2 0 1 3 a n n u a l r e p o r t
oNe NAme.
fAmiliAR fAceS.
Corporate Headquarters
111 Westwood Place | Suite 400 | Brentwood, TN 37027 | (615) 221-2250
For more information visit our website: brookdale.com
Brookdale, All The PlAceS life cAN Go and other trademarks and service marks herein are the registered and unregistered trademarks
and service marks of Brookdale Senior living inc. KcoRP-SPl02-0514
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
As of and for the years ended
December 31,
2013
2012
Selected Operating Data
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,891,966
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131,288
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(3,584)
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0 .03)
Adjusted EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 463,219
Cash From Facility Operations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
294,023
Facility Operating Income(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
812,162
Selected Balance Sheet Data
Property, plant and equipment and leasehold intangibles, net . . . . . . . . . . . . . . . . . $ 3,895,475
58,511
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,737,757
Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,636,578
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,020,937
Weighted average shares used in computing basic
and diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,671
Stock Performance Data
Closing share price on December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Closing share price on December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 .18
$ 2,768,738
80,939
$
(66,467)
$
(0 .54)
$
409,940
$
238,958
$
758,843
$
$ 3,879,977
69,240
$
$ 4,706,768
$ 2,679,369
996,986
$
121,991
$
25 .32
(1) Adjusted EBITDA is a measure of operating performance that is not calculated in accordance with U .S . generally accepted accounting
principles (“GAAP”) . Adjusted EBITDA should not be considered in isolation or as a substitute for net income, income from operations
or cash flows provided by or used in operations, as determined in accordance with GAAP . Adjusted EBITDA is a key measure of the
Company’s operating performance used by management to focus on operating performance and management without mixing in items of
income and expense that relate to long-term contracts and the financing and capitalization of the business . We define Adjusted EBITDA
as net income (loss) before provision (benefit) for income taxes, non-operating (income) expense items, (gain) loss on sale or acquisition
of communities (including gain (loss) on facility lease termination), depreciation and amortization (including non-cash impairment
charges), straight-line lease expense (income), amortization of deferred gain, amortization of deferred entrance fees, non-cash stock-
based compensation expense, and change in future service obligation and including entrance fee receipts and refunds (excluding (i)
first generation entrance fee receipts from the sale of units at a recently opened entrance fee CCRC prior to stabilization and (ii) first
generation entrance fee refunds not replaced by second generation entrance fee receipts at the recently opened community prior to
stabilization) .
(2) Cash From Facility Operations (CFFO) is a measurement of liquidity that is not calculated in accordance with GAAP and should not
be considered in isolation as a substitute for cash flows provided by or used in operations, as determined in accordance with GAAP .
We define CFFO as net cash provided by (used in) operating activities adjusted for changes in operating assets and liabilities, deferred
interest and fees added to principal, refundable entrance fees received, first generation entrance fee receipts at a recently opened
entrance fee CCRC prior to stabilization, entrance fee refunds disbursed adjusted for first generation entrance fee refunds not replaced
by second generation entrance fee receipts at the recently opened community prior to stabilization, lease financing debt amortization
with fair market value or no purchase options, gain (loss) on facility lease termination, recurring capital expenditures (net), distributions
from unconsolidated ventures from cumulative share of net earnings, CFFO from unconsolidated ventures, and other . Recurring capital
expenditures include routine expenditures capitalized in accordance with GAAP that are funded from current operations . Amounts
excluded from recurring capital expenditures consist primarily of major projects, renovations, community repositionings, expansions,
systems projects or other non-recurring or unusual capital items (including integration capital expenditures) or community purchases
that are funded using lease or financing proceeds, available cash and/or proceeds from the sale of communities that are held for sale .
(3) Facility Operating Income is not a measurement of operating performance calculated in accordance with GAAP and should not
be considered in isolation as a substitute for net income, income from operations, or cash flows provided by or used in operations, as
determined in accordance with GAAP . We define Facility Operating Income as net income (loss) before provision (benefit) for income
taxes, non-operating (income) expense items, (gain) loss on sale or acquisition of communities (including gain (loss) on facility lease
termination), depreciation and amortization (including non-cash impairment charges), facility lease expense, general and administrative
expense, including non-cash stock-based compensation expense, change in future service obligation, amortization of deferred entrance
fee revenue and management fees .
Note: See enclosed Form 10-K for non-GAAP reconciliations .
lEttEr to sharEholdErs
Fellow Shareholders:
actually deliver on their brand promises. To us, that
It can be easy at times to forget that aging, in
means that our brand is more important internally
many respects, is one of the good problems of life.
than externally. We are blessed to have a cadre of
If we’re racking our brains trying to determine how
associates who represent our core identity through
best to provide assistance to our aging parents, it is
their commitment, skill and devotion to enhancing
because we are fortunate they have lived long lives.
our residents’ experiences. For them, Brookdale is
If it is our turn to face those same challenges, it is
more than a company; it is a calling to enrich the
as a result of our own good fortune. But that does
lives of those we serve.
not make it easy and it does not mean we do not
Our brand activation gives voice and power
need help.
to this passion and what it means to be a part of
As the nation’s largest provider of senior living
the Brookdale community. Brookdale’s brand will
services and solutions, those of us at Brookdale®
become even more established in the public’s mind
have a unique opportunity. We consider ourselves
as our residents (current and prospective) and
fortunate to be devoted to a business that allows us
their families interact with our communities and
to play a vital role in the lives of so many. And, even
associates and, over time, see that we embrace and
as we deal on a daily basis with many of the most
live up to the values of our vision and mission.
difficult aspects of aging, we appreciate the unique
One of many who exemplifies this caring attitude
life experiences of each of our residents and how
is Donnell “D.J.” Akers, a 2013 ALFA Hero. DJ is an
important their well-being is to their families.
associate at our community in Plano, Texas, and
We know that ours is a complex mix of core
part of DJ’s job is to take meals upstairs to Clare
competencies, including real estate, services and
Bridge Place, our memory care unit. But DJ doesn’t
healthcare. We know that it is all of these things and
just deliver meals; he reaches out to each resident,
more, but fundamentally it is about people – our
saying hello, giving them a handshake or a hug and
associates forming relationships with our residents
uplifting their spirits. He builds relationships and is
and their families and providing them with the care,
known to spend extra time (sometimes as a visitor)
support, dignity and respect they deserve. That
to help a particular resident overcome issues that
means Brookdale must provide our associates with
are problematic to their well-being. Outside of
the training, tools and support they need to have a
Brookdale, DJ has created his own charity to help
powerful, positive impact on our customers’ lives.
feed the homeless in the Dallas–Fort Worth area.
During 2013, we activated a branding campaign
We are proud to have DJ at Brookdale, and he
to give voice to our mission and to engage in a
represents the tens of thousands of associates
discussion with seniors and their families about
who demonstrate that same spirit and empathy,
finding solutions that can bring them or their
caring for our residents out of a passion to make a
loved one to the right place in the continuation
difference in their lives.
of their individual life pursuits. It is a conversation
with which people throughout the country are
increasingly seeking help, due in large part to the
Strong 2013 Performance – Following are a few
highlights of our 2013 financial performance:
rapid growth of the senior population.
• We produced strong growth in the cash-
Consumers typically first experience a brand by
flow oriented metrics that we use to measure the
seeing an advertisement or a marketing message.
performance of our business. Cash From Facility
But strong brands are built when companies
Operations (“CFFO”)(1) and Adjusted EBITDA(1)
| 1
increased 17.6% and 10.2%, respectively, from the
to build out our platform and to maximize the
prior year.
opportunities before us.
• Our operating team produced solid year-over-
1. We are focused on continuing to generate
year top–line growth, increasing occupancy 70
strong and consistent organic growth. We are well
basis points and growing senior housing average
positioned to enhance operating leverage with
revenue per unit by 2.6%. In addition to our revenue
growth in occupancy and rate, complemented by
growth, we had solid cost management resulting
increasing operational effectiveness. There is a
from improvements in our systems and processes,
tremendous opportunity to grow cash flow (CFFO
including our Service Alignment labor management
and Adjusted EBITDA), to create value and to
program. This combination of revenue growth and
provide incremental capital for investment in high-
expense management drove a nearly 8% increase in
return projects.
our same community operating income.
2. We expect to continue generating high returns
• We made substantial capital investments in
for shareholders by deploying capital to increase
our portfolio, including approximately $127 million
the value of our existing assets and adding new
to renovate our communities, keeping them fresh,
communities or business lines. The average age
attractive and competitive. We also invested $48
of our current portfolio underscores our need to
million on “Program Max” projects, completing
re-invest to support organic growth. At the same
15 projects in 2013. Program Max is our initiative
time, the fragmented nature of our industry should
to redevelop and reposition our communities to
continue to provide consolidation opportunities
meet the evolving needs of our residents and their
with attractive returns.
families. In addition, we invested $17 million to
3. Our national footprint with the most diversified
further develop our industry-leading technology
service offerings in a fragmented industry presents
and systems infrastructure, including electronic
us with a unique opportunity to create the first
medical records.
nationally recognized senior living services brand.
• Finally, Brookdale continues to have access
Brand equity creates preference and drives loyalty
to substantial capital for acquisitions, refinancings
with residents and their families. We believe the
and other corporate activities. During 2013, we
continuing development of our brand will produce
completed $101 million in acquisitions and almost
a competitive differentiator for Brookdale that will
$680 million in financings and refinancings.
be difficult for our peers to match.
4. We are committed to innovation. This
Positioned for Future Growth
includes developing and expanding the services we
Looking forward, we expect the need for a trusted
offer and the markets we serve to meet evolving
provider of senior-related solutions to increase
consumer needs and expectations, and to take
dramatically. Due to inevitable demographic trends
advantage of the size, scope and scale we are
and continuing advances in science and healthcare,
creating. Additionally, we expect to form innovative
our society will face the challenges of an increasing
partnerships and relationships with other healthcare
number of frail seniors and a growing prevalence of
providers who see the benefits of our high quality,
chronic conditions and cognitive impairment within
outcome-oriented and scaled continuum of care.
the senior population. Brookdale is building a
platform - a continuum of services - that is already
Emeritus
enabling us to reach a greater number of seniors
Our merger with Emeritus, which we announced
and provide them with more high–quality services
in February of 2014, is both transformational and
than ever before.
very consistent with our four–part strategy. When
We continue to pursue a four-part strategy
completed, it will enhance our opportunity to
2 | 2013 Annual Report
drive long-term organic growth by significantly
to innovate and create new products and services,
expanding our geographic coverage and density,
and to create new approaches to the integration of
and accelerating the growth of our ancillary services
technology, healthcare, wellness and programming.
platform. Simultaneously, we expect to improve
Along with our new teammates from Emeritus, we
our operating efficiencies from unparalleled size
believe we have an unparalleled opportunity to
and scale. The transaction will further expand our
greatly improve the quality of lives for the seniors
potential for attractive capital deployment through
we are so passionate about serving.
portfolio expansion and redevelopment projects.
