| Leases with SNH and HCP and Management Agreements with SNH | Leases with SNH and HCP and Management Agreements with SNH Senior Living Communities Leased from SNH . We are SNH’s largest tenant and SNH is our largest landlord. We leased 185 senior living communities from SNH as of December 31, 2017 and 2016. We lease senior living communities from SNH pursuant to five leases with SNH. Under our leases with SNH, we pay SNH annual rent plus percentage rent equal to 4% of the increase in gross revenues at SNH’s senior living communities over base year gross revenues as specified in the applicable lease. Our obligation to pay percentage rent under Lease No. 5 commences in 2018. Our total annual rent payable to SNH was $207,026 as of December 31, 2017, excluding percentage rent. Our total rent expense under all of our leases with SNH, net of lease inducement amortization and the amortization of the deferred gain associated with the sale and leaseback transaction with SNH in June 2016 described below, was $203,639 and $198,786 for the years ended December 31, 2017 and 2016, respectively, which amounts included $5,533 and $5,646 , respectively, of percentage rent. As of December 31, 2017 and 2016, we had outstanding rent due and payable to SNH of $18,555 and $18,338 , respectively, which are presented in due to related persons in our consolidated balance sheets. Under our leases with SNH, we have the option to extend the lease term for two consecutive 10 or 15 year terms. SNH has the right, in connection with a financing or other capital raising transaction, to reassign one or more of the communities covered by Lease No. 3 or Lease No. 5 to another of our long term lease agreements with SNH. Our leases with SNH are “triple net” leases, which generally require us to pay rent and all property operating expenses, to indemnify SNH from liability which may arise by reason of its ownership of the properties, to maintain the properties at our expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for SNH’s and our benefit. In the event of any damage, or immaterial condemnation, of a leased property, we are generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by SNH, if any, but if other amounts are made available by SNH, our rent will be increased accordingly. In the event of any material or total condemnation of a leased property, the lease will terminate with respect to that leased property, in which event SNH will be entitled to the condemnation proceeds and our rent will be reduced accordingly. In the event of any material or total destruction of a leased property, we may terminate the lease with respect to that leased property, in which event we are required to pay to SNH any shortfall in the amount of proceeds SNH receives from insurance compared to the replacement cost of that leased property and our rent will be reduced accordingly. Under our leases with SNH, we may request that SNH purchase certain improvements to the leased communities in return for rent increases in accordance with a formula specified in the applicable lease; however, SNH is not obligated to purchase such improvements and we are not obligated to sell them to SNH. During the years ended December 31, 2017 and 2016 , SNH purchased $39,800 and $21,437 , respectively, of such improvements and our annual rent payable to SNH increased by $3,193 and $1,720 , respectively, in accordance with the terms of the applicable leases. At December 31, 2017 , our property and equipment balance included $1,702 of improvements of the type we typically request that SNH purchase for an increase in rent; however SNH is not obligated to purchase these improvements. In September 2016, we and SNH sold a former SNF located in Wisconsin that was not classified as held for sale and our annual rent payable to SNH decreased by $25 as a result. Since January 1, 2016, we and SNH added senior living communities to our leases with SNH and engaged in other transactions impacting our leases with SNH, as follows: • In June 2016, we entered a transaction agreement, or the 2016 Transaction Agreement, and related agreements with SNH pursuant to which we sold seven senior living communities to SNH, as further described below. • In September 2016, SNH acquired an additional living unit at a senior living community we lease from SNH located in Florida which was added to the lease for that senior living community, and our annual rent payable to SNH increased by $10 as a result. • In December 2016, we began leasing from SNH two senior living communities located in Illinois with a combined 126 living units which were added to one of our leases with SNH, and our annual rent payable to SNH increased by $1,400 as a result. • During the quarter ended June 30, 2017, we and SNH agreed to amend the applicable lease for certain construction, expansion and development projects at two senior living communities we lease from SNH. If and when we request that SNH purchase improvements related to these specific projects from us, our annual rent payable to SNH will increase by an amount equal to the interest rate