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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________ 
Commission File Number: 001-36499 
New Senior Investment Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
80-0912734
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
(212) 479-3140
(Registrant’s telephone number, including area code) 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes  No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 82,148,869 shares outstanding as of May 4, 2018.



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of New Senior Investment Group Inc.’s (“New Senior,” the “Company,” “we,” “us” or “our”) investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to: 
uncertainty regarding the outcome of our ongoing exploration of strategic alternatives, including whether it will result in any transaction being consummated;
risks associated with the anticipated agreements contemplating termination of the triple net leases with certain affiliates of Holiday Retirement (“Holiday”);
our ability to comply with the terms of our financings, which depends in part on the performance of our operators;
any increase in our borrowing costs as a result of rising interest rates or other factors;
our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due or as needed to comply with the terms of our covenants or to facilitate our ability to sell assets;
our ability to manage our liquidity and sustain distributions to our stockholders, particularly in light of the cash shortfall described in our risk factors under Item 1A. and under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”;
our dependence on our property managers and tenants to operate our properties successfully and in compliance with the terms of our agreements with them, applicable law and the terms of our financings;
factors affecting the performance of our properties, such as increases in costs (including, but not limited to, the costs of labor, supplies, insurance and property taxes);
concentration risk with respect to Holiday, which, for the three months ended March 31, 2018, accounted for 71.6% of net operating income (“NOI”) from our Managed Properties segment and 93.4% of NOI from our Triple Net Lease Properties segment;
risks associated with a change of control in the ownership or senior management of Holiday;
our ability and the ability of our property managers and tenants to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers;
changes of federal, state and local laws and regulations relating to employment, fraud and abuse practices, Medicaid reimbursement and licensure, etc., including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations or our property managers or tenants;
the ability of our property managers, tenants and their respective guarantors to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to us and third parties;
the ability and willingness of our tenants to make the rent and other payments due to us under our leases, and the possibility that we will not be able to derive the full benefit of the original terms of our leases;
our ability to reposition our leased properties on the same or better terms upon the expiration or earlier termination of our leases;
the quality and size of our investment pipeline, our ability to execute investments at attractive risk-adjusted prices, our ability to finance our investments on favorable terms, and our ability to deploy investable cash in a timely manner;
our ability to sell properties on favorable terms and to realize the anticipated benefits from any such dispositions;
changes in economic conditions generally and the real estate, senior housing and bond markets specifically;
our stock price performance and any disruption or lack of access to the capital markets or other sources of financing;
the impact of any current or future legal proceedings and regulatory investigations and inquiries on us, FIG LLC (our “Manager”) or our operators;
potential conflicts of interest relating to our external management structure, the fact that Holiday is majority-owned by private equity funds managed by our Manager (or its affiliates), or other factors, and our ability to effectively manage and resolve actual, potential or perceived conflicts of interest;
effects of the recently completed merger of Fortress Investment Group LLC with affiliates of SoftBank Group Corp. (“Softbank”);



our ability to maintain effective internal control over financial reporting and our reliance on our operators for timely delivery of accurate property-level financial results;
our ability to maintain our qualification as a Real Estate Investment Trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business; and
our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”) and the fact that maintaining such exemption imposes limits on our business strategy.

Although we believe that the expectations reflected in any forward-looking statements contained herein are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.
 
Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

SPECIAL NOTE REGARDING EXHIBITS
 
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding contractual provisions are required to make the statements in this report not misleading.



NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
FORM 10-Q

INDEX
  
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
 
March 31, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Real estate investments:
 

 
 

Land
$
182,238

 
$
182,238

Buildings, improvements and other
2,333,016

 
2,329,524

Accumulated depreciation
(297,035
)
 
(275,794
)
Net real estate property
2,218,219

 
2,235,968

Acquired lease and other intangible assets
69,139

 
264,438

Accumulated amortization
(59,406
)
 
(249,198
)
Net real estate intangibles
9,733

 
15,240

Net real estate investments
2,227,952

 
2,251,208

 
 
 
 
Cash and cash equivalents
120,834

 
137,327

Straight-line rent receivables
85,771

 
82,445

Receivables and other assets, net
38,190

 
37,047

Total Assets
$
2,472,747

 
$
2,508,027

 
 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

Mortgage notes payable, net
$
1,902,901

 
$
1,907,928

Due to affiliates
8,957

 
9,550

Accrued expenses and other liabilities
89,709

 
84,664

Total Liabilities
$
2,001,567

 
$
2,002,142

 
 
 
 
Commitments and contingencies (Note 13)


 


 
 
 
 
Equity


 


Preferred stock $0.01 par value, 100,000,000 shares authorized and none issued or outstanding as of both March 31, 2018 and December 31, 2017
$

 
$

Common stock $0.01 par value, 2,000,000,000 shares authorized, 82,148,869 shares issued and outstanding as of both March 31, 2018 and December 31, 2017
821

 
821

Additional paid-in capital
898,135

 
898,132

Accumulated deficit
(427,776
)
 
(393,068
)
Total Equity
$
471,180

 
$
505,885

 
 
 
 
Total Liabilities and Equity
$
2,472,747

 
$
2,508,027


See notes to consolidated financial statements.

1

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)



 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Resident fees and services
$
75,343

 
$
86,726

Rental revenue
23,875

 
28,247

Total revenues
99,218

 
114,973

 
 
 
 
Expenses
 

 
 

Property operating expense
52,099

 
59,584

Depreciation and amortization
26,725

 
37,518

Interest expense
21,923

 
23,066

Acquisition, transaction and integration expense
2,888

 
348

Management fees and incentive compensation to affiliate
3,752

 
3,824

General and administrative expense
3,752

 
4,011

Loss on extinguishment of debt

 
375

Other expense
1,380

 
135

Total expenses
112,519

 
128,861

Gain on sale of real estate

 
4,199

Loss before income taxes
(13,301
)
 
(9,689
)
Income tax expense
48

 
206

Net loss
$
(13,349
)
 
$
(9,895
)
 
 
 
 
Net loss per share of common stock
 
 
 
Basic and diluted (A)
$
(0.16
)
 
$
(0.12
)
 
 
 
 
Weighted average number of shares of common stock outstanding
 
 
 
Basic and diluted (B)
82,148,869

 
82,140,750

 
 
 
 
Dividends declared per share of common stock
$
0.26

 
$
0.26

 

(A)
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period.

(B)
All outstanding options were excluded from the diluted share calculation as their effect would have been anti-dilutive.

See notes to consolidated financial statements.

2

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
(dollars in thousands, except share data)



 
 
 Common Stock
 
 
 
 
 
 
 
 
 Shares
 
 Amount
 
Accumulated Deficit
 
Additional Paid-in Capital
 
 Total Equity
Equity at December 31, 2017
 
82,148,869

 
$
821

 
$
(393,068
)
 
$
898,132

 
$
505,885

Fair value of stock options issued
 

 

 

 
3

 
3

Dividends declared
 

 

 
(21,359
)
 

 
(21,359
)
Net loss
 

 

 
(13,349
)
 

 
(13,349
)
Equity at March 31, 2018
 
82,148,869

 
$
821


$
(427,776
)
 
$
898,135

 
$
471,180

 
See notes to consolidated financial statements. 