As we look to a very exciting future, we thank
And, it will leverage our national branding initiative
all of our associates who do so much to fulfill our
by expanding Brookdale’s operations across the
brand promise of enriching the lives of those we
country to more than 500 new communities,
serve with compassion, respect, excellence and
increasing our presence to a total of 330 markets
integrity. We are also indebted to our residents and
in 46 states.
their families for entrusting us to partner with them
As a Brookdale shareholder, perhaps the most
to provide solutions to their daily challenges. We
exciting aspect of our post-merger future is the
are honored to serve them, and we are committed
great potential inherent in having 6.5 million people
to earning and retaining their trust.
at least 80-years-old and almost 38 million of those
Finally, we thank our fellow shareholders for their
age 50 to 69 (adult influencers) living within 10 miles
investment in Brookdale. We accomplished much
of a Brookdale community. Brookdale will have
during the last year and are very enthusiastic about
the depth of experience and resources to produce
our future prospects for creating shareholder value.
senior living solutions in ways never done before,
Sincerely,
T. Andrew Smith
Chief Executive Officer
(1) Excluding integration, transaction-related and EMR roll-out costs
| 3
industry rECognition
Pictured Left to Right: Richard P. Grimes, ALFA President & CEO; Donnell “DJ” Akers, ALFA Hero Award Recipient and Brookdale Associate, Plano, Texas;
Brenda J. Bacon, ALFA Board of Directors Chair and Brandywine Senior Living President & CEO; and Mark Ohlendorf, Brookdale President & CFO, ALFA
Board of Directors Immediate Past Chair.
The Assisted Living Federation of America
of dementia. But he is more than just a service-
(ALFA) is the nation’s leading association dedicated
oriented task-master. For DJ, delivering meals is an
to professionally-managed, consumer-driven senior
opportunity to be a friend and bring some joy to the
living communities and the seniors and families
lives of people who contend daily with a condition
they serve. Each year the ALFA Awards recognize
for which there is no cure. He understands that, in
individuals and
institutions
for outstanding
spite of their challenges, these are people who still
achievement, leadership and innovation in the field.
enjoy a pleasant smile, a hearty laugh and a warm
Brookdale Associates, Systems and Programs were
embrace. This is what he truly delivers to Brookdale
honored in various categories for their work and
residents.
contributions in 2013.
DJ’s spirit of service and philanthropy transcends
his work at Brookdale. He is the founder of a charity
ALFA HERO AWARD
Recognizing individuals who are ideal representatives
that provides meals to the homeless in the Dallas-
Fort Worth Metroplex. Once a month, he visits an
of the hundreds of thousands of people serving in
area with a large homeless population where he
senior living communities.
DJ Akers
Brookdale Associate, Plano, Texas
provides meals he has cooked himself. When he
started, he worked out of the trunk of his car but
has since partnered with a local church to feed more
than 500 homeless people each month. DJ is also a
DJ Akers, a Brookdale Associate in Plano, Texas,
retired UPS driver and a military veteran.
received the ALFA Hero Award that is given annually
to five senior living professionals who are creating a
bright future for seniors in America.
BEST OF THE BEST AWARDS
Recognizing innovative new programs and services
One of his duties is to deliver meals to residents
that are creating the future of senior living.
living with Alzheimer’s disease and other forms
4 | 2013 Annual Report
National Advertising Campaign
and Brand Activation
to 15 minutes. “This process was designed with our
human resources associates in mind,” said Chris
Since its introduction on April 29, 2013 millions
Santell, director of HRIS. “By improving efficiency
of Americans have viewed hundreds of Brookdale
at this level, our associates are better able to fulfill
commercial spots on CNN, The Hallmark Channel,
Brookdale’s mission of enriching the lives of those
HGTV and The Food Network. The campaign has
we serve.”
inspired and challenged people to take a new look
at the questions and challenges of growing older.
At the same time, Brookdale’s internal organization
THE HORACE D’ANGELO
JUNIOR MEMORIAL AWARD
transformed as it engaged in the activation of
Honoring ALFA state affiliates and chapters
the Company’s new brand promise, All the Places
that initiated and produced significant regulatory
Life Can Go™. “This brand promise is about the
outcomes during the previous year through effective
opportunity and potential that all residents, family
grassroots advocacy.
members and associates have to optimize their
personal situations through senior living solutions,”
said Mike Ulm, senior director of internal brand.
Karen Peck
Vice President of Clinical Services, East Division
Karen Peck, Brookdale’s Vice President of Clinical
Outpatient Paper-based Documentation
and Outpatient Electronic Documentation
Services for the East division, received The Horace
D’Angelo Junior Memorial Award for her efforts to
Brookdale Therapy is blazing a trail for others
resolve key issues associated with assisted living
in the industry as it uses mobile technology
in Rhode Island. When the assisted living industry
(Samsung Galaxy tablets) to enable point-of-care
and its regulators were locked in disagreement, the
documentation. The distribution of tablets to 2,000
Director of the Rhode Island Department of Health
associates, and the shift to electronic medical
suggested the industry help envision the future of
records, required changing a number of behaviors
assisted living.
from paper-based documentation to the new digital
Karen used her clinical
knowledge
to
format. “Effective documentation skills and systems
translate medical terminology into simple tasks
benefit the entire industry,” said John Dunavan,
that constituents, stakeholders and
legislators
director of learning. “Brookdale intends to offer
understood. She used her assisted living experience
components of these new electronic documentation
in other states to identify which services should be
courses to other senior care stakeholders to improve
available in Rhode Island, and brokered agreement
the quality of resident care across the industry.”
within the industry.
Her efforts resulted in the creation of a licensing
Brookdale’s Basic Hire Template
level giving residents access to nursing services
As a company that hires approximately 27,000
supporting their independence and dignity. Karen
hourly and salaried associates each year, efficiency
chaired the Rhode Island Assisted Living Association
in the hiring process is essential. Brookdale’s Basic
(RIALA) group that crafted proposed regulations
Hire Template was created to fulfill that need. In all,
which were submitted to the state’s Department of
there are six Basic Hire Templates. The result is a
Health as a model for the new license.
streamlined, data-entry protocol that has greatly
reduced the time it takes for human resource
Horace D’Angelo Jr. was a visionary for the
associates to complete the hire or rehire process.
senior living industry, the founder of ALFA and a
A procedure that was once labor-intensive, taking
passionate advocate for serving seniors in a manner
45 to 60 minutes to complete, now takes only 10
that protected their dignity and quality of life.
| 5
CorporatE data
Corporate office
111 Westwood Place,
Suite 400
Brentwood, TN 37027
615.221.2250
brookdale.com
transfer agent
American Stock Transfer &
Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
800.937.5449
governance
stock listing
NYSE: BKD
approximate number
of record holders
(as of may 20, 2014):
403
investor relations Contact
Ross Roadman
Brookdale Senior Living
111 Westwood Place,
Suite 400
Brentwood, TN 37027
615.564.8104
independent auditors
Ernst & Young LLP
155 N. Wacker Drive
Chicago, IL 60606
2014 annual meeting
July 7, 2014 • 10:00 a.m. CDT
Brookdale Senior Living
111 Westwood Place
Brentwood, TN 37027
615.221.2250
Brookdale’s corporate governance guidelines, code of business conduct and ethics, the charters of the
principal board committees and other governance information can be accessed through the Investor
Relations portion of our website, brookdale.com.
forward-looking statements
Certain statements in this Annual Report and other information we provide from time to time (including statements with respect to our pending merger with Emeritus Corporation (the “Merger”) and the pending
transactions with HCP, Inc. (the “HCP Transactions”)) may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include
all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our operational initiatives and growth strategies and
our expectations regarding their effect on our results; our expectations regarding the economy, the senior living industry, occupancy, revenue, cash flow, operating income, expenses, capital expenditures, Program
Max opportunities, cost savings, the demand for senior housing, the home resale market, expansion, development and construction activity, acquisition opportunities, asset dispositions, our share repurchase program,
capital deployment, returns on invested capital and taxes; our expectations regarding returns to shareholders and our growth prospects; our expectations concerning the future performance of recently acquired
communities and the effects of acquisitions on our financial results; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of
our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity and leverage; our expectations regarding financings and refinancings of assets (including
the timing thereof) and their effect on our results; our expectations regarding changes in government reimbursement programs and their effect on our results; our plans to generate growth organically through
occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy, home health and hospice);
our plans to expand, renovate, redevelop and reposition existing communities; our plans to acquire additional communities, asset portfolios, operating companies and home health agencies; the expected project
costs for our expansion, redevelopment and repositioning program; our expected levels of expenditures and reimbursements (and the timing thereof); our expectations regarding our sales, marketing and branding
initiatives and their impact on our results; our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; our
expectations regarding the payment of dividends; our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein);
and our expectations regarding the Merger and the HCP Transactions. Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”, “could”,
“should”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject
to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking
statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual
results to differ materially from our expectations include, but are not limited to, the risk associated with the current global economic situation and its impact upon capital markets and liquidity; changes in governmental
reimbursement programs; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising
the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets
in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our
liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or
other factors could make financing more expensive or unavailable to us; our determination from time to time to purchase any shares under the repurchase program; our ability to fund any repurchases; our ability
to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be able to expand, redevelop and reposition our communities
in accordance with our plans; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to
us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living
spaces we lease; early terminations or non-renewal of management agreements; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates;
environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying
with increasing and evolving regulation; risks relating to the Merger and the HCP Transactions, including in respect of the satisfaction of closing conditions to such transactions; unanticipated difficulties and/or
expenditures relating to such transactions; the risk that regulatory approvals required for such transactions are not obtained or are obtained subject to conditions that are not anticipated; uncertainties as to the timing
of such transactions; litigation relating to such transactions; the impact of such transactions on relationships with residents, employees and third parties; and the inability to obtain, or delays in obtaining cost savings
and synergies from such transactions; as well as other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth
under “Risk Factors” included in the accompanying Annual Report on Form 10-K. Such forward-looking statements speak only as of the date of this Annual Report. We expressly disclaim any obligation to release
publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
additional information and Where to find it
In connection with the Merger, the Company has filed with the SEC a Registration Statement on Form S-4 that includes a joint proxy statement of the Company and Emeritus that also constitutes a prospectus of
the Company, as well as other relevant documents concerning the proposed transaction. STOCKHOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND
ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY CONTAIN IMPORTANT INFORMATION. A free copy
of the joint proxy statement/prospectus and other filings containing information about the Company and Emeritus may be obtained at the SEC’s Internet site (http://www.sec.gov). You are also able to obtain these
documents, free of charge, from the Company at www.brookdale.com under the heading “About Brookdale / Investor Relations” or from Emeritus at www.emeritus.com under the heading “Investor Relations.”
