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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________ 
Commission File Number: 001-36499
New Senior Investment Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
80-0912734
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
55 West 46th Street
New York
NY
10036
(Address of principal executive offices)
(Zip Code)
(646)
822-3700
(Registrant’s telephone number, including area code) 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Trading Symbol:    
 
Name of each exchange on which registered:
Common Stock, $0.01 par value per share
 
SNR
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
ý Yes  No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer 
Smaller reporting company
Non-accelerated filer 
 
 
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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 83,126,259 shares outstanding as of July 28, 2019.



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
  
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of New Senior Investment Group Inc.’s (“New Senior,” the “Company,” “we,” “us” or “our”) investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “would,” “should,” “potential,” “intend,” “expect,” “plan,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

our ability to successfully manage the recent transition to self-management and its impact on our business and operations;
our ability to comply with the terms of our financings, which depends in part on the performance of our operators;
any increase in our borrowing costs as a result of rising interest rates or other factors;
our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due or as needed to comply with the terms of our covenants or to facilitate our ability to sell assets;
our ability to manage our liquidity and sustain distributions to our stockholders, particularly in light of the cash shortfall described in our risk factors under Item 1A. and under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”;
our dependence on our property managers and tenant to operate our properties successfully and in compliance with the terms of our agreements with them, applicable law and the terms of our financings;
factors affecting the performance of our properties, such as increases in costs (including, but not limited to, the costs of labor, supplies, insurance and property taxes);
concentration risk with respect to Holiday Retirement (“Holiday”), which, for the six months ended June 30, 2019, accounted for 84.9% of net operating income (“NOI”) from our Managed Properties segments;
risks associated with a change of control in the ownership or senior management of Holiday;
our ability and the ability of our property managers and tenant to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers;
changes of federal, state and local laws and regulations relating to employment, fraud and abuse practices, Medicaid reimbursement and licensure, etc., including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations or our property managers or tenant;
the ability of our property managers and tenant to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to us and third parties;
the quality and size of our investment pipeline, our ability to execute investments at attractive risk-adjusted prices, our ability to finance our investments on favorable terms, and our ability to deploy investable cash in a timely manner;
our ability to sell properties on favorable terms and to realize the anticipated benefits from any such dispositions;
changes in economic conditions generally and the real estate, senior housing and bond markets specifically;
our stock price performance and any disruption or lack of access to the capital markets or other sources of financing;
the impact of any current or future legal proceedings and regulatory investigations and inquiries on us, FIG LLC (our “Former Manager”) or our operators;
our ability to maintain effective internal control over financial reporting and our reliance on our operators for timely delivery of accurate property-level financial results; and
our ability to maintain our qualification as a Real Estate Investment Trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business.

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




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

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

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

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

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
 



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

INDEX
  
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Real estate investments:
 

 
 

Land
$
177,956

 
$
177,956

Buildings, improvements and other
2,352,264

 
2,335,813

Accumulated depreciation
(399,731
)
 
(358,368
)
Net real estate property
2,130,489

 
2,155,401

Acquired lease and other intangible assets
8,638

 
8,638

Accumulated amortization
(3,055
)
 
(2,877
)
Net real estate intangibles
5,583

 
5,761

Net real estate investments
2,136,072

 
2,161,162

 
 
 
 
Cash and cash equivalents
35,398

 
72,422

Receivables and other assets, net
43,447

 
52,674

Total Assets
$
2,214,917

 
$
2,286,258

 
 
 
 
Liabilities, Redeemable Preferred Stock and Equity
 

 
 

Liabilities
 

 
 

Debt, net
$
1,871,991

 
$
1,884,882

Due to affiliates

 
26,245

Accrued expenses and other liabilities
68,551

 
52,679

Total Liabilities
1,940,542

 
1,963,806

 
 
 
 
Commitments and contingencies (Note 15)


 


 
 
 
 
Redeemable preferred stock, $0.01 par value with $100 liquidation preference, 400,000 shares authorized, issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
40,500

 
40,000

 
 
 
 
Equity


 