3

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)



 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows From Operating Activities
 

 
 

Net loss
$
(13,349
)
 
$
(9,895
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation of tangible assets and amortization of intangible assets
26,749

 
37,555

Amortization of deferred financing costs
2,132

 
2,465

Amortization of deferred revenue, net
331

 
190

Amortization of premium on mortgage notes payable

 
(144
)
Non-cash straight line rent
(3,326
)
 
(4,581
)
Gain on sale of real estate

 
(4,199
)
Loss on extinguishment of debt

 
375

Provision for uncollectible receivables
345

 
645

Other non-cash expense
1,322

 
87

Changes in:
 

 
 

Receivables and other assets, net
(796
)
 
(198
)
Due to affiliates
(593
)
 
(549
)
Accrued expenses and other liabilities
2,915

 
(297
)
Net cash provided by operating activities
$
15,730

 
$
21,454

Cash Flows From Investing Activities
 

 
 

Proceeds from the sale of real estate, net
$

 
$
14,956

Capital expenditures, net of insurance proceeds
(3,561
)
 
(4,386
)
Net cash (used in) provided by investing activities
$
(3,561
)
 
$
10,570

Cash Flows From Financing Activities
 

 
 

Principal payments of mortgage notes payable
$
(7,159
)
 
$
(4,900
)
Repayments of mortgage notes payable

 
(14,730
)
Payment of exit fee on extinguishment of debt

 
(178
)
Payment of deferred financing costs
(587
)
 

Purchase of interest rate caps
(280
)
 

Payment of common stock dividend
(21,359
)
 
(21,357
)
Net cash used in financing activities
$
(29,385
)
 
$
(41,165
)
Net decrease in cash, cash equivalents and restricted cash
(17,216
)
 
(9,141
)
Cash, cash equivalents and restricted cash, beginning of period
157,485

 
97,517

Cash, cash equivalents and restricted cash, end of period
$
140,269

 
$
88,376

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 

Cash paid during the period for interest expense
$
19,633

 
$
20,679

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Issuance of common stock
$

 
$
139


Continued on next page




4

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)



 
Three Months Ended March 31,
 
2018
 
2017
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents
$
137,327

 
$
58,048

Restricted cash (A)
20,158

 
39,469

Total, beginning of period
$
157,485

 
$
97,517

 
 
 
 
Cash and cash equivalents
$
120,834

 
$
50,338

Restricted cash (A)
19,435

 
38,038

Total, end of period
$
140,269

 
$
88,376


(A)
Primarily consists of (i) amounts held by lenders in tax, insurance, replacement reserve and other escrow accounts and (ii) security deposits and is included in “Receivables and other assets, net” in the Consolidated Balance Sheets.

See notes to consolidated financial statements.


5

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)



1.
ORGANIZATION
 
New Senior is a REIT primarily focused on investing in private pay senior housing properties. As of March 31, 2018, we owned a diversified portfolio of 133 primarily private pay senior housing properties located across 37 states. We are listed on the New York Stock Exchange (“NYSE”) under the symbol “SNR” and are headquartered in New York, New York.
 
We operate in two reportable segments: (1) Managed Properties and (2) Triple Net Lease Properties.
 
Managed Properties – We have engaged property managers to manage 81 of our properties on a day-to-day basis under the Managed Properties segment. These properties consist of 51 independent living (“IL”) facilities and 30 assisted living/memory care (“AL/MC”) facilities. Our managed properties are managed by Holiday Retirement (“Holiday”), a portfolio company that is majority owned by private equity funds managed by an affiliate of FIG LLC (the “Manager”), a subsidiary of Fortress Investment Group LLC (“Fortress”), FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of the Manager, Jerry Erwin Associates, Inc. (“JEA”), Thrive Senior Living LLC (“Thrive”), Grace Management, Inc. (“Grace”) and Watermark Retirement Communities, Inc. (“Watermark”), collectively, the “Property Managers,” under property management agreements (the “Property Management Agreements”). Under the Property Management Agreements, the Property Managers are responsible for the day-to-day operations of our senior housing properties and are entitled to a management fee in accordance with the terms of the Property Management Agreements.

Our Property Management Agreements have initial five-year or ten-year terms, with successive, automatic one-year renewal periods. We pay property management fees of 5% to 7% of effective gross income pursuant to our Property Management Agreements with Holiday and, in some cases, Holiday is eligible to earn an incentive fee based on operating performance. We pay property management fees of 3% to 7% of gross revenues and, for certain properties, i) a property management fee based on a percentage of net operating income and ii) when eligible, an incentive fee based on operating performance, pursuant to our property management agreements with other managers.

Triple Net Lease Properties – We own 52 properties subject to triple net lease arrangements (substantially all of which are leased to Holiday). These properties consist of 51 IL properties and 1 rental Continuing Care Retirement Communities (“CCRC”) property. In a triple net lease arrangement, the lessee agrees to operate and maintain the property at its own expense, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. Our triple net lease agreements have initial terms of approximately 15 or 17 years and include renewal options and annual rent increases ranging from 2.5% to 4.5%.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP’’) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of New Senior and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. We consolidate those entities in which we have control over significant operating, financial and investing decisions of the entity. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2017, as filed with the SEC.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.
 

6

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


Use of Estimates

Management is required to make estimates and assumptions when preparing financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the accompanying consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from management’s estimates.

Significant Accounting Policies

There were no material changes to our significant accounting policies disclosed in our Form 10-K for the year ended December 31, 2017.

Recently Adopted Accounting Pronouncements

On January 1, 2018, we adopted ASU 2014-09, Revenues from Contracts with Customers (“ASC 606”) using the modified retrospective method of adoption. This standard requires revenue to 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. The adoption did not result in an adjustment to beginning retained earnings and did not have a significant impact on our consolidated financial statements. Substantially all of our revenue is generated through our triple net lease and managed property leasing arrangements, which are specifically excluded from ASC 606, and are accounted for under other applicable GAAP standards. We account for ancillary revenue under ASC 606. The timing and pattern of revenue recognition of our ancillary revenue under ASC 606 is consistent with that under the prior accounting model.

Additionally, real estate sales are within the scope of ASC 606, 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 these models, 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 earlier. Sales of our real estate are generally not executory across points in time and our performance obligations from these contracts are expected to fall within a single period.

On January 1, 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which requires that the statement of cash flows include a reconciliation and explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard impacts the presentation of our Consolidated Statements of Cash Flows as activity between cash and cash equivalents and restricted cash is no longer presented in our operating, financing or investing activities. Upon adoption, the changes in classification within the statement of cash flows is applied retrospectively to all periods presented. The adoption of this standard resulted in a $0.4 million decrease to the amount of net cash provided by operating activities and a $1.1 million decrease to the amount of net cash provided by investing activities for the three months ended March 31, 2017.

On January 1, 2018, we adopted ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain cash receipts and cash payments are to be presented and classified on the statement of cash flows. The adoption of this standard did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases. This standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We continue to assess the guidance and the impact it may have on our consolidated financial statements and have initiated a review to identify non-lease components, if any, in our lease agreements. 


7

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. This standard replaces the current incurred loss methodology with a methodology that reflects expected credit losses. Under this methodology, a company would recognize an impairment allowance equal to its current estimate of all contractual cash flows that it does not expect to collect from financial assets measured at amortized cost. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted beginning after December 15, 2018. We are assessing the impact this guidance may have on our consolidated financial statements.

3.
DISPOSITIONS

We did not have any dispositions during the three months ended March 31, 2018.

During the three months ended March 31, 2017, we sold two AL/MC properties in the Managed Properties segment for a sale price of $15.5 million, and recognized a gain on sale of $4.2 million, net of selling costs. In connection with this sale, we repaid $14.7 million of debt.

4.
SEGMENT REPORTING

We operate in two reportable business segments: Managed Properties and Triple Net Lease Properties. Under our Managed Properties segment, we invest in senior housing properties throughout the United States and engages property managers to manage those senior housing properties. Under our Triple Net Lease Properties segment, we invest in senior housing and healthcare properties throughout the United States and lease those properties to healthcare operating companies under triple net leases that obligate the tenants to pay all property-related expenses, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees.

We evaluate performance of the combined properties in each reportable business segment based on segment NOI. We define NOI as total revenues less property-level operating expenses, which include property management fees and travel cost reimbursements. We believe that net income, as defined by GAAP, is the most appropriate earnings measurement. However, we believe that segment NOI serves as a useful supplement to net income because it allows investors, analysts and management to measure unlevered property-level operating results and to compare our operating results between periods and to the operating results of other real estate companies on a consistent basis. Segment NOI should not be considered as an alternative to net income as determined in accordance with GAAP.

Depreciation and amortization, interest expense, acquisition, transaction and integration expense, management fees and incentive compensation to affiliate, general and administrative expense, loss on extinguishment of debt, other expense, gain on sale of real estate and income tax expense are not allocated to individual segments for purposes of assessing segment performance. There are no intersegment sales or transfers.