The Company and Emeritus and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the Company’s and Emeritus’ stockholders in connection with
the Merger. Information about the directors and executive officers of the Company and their ownership of Company Common Stock is set forth in the Annual Report on Form 10-K/A, as filed with the SEC on April
30, 2014. Information about the directors and executive officers of Emeritus and their ownership of Emeritus Common Stock is set forth in Emeritus’ Annual Report on Form 10-K/A, as filed with the SEC on April
30, 2014. Additional information regarding the interests of those participants and other persons who may be deemed participants in the Merger may be obtained by reading the joint proxy statement regarding the
Merger. Free copies of this document may be obtained as described in the preceding paragraph. This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an
offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any
such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
6 | 2013 Annual Report
Board of dirECtors
Jeffrey r. leeds 1,3,4, Chairman;
Former Chief Financial Officer,
GreenPoint Financial Corporation
W.E. sheriff, Director;
Former Chief Executive Officer,
Brookdale Senior Living Inc.
frank m. Bumstead 2,3, Director;
Chairman and Principal Shareholder,
Flood, Bumstead, McCready & McCarthy, Inc.
t. andrew smith, Director;
Chief Executive Officer,
Brookdale Senior Living Inc.
Jackie m. Clegg 1,2,4, Director;
Managing Partner,
Clegg International Consultants, LLC
mark J. schulte 3, Director;
Former Co-Chief Executive Officer,
Brookdale Senior Living Inc.
James r. seward 1, Director;
Private Investor
ExECutiVE offiCErs
t. andrew smith
Chief Executive Officer
mark W. ohlendorf
President & Chief Financial Officer
dr. samuel Waxman 2,4, Director;
Distinguished Service Professor,
Mount Sinai School of Medicine
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and Corporate Governance Committee
Kristin a. ferge
Executive Vice President & Treasurer
george t. hicks
Executive Vice President – Finance
gregory B. richard
Executive Vice President & Chief Operating Officer
h. todd Kaestner
Executive Vice President – Corporate Development
Bryan d. richardson
Executive Vice President & Chief Administrative Officer
Edward a. fenoglio
Division President
glenn o. maul
Executive Vice President & Chief People Officer
mary sue patchett
Division President
tricia a. Conahan
Executive Vice President & Chief Marketing Officer
Kari l. schmidt
Division President
| 7
$160
$140
$120
$100
$80
$60
$40
$20
$0
$600
$500
$400
$300
$200
$100
$160
$140
$120
$100
$80
$60
$20
$0
$600
$500
$400
$300
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$100
$160
$140
$120
$100
$80
$60
$160
$40
$140
$120
$20
$160
$100
$0
$140
$80
12/07
$120
$60
$100
$40
$80
$20
$60
$0
12/11
$40
pErformanCE graph
12/08
12/09
12/10
12/11
12/12
12/07
12/08
$40
12/09
12/10
Brookdale Senior Living Inc.
Russell 2000
12/07
12/08
Comparison of Cumulative Return since December
31, 2008 through December 31, 2013 for Brookdale,
12/12
12/07
the Russell 2000 Index and a Peer Group.
12/09
Brookdale Senior Living Inc.
The graph below compares the cumulative
total return for Brookdale common stock with the
12/09
comparable cumulative return of the Russell 2000
12/10
12/11
12/08
$20
$0
12/09
12/07
Index and a peer group of companies composed
12/08
Brookdale Senior Living Inc.
Peer Group
of Emeritus Corporation, Capital Senior Living
and Ventas, Inc. Fiscal year 2013 does not include
Sunrise Senior Living, Inc., which had previously
been included in the peer group, because Sunrise
12/12
Senior Living, Inc. ceased to be a publicly traded
12/11
Russell 2000
12/10
company in January 2013. The graph assumes $100
invested on December 31, 2008 and $100 invested
12/12
12/11
12/12
12/10
at that same time in each of the Russell 2000 Index
Russell 2000
Peer Group
and the peer group. The comparison assumes that
Brookdale Senior Living Inc.
Corporation, Five Star Quality Care, Inc., HCP, Inc.,
$600
Russell 2000
Brookdale Senior Living Inc.
all dividends are reinvested.
Peer Group
Russell 2000
Peer Group
Comparison of fiVE yEar CumulatiVE total rEturn
Among Brookdale Senior Living Inc., the Russell 2000 Index, and a Peer Group
$600
$500
$500
$600
$400
$400
$500
$300
$400
$300
$200
$300
$200
$100
$200
$100
$0
$100
$0
12/08
12/09
$0
12/08
12/10
12/08
12/09
12/10
12/11
12/12
12/13
$0
$0
12/08
12/08
12/09
12/10
12/11
12/09
12/10
12/12
12/11
12/13
12/12
12/13
Brookdale Senior Living Inc.
Russell 2000
Peer Group
12/09
12/11
12/10
12/11
12/12
12/12
Brookdale Senior Living Inc.
12/13
12/13
Russell 2000
Peer Group
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
Brookdale Senior Living Inc.
BKD
$100.00
$325.99
$383.69
$311.65
Russell 2000
$453.76
$487.10
Brookdale Senior Living Inc.
Russell 2000
Russell 2000
$100.00
$127.17
Peer Group
$161.32
$154.59
$179.86
$249.69
Brookdale Senior Living Inc.
Russell 2000
Peer Group
Peer Group
$100.00
$129.37
$163.38
$185.45
$221.82
$196.91
8 | 2013 Annual Report
Peer Group
Peer Group
oUR
MISSION.
enriching the lives of those we serve with compassion, respect, excellence and integrity.
oUR
CORNERSTONES.
moRe ThAN A JoB, A
PASSION.
Take ownership and pride in everything we do.
have fun and celebrate life every day.
DoiNG The RiGhT ThiNG TAKeS
COURAGE.
Put the resident first and the “bottom line” will take care of itself.
Provide meaningful rewards for residents, associates and shareholders.
We SUcceeD ThRoUGh
PARTNERSHIP.
Respect others through honesty, understanding and trust.
Work together as one team.
Recognize that good people make the difference and are the key to our success.
BUilT oN A foUNDATioN of
TRUST.
We earn trust when we listen, understand, partner and solve.
Corporate Headquarters
111 Westwood Place | Suite 400 | Brentwood, TN 37027 | (615) 221-2250
For more information visit our website: brookdale.com
Brookdale, All The PlAceS life cAN Go and other trademarks and service marks herein are the registered and unregistered trademarks
and service marks of Brookdale Senior living inc. KcoRP-SPl02-0514
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32641
BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
20-3068069
(I.R.S. Employer
Identification No.)
111 Westwood Place, Suite 400
Brentwood, Tennessee 37027
(Address of Principal Executive Offices)
(Registrant's telephone number including area code)
(615) 221-2250
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Common Stock, $0.01 Par Value Per Share
Name of Each Exchange on Which Registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of 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 and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the registrant on June 28, 2013, the last business day of the registrant's most recently
completed second fiscal quarter, was approximately $2.3 billion. The market value calculation was determined using a per share price of $26.44, the price at
which the registrant's common stock was last sold on the New York Stock Exchange on such date. For purposes of this calculation, shares held by non-
affiliates excludes only those shares beneficially owned by the registrant's executive officers, directors, and stockholders owning 10% or more of the
outstanding common stock (and, in each case, their immediate family members and affiliates).
As of February 27, 2014, 124,354,003 shares of the registrant's common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Definitive Proxy Statement relating to its 2014 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PAGE
5
20
39
39
40
40
42
43
44
73
74
114
114
114
114
115
115
116
116
116
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K and other information we provide from time to time (including statements with respect to the Merger
(as defined herein)) may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-
looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not
limited to, statements relating to our operational initiatives and growth strategies and our expectations regarding their effect on our results; our expectations
regarding the economy, the senior living industry, occupancy, revenue, cash flow, operating income, expenses, capital expenditures, Program Max
opportunities, cost savings, the demand for senior housing, the home resale market, expansion, development and construction activity, acquisition
opportunities, asset dispositions, our share repurchase program, capital deployment, returns on invested capital and taxes; our expectations regarding returns to
shareholders and our growth prospects; our expectations concerning the future performance of recently acquired communities and the effects of acquisitions
on our financial results; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with
all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity and leverage; our expectations
regarding financings and refinancings of assets (including the timing thereof) and their effect on our results; our expectations regarding changes in government
reimbursement programs and their effect on our results; our plans to generate growth organically through occupancy improvements, increases in annual rental
rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy, home health and hospice);
our plans to expand, renovate, redevelop and reposition existing communities; our plans to acquire additional communities, asset portfolios, operating
companies and home health agencies; the expected project costs for our expansion, redevelopment and repositioning program; our expected levels of
expenditures and reimbursements (and the timing thereof); our expectations regarding our sales, marketing and branding initiatives and their impact on our
results; our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on
our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility
Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as "anticipate(s)", "expect(s)", "intend(s)", "plan(s)", "target(s)",
"project(s)", "predict(s)", "believe(s)", "may", "will", "would", "could", "should", "seek(s)", "estimate(s)" and similar expressions are intended to identify such
forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and
uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material
adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited
to, the risk associated with the current global economic situation and its impact upon capital markets and liquidity; changes in governmental reimbursement
programs; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy
the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of
seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient
cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the
risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes
in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; our determination from time to time to
purchase any shares under the repurchase program; our ability to fund any repurchases; our ability to effectively manage our growth; our ability to maintain
consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be able to expand, redevelop and reposition our communities in
accordance with our plans; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to
obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature
in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewal of
management agreements; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest
rates; environmental contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of
complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; risks relating to the Merger, including in respect of
the satisfaction of closing conditions to the Merger; unanticipated difficulties and/or expenditures relating to the Merger; the risk that regulatory approvals
required for the Merger are not obtained or are obtained subject to conditions that are not anticipated; uncertainties as to the timing of the Merger; litigation
relating to the Merger; the impact of the transaction on relationships with residents,
4
employees and third parties; and the inability to obtain, or delays in obtaining cost savings and synergies from the Merger; as well as other risks detailed from
time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under "Risk
Factors" included elsewhere in this Annual Report on Form 10-K. Such forward-looking statements speak only as of the date of this Annual Report. We
expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
PART I
Item 1.
Business.
Overview
The Pending Merger
On February 20, 2014, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Emeritus Corporation, a Washington corporation
("Emeritus"), and Broadway Merger Sub Corporation, a Delaware corporation and our wholly owned subsidiary ("Merger Sub"). The Merger Agreement
provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Emeritus (the "Merger"), with Emeritus
continuing as the surviving corporation and our wholly owned subsidiary.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of
common stock, par value $0.0001 per share ("Emeritus Common Stock"), of Emeritus (including each restricted share of Emeritus Common Stock, but not
including any shares (x) held by us or Emeritus or any of our or their wholly owned subsidiaries and (y) with respect to which appraisal rights are properly
demanded and not withdrawn under Washington law ("Dissenting Shares")), will be automatically converted into the right to receive 0.95 of a share (the
"Exchange Ratio") of our common stock.
The Merger Agreement provides that each option to purchase Emeritus Common Stock, whether vested or unvested (an "Emeritus Option"), will be canceled at
the effective time of the Merger. Any Emeritus Option with an exercise price that is less than the implied dollar value of the per share consideration to be
received in the Merger (valuing our common stock at its volume weighted average price over the 10 trading days preceding the consummation of the Merger)
will be converted into the right to receive a number of shares of our common stock (net of any required withholding taxes) equal to the product of (x) the
number of shares of Emeritus Common Stock subject to the Emeritus Option multiplied by (y) the excess of the implied dollar value of the per share
consideration (based on the volume weighted average described above) over the exercise price of the Emeritus Option. Any Emeritus Option with an exercise
price that is equal to or greater than the implied dollar value of the per share consideration to be received in the Merger as described above will be canceled
without the payment of any consideration.
