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Section 1: 8-K (8-K)

8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): June 20, 2018

 

 

New Senior Investment Group Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Delaware

(State or other jurisdiction

of incorporation)

 

001-36499

(Commission

File Number)

 

80-0912734

(I.R.S. Employer

Identification Number)

 

1345 Avenue of the Americas, 45th Floor

New York, New York

(Address of principal executive offices)

 

10105

(Zip code)

212-479-3140

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.    

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

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.  ☐

 

 

 


Item 8.01 Other Events.

As a result of the adoption of a new accounting standard (Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash), New Senior is filing this Current Report on Form 8-K to retrospectively reclassify certain previously reported financial information in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, originally filed on February 28, 2018 (the “2017 10-K”).

The new accounting standard requires that the statement of cash flows include a reconciliation and explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

Exhibit 99.1 to this Current Report is incorporated by reference herein and includes updates to the following Items of the 2017 10-K only to the extent necessary to reflect the retrospective reclassification of such information in accordance with the new accounting standard:

 

    Updated Part II, Item 6. Selected Financial Data

 

    Updated Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and

 

    Updated Part II, Item 8. Financial Statements and Supplementary Data.

All other information in New Senior’s 2017 Form 10-K has not been updated for events or developments that occurred subsequent to its filing with the U.S. Securities and Exchange Commission on February 28, 2018. For developments since the filing of the 2017 Form 10-K, please refer to New Senior’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018, filed on May 10, 2018 and New Senior’s other Current Reports on Form 8-K filed since February 28, 2018.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

 

Exhibit Number

 

Description

23.1   Consent of Ernst & Young LLP, independent registered public accounting firm.
99.1   Revised Financial Information and Disclosures from New Senior Investment Group Inc.’s Annual Report on Form 10-K for the Year Ended December 31, 2017
101.INS*   XBRL Instance Document.
101.SCH*   XBRL Taxonomy Extension Schema Document.
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*  

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

*XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NEW SENIOR INVESTMENT GROUP INC.
Date: June 20, 2018     By:  

/s/ Bhairav Patel

      Bhairav Patel
      Interim Chief Financial Officer,
      Chief Accounting Officer and Treasurer

 

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Section 2: EX-23.1 (EX-23.1)

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-205142) of New Senior Investment Group Inc. of our report dated February 27, 2018 (except for the effects of the retrospective adoption of the updated accounting standard discussed in Note 2, as to which the date is June 20, 2018), with respect to the consolidated financial statements and schedule of New Senior Investment Group Inc., included in this Current Report on Form 8-K.

/s/ Ernst & Young LLP

New York, NY

June 20, 2018

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Section 3: EX-99.1 (EX-99.1)

EX-99.1

Exhibit 99.1

PART II

ITEM 6. SELECTED FINANCIAL DATA

The financial data as of and for the years ended December 31, 2017, 2016 and 2015 has been derived from our audited financial statements for those dates included elsewhere in this Form 10-K. The financial data for the years ended December 31, 2014 and 2013 has been derived from our audited financial statements that are not included in this Form 10-K. The selected financial data provided below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes.

Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future period. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

Operating Data

 

     Year Ended December 31,  
(dollars in thousands, except share data)    2017      2016     2015     2014     2013  

Revenues

           

Resident fees and services

   $ 336,739      $ 359,472     $ 277,324     $ 156,993     $ 83,218  

Rental revenue

     112,391        112,966       111,154       97,992       1,918  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     449,130        472,438       388,478       254,985       85,136  

Expenses

           

Property operating expense

     230,045        243,027       189,543       112,242       59,726  

Depreciation and amortization

     139,942        184,546       160,318       103,279       26,933  

Interest expense

     93,597        91,780       75,021       57,026       10,589  

Acquisition, transaction, and integration expense

     2,453        3,942       13,444       14,295       13,294  

Management fees and incentive compensation to affiliate

     18,225        18,143       14,279       8,470       1,796  

General and administrative expense

     15,307        15,194       15,233       7,416       2,188  

Loss on extinguishment of debt

     3,902        245       5,091       —         —    

Other expense (income)

     1,702        727       1,629       (1,500     —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     505,173        557,604       474,558       301,228       114,526  

Gain on sale of real estate

     71,763        13,356       —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     15,720        (71,810     (86,080     (46,243     (29,390

Income tax expense (benefit)

     3,512        439       (3,655     160       656  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,208      $ (72,249   $ (82,425   $ (46,403   $ (30,046
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share of common stock

           

Basic

   $ 0.15      $ (0.88   $ (1.08   $ (0.70   $ (0.45
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.15      $ (0.88   $ (1.08   $ (0.70   $ (0.45
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding

           

Basic

     82,145,295        82,357,349       76,601,161       66,400,914       66,399,857  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     82,741,322        82,357,349       76,601,161       66,400,914       66,399,857  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 1.04      $ 1.04     $ 0.75     $ 0.23     $ —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cash Flow Data

 

     Year Ended December 31,  
(dollars in thousands)    2017     2016     2015     2014     2013  

Net cash provided by (used in):

          

Operating activities

   $ 60,445     $ 102,345     $ 76,966     $ 50,951     $ 45,918  

Investing activities

     319,895       2,144       (1,274,109     (328,328     (1,253,174

Financing activities

     (320,372     (146,479     1,098,280       481,231       1,231,315  

Balance Sheet Data

 

     December 31,  
(dollars in thousands)    2017      2016      2015      2014      2013  

Total assets

   $ 2,508,027      $ 2,821,728      $ 3,017,459      $ 1,966,159      $ 1,507,616  

Total mortgage notes payable, net

     1,907,928        2,130,387        2,151,317        1,223,224        1,035,193  

Total liabilities

     2,002,142        2,242,833        2,250,134        1,317,623        1,099,781  

Total equity

     505,885        578,895        767,325        648,536        407,835  

ITEM 7. 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 Annual Report on Form 10-K. 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 I, 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.

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 shareholder value.

 

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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 the Company’s financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP as the Company’s legal advisor to assist in this ongoing review.

Recent Developments

During 2017, we sold 13 properties in the Managed Properties segment and 6 properties in the Triple Net Lease Properties segment. See Note 3 to the consolidated financial statements for additional information.

During the second quarter of 2017, we transitioned four managed properties to new operators. Three properties were transitioned to Grace and the remaining property was transitioned to Watermark.

During 2017, we recognized approximately $1.5 million for damage remediation and other incremental costs due to Hurricane Irma. See Note 5 to the consolidated financial statements for additional 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.

According to data from the National Investment Center for Seniors Housing and Care (“NIC”), occupancy in the fourth quarter was flat quarter over quarter and decreased 70 basis points year over year. New Senior’s occupancy results underperformed the industry in the fourth quarter of 2017, with same store managed occupancy down 150 basis points year over year.

Industry occupancy for IL facilities was down 50 basis points year over year, while industry occupancy for AL facilities was down 80 basis points year over year. AL industry occupancy continued its positive trends, increasing 10 basis points quarter over quarter. Industry occupancy is expected to remain stable for the next four quarters.

Industry-wide, new supply remains high, but continues to decrease, while the rate of absorption of units continues to increase. Units under construction represent 5.9% of inventory, but the ratio has decreased 120 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 (4.4%).

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 near the lowest level since 2006, record new openings are projected through the first quarter of 2018, and labor cost growth is currently at the highest level since 2007. Industry rate growth softened to 2.6% year over year, with AL (up 2.4%) slightly outperforming IL (up 2.3%).

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.

 

3


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.

 

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Year ended December 31, 2017 compared to the year ended December 31, 2016

The following table provides a reconciliation of our segment NOI to net loss, and compares the results of operations for the respective periods:

 

     Year Ended December 31,      Increase (Decrease)  
(dollars in thousands)    2017      2016      Amount      %  

Segment NOI for Managed Properties

   $ 106,694      $ 116,445      $ (9,751      (8.4 )% 

Segment NOI for Triple Net Lease Properties

     112,391        112,966        (575      (0.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment NOI

     219,085        229,411        (10,326      (4.5 )% 

Expenses

           

Depreciation and amortization

     139,942        184,546        (44,604      (24.2 )% 

Interest expense

     93,597        91,780        1,817        2.0

Acquisition, transaction and integration expense

     2,453        3,942        (1,489      (37.8 )% 

Management fees and incentive compensation to affiliate

     18,225        18,143        82        0.5

General and administrative expense

     15,307        15,194        113        0.7

Loss on extinguishment of debt

     3,902        245        3,657        NM  

Other expense

     1,702        727        975        134.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     275,128        314,577        (39,449      (12.5 )% 

Gain on sale of real estate

     71,763        13,356        58,407        NM  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     15,720        (71,810      87,530        NM  

Income tax expense

     3,512        439        3,073        NM  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 12,208      $ (72,249    $ 84,457        NM  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NM – Not meaningful

Managed Properties

The following table presents same store and total portfolio results as of and for the years ended December 31, 2017 and 2016:

 

     Same Store Portfolio     Total Portfolio  
(dollars in thousands)    2017      2016      Change     %     2017      2016      Change     %  

Resident fees and services

   $ 286,021      $ 286,777      $ (756     (0.3 )%    $ 336,739      $ 359,472      $ (22,733     (6.3 )% 

Less: Property operating expense

     188,528        185,278        3,250       1.8     230,045        243,027        (12,982     (5.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

NOI

   $ 97,493      $ 101,499      $ (4,006     (3.9 )%    $ 106,694      $ 116,445      $ (9,751     (8.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total properties

     77        77            81        94       

Average available beds

     8,883        8,848            10,840        11,527       

Average occupancy (%)

     87.0        89.3            85.7        88.0       

Average monthly revenue per occupied bed

   $ 3,085      $ 3,025          $ 3,020      $ 2,953       

 

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Resident fees and services

Total resident fees and services decreased $22.7 million from the prior year. A decrease of approximately $20.4 million is attributable to the revenue of 15 sold properties. The remaining decrease was primarily due to a decrease in average occupancy rates, partially offset by an increase in average rental rates.

Same store resident fees and services decreased $0.8 million from the prior year, primarily due to a decrease in average occupancy rates, partially offset by an increase in average rental rates.

Property operating expense

Total property operating expense decreased $13.0 million from the prior year. A decrease of approximately $15.9 million is attributable to the operating expenses of 15 sold properties. This decrease was partially offset by higher labor, other administrative and insurance-related costs.

Property operating expense includes property management fees and travel reimbursements paid to Property Managers of $19.8 million and $20.8 million for the years ended December 31, 2017 and 2016, respectively.

Same store property operating expense increased $3.3 million from the prior year, primarily due to higher labor, other administrative, marketing and insurance-related costs.

Segment NOI

Total segment NOI and same store segment NOI decreased $9.8 million and $4.0 million, respectively, from the prior year. 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 years ended December 31, 2017 and 2016:

 

     Same Store Portfolio     Total Portfolio  
(dollars in thousands)    2017      2016      Change      %     2017      2016      Change     %  

Rental revenue

   $ 95,498      $ 95,477      $ 21        —     $ 112,391      $ 112,966      $ (575     (0.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

NOI

   $ 95,498      $ 95,477      $ 21        —     $ 112,391      $ 112,966      $ (575     (0.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total properties

     52        52             52        58       

Average available beds

     6,309        6,305             7,440        7,539       

Average occupancy (%)

     87.7        90.0             85.6        88.0       

Total segment NOI decreased $0.6 million from the prior year, primarily 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 $44.6 million from the prior year, primarily due to certain intangible assets becoming fully amortized.

 

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Interest expense

Interest expense increased $1.8 million from the prior year, primarily due to higher interest rates on our floating rate debt. The weighted average effective interest rate for the years ended December 31, 2017 and 2016 was 4.40% and 4.15%, respectively.

Acquisition, transaction and integration expense

Acquisition, transaction and integration expense decreased $1.5 million from the prior year, primarily due to a termination fee of $1.8 million paid to Blue Harbor, pursuant to the Property Management Agreement, in connection with the sale of two properties in 2016.