Preferred stock, $0.01 par value, 99,600,000 shares (excluding 400,000 shares of redeemable preferred stock) authorized, none issued or outstanding as of June 30, 2019 and December 31, 2018

 

Common stock, $0.01 par value, 2,000,000,000 shares authorized, 83,126,259 and 82,148,869 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
831

 
821

Additional paid-in capital
899,386

 
898,135

Accumulated deficit
(660,078
)
 
(616,504
)
Accumulated other comprehensive loss
(6,264
)
 

Total Equity
233,875

 
282,452

 
 
 
 
Total Liabilities, Redeemable Preferred Stock and Equity
$
2,214,917

 
$
2,286,258

See notes to consolidated financial statements (unaudited).

1

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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 

 
 

 
 
 
 
Resident fees and services
$
114,437

 
$
96,484

 
$
230,474

 
$
171,827

Rental revenue
1,583

 
12,368

 
3,165

 
36,243

Total revenues
116,020

 
108,852

 
233,639

 
208,070

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Property operating expense
74,957

 
63,510

 
152,304

 
115,609

Depreciation and amortization
20,755

 
24,521

 
41,542

 
51,246

Interest expense
23,483

 
25,755

 
47,202

 
47,678

General and administrative expense
5,372

 
3,140

 
10,356

 
6,892

Acquisition, transaction and integration expense
411

 
8,683

 
1,061

 
11,571

Management fees and incentive compensation to affiliate

 
3,687

 

 
7,439

Loss on extinguishment of debt
335

 
58,544

 
335

 
58,544

Other expense
107

 
32

 
1,352

 
1,412

Total expenses
125,420

 
187,872

 
254,152

 
300,391

Loss on sale of real estate
(122
)
 

 
(122
)
 

Gain on lease termination

 
40,090

 

 
40,090

Loss before income taxes
(9,522
)
 
(38,930
)
 
(20,635
)
 
(52,231
)
Income tax expense
64

 
151

 
144

 
199

Net loss
(9,586
)
 
(39,081
)
 
(20,779
)
 
(52,430
)
Deemed dividend on redeemable preferred stock
(599
)
 

 
(1,197
)
 

Net loss attributable to common stockholders
$
(10,185
)
 
$
(39,081
)
 
$
(21,976
)
 
$
(52,430
)
 
 
 
 
 
 
 
 
Net loss per share of common stock
 
 
 
 
 
 
 
Basic and diluted (A)
$
(0.12
)
 
$
(0.48
)
 
$
(0.27
)
 
$
(0.64
)
 
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding
 
 
 
 
 
 
 
Basic and diluted (B)
82,209,844

 
82,148,869

 
82,206,475

 
82,148,869

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.13

 
$
0.26

 
$
0.26

 
$
0.52

 

(A)
Basic earnings per share (“EPS”) is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. The outstanding shares used to calculate the weighted average basic shares excludes 916,415 restricted stock awards as of June 30, 2019, as those shares were issued but were not vested and therefore, not considered outstanding for purposes of computing basic loss per share as of June 30, 2019. Diluted EPS is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period.
(B)
Dilutive share equivalents and options were excluded given our loss position, so basic and diluted EPS were the same for each reporting period.

See notes to consolidated financial statements (unaudited).

2

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





 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(9,586
)
 
$
(39,081
)
 
$
(20,779
)
 
$
(52,430
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on cash flow hedge
(6,264
)
 

 
(6,264
)
 

Total other comprehensive loss
(6,264
)
 

 
(6,264
)
 

Total comprehensive loss
(15,850
)
 
(39,081
)
 
(27,043
)
 
(52,430
)

See notes to consolidated financial statements (unaudited).