The Merger Agreement contains certain customary representations and warranties made by each party that are qualified by the confidential disclosures
provided to the other party in connection with the Merger Agreement, as well as matters included in our and Emeritus' reports filed with the Securities and
Exchange Commission prior to the date of the Merger Agreement. We and Emeritus have agreed to various customary covenants and agreements, including
covenants regarding the conduct of our and their businesses prior to the closing of the Merger (the "Closing"), and covenants prohibiting each of us and
Emeritus from soliciting alternative acquisition proposals and providing information to or engaging in discussions with third-parties, except in limited
circumstances as provided in the Merger Agreement. In addition, the parties have agreed to use their respective reasonable best efforts to do all things
necessary, proper or advisable to consummate the Merger, including obtaining all necessary approvals and consents, subject to certain limitations. In
connection with the Merger, we will also seek stockholder approval to amend our certificate of incorporation to increase the number of authorized shares of
our common stock from 200,000,000 to 500,000,000.
The Closing is subject to satisfaction or waiver of certain conditions, including, among others: (i) the approval of our and Emeritus' stockholders; (ii) the
absence of any law or order prohibiting the Closing; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended; (iv) the receipt of certain federal and state government approvals necessary for the ownership, operation and
management of Emeritus' senior living facilities and expiration of notice periods for the same, subject to certain exceptions; (v) the continuing effectiveness
or receipt, as applicable, of certain third-party consents, subject to certain exceptions; (vi) the accuracy of each party's representations and warranties, subject
to certain materiality
5
qualifiers; (vii) the performance in all material respects of each party's obligations under the Merger Agreement; (viii) no more than 7.5% of the shares of
Emeritus Common Stock being Dissenting Shares; and (ix) the absence of any change, event or development that would reasonably be expected to have either a
Parent Material Adverse Effect or a Company Material Adverse Effect (each as defined in the Merger Agreement).
The Merger Agreement may be terminated by either party under certain circumstances, including, among others: (i) if the Closing has not occurred by the nine-
month anniversary of the Merger Agreement (subject to extension for up to 60 days if certain required regulatory approvals have not yet been obtained); (ii) if
a court or other governmental entity has issued a final and non-appealable order prohibiting the Closing; (iii) if our or Emeritus' stockholders fail to approve
the transaction; (iv) upon a material uncured breach by the other party that would result in a failure of the conditions to the Closing; or (v) if the other party's
board of directors makes an Adverse Recommendation Change (as defined in the Merger Agreement), or fails to reaffirm its recommendation following
receipt of an acquisition proposal. In addition, prior to obtaining its stockholder approval and subject to the payment of a termination fee, we and Emeritus each
may terminate the Merger Agreement in order to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). Upon termination of
the Merger Agreement, under specified circumstances (including in connection with a Superior Proposal), we will be obligated to pay a termination fee of
$143 million to Emeritus and Emeritus will be required to pay a termination fee of $53 million to us. If the Merger Agreement is terminated because a party's
stockholders do not approve the transaction, such party will be obligated to pay the other party $13.5 million (which amount is intended as compensation for
transaction expenses).
We and Emeritus have agreed to take all action necessary to provide that our board of directors appoints one individual serving on the Emeritus board of
directors to our board of directors at the Closing (subject to the approval of such nominee by our board's Nominating and Corporate Governance Committee).
In connection with the foregoing, it is anticipated that Granger Cobb, President and Chief Executive Officer of Emeritus, will be joining our board of directors
following the Closing. In addition, Mr. Cobb will provide consulting services to us following the Closing.
In connection with the execution of the Merger Agreement, we concurrently entered into a voting agreement (the "Voting Agreement") with certain
stockholders of Emeritus (the "Emeritus Stockholders") providing for, among other things, the Emeritus Stockholders' agreement to vote all of the shares of
Emeritus Common Stock held by them in favor of the transactions contemplated by the Merger Agreement. The Voting Agreement terminates on the earliest
of (i) the date the Merger Agreement is terminated in accordance with its terms, (ii) the effective time of the Merger and (iii) the termination of the Voting
Agreement by the mutual written consent of us and the Stockholders. In addition, certain Stockholders have agreed to certain limitations on their ability to sell
shares of our common stock received by them in the Merger for a specified period following the effective time of the Merger.
In connection with the execution of the Merger Agreement, we concurrently entered into a letter agreement (the "Letter Agreement") with certain of our
stockholders that are affiliates of certain funds managed by affiliates of Fortress Investment Group LLC (the "Fortress Stockholders") that are party to that
certain Stockholders Agreement, dated as of November 28, 2005, by and among us and the stockholders named therein (as amended, the "Fortress
Stockholders Agreement"), providing for, among other things, the Fortress Stockholders' agreement to vote all of the shares of our common stock to the extent
held by them as of the applicable record date for our special meeting in favor of the transactions contemplated by the Merger Agreement. Pursuant to the terms
and subject to the conditions set forth in the Letter Agreement, we have agreed, among other things, (i) following the filing of our Registration Statement on
Form S-4 (the "Form S-4") and prior to the Closing, not to exercise our right under the Fortress Stockholders Agreement to suspend the Fortress Stockholders'
use of the prospectus under our Registration Statement on Form S-3 (the "Form S-3"); (ii) from the date of the Merger Agreement until the expiration of a
period of thirty consecutive days following the filing of the Form S-4 during which the financial information set forth in the Form S-4 and Form S-3 is not
"stale" (such period, the "Restricted Period"), not to issue any equity securities, subject to certain exceptions; and (iii) during the thirty day period following
any sale by the Fortress Stockholders of at least 5,000,000 shares of our common stock during the Restricted Period, not to issue any equity securities,
subject to certain exceptions. The Letter Agreement also provides that the Fortress Stockholders will cause the resignation of their designees to our board of
directors upon any decrease of their ownership of our common stock below certain agreed thresholds.
The foregoing description of the Merger Agreement, the Voting Agreement and the Letter Agreement and the transactions contemplated thereby do not purport
to be complete and are subject to and qualified in their entirety by reference to the full text of the Merger Agreement, Voting Agreement and Letter
Agreement, each of which is
6
included as an exhibit to this Form 10-K, which can found in our Securities and Exchange Commission filings at www.sec.gov. The foregoing information
about the Merger Agreement, the Voting Agreement and the Letter Agreement and the actions and conditions contemplated thereby is stated as of the date on
which this Form 10-K is filed. We undertake no obligation to correct or update any information after the date hereof.
The Merger Agreement has been filed as an exhibit to this Form 10-K to provide investors and security holders with information regarding its terms. It is not
intended to provide any other factual information about us, Emeritus or any of our or their subsidiaries or affiliates. The representations, warranties and
covenants contained in the Merger Agreement were made by the parties thereto only for purposes of that agreement and as of specific dates; were made solely
for the benefit of the parties to the Merger Agreement; may be subject to limitations agreed upon by the contracting parties, including being qualified by
confidential disclosures exchanged between the parties in connection with the execution of the Merger Agreement (such disclosures include information that
has been included in our public disclosures, as well as additional non-public information); may have been made for the purposes of allocating contractual risk
between the parties to the Merger Agreement instead of establishing these matters as facts; and may be subject to standards of materiality applicable to the
contracting parties that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any descriptions
thereof as characterizations of the actual state of facts or condition of us or Emeritus or any of our or their subsidiaries or affiliates. Additionally, the
representations, warranties, covenants, conditions and other terms of the Merger Agreement may be subject to subsequent waiver or modification. Moreover,
information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which
subsequent information may or may not be fully reflected in our or Emeritus' public disclosures.
Our Business
As of December 31, 2013, we are the largest operator of senior living communities in the United States based on total capacity, with 649 communities in 36
states and the ability to serve approximately 67,000 residents. We offer our residents access to a full continuum of services across the most attractive sectors
of the senior living industry. As of December 31, 2013, we operated in six business segments: retirement centers, assisted living, continuing care retirement
communities ("CCRCs") – rental, CCRCs – entry fee, Brookdale Ancillary Services (formerly known as Innovative Senior Care) and management services.
As of December 31, 2013, we operated 76 retirement center communities with 14,549 units, 438 assisted living communities with 22,176 units, 26 rental
CCRC communities with 6,504 units, 14 entry fee CCRC communities with 5,873 units and 95 communities with 17,422 units where we provide management
services for third parties or joint ventures in which we have an ownership interest. We offer therapy services to approximately 52,000 of our units and home
health services to approximately 47,000 of our units. The majority of our units are located in campus settings or communities containing multiple services,
including CCRCs. For the year ended December 31, 2013, the weighted average occupancy rate for our owned/leased communities was 88.7%. We generate
approximately 80.0% of our resident fee revenues from private pay customers. For the year ended December 31, 2013, 42.2% of our resident and management
fee revenues were generated from owned communities, 47.1% from leased communities, 9.5% from our Brookdale Ancillary Services business and 1.2%
from management fees from communities we operate on behalf of third parties or joint ventures.
The table below presents a summary of our operating results and certain other financial metrics for each of the years ended December 31, 2013, 2012 and
2011 (dollars in millions):
Total revenues
Net loss(1)
Adjusted EBITDA(2)
Cash From Facility Operations(3)
Facility Operating Income(2)
$
$
$
$
$
2,892.0 $
(3.6) $
463.2 $
294.0 $
812.2 $
2,768.7 $
(66.5) $
409.9 $
239.0 $
758.8 $
2,456.5
(69.1)
402.7
239.9
757.8
(1) Net loss for 2013, 2012 and 2011 include non-cash impairment charges of $12.9 million, $27.7 million and $16.9 million, respectively.
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For the Years Ended December 31,
2012
2013
2011
(2)
(3)
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures" for an explanation of how
we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, and a
reconciliation of net loss to each of these measures.
Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations — Non-GAAP Financial Measures" for an explanation of how we define this measure, a detailed
description of why we believe such measure is useful and the limitations of such measure, and a reconciliation of net cash provided by operating
activities to such measure.
Our operating results for the year ended December 31, 2013 were favorably impacted by an increase in the average monthly revenue per unit compared to the
prior year, a 70 basis points increase in average occupancy and an increase in revenues from our ancillary services programs. The increases in occupancy rates
were a result of improving fundamentals, execution by our field organization and sales and marketing team and the benefit of the capital we have invested and
continue to spend on our communities.
During 2013, we increased our owned property portfolio by acquiring the underlying real estate associated with eight Assisted Living communities with a total
of approximately 633 units for an aggregate purchase price of $83.3 million. Six of the communities had previously been managed by us since the acquisition
of Horizon Bay in September 2011. During the period, we also acquired two home health agencies and one hospice agency for an aggregate purchase price of
approximately $2.6 million.
During the year, we also made additional progress on our Program Max initiative. For the year ended December 31, 2013, we invested $31.8 million on the
expansion, redevelopment and repositioning of our existing communities, net of third party lender or lessor reimbursement. We have completed 15 Program
Max projects in 2013, which have resulted in 164 net new units. We currently have 25 additional Program Max projects that have been approved, most of
which have begun construction.