8

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
Triple Net Lease Properties
 
Managed
Properties
 
Consolidated
 
Triple Net Lease Properties
 
Managed
Properties
 
Consolidated
Revenues
 

 
 

 
 

 
 
 
 
 
 
Resident fees and services
$

 
$
75,343

 
$
75,343

 
$

 
$
86,726

 
$
86,726

Rental revenue
23,875

 

 
23,875

 
28,247

 

 
28,247

Less: Property operating expense

 
52,099

 
52,099

 

 
59,584

 
59,584

Segment NOI
$
23,875

 
$
23,244

 
$
47,119

 
$
28,247

 
$
27,142

 
$
55,389

 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 

 
26,725

 
 
 
 
 
37,518

Interest expense
 

 
 

 
21,923

 
 
 
 
 
23,066

Acquisition, transaction and integration expense
 

 
 

 
2,888

 
 
 
 
 
348

Management fees and incentive compensation to affiliate
 

 
 

 
3,752

 
 
 
 
 
3,824

General and administrative expense
 

 
 

 
3,752

 
 
 
 
 
4,011

Loss on extinguishment of debt
 
 
 
 

 
 
 
 
 
375

Other expense
 
 
 
 
1,380

 
 
 
 
 
135

Total expenses
 
 
 
 
60,420

 
 
 
 
 
69,277

Gain on sale of real estate
 
 
 
 

 
 
 
 
 
4,199

Loss before income taxes
 
 
 
 
(13,301
)
 
 
 
 
 
(9,689
)
Income tax expense
 

 
 

 
48

 
 
 
 
 
206

Net loss
 

 
 

 
$
(13,349
)
 
 
 
 
 
$
(9,895
)

Property operating expense includes property management fees, property-level payroll expense and travel reimbursement costs. See Note 10 for additional information on these expenses related to Blue Harbor and Holiday.

Assets by reportable business segment are reconciled to total assets as follows:
 
March 31, 2018
 
December 31, 2017

Amount
 
Percentage
 
Amount
 
Percentage
Managed Properties
$
1,419,198

 
57.4
%
 
$
1,430,957

 
57.1
%
Triple Net Lease Properties
970,246

 
39.2
%
 
980,666

 
39.1
%
All other assets (A)
83,303

 
3.4
%
 
96,404

 
3.8
%
Total assets
$
2,472,747

 
100.0
%
 
$
2,508,027

 
100.0
%

(A)
Primarily consists of corporate cash which is not directly attributable to our reportable business segments.

Rental revenue attributable to our triple net leases with Holiday accounted for 22.5% and 19.4% of our total revenues for the three months ended March 31, 2018 and 2017, respectively.


9

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


The following table presents the percentage of total revenues by geographic location:
 
As of and for the three months ended March 31, 2018
 
As of and for the three months ended March 31, 2017
 
Number of Communities
 
% of Total Revenue
 
Number of Communities
 
% of Total Revenue
Florida
15

 
12.9
%
 
24

 
19.2
%
California
11

 
11.6
%
 
11

 
9.7
%
Texas
13

 
9.2
%
 
19

 
12.2
%
North Carolina
9

 
7.5
%
 
9

 
6.5
%
Pennsylvania
7

 
7.2
%
 
7

 
5.8
%
Oregon
9

 
5.8
%
 
9

 
4.8
%
Other
69

 
45.8
%
 
71

 
41.8
%
Total
133

 
100.0
%
 
150

 
100.0
%

5.
REAL ESTATE INVESTMENTS
 
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
182,238

 
$

 
$
182,238

 
$
182,238

 
$

 
$
182,238

Building and improvements
2,218,277

 
(224,335
)
 
1,993,942

 
2,216,461

 
(208,540
)
 
2,007,921

Furniture, fixtures and equipment
114,739

 
(72,700
)
 
42,039

 
113,063

 
(67,254
)
 
45,809

Total real estate investments
$
2,515,254

 
$
(297,035
)
 
$
2,218,219

 
$
2,511,762

 
$
(275,794
)
 
$
2,235,968

 
Depreciation expense was $21.2 million and $23.2 million for the three months ended March 31, 2018 and 2017, respectively.

The following table summarizes our real estate intangibles:
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted Average Remaining Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted Average Remaining Amortization Period
Above/below market lease intangibles, net
$
1,607

 
$
(404
)
 
$
1,203

 
12.7 years
 
$
1,607

 
$
(380
)
 
$
1,227

 
12.9 years
In-place lease and other intangibles
67,532

 
(59,002
)
 
8,530

 
29.4 years
 
262,831

 
(248,818
)
 
14,013

 
18.3 years
Total intangibles
$
69,139

 
$
(59,406
)
 
$
9,733

 
 
 
$
264,438

 
$
(249,198
)
 
$
15,240

 
 
 
Amortization expense was $5.5 million and $14.3 million for the three months ended March 31, 2018 and 2017, respectively.

During the three months ended March 31, 2018, we wrote-off $195.3 million of fully amortized in-place lease and other intangible assets.


10

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


We evaluated long-lived assets, primarily consisting of our real estate investments, for impairment indicators. In performing this evaluation, market conditions and our current intentions with respect to holding or disposing of the asset are considered. Where indicators of impairment are present, we evaluated whether the sum of the expected future undiscounted cash flows is less than book value. Based on such assessment, the future undiscounted cash flows of the underlying operations exceeds the carrying value of such real estate investments, including definite lived intangible assets. Therefore, we did not recognize any impairment loss during the periods presented.

6.
STRAIGHT-LINE RENT RECEIVABLES

Rental revenue from the Triple Net Lease Properties segment is recognized on a straight-line basis over the applicable term of the lease when collectability is reasonably assured. Recognizing rental revenue on a straight-line basis typically results in recognizing revenue in excess of cash amounts contractually due from our tenants during the first half of the lease term, creating a straight-line rent receivable. Our straight-line rent receivable was $85.8 million and $82.4 million as of March 31, 2018 and December 31, 2017, respectively.

We assess the collectability of straight-line rent receivables on an ongoing basis. This assessment is based on several qualitative and quantitative factors, including and as appropriate, the payment history of the triple net lease tenant, the tenant’s ability to satisfy its lease obligations, the value of the underlying collateral or deposit, if any, and current economic conditions. We considered the timeliness of lease payments, compliance with lease terms, security and other deposits posted by the tenants and collateral provided by the lease guarantors and determined no reserve was necessary for the periods presented.

7.
RECEIVABLES AND OTHER ASSETS, NET

 
March 31, 2018
 
December 31, 2017
Escrows held by lenders (A)
$
16,659

 
$
16,936

Prepaid expenses
4,355

 
4,490

Resident receivables, net
2,826

 
2,672

Deferred tax assets, net
5,413

 
5,475

Security deposits
2,776

 
3,222

Income tax receivable
816

 
802

Other assets and receivables
5,345

 
3,450

Total receivables and other assets
$
38,190

 
$
37,047


(A)
Represents amounts held by lenders in tax, insurance, replacement reserve and other escrow accounts that are related to mortgage notes collateralized by New Senior’s properties.

The following table summarizes the allowance for doubtful accounts and the related provision for uncollectible receivables: 
 
Three Months Ended March 31,
 
2018
 
2017
Balance, beginning of period
$
938

 
$
976

Provision for uncollectible receivables
345

 
645

Write-offs, net of recoveries
(448
)
 
(502
)
Balance, end of period
$
835

 
$
1,119


The provision for resident receivables and related write-offs are included in “Property operating expense” in the Consolidated Statements of Operations.