Management fees and incentive compensation to affiliate

Management fees and incentive compensation to affiliate expense was relatively unchanged from the prior year.

General and administrative expense

General and administrative expense was relatively unchanged from the prior year and primarily consists of the reimbursement to the Manager for costs incurred for tasks and other services performed by the Manager under the Management Agreement and other professional fees.

Loss on extinguishment of debt

During 2017 and 2016, we repaid $204.7 million and $13.7 million of debt, respectively, associated with our property sales, and recognized a loss on extinguishment of debt of $3.9 million and $0.2 million, respectively.

Other expense

Other expense increased $1.0 million from the prior year, primarily due to damage remediation costs of $1.5 million due to Hurricane Irma, partially offset by lower casualty-related charges and a fair value loss on our interest rate caps.

Other

Gain on sale of real estate

During 2017 and 2016, we sold 19 properties and 2 properties, respectively, and recognized a gain on sale of $71.8 million and $13.4 million, respectively.

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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Income tax expense increased $3.1 million from the prior year, primarily due to the Act which reduced the corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. Accordingly, our deferred tax assets were remeasured, 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.

 

 

7


Year ended December 31, 2016 compared to the year ended December 31, 2015

The following table provides a reconciliation of our segment NOI to net loss, and compares the results of operations for the respective periods:

 

     Year Ended December 31,      Increase (Decrease)  
(dollars in thousands)    2016      2015      Amount      %  

Segment NOI for Managed Properties

   $ 116,445      $ 87,781      $ 28,664        32.7

Segment NOI for Triple Net Lease Properties

     112,966        111,154        1,812        1.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Segment NOI

     229,411        198,935        30,476        15.3

Expenses

           

Depreciation and amortization

     184,546        160,318        24,228        15.1

Interest expense

     91,780        75,021        16,759        22.3

Acquisition, transaction and integration expense

     3,942        13,444        (9,502      (70.7 )% 

Management fees and incentive compensation to affiliate

     18,143        14,279        3,864        27.1

General and administrative expense

     15,194        15,233        (39      (0.3 )% 

Loss on extinguishment of debt

     245        5,091        (4,846      (95.2 )% 

Other expense

     727        1,629        (902      (55.4 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     314,577        285,015        29,562        10.4

Gain on sale of real estate

     13,356        —          13,356        NM  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (71,810      (86,080      14,270        16.6

Income tax expense (benefit)

     439        (3,655      4,094        NM  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (72,249    $ (82,425    $ 10,176        12.3
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NM – Not meaningful

Managed Properties

The following table presents same store and total portfolio results as of and for the years ended December 31, 2016 and 2015:

 

     Same Store Portfolio     Total Portfolio  
(dollars in thousands)    2016      2015      Change     %     2016      2015      Change      %  

Resident fees and services

   $ 170,668      $ 169,393      $ 1,275       0.8   $ 359,472      $ 277,324      $ 82,148        29.6

Less: Property operating expense

     126,656        122,698        3,958       3.2     243,027        189,543        53,484        28.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

NOI

   $ 44,012      $ 46,695      $ (2,683     (5.7 )%    $ 116,445      $ 87,781      $ 28,664        32.7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total properties

     39        39            94        96        

Average available beds

     5,023        5,024            11,527        8,627        

Average occupancy (%)

     85.0        84.1            88.0        86.6        

Average monthly revenue per occupied bed

   $ 3,333      $ 3,342          $ 2,953      $ 3,094        

Resident fees and services

Total resident fees and services increased $82.1 million from the prior year, primarily due to revenues derived from 53 properties that were acquired during 2015.

Same store resident fees and services increased $1.3 million from the prior year, primarily due to an increase in average occupancy rates, partially offset by higher incentives.

 

8


Property operating expense

Total property operating expense increased $53.5 million from the prior year, primarily due to higher labor, utilities, food, property tax (collectively an increase of approximately $40.0 million) and other costs as a result of the additional properties that were acquired during 2015.

Property operating expense includes property management fees and travel reimbursements paid to Property Managers of $20.8 million and $17.0 million for the years ended December 31, 2016 and 2015, respectively.

Same store property operating expense increased $4.0 million from the prior year, primarily due to higher labor costs.

Segment NOI

Total segment NOI increased $28.7 million from the prior year, primarily due to the impact of the properties that were acquired during 2015.

Same store segment NOI decreased $2.7 million from the prior year, primarily due to higher labor costs.

Triple Net Lease Properties

The following table presents same store and total portfolio results as of and for the years ended December 31, 2016 and 2015:

 

     Same Store Portfolio     Total Portfolio  
(dollars in thousands)    2016      2015      Change      %     2016      2015      Change      %  

Rental revenue

   $ 106,969      $ 106,659      $ 310        0.3   $ 112,966      $ 111,154      $ 1,812        1.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

NOI

   $ 106,969      $ 106,659      $ 310        0.3   $ 112,966      $ 111,154      $ 1,812        1.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total properties

     57        57             58        58        

Average available beds

     7,077        7,075             7,539        7,383        

Average occupancy (%)

     87.9        88.7             88.0        88.9        

Total segment NOI increased $1.8 million from the prior year, primarily due to the acquisition of a rental CCRC in the second quarter of 2015. 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 increased $24.2 million from the prior year, primarily due to the impact of the properties that were acquired during 2015.

Interest expense

Interest expense increased $16.8 million from the prior year. The net increase in mortgage notes payable, related to the properties that were acquired during 2015, resulted in an increase in interest expense of approximately $17.6 million.

The weighted average effective interest rate for the years ended December 31, 2016 and 2015 was 4.15% and 4.20%, respectively.

 

9


Acquisition, transaction and integration expense

Acquisition, transaction and integration expense decreased $9.5 million from the prior year. The decrease primarily reflects a decrease in acquisition-related costs of approximately $11.6 million due to no acquisitions being made during 2016, partially offset by an early termination fee of $1.8 million paid to Blue Harbor, pursuant to the Property Management Agreement, in connection with the sale of two properties in 2016.

Management fees and incentive compensation to affiliate

Management fees and incentive compensation to affiliate expense increased $3.9 million from the prior year. The increase is primarily attributable to incentive compensation of $2.7 million earned by the Manager during 2016 and the equity offering in June 2015, partially offset by our repurchase of 4.4 million shares of common stock in December 2015 and January 2016.

General and administrative expense

General and administrative expense was relatively unchanged from the prior year and primarily consists of the reimbursement to the Manager for costs incurred for tasks and other services performed by the Manager under the Management Agreement and other professional fees.

Loss on extinguishment of debt

During 2016, we repaid $13.7 million of floating rate debt associated with our sale of two properties and recognized a loss on extinguishment of debt of $0.2 million.

Other expense

Other expense decreased $0.9 million from the prior year, primarily due to a higher fair value loss of approximately $0.8 million on our interest rate caps in 2015.

Income tax expense (benefit)

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. During the years ended December 31, 2016 and 2015, our TRS recorded approximately $0.4 million and $3.7 million in income tax expense and income tax benefit, respectively. Results of operations for 2015 include $2.2 million in out of period adjustments which primarily relate to a $2.2 million tax benefit recognized in the fourth quarter for deferred tax assets originating in our TRS which should have been recognized in prior years. We do not believe these out of period adjustments are material to our financial position or results of operations for any prior periods, nor to the year ended 2015.

OUR PORTFOLIO

See Item 1, “Business - Our Portfolio” for a description of our senior housing portfolio.

TRANSACTIONS WITH AFFILIATES

Management Agreements

See Item 1, “Business - Management Agreements” and Note 9 to the consolidated financial statements for more information on the Management Agreement.

 

10


Property Management Agreements

We enter into long-term property management agreements for our managed properties. See Note 1 and Note 9 to the consolidated financial statements for information related to our property management agreements.

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 December 31, 2017, we had approximately $137.3 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 shareholders.

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 shareholders. We have funded the shortfall using cash on hand (including the proceeds from asset sales), which increased from $58.0 million as of December 31, 2016 to $137.3 million as of December 31, 2017 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 shareholders. Our board of directors may determine that it is not prudent or feasible to maintain distributions at the current level. See Part I, Item IA. “Risk Factors-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 “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:

 

    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.

 

 

11


    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 December 31, 2017, we were in compliance with all of such covenants.

As noted above, our principal payments increased meaningfully in May 2017. See Note 7 to the consolidated financial statements for further information related to our mortgage notes as of December 31, 2017.

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 year ended December 31, 2017, we funded $20.0 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 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 14 to the consolidated financial statements.

Cash Flows

The following table provides a summary of our cash flows:

 

     Year Ended December 31,  
(dollars in thousands)    2017      2016      2015  

Net cash provided by (used in)

        

Operating activities

   $ 60,445      $ 102,345      $ 76,966  

Investing activities

     319,895        2,144        (1,274,109

Financing activities

     (320,372      (146,479      1,098,280  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

     59,968        (41,990      (98,863

Cash, cash equivalents and restricted cash, beginning of year

     97,517        139,507        238,370  
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash, end of year

   $ 157,485      $ 97,517      $ 139,507  
  

 

 

    

 

 

    

 

 

 

 

12


Operating activities

Net cash provided by operating activities was $60.4 million, $102.3 million and $77.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The decrease of $41.9 million from 2016 to 2017 was primarily due to the sale of 21 properties, which includes approximately $15.9 million of security and other deposits returned as part of the sale of 6 triple net lease properties. Additionally, operating cash declined due to a decrease in average occupancy rates, which were 85.7% and 88.0% for the years ended December 31, 2017 and 2016, respectively. These decreases were partially offset by an increase in average rental rates.

The increase of $25.4 million from 2015 to 2016 was primarily due to a net increase in operating cash flows generated by the properties that were acquired during 2015.

Investing activities

Net cash provided by investing activities was $319.9 million and $2.1 million and net cash used in investing activities was $1.3 billion for the years ended December 31, 2017, 2016 and 2015, respectively.

The increase of $317.8 million from 2016 to 2017 was primarily due to proceeds of $339.6 million received from the sale of 19 properties during 2017.

The decrease in outflows of $1.3 billion from 2015 to 2016 was primarily due to no acquisitions closing in 2016, whereas during 2015, we acquired 54 properties for $1.3 billion.

Financing activities

Net cash used in financing activities was $320.4 million and $146.5 million and net cash provided by financing activities was $1.1 billion for the years ended December 31, 2017, 2016 and 2015, respectively.

The increase of $173.9 million from 2016 to 2017 was primarily due to debt repayments of $204.7 million associated with the sale of 19 properties during 2017 and an increase in debt principal payments of approximately $10.7 million. These increases were partially offset by the repurchase of $30.9 million of common stock in 2016.

The decrease of $1.2 billion from 2015 to 2016 was primarily due to no acquisitions closing in 2016. During 2015, we financed the acquisition of 54 properties and refinanced debt with net proceeds of approximately $943.8 million from the issuance of mortgage debt and with net proceeds of approximately $266.5 million from the issuance of common stock. Additionally, during 2016, we repurchased 3.3 million shares of our common stock for approximately $30.9 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.

Dividends paid to common stockholders in 2017 are considered return of capital for tax purposes.

 

13


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.

The Tax Cuts and Jobs Act

On December 22, 2017, the Act was signed into law which 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.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2017, 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 December 31, 2017, we had the following material contractual obligations (dollars in thousands):

 

     2018 (A)      2019      2020      2021      2022      Thereafter      Total  

Principal payments

   $ 28,258      $ 28,862      $ 30,203      $ 29,050      $ 19,938      $ 31,780      $ 168,091  

Balloon payments

     50,740        95,345        24,950        311,518        561,477        712,977        1,757,007  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     78,998        124,207        55,153        340,568        581,415        744,757        1,925,098  

Interest (B)

     76,906        78,967        74,992        57,252        41,508        66,784        396,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations (C)

   $ 155,904      $ 203,174      $ 130,145      $ 397,820      $ 622,923      $ 811,541      $ 2,321,507  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) In February 2018, we exercised an option to extend the balloon payment to April 2019. See Note 15 to the consolidated financial statements for additional information.
(B) Estimated interest payments on floating rate debt is calculated using LIBOR rates in effect at December 31, 2017 and may not be indicative of actual payments. Actual payments may vary significantly due to LIBOR fluctuations. See Note 7 to the consolidated financial statements for further information about interest rates.
(C) Total obligations includes an estimate of interest payments on floating rate debt, see Note B above.