We believe that we are positioned to take advantage of favorable demographic trends and future supply-demand dynamics in the senior living industry. We also
believe that we operate in the most attractive sectors of the senior living industry with significant opportunities to increase our revenues through providing a
combination of housing, hospitality services, ancillary services and health care services. Our senior living communities offer residents a supportive "home-
like" setting, assistance with activities of daily living ("ADLs") (such as eating, bathing, dressing, toileting and transferring/walking) and, in several
communities, licensed skilled nursing services. We also provide ancillary services, including therapy and home health services, to our residents. Our strategy
is to be the leading provider of senior living solutions, built on a large and growing senior housing platform. By providing residents with a range of service
options as their needs change, we provide greater continuity of care, enabling seniors to "age-in-place" and thereby maintain residency with us for a longer
period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their
elderly relatives.
We believe that there are substantial organic growth opportunities inherent in our existing portfolio. We intend to take advantage of those opportunities by
growing revenues, while maintaining expense control, at our existing communities, continuing the expansion and maturation of our ancillary services programs,
expanding, redeveloping and repositioning our existing communities, and acquiring additional operating companies and communities.
Growth Strategy
Our primary growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income. Key elements of
our strategy to achieve these objectives include:
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· Organic growth in our core business, including expense control and the realization of economies of scale. We plan to grow our existing
operations by increasing revenues through a combination of occupancy growth and increases in the monthly service fees we receive. We believe we
will continue to see improving demand fundamentals in the senior living industry. In addition, we intend to focus on growing occupancy and rates by
continually improving our operational, sales and marketing execution. We have recently taken steps to centralize and modernize our marketing
function and programs to meet the changing manner in which our prospective customers and their families approach a buying decision. We have
created a multi-layered marketing approach, which greatly enhances the use of the internet and response mechanisms like centralized call centers.
Much of our marketing approach is centered on the Brookdale branding initiative that was launched in 2013. Additionally, we intend to continue
investing significant capital expenditures into our portfolio to renovate and upgrade communities, which we expect will drive greater occupancy and
higher rates. We also plan to continue our efforts to achieve cost savings through the realization of additional economies of scale and initiatives
designed to improve operational effectiveness. We will continue to improve our systems and processes to most efficiently meet the needs of our
residents. The size of our business has allowed us to achieve savings in the procurement of goods and services, and we expect that we can achieve
additional savings.
· Growth through strategic capital allocation. We plan to grow our revenues and cash flows by deploying capital to increase the value of existing
assets and adding new communities or business lines. Through our Program Max initiative, we intend to expand, redevelop and reposition certain of
our existing communities where economically advantageous. Certain of our communities with stabilized occupancies and excess demand in their
respective markets may benefit from additions and expansions (which additions and expansions may be subject to landlord, lender and other third party
consents). Additionally, the community, as well as our presence in the market, may benefit from adding a new level of service for residents. Through
Program Max, we may also reposition certain communities to meet the evolving needs of our customers. This may include converting space from one
level of care to another, reconfiguration of existing units, the addition of services that are not currently present or physical plant modifications. As
opportunities arise, we plan to continue to take advantage of the fragmented continuing care, independent living and assisted living sectors by
selectively purchasing existing operating companies, asset portfolios, home health agencies and senior living communities. We may also seek to
acquire the fee interest in communities that we currently lease or manage. Our acquisition strategy will continue to focus primarily on accretive
acquisitions of strategic portfolios or select communities that fill a service level need in one of our market continuums.
· Growth through development of a market leading Brookdale brand. We plan to continue to build a recognized national brand, which creates market
differentiation and value enhancement through higher occupancy and increased rates. Being the sole senior living provider with a national footprint
and diverse service offerings, we believe we are best positioned to become the leading solutions provider for seniors and their families as they
grapple with the issues of aging. We expect that aligning and unifying marketing activities and spending within the brand initiative will drive
preference for Brookdale among prospects. We expect that creating brand equity will drive loyalty with residents and their families and, importantly,
with associates, thereby improving recruitment, engagement and retention.
· Growth through innovation of product offerings, including our Brookdale Ancillary Services programs. We plan to grow our revenues by
innovating our product offerings and providing new senior living solutions to meet evolving consumer needs and expectations. We plan to provide
more solutions for current customers and leverage and expand products to serve new customers. For example, we will continue to roll out hospice
services into our markets. In 2013, we increased the number of markets with hospice services to 11 and expect to continue to add markets over the
next several years. We also plan to leverage the array of services that are currently offered to residents in our buildings to seniors who want to remain
in their homes. Through the Brookdale Ancillary Services program, we currently provide therapy, home health, hospice and other ancillary services, as
well as education and wellness programs. We plan to focus on expanding those services outside of our communities to seniors in their homes,
initially to those who are short-term patients of skilled nursing centers. We expect that this will not only grow cash flow, but providing quality service
in a person's home can become the entry point into the full continuum of our services. We also plan to focus on the opportunity to become a
significant player in the post-acute healthcare world. We expect to continue our initiatives to
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link our unique continuum of care with other post-acute care providers to provide the most effective, comprehensive set of solutions for seniors.
The Senior Living Industry
The senior living industry has undergone dramatic growth in the last twenty years, marked by the emergence of the assisted living segment in the mid-1990's.
The industry is highly fragmented and characterized by numerous local and regional operators. We are one of a limited number of large operators that provide
a broad range of community locations and service level offerings at varying price levels.
Beginning in 2007, the industry was affected by the downturn the general economy, increased unemployment and a downturn in the housing market. In spite of
these factors, industry occupancy declined only approximately 300 basis points to a cyclic low in early 2010 of 87.0%, while rate growth remained positive at
less than 1% per year. This also resulted in a near halt in construction of new units. The industry has experienced a slow recovery in occupancy and rate growth
since the beginning of 2010 according to the National Investment Center for the Seniors Housing & Care Industry ("NIC"). Over the past year, occupancy has
been rising modestly, as the pace of absorption has been outpacing inventory growth.
We believe that a number of trends will contribute to the continued growth of the senior living industry in coming years. The primary market for senior living
services is individuals age 75 and older. According to U.S. Census data, that group is projected to be the fastest growing age cohort over the next twenty years.
As a result of scientific and medical breakthroughs over the past 30 years, seniors have been living longer. Due to demographic trends, and continuing
advances in science, nutrition and healthcare, the senior population will continue to grow, and we expect the demand for senior living services to continue to
increase in future years.
We believe the senior living industry has been and will continue to be impacted by several other trends. Increased longevity results in increasing frailty in
seniors, soaring rates of dementia among the elderly, and a growing burden of chronic illness and chronic conditions. As a result of increased mobility in
society, a reduction of average family size and increased number of two-wage earner couples, families struggle to provide care for seniors and look for
alternatives outside of their family for their care. There is a growing consumer awareness among seniors and their families concerning the types of services
provided by senior living operators, which has further contributed to the demand for senior living services. Also, the current prospective senior customer
possesses greater financial resources than in the past, which makes it more likely that they are able to afford to live in market-rate senior housing. Seniors in
the demographic cohort that were born between 1925 and 1945 have a significant amount of income generated from savings, pensions, social security, along
with a strong asset base, particularly now that the national housing markets have rebounded.
Challenges in our industry include increased state and local regulation of the assisted living and skilled nursing sectors, which has led to an increase in the cost
of doing business. The regulatory environment continues to intensify in the number and types of laws and regulations affecting us, accompanied by increased
enforcement activity by state and local officials. In addition, like other companies, our financial results may be negatively impacted by increasing employment
costs including salaries, wages and benefits, such as health care, for our employees. Increases in the costs of food, utilities, insurance, and real estate taxes
may also have a negative impact on our financial results.
Beginning October 1, 2011, we were impacted by a reduction in the reimbursement rates for Medicare skilled nursing patients and home health patients, as
well as a negative change in the allowable method for delivering therapy services to skilled nursing patients (resulting in increased therapy labor expense). In
addition, certain per person annual limits on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These
exceptions are currently scheduled to expire on March 31, 2014. If these exceptions are modified or not extended beyond that date, our revenues and net
operating income relating to our outpatient therapy services could be materially adversely impacted.
Effective October 1, 2012, certain Medicare Part B therapy services exceeding a specified threshold are subject to a pre-payment manual medical review
process. The review process has had an adverse effect on the provision and billing of services for patients and could negatively impact therapist productivity.
These new Medicare Part B therapy cap exception requirements, including the applicable pre-approval requirements, could also negatively
10
impact the revenues and net operating income relating to our outpatient therapy services business.
In addition, there continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit
payments to healthcare providers in the future. For example, based on current federal law, an automatic 2% reduction in Medicare spending was imposed
beginning on March 1, 2013. In 2012 we saw a rate reduction on multiple procedure payments ("MPPR") which was further increased effective April 1, 2013.
In addition, payments for our outpatient therapy services are tied to Medicare's physician payment fee schedule. By statute, the physician fee schedule is
subject to annual automatic adjustment by a sustainable growth rate ("SGR") formula that has resulted in reductions in reimbursement rates every year since
2002. However, in each case, Congress has acted to suspend or postpone the effect of these automatic reimbursement reductions. If Congress does not extend
this relief, as it has done since 2002, or permanently modify the SGR formula by April 1, 2014, payment levels for outpatient therapy services under the
physician fee schedule will be reduced at that point by approximately 25%. We cannot predict what action, if any, Congress will take on the physician fee
schedule or what future rule changes the Centers for Medicare and Medicaid Services ("CMS") will implement. Changes in the reimbursement policies of the
Medicare program could have an adverse effect on our results of operations and cash flow.
Our History
We were formed as a Delaware corporation in June 2005 for the purpose of combining two leading senior living operating companies, Brookdale Living
Communities, Inc. ("BLC) and Alterra Healthcare Corporation ("Alterra"). BLC and Alterra had been operating independently since 1986 and 1981,
respectively. On November 22, 2005, we completed our initial public offering of common stock, and on July 25, 2006, we acquired American Retirement
Corporation ("ARC"), another leading senior living provider which had been operating independently since 1978. On September 1, 2011, we completed the
acquisition of Horizon Bay, the then-ninth largest operator of senior living communities in the United States.
Our Product Offerings
We offer a variety of senior living housing and service alternatives in communities located across the United States. Our primary product offerings consist of
(i) retirement center communities; (ii) assisted living communities; (iii) CCRCs – rental; (iv) CCRCs – entry fee; (v) Brookdale Ancillary Services; and (vi)
management services.
Retirement Centers. Our retirement center communities are primarily designed for middle to upper income seniors generally age 75 and older who desire an
upscale residential environment providing the highest quality of service.
The majority of our retirement center communities consist of both independent and assisted living units in a single community, which allows residents to "age-
in-place" by providing them with a continuum of senior independent and assisted living services. While the number varies depending upon the particular
community, approximately 76.1% of all of the units at our retirement center communities are independent living units, with the balance of units licensed for
assisted living.