11

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


8.
MORTGAGE NOTES PAYABLE, NET
 
 
March 31, 2018
 
December 31, 2017
 
Outstanding Face Amount
 
Carrying Value (A)
 
Maturity Date
 
Stated Interest Rate
 
Weighted Average Maturity (Years)
 
Outstanding Face Amount
 
Carrying Value (A)
Managed Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate
$
562,985

 
$
559,806

 
Aug 2019 - Sep 2025
 
3.65% to 4.93%
 
6.3
 
$
563,526

 
$
560,182

Floating Rate (B)
638,043

 
633,668

 
Oct 2020 - May 2022
 
1M LIBOR + 2.20% to 1M LIBOR + 2.70%
 
3.8
 
640,880

 
636,166

Triple Net Lease Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate (C)
666,102

 
658,686

 
Jan 2021 - Jan 2024
 
3.80% to 7.40%
 
4.1
 
669,656

 
660,646

Floating Rate (D)
50,809

 
50,741

 
Apr 2019
 
3M LIBOR + 3.00%
 
1.1
 
51,036

 
50,934

Total
$
1,917,939

 
$
1,902,901

 
 
 
 
 
4.6
 
$
1,925,098

 
$
1,907,928


(A)
The totals are reported net of deferred financing costs of $15.0 million and $17.2 million as of March 31, 2018 and December 31, 2017, respectively.
(B)
Substantially all of these loans have LIBOR caps that range between 3.30% and 3.71% as of March 31, 2018.
(C)
Includes loans with an outstanding face amount of $335.0 million and $285.1 million, as of March 31, 2018, for which we bought down the interest rates to 4.00% and 3.80%, respectively, through January 2019. The interest rates will increase to 4.99% and 4.55%, respectively, thereafter.
(D)
We have an option to extend the maturity date to April 2020, subject to a fee of 0.125% of the then-outstanding principal balance.

During the three months ended March 31, 2017, we repaid $14.7 million of debt associated with the sale of two properties in the Managed Properties segment and recognized a loss on extinguishment of debt of $0.4 million, which represents the write-off of related unamortized deferred financing costs and other exit fees.

During the three months ended March 31, 2018, we exercised an option to extend a balloon payment of $50.7 million from April 2018 to April 2019.

The carrying value of the collateral relating to the fixed rate and floating rate mortgages was $1.5 billion and $0.8 billion as of both March 31, 2018 and December 31, 2017, respectively.
  
Our mortgage notes payable contain various customary financial and other covenants, in some cases including Debt Service Coverage Ratio and Project Yield, as defined in the agreements. We were in compliance with the covenants in our mortgage notes payable agreements as of March 31, 2018.
  
The fair values of mortgage notes payable as of both March 31, 2018 and December 31, 2017 was $1.9 billion. Mortgage notes payable are not measured at fair value in the Consolidated Balance Sheets. The disclosed fair value of mortgage notes payable, classified as level 3 within the fair value hierarchy, is based on a discounted cash flow valuation model. Significant inputs in the model include amounts and timing of expected future cash flows and market yields which are constructed based on inputs implied from similar debt offerings.


12

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


Interest rate caps

During the three months ended March 31, 2018, we renewed an interest rate cap on our floating rate debt which carries a LIBOR cap rate of 3.66%, has a notional value of $591.2 million and is effective through April 1, 2020. Our interest rate caps are level 2 instruments and we estimate the fair value based on pricing models that consider inputs including forward yield curves, cap strike rates, cap volatility and discount rates. We recognized fair value losses of $0.1 million for both the three months ended March 31, 2018 and 2017 which are included in “Other expense” in the Consolidated Statements of Operations and “Other non-cash expense” in the Consolidated Statements of Cash Flows. The fair value was $0.2 million as of March 31, 2018 and is included in “Receivables and other assets, net” in the Consolidated Balance Sheets. The fair value as of December 31, 2017 was not material.

9.
ACCRUED EXPENSES AND OTHER LIABILITIES
 
 
March 31, 2018
 
December 31, 2017
Security deposits payable
$
47,103

 
$
46,291

Escrow liabilities (A)
6,100

 
6,664

Accounts payable
12,105

 
9,794

Mortgage interest payable
6,455

 
6,297

Deferred community fees, net
4,772

 
4,612

Rent collected in advance
2,745

 
2,091

Property tax payable
3,563

 
3,331

Other liabilities
6,866

 
5,584

Total accrued expenses and other liabilities
$
89,709

 
$
84,664


(A)
Represents amounts held by lenders in tax, insurance, replacement reserve and other escrow accounts that are related to mortgage notes collateralized by New Senior’s triple net lease properties.

10.
TRANSACTIONS WITH AFFILIATES
 
Management Agreements

We are party to a management agreement (the “Management Agreement”) with the Manager, under which the Manager advises us on various aspects of our business and manages our day-to-day operations, subject to the supervision of our board of directors. For its management services, the Manager is entitled to a base management fee of 1.5% per annum of our gross equity. Gross equity is generally defined as the equity invested by Drive Shack Inc. (“Drive Shack”) (including cash contributed to us) as of the completion of the spin-off from Drive Shack, plus the aggregate offering price from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions (calculated without regard to depreciation and amortization) and repurchases of common stock, calculated and payable monthly in arrears in cash. We incurred management fees of $3.8 million during both the three months ended March 31, 2018 and 2017, under the Management Agreement, which are included in “Management fees and incentive compensation to affiliate” in the Consolidated Statements of Operations. As of March 31, 2018 and December 31, 2017, we had a payable for management fees of $1.2 million and $1.3 million, respectively, which is included in “Due to affiliates” in the Consolidated Balance Sheets.
 

13

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


The Manager is entitled to receive, on a quarterly basis, incentive compensation on a cumulative, but not compounding basis, in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) funds from operations (as defined in the Management Agreement) before the incentive compensation per share of common stock, plus (b) gains (or losses) from sales of property per share of common stock, plus (c) internal and third party acquisition-related expenses, plus (d) unconsummated transaction expenses, and plus (e) other non-routine items (as defined in the Management Agreement), exceed (2) an amount equal to (a) the weighted average value per share of the equity invested by Drive Shack in the assets of New Senior (including cash contributed to us) as of the completion of the spin-off and the price per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions, which shall be calculated without regard to depreciation and amortization and repurchases of common stock) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. The Manager did not earn incentive compensation during the three months ended March 31, 2018 or 2017. The Manager is also entitled to receive, upon the successful completion of an equity offering, options with respect to 10% of the number of shares sold in the offering with an exercise price equal to the price paid by the purchaser in the offering.

Because the Manager’s employees perform certain legal, accounting, due diligence, asset management and other services that outside professionals or outside consultants otherwise would perform, the Manager is paid or reimbursed, pursuant to the Management Agreement, for the cost of performing such tasks, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis. We are also required to pay all operating expenses, except those specifically required to be borne by the Manager under the Management Agreement. We are required to pay expenses that include, but are not limited to, issuance and transaction costs incidental to the sourcing, evaluation, acquisition, management, disposition, and financing of our investments, legal, underwriting, sourcing, asset management and accounting and auditing fees and expenses, the compensation and expenses of independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees or agents of the Manager for travel on our behalf, costs associated with any computer software or hardware that is used by us, costs to obtain liability insurance to indemnify directors and officers and the compensation and expenses of our transfer agent.

The following table summarizes our reimbursement to the Manager for costs incurred for tasks and other services performed by the Manager under the Management Agreement:
 
Three Months Ended March 31,
 
2018
 
2017
Included in:
 
 
 
General and administrative expense
$
1,777

 
$
2,020

Acquisition, transaction and integration expense
487

 
362

Total reimbursements to the Manager
$
2,264

 
$
2,382


As of March 31, 2018 and December 31, 2017, we had a payable for Manager reimbursements of $0.8 million and $1.3 million, respectively, which is included in “Due to affiliates” in the Consolidated Balance Sheets.

Property Management Agreements
 
Within our Managed Properties segment, we are party to Property Management Agreements with Blue Harbor, an affiliate of Fortress, and Holiday, a portfolio company that is majority owned by a private equity fund managed by an affiliate of Fortress, to manage most of its senior housing properties. Pursuant to these Property Management Agreements, we pay monthly property management fees. For AL/MC properties managed by Blue Harbor and Holiday, we pay management fees equal to 6% of effective gross income for the first two years and 7% thereafter. For IL properties managed by Blue Harbor and Holiday, we generally pay management fees equal to 5% of effective gross income. For certain property management agreements, we may also pay an incentive fee based on operating performance of the properties. No incentive fees were incurred during the three months ended March 31, 2018 and 2017. Property management fees are included in “Property operating expense” in the Consolidated Statements of Operations. Other amounts paid to affiliated managers that are included in property operating expense are payroll expense and travel reimbursement costs. The payroll expense is structured as a reimbursement to the Property Manager, who is the employer of record.