In addition to mortgage notes payable, we are a party to the Management Agreement with the Manager and property management agreements with Property Managers. See Note 14 to the consolidated financial statements for information related to our capital improvement, repair and lease commitments.

INFLATION

Our triple net leases provide for either fixed increases in base rents and/or indexed escalators, based on the CPI. In our Managed Properties segment, resident agreements are generally month to month agreements affording us the opportunity to increase prices subject to market and other conditions.

 

14


NON-GAAP FINANCIAL MEASURES

A non-GAAP financial measure is a measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are not excluded from or included in the most comparable GAAP measure. We consider certain non-GAAP financial measures to be useful supplemental measures of our operating performance. GAAP accounting for real estate assets assumes that the value of real estate assets diminishes predictably over time, even though real estate values historically have risen or fallen with market conditions. As a result, many industry investors look to non-GAAP financial measures for supplemental information about real estate companies.

You should not consider non-GAAP measures as alternatives to GAAP net income (loss), which is an indicator of our financial performance, or as alternatives to GAAP cash flow from operating activities, which is a liquidity measure. Additionally, non-GAAP measures are not intended to be a measure of our ability to satisfy our debt and other cash requirements. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP measures in conjunction with GAAP net income, cash flow from operating activities, investing activities and financing activities, as presented in our consolidated financial statements, and other financial data included elsewhere in this report. Moreover, the comparability of non-GAAP financial measures across companies may be limited as a result of differences in the manner in which real estate companies calculate such measures.

Below is a description of the non-GAAP financial measures used by our management and reconciliations of these measures to the most directly comparable GAAP measures.

Funds From Operations and Normalized Funds From Operations

We use Funds From Operations (“FFO”) and Normalized FFO as supplemental measures of our operating performance. We use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as GAAP net income excluding gains (losses) from sales of depreciable real estate assets and impairment charges of depreciable real estate, plus real estate depreciation and amortization, and after adjustments for unconsolidated entities and joint ventures to reflect FFO on the same basis. FFO does not account for debt principal payments and is not intended as a measure of a REIT’s ability to satisfy such payments or any other cash requirements.

Normalized FFO, as defined below, measures the financial performance of our portfolio of assets excluding items that, although incidental to, are not reflective of the day-to-day operating performance of our portfolio of assets. We believe that Normalized FFO is useful because it facilitates the evaluation of our portfolio’s operating performance (i) between periods on a consistent basis and (ii) to the operating performance of other real estate companies. However, comparability may be limited because our calculation of Normalized FFO may differ significantly from that of other companies or because of features of our business that are not present in other companies.

We define Normalized FFO as FFO excluding the following income and expense items, as applicable: (a) acquisition, transaction and integration related costs and expenses; (b) the write off of unamortized discounts, premiums, deferred financing costs, or additional costs, make whole payments and penalties or premiums incurred as the result of early repayment of debt (collectively “Gain (Loss) on extinguishment of debt”); (c) incentive compensation recognized as a result of sales of property; (d) the remeasurement of deferred tax assets and (e) other items that we believe are not indicative of operating performance, generally reported as “Other expense (income)” in the Consolidated Statements of Operations.

 

15


Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) facilitates an assessment of the operating performance of our existing portfolio of assets on an unleveraged basis by eliminating the impact of our capital structure and tax position. We define Adjusted EBITDA as Normalized FFO excluding interest and taxes.

The following table sets forth a reconciliation of net loss to FFO, Normalized FFO and Adjusted EBITDA:

 

     Year Ended December 31,  
(dollars in thousands)    2017      2016      2015  

Net income (loss)

   $ 12,208      $ (72,249    $ (82,425

Gain on sale of real estate

     (71,763      (13,356      —    

Depreciation and amortization

     139,942        184,546        160,318  
  

 

 

    

 

 

    

 

 

 

FFO

     80,387        98,941        77,893  

Acquisition, transaction and integration expense

     2,453        3,942        13,444  

Loss on extinguishment of debt

     3,902        245        5,091  

Incentive compensation on sale of real estate (A)

     2,930        2,044        —    

Remeasurement of deferred tax assets (B)

     2,966        —          —    

Other expense (C)

     1,702        727        1,629  
  

 

 

    

 

 

    

 

 

 

Normalized FFO

     94,340        105,899        98,057  

Interest expense

     93,597        91,780        75,021  

Income tax expense (benefit)

     546        439        (3,655
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 188,483      $ 198,118      $ 169,423  
  

 

 

    

 

 

    

 

 

 

 

(A) Represents incentive compensation directly related to the gain on sale of real estate, which may represent a portion of total incentive compensation earned by the Manager in a given quarter, as reported in “Management fees and incentive compensation to affiliate” in the Consolidated Statements of Operations. The calculation of gain on sale for purposes of the incentive compensation calculation differs significantly from gain on sale calculated in accordance with GAAP.
(B) Reflects the remeasurement of our deferred tax assets due to the reduction in the U.S. corporate income tax rate and is included in “Income tax expense (benefit)” in the Consolidated Statements of Operations.
(C) Primarily includes damage remediation costs due to Hurricane Irma, changes in the fair value of financial instruments, casualty related charges and restructuring costs.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our historical financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Our estimates are based on information available to management at the time of preparation of the financial statements, including the result of historical analysis, our understanding and experience of our operations, our knowledge of the industry and market-participant data available to us.

Actual results have historically been in line with management’s estimates and judgments used in applying each of the accounting policies described below, and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our consolidated financial statements. However, we do not expect our assessments and assumptions below to materially change in the future.

A summary of our significant accounting policies is presented in Note 2 to our consolidated financial statements. The following is a summary of our accounting policies that are most effected by judgments, estimates and assumptions.

 

16


Revenue Recognition

Resident Fees and Services - Resident fees and services include monthly rental revenue, care income and ancillary income recognized from the Managed Properties segment. Resident fees and services are recognized monthly as services are provided. Most lease agreements with residents are cancelable by the resident with 30 days’ notice. Ancillary income primarily relates to non-refundable community fees. Non-refundable community fees are recognized on a straight-line basis over the estimated length of stay of residents, which approximates 24 months for AL/MC properties and 33 months for IL properties.

Acquisition Accounting

We have determined that all of our acquisitions should be accounted for under the acquisition method. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the respective transaction dates. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as estimated future cash flow projections, appropriate discount and capitalization rates and other estimates based on available market information. Estimates of future cash flows are based on a number of factors including property operating results, known and anticipated trends, as well as market and economic conditions.

In measuring the fair value of tangible and identified intangible assets acquired and liabilities assumed, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. In the case of real property, the fair value of the tangible assets acquired is determined by valuing the property as if it were vacant. Significant estimates impacting the measurement at fair value of our real estate property include expected future rental rates and occupancy, construction cost data and qualitative selection of comparable market transactions as well as the assessment of the relative quality and condition of our acquired properties.

Recognized intangible assets primarily include the fair value of in-place resident leases. We estimate the fair value of in-place leases as (i) the present value of the estimated rental revenue that would have been forgone, offset by variable costs that would have otherwise been incurred during a reasonable lease-up period, as if the acquired units were vacant and (ii) the estimated absorption costs, such as additional marketing costs that would have been incurred during the lease-up period. The acquisition fair value of the in-place lease intangibles is amortized over the estimated length of stay of the residents at the senior housing properties on a straight-line basis, which approximates 24 months for AL/MC and CCRC properties and 33 months for IL properties.

Contingent consideration, if any, is measured at fair value on the date of acquisition. In subsequent reporting periods, the fair value of the contingent consideration is remeasured at each reporting date, with any change recorded in “Other expense” in the Consolidated Statements of Operations.

Provision for Uncollectible Receivables

We assess the collectability of our rent receivables, including that of our straight-line rent receivable, on an ongoing basis. We base our assessment on several qualitative and quantitative factors, including and as appropriate, resident and triple net lease tenant payment history, the financial strength of the resident or tenant and of guarantors, the value of the underlying collateral or deposit, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will not be able to recover the full value of the receivable, we provide for a specific reserve against the portion of the receivable that we estimate may not be recoverable. Any unrecovered amount adversely impacts our cash flows, liquidity and results of operations on a dollar-for-dollar basis.

 

17


Impairment of Long Lived Assets

We periodically evaluate long-lived assets, including definite lived intangible assets, primarily consisting of our real estate investments, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations. In performing this evaluation, market conditions and our current intentions with respect to holding or disposing of the asset are considered. If the sum of the expected future undiscounted cash flows is less than book value, we recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds its fair value. An impairment loss is recognized at the time any such determination is made. We have not recorded an impairment loss since inception.

Income Taxes

As a REIT, we are generally not subject to federal income tax on income that we distribute as dividends to our stockholders. Our determination that we qualify as a REIT is based on interpretation of tax laws and our conclusion has an impact on the measurement and recognition of income tax expense. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates and distributions to stockholders would not be deductible by us in computing our taxable income. Failing to qualify as a REIT could materially and adversely affect our financial position, performance and liquidity.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the consolidated financial statements for information about recent accounting pronouncements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

18


Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

New Senior Investment Group Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of New Senior Investment Group Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2014.

New York, New York

February 27, 2018, except for the effects of the retrospective adoption of the updated accounting standard discussed in Note 2, as to which the date is June 20, 2018.

 

19


Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

New Senior Investment Group Inc.

Opinion on Internal Control over Financial Reporting

We have audited New Senior Investment Group Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, New Senior Investment Group Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 27, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

20


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

New York, New York

February 27, 2018

 

21


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

     December 31,  
     2017     2016  

Assets

    

Real estate investments:

    

Land

   $ 182,238     $ 220,317  

Buildings, improvements and other

     2,329,524       2,552,862  

Accumulated depreciation

     (275,794     (218,968
  

 

 

   

 

 

 

Net real estate property

     2,235,968       2,554,211  
  

 

 

   

 

 

 

Acquired lease and other intangible assets

     264,438       319,929  

Accumulated amortization

     (249,198     (255,452
  

 

 

   

 

 

 

Net real estate intangibles

     15,240       64,477  
  

 

 

   

 

 

 

Net real estate investments

     2,251,208       2,618,688  

Cash and cash equivalents

     137,327       58,048  

Straight-line rent receivables

     82,445       73,758  

Receivables and other assets, net

     37,047       71,234  
  

 

 

   

 

 

 

Total Assets

   $ 2,508,027     $ 2,821,728  
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities

    

Mortgage notes payable, net

   $ 1,907,928     $ 2,130,387  

Due to affiliates

     9,550       11,623  

Accrued expenses and other liabilities

     84,664       100,823  
  

 

 

   

 

 

 

Total Liabilities

   $ 2,002,142     $ 2,242,833  
  

 

 

   

 

 

 

Commitments and contingencies (Note 14)

    

Equity

    

Preferred Stock $0.01 par value, 100,000,000 shares authorized and none issued or outstanding as of both December 31, 2017 and 2016

   $ —       $ —    

Common stock $0.01 par value, 2,000,000,000 shares authorized, 82,148,869 and 82,127,247 shares issued and outstanding as of December 31, 2017 and 2016, respectively

     821       821  

Additional paid-in capital

     898,132       897,918  

Accumulated deficit

     (393,068     (319,844
  

 

 

   

 

 

 

Total Equity

   $ 505,885     $ 578,895  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 2,508,027     $ 2,821,728  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

22


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except share data)

 

     Year Ended December 31,  
     2017      2016     2015  

Revenues

       

Resident fees and services

   $ 336,739      $ 359,472     $ 277,324  

Rental revenue

     112,391        112,966       111,154  
  

 