Our retirement center communities are large multi-story buildings containing on average 191 units with extensive common areas and amenities. Residents may
choose from studio, one-bedroom and two-bedroom units, depending upon the specific community.
Each retirement center community provides residents with basic services such as meal service, 24-hour emergency response, housekeeping, concierge
services, transportation and recreational activities. Most of these communities also offer custom tailored supplemental care services at an additional charge,
which may include medication reminders, check-in services and escort and companion services.
In addition to the basic services, our retirement center communities that include assisted living also provide residents with supplemental care service options
to provide assistance with ADLs. The levels of care provided to residents vary from community to community depending, among other things, upon the
licensing requirements and healthcare regulations of the state in which the community is located.
Residents in our retirement center communities are able to maintain their residency for an extended period of time due to the range of service options
available to residents (not including skilled nursing) as their needs change.
11
Residents with cognitive or physical frailties and higher level service needs are accommodated with supplemental services in their own units or, in certain
communities, are cared for in a more structured and supervised environment on a separate wing or floor. These communities also generally have a dedicated
assisted living staff, including nurses at the majority of communities, and separate assisted living dining rooms and activity areas.
The communities in our Retirement Centers segment represent approximately 21.9% of our total senior living capacity.
Assisted Living. Our assisted living communities offer housing and 24-hour assistance with ADLs to mid-acuity frail and elderly residents. Our assisted
living communities include both freestanding, multi-story communities with more than 50 beds and smaller, freestanding single story communities with less
than 50 beds. Depending upon the specific location, the community may include (i) private studio, one-bedroom and one-bedroom deluxe apartments, or (ii)
individual rooms for one or two residents in wings or "neighborhoods" scaled to a single-family home, which includes a living room, dining room, patio or
enclosed porch, laundry room and personal care area, as well as a caregiver work station.
Under our Clare Bridge brand, we also operate 87 memory care communities, which are freestanding assisted living communities specially designed for
residents with Alzheimer's disease and other dementias requiring the attention, personal care and services needed to help cognitively impaired residents
maintain a higher quality of life. Our memory care communities have from 19 to 69 beds and some are part of a campus setting which includes a freestanding
assisted living community.
All residents at our assisted living and memory care communities receive the basic care level, which includes ongoing health assessments, three meals per day
and snacks, coordination of special diets planned by a registered dietitian, assistance with coordination of physician care, social and recreational activities,
housekeeping and personal laundry services. In some locations we offer our residents exercise programs and programs designed to address issues associated
with early stages of Alzheimer's and other forms of dementia. In addition, we offer at additional cost, higher levels of personal care services to residents at
these communities who are very physically frail or experiencing early stages of Alzheimer's disease or other dementia and who require more frequent or
intensive physical assistance or increased personal care and supervision due to cognitive impairments.
As a result of their progressive decline in cognitive abilities, residents at our memory care communities typically require higher levels of personal care and
services and therefore pay higher monthly service fees. Specialized services include assistance with ADLs, behavior management and an activities program, the
goal of which is to provide a normalized environment that supports residents' remaining functional abilities. Whenever possible, residents participate in all
facets of daily life at the residence, such as assisting with meals, laundry and housekeeping.
The communities in our Assisted Living segment (including our memory care communities) represent approximately 33.3% of our total senior living capacity.
CCRCs - Rental. Our CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and
health. Most of our CCRCs have independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also
include memory care/Alzheimer's service areas.
The communities in our CCRCs – Rental segment represent approximately 9.8% of our total senior living capacity.
CCRCs – Entry Fee. The communities in our CCRCs – Entry Fee segment are similar to those in our CCRCs – Rental segment but allow for residents in the
independent living apartment units to pay a one-time upfront entrance fee, typically $100,000 to $400,000 or more, which is partially refundable in certain
circumstances. The amount of the entrance fee varies depending upon the type and size of the dwelling unit, the type of contract plan selected, whether the
contract contains a lifecare benefit (i.e., a healthcare discount) for the resident, the amount and timing of the refund, and other variables. These agreements are
subject to regulations in various states. In addition to their initial entrance fee, residents under all of our entrance fee agreements also pay a monthly service
fee, which entitles them to the use of certain amenities and services. Since we receive entrance fees upon initial occupancy, the monthly fees are generally less
than fees at a comparable rental community. Eleven of our communities that we own or lease are entry fee communities.
12
The refundable portion of a resident's entrance fee is generally refundable within a certain number of months or days following contract termination or upon
the sale of the unit, or in some agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit. In addition, some entrance fee
agreements entitle the resident to a refund of the original entrance fee paid plus a percentage of the appreciation of the unit upon resale.
The communities in our CCRCs – Entry Fee segment represent approximately 8.8% of our total senior living capacity. The independent living units at our
entrance fee communities (those units on which entry fees are paid) represent 4.9% of our total senior living capacity. Excluding managed communities and
equity homes (which are residences located on certain of our CCRC campuses that we do not generally own), entrance fee communities represent 12.1% of
our total senior living capacity.
Brookdale Ancillary Services. Our Brookdale Ancillary Services segment includes the outpatient therapy, home health and hospice services provided to
residents of many of our communities, to other senior living communities that we do not own or operate and to seniors living outside of our communities. The
Brookdale Ancillary Services segment does not include the therapy services provided in our skilled nursing units, which are included in the CCRCs - Rental
and CCRCs - Entry Fee segments.
Through Brookdale Ancillary Services, we currently provide therapy, home health and other ancillary services, as well as education and wellness programs, to
residents of many of our communities. These programs are focused on wellness and physical fitness to allow residents to maintain maximum independence.
These services provide many continuing education opportunities for residents and their families through health fairs, seminars, and other consultative
interactions. The therapy services we provide include physical, occupational, speech and other specialized therapy and home health services. The home health
services we provide include skilled nursing, physical therapy, occupational therapy, speech language pathology, home health aide services, and social services
as needed. In addition to providing these in-house therapy and wellness services at our communities, we also provide these services to other senior living
communities that we do not own or operate and to seniors living outside of our communities. These services may be reimbursed under the Medicare program
or paid directly by residents from private pay sources and revenues are recognized as services are provided. We have also begun offering hospice services in
certain locations. We believe that our Brookdale Ancillary Services are unique in the senior living industry and that we have a significant advantage over our
competitors with respect to providing ancillary services because of our established infrastructure and experience.
Management Services. We operate certain of our communities pursuant to management agreements. In some of these cases, the community is owned by
third parties and, in other cases, the community is owned in a joint venture structure in which we have an ownership interest. Under the management
agreements for these communities, we receive management fees as well as reimbursed expenses, which represent the reimbursement of certain expenses we
incur on behalf of the owners.
The communities in our Management Services segment represent 26.2% of our total senior living capacity. As of December 31, 2013, we managed a total of
95 communities with a total of 17,422 units on behalf of third parties or joint ventures in which we have an ownership interest. There are a total of 51
retirement centers, 32 assisted living communities and 12 CCRC communities (of which six are entrance fee communities) in our Management Services
segment.
Competitive Strengths
We believe our nationwide network of senior living communities is well positioned to benefit from the growth and increasing demand in the industry. Some of
our most significant competitive strengths are:
·
Skilled management team with extensive experience. Our senior management team has extensive experience in acquiring, operating and managing a
broad range of senior living assets, including experience in the senior living, healthcare and real estate industries.
· Geographically diverse, high-quality, purpose-built communities. As of December 31, 2013, we operate a nationwide base of 649 purpose-built
communities in 36 states, including 109 communities in the ten most populous standard metropolitan statistical areas.
· Ability to provide a broad spectrum of care. Given our diverse mix of retirement centers, assisted living communities and CCRCs, we are able to
meet a wide range of our customers' needs. We believe that we are one of the few companies in the senior living industry with this capability and the
only company that does so at scale on a national basis. We believe that our multiple product offerings create marketing synergies and cross-selling
opportunities.
· The size of our business allows us to realize cost and operating efficiencies. We are the largest operator of senior living communities in the
United States based on total capacity. The size of our business allows us to realize cost savings and economies of scale in the procurement of goods
and services. Our scale also allows us to achieve increased efficiencies with respect to various corporate functions. We intend to utilize our expertise
and size to capitalize on economies of scale resulting from our national platform. Our geographic footprint and centralized infrastructure provide us
with a significant operational advantage over local and regional operators of senior living communities. In connection with our formation transactions
and our acquisitions, we negotiated new contracts for food, insurance and other goods and services. In
13
addition, we have and will continue to consolidate corporate functions such as accounting, finance, human resources, legal, information technology
and marketing.
·
Significant experience in providing ancillary services. Through our Brookdale Ancillary Services program, we provide a range of education,
wellness, therapy, home health and other ancillary services to residents of certain of our retirement centers, assisted living, and CCRC communities.
Having therapy clinics and home health agencies located in our senior living communities to provide needed services to our residents is a distinct
competitive difference. We have significant experience in providing these ancillary services and expect to receive additional revenues as we expand
our ancillary service offerings to additional communities and to seniors outside of our communities.
Segments
As of December 31, 2013, we had six reportable segments: retirement centers; assisted living; CCRCs – rental; CCRCs – entry fee; Brookdale Ancillary
Services and management services. These segments were determined based on the way that our chief operating decision maker organizes our business
activities for making operating decisions, assessing performance, developing strategy and allocating capital resources.
Operating results from our six business segments are discussed further in "Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 20 to our consolidated financial statements included in this Annual Report on Form 10-K.
Operations
Operations Overview
We believe that successful senior living operators must effectively combine the expertise and business disciplines of housing, hospitality, health care,
marketing, finance and real estate.
We continually review opportunities to expand the types of services we provide to our residents. To date, we have been able to increase our average monthly
revenue per unit each year and we have generally experienced increasing facility operating margins through a combination of the implementation of efficient
operating procedures and the economies of scale associated with the size and number of our communities. Our operating procedures include securing national
vendor contracts to obtain the lowest possible pricing for certain services such as food, energy and insurance, implementing effective budgeting and financial
controls at each community, and establishing standardized training and operations procedures.
We have implemented intensive standards, policies and procedures and systems, including detailed staff manuals, which we believe have contributed to high
levels of customer service and to improved facility operating margins. We have centralized accounting, finance and other operating functions in our support
centers so that, consistent with our operating philosophy, community-based personnel can focus on resident care and efficient operations. We have established
company-wide policies and procedures relating to, among other things: resident care; community design and community operations; billings and collections;
accounts payable; finance and accounting; risk management; development of employee training materials and programs; marketing activities; the hiring and
training of management and other community-based personnel; compliance with applicable local and state regulatory requirements; and implementation of our
acquisition, development and leasing plans.
Consolidated Corporate Operations Support
We have developed a centralized infrastructure and services platform, which provides us with a significant operational advantage over local and regional
operators of senior living communities. The size of our business also allows us to achieve increased efficiencies with respect to various corporate functions
such as human resources, finance, accounting, legal, information technology and marketing. We are also able to realize cost efficiencies in the purchasing of
food, supplies, insurance, benefits, and other goods and services. In addition, we have established centralized operations groups to support all of our product
lines and communities in areas such as training, regulatory affairs, asset management, dining and procurement.