then applicable to SNH’s borrowings under its revolving credit facility plus 2% per annum of the amount SNH purchased. This amount of increased rent will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, our annual rent payable to SNH will be revised to equal the amount otherwise determined pursuant to the capital improvement formula specified in the applicable lease. • In August 2017, we sold to SNH a land parcel adjacent to a senior living community located in Delaware that we lease from SNH for $750 , excluding closing costs. This land parcel was added to the applicable lease and our annual minimum rent payable to SNH increased by $33 in accordance with the terms of that lease. In June 2016, we entered the 2016 Transaction Agreement and related agreements with SNH. Pursuant to the 2016 Transaction Agreement, on June 29, 2016, we sold seven senior living communities to SNH for an aggregate purchase price of $112,350 , and SNH simultaneously leased these communities back to us under the new long term Lease No. 5. Pursuant to Lease No. 5, we are required to pay SNH initial annual rent of $8,426 , plus, beginning in 2018, percentage rent equal to 4% of the amount by which gross revenues, as defined in Lease No. 5, of each community exceeds gross revenues of such community in 2017. The initial term of Lease No. 5 expires on December 31, 2028, subject to our options to extend the term of Lease No. 5 for two consecutive 15 year terms. In accordance with FASB ASC Topic 840, Leases , the June 2016 sale and leaseback transaction with SNH qualified for sale-leaseback accounting and we have classified Lease No. 5 as an operating lease. Accordingly, the carrying value of the senior living communities we sold to SNH of $29,706 was removed from our consolidated balance sheets, and the gain generated from the sale of $82,644 was deferred and is being amortized as a reduction of rent expense over the initial term of Lease No. 5. As of December 31, 2017 , the short term portion of the deferred gain in the amount of $6,609 is presented in other current liabilities in our consolidated balance sheets, and the long term portion of $66,087 is presented separately in our consolidated balance sheets. We incurred transaction costs of approximately $750 in connection with the sale of these senior living communities to SNH, which amount was expensed in full during the year ended December 31, 2016. Senior Living Communities Leased from HCP . As of December 31, 2017 , we leased four senior living communities under one lease with HCP, Inc., or HCP. This lease is also a “triple net” lease which requires that we pay all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintaining the communities, and indemnifying the landlord for any liability which may arise from the operations during the lease term. Our lease with HCP contains a minimum annual escalator of 2% , but not greater than 4% , depending on increases in certain cost of living indexes and expires on April 30, 2028 and includes one 10 year renewal option. The following table is a summary of our leases with SNH and with HCP as of December 31, 2017 : Number of Properties Annual Minimum Rent as of December 31, 2017 Current Expiration date Remaining Renewal Options 1. Lease No. 1 for SNFs and independent and assisted living communities 83 $ 59,671 December 31, 2024 Two 15-year renewal options. 2. Lease No. 2 for SNFs and independent and assisted living communities 47 66,375 June 30, 2026 Two 10-year renewal options. 3. Lease No. 3 for independent and assisted living communities 17 35,649 December 31, 2028 Two 15-year renewal options. 4. Lease No. 4 for SNFs and independent and assisted living communities 29 35,477 April 30, 2032 Two 15-year renewal options. 5. Lease No. 5 for independent and assisted living communities 9 9,854 December 31, 2028 Two 15-year renewal options. 6. One HCP lease 4 2,706 April 30, 2028 One 10-year renewal option. Totals 189 $ 209,732 The future minimum rents required by our leases as of December 31, 2017 , are as follows: 2018 209,768 2019 209,823 2020 209,879 2021 209,936 2022 209,995 Thereafter 972,651 $ 2,022,052 Senior Living Communities Managed for the Account of SNH . We managed 70 and 68 senior living communities for the account of SNH as of December 31, 2017 and 2016, respectively, pursuant to long term management agreements and pooling agreements that combine various calculations of revenues and expenses from the operations of the communities covered by the applicable pooling agreement. We earned base management fees from SNH of $12,970 and $11,548 for the years ended December 31, 2017 and 2016 , respectively. In addition, we earned incentive fees of $0 and $108 and fees for our management of capital expenditure projects at the communities we managed for the account of SNH of $845 and $432 for the years ended December 31, 2017 and 2016 , respectively, which amounts are included in management fee revenue in our consolidated statements of operations. We have pooling agreements with SNH that combine most of our management agreements with SNH that include assisted