| Leases with SNH and HCP and Management Agreements with SNH | Leases with SNH and HCP and Management Agreements with SNH We are SNH’s largest tenant and SNH is our largest landlord. As of September 30, 2019 and 2018 , we leased 166 and 184 senior living communities from SNH, respectively. We lease senior living communities from SNH pursuant to five master leases. We also manage senior living communities for the account of SNH pursuant to management and pooling agreements under which we earn management fees. As of September 30, 2019 and 2018 , we managed 77 and 75 senior living communities, respectively, for the account of SNH, pursuant to these management and pooling agreements. The April 2019 Transaction Agreement with SNH . Among other things, the Transaction Agreement provides that, subject to certain conditions, effective as of January 1, 2020 (or January 1, 2021 if extended under the Transaction Agreement), or the Conversion Time: • our five existing master leases with SNH for all of SNH's senior living communities that are leased by us, as well as our existing management agreements and pooling agreements with SNH for SNH's senior living communities that are operated by us, will be terminated and replaced, or the Conversion, with new management agreements for all of these senior living communities, or collectively, the New Management Agreements; • we will issue to SNH such number of our common shares as is necessary to cause SNH to own, when considered together with our common shares then owned by SNH, approximately 34% of our then outstanding common shares, and enable SNH to declare a pro rata distribution to holders of its common shares of beneficial interest of the right to receive, and we will issue on a pro rata basis to such holders, a number of our common shares which equals approximately 51% of our then outstanding common shares, or, together, the Share Issuances; the noted percentage ownership amounts are post-issuance, giving effect to the Share Issuances; and • as consideration for the Share Issuances, SNH will provide to us $75,000 of additional consideration, or, collectively with the Conversion and the Share Issuances, the Restructuring Transactions. In accordance with ASC Topic 360, Property, Plant and Equipment , or ASC 360, the senior living communities under the five existing master leases with SNH that will terminate, as described above, meet the conditions to be classified as held for sale in reporting periods subsequent to our entry into the Transaction Agreement. As a result, as of September 30, 2019 , we have classified these senior living communities as held for sale. The carrying value of these senior living communities was $(2,637) , and consisted of restricted cash of $42 , prepaid and other current assets of $3,416 , net property and equipment of $9,767 , other intangible assets of $191 , accrued real estate taxes of $14,010 and security deposits and current portion of continuing care contracts of $2,043 , all of which were presented on our condensed consolidated balance sheets as assets and liabilities held for sale. These communities, while leased by us, generated income (loss) from operations before income taxes of $8,430 and $(8,246) for the three months ended September 30, 2019 and 2018, respectively, and $17,436 and $(19,534) for the nine months ended September 30, 2019 and 2018, respectively. Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to SNH by us under our master leases with SNH was reduced to $11,000 , subject to adjustment, and no additional rent is payable to SNH by us from such date to the Conversion Time; and (2) on April 1, 2019, SNH purchased from us $49,115 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to SNH's senior living communities leased and operated by us, which amount remains subject to adjustment but will not exceed $60,000 . In accordance with the Transaction Agreement, the aggregate amount of monthly minimum rent payable to SNH was reduced to $10,815 as of September 30, 2019 , as a result of dispositions, and remains subject to further adjustment. At our annual meeting of stockholders held on June 11, 2019, our stockholders approved the Share Issuances. The Restructuring Transactions remain subject to conditions, including, among others: (1) the receipt of all Required Licenses (as defined in the Transaction Agreement) and any other third party consent or approval required for the consummation of the Restructuring Transactions; (2) the effectiveness of the registration statement on Form S-1 filed by us on September 27, 2019 with the Securities and Exchange Commission, or SEC, to register our common shares to be issued pursuant to the Transaction Agreement; and (3) approval by Nasdaq of the listing of our common shares to be issued pursuant to the Transaction Agreement subject to official notice of issuance. If any required approval is not obtained by December 31, 2019, and the failure to obtain such approval is not the result of a breach or default by us under the Transaction Agreement, we and SNH have agreed to work in good faith to determine an alternative to allow the Restructuring Transactions to occur on January 1, 2020; provided SNH is not required to agree to any alternative that would adversely affect SNH's qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended. If we and SNH do not agree to any such alternative, and, as of January 1, 2020, the failure to obtain a required approval is the only remaining condition under the Transaction Agreement, the Conversion Time will be automatically