14

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


The following table summarizes property management fees and reimbursements paid to Property Managers affiliated with Fortress:
 
Three Months Ended March 31,
 
2018
 
2017
Property management fees
$
3,881

 
$
4,927

Travel reimbursement costs
56

 
85

Property-level payroll expenses
19,361

 
24,891


As of March 31, 2018 and December 31, 2017, we had payables for property management fees of $1.3 million and $1.4 million, respectively, and property-level payroll expenses of $5.6 million and $5.6 million, respectively, which are included in “Due to affiliates” in the Consolidated Balance Sheets. The Property Management Agreements with affiliated managers have initial terms of 5 or 10 years and provide for automatic one-year extensions after the initial term, subject to termination rights. 

Triple Net Lease Agreements

Within our Triple Net Lease segment, we are party to triple net leases with Holiday. Pursuant to the leases, the tenant is required to pay monthly rent payments in accordance with the lease terms. Such payments amounted to $19.2 million and $18.6 million for the three months ended March 31, 2018 and 2017, respectively.

11.
INCOME TAXES
 
New Senior is organized and conducts its operations to qualify as a REIT under the requirements of the Internal Revenue Code of 1986, as amended (the “Code”). However, certain of our activities are conducted through our taxable REIT subsidiary (“TRS”) and therefore are subject to federal and state income taxes at regular corporate tax rates.

The following table presents the provision for income taxes:
 
Three Months Ended March 31,
 
2018
 
2017
Current
 

 
 

Federal
$
(41
)
 
$

State and local
27

 
71

Total current provision
(14
)
 
71

Deferred
 

 
 

Federal
58

 
95

State and local
4

 
40

Total deferred provision
62

 
135

Total provision for income taxes
$
48

 
$
206



15

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


The following table presents the significant components of deferred tax assets:
 
March 31, 2018
 
December 31, 2017
Deferred tax assets:
 
 
 
Prepaid fees and rent
$
901

 
$
790

Net operating losses
4,055

 
4,050

Deferred rent
728

 
949

Tax credits

 
42

Other
74

 
99

Total deferred tax assets
5,758

 
5,930

Less valuation allowance

 

Net deferred tax assets
5,758

 
5,930

Deferred tax liabilities:
 
 
 
Depreciation and amortization
345

 
455

Total deferred tax liabilities
345

 
455

Total net deferred tax assets
$
5,413

 
$
5,475


In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by the TRS during the periods in which temporary differences become deductible and before the net operating loss carryforward expires. We have not recorded a valuation allowance against our deferred tax assets as of March 31, 2018 or December 31, 2017 as management believes that it is more likely than not that our deferred tax assets will be realized.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act includes a number of significant changes to existing U.S. corporate income tax laws, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. We measure deferred tax assets using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, our deferred tax assets were remeasured to reflect the reduction in the U.S. corporate income tax rate, resulting in a non-recurring $3.0 million increase in income tax expense for the year ended December 31, 2017 and a corresponding decrease of the same amount in our deferred tax assets as of December 31, 2017.

12.
EQUITY

In the first quarter of 2018, strike prices for outstanding options were reduced by $1.04, reflecting the portion of our 2017 dividends which were deemed return of capital.

In March 2018, we granted options to a new director relating to 5,000 shares of common stock, the grant date fair value of which was not material.

As of March 31, 2018, approximately 1.3 million shares of our common stock were held by Fortress, through its affiliates, and its principals.


16

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


13.
COMMITMENTS AND CONTINGENCIES
 
As of March 31, 2018, management believes there are no material contingencies that would affect our results of operations, cash flows or financial position.
 
Certain Obligations, Liabilities and Litigation
 
We are and may become subject to various obligations, liabilities, investigations, inquiries and litigation assumed in connection with or arising from our on-going business, as well as acquisitions, sales, leasing and other activities. These obligations and liabilities (including the costs associated with investigations, inquiries and litigation) may be greater than expected or may not be known in advance. Any such obligations or liabilities could have a material adverse effect on our financial position, cash flows and results of operations, particularly if we are not entitled to indemnification, or if a responsible third party fails to indemnify us.
  
Certain Tax-Related Covenants
 
If we are treated as a successor to Drive Shack under applicable U.S. federal income tax rules, and if Drive Shack failed to qualify as a REIT for a taxable year ending on or before December 31, 2015, we could be prohibited from electing to be a REIT. Accordingly, in the separation and distribution agreement entered into to effect our spin-off from Drive Shack (“Separation and Distribution Agreement”), Drive Shack (i) represented that it had no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Senior as necessary to enable us to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to us and our tax counsel with respect to the composition of Drive Shack’s income and assets, the composition of its stockholders and its operation as a REIT, and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Drive Shack’s taxable years ending on or before December 31, 2015 (unless Drive Shack obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that Drive Shack’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above).

Proceedings Indemnified and Defended by Third Parties

From time to time, we are party to certain legal actions, regulatory investigations and claims for which third parties are contractually obligated to indemnify, defend and hold us harmless. While we are presently not being defended by any tenant and other obligated third parties in these types of matters, there is no assurance that our tenants, their affiliates or other obligated third parties will defend us in these matters in the future, or that such parties will have sufficient assets, income and access to financing to enable them to satisfy their defense and indemnification obligations to us.

Environmental Costs
 
As a commercial real estate owner, we are subject to potential environmental costs. As of March 31, 2018, management is not aware of any environmental concerns that would have a material adverse effect on our financial position or results of operations.

Capital Improvement and Repair Commitments
 
We have agreed to make $1.0 million available for capital improvements during the 15 year lease periods to the triple net lease property under Watermark, none of which has been funded as of March 31, 2018. Upon funding these capital improvements, we will be entitled to a rent increase.


17

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2018
(dollars in tables in thousands, except share data)


14.
SUBSEQUENT EVENTS

These consolidated financial statements include a discussion of material events, if any, which have occurred subsequent to March 31, 2018 (referred to as subsequent events) through the issuance of the consolidated financial statements.

On May 9, 2018, we entered into an agreement (the “Lease Termination Agreement”) to terminate our triple net leases with affiliates of Holiday Retirement (collectively, “Holiday”). In exchange, we will receive $116 million of total consideration, including a $70 million termination payment and $46 million of retained security deposits. The effectiveness of the lease termination is subject to us completing a refinancing of the existing debt on the portfolio, which had an outstanding face amount of approximately $666 million and a coupon of 4.15% as of March 31, 2018, on or before May 21, 2018. We expect to refinance the existing debt with a one-year $720 million secured loan bearing interest at LIBOR plus 4.0% for the first six months and increasing by 50 basis points after the sixth monthly payment date and by an additional 50 basis points after the ninth monthly payment date. We expect to incur approximately $65 million of prepayment fees and expenses refinancing the existing debt. Pursuant to the Lease Termination Agreement, we also agreed to enter into property management agreements with Holiday, whereby Holiday will manage this portfolio.


18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Senior. The following should be read in conjunction with the consolidated financial statements and notes thereto included within this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in Part II, Item 1A “Risk Factors.”
 
OVERVIEW
 
Our Business
 
We are a REIT with a portfolio of 133 senior housing properties located across the United States. We are the only pure play senior housing REIT and one of the largest owners of senior housing properties. We are listed on the NYSE under the symbol “SNR” and are headquartered in New York, New York.
 
We conduct our business through two reportable segments: Managed Properties and Triple Net Lease Properties. See our consolidated financial statements and the related notes included in Part I, Item 1.

We are externally managed and advised by an affiliate of Fortress, subject to the supervision of our board of directors. For its services, the Manager is entitled to an annual management fee and is eligible for incentive compensation upon the satisfaction of certain performance thresholds, both as defined in, and in accordance with the terms of, the Management Agreement.