3

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


 
 
Three Months Ended June 30, 2019
 
 
 Common Stock
 
Accumulated Deficit
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Total Equity
 
 
 Shares
 
 Amount
Balance at March 31, 2019
 
82,209,844

 
$
822

 
$
(639,086
)
 
$
898,858

 
$

 
$
260,594

Restricted stock awards issued
 
916,415

 
9

 

 
(9
)
 

 

Amortization of equity-based compensation
 

 

 

 
537

 

 
537

Dividends declared - common stock ($0.13 per share)
 

 

 
(10,688
)
 

 

 
(10,688
)
Dividends declared - restricted stock awards ($0.13 per share)
 

 

 
(119
)
 

 

 
(119
)
Deemed/paid dividend on redeemable preferred stock
 

 

 
(599
)
 

 

 
(599
)
Other comprehensive loss
 

 

 

 

 
(6,264
)
 
(6,264
)
Net loss
 

 

 
(9,586
)
 

 

 
(9,586
)
Balance at June 30, 2019
 
83,126,259

 
$
831

 
$
(660,078
)
 
$
899,386

 
$
(6,264
)
 
$
233,875


 
 
Six Months Ended June 30, 2019
 
 
 Common Stock
 
Accumulated Deficit
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Total Equity
 
 
 Shares
 
 Amount
Balance at December 31, 2018
 
82,148,869

 
$
821

 
$
(616,504
)
 
$
898,135

 
$

 
$
282,452

Restricted stock awards issued
 
916,415

 
9

 

 
(9
)
 

 

Amortization of equity-based compensation
 

 

 

 
986

 

 
986

Directors shares issued
 
60,975

 
1

 

 
274

 

 
275

Dividends declared - common stock ($0.26 per share)
 

 

 
(21,375
)
 

 

 
(21,375
)
Dividends declared - restricted stock awards ($0.26 per share)
 

 

 
(223
)
 

 

 
(223
)
Deemed/paid dividend on redeemable preferred stock
 

 

 
(1,197
)
 

 

 
(1,197
)
Other comprehensive loss
 

 

 

 

 
(6,264
)
 
(6,264
)
Net loss
 

 

 
(20,779
)
 

 

 
(20,779
)
Balance at June 30, 2019
 
83,126,259

 
$
831


$
(660,078
)
 
$
899,386

 
$
(6,264
)
 
$
233,875

 










4

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


 
 
Three Months Ended June 30, 2018
 
 
 Common Stock
 
Accumulated Deficit
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Total Equity
 
 
 Shares
 
 Amount
Balance at March 31, 2018
 
82,148,869

 
$
821

 
$
(427,776
)
 
$
898,135

 
$

 
$
471,180

Dividends declared - common stock ($0.26 per share)
 

 

 
(21,357
)
 

 

 
(21,357
)
Net loss
 

 

 
(39,081
)
 

 

 
(39,081
)
Balance at June 30, 2018
 
82,148,869

 
$
821

 
$
(488,214
)
 
$
898,135

 
$

 
$
410,742


 
 
Six Months Ended June 30, 2018
 
 
 Common Stock
 
Accumulated Deficit
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Total Equity
 
 
 Shares
 
 Amount
Balance at December 31, 2017
 
82,148,869

 
$
821

 
$
(393,068
)
 
$
898,132

 
$

 
$
505,885

Fair value of stock options issued
 

 

 

 
3

 

 
3

Dividends declared - common stock ($0.52 per share)
 

 

 
(42,716
)
 

 

 
(42,716
)
Net loss
 

 

 
(52,430
)
 

 

 
(52,430
)
Balance at June 30, 2018
 
82,148,869

 
$
821

 
$
(488,214
)
 
$
898,135

 
$

 
$
410,742


See notes to consolidated financial statements (unaudited).

5

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


 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows From Operating Activities
 

 
 

Net loss
$
(20,779
)
 
$
(52,430
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation of tangible assets and amortization of intangible assets
41,542

 
51,281

Amortization of deferred financing costs
2,305

 
5,294

Amortization of deferred revenue, net
1,035

 
1,196

Non-cash straight line rental revenue
(321
)
 
(5,019
)
Non-cash adjustment on lease termination (A)

 
29,910

Loss on extinguishment of debt
335

 
58,544

Provision for bad debt

 
900

Amortization of equity-based compensation
986

 

Loss on sale of real estate
122

 

Other non-cash expense
1,159

 
1,257

Changes in:
 

 
 

Receivables and other assets, net
(1,818
)
 
(5,103
)
Due to affiliates
(25,995
)
 