extended to January 1, 2021. Pursuant to the Transaction Agreement, since our stockholders approved the Share Issuances, the aggregate amount of monthly minimum rent payable to SNH under our existing master leases with SNH remains at $11,000 , subject to adjustment, regardless of whether the Transaction Agreement is extended and/or is terminated. In accordance with the Transaction Agreement, this amount was reduced to approximately $10,800 as of September 30, 2019 as a result of dispositions, and remains subject to further adjustment. In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to SNH under our existing master leases with SNH pursuant to the Transaction Agreement was determined to be a modification of these master leases, and we have reassessed the classification of these master leases based on the modified terms and determined that these master leases continue to be classified as long term operating leases. Accordingly, we have remeasured the lease liability and right of use asset recorded in the condensed consolidated balance sheets. Pursuant to the Transaction Agreement, we have agreed to expand our Board of Directors within six months following the Conversion Time to add an Independent Director (as defined in our Bylaws) reasonably satisfactory to SNH. Pursuant to the New Management Agreements, we will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year. The New Management Agreements provide for 15 year terms, subject to our right to extend for two consecutive five year terms if we achieve certain performance targets for the combined managed communities portfolio. The New Management Agreements also provide SNH with the right to terminate the New Management Agreement for any community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided SNH may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. In connection with the Transaction Agreement, we entered into a credit agreement with SNH pursuant to which SNH extended to us a $25,000 line of credit, or the SNH credit facility. The SNH credit facility matures on January 1, 2020, or January 1, 2021 if the Conversion Time is extended pursuant to the Transaction Agreement. The SNH credit facility provides for interest to be paid on borrowed amounts at a rate of 6% per year and is secured by real estate mortgages on six senior living communities owned by certain of our subsidiaries that guarantee our obligations under the SNH credit facility, and certain personal property owned by those and certain other of our subsidiaries. The SNH credit facility provides for acceleration of payment of all amounts outstanding under the SNH credit facility upon the occurrence and continuation of certain events of default, including a default by us under the Transaction Agreement and certain other agreements. The agreement governing the SNH credit facility contains covenants, including those that restrict our ability to incur debt or to pay dividends or make other distributions to our stockholders in certain circumstances. As of November 5, 2019 , we have not made any borrowings under the SNH credit facility. We incurred transaction costs of $1,330 and $10,138 related to the Transaction Agreement for the three and nine months ended September 30, 2019 , respectively. Senior Living Communities Leased from SNH . Under our master leases with SNH, we pay SNH annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at the applicable senior living communities over base year gross revenues as specified in the applicable lease. Our obligation to pay percentage rent under Lease No. 5 commenced in 2018. Different base years apply to those communities that pay percentage rent. The base year for a particular leased community is usually the first full calendar year after that community has become subject to that lease. As noted above, pursuant to the Transaction Agreement, no additional rent is payable to SNH by us from February 1, 2019 to the Conversion Time. Our total annual rent payable to SNH as of September 30, 2019 and 2018 was $129,785 and $ 207,504 , respectively, excluding percentage rent. As noted above, pursuant to the Transaction Agreement, since our stockholders approved the Share Issuances, the aggregate amount of monthly minimum rent payable to SNH under our existing master leases with SNH remains at $11,000 , subject to adjustment, regardless of whether the Transaction Agreement is extended and/or is terminated. In accordance with the Transaction Agreement, this amount was reduced to approximately $10,800 as of September 30, 2019 as a result of dispositions, and remains subject to further adjustment. Our total rent expense under all of our leases with SNH was $32,375 and $51,541 for the three months ended September 30, 2019 and 2018 , respectively, and $118,647 and $154,425 for the nine months ended September 30, 2019 and 2018 , respectively, which amounts included estimated percentage rent of $0 and $1,387 for the three months ended September 30, 2019 and 2018 , respectively, and $1,547 and $4,068 for the nine months ended September 30, 2019 and 2018 , respectively. Rent expense for the three and nine months ended September 30, 2018 was net of lease inducement amortization and the amortization of the deferred gain associated with the sale and leaseback transaction with SNH in June 2016 of $1,652 and $4,956 , respectively. Rent expense for the three and nine months ended September 30, 2019 was net of lease inducement amortization of $472 and $944 , respectively. Pursuant to the Transaction Agreement, our rent payable to SNH was reduced by a total of $13,840 in aggregate for February and March 2019 and we did not pay such amount to SNH. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019 was not adjusted for the rent reduction for February and March 2019. Instead, the rent reduction for February and March 2019 was determined to be a lease inducement, for which a liability for the $13,840 has been recorded as a reduction of the right of use asset on our condensed consolidated balance sheets and will be amortized as a reduction of rent expense over the remaining terms of our master leases. As of September 30, 2019 and December 31, 2018, we had outstanding rent due and payable to SNH of $10,877 and $18,781 , respectively, which amounts are included in due to related persons in our condensed consolidated balance sheets. Under our leases with SNH, we are required to operate continuously and maintain, at our expense, the leased communities in good order and repair, including structural and non-structural components. We may request that SNH purchase certain improvements to the leased communities in return for increases in annual rent 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. We sold to SNH $14,749 of improvements to communities leased from SNH for the nine months ended September 30, 2018 . As a result, the annual rent payable by us to SNH increased by approximately $1,177 . Pursuant to the Transaction Agreement, the improvements we sold to SNH for the communities we leased from SNH during the nine months ended September 30, 2019 did not result in increased rent payable by us to SNH. As of September 30, 2019 , our assets held for sale included $2,243 for similar improvements to communities leased from SNH that SNH has agreed to purchase from us. In accordance with FASB ASC Topic 840, Leases , the sale and leaseback transaction we completed in June 2016 with SNH qualified for sale-leaseback accounting and we classified the related lease as an operating lease. Accordingly, the gain generated from the sale of $82,644 was deferred and was being amortized as a reduction of rent expense over the initial term of the related lease. In accordance with our adoption of Topic 842 effective January 1, 2019, we recorded through retained earnings our total deferred gain as of that date. Since January 1, 2019, we and SNH have sold to third parties 18 SNFs located in California, Kansas, Iowa and Nebraska that SNH owned and that we leased from SNH for an aggregate sales price of approximately $29,500 , excluding closing costs. As a result of these sales, the annual minimum rent payable to SNH by us under our master leases with SNH was reduced in accordance with the Transaction Agreement. We recorded a loss of $749 for the nine months ended September 30, 2019 , as a result of settling certain liabilities associated with the sale of 15 of these 18 SNFs, which amount is included in loss (gain) on sale of senior living communities in our condensed consolidated statements of operations. We did not receive any proceeds from these sales. In April 2019, we and SNH entered into an agreement to sell to a third party two SNFs located in Wisconsin that SNH owns and leases to us for an aggregate sales price of approximately $11,000 , excluding closing costs. This sale agreement was terminated in August 2019. Previously, in accordance with ASC 360, these two SNFs met the conditions to be classified as held for sale. Despite the termination of this sale agreement, these SNFs remain classified as held for sale as of September 30, 2019 as a result of our and SNH's agreement to terminate our five master leases with SNH pursuant to the Transaction Agreement and are included in the amounts disclosed above regarding our assets held for sale. In June 2018, we and SNH sold one SNF to a third party, which had been previously leased to us, located in California for a sales price of approximately $6,500 , excluding closing costs. Pursuant to the terms of our lease with SNH, as a result of this sale, our annual rent payable to SNH decreased by 10.0% of the net proceeds that SNH received from this sale, in accordance with the terms of the applicable lease. We did not receive any proceeds from this sale. Also in June 2018, 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, as a result of this acquisition, our annual rent payable to SNH increased by $14 in accordance with the terms of such lease. Senior Living Communities Leased from HCP . As of September 30, 2019 , 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 2.0% , but not greater than 4.0% , depending on increases in certain cost of living indexes and expires on April 30, 2028 and includes one 10 year renewal option. Rent expense is recognized for actual rent paid plus or minus a straight line adjustment for the minimum lease escalators, which amount is not material to our condensed consolidated financial statements. The right of use asset balance has been decreased for the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements. The following table is a summary of our leases with SNH and with HCP as of September 30, 2019 : Future Minimum Rents for the Twelve Months Ending September 30, Number of Properties Current Expiration Date Remaining Renewal Options Annual Minimum Rent as of September 30, 2019 2020 2021 2022 2023 2024 Thereafter Total IBR Lease Liability (1) 1. Lease No. 1 for SNFs and independent and assisted living communities 73 December 31, 2024 Two 15-year renewal options. $ 31,226 $ 31,226 $ 31,226 $ 31,226 $ 31,226 $ 7,806 $ — $ 163,936 4.53 % $ 145,675 2. Lease No. 2 for SNFs and independent and assisted living communities 39 June 30, 2026 Two 10-year renewal options. 