Our board of directors has approved broad investment guidelines for our Manager that permit us to invest in asset classes that differ materially from the assets we currently own.

Recent Developments

On February 23, 2018, we announced that our board of directors, together with our management team and legal and financial advisors, has been conducting a process to explore and evaluate a full range of strategic alternatives to maximize stockholder value.

There can be no assurance that this process will result in a transaction or, if a transaction is undertaken, its terms or timing. We do not intend to make any further public comment regarding the review until it has been completed. We retained J.P. Morgan Securities LLC as our financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP as our legal advisor to assist in this ongoing review.

On May 9, 2018, we entered into an agreement (the “Lease Termination Agreement”) to terminate our triple net leases with affiliates of Holiday Retirement (collectively, “Holiday”). In exchange, we will receive $116 million of total consideration, including a $70 million termination payment and $46 million of retained security deposits. The effectiveness of the lease termination is subject to us completing a refinancing of the existing debt on the portfolio, which had an outstanding face amount of approximately $666 million and a coupon of 4.15% as of March 31, 2018, on or before May 21, 2018. We expect to refinance the existing debt with a one-year $720 million secured loan bearing interest at LIBOR plus 4.0% for the first six months and increasing by 50 basis points after the sixth monthly payment date and by an additional 50 basis points after the ninth monthly payment date. We expect to incur approximately $65 million of prepayment fees and expenses refinancing the existing debt. Pursuant to the Lease Termination Agreement, we also agreed to enter into property management agreements with Holiday, whereby Holiday will manage this portfolio. For additional information, see Part II, Item 5. “Other Information.”
 
MARKET CONSIDERATIONS
  
Senior housing is a $300 billion market, and ownership of senior housing assets is highly fragmented. Given these industry fundamentals and compelling demographics that are expected to drive increased demand for senior housing, we believe the senior housing industry could present attractive investment opportunities. However, increased competition from other buyers of senior housing assets, as well as liquidity constraints and other factors, could impair our ability to source attractive investment opportunities within the senior housing industry and thus to seek investments in the broader healthcare industry. There can be no assurance that any investments we may make will be successful, and investments in asset classes other than senior housing could involve additional risks and uncertainties.

19



According to data from the National Investment Center for Seniors Housing and Care (“NIC”), occupancy in the first quarter decreased 40 basis points quarter over quarter and decreased 80 basis points year over year. New Senior’s occupancy results underperformed the industry in the first quarter of 2018, with same store managed occupancy down 160 basis points year over year.

Industry occupancy for IL facilities was down 60 basis points year over year, while industry occupancy for AL facilities was down 90 basis points year over year. Industry occupancy is expected to generally remain stable for the next four quarters.

Industry-wide, new supply remains high but continues to decrease. Units under construction represent 6.2% of inventory, but the ratio has decreased 100 basis points from a peak in the third quarter of 2016. The ratio of AL construction to inventory (7.8%) remains significantly higher than that for IL (4.9%).

Pressures from new competition remain significant for AL facilities in particular, including for some of those in our managed portfolio. Industry-wide for AL facilities, occupancy is at its lowest level since 2006 and labor cost growth is currently at its highest level since 2007. Industry rate growth continued its downward trend, softening to 2.2% year over year, with AL (up 2.6%) slightly outperforming IL (up 1.9%).

The value of our existing portfolio could be impaired by new construction, as well as increased availability and popularity of home health care or other alternatives to senior housing, by hampering occupancy and rate growth, along with increasing operating expenses.

RESULTS OF OPERATIONS
 
Segment Overview
 
We evaluate our business operations and allocate resources based on two segments: (i) Managed Properties and (ii) Triple Net Lease Properties. Under our Managed Properties segment, we own 81 properties managed by Property Managers under property management agreements. Under our Triple Net Lease Properties segment, we lease 52 of our properties under three triple net master leases.

Net Operating Income

We evaluate performance of these reportable business segments based on segment NOI. We consider NOI an important supplemental measure used to evaluate the operating performance of our segments because it allows investors, analysts and our management to assess our unleveraged property-level operating results and to compare our operating results between periods and to the operating results of other real estate companies on a consistent basis. We define NOI as total revenues less property operating expense.

Our Managed Properties segment is comprised of primarily independent living and assisted living senior housing properties that are operated by property managers to whom we pay a management fee. Our Triple Net Lease Properties segment comprises senior housing properties leased on a long-term basis, and our tenants are typically responsible for bearing property-related expenses including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. Depreciation and amortization, interest expense, acquisition, transaction and integration expense, management fees and incentive compensation to affiliate, general and administrative expense, loss on extinguishment of debt, other expense (income), gain on sale of real estate and income tax expense (benefit) are not allocated to individual segments for purposes of assessing segment performance. Because of such differences in our exposure to property operating results, each segment requires a different type of management focus. As such, these segments are managed separately. In deciding how to allocate resources and assess performance, our chief operating decision maker regularly evaluates the performance of our reportable segments on the basis of NOI.

Same Store

Same store information is intended to enable management to evaluate the performance of a consistent portfolio of real estate in a manner that eliminates variances attributable to changes in the composition of our portfolio over time, due to sales and various other factors. Properties acquired, sold, transitioned to other operators or classified as held for sale during the comparable periods are excluded from the same store amounts.


20


Three months ended March 31, 2018 compared to three months ended March 31, 2017

The following table provides a reconciliation of our segment NOI to net loss, and compares the results of operations for the respective periods:
 
Three Months Ended March 31,
 
Increase (Decrease)
(dollars in thousands)
2018
 
2017
 
Amount
 
Percentage
Segment NOI for Managed Properties
$
23,244

 
$
27,142

 
$
(3,898
)
 
(14.4
)%
Segment NOI for Triple Net Lease Properties
23,875

 
28,247

 
(4,372
)
 
(15.5
)%
Total segment NOI
47,119

 
55,389

 
(8,270
)
 
(14.9
)%
Expenses
 
 
 
 
 
 
 
Depreciation and amortization
26,725

 
37,518

 
(10,793
)
 
(28.8
)%
Interest expense
21,923

 
23,066

 
(1,143
)
 
(5.0
)%
Acquisition, transaction and integration expense
2,888

 
348

 
2,540

 
NM

Management fees and incentive compensation to affiliate
3,752

 
3,824

 
(72
)
 
(1.9
)%
General and administrative expense
3,752

 
4,011

 
(259
)
 
(6.5
)%
Loss on extinguishment of debt

 
375

 
(375
)
 
NM

Other expense
1,380

 
135

 
1,245

 
NM

Total expenses
60,420

 
69,277

 
(8,857
)
 
(12.8
)%
Gain on sale of real estate

 
4,199

 
(4,199
)
 
NM

Loss before income taxes
(13,301
)
 
(9,689
)
 
(3,612
)
 
(37.3
)%
Income tax expense
48

 
206

 
(158
)
 
(76.7
)%
Net loss
$
(13,349
)
 
$
(9,895
)
 
$
(3,454
)
 
(34.9
)%
_______________
NM – Not meaningful

Managed Properties

The following table presents same store and total portfolio results as of and for the three months ended March 31, 2018 and 2017:
 
Same Store Portfolio
 
Total Portfolio
(dollars in thousands)
2018
 
2017
 
Change
 
%
 
2018
 
2017
 
Change
 
%
Resident fees and services
$
70,921

 
$
70,950

 
$
(29
)
 
 %
 
$
75,343

 
$
86,726

 
$
(11,383
)
 
(13.1
)%
Less: Property operating expense
48,319

 
47,189

 
1,130

 
2.4
 %
 
52,099

 
59,584

 
(7,485
)
 
(12.6
)%
NOI
$
22,602

 
$
23,761

 
$
(1,159
)
 
(4.9
)%
 
$
23,244

 
$
27,142

 
$
(3,898
)
 
(14.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
77

 
77

 
 
 
 
 
81

 
92

 
 
 
 
Average available beds
8,889

 
8,876

 
 
 
 
 
9,543

 
11,296

 
 
 
 
Average occupancy (%)
85.4

 
87.0

 
 
 
 
 
84.7

 
86.1

 
 
 
 
Average monthly revenue per occupied bed
$
3,113

 
$
3,063

 
 
 
 
 
$
3,109

 
$
2,972

 
 
 
 

Resident fees and services
 
Total resident fees and services decreased $11.4 million. A decrease of approximately $11.1 million is attributable to the revenue of 13 sold properties. The remaining decrease was primarily attributable to a decrease in average occupancy rates, partially offset by an increase in average rental rates.

