managed communities | 202,145 |
| | 242,160 |
| | (40,015 | ) | | (16.5 | )% |
| Interest income | 2,813 |
| | 2,941 |
| | (128 | ) | | (4.4 | )% |
| Interest expense | (62,828 | ) | | (73,901 | ) | | (11,073 | ) | | (15.0 | )% |
| Debt modification and extinguishment costs | (2,672 | ) | | (9 | ) | | 2,663 |
| | NM |
|
| Equity in loss of unconsolidated ventures | (991 | ) | | (1,324 | ) | | (333 | ) | | (25.2 | )% |
| Gain on sale of assets, net | 2,846 |
| | 23,322 |
| | (20,476 | ) | | (87.8 | )% |
| Other non-operating income | 3,199 |
| | 5,505 |
| | (2,306 | ) | | (41.9 | )% |
| Benefit (provision) for income taxes | (633 | ) | | 15,546 |
| | (16,179 | ) | | NM |
|
General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to a decrease in transaction and organizational restructuring costs. Transaction and organizational restructuring costs decreased $4.4 million compared to the prior period, to $0.6 million for the three months ended June 30, 2019. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, our assessment of options and alternatives to enhance stockholder value, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance and retention costs. For the remainder of 2019 we expect to incur additional transaction costs related to stockholder relations advisory matters.
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to lease termination activity since the beginning of the prior year quarter.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity through sales and lease terminations since the beginning of the prior year period. Weighted average occupancy decreased 160 basis points at the 809 communities we owned or leased during both full periods, primarily due to the impact of new competition in our markets. Additionally, Brookdale Ancillary Services segment revenue decreased $6.7 million, or 5.7%, primarily due to a decrease in volume for outpatient therapy services and a decrease in reimbursement rates for home health services. The 136 communities disposed of subsequent to the beginning of the prior year period (including the 62 communities for which the financial results were deconsolidated from our financial statements prospectively upon formation of the Blackstone Venture on March 29, 2017) generated $4.0 million of revenue during the current year period compared to $115.1 million of revenue in the prior year period. The decrease in resident fee revenue was partially offset by a 1.4% increase in RevPOR at the 809 communities we owned or operated during both full periods compared to the prior year period. Total RevPAR for the consolidated portfolio also increased by 1.1% compared to the prior year period.quarter.
Retirement Centers segment revenue decreased $8.7 million, or 5.1%, primarily due to the impact of dispositions of 11 communities since the beginning of the prior year period, which generated $0.7 million of revenue during the current year period compared to $11.1 million of revenue in the prior year period. This decrease was partially offset by the impact of the reclassification of one community from the CCRCs-Rental segment into this segment subsequent to the prior year period. Retirement Centers segment revenue at the communities we operated during both full periods was $154.2 million during the current year period, a decrease of $0.2 million, or 0.1%, over the prior year period, primarily due to a 140 basis point decrease in occupancy at these communities, partially offset by a 1.6% increase in RevPOR at these communities.
Assisted Living segment revenue decreased $65.1 million, or 10.7%, primarily due to the impact of dispositions of 113 communities since the beginning of the prior year period, which generated $3.3 million of revenue during the current year period compared to $66.2 million of revenue in the prior year period. Assisted Living segment revenue at the communities we operated during both full periods was $530.3 million during the current year period, a decrease of $2.5 million, or 0.5%, over the prior year period, primarily due to a 150 basis point decrease in occupancy at these communities, partially offset by a 1.4% increase in RevPOR at these communities.
CCRCs-Rental segment revenue decreased $39.4 million, or 26.7%, primarily due to the impact of dispositions of 12 communities since the beginning of the prior year period, which generated $0.1 million of revenue during the current year period compared to $37.8 million of revenue in the prior year period. Additionally, revenue decreased due to the impact of the reclassification of one community out of this segment and into the Retirement Centers segment subsequent to the prior year period. CCRCs-Rental segment revenue at the communities we operated during both full periods was $108.0 million during the current year period, a decrease of $0.4 million, or 0.4%, over the prior year period, primarily due to a 180 basis point decrease in occupancy at these communities, partially offset by a 1.8% increase in RevPOR at these communities.
Brookdale Ancillary Services segment revenue decreased $6.7 million, or 5.7%, primarily due to a decrease in volume for outpatient therapy services and a decrease in reimbursement rates for home health services. During the three months ended December 31, 2016, we significantly reduced the number of outpatient therapy clinics located in our communities as lower reimbursement rates and lower utilization made the business less attractive. For home health in 2017, CMS has implemented a net 0.7% reimbursement reduction, consisting of a 2.8% market basket inflation increase, less a 0.3% productivity reduction, a 2.3% rebasing adjustment, and a 0.9% reduction to account for industry wide case-mix growth. As a result, our home health reimbursement has been reduced by approximately 3.0% compared to the prior year period, which is consistent with our expectations for the remainder of 2017. These decreases were partially offset by an increase in volume for hospice services.
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed communities, increased $51.8 million, or 25.5%, over the prior year period primarily due to our entry into management agreements with the Blackstone Venture subsequent to the prior year period.
Facility Operating Expense
Facility operating expense decreased $53.6 million, or 7.6%, over the prior year period. For the three months ended September 30, 2017, facility operating expense includes $5.3 million of costs related to our response to Hurricanes Harvey and Irma. The decrease in facility operating expense is primarily due to disposition activity, through sales and lease terminations, of 136 communities since the beginning of the prior year period, which incurred $3.3 million of facility operating expenses during the current year period compared to $87.4 million of facility operating expenses in the prior year period. Additionally, Brookdale Ancillary Services segment facility operating expenses decreased $1.9 million, or 1.8%, primarily due to a decrease in volume for outpatient therapy services. These decreases were partially offset by an increase in salaries and wages arising from wage rate increases at the communities we operated during both full periods and an $8.1 million increase in insurance expense related to positive changes in the three months ended September 30, 2016 to estimates in general liability and professional liability and workers compensation expenses.
Retirement Centers segment facility operating expenses decreased $1.5 million, or 1.6%, primarily due to the impact of dispositions of 11 communities since the beginning of the prior year period, which incurred $0.5 million of expenses during the current year period compared to $6.8 million in the prior year period. This decrease was partially offset by an increase in salaries and wages arising from wage rate increases at the communities we operated during both full periods and the impact of the reclassification of one community from the CCRCs-Rental segment into this segment subsequent to the prior year period. Retirement Centers segment facility operating expenses, excluding costs related to hurricanes, at the communities we operated during both full periods were $89.6 million, an increase of $2.2 million, or 2.5%, over the prior year period.
Assisted Living segment facility operating expenses decreased $20.8 million, or 5.3%, primarily driven by the impact of dispositions of 113 communities since the beginning of the prior year period, which incurred $2.8 million of expenses during the current year period compared to $49.1 million in the prior year period. This decrease was partially offset by an increase in salaries and wages arising from wage rate increases at the communities we operated during both full periods and a $6.9 million increase in insurance expense related to positive changes in the three months ended September 30, 2016 to estimates in general liability and professional liability and workers compensation expenses. Assisted Living segment facility operating expenses, excluding costs related to hurricanes, at the communities we operated during both full periods were $354.9 million, an increase of $19.5 million, or 5.8%, over the prior year period.
CCRCs-Rental segment facility operating expenses decreased $29.4 million, or 25.7%, primarily driven by the impact of dispositions of 12 communities since the beginning of the prior year period, which incurred $0.1 million of expenses during the current year period compared to $31.5 million in the prior year period. Additionally, facility operating expenses decreased due to the impact of the reclassification of one community out of this segment and into the Retirement Centers segment subsequent to the prior year period. CCRCs-Rental segment facility operating expenses, excluding costs related to hurricanes, at the
communities we operated during both full periods were $83.9 million, an increase of $1.6 million, or 2.0%, over the prior year period.
Brookdale Ancillary Services segment operating expenses decreased $1.9 million, or 1.8%, primarily due to decreases in volume for outpatient therapy services. During the three months ended December 31, 2016, we significantly reduced the number of outpatient therapy clinics located in our communities as lower reimbursement rates and lower utilization made the business less attractive.
General and Administrative Expense
General and administrative expense increased $0.4 million, or 0.6%, over the prior year period primarily due to increased legal fees. This increase was partially offset by a $5.6 million decrease in integration, transaction-related and strategic project costs. Integration, transaction-related and strategic project costs were $0.8 million during the current period compared to $6.4 million in the prior year period. Integration costs for 2016 include transition costs associated with organizational restructuring (such as severance and retention payments and recruiting expenses), third party consulting expenses directly related to the integration of acquired communities (in areas such as cost savings and synergy realization, branding and technology and systems work), and internal costs such as training, travel and labor, reflecting time spent by Company personnel on integration activities and projects. Transaction-related costs for 2016 include third party costs directly related to acquisition and disposition activity, community financing and leasing activity and corporate capital structure assessment activities (including shareholder relations advisory matters), and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Strategic project costs for 2016 include costs associated with strategic projects related to refining our strategy, building out enterprise-wide capabilities (including EMR roll-out project) and reducing costs and achieving synergies by capitalizing on scale.