3,590

Accrued expenses and other liabilities
6,295

 
12,464

Net cash provided by operating activities
$
4,866

 
$
101,884

Cash Flows From Investing Activities
 

 
 

Proceeds from sale of real estate
$
13,086

 
$

Capital expenditures, net of insurance proceeds
(14,038
)
 
(8,185
)
Net cash used in investing activities
$
(952
)
 
$
(8,185
)
Cash Flows From Financing Activities
 

 
 

Principal payments of mortgage notes payable and capital lease obligations
$
(5,187
)
 
$
(12,782
)
Proceeds from mortgage notes payable

 
720,000

Proceeds from borrowings on revolving credit facility
4,250

 

Repayments of mortgage notes payable
(13,674
)
 
(663,796
)
Payment of exit fee on extinguishment of debt
(206
)
 
(51,886
)
Payment of deferred financing costs
(1,055
)
 
(12,320
)
Purchase of interest rate caps
(35
)
 
(341
)
Payment of common stock dividend
(21,375
)
 
(42,716
)
Payment of redeemable preferred stock dividend
(697
)
 

Net cash used in financing activities
$
(37,979
)
 
$
(63,841
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(34,065
)
 
29,858

Cash, cash equivalents and restricted cash, beginning of period
92,656

 
157,485

Cash, cash equivalents and restricted cash, end of period
$
58,591

 
$
187,343

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 

Cash paid during the period for interest expense
$
44,963

 
$
42,234

Cash paid during the period for income taxes
344

 
326

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Issuance of common stock
$
275

 
$

Capital lease obligations
345

 
121

Furniture, fixtures, equipment and other improvements (B)

 
9,975



(A)
Primarily includes the non-cash write-offs of straight-line rent receivables and net above-market rent lease intangible assets, offset by the fair value of furniture, fixtures, equipment and other improvements received by us as a result of the Lease Termination (as defined in Note 1). Refer to Note 3 for additional details related to the Lease Termination.
(B)
Fair value of furniture, fixtures, equipment and other improvements received by us as a result of the Lease Termination. Refer to Note 3 for additional details related to the Lease Termination.

6

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


 
Six Months Ended June 30,
 
2019
 
2018
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents
$
72,422

 
$
137,327

Restricted cash (A)
20,234

 
20,158

Total, beginning of period
$
92,656

 
$
157,485

 
 
 
 
Cash and cash equivalents
$
35,398

 
$
170,762

Restricted cash (A)
23,193

 
16,581

Total, end of period
$
58,591

 
$
187,343


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

See notes to consolidated financial statements (unaudited).


7

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)



1.
ORGANIZATION
 
New Senior is a REIT primarily focused on investing in private pay senior housing properties. As of June 30, 2019, we owned a diversified portfolio of 131 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.
 
Through December 31, 2018, we were externally managed and advised by FIG LLC (the “Former Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”). On November 19, 2018, we entered into definitive agreements with the Former Manager to internalize our management, effective December 31, 2018 (the “Internalization”). In connection with the Internalization, we also entered into a Transition Services Agreement with the Former Manager to continue to provide certain services for a transition period. In connection with the termination of the Management Agreement (defined in Note 12), we (i) made a one-time cash payment of $10.0 million to the Former Manager in January 2019, and (ii) issued to the Former Manager 400,000 shares of our newly created Redeemable Series A Cumulative Perpetual Preferred Stock (the “Redeemable Preferred Stock”), with an aggregate fair value of $40.0 million.

We operate in three reportable segments: (1) Managed Independent Living (“IL”) Properties, (2) Managed Assisted Living/Memory Care (“AL/MC”) Properties, and (3) Triple Net Lease Properties.
 
Managed Properties – We have engaged property managers to manage 130 of our properties on a day-to-day basis under the Managed Properties segments. These properties consist of 102 IL facilities and 28 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 our Former Manager (an affiliate of Fortress), FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of our Former Manager, Jerry Erwin Associates, Inc. (“JEA”), Grace Management, Inc. (“Grace”), Watermark Retirement Communities, Inc. (“Watermark”), Integral Senior Living Management, LLC (“Integral”) and Phoenix Senior Living LLC (“Phoenix”) (collectively, the “Property Managers”), under Property Management Agreements (collectively, 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 4.5% to 7% of gross revenues and, for certain properties, when eligible, an incentive fee based on operating performance, pursuant to our Property Management Agreements.