living units, or our AL Management Agreements. The pooling agreements combine various calculations of revenues and expenses from the operations of the applicable communities covered by such agreements. Our AL Management Agreements and the pooling agreements generally provide that we receive from SNH: • a management fee equal to either 3% or 5% of the gross revenues realized at the applicable communities, • reimbursement for our direct costs and expenses related to such communities, • an annual incentive fee equal to either 35% or 20% of the annual net operating income of such communities remaining after SNH realizes an annual minimum return equal to either 8% or 7% of its invested capital, or, in the case of certain of the communities, a specified amount plus 7% of its invested capital since December 31, 2015, and • a fee for our management of capital expenditure projects equal to 3% of amounts funded by SNH. Pursuant to the 2016 Transaction Agreement, on June 29, 2016, we and SNH terminated three of our four then existing pooling agreements and entered 10 new pooling agreements, or the New Pooling Agreements, that combined all but two of our existing AL Management Agreements. Under the New Pooling Agreements, the calculations of our fees and of SNH’s annual minimum return related to AL Management Agreements that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the New Pooling Agreements reduced SNH’s annual minimum return to 7% , and also, with respect to certain of the communities, reset SNH’s annual minimum return as of January 1, 2016 to specified amounts. For AL Management Agreements that became effective from and after May 2015, the New Pooling Agreements increased our management fee from 3% to 5% of the gross revenues realized at the applicable community, and changed our annual incentive fee from 35% to 20% of the annual net operating income of the applicable community remaining after SNH realizes its requisite annual minimum return. Our management agreements with SNH for the part of the senior living community owned by SNH and located in Yonkers, New York that is not subject to the requirements of New York healthcare licensing laws, as described elsewhere herein, and for the assisted living community owned by SNH and located in Villa Valencia, California, are not currently included in any of our pooling agreements with SNH. We also have a pooling agreement with SNH that combines our management agreements with SNH for senior living communities consisting only of independent living units. Our management agreements with SNH generally expire between 2030 and 2041, and are subject to automatic renewal for two consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. These management agreements also generally provide that we, in some cases, and SNH each have the option to terminate the agreements upon the acquisition by a person or group of more than 9.8% of the other’s voting stock and upon certain change in control events affecting the other party, as defined in the applicable agreements, including the adoption of any stockholder proposal (other than a precatory proposal) with respect to the other party, or the election to the board of directors or trustees, as applicable, of the other party of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of the other party’s board of directors or board of trustees, as applicable, in office immediately prior to the making of such proposal or the nomination or appointment of such individual. Since January 1, 2016, we began managing additional senior living communities of SNH, the terms of which are described below, and engaged in other transactions relevant to our management and pooling arrangements with SNH, as follows: • In April, May and July 2016, we began managing for the account of SNH three senior living communities located in North Carolina, Georgia and Alabama, respectively, with a combined 301 living units. • In December 2016, we began managing for the account of SNH five senior living communities located in Georgia with a combined 395 living units. In connection with our entering into these management agreements with SNH, we entered an additional pooling agreement with SNH on terms substantially consistent with those of the New Pooling Agreements described above. • Also in December 2016, SNH acquired a land parcel adjacent to a senior living community located in Georgia that we manage for the account of SNH which was added to the management agreement for the senior living community. • Also in December 2016, SNH sold a memory care building located in Florida that we historically managed, and the separate management agreement for this building was terminated as a result. • During the quarter ended June 2017, we and SNH agreed to amend the applicable management and pooling agreements for a construction, expansion and development project at a senior living community that SNH owns and that is managed by us. SNH’s minimum return on invested capital for this specific project will increase by an amount equal to the interest rate then applicable to its borrowings under its