Transaction Costs
Transaction costs increased $1.3 million to $2.0 million. Transaction costs in the current year period were primarily related to direct costs related to our ongoing assessment of options and alternatives to enhance stockholder value. Transaction costs in the prior year period were primarily related to direct costs related to community disposition activity.
Facility Lease Expense
Facility lease expense decreased $8.1 million, or 8.7%, primarily due to lease termination activity since the beginning of the prior year period.
Depreciation and Amortization
Depreciation and amortization expense decreased $13.1 million, or 10.0%, primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period.
Goodwill and Asset Impairment
Impairment. During the current year period, we recorded $368.6$3.8 million of non-cash impairment charges, primarily for management contract intangible assets associated with terminated contracts. During the prior year period, we recorded $16.1 million of non-cash impairment charges. The prior year period impairment charges primarily consisted of $205.0a $9.2 million decrease in the estimated selling prices of goodwill within the Assisted Living segment, $149.9assets held for sale and a $6.9 million impairment of property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living segment, and $13.7 million of intangible assets for health care licenses within the Brookdale Ancillary ServicesMemory Care segment. Asset impairment expense in the prior year period was primarily related to decreases in the estimated selling price of assets held for sale during the prior year period.
During the third quarter of 2017, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period since the last testing date, significant underperformance relative to historical and projected operating results, and an increased competitive environment in the senior living industry. As a result, we performed an interim quantitative goodwill impairment test as of September 30, 2017, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying amount of our Assisted Living segment exceeded its estimated fair value by $205.0 million as of September 30, 2017. As a result, we recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted Living segment for the three months ended September 30, 2017.
During the three months ended September 30, 2017, we evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $149.9 million for the three months ended September 30, 2017, including $131.2 million within the Assisted Living segment.
Additionally, during the third quarter of 2017, we identified indicators of impairment for our home health care licenses in Florida, including significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare for home health care services, an increased competitive environment in the home health care industry, and disruption from the impact of Hurricane Irma. We performed an interim quantitative impairment test as of September 30, 2017 on the health care licenses. Based on the results of the quantitative impairment test, we determined that the carrying amount of certain of our home health care licenses in Florida exceeded their estimated fair value by $13.7 million as of September 30, 2017. As a result, we recorded $13.7 million of impairment charges for health care licenses within the Brookdale Ancillary Services segment for the three months ended September 30, 2017.
Estimating the fair values of our goodwill and other assets requires management to use significant estimates, assumptions and judgments regarding future circumstances and events that are unpredictable and inherently uncertain. Future circumstances and events may result in outcomes that are different from these estimates, assumptions and judgments, which could result in future impairments to our goodwill and other assets. See Note 6 and Note 75 to the condensed consolidated financial statements includedcontained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about our evaluations of goodwill and other assets forthe impairment and the related impairment charges.
Loss on Facility Lease Termination
A and Modification, Net. During the current year period, we recorded a $1.8 million loss on facility lease termination and modification, net for the termination of $4.9leases for seven communities. The decrease in loss on facility lease termination and modification, net was primarily due to a $125.7 million was recognizedloss on the restructuring of community leases with Ventas and a $22.6 million loss on lease termination activity with Welltower during the current year period for lease termination activity.three months ended June 30, 2018.
Costs Incurred on Behalf of Managed Communities
CostsCommunities. The decrease in costs incurred on behalf of managed communities increased $49.2 million, or 26.2%,was primarily due to our entry intoterminations of management agreements withsubsequent to the Blackstone Venture.beginning of the prior year period.
Interest Expense
InterestExpense. The decrease in interest expense decreased by $16.5 million, or 17.1%,was primarily due to financing lease termination activity and the repayment of debt since the beginning of the prior year period.
EquityGain on Sale of Assets, Net. The decrease in Lossgain on sale of Unconsolidated Ventures
Equityassets, net was primarily due to a $16.9 million gain on sale of our investments in loss of unconsolidated ventures increased by $5.8and a $6.5 million overgain on sale of three communities during the prior year period. Equity in loss of unconsolidated ventures of $6.7 million in the current year period includes losses
Benefit (Provision) for the Blackstone Venture, which was formed subsequent to the prior year period, and the impact of additional interest expense incurred as a result of non-recourse mortgage financing obtained by the CCRC Venture subsequent to the prior year period.
Income Taxes
Taxes. The difference between our effective tax ratesrate for the three months ended SeptemberJune 30, 20172019 and September 30, 20162018 was primarily due to an increase in the full year valuation allowance against our deferred tax assets and the non-deductible write-off of goodwill during the quarter ended September 30, 2017. projected in 2019 as compared to 2018.
We recorded an aggregate deferred federal, state, and local tax benefit of $91.3$13.0 million as a result of the operating loss for the three months ended SeptemberJune 30, 2017,2019, offset by an increase in the valuation allowance of $13.3 million. The change in the valuation allowance for the three months ended June 30, 2019 resulted from anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of $46.4 million as a result of the operating loss for the three months ended June 30, 2018, which was offset by an increase in the valuation allowance of $59.6$30.3 million. The excess of the deferred federal, state and local benefit over the increase in the valuation allowance for the three months ended September 30, 2017 is the result of the reversal of future tax liabilities offset by future tax deductions.
We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of SeptemberJune 30, 20172019 and December 31, 20162018 was $484.5$370.2 million and $264.3$336.4 million, respectively. As described in Note 4 to the condensed consolidated financial statements, we recorded a significant increase to the valuation allowance in connection with the transactions related to the formation of the Blackstone Venture. We do not expect that we will become a federal cash taxpayer until 2021, at the earliest.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the three months ended SeptemberJune 30, 20172019 and September 30, 20162018 which are included in provision for income tax for the period. Tax returns for years 20122014 through 20162017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Operating Results - Unconsolidated Ventures
The Company’s proportionate share of Adjusted EBITDA of unconsolidated ventures was $10.9 million for the three months ended June 30, 2019, which represented a decrease of 22.9% from the three months ended June 30, 2018 primarily attributable to the sale of our interest in four unconsolidated ventures since the beginning of the prior year quarter.
Comparison of NineSix Months Ended SeptemberJune 30, 2017 to September 30, 20162019 and 2018
Summary Operating Results
The following table sets forth,summarizes our overall operating results for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
During the threesix months ended March 31, 2017, one community moved from the CCRCs-Rental segment to the Retirement Centers segment to more accurately reflect the underlying product offering of the community in the current period given changes to the community. The movement did not change our reportable segments, but it did impact the revenues, expensesJune 30, 2019 and operating data reported within the two segments. Revenue, expenses and operating data for the nine months ended September 30, 2016 have not been recast.
As of September 30, 2017 our total operations included 1,031 communities with a capacity to serve 101,202 residents.
2018.