Same store resident fees and services was flat as a decrease in average occupancy rates was offset by an increase in average rental rates.
 

21


Property operating expense
 
Property operating expense decreased $7.5 million. A decrease of approximately $8.5 million is attributable to the operating expenses of 13 sold properties. This decrease was partially offset by higher labor and utilities costs.
 
Property operating expense includes property management fees and travel reimbursements paid to the Property Managers of $4.3 million and $5.2 million for the three months ended March 31, 2018 and 2017, respectively.

Same store property operating expense increased $1.1 million, primarily due to higher labor and utilities costs.
 
Segment NOI
 
Total segment NOI and same store segment NOI decreased $3.9 million and $1.2 million, respectively. See above for the variance explanations.

Triple Net Lease Properties
 
The following table presents same store and total portfolio results as of and for the three months ended March 31, 2018 and 2017:
 
Same Store Portfolio
 
Total Portfolio
(dollars in thousands)
2018
 
2017
 
Change
 
%
 
2018
 
2017
 
Change
 
%
Rental revenue
$
23,875

 
$
23,875

 
$

 
%
 
$
23,875

 
$
28,247

 
$
(4,372
)
 
(15.5
)%
NOI
$
23,875

 
$
23,875

 
$

 
%
 
$
23,875

 
$
28,247

 
$
(4,372
)
 
(15.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
52

 
52

 
 
 
 
 
52

 
58

 
 
 
 
Average available beds
6,309

 
6,307

 
 
 
 
 
6,309

 
7,541

 
 
 
 
Average occupancy (%)
87.4

 
89.5

 
 
 
 
 
85.3

 
87.5

 
 
 
 
 
Total segment NOI decreased $4.4 million due to the sale of six properties in the fourth quarter of 2017. As a percentage of rental revenue, segment NOI was 100% of revenue for each fiscal year as the lessee operates the property and bears the related costs, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees.

Expenses
 
Depreciation and amortization
 
Depreciation and amortization expense decreased $10.8 million, primarily due to certain intangibles becoming fully amortized and the sale of 19 properties.

Interest expense
 
Interest expense decreased $1.1 million, primarily due to debt repayments of $190.0 million since March 31, 2017, partially offset by higher average interest rates on our floating rate debt. The weighted average effective interest rate for the three months ended March 31, 2018 and 2017 was 4.56% and 4.32%, respectively.

Acquisition, transaction and integration expense
 
Acquisition, transaction and integration expense increased $2.5 million, primarily due to diligence-related costs associated with our review of strategic alternatives to maximize stockholder value.
 
Management fees and incentive compensation to affiliate
 
Management fees and incentive compensation to affiliate expense decreased $0.1 million, primarily due to capital distributions in 2017.


22


General and administrative expense
 
General and administrative expense decreased $0.3 million, primarily due to a lower reimbursement to the Manager and a decrease in professional fees.

Loss on extinguishment of debt
 
During the three months ended March 31, 2017, we repaid $14.7 million of debt associated with the sale of two properties and recognized a loss on extinguishment of debt of $0.4 million.

Other expense

Other expense increased $1.2 million. On March 26, 2018, Florida passed the “Emergency Environmental Control for Assisted Living Facilities” bill (the “Florida Generator Bill”) which requires all assisted living facilities to have an alternative power source, such as a generator. During the fourth quarter of 2017, we sold nine Florida properties and agreed with the buyer to cover a portion of the costs to comply with this rule if it became effective. Accordingly, during the three months ended March 31, 2018, we recorded a loss of $0.9 million, which represents our current best estimate of the expected costs. The additional increase is primarily due to a higher fair value loss on our interest rate caps.

Other

Gain on sale of real estate

During the three months ended March 31, 2017, we sold two properties and recognized a gain on sale of $4.2 million.

Income tax expense

We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. However, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes. Income tax expense decreased $0.2 million, primarily due to our TRS generating less earnings.


23


OUR PORTFOLIO
 
Our portfolio is currently comprised of senior housing properties, including IL, AL/MC and CCRC properties. Our Manager will make decisions about our future investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may, without a stockholder vote, change the composition of our portfolio and make investments in assets that differ from, and are possibly riskier than, our current portfolio of senior housing properties.
 
The following table summarizes the geographic locations of our senior housing properties as of March 31, 2018
 
 
Managed Properties
 
Triple Net Lease Properties
 
Total
Location
 
Number of Communities
 
Number of Beds
 
Number of Communities
 
Number of Beds
 
Number of Communities
 
Number of Beds
Arizona
 
1

 
108

 
1

 
115

 
2

 
223

Arkansas
 
1

 
113

 

 

 
1

 
113

California
 
9

 
1,049

 
2

 
235

 
11

 
1,284

Colorado
 
1

 
119

 
4

 
439

 
5

 
558

Connecticut
 

 

 
2

 
277

 
2

 
277

Florida
 
12

 
1,488

 
3

 
370

 
15

 
1,858

Georgia
 
2

 
194

 

 

 
2

 
194

Hawaii
 
1

 
123

 

 

 
1

 
123

Idaho
 
1

 
121

 

 

 
1

 
121

Illinois
 
1

 
66

 
1

 
111

 
2

 
177

Indiana
 
1

 
114

 

 

 
1

 
114

Iowa
 

 

 
2

 
215

 
2

 
215

Kansas
 
1

 
117

 
2

 
238

 
3

 
355

Kentucky
 

 

 
1

 
117

 
1

 
117

Louisiana
 
1

 
120

 
1

 
103

 
2

 
223

Massachusetts
 
2

 
255

 

 

 
2

 
255

Michigan
 
1

 
119

 
1

 
121

 
2

 
240

Mississippi
 
1

 
67

 
1

 
94

 
2

 
161

Missouri
 

 

 
3

 
320

 
3

 
320

Montana
 
1

 
127

 
1

 
115

 
2

 
242

Nebraska
 
1

 
117

 

 

 
1

 
117

Nevada
 
1

 
174

 
1

 
121

 
2

 
295

New Hampshire
 
4

 
263

 

 

 
4

 
263

New York
 
1

 
120

 
2

 
234

 
3

 
354

North Carolina
 
7

 
916

 
2

 
240

 
9

 
1,156

Ohio
 
3

 
354

 

 

 
3

 
354

Oklahoma
 
1

 
121

 

 

 
1

 
121

Oregon
 
3

 
340

 
6

 
601

 
9

 
941

Pennsylvania
 
3

 
406

 
4

 
808

 
7

 
1,214

South Carolina
 
1

 
120

 

 

 
1

 
120

South Dakota
 
1

 
114

 

 

 
1

 
114

Tennessee
 
3

 
235

 
1

 
110

 
4

 
345

Texas
 
5

 
745

 
8

 
972

 
13

 
1,717

Utah
 
5

 
593

 
1

 
117

 
6

 
710

Virginia
 
2

 
234

 
1

 
120

 
3

 
354

Washington
 
2

 
275

 

 

 
2

 
275

Wisconsin
 
1

 
117

 
1

 
116

 
2

 
233

Total
 
81

 
9,544

 
52

 
6,309

 
133

 
15,853

 

24


LIQUIDITY AND CAPITAL RESOURCES
 
Our principal liquidity needs are to (i) fund operating expenses, (ii) meet debt service requirements, (iii) fund recurring capital expenditures and investment activities, if applicable, and (iv) make distributions to stockholders. As of March 31, 2018, we had approximately $120.8 million in liquidity, consisting of unrestricted cash and cash equivalents. A portion of this amount is held in operating accounts used to fund expenses at our managed properties and, therefore, may not be available for distribution to stockholders.