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Community Staffing and Training
Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of service, social services
and financial performance. Each Executive Director receives specialized training from us. In addition, a portion of each Executive Director's compensation is
directly tied to the operating performance of the community and key service quality measures. We believe that the quality of our communities, coupled with
our competitive compensation philosophy, has enabled us to attract high-quality, professional community Executive Directors.
Depending upon the size of the community, each Executive Director is supported by a community staff member who is directly responsible for day-to-day care
of the residents and either community staff or regional support to oversee the community's marketing and community outreach programs. Other key positions
supporting each community may include individuals responsible for food service, activities, housekeeping, and engineering.
We believe that quality of care and operating efficiency can be maximized by direct resident and staff contact. Employees involved in resident care, including
the administrative staff, are trained in the support and care needs of the residents and emergency response techniques. We have adopted formal training and
evaluation procedures to help ensure quality care for our residents. We have extensive policy and procedure manuals and hold frequent training sessions for
management and staff at each site.
Quality Assurance
We maintain quality assurance programs at each of our communities through our corporate and regional staff. Our quality assurance program is designed to
achieve a high degree of resident and family member satisfaction with the care and services that we provide. Our quality control measures include, among other
things, community inspections conducted by corporate staff on a regular basis. These inspections cover the appearance of the exterior and grounds; the
appearance and cleanliness of the interior; the professionalism and friendliness of staff; quality of resident care (including assisted living services, nursing
care, therapy and home health programs); the quality of activities and the dining program; observance of residents in their daily living activities; and compliance
with government regulations. Our quality control measures also include the survey of residents and family members on a regular basis to monitor their
perception of the quality of services provided to residents.
In order to foster a sense of community as well as to respond to residents' needs and desires, at many of our communities, we have established a resident
council or other resident advisory committee that meets monthly with the Executive Director of the community. Separate resident committees also exist at
many of these communities for food service, activities, marketing and hospitality. These committees promote resident involvement and satisfaction and enable
community management to be more responsive to the residents' needs and desires.
Marketing and Sales
Our marketing strategy is intended to create awareness of our Brookdale brand, our communities, our products and our services among potential residents and
their family members and among referral sources, including hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing
facilities, home health agencies and social workers. Our marketing staff develops overall strategies for promoting our communities and monitors the success
of our marketing efforts, including outreach programs. In addition to direct contacts with prospective referral sources, we also rely on internet inquiries, print
advertising, yellow pages advertising, direct mail, signage and special events, health fairs and community receptions. Certain resident referral programs have
been established and promoted within the limitations of federal and state laws at many communities.
In order to mitigate the impact of weakness in the housing market, we have implemented several sales and marketing initiatives designed to increase our
entrance fee sales results. These include the acceptance of short-term promissory notes in satisfaction of a resident's required entrance fee from certain pre-
qualified, prospective residents who are waiting for their homes to sell. In addition, we have implemented the MyChoice program, which allows new and
existing residents in certain communities the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee, thereby
offering choices to residents desiring a more affordable ongoing monthly service fee.
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Competition
The senior living industry is highly competitive. We compete with numerous organizations that provide similar senior living alternatives, such as home health
care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers. In general, regulatory and
other barriers to competitive entry in the retirement center and assisted living sectors of the senior living industry are not substantial. Although new
construction of senior living communities has declined in recent years, we have experienced and expect to continue to experience competition in our efforts
to acquire and operate senior living communities. Some of our present and potential senior living competitors have, or may obtain, greater financial resources
than us and may have a lower cost of capital. Consequently, we may encounter competition that could limit our ability to attract residents or expand our
business, which could have a material adverse effect on our revenues and earnings. Our major publicly-traded competitors which operate senior living
communities are Emeritus Corporation and Capital Senior Living Corporation and our major private competitors include Sunrise Senior Living, LLC, Life
Care Services, LLC and Atria Senior Living Group, as well as a large number of not-for-profit entities. Partially as a result of tax law changes enacted through
RIDEA, we now compete more directly with the various publicly-traded healthcare REITs for the acquisition of senior housing properties. The largest three of
these publicly-traded healthcare REITs measured on equity market capitalization include HCP, Inc., Ventas, Inc. and Health Care REIT, Inc.
Customers
Our target retirement center residents are senior citizens age 75 and older who desire or need a more supportive living environment. The average retirement
center resident resides in a retirement center community for approximately 36 months. A number of our retirement center residents relocate to one of our
communities in order to be in a metropolitan area that is closer to their adult children.
Our target assisted living residents are predominantly senior citizens age 80 and older who require daily assistance with two or three ADLs. The average
assisted living resident resides in an assisted living community for approximately 20 months. Residents typically enter an assisted living community due to a
relatively immediate need for services that might have been triggered by a medical event or need.
Our target CCRC residents are senior citizens who are seeking a community that offers a variety of services and a continuum of care so that they can "age in
place." These residents generally first enter the community as a resident of an independent living unit and may later move into an assisted living or skilled
nursing area as their needs change.
We believe our combination of retirement center and assisted living operating expertise and the broad base of customers that this enables us to target creates a
unique opportunity for us to invest in a broad spectrum of assets in the senior living industry, including retirement center, assisted living, CCRC and skilled
nursing communities.
Employees
As of December 31, 2013, we had approximately 30,000 full-time employees and approximately 19,000 part-time employees, of which 418 work in our
Nashville headquarters office, 442 work in our Milwaukee office, 28 work in our Chicago office and 143 work in a variety of field-based management
positions. We currently consider our relationship with our employees to be good.
Government Regulation
The regulatory environment surrounding the senior living industry continues to intensify in the number and type of laws and regulations affecting it. In addition,
federal, state and local officials are increasingly focusing their efforts on enforcement of these laws and regulations. This is particularly true for large for-
profit, multi-community providers like us. Some of the laws and regulations that impact our industry include: state and local laws impacting licensure,
protecting consumers against deceptive practices, and generally affecting the communities' management of property and equipment and how we otherwise
conduct our operations, such as fire, health and safety laws and regulations and privacy laws; federal and state laws designed to protect Medicare and Medicaid,
which mandate what are allowable costs, pricing, quality of services, quality of care, food service, resident rights (including abuse and neglect) and fraud;
federal and state residents' rights statutes and regulations; Anti-Kickback and physicians
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referral ("Stark") laws; and safety and health standards set by the Occupational Safety and Health Administration. We are unable to predict the future course of
federal, state and local legislation or regulation. Changes in the regulatory framework could have a material adverse effect on our business.
Many senior living communities are also subject to regulation and licensing by state and local health and social service agencies and other regulatory
authorities. Although requirements vary from state to state, these requirements may address, among others, the following: personnel education, training and
records; community services, including administration of medication, assistance with self-administration of medication and the provision of nursing, home
health and therapy services; staffing levels; monitoring of resident wellness; physical plant specifications; furnishing of resident units; food and housekeeping
services; emergency evacuation plans; professional licensing and certification of staff prior to beginning employment; and resident rights and responsibilities,
including in some states the right to receive health care services from providers of a resident's choice that are not our employees. In several of the states in
which we operate or may operate, we are prohibited from providing certain higher levels of senior care services without first obtaining the appropriate
licenses. In addition, in several of the states in which we operate or intend to operate, assisted living communities, home health agencies and/or skilled nursing
facilities require a certificate of need before the community can be opened or the services at an existing community can be expanded. Senior living
communities may also be subject to state and/or local building, zoning, fire and food service codes and must be in compliance with these local codes before
licensing or certification may be granted. These laws and regulatory requirements could affect our ability to expand into new markets and to expand our
services and communities in existing markets. In addition, if any of our presently licensed communities operates outside of its licensing authority, it may be
subject to penalties, including closure of the community.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by
governmental authorities and consequent citations for failure to comply with regulatory requirements. Unannounced surveys or inspections may occur annually
or bi-annually, or following a regulator's receipt of a complaint about the community. From time to time in the ordinary course of business, we receive
deficiency reports from state regulatory bodies resulting from such inspections or surveys. Most inspection deficiencies are resolved through an agreed-to
plan of corrective action relating to the community's operations, but the reviewing agency typically has the authority to take further action against a licensed or
certified community, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license,
suspension or denial of admissions, loss of certification as a provider under federal health care programs or imposition of other sanctions, including criminal
penalties. Loss, suspension or modification of a license may also cause us to default under our loan or lease agreements and/or trigger cross-defaults.
Sanctions may be taken against providers or facilities without regard to the providers' or facilities' history of compliance. We may also expend considerable
resources to respond to federal and state investigations or other enforcement action under applicable laws or regulations. To date, none of the deficiency
reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse effect on our revenues. However, any future
substantial failure to comply with any applicable legal and regulatory requirements could result in a material adverse effect to our business as a whole. In
addition, states Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. State Medicaid Fraud and
Abuse Units may also investigate assisted living communities even if the community or any of its residents do not receive federal or state funds.
Regulation of the senior living industry is evolving at least partly because of the growing interests of a variety of advocacy organizations and political
movements attempting to standardize regulations for certain segments of the industry, particularly assisted living. Our operations could suffer if future
regulatory developments, such as federal assisted living laws and regulations, as well as mandatory increases in the scope and severity of deficiencies
determined by survey or inspection officials or increase the number of citations that can result in civil or criminal penalties. Certain current state laws and
regulations allow enforcement officials to make determinations on whether the care provided by one or more of our communities exceeds the level of care for
which the community is licensed. A finding that a community is delivering care beyond its license might result in the immediate transfer and discharge of
residents, which may create market instability and other adverse consequences. Furthermore, certain states may allow citations in one community to impact
other communities in the state. Revocation or suspension of a license, or a citation, at a given community could therefore impact our ability to obtain new
licenses or to renew existing licenses at other communities, which may also cause us to be in default under our loan or lease agreements and trigger cross-
defaults or may also trigger defaults under certain of our credit agreements, or adversely affect our ability to operate and/or obtain financing in the future. If a
state were to find that one community's citation will impact another of our communities, this will also increase costs and result in increased surveillance by the
state survey agency. If regulatory requirements increase, whether through enactment of new laws or regulations or
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changes in the enforcement of existing rules, including increased enforcement brought about by advocacy groups, in addition to federal and state regulators,
our operations could be adversely affected. In addition, any adverse finding by survey and inspection officials may serve as the basis for false claims lawsuits
by private plaintiffs and may lead to investigations under federal and state laws, which may result in civil and/or criminal penalties against the community or
individual.
There are various extremely complex federal and state laws governing a wide array of referrals, relationships and arrangements and prohibiting fraud by health
care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud
initiatives. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Balanced Budget Act of 1997 expanded the penalties for health
care fraud. In addition, with respect to our participation in federal health care reimbursement programs, the government or private individuals acting on behalf
of the government may bring an action under the False Claims Act alleging that a health care provider has defrauded the government and seek treble damages
for false claims and the payment of additional monetary civil penalties. Recently, other health care providers have faced enforcement action under the False
Claims Act. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a
percentage of the federal government's recovery. Because of these incentives, so-called "whistleblower" suits have become more frequent. Also, if any of our
communities exceeds its level of care, we may be subject to private lawsuits alleging "transfer trauma" by residents. Such allegations could also lead to
investigations by enforcement officials, which could result in penalties, including the closure of communities. The violation of any of these regulations may
result in the imposition of fines or other penalties that could jeopardize our business.