|
| | | | | | | | | | | | | | |
| (dollars in thousands, except Total RevPAR, RevPAR and RevPOR) | Nine Months Ended
September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (6) |
| Statement of Operations Data: | | | | | | | |
| Revenue | | | | | | | |
| Resident fees | | | | | | | |
| Retirement Centers | $ | 496,854 |
| | $ | 510,122 |
| | $ | (13,268 | ) | | (2.6 | )% |
| Assisted Living | 1,680,194 |
| | 1,837,632 |
| | (157,438 | ) | | (8.6 | )% |
| CCRCs-Rental | 364,075 |
| | 448,002 |
| | (83,927 | ) | | (18.7 | )% |
| Brookdale Ancillary Services | 332,766 |
| | 362,791 |
| | (30,025 | ) | | (8.3 | )% |
| Total resident fees | 2,873,889 |
| | 3,158,547 |
| | (284,658 | ) | | (9.0 | )% |
Management services (1) | 707,337 |
| | 609,565 |
| | 97,772 |
| | 16.0 | % |
| Total revenue | 3,581,226 |
| | 3,768,112 |
| | (186,886 | ) | | (5.0 | )% |
| Expense | |
| | |
| | |
| | |
|
| Facility operating expense | |
| | |
| | |
| | |
|
| Retirement Centers | 289,648 |
| | 287,807 |
| | 1,841 |
| | 0.6 | % |
| Assisted Living | 1,102,258 |
| | 1,164,859 |
| | (62,601 | ) | | (5.4 | )% |
| CCRCs-Rental | 281,484 |
| | 345,943 |
| | (64,459 | ) | | (18.6 | )% |
| Brookdale Ancillary Services | 294,211 |
| | 314,617 |
| | (20,406 | ) | | (6.5 | )% |
| Total facility operating expense | 1,967,601 |
| | 2,113,226 |
| | (145,625 | ) | | (6.9 | )% |
| General and administrative expense | 196,429 |
| | 246,741 |
| | (50,312 | ) | | (20.4 | )% |
| Transaction costs | 12,924 |
| | 1,950 |
| | 10,974 |
| | NM |
|
| Facility lease expense | 257,934 |
| | 281,890 |
| | (23,956 | ) | | (8.5 | )% |
| Depreciation and amortization | 366,023 |
| | 391,314 |
| | (25,291 | ) | | (6.5 | )% |
| Goodwill and asset impairment | 390,816 |
| | 26,638 |
| | 364,178 |
| | NM |
|
| Loss on facility lease termination | 11,306 |
| | — |
| | 11,306 |
| | NM |
|
| Costs incurred on behalf of managed communities | 650,863 |
| | 559,067 |
| | 91,796 |
| | 16.4 | % |
| Total operating expense | 3,853,896 |
| | 3,620,826 |
| | 233,070 |
| | 6.4 | % |
| Income (loss) from operations | (272,670 | ) | | 147,286 |
| | (419,956 | ) | | NM |
|
| Interest income | 2,720 |
| | 2,239 |
| | 481 |
| | 21.5 | % |
| Interest expense | (249,544 | ) | | (289,989 | ) | | (40,445 | ) | | (13.9 | )% |
| Debt modification and extinguishment costs | (11,883 | ) | | (3,240 | ) | | 8,643 |
| | NM |
|
| Equity in (loss) earnings of unconsolidated ventures | (10,311 | ) | | 478 |
| | (10,789 | ) | | NM |
|
| (Loss) gain on sale of assets, net | (1,383 | ) | | 2,126 |
| | (3,509 | ) | | NM |
|
| Other non-operating income | 6,519 |
| | 11,011 |
| | (4,492 | ) | | (40.8 | )% |
| Income (loss) before income taxes | (536,552 | ) | | (130,089 | ) | | 406,463 |
| | NM |
|
| Provision for income taxes | (50,075 | ) | | (5,947 | ) | | 44,128 |
| | NM |
|
| Net income (loss) | (586,627 | ) | | (136,036 | ) | | 450,591 |
| | NM |
|
| Net (income) loss attributable to noncontrolling interest | 151 |
| | 126 |
| | 25 |
| | 19.8 | % |
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | (586,476 | ) | | $ | (135,910 | ) | | $ | 450,616 |
| | NM |
|
|
| | | | | | | | | | | | | | |
| | Six Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2019 | | 2018 | | Amount | | Percent |
| Total revenue | $ | 2,061,501 |
| | $ | 2,342,434 |
| | $ | (280,933 | ) | | (12.0 | )% |
| Facility operating expense | 1,176,340 |
| | 1,259,401 |
| | (83,061 | ) | | (6.6 | )% |
| Net income (loss) | (98,661 | ) | | (622,743 | ) | | (524,082 | ) | | (84.2 | )% |
| Adjusted EBITDA | 220,619 |
| | 294,373 |
| | (73,754 | ) | | (25.1 | )% |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | Increase (Decrease) |
| | 2017 | | 2016 | | Amount | | Percent (6) |
| Selected Operating and Other Data: | | | | | | | |
| Total number of communities (period end) | 1,031 |
| | 1,077 |
| | (46 | ) | | (4.3 | )% |
Total units operated (2) | | | |
| | |
| | |
|
| Period end | 101,202 |
| | 104,545 |
| | (3,343 | ) | | (3.2 | )% |
| Weighted average | 102,096 |
| | 106,945 |
| | (4,849 | ) | | (4.5 | )% |
Owned/leased communities units (2) | | | |
| | |
| | |
|
| Period end | 69,675 |
| | 78,562 |
| | (8,887 | ) | | (11.3 | )% |
| Weighted average | 72,603 |
| | 80,566 |
| | (7,963 | ) | | (9.9 | )% |
Total RevPAR (3) | $ | 4,394 |
| | $ | 4,352 |
| | $ | 42 |
| | 1.0 | % |
RevPAR (4) | $ | 3,885 |
| | $ | 3,851 |
| | $ | 34 |
| | 0.9 | % |
| Owned/leased communities occupancy rate (weighted average) | 84.9 | % | | 86.1 | % | | (1.2 | )% | | (1.4 | )% |
RevPOR (5) | $ | 4,577 |
| | $ | 4,475 |
| | $ | 102 |
| | 2.3 | % |
| | | | | | | | |
| Selected Segment Operating and Other Data: | | | | | |
| | |
|
| Retirement Centers | | | | | |
| | |
|
| Number of communities (period end) | 85 |
| | 95 |
| | (10 | ) | | (10.5 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 15,961 |
| | 17,105 |
| | (1,144 | ) | | (6.7 | )% |
| Weighted average | 16,413 |
| | 17,099 |
| | (686 | ) | | (4.0 | )% |
RevPAR (4) | $ | 3,364 |
| | $ | 3,315 |
| | $ | 49 |
| | 1.5 | % |
| Occupancy rate (weighted average) | 87.6 | % | | 89.0 | % | | (1.4 | )% | | (1.6 | )% |
RevPOR (5) | $ | 3,838 |
| | $ | 3,723 |
| | $ | 115 |
| | 3.1 | % |
| Assisted Living | |
| | |
| | |
| | |
|
| Number of communities (period end) | 705 |
| | 783 |
| | (78 | ) | | (10.0 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 46,520 |
| | 51,494 |
| | (4,974 | ) | | (9.7 | )% |
| Weighted average | 48,215 |
| | 53,340 |
| | (5,125 | ) | | (9.6 | )% |
RevPAR (4) | $ | 3,872 |
| | $ | 3,828 |
| | $ | 44 |
| | 1.1 | % |
| Occupancy rate (weighted average) | 84.3 | % | | 85.5 | % | | (1.2 | )% | | (1.4 | )% |
RevPOR (5) | $ | 4,595 |
| | $ | 4,477 |
| | $ | 118 |
| | 2.6 | % |
| CCRCs-Rental | | | |
| | |
| | |
|
| Number of communities (period end) | 30 |
| | 43 |
| | (13 | ) | | (30.2 | )% |
Total units (2) | | | |
| | |
| | |
|
| Period end | 7,194 |
| | 9,963 |
| | (2,769 | ) | | (27.8 | )% |
| Weighted average | 7,975 |
| | 10,127 |
| | (2,152 | ) | | (21.3 | )% |
RevPAR (4) | $ | 5,038 |
| | $ | 4,881 |
| | $ | 157 |
| | 3.2 | % |
| Occupancy rate (weighted average) | 83.1 | % | | 84.0 | % | | (0.9 | )% | | (1.1 | )% |
RevPOR (5) | $ | 6,069 |
| | $ | 5,812 |
| | $ | 257 |
| | 4.4 | % |
| Management Services | | | | | |
| | |
|
| Number of communities (period end) | 211 |
| | 156 |
| | 55 |
| | 35.3 | % |
Total units (2) | | | |
| | |
| | |
|
| Period end | 31,527 |
| | 25,983 |
| | 5,544 |
| | 21.3 | % |
| Weighted average | 29,493 |
| | 26,379 |
| | 3,114 |
| | 11.8 | % |
| Occupancy rate (weighted average) | 85.1 | % | | 87.0 | % | | (1.9 | )% | | (2.2 | )% |
|
| | | | | | | | | | | | | | |
| | | | | | | | |
| Brookdale Ancillary Services | |
| | |
| | |
| | |
|
| Outpatient Therapy treatment codes | 563,322 |
| | 1,405,800 |
| | (842,478 | ) | | (59.9 | )% |
| Home Health average daily census | 15,010 |
| | 15,223 |
| | (213 | ) | | (1.4 | )% |
| Hospice average daily census | 1,042 |
| | 735 |
| | 307 |
| | 41.8 | % |
| |
(1) | Management services segment revenue includes management fees and reimbursements for which we are the primary obligor of costs incurred on behalf of managed communities. |
| |
(2) | Weighted average units operated represents the average units operated during the period. |
| |
(3) | Total RevPAR, or average monthly resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(4) | RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. |
| |
(5) | RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as resident fee revenues, excluding Brookdale Ancillary Services segment revenue and entrance fee amortization, for the corresponding portfolio for the period, divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. |
Resident Fees
Resident feeThe decrease in total revenue decreased $284.7was primarily attributable to the disposition of 127 communities through sales of owned communities and lease terminations since the beginning of the prior year period, which resulted in $237.6 million or 9.0%,less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by a 1.8% increase in same community RevPAR at the 650 communities we owned or leased during both full periods, comprised of a 3.2% increase in same community RevPOR and a 120 basis points decrease in same community weighted average occupancy. Additionally, management services revenue, including management fees and reimbursed costs incurred on behalf of managed communities, decreased $90.0 million primarily due to terminations of management agreements subsequent to the beginning of the prior year period.
The decrease in facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $160.9 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease was partially offset by a 4.9% increase in same community facility operating expense, which was primarily due to an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense of approximately $8.1 million and $21.0 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense excludes approximately $7.4 million and $19.5 million, respectively, of such additional revenue and expenses.