On May 9, 2018, we entered into a lease termination agreement to terminate our triple net leases with affiliates of Holiday relating to 51 IL properties (the “Holiday Portfolio”). The lease termination was effective May 14, 2018 (the “Lease Termination”). Concurrently with the Lease Termination, we entered into property management agreements with Holiday to manage the properties in the Holiday Portfolio following the Lease Termination in exchange for a property management fee. As a result, such properties are now included in the Managed Properties segment.

Triple Net Lease Properties – We own one Continuing Care Retirement Community (“CCRC”) in the United States and lease this property to a healthcare operating company under a triple net lease agreement. 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 agreement has an initial term of 15 years and includes a renewal option and annual rent increases ranging from 2.75% to 3.25%.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP’’) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of New Senior and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. We consolidate those entities in which we have control over significant operating, financial and investing decisions of the entity. In the opinion of management, all adjustments (consisting of

8

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)


normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2018, as filed with the SEC.

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.

Significant Accounting Policies

Equity-Based Compensation

Compensation expense for equity-based awards with graded vesting schedules granted to employees and non-employees is recognized in “General and administrative expense” in our Consolidated Statements of Operations on a straight-line basis over the vesting period based on the grant date fair value of the award. Forfeitures of equity-based awards are recognized as they occur.

Earnings per Share

Basic earnings per share of common stock is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is calculated by including the effect of dilutive securities.

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. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with our related assertions.

We recognize all derivatives as either assets or liabilities in our Consolidated Balance Sheets at fair value as of the reporting date. Derivative valuation requires us to make estimates and judgments that affect the fair value of the instruments. We apply hedge accounting on our interest rate swap and therefore, changes in fair value of the instrument are recorded in “Accumulated other comprehensive income (loss)” in our Consolidated Balance Sheets. We do not apply hedge accounting on our interest rate caps and therefore, changes in fair value of these instruments are recorded in “Other expense (income)” in our Consolidated Statements of Operations.

Refer to our significant accounting policies disclosed in our Form 10-K for the year ended December 31, 2018 for other significant accounting policies.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, (codified under Accounting Standards Codification (“ASC”) 842, 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. As lessee, a right-of-use asset and corresponding liability for future obligations under a leasing arrangement would be recognized on the balance sheet. As lessor, gross leases will be subject to allocation between lease and non-lease service components, with the latter accounted for under the new revenue recognition standard. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee.


9

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)


We adopted ASC 842 on January 1, 2019 under the modified retrospective transition approach using the effective date as the date of initial application. Therefore, financial information and disclosures under ASC 842 will not be provided for periods prior to January 1, 2019. We elected the “package of practical expedients”, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected the short-term lease practical expedient, which permits us to not recognize right-of-use asset or lease liability for operating leases with an initial lease term equal to or less than 12 months. In addition, we made an accounting policy election to treat lease and related non-lease components in a contract as a single performance obligation to the extent that the timing and pattern of revenue recognition are the same for the lease and non-lease components and the combined single lease component is classified as an operating lease.

Lessor Accounting
As a lessor, our recognition of rental revenue remained consistent with prior accounting guidance. 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 determined not probable, any lease income is limited to the lesser of the lease income reflected on a straight-line basis or the cash collected.

Resident leases within our Managed Properties segments contain service components. We elected the practical expedient to account for our resident leases as a single lease component. We elected the practical expedient to account for our resident leases as a single lease component since (1) the timing and pattern or transfer of the lease and non-lease components is the same, (2) the lease component is the predominant component, and (3) the combined single lease component would be classified as an operating lease.