 

    

 

 

   

 

 

 

Total revenues

     449,130        472,438       388,478  

Expenses

       

Property operating expense

     230,045        243,027       189,543  

Depreciation and amortization

     139,942        184,546       160,318  

Interest expense

     93,597        91,780       75,021  

Acquisition, transaction, and integration expense

     2,453        3,942       13,444  

Management fees and incentive compensation to affiliate

     18,225        18,143       14,279  

General and administrative expense

     15,307        15,194       15,233  

Loss on extinguishment of debt

     3,902        245       5,091  

Other expense

     1,702        727       1,629  
  

 

 

    

 

 

   

 

 

 

Total expenses

     505,173        557,604       474,558  

Gain on sale of real estate

     71,763        13,356       —    
  

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     15,720        (71,810     (86,080

Income tax expense (benefit)

     3,512        439       (3,655
  

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 12,208      $ (72,249   $ (82,425
  

 

 

    

 

 

   

 

 

 

Net income (loss) per share of common stock

       

Basic

   $ 0.15      $ (0.88   $ (1.08
  

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.15      $ (0.88   $ (1.08
  

 

 

    

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding

       

Basic

     82,145,295        82,357,349       76,601,161  
  

 

 

    

 

 

   

 

 

 

Diluted

     82,741,322        82,357,349       76,601,161  
  

 

 

    

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 1.04      $ 1.04     $ 0.75  
  

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

23


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands, except share data)

 

     Common Stock                    
     Shares     Amount     Accumulated
Deficit
    Additional
Paid-in Capital
    Total Equity  

Equity at December 31, 2014

     66,415,415     $ 664     $ (24,715   $ 672,587     $ 648,536  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of common stock, net

     20,114,090       201       —         266,312       266,513  

Repurchase of common stock

     (1,112,000     (11     —         (10,262     (10,273

Exercise of stock options

     30,046       —         —         —         —    

Fair value of stock options issued

     —         —         —         17       17  

Dividends declared

     —         —         (55,043     —         (55,043

Net loss

     —         —         (82,425     —         (82,425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity at December 31, 2015

     85,447,551     $ 854     $ (162,183   $ 928,654     $ 767,325  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repurchase of common stock

     (3,333,333     (33     —         (30,880     (30,913

Fair value of stock options issued

     —         —         —         5       5  

Director’s shares issued

     13,029       —         —         139       139  

Dividends declared

     —         —         (85,412     —         (85,412

Net loss

     —         —         (72,249     —         (72,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity at December 31, 2016

     82,127,247     $ 821     $ (319,844   $ 897,918     $ 578,895  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Director’s shares issued

     21,622       —         —         214       214  

Dividends declared

     —         —         (85,432     —         (85,432

Net income

     —         —         12,208       —         12,208  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity at December 31, 2017

     82,148,869     $ 821     $ (393,068   $ 898,132     $ 505,885  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

24


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Year Ended December 31,  
     2017     2016     2015  

Cash Flows From Operating Activities

      

Net income (loss)

   $ 12,208     $ (72,249   $ (82,425

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation of tangible assets and amortization of intangible assets

     140,078       184,689       160,460  

Amortization of deferred financing costs

     9,090       9,582       9,320  

Amortization of deferred revenue, net

     (385     1,903       1,591  

Amortization of (premium) discount on mortgage notes payable

     (512     (603     77  

Non-cash straight-line rent

     (17,865     (21,842     (25,462

Gain on sale of real estate

     (71,763     (13,356     —    

Loss on extinguishment of debt

     3,902       245       5,091  

Equity-based compensation

     75       144       17  

Provision for bad debt

     2,228       2,150       2,105  

Remeasurement of deferred tax assets

     2,966       —         —    

Other non-cash expense

     1,168       702       964  

Changes in:

      

Receivables and other assets, net

     (1,724     (23     (7,404

Due to affiliates

     (2,073     1,979       2,762  

Accrued expenses and other liabilities

     (16,948     9,024       9,870  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 60,445     $ 102,345     $ 76,966  
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities

      

Proceeds from the sale of real estate, net

   $ 339,624     $ 22,711     $ —    

Capital expenditures, net of insurance proceeds

     (19,729     (21,151     (11,411

Deposits refunded (paid) for real estate investments

     —         584       (11,355

Cash paid for acquisitions, net of deposits

     —         —         (1,251,343
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   $ 319,895     $ 2,144     $ (1,274,109
  

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities

      

Principal payments of mortgage notes payable

   $ (26,946   $ (16,240   $ (15,599

Repayments of mortgage notes payable

     (204,730     (13,725     (304,484

Payment of exit fee on extinguishment of debt

     (3,264     (189     (1,499

Payment of common stock dividend

     (85,432     (85,412     (70,318

Repurchase of common stock

     —         (30,913     (10,273

Payment of deferred financing costs

     —         —         (13,065

Proceeds from mortgage notes payable

     —         —         1,248,252  

Purchase of interest rate caps

     —         —         (1,247

Proceeds from issuance of common stock and exercise of options

     —         —         276,569  

Costs related to issuance of common stock

     —         —         (10,056
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ (320,372   $ (146,479   $ 1,098,280  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

     59,968       (41,990     (98,863

Cash, cash equivalents and restricted cash, beginning of year

     97,517       139,507       238,370  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash, end of year

   $ 157,485     $ 97,517     $ 139,507  
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

      

Cash paid during the year for interest expense

   $ 85,373     $ 82,557     $ 62,870  

Cash paid during the year for income taxes

     274       266       190  

Supplemental Schedule of Non-Cash Investing and Financing Activities

      

Issuance of common stock and exercise of options

   $ 214     $ 139     $ 316  

Other liabilities assumed with acquisitions

     —         —         651  

 

Continued on next page

 

25


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Year Ended December 31,  
     2017      2016      2015  

Reconciliation of Cash, Cash Equivalents and Restricted Cash

        

Cash and cash equivalents

   $ 58,048      $ 116,881      $ 226,377  

Restricted cash (A)

     39,469        22,626        11,993  
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash, beginning of year

   $ 97,517      $ 139,507      $ 238,370  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

   $ 137,327      $ 58,048      $ 116,881  

Restricted cash (A)

     20,158        39,469        22,626  
  

 

 

    

 

 

    

 

 

 

Cash, cash equivalents and restricted cash, end of year

   $ 157,485      $ 97,517      $ 139,507  
  

 

 

    

 

 

    

 

 

 

 

(A) 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.

 

26


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

1. ORGANIZATION

New Senior Investment Group Inc. (“New Senior,” “we,” “us” or “our”) is a Real Estate Investment Trust (“REIT”) primarily focused on investing in private pay senior housing properties. We were formed as a Delaware limited liability company in 2012 and converted to a Delaware corporation on May 30, 2014 and changed our name to New Senior Investment Group Inc. on June 16, 2014.

As of December 31, 2017, 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 Community (“CCRC”). 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’’) with the instructions to Form 10-K 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.

 

 

27


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

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

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.

Revenue Recognition

Resident Fees and Services - Resident fees and services include monthly rental revenue, care income and ancillary income recognized from the Managed Properties segment. Resident fees and services are recognized monthly as services are provided. Most lease agreements with residents are cancelable by the resident with 30 days’ notice. Ancillary income primarily relates to non-refundable community fees. Non-refundable community fees are recognized on a straight-line basis over the estimated length of stay of residents, which approximates 24 months for AL/MC properties and 33 months for IL properties.

Rental Revenue - 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.

Acquisition Accounting

We have determined that all of our acquisitions should be accounted for under the acquisition method. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the respective transaction dates. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as estimated future cash flow projections, appropriate discount and capitalization rates and other estimates based on available market information. Estimates of future cash flows are based on a number of factors including property operating results, known and anticipated trends, as well as market and economic conditions.

In measuring the fair value of tangible and identified intangible assets acquired and liabilities assumed, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. In the case of buildings, the fair value of the tangible assets acquired is determined by valuing the property as if it were vacant. Significant estimates impacting the measurement at fair value of our real property include construction cost data and qualitative selection of comparable market transactions as well as the assessment of the relative quality and condition of the acquired properties.

 

28


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Recognized intangible assets primarily include the fair value of in-place resident leases. We estimate the fair value of in-place leases as (i) the present value of the estimated rental revenue that would have been forgone, offset by variable costs that would have otherwise been incurred during a reasonable lease-up period, as if the acquired units were vacant and (ii) the estimated absorption costs, such as additional marketing costs that would have been incurred during the lease-up period. The acquisition fair value of the in-place lease intangibles is amortized over the estimated length of stay of the residents on a straight-line basis.

Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of the contingent consideration is remeasured at each reporting date with any change recorded in “Other expense” in the Consolidated Statements of Operations.

Acquisition and transaction expense includes costs related to completed and potential acquisitions, dispositions and other transactions. Such costs include advisory, legal, accounting, valuation and other professional or consulting fees. Integration expense includes costs directly related to the integration of acquired businesses such as lender mandated repairs, licensing, rebranding and training incurred in connection with an acquisition. Acquisition, transaction and integration costs are expensed as incurred.

Real Estate Investments

Real estate investments are recorded at cost less accumulated depreciation or accumulated amortization.

Depreciation is calculated on a straight-line basis using estimated remaining useful lives not to exceed 40 years for buildings, 3 to 10 years for building improvements and 3 to 5 years for other fixed assets.

Amortization for in-place lease intangibles, ground lease intangibles and other intangibles is calculated on a straight-line basis using estimated useful lives of 24 to 33 months, 74 to 82 years and 5 to 13 years, respectively. Amortization for above/below market lease intangibles is calculated on a straight line basis using estimated useful lives of 15 to 17 years.

Impairment of Long Lived Assets

We periodically evaluate long-lived assets, including definite lived intangible assets, primarily consisting of our real estate investments, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations. In performing this evaluation, market conditions and our current intentions with respect to holding or disposing of the asset are considered. If the sum of the expected future undiscounted cash flows is less than book value, we recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds its fair value. An impairment loss is recognized at the time any such determination is made. We have not recorded an impairment loss since inception.

Cash and Cash Equivalents

Cash and cash equivalents consists of cash on hand and all highly liquid short term investments with maturities of 90 days or less, when purchased.

Restricted Cash

Restricted cash 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.

 

29


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Straight-line Rent Receivables and Receivables and Other Assets, Net

Receivables and other assets, net consists primarily of escrows held by lenders and resident receivables, net of allowance and prepaid expenses. We assess the collectability of rent receivables, including 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 resident and triple net lease tenant, the financial strength of the resident or tenant and of guarantors, the value of the underlying collateral or deposit, if any, and current economic conditions. If the evaluation of these factors indicates it is probable that we will not be able to recover the full value of the receivable, we provide a specific reserve against the portion of the receivable that we estimate may not be recovered. We have not recorded a reserve against our straight-line rent receivable since inception.

Deferred Financing Costs

Deferred financing costs consist of fees and direct costs incurred in obtaining financing. Deferred financing costs are presented as a direct deduction from the carrying amount of the related debt liability and are amortized over the terms of the related borrowings using the effective interest rate method as a component of interest expense. Amortized costs of $9.1 million, $9.6 million and $9.3 million are included in “Interest expense” in the Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, respectively.

Deferred Revenue

Deferred revenue primarily includes non-refundable community fees received when residents move in, and are included within “Accrued expenses and other liabilities” in the Consolidated Balance Sheets. Deferred revenue amounts are amortized into income on a straight-line basis over the estimated length of stay of the resident, and are included within “Resident fees and services” in the Consolidated Statements of Operations.

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 (“Code”). Requirements for qualification as a REIT include various restrictions on ownership of stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of the remaining balance may extend until timely filing of our tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

Certain activities are conducted through a taxable REIT subsidiary (“TRS”) and therefore are subject to federal and state income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date.

We recognize tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in the Consolidated Statements of Operations. As of December 31, 2017 and 2016, we had no uncertain tax positions.