The improvement to net income (loss) was primarily attributable to decreases in goodwill and asset impairment expense and in loss on facility lease termination and modification compared to the prior period, offset by a decrease in net gain on sale of assets and the revenue and facility operating expense factors noted above. Goodwill and asset impairment expense was $4.2 million for the six months ended June 30, 2019 compared to $446.5 million for the prior year period. We recognized a loss on lease termination and modification of $146.5 million for the six months ended June 30, 2018 primarily as a result of agreements with Ventas and Welltower. Net gain on sale of assets was $2.1 million for the six months ended June 30, 2019 compared to a net gain on sale of assets of $66.8 million for the prior year period.
The decrease in Adjusted EBITDA was primarily attributable to the revenue and facility operating expense factors noted above, offset by lower general and administrative expenses (excluding non-cash stock-based compensation expense and transaction and organizational restructuring costs) of $7.1 million and lower cash facility operating lease payments of $31.5 million.
Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the six months ended June 30, 2019 and 2018 including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 1,385,376 |
| | $ | 1,581,862 |
| | $ | (196,486 | ) | | (12.4 | )% |
| Facility operating expense | $ | 967,714 |
| | $ | 1,057,549 |
| | $ | (89,835 | ) | | (8.5 | )% |
| | | | | | | | |
| Number of communities (period end) | 671 |
| | 748 |
| | (77 | ) | | (10.3 | )% |
| Number of units (period end) | 55,209 |
| | 61,709 |
| | (6,500 | ) | | (10.5 | )% |
| Number of units (weighted average) | 55,963 |
| | 66,450 |
| | (10,487 | ) | | (15.8 | )% |
| RevPAR | $ | 4,100 |
| | $ | 3,965 |
| | $ | 135 |
| | 3.4 | % |
| Occupancy rate (weighted average) | 83.5 | % | | 84.3 | % | | (80 | ) bps | | n/a |
|
| RevPOR | $ | 4,909 |
| | $ | 4,705 |
| | $ | 204 |
| | 4.3 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 1,290,900 |
| | $ | 1,269,179 |
| | $ | 21,721 |
| | 1.7 | % |
| Facility operating expense | $ | 885,819 |
| | $ | 844,053 |
| | $ | 41,766 |
| | 4.9 | % |
| | | | | | | | |
| Number of communities | 650 |
| | 650 |
| | — |
| | — | % |
| Total average units | 51,901 |
| | 51,931 |
| | (30 | ) | | (0.1 | )% |
| RevPAR | $ | 4,143 |
| | $ | 4,071 |
| | $ | 72 |
| | 1.8 | % |
| Occupancy rate (weighted average) | 83.9 | % | | 85.1 | % | | (120 | ) bps | | n/a |
|
| RevPOR | $ | 4,938 |
| | $ | 4,785 |
| | $ | 153 |
| | 3.2 | % |
Independent Living Segment
The following table summarizes the operating results and data for our Independent Living segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 271,645 |
| | $ | 317,690 |
| | $ | (46,045 | ) | | (14.5 | )% |
| Facility operating expense | $ | 167,310 |
| | $ | 188,134 |
| | $ | (20,824 | ) | | (11.1 | )% |
| | | | | | | | |
| Number of communities (period end) | 68 |
| | 75 |
| | (7 | ) | | (9.3 | )% |
| Number of units (period end) | 12,460 |
| | 13,559 |
| | (1,099 | ) | | (8.1 | )% |
| Number of units (weighted average) | 12,435 |
| | 15,064 |
| | (2,629 | ) | | (17.5 | )% |
| RevPAR | $ | 3,597 |
| | $ | 3,515 |
| | $ | 82 |
| | 2.3 | % |
| Occupancy rate (weighted average) | 89.4 | % | | 87.9 | % | | 150 | bps | | n/a |
|
| RevPOR | $ | 4,023 |
| | $ | 3,998 |
| | $ | 25 |
| | 0.6 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 244,649 |
| | $ | 237,046 |
| | $ | 7,603 |
| | 3.2 | % |
| Facility operating expense | $ | 146,041 |
| | $ | 139,302 |
| | $ | 6,739 |
| | 4.8 | % |
| | | | | | | | |
| Number of communities | 63 |
| | 63 |
| | — |
| | — | % |
| Total average units | 11,331 |
| | 11,358 |
| | (27 | ) | | (0.2 | )% |
| RevPAR | $ | 3,599 |
| | $ | 3,479 |
| | $ | 120 |
| | 3.4 | % |
| Occupancy rate (weighted average) | 89.9 | % | | 88.9 | % | | 100 | bps | | n/a |
|
| RevPOR | $ | 4,003 |
| | $ | 3,912 |
| | $ | 91 |
| | 2.3 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 17 communities since the beginning of the prior year period, which resulted in $60.9 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.3% increase in same community RevPOR and a 100 basis points increase in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. Additionally, the decrease in resident fees was partially offset by $3.5 million of additional revenue for one community acquired subsequent to the beginning of the prior year period.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $35.7 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, the decrease in facility operating expense was partially offset by $2.0 million of additional facility operating expense for one community acquired subsequent to the beginning of the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $3.3 million and $5.7 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $3.0 million and $5.3 million, respectively, of such additional revenue and expenses.
Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 908,751 |
| | $ | 1,054,307 |
| | $ | (145,556 | ) | | (13.8 | )% |
| Facility operating expense | $ | 634,908 |
| | $ | 708,032 |
| | $ | (73,124 | ) | | (10.3 | )% |
| | | | | | | | |
| Number of communities (period end) | 577 |
| | 645 |
| | (68 | ) | | (10.5 | )% |
| Number of units (period end) | 36,175 |
| | 41,266 |
| | (5,091 | ) | | (12.3 | )% |
| Number of units (weighted average) | 36,964 |
| | 44,588 |
| | (7,624 | ) | | (17.1 | )% |
| RevPAR | $ | 4,081 |
| | $ | 3,941 |
| | $ | 140 |
| | 3.6 | % |
| Occupancy rate (weighted average) | 81.8 | % | | 83.2 | % | | (140 | ) bps | | n/a |
|
| RevPOR | $ | 4,987 |
| | $ | 4,738 |
| | $ | 249 |
| | 5.3 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 865,307 |
| | $ | 852,475 |
| | $ | 12,832 |
| | 1.5 | % |
| Facility operating expense | $ | 592,043 |
| | $ | 565,404 |
| | $ | 26,639 |
| | 4.7 | % |
| | | | | | | | |
| Number of communities | 564 |
| | 564 |
| | — |
| | — | % |
| Total average units | 34,933 |
| | 34,935 |
| | (2 | ) | | — | % |
| RevPAR | $ | 4,128 |
| | $ | 4,067 |
| | $ | 61 |
| | 1.5 | % |
| Occupancy rate (weighted average) | 82.4 | % | | 84.2 | % | | (180 | ) bps | | n/a |
|
| RevPOR | $ | 5,015 |
| | $ | 4,833 |
| | $ | 182 |
| | 3.8 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of 107 communities since the beginning of the prior year period, which resulted in $166.0 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 3.8% increase in same community RevPOR and a 180 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets. Additionally, the decrease in resident fees was partially offset by $1.7 million of additional revenue for two communities acquired subsequent to the beginning of the prior year period.
The decrease in the segment’s facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in $115.3 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, the decrease in facility operating expense was partially offset by $1.3 million of additional facility operating expense for two communities acquired subsequent to the beginning of the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $3.6 million and $12.8 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $3.4 million and $12.1 million, respectively, of such additional revenue and expenses.
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the six months ended June 30, 2019 and 2018, including operating results and data on a same community basis.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 204,980 |
| | $ | 209,865 |
| | $ | (4,885 | ) | | (2.3 | )% |
| Facility operating expense | $ | 165,496 |
| | $ | 161,383 |
| | $ | 4,113 |
| | 2.5 | % |
| | | | | | | | |
| Number of communities (period end) | 26 |
| | 28 |
| | (2 | ) | | (7.1 | )% |
| Number of units (period end) | 6,574 |
| | 6,884 |
| | (310 | ) | | (4.5 | )% |
| Number of units (weighted average) | 6,564 |
| | 6,798 |
| | (234 | ) | | (3.4 | )% |
| RevPAR | $ | 5,156 |
| | $ | 5,125 |
| | $ | 31 |
| | 0.6 | % |
| Occupancy rate (weighted average) | 81.7 | % | | 83.5 | % | | (180 | ) bps | | n/a |
|
| RevPOR | $ | 6,308 |
| | $ | 6,137 |
| | $ | 171 |
| | 2.8 | % |
| | | | | | | | |
| Same Community Operating Results and Data | | | | | | | |
| Resident fees | $ | 180,944 |
| | $ | 179,658 |
| | $ | 1,286 |
| | 0.7 | % |
| Facility operating expense | $ | 147,735 |
| | $ | 139,347 |
| | $ | 8,388 |
| | 6.0 | % |
| | | | | | | | |
| Number of communities | 23 |
| | 23 |
| | — |
| | — | % |
| Total average units | 5,637 |
| | 5,638 |
| | (1 | ) | | — | % |
| RevPAR | $ | 5,327 |
| | $ | 5,291 |
| | $ | 36 |
| | 0.7 | % |
| Occupancy rate (weighted average) | 81.6 | % | | 83.1 | % | | (150 | ) bps | | n/a |
|
| RevPOR | $ | 6,531 |
| | $ | 6,366 |
| | $ | 165 |
| | 2.6 | % |
The decrease in the segment’s resident fees was primarily attributable to the disposition of three communities since the beginning of the prior year period, which resulted in $10.7 million less in resident fees during the six months ended June 30, 2019 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment’s same community RevPAR, comprised of a 2.6% increase in same community RevPOR and a 150 basis points decrease in same community weighted average occupancy. The increase in the segment’s same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment’s same community weighted average occupancy reflects the impact of new competition in our markets. Additionally, the decrease in resident fees was partially offset by $4.0 million of additional revenue for one community acquired subsequent to the beginning of the prior year period.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment’s same community facility operating expense, including an increase in labor expense arising from wage rate increases and increased use of overtime. There was also an increase in advertising, repairs and maintenance, and insurance costs during the period. Additionally, there was $2.2 million of additional facility operating expense for one community acquired subsequent to the beginning of the prior year period. The increase in facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in $9.9 million less in facility operating expense during the six months ended June 30, 2019 compared to the prior year period.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $1.1 million and $2.5 million, respectively, during the six months ended June 30, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $1.0 million and $2.1 million, respectively, of such additional revenue and expenses.
Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health Care Services segment for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except census and treatment codes) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Resident fees | $ | 225,966 |
| | $ | 220,373 |
| | $ | 5,593 |
| | 2.5 | % |
| Facility operating expense | $ | 208,626 |
| | $ | 201,852 |
| | $ | 6,774 |
| | 3.4 | % |
| | | | | | | | |
| Home health average daily census | 15,935 |
| | 15,367 |
| | 568 |
| | 3.7 | % |
| Hospice average daily census | 1,485 |
| | 1,319 |
| | 166 |
| | 12.6 | % |
| Outpatient therapy treatment codes | 328,467 |
| | 343,325 |
| | (14,858 | ) | | (4.3 | )% |
The increase in the segment’s resident fees was primarily attributable to an increase in volume for hospice services. Home health revenue also increased due to higher average daily census, offset by unfavorable case-mix and community dispositions.
The increase in the segment’s facility operating expense was primarily attributable to an increase in labor costs arising from wage rate increases and the expansion of our hospice services.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands, except communities, units, and occupancy) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| Management fees | $ | 31,192 |
| | $ | 35,752 |
| | $ | (4,560 | ) | | (12.8 | )% |
| Reimbursed costs incurred on behalf of managed communities | $ | 418,967 |
| | $ | 504,447 |
| | $ | (85,480 | ) | | (16.9 | )% |
| | | | | | | | |
| Number of communities (period end) | 138 |
| | 240 |
| | (102 | ) | | (42.5 | )% |
| Number of units (period end) | 21,451 |
| | 33,176 |
| | (11,725 | ) | | (35.3 | )% |
| Number of units (weighted average) | 23,755 |
| | 32,060 |
| | (8,305 | ) | | (25.9 | )% |
| Occupancy rate (weighted average) | 82.9 | % | | 83.9 | % | | (100 | ) bps | | n/a |
|
The decrease in management fees was primarily attributable to the transition of management arrangements on 91 net communities since the beginning of the prior year period, generally for interim management arrangements on formerly leased or owned communities and management arrangements on certain former unconsolidated ventures in which we sold our interest. Management fees of $31.2 million for the six months ended June 30, 2019 include $3.9 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately $3.0 million of management fees attributable to approximately 35 communities that, as of June 30, 2019, we expect the terminations of our management agreements to occur in the next year, including interim management arrangements on formerly leased communities and management arrangements on certain former unconsolidated ventures in which we sold our interest.
The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating results for the six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | |
| (in thousands) | Six Months Ended
June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent |
| General and administrative expense | $ | 113,887 |
| | $ | 144,342 |
| | $ | (30,455 | ) | | (21.1 | )% |
| Facility operating lease expense | 136,357 |
| | 162,360 |
| | (26,003 | ) | | (16.0 | )% |
| Depreciation and amortization | 190,912 |
| | 230,371 |
| | (39,459 | ) | | (17.1 | )% |
| Goodwill and asset impairment | 4,160 |
| | 446,466 |
| | (442,306 | ) | | (99.1 | )% |
| Loss on facility lease termination and modification, net | 2,006 |
| | 146,467 |
| | (144,461 | ) | | (98.6 | )% |
| Costs incurred on behalf of managed communities | 418,967 |
| | 504,447 |
| | (85,480 | ) | | (16.9 | )% |
| Interest income | 5,897 |
| | 5,924 |
| | (27 | ) | | (0.5 | )% |
| Interest expense | (126,193 | ) | | (146,441 | ) | | (20,248 | ) | | (13.8 | )% |
| Debt modification and extinguishment costs | (2,739 | ) | | (44 | ) | | 2,695 |
| | NM |
|
| Equity in loss of unconsolidated ventures | (1,517 | ) | | (5,567 | ) | | (4,050 | ) | | (72.8 | )% |
| Gain on sale of assets, net | 2,144 |
| | 66,753 |
| | (64,609 | ) | | (96.8 | )% |
| Other non-operating income | 6,187 |
| | 8,091 |
| | (1,904 | ) | | (23.5 | )% |
| Benefit (provision) for income taxes | (1,312 | ) | | (39 | ) | | (1,273 | ) | | NM |
|
General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to a decrease in organizational restructuring costs and salaries and wages expense as a result of a reduction in our corporate associate headcount since the beginning of the prior year period as we scaled our general and administrative costs in connection with community dispositions. Transaction and organizational restructuring costs decreased $21.1 million compared to the prior period, to $1.1 million for the six months ended June 30, 2019.
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to lease termination activity since the beginning of the prior year quarter.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity through sales and lease terminations since the beginning of the prior year period. Weighted average occupancy decreased 130 basis points at the 800 communities we owned or leased during both full periods, primarily due to the impact of new competition in our markets. Additionally, Brookdale Ancillary Services segment revenue decreased $30.0 million, or 8.3%, primarily due to a decrease in volume for outpatient therapy services and a decrease in reimbursement rates for home health services. The 139 communities disposed of subsequent to the beginning of the prior year period (including the 62 communities for which the financial results were deconsolidated from our financial statements prospectively upon formation of the Blackstone Venture on March 29, 2017) generated $96.6 million of revenue during the current year period compared to $361.1 million of revenue in the prior year period. The decrease in resident fee revenue was partially offset by a 1.8% increase in RevPOR at the 800 communities we owned or operated during both full periods compared to the prior year period. Total RevPAR for the consolidated portfolio also increased by 1.0% compared to the prior year period.year.
Retirement Centers segment revenue decreased $13.3 million, or 2.6%, primarily due to the impact of dispositions of 11 communities since the beginning of the prior year period, which generated $10.1 million of revenue during the current year period compared to $33.1 million of revenue in the prior year period. This decrease was partially offset by the impact of the reclassification of one community from the CCRCs-Rental segment into this segment during the current period. Retirement Centers segment revenue at the communities we operated during both full periods was $446.9 million during the current year period, an increase of $2.1 million, or 0.5%, over the prior year period, primarily due to a 2.0% increase in RevPOR at these communities, partially offset by a 130 basis point decrease in occupancy at these communities.
Assisted Living segment revenue decreased $157.4 million, or 8.6%, primarily due to the impact of dispositions of 115 communities since the beginning of the prior year period, which generated $51.1 million of revenue during the current year period compared to $209.5 million of revenue in the prior year period. Assisted Living segment revenue at the communities we operated during both full periods was $1,588.5 million during the current year period, a decrease of $3.2 million, or 0.2%, over the prior year period, primarily due to a 140 basis point decrease in occupancy at these communities, partially offset by a 1.7% increase in RevPOR at these communities.
CCRCs-Rental segment revenue decreased $83.9 million, or 18.7%, primarily due to the impact of dispositions of 13 communities since the beginning of the prior year period, which generated $35.5 million of revenue during the current year period compared to $118.5 million of revenue in the prior year period. Additionally, revenue decreased due to the impact of the reclassification of one community out of this segment and into the Retirement Centers segment during the current period. CCRCs-Rental segment revenue at the communities we operated during both full periods was $320.5 million during the current year period, an increase of $2.9 million, or 0.9%, over the prior year period, primarily due to a 2.1% increase in RevPOR at these communities, partially offset by a 110 basis point decrease in occupancy at these communities.
Brookdale Ancillary Services segment revenue decreased $30.0 million, or 8.3%, primarily due to a decrease in volume for outpatient therapy services and a decrease in reimbursement rates for home health services. During the three months ended December 31, 2016, we significantly reduced the number of outpatient therapy clinics located in our communities as lower reimbursement rates and lower utilization made the business less attractive. For home health in 2017, CMS has implemented a net 0.7% reimbursement reduction, consisting of a 2.8% market basket inflation increase, less a 0.3% productivity reduction, a 2.3% rebasing adjustment, and a 0.9% reduction to account for industry wide case-mix growth. As a result, our home health reimbursement has been reduced by approximately 3.0% compared to the prior year period, which is consistent with our expectations for the remainder of 2017. These decreases were partially offset by an increase in volume for hospice services.