39,318 39,318 39,318 39,318 39,318 39,318 29,491 265,399 4.64 % 227,483 3. Lease No. 3 for independent and assisted living communities 17 December 31, 2028 Two 15-year renewal options. 26,679 26,679 26,679 26,679 26,679 26,679 86,706 246,780 4.6 % 200,687 4. Lease No. 4 for SNFs and independent and assisted living communities 28 April 30, 2032 Two 15-year renewal options. 25,642 25,642 25,642 25,642 25,642 25,642 168,804 322,656 4.64 % 244,125 5. Lease No. 5 for independent and assisted living communities 9 December 31, 2028 Two 15-year renewal options. 6,921 6,921 6,921 6,921 6,921 6,921 22,489 64,015 4.6 % 52,059 6. One HCP lease 4 April 30, 2028 One 10-year renewal option. 2,839 2,896 2,948 3,005 3,073 3,134 8,382 26,277 4.6 % 21,555 Totals 170 $ 132,625 $ 132,682 $ 132,734 $ 132,791 $ 132,859 $ 109,500 $ 315,872 $ 1,089,063 $ 891,584 (1) Total lease liability does not include the lease liability related to our headquarters of $1,675 . Senior Living Communities Managed for the Account of SNH and its Related Entities . As of September 30, 2019 and 2018 , we managed 77 and 75 senior living communities, respectively, for the account of SNH. We earned base management fees of $3,763 and $3,597 from the senior living communities we managed for the account of SNH for the three months ended September 30, 2019 and 2018 , respectively, and $11,284 and $10,486 for the nine months ended September 30, 2019 and 2018 , respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we managed for the account of SNH of $221 and $344 for the three months ended September 30, 2019 and 2018 , respectively, and $568 and $714 for the nine months ended September 30, 2019 and 2018 , respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations. Pursuant to the Transaction Agreement, we and SNH have agreed to replace our long term management and pooling agreements with the New Management Agreements, subject to certain conditions and the receipt of various approvals. During the first quarter of 2018, we sold two senior living communities pursuant to a transaction agreement we entered with SNH in November 2017, or the 2017 transaction agreement, 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 and premiums of $17,356 , of which the principal amount of $16,776 was assumed by SNH. These transactions are accounted for in accordance with ASU No. 2014-09, in particular ASC 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 rather than continuing involvement in the ownership of the real estate. We recorded a gain of $0 and $5,684 for the three and nine months ended September 30, 2018 , respectively, as a result of the sale of these two senior living communities, which gain is included in loss (gain) on sale of senior living communities in our condensed consolidated statements of operations. In June 2018, we sold to SNH the remaining two senior living communities pursuant to the 2017 transaction agreement for an aggregate sales price of $23,300 . These two senior living communities had an aggregate carrying value of $5,163 , net of mortgage debt and premiums of $17,226 , of which the principal amount of $16,588 was assumed by SNH. These transactions are accounted for in accordance with ASU No. 2014-09, in particular ASC Topic 610 and related ASUs, effective with our adoption of these new ASUs on January 1, 2018. We recorded a gain of $0 and $1,549 for the three and nine months ended September 30, 2018 , respectively, as a result of the sale of these two senior living communities, which gain is included in loss (gain) on sale of senior living communities in our condensed consolidated statements of operations. We now manage for SNH’s account, pursuant to management and pooling agreements, the senior living communities that we sold to SNH pursuant to the 2017 transaction agreement. We also provide certain other services to residents at some of the senior living communities we manage for the account of 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 $1,478 and $1,584 for the three months ended September 30, 2019 and 2018 , respectively, and $4,667 and $4,944 for the nine months ended September 30, 2019 and 2018 , 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 condensed consolidated statements of operations. In order to accommodate certain requirements of New York healthcare licensing laws, a part of the senior living community SNH owns, and we manage, located in Yonkers, New York is subleased by a subsidiary of SNH to D&R Yonkers LLC. As of September 30, 2019 , SNH’s president and chief operating officer and its chief financial officer and treasurer were the members of D&R Yonkers LLC; until they became the members in September 2019, the members previously were SNH’s former president and chief operating officer and our former Executive Vice President, Chief Financial Officer and Treasurer during the remainder of the periods presented. We treat the part of this senior living community that we manage for D&R Yonkers LLC and the part of this senior living community that we manage for the account of SNH as one senior living community. We earned management fees of $69 and $68 for the three months ended September 30, 2019 and 2018 , respectively, and $208 for each of the nine months ended September 30, 2019 and 2018 , respectively, under this management arrangement with D&R Yonkers LLC, which amounts are included in management fee revenue in our condensed consolidated statements of operations. |