 

30


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Fair Value Measurement

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy, which is described below, prioritizes the inputs we use in measuring fair value:

 

    Level 1 - Quoted prices for identical instruments in active markets.

 

    Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

 

    Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Derivative Instruments

In the normal course of business, we may use derivative instruments to manage, or hedge, interest rate risk. We do not use derivative instruments for trading or speculative purposes and do not apply hedge accounting. We recognize all derivatives as either assets or liabilities at fair value. Derivative valuation requires us to make estimates and judgments that affect the fair value of the instruments. We estimate the fair value of derivatives based on pricing models that consider level 2 inputs including forward yield curves, cap strike rates, cap volatility and discount rates. The fair value adjustments on our interest rate caps were losses of $0.1 million, $0.2 million and $1.0 million for the years ended December 31, 2017, 2016 and 2015, respectively, and 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 of the interest rate caps was immaterial as of December 31, 2017 and was $0.1 million as of December 31, 2016, and is included in “Receivables and other assets, net” in the Consolidated Balance Sheets. Our interest rate caps were executed with investment grade counterparties.

Assets Held for Sale

We classify certain long-lived assets as held for sale once the criteria, as defined by GAAP, has been met. Assets held for sale are included in “Receivables and other assets, net” in the Consolidated Balance Sheets. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated.

Sale of Assets

We recognize sales of assets only upon the closing of the transactions with the purchaser. We recognize gains on assets sold using the full accrual method upon closing if the collectability of the sales price is reasonably assured, we are not obligated to perform any significant activities after the sale to earn the profit, we have received adequate initial investment from the purchaser, and other profit recognition criteria has been satisfied.

Stock Options

Options granted to our directors are measured at fair value at the grant date with the related expense recognized over the service term, if any.

 

31


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These included identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. While this ASU specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate. In August 2015, the FASB deferred the effective date of this standard by one year, which will be for fiscal years, and interim periods within those years, beginning after December 15, 2017. We will adopt this standard under the modified retrospective approach effective on January 1, 2018. Under the modified retrospective approach, the standard is applied to the most current period presented, and the cumulative effect of the adoption change is recognized as an adjustment to beginning retained earnings. We have determined that the adoption of this standard will not result in an adjustment to beginning retained earnings and will not result in a change in the amount, timing and pattern of recognition of our revenue as a substantial portion of our revenue is generated through our triple net lease and managed property leasing arrangements, which are excluded from ASU 2014-09.

Additionally, real estate sales are within the scope of ASU 2014-09, as amended by ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 clarifies the scope of subtopic 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and adds guidance for partial sales of nonfinancial assets. Under ASU 2014-09 and ASU 2017-05, the income recognition for real estate sales is largely based on the transfer of control versus continuing involvement under the current guidance. 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. As a result, the adoption of this standard is not expected to impact the timing of our income recognition from sales of real estate.

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.

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.

 

32


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230) - Restricted Cash, related to the classification of restricted cash on the statement of cash flows. This ASU 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. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. Adoption of this ASU will impact the presentation of our Consolidated Statements of Cash Flows as activity between cash and cash equivalents and restricted cash will no longer be presented in our operating, financing or investing activities. These financial statements reflect the adoption of ASU 2016-18 as if it was adopted as of December 31, 2017.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805) - Clarifying the Definition of a Business. This standard narrows the FASB’s definition of a business and provides a framework that assists entities with making reasonable judgments about whether a transaction involves an asset or business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The ASU is to be applied prospectively and upon adoption we expect that the majority of our acquisitions will be deemed asset acquisitions which will result in the elimination of a measurement period, the capitalization of related third party transaction costs and any associated contingent consideration being recognized when the contingency is resolved.

3. DISPOSITIONS

2017 Activity

In November, we sold a portfolio of nine AL/MC properties in the Managed Properties segment for a purchase price of $109.5 million and recognized a gain on sale of $6.9 million, net of selling costs. In connection with this sale we repaid $78.7 million of debt.

In December, we sold a portfolio of six properties (four CCRC, one IL and one AL/MC) in the Triple Net Lease Properties segment for a purchase price of $186.0 million, including lease termination fees, and recognized a gain on sale of $42.3 million, net of selling costs. In connection with this sale, we repaid $98.1 million of debt.

The following table presents the revenues and expenses of the above portfolios:

 

     Year Ended December 31,  
     2017      2016      2015  

Revenues

        

Resident fees and services

   $ 28,910      $ 34,370      $ 32,762  

Rental revenue

     16,893        17,490        17,496  
  

 

 

    

 

 

    

 

 

 

Total revenues

     45,803        51,860        50,258  

Expenses

        

Property operating expense

     23,413        27,033        25,781  

Depreciation and amortization

     7,212        19,205        32,284  

Interest expense

     7,262        7,630        7,436  
  

 

 

    

 

 

    

 

 

 

Total expenses

   $ 37,887      $ 53,868      $ 65,501  

In addition to the above transactions, we sold four properties (two AL/MC and two IL) in the Managed Properties segment for a purchase price of $48.5 million and recognized a gain on sale of $22.5 million, net of selling costs. In connection with these sales, we repaid $28.0 million of debt.

 

33


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

2016 Activity

We sold two AL/MC properties for a purchase price of $23.0 million and recognized a gain on sale of $13.4 million, net of selling costs. In connection with this sale, we repaid $13.7 million of debt associated with these properties and, pursuant to the Property Management Agreement, paid an early termination fee of $1.8 million to Blue Harbor, which is included in “Acquisition, transaction and integration expense” in the Consolidated Statements of Operations.

4. SEGMENT REPORTING

As of December 31, 2017, we operated 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 engage 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 (income), gain on sale of real estate and income tax expense (benefit) are not allocated to individual segments for purposes of assessing segment performance. There are no intersegment sales or transfers.

 

34


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

    Year Ended December 31, 2017     Year Ended December 31, 2016     Year Ended December 31, 2015  
    Triple Net
Lease
Properties
    Managed
Properties
    Consolidated     Triple Net
Lease
Properties
    Managed
Properties
    Consolidated     Triple Net
Lease
Properties
    Managed
Properties
    Consolidated  

Revenues

                 

Resident fees and services

  $ —       $ 336,739     $ 336,739     $ —       $ 359,472     $ 359,472     $ —       $ 277,324     $ 277,324  

Rental revenue

    112,391       —         112,391       112,966       —         112,966       111,154       —         111,154  

Less: Property operating expense

    —         230,045       230,045       —         243,027       243,027       —         189,543       189,543  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment NOI

  $ 112,391     $ 106,694     $ 219,085     $ 112,966     $ 116,445     $ 229,411     $ 111,154     $ 87,781     $ 198,935  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

        139,942           184,546           160,318  

Interest expense

        93,597           91,780           75,021  

Acquisition, transaction and integration expense

        2,453           3,942           13,444  

Management fees and incentive compensation to affiliate

        18,225           18,143           14,279  

General and administrative expense

        15,307           15,194           15,233  

Loss on extinguishment of debt

        3,902           245           5,091  

Other expense

        1,702           727           1,629  
     

 

 

       

 

 

       

 

 

 

Total expenses

        275,128           314,577           285,015  

Gain on sale of real estate

        71,763           13,356           —    
     

 

 

       

 

 

       

 

 

 

Income (loss) before income taxes

        15,720           (71,810         (86,080

Income tax expense (benefit)

        3,512           439           (3,655
     

 

 

       

 

 

       

 

 

 

Net income (loss)

      $ 12,208         $ (72,249       $ (82,425
     

 

 

       

 

 

       

 

 

 

Property operating expense includes property management fees and travel reimbursement costs. We also reimbursed the Property Managers for property-level payroll expenses. See Note 9 for additional information on these expenses related to Blue Harbor and Holiday.

Assets by reportable business segment are reconciled to total assets as follows:

 

     December 31, 2017     December 31, 2016  
     Amount      Percentage     Amount      Percentage  

Managed Properties

   $ 1,430,957        57.1   $ 1,639,726        58.1

Triple Net Lease Properties

     980,666        39.1     1,151,102        40.8

All other assets (A)

     96,404        3.8     30,900        1.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

   $ 2,508,027        100.0   $ 2,821,728        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

35


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Capital expenditures in the Managed Properties segment, including investments in real estate property, were $20.0 million, $17.2 million and $11.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Capital expenditures in the Triple Net Lease segment were $0.7 million and $4.1 million for the years ended December 31, 2017 and 2016. There were no capital expenditures in 2015.

The following table presents the percentage of total revenues by geographic location:

 

     As of and for the year ended
December 31, 2017
    As of and for the year ended
December 31, 2016
 
     Number of
Communities
     % of Total Revenue     Number of
Communities
     % of Total Revenue  

Florida

     15        18.0     26        19.8

Texas

     13        12.2     19        12.0

California

     11        10.2     11        10.0

North Carolina

     9        6.6     9        6.4

Pennsylvania

     7        6.2     7        6.0

Oregon

     9        5.0     9        5.3

Other

     69        41.8     71        40.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     133        100.0     152        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

5. REAL ESTATE INVESTMENTS

 

     December 31, 2017      December 31, 2016  
     Gross
Carrying
Amount
     Accumulated
Depreciation
    Net
Carrying
Value
     Gross
Carrying
Amount
     Accumulated
Depreciation
    Net
Carrying
Value
 

Land

   $ 182,238      $ —       $ 182,238      $ 220,317      $ —       $ 220,317  

Building and improvements

     2,216,461        (208,540     2,007,921        2,430,658        (163,670     2,266,988  

Furniture, fixtures and equipment

     113,063        (67,254     45,809        122,204        (55,298     66,906  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate investments

   $ 2,511,762      $ (275,794   $ 2,235,968      $ 2,773,179      $ (218,968   $ 2,554,211  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Depreciation expense was $91.6 million, $92.4 million and $72.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The following table summarizes our real estate intangibles:

 

    December 31, 2017     December 31, 2016  
    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     $ (380   $ 1,227       12.9 years     $ 2,426     $ (419   $ 2,007       13.4 years  

In-place lease and other intangibles

    262,831       (248,818     14,013       18.3 years       317,503       (255,033     62,470       5.2 years  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total intangibles

  $ 264,438     $ (249,198   $ 15,240       $ 319,929     $ (255,452   $ 64,477    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

36


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Amortization expense was $48.3 million, $92.2 million and $87.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Additionally, amortization of above/below market leases was $0.1 million for each of the years ended December 31, 2017, 2016 and 2015, and is reported as a net reduction to “Rental revenue” in the Consolidated Statements of Operations.

The following table sets forth the estimated future amortization of intangible assets as of December 31, 2017:

 

Years Ending December 31 2018

   $ 8,344  

2019

     448  

2020

     448  

2021

     448  

2022

     448  

Thereafter

     5,104  
  

 

 

 

Total intangibles

   $ 15,240  
  

 

 

 

Impact from Hurricane Irma

Due to the impact of Hurricane Irma, we recognized $1.5 million for damage remediation and other incremental costs in 2017 which is included in “Other expense” in the Consolidated Statements of Operations. We do not expect additional remediation costs in subsequent periods to be material.

6. RECEIVABLES AND OTHER ASSETS, NET

 

     December 31, 2017      December 31, 2016  

Escrows held by lenders (A)

   $ 16,936      $ 36,231  

Prepaid expenses

     4,490        3,617  

Resident receivables, net

     2,672        3,111  

Deferred tax assets

     5,475        8,660  

Security deposits

     3,222        3,238  

Income tax receivable

     802        1,313  

Assets held for sale (B)

     —          10,824  

Other assets and receivables

     3,450        4,240  
  

 

 

    

 

 

 

Total receivables and other assets

   $ 37,047      $ 71,234  
  

 

 

    

 

 

 

 

(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.
(B) The balance as of December 31, 2016 represents two AL/MC properties in the Managed Properties segment and primarily consists of the carrying value of buildings and land. These properties were sold on January 31, 2017.