Lessee Accounting
We determine if a contract is or contains a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use asset and lease liability are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate to determine the present value of lease payments as the rates implicit in our leases are not readily determinable. Upon adoption on January 1, 2019 and as of June 30, 2019, our operating lease right-of-use assets, which approximates our operating lease liabilities, were $2.6 million and $2.4 million, respectively, for our corporate office, land and equipment leases. Our operating lease right-of-use asset is included in “Buildings, improvements and other” and our operating lease liability is included in “Accrued expenses and other liabilities” in our Consolidated Balance Sheets. The weighted-average remaining lease term for our operating leases was 4.7 years and 5.1 years at June 30, 2019 and December 31, 2018, respectively. The weighted-average discount rate was 6.03% and 6.02% at June 30, 2019 and December 31, 2018, respectively.

Upon the adoption of ASC 842, capital leases under prior accounting guidance were classified as finance leases, which did not have a significant change to our accounting for such leases.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. 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. The adoption of this ASU is not expected to have a significant impact on our consolidated financial statements.

3.
LEASE TERMINATION

On May 9, 2018, we entered into a lease termination agreement with affiliates of Holiday to terminate our triple net leases relating to the Holiday Portfolio. The Lease Termination was effective May 14, 2018. We received total consideration of $115.6 million including a $70.0 million termination payment and retention of $45.6 million in security deposits held by us. In connection with the Lease Termination, we also assumed ownership of certain furniture, fixtures, equipment and other improvements with a fair market value of $10.0 million. As a result of the Lease Termination, we recognized a gain on lease termination of $40.1 million after adjusting for write-offs of straight-line rent receivables of $84.3 million and net above-market rent lease intangible assets of $1.2 million for the three and six months ended June 30, 2018.


10

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)


Concurrently with the Lease Termination, we entered into property management agreements with Holiday pursuant to which we pay a management fee equal to a monthly base fee in the amount of 5.0% of effective gross income in the first year of the term and 4.5% of effective gross income for the remainder of the term. In addition, Holiday is eligible to earn an annual incentive fee of up to 2.0% of effective gross income if the Holiday Portfolio achieves certain performance thresholds. The agreements may be terminated without penalty after the first year of the term.

4.
DISPOSITIONS

In the three months ended June 30, 2019, we sold two AL/MC assets in the Managed AL/MC Properties segment for a combined sale price of $13.8 million, and recognized a loss on sale of $0.1 million, which is included in “Loss on sale of real estate” in our Consolidated Statements of Operations. In connection with these dispositions, we repaid $13.7 million of debt. Prior to the sale, both assets were classified as “Assets held for sale” and included in “Receivables and other assets, net” on the Consolidated Balance Sheets.
 
We did not have any dispositions during the six months ended June 30, 2018.

5. SEGMENT REPORTING

We operate in three reportable business segments: Managed IL Properties, Managed AL/MC Properties and Triple Net Lease Properties. Under our Managed Properties segments, 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 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 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. Segment NOI should not be considered as an alternative to net income as determined in accordance with GAAP.

Effective May 14, 2018, we terminated our triple net leases with respect to the properties in the Holiday Portfolio and concurrently entered into property management agreements with Holiday with respect to such properties. The NOI for such properties following the Lease Termination has been included in the Managed IL Properties segment. This resulted in a significant increase in the segment NOI of the Managed IL Properties with a corresponding decrease in the segment NOI of the Triple Net Lease Properties during the three and six months ended June 30, 2019.

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

11

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)


 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
 
IL
 
AL/MC
 
 
 
IL
 
AL/MC
 
Revenues
 

 
 
 
 

 
 

 
 
 
 
 
 
 
 
Resident fees and services
$

 
$
83,516

 
$
30,921

 
$
114,437

 
$

 
$
63,797

 
$
32,687

 
$
96,484

Rental revenue
1,583

 

 

 
1,583

 
12,368

 

 

 
12,368

Less: Property operating expense

 
49,052

 
25,905

 
74,957

 

 
37,587

 
25,923

 
63,510

Segment NOI
$
1,583

 
$
34,464

 
$
5,016

 
$
41,063

 
$
12,368

 
$
26,210

 
$
6,764

 
$
45,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 
 
 

 
20,755

 
 
 
 
 
 