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed communities, increased $97.8 million, or 16.0%, over the prior year period primarily due to our entry into management agreements with the Blackstone Venture.
Facility Operating Expense
Facility operating expense decreased $145.6 million, or 6.9%, over the prior year period. For the nine months ended September 30, 2017, facility operating expense includes $5.3 million of costs related to our response to Hurricanes Harvey and Irma. The decrease in facility operating expense is primarily due to disposition activity, through sales and lease terminations, of 139 communities since the beginning of the prior year period, which incurred $74.4 million of facility operating expenses during the current year period compared to $272.6 million of facility operating expenses in prior year period. Additionally, Brookdale Ancillary Services segment facility operating expenses decreased $20.4 million, or 6.5%, primarily due to a decrease in volume for outpatient therapy services. These decreases were partially offset by an increase in salaries and wages arising from wage rate increases at the communities we operated during both full periods and a $19.2 million increase in insurance expense related to positive changes in the nine months ended September 30, 2016 to estimates in general liability and professional liability and workers compensation expenses.
Retirement Centers segment facility operating expenses increased $1.8 million, or 0.6%, primarily driven by an increase in salaries and wages arising from wage rate increases and the impact of the reclassification of one community from the CCRCs-Rental segment into this segment during the current year period. The increase was partially offset by dispositions of 11 communities since the beginning of the prior year period, which incurred $6.5 million of expenses during the current year period compared to $20.1 million in the prior year period. Retirement Centers segment facility operating expenses, excluding costs related to hurricanes, at the communities we operated during both full periods were $257.2 million, an increase of $7.8 million, or 3.1%, over the prior year period.
Assisted Living segment facility operating expenses decreased $62.6 million, or 5.4%, primarily driven by the impact of dispositions of 115 communities since the beginning of the prior year period, which incurred $38.6 million of expenses during the current year period compared to $154.4 million in the prior year period. This decrease was partially offset by an increase in salaries and wages arising from wage rate increases at the communities we operated during both full periods and a $17.6 million increase in insurance expense related to positive changes in the nine months ended September 30, 2016 to estimates in general liability and professional liability and workers compensation expenses. Assisted Living segment facility operating expenses, excluding costs related to hurricanes, at the communities we operated during both full periods were $1,030.5 million, an increase of $39.6 million, or 4.0%, over the prior year period.
CCRCs-Rental segment facility operating expenses decreased $64.5 million, or 18.6%, primarily driven by the impact of dispositions of 13 communities since the beginning of the prior year period, which incurred $29.2 million of expenses during the current year period compared to $98.1 million in the prior year period. Additionally, facility operating expenses decreased due to the impact of the reclassification of one community out of this segment and into the Retirement Centers segment during the current year period. CCRCs-Rental segment facility operating expenses, excluding costs related to hurricanes, at the communities we operated during both full periods were $242.6 million, an increase of $3.6 million, or 1.5%, over the prior year period.
Brookdale Ancillary Services segment operating expenses decreased $20.4 million, or 6.5%, primarily due to a decrease in volume for outpatient therapy services. During the three months ended December 31, 2016, we significantly reduced the number of outpatient therapy clinics located in our communities as lower reimbursement rates and lower utilization made the business less attractive.
General and Administrative Expense
General and administrative expense decreased $50.3 million, or 20.4%, over the prior year period primarily due to a $40.7 million decrease in integration, transaction-related and strategic project costs. Integration, transaction-related and strategic project costs were $1.6 million during the current period compared to $42.2 million in the prior year period. Integration costs for 2016 include transition costs associated with organizational restructuring (such as severance and retention payments and recruiting expenses), third party consulting expenses directly related to the integration of acquired communities (in areas such as cost savings and synergy realization, branding and technology and systems work), and internal costs such as training, travel and labor, reflecting time spent by Company personnel on integration activities and projects. Transaction-related costs for 2016 include third party costs directly related to acquisition and disposition activity, community financing and leasing activity and corporate capital structure assessment activities (including shareholder relations advisory matters), and are primarily comprised of legal, finance, consulting, professional fees and other third party costs. Strategic project costs for 2016 include costs associated with strategic projects related to refining our strategy, building out enterprise-wide capabilities (including EMR roll-out project) and reducing costs and achieving synergies by capitalizing on scale. Additionally, a reduction in corporate associate headcount resulted in decreased salaries and wages for the nine months ended September 30, 2017.
Transaction Costs
Transaction costs increased $11.0 million to $12.9 million. Transaction costs in the current year period were primarily related to direct costs related to the formation of the Blackstone Venture and our ongoing assessment of options and alternatives to enhance stockholder value. Transaction costs in the prior year period were primarily related to direct costs related to community disposition activity.
Facility Lease Expense
Facility lease expense decreased $24.0 million, or 8.5%, primarily due to lease termination activity since the beginning of the prior year period.
Depreciation and Amortization
Depreciation and amortization expense decreased $25.3 million, or 6.5%, primarily due to disposition activity, through sales and lease terminations, since the beginning of the prior year period.
Goodwill and Asset Impairment
Impairment. During the current year period, we recorded $390.8$4.2 million of non-cash impairment charges, primarily for management contract intangible assets associated with terminated contracts. During the prior year period, we recorded $446.5 million of non-cash impairment charges. The prior year period impairment charges primarily consisted of $205.0$351.7 million of goodwill impairment within the Assisted Living and Memory Care segment, $152.4$47.7 million of impairment of property, plant and equipment and leasehold intangibles for certain communities, primarily in the Assisted Living and Memory Care segment, $19.7and $33.4 million related to the formation of the Blackstone Venture and termination of leases related thereto, and $13.7 million of intangible assets for health care licenses within the Brookdale Ancillary Services segment. Asset impairment expense in the prior year period was primarily related to decreases in the estimated selling price of assets held for sale during the prior year period.
During the third quarter of 2017, we identified qualitative indicators of impairment of our goodwill, including a significant declineinvestments in our stock price and market capitalization for a sustained period since the last testing date, significant underperformance relative to historical and projected operating results, and an increased competitive environment in the senior living industry. As a result, we performed an interim quantitative goodwill impairment test as of September 30, 2017, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying amount of our Assisted Living segment exceeded its estimated fair value by $205.0 million as of September 30, 2017. As a result, we recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted Living segment for the nine months ended September 30, 2017.
During the nine months ended September 30, 2017, we evaluated property, plant and equipment and leasehold intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. We compared the estimated fair value of the assets to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair value. As a result, we recorded property, plant and equipment and leasehold intangibles non-cash impairment charges of $152.4 million for the nine months ended September 30, 2017, including $133.7 million within the Assisted Living segment.
Additionally, during the third quarter of 2017, we identified indicators of impairment for our home health care licenses in Florida, including significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare for home health care services, an increased competitive environment in the home health care industry, and disruption from the impact of Hurricane Irma. We performed an interim quantitative impairment test as of September 30, 2017 on the health care licenses. Based on the results of the quantitative impairment test, we determined that the carrying amount of certain of our home health care licenses in Florida exceeded their estimated fair value by $13.7 million as of September 30, 2017. As a result, we recorded $13.7 million of impairment charges for health care licenses within the Brookdale Ancillary Services segment for the three months ended September 30, 2017.
Estimating the fair values of our goodwill and other assets requires management to use significant estimates, assumptions and judgments regarding future circumstances and events that are unpredictable and inherently uncertain. Future circumstances and events may result in outcomes that are different from these estimates, assumptions and judgments, which could result in future impairments to our goodwill and other assets.unconsolidated ventures. See Note 6 and Note 75 to the condensed consolidated financial statements includedcontained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about our evaluations of goodwill and other assets forthe impairment and the related impairment charges.
Loss on Facility Lease Termination
A and Modification, Net. During the current year period, we recorded a $2.0 million loss on facility lease termination and modification, net for the termination of $11.3leases for eight communities. The decrease in loss on facility lease termination and modification, net was primarily due to a $125.7 million was recognizedloss on the restructuring of community leases with Ventas, and a $22.6 million loss on lease termination activity with Welltower during the current year period for lease termination activity.three months ended June 30, 2018.
Costs Incurred on Behalf of Managed Communities
CostsCommunities. The decrease in costs incurred on behalf of managed communities increased $91.8 million, or 16.4%,was primarily due to our entry intoterminations of management agreements with the Blackstone Venture subsequent to the beginning of the prior year period.
Interest Expense
InterestExpense. The decrease in interest expense decreased by $40.4 million, or 13.9%,was primarily due to financing lease termination activity and the repayment of long-term debt and our secured credit facility since the beginning of the prior year period.
Equity in Earnings (Loss)Loss of Unconsolidated Ventures
EquityVentures. The decrease in earnings (loss) of unconsolidated ventures decreased by $10.8 million over the prior year period. Equityequity in loss of unconsolidated ventures was primarily due to the sale of $10.3 millioninvestments in unconsolidated ventures since the current year period includes losses for the Blackstone Venture, which was formed subsequent tobeginning of the prior year period,period.