The following table summarizes the allowance for doubtful accounts and the related provision for resident receivables:

 

     Year Ended December 31,  
     2017      2016      2015  

Balance, beginning of period

   $ 976      $ 509      $ 190  

Provision for bad debt

     2,228        2,150        2,105  

Write-offs, net of recoveries

     (2,266      (1,683      (1,786
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 938      $ 976      $ 509  
  

 

 

    

 

 

    

 

 

 

 

37


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

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

 

38


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

7. MORTGAGE NOTES PAYABLE, NET

 

    December 31, 2017     December 31, 2016  
    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

  $ 563,526     $ 560,182      

Aug 2019 -

Sep 2025

 

 

    3.65% to 4.93%       6.5     $ 604,749     $ 601,232  

Floating Rate (B)

    640,880       636,166      

Oct 2020 -

May 2022

 

 

   

1M LIBOR +
2.20% to 1M
LIBOR + 2.70%
 
 
 
    4.1       717,254       710,672  

Triple Net Lease Properties

             

Fixed Rate (C)

    669,656       660,646      

Jan 2021 -

Jan 2024

 

 

    3.80% to 7.40%       4.3       683,137       667,579  

Floating Rate

    51,036       50,934       Apr 2018      
3M LIBOR +
3.00%
 
 
    0.3       151,634       150,904  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Total

  $ 1,925,098     $ 1,907,928           4.8     $ 2,156,774     $ 2,130,387  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

 

(A) The totals are reported net of deferred financing costs of $17.2 million and $27.8 million as of December 31, 2017 and 2016, respectively.
(B) All of these loans have LIBOR caps that range between 3.30% and 3.80% as of December 31, 2017.
(C) Includes loans with an outstanding face amount of $336.8 million and $286.5 million, as of December 31, 2017, 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.

We repaid $204.7 million and $13.7 million of debt during the years ended December 31, 2017 and 2016, respectively, associated with our property sales, and recognized a loss on extinguishment of debt of $3.9 million and $0.2 million, respectively, which represents exit fees and the write-off of related unamortized deferred financing costs.

In March 2015, we refinanced mortgage loans of $297.0 million and recognized a loss on extinguishment of debt of $5.1 million, which represents the write-off of related unamortized deferred financing costs, mortgage discounts, exit fees and other costs, as of the date of the refinancing.

The carrying value of the collateral relating to fixed rate and floating rate mortgages was $1.5 billion and $0.8 billion as of December 31, 2017 and $1.6 billion and $1.0 billion as of December 31, 2016, respectively.

Our mortgage notes payable have contractual maturities as follows:

 

     Principal
Payments
     Balloon
Payments
     Total  

2018 (A)

   $ 28,258      $ 50,740      $ 78,998  

2019

     28,862        95,345        124,207  

2020

     30,203        24,950        55,153  

2021

     29,050        311,518        340,568  

2022

     19,938        561,477        581,415  

Thereafter

     31,780        712,977        744,757  
  

 

 

    

 

 

    

 

 

 

Total outstanding face amount

   $ 168,091      $ 1,757,007      $ 1,925,098  
  

 

 

    

 

 

    

 

 

 

 

(A) In February 2018, we exercised an option to extend the balloon payment to April 2019. See Note 15 for additional information.

 

39


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

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 December 31, 2017.

The fair values of mortgage notes payable as of December 31, 2017 and 2016 was $1.9 billion and $2.1 billion, respectively. Mortgage notes payable are not measured at fair value in the Consolidated Balance Sheets. The 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.

8. ACCRUED EXPENSES AND OTHER LIABILITIES

 

     December 31, 2017      December 31, 2016  

Security deposits payable

   $ 46,291      $ 57,186  

Escrow liabilities (A)

     6,664        10,503  

Accounts payable

     9,794        10,137  

Mortgage interest payable

     6,297        6,671  

Deferred community fees, net

     4,612        5,257  

Rent collected in advance

     2,091        3,180  

Property tax payable

     3,331        3,877  

Other liabilities

     5,584        4,012  
  

 

 

    

 

 

 

Total accrued expenses and other liabilities

   $ 84,664      $ 100,823  
  

 

 

    

 

 

 

 

(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.

9. TRANSACTIONS WITH AFFILIATES

Management Agreements

In conjunction with the spin-off, New Senior entered into a management agreement (the “Management Agreement”) with the Manager dated November 6, 2014 (effective November 7, 2014), 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 (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. During the years ended December 31, 2017, 2016 and 2015, we incurred management fees of $15.3 million, $15.4 million and $14.3 million, respectively, under the Management Agreement, which is included in “Management fees and incentive compensation to affiliate” in the Consolidated Statements of Operations. As of both December 31, 2017 and 2016, we had a payable for management fees of $1.3 million which is included in “Due to affiliates” in the Consolidated Balance Sheets.

 

40


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(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. During the years ended December 31, 2017 and 2016, the Manager earned incentive compensation of $2.9 million and $2.7 million, respectively, which is included in “Management fees and incentive compensation to affiliate” in the Consolidated Statements of Operations. The Manager did not earn incentive compensation in 2015. As of December 31, 2016, we had a payable for incentive compensation of $2.1 million which is included in “Due to affiliates” in the Consolidated Balance Sheets. We did not have a payable for incentive compensation as of December 31, 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:

 

     Year Ended December 31,  
     2017      2016      2015  

Included in:

        

General and administrative expense

   $ 7,570      $ 8,158      $ 6,607  

Acquisition, transaction and integration expense

     1,697        1,610        3,073  
  

 

 

    

 

 

    

 

 

 

Total reimbursements to the Manager

   $ 9,267      $ 9,768      $ 9,680  
  

 

 

    

 

 

    

 

 

 

As of December 31, 2017 and 2016, we had a payable for Manager reimbursements of $1.3 million and $1.0 million, respectively, which is included in “Due to affiliates” in the Consolidated Balance Sheets.

During 2015, we executed a plan to centralize operations in New York, New York and relocate certain personnel from the Plano, Texas office to New York, New York. We determined that this plan qualified as a restructuring activity under ASC 420. During the years ended December 31, 2016 and 2015, we incurred costs of $0.1 million and $0.7 million, respectively, which primarily consist of severance-related costs and lease-related expenses associated with the office in Plano, Texas, and are included in “Other expense” in the Consolidated Statements of Operations.

 

41


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

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 our 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 years ended December 31, 2017, 2016 and 2015. 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.

The following table summarizes property management fees and reimbursements paid to Property Managers affiliated with Fortress:

 

     Year Ended December 31,  
     2017      2016      2015  

Property management fees

   $ 18,296      $ 19,724      $ 16,167  

Travel reimbursement costs

     304        366        369  

Property-level payroll expenses

     92,167        104,180        85,477  

As of December 31, 2017 and 2016, we had payables for property management fees of $1.4 million and $1.7 million, respectively, and property-level payroll expenses of $5.6 million and $5.5 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.

In October 2016, we sold two properties and, pursuant to the Property Management Agreement, paid an early termination fee of $1.8 million to Blue Harbor. See Note 3 for further information.

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 $74.2 million, $71.0 million and $68.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

10. INCOME TAXES

New Senior is organized and conducts its 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 at regular corporate tax rates.

 

42


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

The Tax Cuts and Jobs Act

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.

The following table presents the provision (benefit) for income taxes:

 

     Year Ended December 31,  
     2017      2016      2015  

Current

        

Federal

   $ (10    $ 16      $ 26  

State and local

     337        326        84  
  

 

 

    

 

 

    

 

 

 

Total current provision

     327        342        110  

Deferred

        

Federal

     3,376        89        (3,576

State and local

     (191      8        (189
  

 

 

    

 

 

    

 

 

 

Total deferred provision

     3,185        97        (3,765
  

 

 

    

 

 

    

 

 

 

Total provision (benefit) for income taxes

   $ 3,512      $ 439      $ (3,655
  

 

 

    

 

 

    

 

 

 

Generally, our effective tax rate differs from the federal statutory rate as a result of state and local taxes and non-taxable REIT income. The table below provides a reconciliation of our provision for income taxes, based on the statutory rate of 35%, to the effective tax rate.

 

     Year Ended December 31,  
     2017     2016     2015  

Statutory U.S. federal income tax rate

     35.00     35.00     35.00

Non-taxable REIT (loss)

     (32.19 )%      (35.16 )%      (30.87 )% 

State and local taxes

     0.61     (0.39 )%      0.16

Change in federal tax rate

     18.87     —       —  

Other

     0.06     (0.06 )%      (0.06 )% 
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     22.35     (0.61 )%      4.23
  

 

 

   

 

 

   

 

 

 

 

43


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities are presented below:

 

     December 31,  
     2017      2016  

Deferred tax assets:

     

Prepaid fees and rent

   $ 790      $ 1,816  

Net operating loss

     4,050        4,386  

Deferred rent

     949        3,129  

Tax credits

     42        42  

Other

     99        113  
  

 

 

    

 

 

 

Total deferred tax assets

     5,930        9,486  

Less valuation allowance

     —          —    
  

 

 

    

 

 

 

Net deferred tax assets

     5,930        9,486  

Deferred tax liabilities:

     

Depreciation and amortization

     455        826  
  

 

 

    

 

 

 

Total deferred tax liabilities

     455        826  
  

 

 

    

 

 

 

Total net deferred tax assets

   $ 5,475      $ 8,660  
  

 

 

    

 

 

 

Net deferred tax assets are included within “Receivables and other assets, net” in the Consolidated Balance Sheets.

As of December 31, 2017, our TRS had a loss carryforward of approximately $15.8 million for federal and state income tax purposes, which will begin to expire in 2034. The net operating loss carryforward can generally be used to offset future taxable income, if and when it arises.

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 December 31, 2017 as management believes that it is more likely than not that our deferred tax assets will be realized.

New Senior and our TRS file income tax returns with the U.S. federal government and various state and local jurisdictions. Generally, we are no longer subject to tax examinations by tax authorities for tax years ended prior to December 31, 2014. The examination of our TRS federal income tax return for the year ended December 31, 2013 was completed and is no longer subject to examination. The conclusion of the examination resulted in a minimal reduction to the TRS’s net operating loss carryforward. We have assessed our tax positions for all open years and concluded that there are no material uncertainties to be recognized. As of December 31, 2017, we do not believe that there will be a significant change to uncertain tax positions during the next 12 months.

 

44


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

11. EQUITY AND EARNINGS PER SHARE

Equity and Dividends

During the years ended December 31, 2017, 2016 and 2015, we declared dividends per common share of $1.04, $1.04 and $0.75, respectively.

During 2017, we issued an aggregate of 21,622 shares of our common stock to independent directors as compensation.

As of December 31, 2017, approximately 1.3 million shares of our common stock were held by Fortress, through its affiliates, and its principals.

Option Plan

Effective upon the spin-off, we have a Nonqualified Stock Option and Incentive Award Plan (the “Plan”) which provides for the grant of equity-based awards, including restricted stock, stock options, stock appreciation rights, performance awards, tandem awards and other equity-based and non-equity based awards, in each case to the Manager and to the directors, officers, employees, service providers, consultants and advisors of the Manager who perform services for New Senior and to New Senior’s directors, officers, service providers, consultants and advisors. New Senior has initially reserved 30 million shares of its common stock for issuance under the Plan; on the first day of each fiscal year beginning during the ten-year term of the Plan in and after calendar year 2014, that number will be increased by a number of shares of New Senior’s common stock equal to 10% of the number of shares of common stock newly issued by New Senior during the immediately preceding fiscal year. New Senior’s board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

Prior to the spin-off, Drive Shack had issued rights relating to shares of Drive Shack’s common stock (the “Drive Shack options”) to the Manager in connection with capital raising activities. In connection with the spin-off, 5.5 million options that were held by the Manager, or by the directors, officers or employees of the Manager, were converted into an adjusted Drive Shack option and a right relating to a number of shares of New Senior common stock (the “New Senior option”). The exercise price of each adjusted Drive Shack option and New Senior option was set to collectively maintain the intrinsic value of the Drive Shack option immediately prior to the spin-off and to maintain the ratio of the exercise price of the adjusted Drive Shack option and the New Senior option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five day average closing price subsequent to the spin-off date. The options expired or expire, as applicable, between January 12, 2015 and August 18, 2024.