 
24,521

Interest expense
 

 
 
 
 

 
23,483

 
 
 
 
 
 
 
25,755

General and administrative expense
 

 
 
 
 

 
5,372

 
 
 
 
 
 
 
3,140

Acquisition, transaction and integration expense
 

 
 
 
 

 
411

 
 
 
 
 
 
 
8,683

Management fees and incentive compensation to affiliate
 
 
 
 
 
 

 
 
 
 
 
 
 
3,687

Loss on extinguishment of debt
 
 
 
 
 
 
335

 
 
 
 
 
 
 
58,544

Other expense
 
 
 
 
 
 
107

 
 
 
 
 
 
 
32

Total expenses
 
 
 
 
 
 
50,463

 
 
 
 
 
 
 
124,362

Loss on sale of real estate
 
 
 
 
 
 
(122
)
 
 
 
 
 
 
 

Gain on lease termination
 
 
 
 
 
 

 
 
 
 
 
 
 
40,090

Loss before income taxes
 
 
 
 
 
 
(9,522
)
 
 
 
 
 
 
 
(38,930
)
Income tax expense
 

 
 
 
 

 
64

 
 
 
 
 
 
 
151

Net loss
 

 
 
 
 

 
$
(9,586
)
 
 
 
 
 
 
 
$
(39,081
)

12

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019
(dollars in tables in thousands, except share data)


 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
 
IL
 
AL/MC
 
 
IL
 
AL/MC
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resident fees and services
$

 
$
167,261

 
$
63,213

 
$
230,474

 
$

 
$
106,351

 
$
65,476

 
$
171,827

Rental revenue
3,165

 


 

 
3,165

 
36,243

 
 
 

 
36,243

Less: Property operating expense

 
99,772

 
52,532

 
152,304

 

 
63,803

 
51,806

 
115,609

Segment NOI
$
3,165

 
$
67,489

 
$
10,681

 
$
81,335

 
$
36,243

 
$
42,548

 
$
13,670

 
$
92,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
41,542

 
 
 
 
 
 
 
51,246

Interest expense
 
 
 
 
 
 
47,202

 
 
 
 
 
 
 
47,678

General and administrative expense
 
 
 
 
 
 
10,356

 
 
 
 
 
 
 
6,892

Acquisition, transaction and integration expense
 
 
 
 
 
 
1,061

 
 
 
 
 
 
 
11,571

Management fees and incentive compensation to affiliate
 
 
 
 
 
 

 
 
 
 
 
 
 
7,439

Loss on extinguishment of debt
 
 
 
 
 
 
335

 
 
 
 
 
 
 
58,544

Other expense
 
 
 
 
 
 
1,352

 
 
 
 
 
 
 
1,412

Total expenses
 
 
 
 
 
 
101,848

 
 
 
 
 
 
 
184,782

Loss on sale of real estate
 
 
 
 
 
 
(122
)
 
 
 
 
 
 
 

Gain on lease termination
 
 
 
 
 
 

 
 
 
 
 
 
 
40,090

Loss before income taxes
 
 
 
 
 
 
(20,635
)
 
 
 
 
 
 
 
(52,231
)
Income tax expense
 
 
 
 
 
 
144

 
 
 
 
 
 
 
199

Net loss
 
 
 
 
 
 
$
(20,779
)
 
 
 
 
 
 
 
$
(52,430
)

For the three and six months ended June 30, 2019, no rental revenue was attributable to Holiday due to the Lease Termination in May 2018. For the three and six months ended June 30, 2018, rental revenue attributable to our triple net leases with Holiday accounted for 9.9% and 15.9% of our total revenue, respectively.

Assets by reportable business segment are reconciled to total assets as follows:
 
June 30, 2019
 
December 31, 2018

Amount
 
Percentage
 
Amount
 
Percentage
Managed IL Properties
$
1,769,545

 
79.9
%
 
$
1,792,746

 
78.4
%
Managed AL/MC Properties
381,865

 
17.2
%
 
399,393

 
17.5
%
Triple Net Lease Properties
57,215

 
2.6
%
 
58,270

 
2.5
%
All other assets