Our principal sources of liquidity are (i) cash flows from operating activities, (ii) proceeds from acquisition financing in the form of mortgage debt, and, from time to time, (iii) proceeds from the issuance of equity securities and (iv) proceeds from dispositions of assets. Our cash flows from operating activities are primarily driven by (i) rental revenues and fees received from residents of our managed properties, and (ii) rental revenues from the tenants of our triple net lease properties, less (iii) operating expenses (primarily management fees and reimbursements to our Manager, property operating expense of our managed properties, professional fees, insurance and taxes) and (iv) interest payments on the mortgage notes payable. Our principal uses of liquidity are the expenses included in cash flows from operating activities, plus capital expenditures and principal payments on debt.

We anticipate that our cash on hand combined with our cash flows provided by operating activities will be sufficient to fund our business operations, recurring capital expenditures, principal payments, and the distributions we are required to make to comply with REIT requirements over the next twelve months. Our actual distributions to stockholders have historically been higher than the REIT distribution requirement.

Our cash flows from operating activities, less capital expenditures and principal payments (which increased meaningfully in May 2017), have been, and continue to be, less than the amount of distributions to our stockholders. We have funded the shortfall using cash on hand (including the proceeds from asset sales), which increased from $50.3 million as of March 31, 2017 to $120.8 million as of March 31, 2018 primarily on account of asset sales. As noted above, a portion of this amount is held in operating accounts used to fund expenses at our managed properties and, therefore, may not be available for distribution to stockholders.

On May 10, 2018, we announced that our board of directors has not made a determination regarding the amount of any dividend on our common stock for the quarter ended March 31, 2018. Our board of directors continues to evaluate our dividend policy, particularly in light of its ongoing review of strategic alternatives as well as the fact that our cash flows from operating activities, less capital expenditures and principal payments (which increased meaningfully in May 2017), have been, and continue to be, less than the amount of distributions to our stockholders. The board is expected to make its determination by June 1, 2018. There can be no assurance that we will pay cash dividends in an amount consistent with prior quarters. Any difference between the amount of any future dividend and the amount of dividends in prior quarters could be material, and there can be no assurance that our board will declare any dividend at all. See Part II, Item IA. “Risk Factors-Our board of directors is actively considering our dividend policy, and the amount of any future dividends could be materially lower than dividends paid in prior quarters” and “-We have not established a minimum distribution payment level, and we cannot assure you of our ability to maintain our current distribution payment level or to pay any distributions in the future.”

The expectations set forth above are forward-looking and subject to a number of uncertainties and assumptions, which are described below under “Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations” as well as “Part II, Item 1A. Risk Factors.” If our expectations about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.

Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations
 
The following factors could impact our liquidity, capital resources and capital obligations:

Holiday Lease Termination Agreement: We entered into agreements to terminate our triple net leases with Holiday, as described in Part II, Item 5. “Other Information,” and the outcome could impact our liquidity, depending on whether we are successful in terminating such leases.
Access to Financing: Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with covenant terms, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto and the relative attractiveness of alternative investment or lending opportunities.

25


Impact of Expected Additional Borrowings or Sales of Assets on Cash Flows: The availability and timing of and proceeds from additional borrowings may be different than expected or may not occur as expected. The timing of any sale of assets, and the proceeds from any such sales, are unpredictable and may vary materially from an asset’s estimated fair value and carrying value.
Compliance with Debt Obligations: Our financings subject us and our operators to a number of obligations, and a failure to satisfy certain obligations, including (without limitation) a failure by the guarantors of our leases to satisfy certain financial covenants that depend in part on the performance of our leased assets as well as the performance of other properties leased by Holiday that we do not own, both of which are outside of our control, could give rise to a requirement to prepay outstanding debt or result in an event of default and the acceleration of the maturity date for repayment. We may also seek amendments to these debt covenants, and there can be no assurance that we will be able to obtain any such amendment on commercially reasonable terms, if at all.
Debt Obligations

Our mortgage notes payable contain various customary financial and other covenants, and in certain cases include a Debt Service Coverage Ratio, Project Yield or Minimum Net Worth and Liquid Assets provision, as defined in the agreements. As of March 31, 2018, we were in compliance with all of such covenants.

As noted above, our principal payments increased meaningfully in May 2017. See Note 8 to the consolidated financial statements for further information related to our mortgage notes as of March 31, 2018.

Capital Expenditures
 
For our Managed Properties segment, we anticipate that capital expenditures will be funded through operating cash flows from the Managed Properties. During the three months ended March 31, 2018, we funded $3.6 million of capital expenditures.

With respect to our Triple Net Lease Properties segment, the terms of these arrangements typically require the tenants to fund all necessary capital expenditures in order to maintain and improve the applicable senior housing properties. To the extent that our triple net leases with Holiday are terminated or our tenants are unwilling or unable to fund these capital expenditure obligations under the existing lease arrangements, we may fund capital expenditures with additional borrowings or cash flow from the operations of these senior housing properties. We may also provide corresponding loans or advances to tenants which would increase the rent payable to us. For further information regarding capital expenditures related to our triple net lease properties, see “Contractual Obligations” below and Note 13 to the consolidated financial statements.
 
Cash Flows
 
The following table provides a summary of our cash flows:
 
Three Months Ended March 31,
(dollars in thousands)
2018
 
2017
Net cash provided by (used in)
 
 
 
Operating activities
$
15,730

 
$
21,454

Investing activities
(3,561
)
 
10,570

Financing activities
(29,385
)
 
(41,165
)
Net decrease in cash, cash equivalents and restricted cash
(17,216
)
 
(9,141
)
Cash, cash equivalents and restricted cash, beginning of period
157,485

 
97,517

Cash, cash equivalents and restricted cash, end of period
$
140,269

 
$
88,376


Operating activities
 
Net cash provided by operating activities was $15.7 million and $21.5 million for the three months ended March 31, 2018 and 2017, respectively. The period-over-period decrease of $5.7 million was primarily due to the sale of 17 properties since March 31, 2017 and a decrease in average occupancy rates, partially offset by an increase in average rental rates.
 

26


Investing activities
 
Net cash used in investing activities was $3.6 million and net cash provided by investing activities was $10.6 million for the three months ended March 31, 2018 and 2017, respectively. The period-over-period decrease of $14.1 million was primarily due to proceeds of $15.0 million received from the sale of two properties during the three months ended March 31, 2017.
 
Financing activities
 
Net cash used in financing activities was $29.4 million and $41.2 million for the three months ended March 31, 2018 and 2017, respectively. The period-over-period decrease of $11.8 million was primarily due to debt repayments of $14.7 million during the three months ended March 31, 2017 associated with the sale of two properties, partially offset by an increase in principal payments of $2.3 million.

REIT Compliance Requirements
 
We are organized and conduct our operations to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains. We intend to pay dividends greater than all of our REIT taxable income to holders of our common stock in 2018, if, and to the extent, authorized by our board of directors. We note that a portion of this requirement may be able to be met in future years with stock dividends, rather than cash distributions, subject to limitations. We expect that our operating cash flows will exceed REIT taxable income due to depreciation and other non-cash deductions in computing REIT taxable income. However, before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our obligations. If we do not have sufficient liquid assets to enable us to satisfy the 90% distribution requirement, or if we decide to retain cash, we may sell assets, issue additional equity securities or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
 
Income Tax
 
We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. Currently, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes at regular corporate tax rates.

OFF-BALANCE SHEET ARRANGEMENTS
 
As of March 31, 2018, we do not have any off-balance sheet arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose or variable interest entities established to facilitate off-balance sheet arrangements. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
 
CONTRACTUAL OBLIGATIONS

As of March 31, 2018, we had the following material contractual obligations, including estimates of interest payments on our floating rate debt (dollars in thousands):
 
Period from
April 1, 2018 to December 31, 2018
 
2019 (A)
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Principal payments
$
21,060

 
$
28,536

 
$
29,642

 
$
28,510

 
$
19,812