 

45


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

2017 Activity

In the first quarter of 2017, strike prices for outstanding options were reduced by $0.97, reflecting the portion of our 2016 dividends which were deemed return of capital.

2016 Activity

In the first quarter of 2016, strike prices for outstanding options were reduced by $0.98, reflecting the portion of our 2015 dividends which were deemed return of capital.

In March 2016, 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.

Our outstanding options are summarized as follows:

 

     Options
Outstanding at
December 31, 2016
     2017 Activity      Options
Outstanding at
December 31, 2017
 
      Expired      Reverted to
Manager
    

Held by the Manager

     6,578,114        (110,029      266,657        6,734,742  

Issued to the Manager and subsequently transferred to certain of the Manager’s employees

     675,240        (6,301      (266,657      402,282  

Issued to the independent directors

     25,000        —          —          25,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total outstanding options

     7,278,354        (116,330      —          7,162,024  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our outstanding options as of December 31, 2017. The last sale price on the NYSE for our common stock in the year ended December 31, 2017 was $7.56 per share.

 

Recipient

   Date of Grant (A)      Options
Outstanding and
Exercisable
     Weighted Average
Exercise Price (B)
     Intrinsic Value
(millions)
 

Manager

     March 2011        182,527      $ 5.23      $ 0.4  

Manager

     September 2011        283,305        2.14        1.5  

Manager

     April 2012        257,660        5.71        0.5  

Manager

     May 2012        312,026        6.80        0.2  

Manager

     July 2012        346,343        6.76        0.3  

Manager

     January 2013        958,331        12.47        —    

Manager

     February 2013        383,331        14.90        —    

Manager

     June 2013        670,829        15.94        —    

Manager

     November 2013        965,847        17.28        —    

Manager

     August 2014        765,416        18.94        —    

Directors

     November 2014        20,000        15.26        —    

Manager (C)

     June 2015        2,011,409        11.80        —    

Directors

     March 2016        5,000        9.15        —    
     

 

 

       

Total

        7,162,024        
     

 

 

       

Aggregate:

           

Weighted average exercise price

      $ 12.72        

Weighted average remaining life (years)

        5.9        

Intrinsic value (millions)

      $ 2.9        

 

 

(A) Options expire on the tenth anniversary from date of grant.
(B) The strike prices are subject to adjustment in connection with return of capital dividends.
(C) Includes 402,282 options that the Manager assigned to Fortress employees.

 

46


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Earnings Per Share

Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income (loss) 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. Our common stock equivalents are our outstanding stock options.

The following table presents the amounts used in computing our basic EPS and diluted EPS:

 

     Year Ended December 31,  
     2017      2016      2015  

Numerator

        

Net income (loss) applicable to common shares

   $ 12,208      $ (72,249    $ (82,425

Denominator

        

Basic weighted average shares of common stock

     82,145,295        82,357,349        76,601,161  

Stock options (A)

     596,027        —          —    
  

 

 

    

 

 

    

 

 

 

Diluted weighted average shares of common stock

     82,741,322        82,357,349        76,601,161  
  

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.15      $ (0.88    $ (1.08
  

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.15      $ (0.88    $ (1.08
  

 

 

    

 

 

    

 

 

 

 

(A) During the years ended December 31, 2016 and 2015, 539,783 and 635,624 potentially dilutive shares, respectively, were excluded given our loss position, so basic EPS and diluted EPS were the same for each reporting period.

12. CONCENTRATION OF CREDIT RISK

The following table presents our managed properties and triple net lease properties as a percentage of total real estate investments (based on their carrying amount):

 

     December 31,  
     2017     2016     2015  

Holiday - Managed Properties

     44.4     46.8     46.8

Holiday - Triple Net Lease Properties

     36.8     32.7     32.1

Blue Harbor

     10.3     10.5     10.5

Other

     8.5     10.0     10.6

 

47


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

Managed Properties

The following table presents the properties managed by Holiday and Blue Harbor as a percentage of segment real estate investments, net, segment revenue and segment NOI:

 

     As of and for the year ended December 31,  
     2017     2016     2015  
     Holiday     Blue Harbor     Holiday     Blue Harbor     Holiday     Blue Harbor  

Segment real estate investments, net

     73.1     16.9     78.2     17.5     77.9     17.5

Segment revenue

     63.7     28.3     65.9     29.6     57.7     38.8

Segment NOI

     73.4     21.9     72.3     24.2     62.2     34.4

Because Holiday and Blue Harbor manage, but do not lease our properties in the Managed Properties segment, we are not directly exposed to their credit risk in the same manner or to the same extent as that of our triple net lease tenants. However, we rely on Holiday and Blue Harbor’s personnel, expertise, accounting resources and information systems, proprietary information, good faith and judgment to manage our properties efficiently and effectively. We also rely on Holiday and Blue Harbor to otherwise operate our properties in compliance with the terms of the Property Management Agreements, although we have various rights as the property owner to terminate and exercise remedies under the Property Management Agreements. Holiday’s and Blue Harbor’s inability or unwillingness to satisfy their obligations under those agreements, to efficiently and effectively manage our properties, or to provide timely and accurate accounting information could have a material adverse effect on us. Additionally, significant changes in Holiday’s and Blue Harbor’s senior management or adverse developments in their business and affairs or financial condition could have a material adverse effect on us.

Triple Net Lease Properties

The following table presents rental revenue in our triple net lease agreements with the tenant for the Holiday Portfolios as a percentage of our total revenue and total NOI:

 

     Year Ended December 31,  
     2017     2016     2015  

Total revenue

     19.9     18.9     23.0

Total NOI

     40.7     38.9     45.0

Pursuant to the triple net lease arrangements, the tenants are contractually obligated to pay for all property-related expenses, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. If any tenant defaults under the lease, material adverse effects may include loss in revenues and funding of certain property related costs. In addition, each of the leases requires the tenant to comply with the terms of mortgage financing documents, if any, affecting the properties and has guaranty and cross default provisions tied to other leases with the same tenant.

Because the properties leased to the tenant for the Holiday Portfolios account for a significant portion of total revenues and NOI, our financial condition and results of operations could be weakened and our ability to service our indebtedness and to make distributions to stockholders could be limited if the tenant for the Holiday Portfolios becomes unable or unwilling to satisfy its obligations to us or to renew leases with us upon expiration of the terms thereof. We cannot assure that the tenant for the Holiday Portfolios will have sufficient assets, income and access to financing to enable it to satisfy its respective obligations to us, and any inability or unwillingness by the tenant for the Holiday Portfolios to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, our ability to service our indebtedness and other obligations and ability to make distributions to stockholders, as required for us to continue to qualify as a REIT. We also cannot assure that the tenant for the Holiday Portfolios will elect to renew leases with us upon expiration of the terms thereof or that we will be able to reposition any properties that are not renewed on a timely basis or on the same or better economic terms, if at all.

 

48


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

We monitor the creditworthiness of our tenants by evaluating the ability of the tenants to meet their lease obligations to us based on the tenants’ financial performance, including the evaluation of tenant lease obligations. We periodically obtain various financial and operational information and review this information in conjunction with contractually agreed coverage metrics to monitor the financial condition and performance of the tenants, and ultimately, the tenants’ ability to generate sufficient liquidity to meet their obligations under the leases.

Each triple net master lease includes (i) a covenant requiring the tenant for the Holiday Portfolios to maintain a minimum lease coverage ratio, which the triple net master lease defines as net operating income less a reserve for capital expenditures for the applicable trailing 12-month period for the Holiday Portfolios divided by the base rental revenue for such trailing 12-month period, which steps up during the term of the lease and is subject to certain cure provisions, (ii) minimum capital expenditure requirements, (iii) customary operating covenants, events of default, and remedies, (iv) a non-compete clause restricting certain affiliates of the tenant for the Holiday Portfolios from developing or constructing new independent living properties within a specified radius of any property acquired by us in this transaction, and (v) restrictions on a change of control of the tenant for the Holiday Portfolios and Guarantor (as defined below), subject to certain exceptions. The triple net master leases also require the tenant for the Holiday Portfolios to fund a security deposit in the amount of approximately $43.4 million, which serves as security for the tenant for the Holiday Portfolios’ performance of its obligations to us. Additionally, the tenant for the Holiday Portfolios granted us a first priority security interest in certain personal property and receivables arising from the operations of the Holiday Portfolios, which security interest also secures the tenant for the Holiday Portfolios’ obligations under the triple net master leases. The tenant for the Holiday Portfolios’ obligations to us under the triple net master leases are further guaranteed by Holiday AL Holdings LP, (the “Guarantor”), an affiliate of Fortress. The Guarantor is required to maintain a minimum net worth of $150.0 million, a minimum fixed charge coverage ratio of 1.10 and a maximum leverage ratio of 10 to 1. The minimum fixed charge coverage ratio and other financial covenants applicable to the Guarantor are not subject to a cure. A failure to comply with the covenants could give rise to an event of default under the applicable financings, which could have a material adverse effect on our financial position, cash flows, results of operations and liquidity.

13. FUTURE MINIMUM RENTS

The following table sets forth future contracted minimum rents from tenants within the Triple Net Lease Properties segment, excluding contingent payment escalations, as of December 31, 2017:

 

Years Ending December 31 2018

   $ 82,398  

2019

     85,240  

2020

     88,180  

2021

     91,222  

2022

     94,370  

Thereafter

     887,592  
  

 

 

 

Total future minimum rents

   $ 1,329,002  
  

 

 

 

14. COMMITMENTS AND CONTINGENCIES

As of December 31, 2017, management believes there are no material contingencies that would affect our results of operations, cash flows or financial position.

 

49


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

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 continue to defend us in these matters, 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 December 31, 2017, 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, Repair and Lease Commitments

We have agreed to make $1.0 million available for capital improvements during the 15 year lease period to the triple net lease property under Watermark, none of which has been funded as of December 31, 2017. Upon funding these capital improvements, we will be entitled to a rent increase.

15. SUBSEQUENT EVENTS

These consolidated financial statements include a discussion of material events, if any, which have occurred subsequent to December 31, 2017 (referred to as subsequent events) through the issuance of the consolidated financial statements.

 

50


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

In February 2018, we exercised an option to extend a balloon payment of $50.7 million from April 2018 to April 2019.

On February 22, 2018, our board of directors declared a cash dividend on our common stock of $0.26 per common share for the quarter ended December 31, 2017. The dividend is payable on March 22, 2018 to shareholders of record on March 8, 2018.