Gain on Sale of Assets, Net. The decrease in gain on sale of assets, net was primarily due to a $59.1 million gain on sale of our investments in unconsolidated ventures and the impactan $8.4 million gain on sale of additional interest expense incurred as a result of non-recourse mortgage financing obtained by the CCRC Venture subsequent tosix communities during the prior year period.
Benefit (Provision) for Income Taxes
Taxes. The difference between our effective tax ratesrate for the ninesix months ended SeptemberJune 30, 20172019 and September 30, 20162018 was primarily due to recording an additional valuation allowance against our deferred tax assets and an increasethe non-deductible impairment of goodwill that occurred in the non-deductible write-off of goodwill during the ninesix months ended SeptemberJune 30, 2017. 2018 and the adjustment from stock-based compensation which was greater in the six months ended June 30, 2018 compared to the six months ended June 30, 2019.
We recorded an aggregate deferred federal, state, and local tax benefit of $123.0$21.2 million as a result of the operating loss for the ninesix months ended SeptemberJune 30, 2017,2019, offset by an increase in the valuation allowance of $21.7 million. The change in the valuation allowance for the six months ended June 30, 2019 resulted from anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of $55.9 million as a result of the operating loss for the six months ended June 30, 2018, which was offset by an increase in the valuation allowance of $171.6 million, of which $85.0 million was recorded as a result of the Blackstone Venture. $54.9 million.
We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of SeptemberJune 30, 20172019 and December 31, 20162018 was $484.5$370.2 million and $264.3$336.4 million, respectively. As described in Note 4 to the condensed consolidated financial statements, we recorded a significant increase to the valuation allowance in connection with the transactions related to the formation of the Blackstone Venture. We do not expect that we will become a federal cash taxpayer until 2021, at the earliest.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the ninethree months ended SeptemberJune 30, 20172019 and September 30, 20162018 which are included in provision for income tax for the period. Tax returns for years 20122014 through 20162017 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Operating Results - Unconsolidated Ventures
The Company’s proportionate share of Adjusted EBITDA of unconsolidated ventures was $22.2 million for the six months ended June 30, 2019, which represented a decrease of 28.1% from the six months ended June 30, 2018 primarily attributable to the sale of our interest in five unconsolidated ventures since the beginning of the prior year period.
Liquidity and Capital Resources
This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures. During the first quarter of 2019, we modified our definition of Adjusted Free Cash Flow to no longer adjust net cash provided by (used in) operating activities for changes in working capital items other than prepaid insurance premiums financed with notes payable and lease liability for lease termination and modification. Amounts for all periods herein reflect application of the modified definition.
Liquidity and Indebtedness
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statementsconsolidated statements of cash flows, and our Adjusted Free Cash Flows (in thousands):Flow and proportionate share of Adjusted Free Cash Flow of unconsolidated ventures:
|
| | | | | | | | | | | | | |
| | Nine Months Ended
September 30, | | | |
| | 2017 | | 2016 | Increase (Decrease) | | % Increase (Decrease) |
| Net cash provided by operating activities | $ | 283,109 |
| | $ | 277,281 |
| $ | 5,828 |
| | 2.1 | % |
| Net cash used in investing activities | (529,718 | ) | | (54,374 | ) | 475,344 |
| | 874.2 | % |
| Net cash provided by (used in) financing activities | 321,766 |
| | (236,752 | ) | 558,518 |
| | 235.9 | % |
| Net increase (decrease) in cash and cash equivalents | 75,157 |
| | (13,845 | ) | 89,002 |
| | 642.8 | % |
| Cash and cash equivalents at beginning of period | 216,397 |
| | 88,029 |
| 128,368 |
| | 145.8 | % |
| Cash and cash equivalents at end of period | $ | 291,554 |
| | $ | 74,184 |
| $ | 217,370 |
| | 293.0 | % |
|
| | | | | | | | | | | | | | |
| | Six Months Ended
June 30, | | Increase (Decrease) |
| (in thousands) | 2019 | | 2018 | | Amount | | Percent |
| Net cash provided by (used in) operating activities | $ | 59,119 |
| | $ | 98,584 |
| | $ | (39,465 | ) | | (40.0 | )% |
| Net cash provided by (used in) investing activities | (80,299 | ) | | 11,512 |
| | (91,811 | ) | | NM |
|
| Net cash provided by (used in) financing activities | (104,079 | ) | | (201,980 | ) | | 97,901 |
| | 48.5 | % |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (125,259 | ) | | (91,884 | ) | | (33,375 | ) | | 36.3 | % |
| Cash, cash equivalents and restricted cash at beginning of period | 450,218 |
| | 282,546 |
| | 167,672 |
| | 59.3 | % |
| Cash, cash equivalents and restricted cash at end of period | $ | 324,959 |
| | $ | 190,662 |
| | $ | 134,297 |
| | 70.4 | % |
| | | | | | | | |
| Adjusted Free Cash Flow | $ | (63,340 | ) | | $ | 27,392 |
| | $ | (90,732 | ) | | NM |
|
| Brookdale's proportionate share of Adjusted Free Cash Flow of unconsolidated ventures | 12,342 |
| | 15,386 |
| | (3,044 | ) | | (19.8 | )% |
The increasedecrease in net cash provided by (used in) operating activities of $5.8 million was attributable primarily to a $21.3 million decrease in integration, transaction, transaction-related and strategic project costs compared to the prior year period. The increase was partially offset by the impact of disposition activity, through sales and lease terminations, since the beginning of the prior year period, and an increase in facility operating expensesexpense at the communities operated during both full periods.periods, lower revenue collected in advance due to quarter-end timing, and an increase in working capital liabilities paid during the current year period. These changes were partially offset by $46.6 million of cash paid to terminate community operating leases during the prior year period.
The increasechange in net cash used inprovided by (used in) investing activities of $475.3 million was primarily attributable to a $218.3 million decrease in proceeds from sales of marketable securities, purchases of $98.1 million of marketable of securities during the current year period, our contribution of $179.2 million in connection with the formation of the Blackstone Venture during the current year period, and a $78.5 million decrease in net proceeds from the sale of assets. These increaseschanges were partially offset by reduced$271.3 million of cash paid for the acquisition of communities during the prior year period and capital expenditure activity.a $30.2 million increase in cash proceeds from notes receivable during the current period.
The change in net cash provided by (used in) financing activities was primarily attributable to $430.4a $228.2 million decrease in repayment of debt and financing lease obligations compared to the prior year period, including the impact of our cash settlement of the aggregate principal amount of the $316.3 million of net2.75% convertible senior notes during June 2018, and $10.5 million of cash paid to terminate community financing leases during the prior year period. These changes were partially offset by a $121.7 million decrease in debt proceeds from refinancing activities completedcompared to the prior year period and $18.4 million of cash paid during the current year period. Additionally, cash usedperiod for share repurchases.
The decrease in financing activities forAdjusted Free Cash Flow was primarily attributable to a $31.6 million increase in non-development capital expenditures, net, the nine months ended September 30, 2016 included $210.0 millionimpact of net repayments ondisposition activity, an increase in facility operating expense at the communities operated during both full periods, and changes in working capital. The decrease in our secured credit facility.proportionate share of Adjusted Free Cash Flow of unconsolidated ventures was primarily attributable to the sale of our interest in five unconsolidated ventures since the beginning of the prior year.
Our principal sources of liquidity have historically been from:
cash balances on hand, cash equivalents and marketable securities;
cash flows from operations;
proceeds from our credit facilities;
funds generated through unconsolidated venture arrangements;
proceeds from mortgage financing, refinancing of various assets or sale-leaseback transactions;
funds raised in the debt or equity markets; and
proceeds from the disposition of assets.
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.
Our liquidity requirements have historically arisen from:
working capital;
operating costs such as employee compensation and related benefits, severance costs, general and administrative expense, and supply costs;
debt service and lease payments;
acquisition consideration, lease termination and restructuring costs, and transaction and integration costs;
capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our current communities, and the development of new communities;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
purchases of common stock under our share repurchase authorizations;
other corporate initiatives (including integration, information systems, branding, and other strategic projects); and
prior to 2009, dividend payments.
Over the near-term, we expect that our liquidity requirements will primarily arise from:
working capital;
operating costs such as employee compensation and related benefits, general and administrative expense, and supply costs;
debt service and lease payments;
acquisition consideration, including repaymentthe acquisition of the $316.3 million outstanding principal amountcertain leased communities under purchase option provisions;
transaction costs and expansion of our 2.75% convertible senior notes due June 15, 2018, and lease payments;healthcare services;
capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our existing communities;
acquisition consideration and transaction costs;
cash funding needs of our unconsolidated ventures for operating, capital expenditure, and financing needs;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
purchases of common stock under our share repurchase authorization; and
other corporate initiatives (including information systems and other strategic projects).