revolving credit facility plus 2% per annum. This amount of increased minimum return will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, the amount of annual minimum return on invested capital will be revised to equal the amount otherwise determined pursuant to the applicable management and pooling agreements. We and SNH also agreed that the commencement of the measurement period for determining whether the specified annual minimum return under the applicable management and pooling agreements has been achieved will be deferred until 12 months after a certificate of occupancy is issued with respect to the project. • In November 2017, we entered a transaction agreement, or the 2017 Transaction Agreement, with SNH pursuant to which we agreed to sell six senior living communities to SNH, as further described below. In November 2017, we entered the 2017 Transaction Agreement with SNH pursuant to which we agreed to sell six senior living communities to SNH. The aggregate sales price for these six senior living communities is $104,367 , including $2,375 of mortgage debt that we prepaid with proceeds in December 2017 in connection with the sale of one senior living community and SNH’s assumption of, as of December 31, 2017, approximately $33,537 of mortgage debt principal secured by certain of these senior living communities and excluding closing costs. Pursuant to the 2017 Transaction Agreement, we also agreed that, as we sell these communities, we and SNH would enter new management agreements for us to manage these senior living communities for SNH and the new management agreements would be combined pursuant to two new pooling agreements to be entered between us and SNH. In December 2017, January 2018 and February 2018, we sold to, and began managing for the account of, SNH four of these senior living communities and in connection with those sales, we entered management agreements with SNH for each of these senior living communities and two new pooling agreements with SNH. Pursuant to the terms of the management and pooling agreements for five of these senior living communities, SNH will pay us a management fee equal to 5% of the gross revenues realized at these communities plus reimbursement for our direct costs and expenses related to our operation of these communities, as well as an annual incentive fee equal to 20% of the annual net operating income of such communities remaining after SNH realizes an annual minimum return equal to 7% of its invested capital for these senior living communities. The terms of the management and pooling agreements for one of these senior living communities that is subject to an ongoing construction, expansion and development project are substantially the same as the terms of the management and pooling agreements for the other five senior living communities, except that SNH’s annual minimum return on invested capital related to the ongoing construction, expansion and development project at this community will be an amount equal to the interest rate then applicable to its borrowings under its revolving credit facility plus 2% per annum. This amount of minimum return will apply until the earlier of 12 months after a certificate of occupancy is issued with respect to the project and the third anniversary of our sale of this community; thereafter, the amount of annual minimum return on invested capital related to this project will be 7% of SNH’s invested capital. Also pursuant to the terms of the management and pooling agreements for these senior living communities, SNH will pay us a fee for our management of capital expenditure projects at these senior living communities equal to 3% of amounts funded by SNH. The terms of these management and pooling agreements will expire in 2041 and will be subject to automatic renewals, unless earlier terminated or timely notices of nonrenewal are delivered. The remaining sales under the 2017 Transaction Agreement are expected to occur as third party approvals are received by the end of the first half of 2018. These sales are subject to conditions, including SNH's assumption of the mortgage debt relating to those properties and receipt of any applicable regulatory approvals. The conditions to these sales may not be met and some or all of these sales may not be completed, may be delayed or the terms of these sales or the management and pooling agreements for these communities may change. In accordance with FASB ASC Topic 360, Property, Plant and Equipment , or ASC 360, the six senior living communities we have agreed to sell to, and manage for the account of, SNH as described above have met the conditions to be classified as held for sale in November of 2017. The carrying value at that time for these six senior living communities was $53,743 and consisted primarily of property, plant and equipment, net of mortgage debt, net of mortgage discounts or premiums, of $37,084 . The carrying value at December 31, 2017 for the four senior living communities we had yet to sell was $24,299 and consisted primarily of property, plant and equipment, net of mortgage debt, net