 

51


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017, 2016 and 2015

(dollars in tables in thousands, except share data)

 

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

 

    Quarter Ended     Year Ended
December 31
 
    March 31     June 30     September 30     December 31    

2017

         

Revenue

  $ 114,973     $ 114,286     $ 112,955     $ 106,916     $ 449,130  

Net operating income

    55,389       55,618       54,346       53,732       219,085  

(Loss) income before income taxes

    (9,689     3,268       (14,619     36,760       15,720  

Income tax expense (benefit)

    206       147       (80     3,239       3,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (9,895   $ 3,121     $ (14,539   $ 33,521     $ 12,208  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share of common stock

         

Basic

  $ (0.12   $ 0.04     $ (0.18   $ 0.41     $ 0.15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.12   $ 0.04     $ (0.18   $ 0.41     $ 0.15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding

         

Basic

    82,140,750       82,142,562       82,148,869       82,148,869       82,145,295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    82,140,750       82,778,761       82,148,869       82,632,232       82,741,322  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2016

         

Revenue

  $ 117,945     $ 118,541     $ 118,457     $ 117,495     $ 472,438  

Net operating income

    57,320       57,935       57,103       57,053       229,411  

Loss before income taxes

    (22,074     (27,883     (19,459     (2,394     (71,810

Income tax (benefit) expense

    (226     (525     782       408       439  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (21,848   $ (27,358   $ (20,241   $ (2,802   $ (72,249
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share of common stock

         

Basic and diluted

  $ (0.26   $ (0.33   $ (0.25   $ (0.03   $ (0.88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding

         

Basic and diluted

    83,066,599       82,114,218       82,126,397       82,127,247       82,357,349  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

52


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2017

(dollars in thousands)

 

       

Location

          Initial Cost to the Company           Gross Amount Carried at Close of Period                                

Property Name

  Type  

City

  State     Encumbrances     Land     Buildings and
Improvements
    Furniture,
Fixtures
and
Equipment
    Costs
Capitalized
Subsequent to
Acquisition
    Land     Buildings and
Improvements
    Furniture,
Fixtures
and
Equipment
    Total (A)     Accumulated
Depreciation
    Net Book
Value
    Year
Constructed /

Renovated
    Year
Acquired
    Life on
Which
Depreciation
in Income
Statement is
Computed
 

Managed Properties

                                 

Andover Place

  IL   Little Rock     AR       13,995       629       14,664       783       285       629       14,785       947       16,361       (1,381     14,980       1991/NA       2015       3-40 years  

Desert Flower

  AL/MC   Scottsdale     AZ       17,050       2,295       16,901       101       1,414       2,295       17,814       602       20,711       (2,933     17,778       1999/2005       2012       3-40 years  

Arcadia Place

  IL   Vista     CA       16,575       1,569       14,252       804       436       1,569       14,414       1,078       17,061       (1,477     15,584       1989/NA       2015       3-40 years  

Chateau at Harveston

  IL   Temecula     CA       24,964       1,564       27,532       838       161       1,564       27,620       911       30,095       (2,453     27,642       2008/NA       2015       3-40 years  

Golden Oaks

  IL   Yucaipa     CA       22,454       772       24,989       867       324       772       25,118       1,062       26,952       (2,415     24,537       2008/NA       2015       3-40 years  

Orchard Park

  AL/MC   Clovis     CA       15,957       1,126       16,889       45       702       1,126       17,351       285       18,762       (2,816     15,946       1998/2007       2012       3-40 years  

Rancho Village

  IL   Palmdale     CA       18,429       323       22,341       882       365       323       22,410       1,178       23,911       (2,270     21,641       2008/NA       2015       3-40 years  

Sunshine Villa

  AL/MC   Santa Cruz     CA       20,661       2,243       21,082       58       795       2,243       21,498       437       24,178       (3,476     20,702       1990/NA       2012       3-40 years  

The Remington

  IL   Hanford     CA       13,628       1,300       16,003       825       415       1,300       16,123       1,120       18,543       (1,561     16,982       1997/NA       2015       3-40 years  

The Springs of Escondido

  IL   Escondido     CA       15,375       670       14,392       721       1,491       670       15,168       1,436       17,274       (1,502     15,772       1986/NA       2015       3-40 years  

The Springs of Napa

  IL   Napa     CA       15,408       2,420       11,978       700       209       2,420       12,008       879       15,307       (1,306     14,001       1996/NA       2015       3-40 years  

Quincy Place

  IL   Denver     CO       16,435       1,180       18,200       825       491       1,180       18,340       1,176       20,696       (1,659     19,037       1996/NA       2015       3-40 years  

Augustine Landing

  IL   Jacksonville     FL       19,076       680       19,635       770       240       680       19,761       884       21,325       (1,679     19,646       1999/NA       2015       3-40 years  

Barkley Place

  AL/MC   Fort Myers     FL       11,254       1,929       9,158       1,040       576       1,929       9,887       887       12,703       (2,205     10,498       1988/NA       2013       3-40 years  

Grace Manor

  AL/MC   Port Orange     FL       4,146       950       4,482       135       152       950       4,560       209       5,719       (459     5,260       2011/NA       2015       3-40 years  

Marion Woods

  IL   Ocala     FL       19,936       540       20,048       882       557       540       20,198       1,289       22,027       (1,941     20,086       2003/NA       2015       3-40 years  

Royal Palm

  AL/MC   Port Charlotte     FL       14,173       2,019       13,696       1,370       2,055       2,019       14,686       2,435       19,140       (3,476     15,664       1985/NA       2013       3-40 years  

Sterling Court

  IL   Deltona     FL       9,249       1,095       13,960       954       259       1,095       14,101       1,072       16,268       (1,726     14,542       2008/NA       2015       3-40 years  

Summerfield

  AL/MC   Bradenton     FL       12,281       1,367       14,361       1,247       1,113       1,367       14,676       2,045       18,088       (3,471     14,617       1988/NA       2013       3-40 years  

Sunset Lake Village

  AL/MC   Venice     FL       9,931       1,073       13,254       838       745       1,073       13,362       1,475       15,910       (2,592     13,318       1998/NA       2013       3-40 years  

University Pines

  IL   Pensacola     FL       21,057       1,080       19,150       777       241       1,080       19,299       869       21,248       (1,642     19,606       1996/NA       2015       3-40 years  

Venetian Gardens

  IL   Venice     FL       16,360       865       21,173       860       356       865       21,269       1,120       23,254       (2,227     21,027       2007/NA       2015       3-40 years  

Village Place

  AL/MC   Port Charlotte     FL       8,262       1,064       8,503       679       742       1,064       8,604       1,320       10,988       (1,977     9,011       1998/NA       2013       3-40 years  

Windward Palms

  IL   Boynton Beach     FL       16,597       1,564       20,097       867       672       1,564       20,349       1,287       23,200       (2,180     21,020       2007/NA       2015       3-40 years  

Ivy Springs Manor

  AL/MC   Buford     GA       13,704       1,230       13,067       270       223       1,230       13,165       395       14,790       (1,171     13,619       2012/NA       2015       3-40 years  

Pinegate

  IL   Macon     GA       12,902       540       12,290       811       257       540       12,403       955       13,898       (1,282     12,616       2001/NA       2015       3-40 years  

Kalama Heights

  IL   Kihei     HI       22,896       3,360       27,212       846       512       3,360       27,422       1,148       31,930       (2,384     29,546       2000/NA       2015       3-40 years  

Willow Park

  AL/MC   Boise     ID       13,308       1,456       13,548       58       554       1,456       13,948       212       15,616       (2,381     13,235       1997/2011       2012       3-40 years  

Grandview

  AL/MC   Peoria     IL       11,358       1,606       12,015       280       337       1,606       12,192       440       14,238       (1,258     12,980       2014       2014       3-40 years  

Redbud Hills

  IL   Bloomington     IN       16,500       2,140       17,839       797       226       2,140       17,945       917       21,002       (1,613     19,389       1998/NA       2015       3-40 years  

Greenwood Terrace

  IL   Lenexa     KS       19,643       950       21,883       811       1,042       950       22,022       1,714       24,686       (2,117     22,569       2003/NA       2015       3-40 years  

Waterview Court

  IL   Shreveport     LA       6,449       1,267       4,070       376       783       1,267       4,605       624       6,496       (910     5,586       1999/NA       2015       3-40 years  

Bluebird Estates

  IL   East Longmeadow     MA       21,812       5,745       24,591       954       184       5,745       24,694       1,035       31,474       (2,629     28,845       2008/NA       2015       3-40 years  

Quail Run Estates

  IL   Agawam     MA       18,799       1,410       21,330       853       547       1,410       21,550       1,180       24,140       (2,139     22,001       1996/NA       2015       3-40 years  

 

53


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2017

(dollars in thousands)

 

       

Location

        Initial Cost to the Company           Gross Amount Carried at Close of Period                          

Property Name

  Type  

City

  State   Encumbrances     Land     Buildings and
Improvements
    Furniture,
Fixtures
and
Equipment
    Costs
Capitalized
Subsequent to
Acquisition
    Land     Buildings and
Improvements
    Furniture,
Fixtures
and
Equipment
    Total (A)     Accumulated
Depreciation
    Net Book
Value
    Year
Constructed /

Renovated
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement is
Computed

Genesee Gardens

  IL   Flint Township   MI     15,900       420       17,080       825       439       420       17,356       988       18,764       (1,574     17,190     2001/NA   2015   3-40 years

The Gardens

  AL/MC   Ocean Springs   MS     6,109       850       7,034       460       446       850       7,247       693       8,790       (1,153     7,637     1999/2004/2013   2014   3-40 years

Aspen View

  IL   Billings   MT     14,110       930       22,611       881       146       930       22,784       854       24,568       (2,001     22,567     1996/NA   2015   3-40 years

Cedar Ridge

  IL   Burlington   NC     15,637       1,030       20,330       832       259       1,030       20,391       1,030       22,451       (1,718     20,733     2006/NA   2015   3-40 years

Courtyards at Berne Village

  AL/MC   New Bern   NC     14,958       1,657       12,893       1,148       865       1,657       13,254       1,652       16,563       (3,023     13,540     1985/2004   2013   3-40 years

Crescent Heights

  IL   Concord   NC     21,022       1,960       21,290       867       224       1,960       21,378       1,003       24,341       (2,267     22,074     2008/NA   2015   3-40 years

Forsyth Court

  IL   Winston Salem   NC     13,274       1,428       13,286       499       943       1,428       13,730       998       16,156       (1,562     14,594     1989/NA   2015   3-40 years

Lodge at Wake Forest

  IL   Wake Forest   NC     22,538       1,209       22,571       867       282       1,209       22,672       1,048       24,929       (2,265     22,664     2008/NA   2015   3-40 years

Shads Landing

  IL   Charlotte   NC     21,733       1,939       21,988       846       195       1,939       22,086       943       24,968       (2,371     22,597     2008/NA   2015   3-40 years

Woods at Holly Tree

  IL   Wilmington   NC     27,383       3,310       24,934       811       432       3,310       25,014       1,163       29,487       (2,170     27,317     2001/NA   2015   3-40 years

Rolling Hills Ranch

  IL   Omaha   NE     14,296       1,022       16,251       846       191       1,022       16,359       929       18,310       (1,825     16,485     2007/NA   2015   3-40 years

Kirkwood Corners

  AL/MC   Lee   NH     2,459       578       1,847       124       319       578       2,012       278       2,868       (429     2,439     1996   2014   3-40 years

Maple Suites

  IL   Dover   NH     24,895       1,084       30,943       838       274       1,084       31,059       996       33,139       (3,116     30,023     2007/NA   2015   3-40 years

Pine Rock Manor

  AL/MC   Warner   NH     8,074       780       8,580       378       395       780       8,784       569       10,133       (1,467     8,666     1994   2014   3-40 years

Pines of New Market

  AL/MC   Newmarket   NH     5,876       629       4,879       353       353       629       5,107       478       6,214       (853     5,361     1999   2014   3-40 years

Montara Meadows

  IL   Las Vegas   NV     11,670       1,840       11,654       1,206       1,250       1,840       12,160       1,950       15,950       (1,787     14,163     1986/NA   2015   3-40 years

Manor at Woodside

  IL   Poughkeepsie   NY     17,150       —         12,130       670       799       —         12,659       940       13,599       (2,418     11,181     2001/NA   2013   3-40 years

Alexis Gardens

  IL   Toledo   OH     17,384       450       18,412       811       310       450       18,537       996       19,983       (1,676     18,307     2002/NA   2015   3-40 years

Copley Place

  IL   Copley   OH     15,308       553       19,125       867       192       553       19,236       948       20,737       (2,009     18,728     2008/NA   2015   3-40 years

Laurelwood

  AL/MC   Dayton   OH     6,815       1,056       7,755       750       747       1,056       7,927       1,325       10,308       (1,795     8,513     1994/NA   2014   3-40 years

Lionwood

  IL   Oklahoma City   OK     4,523       744       5,180       383       588       744       5,430       721       6,895       (794     6,101     2000/NA   2015   3-40 years

Parkrose Chateau

  IL   Portland   OR     12,569       2,741       17,472       749       372       2,741       17,676       917       21,334       (1,613     19,721     1991/NA   2015   3-40 years

Sheldon Park

  AL/MC   Eugene   OR