We are highly leveraged and have significant debt and lease obligations. As of SeptemberJune 30, 2017,2019, we have threehad two principal corporate-level debt obligations: our $400.0 million secured credit facility our $316.3providing commitments of $250.0 million outstanding principal amount of 2.75% convertible senior notes due June 15, 2018, and our separate letter of credit facilitiesunsecured facility providing for up to $64.5$47.5 million of letters of credit in the aggregate. The remainder of our indebtedness is generally comprised of approximately $3.6 billion of non-recourse property-level mortgage financings as of September 30, 2017.credit.
As of SeptemberJune 30, 2017,2019, we had $3.9$3.6 billion of debt outstanding, excluding capital and financing lease obligations, at a weighted-average interest rate of 4.8% (calculated using an imputed interest rate of 7.5% for our 2.75% convertible senior notes due June 15, 2018)4.89%. No balance was drawn on our secured credit facility as of September 30, 2017. As of September 30, 2017, we had $1.6such date, 95.2% or $3.4 billion, of capital and financing leaseour total debt obligations and $102.9represented non-recourse property-level mortgage financings, $88.6 million of letters of credit had been issued under our secured credit facility and separate unsecured letter of credit facilities.facility, and no balance was drawn on our secured credit facility. As of June 30, 2019, the current portion of long-term debt was $267.2 million, including $18.5 million of mortgage debt related to five communities classified as held for sale as of June 30, 2019. As of June 30, 2019, $1.1 billion of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining $102.9 million of our long-term variable rate debt is not subject to any interest rate cap agreements.
As of June 30, 2019, we had $1.5 billion and $863.6 million of operating and financing lease obligations, respectively. For the twelve months ending SeptemberJune 30, 20182020 we will be required to make approximately $164.2$307.3 million and $366.2$88.7 million of cash payments in connection with our existing capitaloperating and financing leases, respectively. Additionally, we expect to exercise purchase options with respect to eight of our community leases (336 units) within the next twelve months. However, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising such purchase options. Furthermore, the terms of any such options that are based on fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending on the circumstances at the time of exercise. We expect to fund our operating leases, respectively.acquisition of such communities with the proceeds from non-recourse mortgage financing on the acquired communities and cash on hand.
Total liquidity of $899.4$478.3 million as of SeptemberJune 30, 20172019 included $291.6$256.0 million of unrestricted cash and cash equivalents (excluding restricted cash and escrow deposits-restricted and lease security deposits of $67.3$117.3 million in the aggregate), $246.4$58.8 million of marketable securities, and $361.5$163.5 million of availability on our secured credit facility. Total liquidity as of June 30, 2019 decreased $114.2 million from total liquidity of $592.5 million as of December 31, 2018. The decrease was primarily attributable to the negative $63.3 million of Adjusted Free Cash Flow, repayment of debt of $227.1 million during the period, $18.4 million paid for share repurchases, an increase in restricted cash deposits on our insurance programs as we replaced letters of credit as collateral with restricted cash, and a lower
In June 2017, we obtained a $54.7
amount available on the secured credit facility. These decreases were partially offset by net cash proceeds of $52.4 million non-recourse additionfrom asset sales, proceeds from debt of $158.2 million, and borrow-up loan, secured by first mortgages on seven communities. The loan bears interest at a fixed rate of 4.69% and matures on March 1, 2022. Proceeds from$31.6 million notes receivable during the loan added to our liquidity.
current period. In July 2017,of 2019 we completedincreased the refinancing of two existing loan portfoliosavailability under our secured by the non-recourse first mortgage on 22 communities. The $221.3credit facility to $180.8 million of proceeds from the refinancing were primarily utilized to repay $188.1 million and $13.6 million of mortgage debt maturing in April 2018 and January 2021, respectively. The mortgage facility has a 10 year term, and 70% of the principal amount bears interest at a fixed rate of 4.81% and the remaining 30% of the principal amount bears interest at a variable rate of 30-day LIBOR plus a margin of 244 basis points.
In August 2017, we obtained $975.0 million of loans secured by the non-recourse first mortgages on 51 communities. Sixty percent of the principal amount bears interest at a fixed rate, with one half of such amount bearing interest at 4.43% and maturing in 2024 and the other one half bearing interest at 4.47% and maturing in 2027. Forty percent of the principal amount bears interest at a variable rate equalafter giving effect to the 30-day LIBOR plus a marginaddition of 241.5 basis points and matures in 2027. The $975.0 million of proceeds fromthree communities to the refinancing were primarily utilized to repay $389.9 million and $228.9 million of outstanding mortgage debt scheduled to mature in August 2018 and May 2023, respectively. The net proceeds from the refinancing activity added to our liquidity.borrowing base.
As of SeptemberJune 30, 2017, we had $192.52019, our current liabilities exceeded current assets by $313.7 million. Our current liabilities include $248.1 million of negative working capital. Dueoperating and financing lease obligations recognized on our condensed consolidated balance sheet, including $182.7 million for the current portion of operating lease obligations recognized on our condensed consolidated balance sheet as a result of the application of ASC 842. Additionally, due to the nature of our business, it is not unusual to operate in the position of negative working capital because we collect revenues much more quickly, often in advance, than we are required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities. Our operations generally result in a very low level of current assets primarily stemming from our deployment of cash to pay down long-term liabilities, in connection with our ongoing portfolio optimization initiative,to fund capital expenditures, and to pursue strategic businesstransaction opportunities.
Capital Expenditures
development opportunities. As of September 30, 2017, the current portion of long-term debt was $553.6 million, which includes the carrying amount of our 2.75% convertible senior notes due June 15, 2018, the carrying amount of $67.2 million of mortgage debt due in May 2018 and $50.4 million of mortgage debt related to 15 communities classified as held for sale as of September 30, 2017. We estimate that we will have sufficient liquidity to settle the outstanding principal amount of $316.3 million of the convertible notes in cash at maturity.
Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence, including for unit turnovers (subject to a $500 floor)) and community renovations, apartment upgrades and other major building infrastructure projects. Corporate capital expenditures include those for information technology systems and equipment, the expansion of our support platform and ancillaryhealthcare services programs, and the remediation or replacement of assets as a result of casualty losses. Development capital expenditures include community expansions and major community redevelopment and repositioning projects, including our Program Max initiative, and the development of new communities.
Through our Program Max initiative, we intend to expand, renovate, redevelop, and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These Program Max projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications. We currently have 820 Program Max projects that have been approved, most of which have begun construction and are expected to generate 2788 net new units.
Following Hurricane Irma in 2017, legislation was adopted in the State of Florida in March 2018 that requires skilled nursing homes and assisted living and memory care communities in Florida to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. Our impacted Florida communities must be in compliance as of January 1, 2019, which has been extended in certain circumstances. To comply with this legislation, we made approximately $12.1 million and $3.0 million in capital expenditures in 2018 and the six months ended June 30, 2019, respectively. We expect to incur approximately $2.0 million of additional capital expenditures in the remainder of 2019 to comply with this legislation.
The following table summarizes our actual capital expenditures for the ninesix months ended SeptemberJune 30, 2017 as well as our anticipated capital expenditures for the year ended December 31, 20172019 for our consolidated communities (in millions):business:
| | | | Actual Nine Months Ended September 30, 2017 | | Anticipated 2017 Range | |
| (in millions) | | Six Months Ended June 30, 2019 |
Community-level capital expenditures, net (1) | $ | 93.1 |
| | $ | 140.0 - 145.0 | $ | 103.2 |
|
Corporate (2) | 21.5 |
| | | 40.0 - 45.0 | 17.9 |
|
Non-development capital expenditures, net (3) | 114.6 |
| | 180.0 - 190.0 | 121.1 |
|
Development capital expenditures, net (4) | 7.2 |
| | | 10.0 - 20.0 | 10.6 |
|
| Total capital expenditures, net | $ | 121.8 |
| | $ | 190.0 - 210.0 | $ | 131.7 |
|
Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to forgo, delay or abandon some or all of our plans to restructure leases and grow our business.plans.
We currently estimate that our existing cash flows from operations, together with cash on hand, amounts available under our secured credit facility and to a lesser extent, proceeds from anticipated dispositions of owned communities and financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming a relatively stable macroeconomic environment.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, theour actual level of capital expenditures, our portfolio optimization efforts, development and acquisition activity, general economic conditions, and the cost of capital. Volatility in the credit and financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies. Volatility in the credit and financial markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. As a result, this may impact our abilitymaintain capital spending levels, to execute on our portfolio optimization and growth initiatives, maintain capital spending levels,strategy or execute other aspects of our business strategy.to pursue lease restructuring, development, or acquisitions that we may identify. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index.index or the leased property revenue. We are responsible for all operating costs, including repairs, property taxes and insurance. As of June 30, 2019, the weighted-average remaining lease term of our operating and financing leases was 7.3 and 8.8 years, respectively. The initial lease terms primarily vary from 10 to 20 years and generally include renewal options ranging from 5 to 20 years. The remaining base lease terms vary from less than one year to 15 years and generally provide for renewal or extension options from 5 to 20 years and in some instances, purchase options.
Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the "Contractual Commitments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 filed with the SEC on February 15, 2017.