of mortgage discounts or premiums, of $34,781 , which are all presented separately on our consolidated balance sheets as held for sale. These six senior living communities generated income (loss) from continuing operations before income taxes of $1,684 and $(44) for the years ended December 31, 2017 and 2016, respectively, excluding the gain on sale of the communities. In December 2017, we sold two of the six senior living communities for an aggregate sales price of $39,150 . These two senior living communities had an aggregate carrying value of $29,444 , net of mortgage debt, which itself was net of a mortgage discount, of $2,303 . In accordance with ASC 360, these transactions qualify as real estate sales and the gains on the transactions were recognized immediately in accordance with the full accrual method as a result of the lack of continuing involvement by us in the ownership of the senior living communities after closing. The carrying value of the senior living communities was not included in our consolidated balance sheets, and the gain generated from the sale of $7,258 , is presented separately on our consolidated statements of operations. In January and February 2018, we sold two additional senior living communities for an aggregate sales price of $41,917 . These two senior living communities had an aggregate carrying value of $19,425 , net of mortgage debt, net of a mortgage premium, of $17,356 , all of which was assumed by SNH. These transactions are accounted for in accordance with ASU No. 2014-09, in particular Topic 610 and related ASUs, effective with the adoption of these new ASUs on January 1, 2018. Under these new ASUs, the income recognition for real estate sales is largely based on the transfer of control versus continuing involvement. We expect to record a gain in 2018 resulting from the sale of these two senior living communities of approximately $5,850 . We expect to complete the sale of the remaining two senior living communities by the end of the first half of 2018 for an aggregate purchase price of $23,300 . At December 31, 2017, the carrying value of these two senior living communities was $4,874 , net of mortgage debt, net of a mortgage premium, of $17,425 , all of which is expected to be assumed by SNH in connection with these sales. In addition, in December 2017, we recorded a long lived asset impairment charge at one of these senior living communities of $1,584 to reduce the carrying value of that community to its estimated fair value, less costs to sell. Also in November 2017, we amended our preexisting pooling agreements with SNH, among other things, to provide that, with respect to SNH’s right to terminate all of the management agreements covered by a preexisting pooling agreement if it does not receive its annual minimum return under such agreement in each of three consecutive years, the commencement year for the measurement period for determining whether the specified annual minimum return under the applicable pooling agreement has been achieved will be 2017. In addition to management services, we also provide certain other services to residents at some of the senior living communities we manage for SNH, such as rehabilitation services. At senior living communities we manage for the account of SNH where we provide rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation services. At senior living communities we manage for the account of SNH where we provide both inpatient and outpatient rehabilitation services, SNH generally pays us for these services and charges for such services are included in amounts charged to residents, third party payers or government programs. We earned revenues of $7,525 and $7,707 for the years ended December 31, 2017 and 2016, respectively, for rehabilitation services we provided at senior living communities we manage for the account of SNH and that are payable by SNH. These amounts are included in senior living revenue in our consolidated statements of operations for those periods. D&R Yonkers LLC . In order to accommodate certain requirements of New York healthcare licensing laws, a part of the senior living community SNH owns and we manage that is located in Yonkers, New York is subleased by a subsidiary of SNH to D&R Yonkers LLC. D&R Yonkers LLC is owned by our Chief Financial Officer and Treasurer and SNH’s president and chief operating officer. We manage this part of the community pursuant to a long term management agreement with D&R Yonkers LLC under which we earn a management fee equal to 3% of the gross revenues realized at that part of the community and no incentive fee is payable to us. Our management agreement with D&R Yonkers LLC expires on August 31, 2022, and is subject to renewal for eight consecutive five year terms, unless earlier terminated or timely notice of nonrenewal is delivered. Pursuant to our management agreement with D&R Yonkers LLC, we earned management fees of $265 and $262 for the years ended December 31, 2017 and 2016, respectively, which are included in management fee revenue in our consolidated statements of operations. |