Additionally, we operate communities that participate in federal and/or state health care reimbursement programs, including state Medicaid waiver programs
for assisted living communities, the Medicare skilled nursing facility benefit program and other healthcare programs such as therapy and home health services,
or other federal and/or state health care programs. Consequently, we are subject to federal and state laws that prohibit anyone from presenting, or causing to be
presented, claims for reimbursement which are false, fraudulent or are for items or services that were not provided as claimed. Similar state laws vary from
state to state and we cannot be sure that these laws will be interpreted consistently or in keeping with past practices. Violation of any of these laws can result in
loss of licensure, claims for recoupment, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or
services to beneficiaries of the applicable federal and/or state health care reimbursement program. Loss of licensure may also cause us to default under our
leases and loan agreements and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law, the
Stark laws and certain state referral laws. The Federal Anti-Kickback Law makes it unlawful for any person to offer or pay (or to solicit or receive) "any
remuneration ... directly or indirectly, overtly or covertly, in cash or in kind" for referring or recommending for purchase any item or service which is eligible
for payment under the Medicare and/or Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and relationships
between health care providers and sources of patient referral. If we were to violate the Federal Anti-Kickback Law, we may face criminal penalties and civil
sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid, which may also cause us to default under our
leases and loan agreements and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and
Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our senior living communities, it is
difficult to predict how our revenues could be affected if we were subject to an action alleging such violations. We are also subject to federal and state laws
designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services, or HHS, has issued rules pursuant to
HIPAA relating to the privacy of such information. Rules that became effective April 14, 2003 govern our use and disclosure of health information at certain
HIPAA covered communities. We established procedures to comply with HIPAA privacy requirements at these communities. We were required to be in
compliance with the HIPAA rule establishing administrative, physical and technical security standards for health information by April 2005. To the best of our
knowledge, we are in compliance with these rules.
Environmental Matters
Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of
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certain hazardous or toxic substances, including, among others, petroleum and materials containing asbestos, that could be located on, in, at or under a
property, regardless of how such materials came to be located there. Additionally, such an owner or operator of real property may incur costs relating to the
release of hazardous or toxic substances, including government fines and payments for personal injuries or damage to adjacent property. The cost of any
required investigation, remediation, removal, mitigation, compliance, fines or personal or property damages and our liability therefore could exceed the
property's value and/or our assets' value. In addition, the presence of such substances, or the failure to properly dispose of or remediate the damage caused by
such substances, may adversely affect our ability to sell such property, to attract additional residents and retain existing residents, to borrow using such
property as collateral or to develop or redevelop such property. In addition, such laws impose liability for investigation, remediation, removal and mitigation
costs on persons who disposed of or arranged for the disposal of hazardous substances at third-party sites. Such laws and regulations often impose liability
without regard to whether the owner or operator knew of, or was responsible for, the presence, release or disposal of such substances as well as without regard
to whether such release or disposal was in compliance with law at the time it occurred. Moreover, the imposition of such liability upon us could be joint and
several, which means we could be required to pay for the cost of cleaning up contamination caused by others who have become insolvent or otherwise
judgment proof.
We do not believe that we have incurred such liabilities that would have a material adverse effect on our business, financial condition and results of operations.
Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-
containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the
environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents, including, for
example, blood-contaminated bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious
disease. The management of infectious medical waste, including its handling, storage, transportation, treatment and disposal, is subject to regulation under
various federal, state and local environmental laws. These environmental laws set forth the management requirements for such waste, as well as related permit,
record-keeping, notice and reporting obligations. Each of our communities has an agreement with a waste management company for the proper disposal of all
infectious medical waste. The use of such waste management companies does not immunize us from alleged violations of such medical waste laws for
operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost
to cleanup disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with environmental laws could adversely affect
our business operations and financial condition.
Federal regulations require building owners and those exercising control over a building's management to identify and warn, via signs and labels, their
employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials
and potential asbestos-containing materials in their buildings. The regulations also set forth employee training, record-keeping requirements and sampling
protocols pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these
regulations. Building owners and those exercising control over a building's management may be subject to an increased risk of personal injury lawsuits by
workers and others exposed to asbestos-containing materials and potential asbestos-containing materials. The regulations may affect the value of a building
containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations
also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials
when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability
for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines
to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-
containing materials and potential asbestos-containing materials.
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The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may
lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan. Furthermore, the presence of mold,
lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may present a risk that third
parties will seek recovery from the owners, operators or tenants of such properties for personal injury or property damage. In some circumstances, areas
affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could
adversely affect the ability of a community to retain or attract residents and could adversely affect a community's market value.
We believe that we are in material compliance with applicable environmental laws.
We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory
framework (including legislative or regulatory efforts designed to address climate change, such as the proposed "cap and trade" legislation) could have a
material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not
currently operate may subject us to additional restrictions on the manner in which we operate our communities.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, are available free of
charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission, at the following address: www.brookdale.com. The information within, or that can be accessed through, the web site is not part of this report.
We have posted our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of our Audit, Compensation, Investment and
Nominating and Corporate Governance Committees on our web site at www.brookdale.com. In addition, our Code of Ethics for Chief Executive and Senior
Financial Officers, which applies to our Chief Executive Officer, President, Chief Financial Officer, Treasurer and Controller, is also available on our website.
Our corporate governance materials are available in print free of charge to any stockholder upon request to our Corporate Secretary, Brookdale Senior Living
Inc., 111 Westwood Place, Suite 400, Brentwood, Tennessee 37027.
Item 1A.
Risk Factors.
Risks Related to the Merger
Failure to complete the Merger could negatively affect our share price, future business and financial results.
Completion of the Merger is not assured and is subject to risks, including the risks that approval of the transaction by our stockholders and the stockholders of
Emeritus or by governmental agencies will not be obtained or that certain other closing conditions will not be satisfied. If the Merger is not completed, our
ongoing business and financial results may be adversely affected and we will be subject to several risks, including:
·
·
having to pay certain significant transaction costs relating to the Merger without receiving the benefits of the Merger;
potentially having to pay a termination fee of $13.5 million if our stockholder approval is not obtained or a termination fee of $143 million in other
specific circumstances, including without limitation, a change in our board of directors' recommendation to our stockholders or termination to accept
an alternative acquisition proposal;
·
our share price may decline to the extent that the current market prices reflect an assumption by the market that the Merger will be completed; and
· we may be subject to litigation related to any failure to complete the Merger.
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We will incur substantial transaction fees and costs in connection with the Merger.
We expect to incur a significant amount of non-recurring expenses in connection with the Merger. Additional unanticipated costs may be incurred in the
course of the integration of our businesses and the business of Emeritus. We cannot be certain that the elimination of duplicative costs or the realization of
other efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all.
We and Emeritus may be unable to obtain the regulatory approvals and third party consents required to complete the Merger or, in order to do so, we
and Emeritus may be required to comply with material restrictions or conditions that may negatively affect the combined company after the Merger is
completed or cause us to abandon the Merger. Failure to complete the Merger could negatively affect our future business and financial results.
Completion of the Merger is contingent upon, among other things, the receipt of certain required regulatory approvals, including the expiration or termination
of the applicable HSR Act waiting period and required regulatory approvals from governmental authorities necessary for the ownership, operation and
management of each of the Emeritus facilities and the Emeritus management properties following closing of the Merger as well as certain third party
consents. We and Emeritus can provide no assurance that all required regulatory or third party authorizations, approvals or consents will be obtained or that the
authorizations, approvals or consents will not contain terms, conditions or restrictions that would be detrimental to the combined company after completion of
the Merger.
Delays in completing the Merger may substantially reduce the expected benefits of the Merger.
Satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect. Any delay in completing or any
additional conditions imposed in order to complete the Merger may materially adversely affect the synergies and other benefits that we expect to achieve from
the Merger and the integration of our businesses. In addition, we and Emeritus each have the right to terminate the Merger agreement if the Merger is not
completed by November 20, 2014, except that such date may be extended to January 20, 2015 if the only unsatisfied conditions to the completion of the
Merger are those regarding the receipt of certain regulatory and third party approvals and consents.
Stockholder litigation against Emeritus and/or us could result in an injunction preventing completion of the Merger, the payment of damages in the
event the Merger is completed and/or may adversely affect the combined company's business, financial condition or results of operations following the
Merger.
Transactions such as the Merger are often subject to lawsuits by stockholders. One of the conditions to the closing of the Merger is that no temporary
restraining order, preliminary or permanent injunction or other judgment, order or decree issued by any court of competent jurisdiction or other law, legal
restraint or prohibition will be in effect preventing the consummation of the Merger. Consequently, if any lawsuit is successful in obtaining an injunction
prohibiting us or Emeritus from consummating the Merger on the agreed upon terms, the injunction may prevent the Merger from being completed within the
expected timeframe, or at all. Furthermore, if the Merger is prevented or delayed, the lawsuits could result in substantial costs, including any costs associated
with the indemnification of directors. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may
adversely affect the combined company's business, financial condition or results of operations.
We will be subject to various uncertainties and contractual restrictions while the Merger is pending that could adversely affect our financial results.
Uncertainty about the effect of the Merger on employees, suppliers and residents may have an adverse effect on us. These uncertainties may impair our ability
to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause residents, suppliers and others
who deal with us to seek to change existing business relationships with us. Employee retention and recruitment may be particularly challenging prior to
completion of the Merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company.
The pursuit of the Merger and the preparation for the integration of the two companies may place a significant
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burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered
in the transition and integration process could affect our financial results or the financial results of the combined company.
In addition, the Merger agreement restricts us from taking certain specified actions while the Merger is pending without first obtaining Emeritus' prior written
consent. These restrictions may limit us from pursuing attractive business opportunities and making other changes to our business prior to completion of the
Merger or termination of the Merger agreement.
If completed, the Merger may not achieve its intended results, and we may be unable to successfully integrate our and Emeritus' operations.
We entered into the Merger agreement with the expectation that the Merger will result in various benefits, including, among other things, cost savings and
operating efficiencies. Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including whether our business and the
business of Emeritus can be integrated in an efficient and effective manner.
It is possible that the integration process could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen
expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and
compensation arrangements, any of which could adversely affect the combined company's ability to achieve the anticipated benefits of the Merger.
Difficulties in combining operations of the two companies could also result in the loss of residents, suppliers, partners or other persons with whom we
conduct business and potential disputes or litigation with residents, suppliers, partners or other persons with whom we conduct business. The combined
company's results of operations could also be adversely affected by any issues attributable to either company's operations that arise or are based on events or
actions that occur prior to the closing of the Merger. The integration process is subject to a number of uncertainties, and no assurance can be given that the
anticipated benefits, expense savings and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits
could result in increased costs or decreases in the amount of expected revenues and could adversely affect the combined company's future business, financial
condition, operating results and prospects.
Our current stockholders will have a reduced ownership and voting interest after the Merger.
We expect to issue approximately 46 million shares of our common stock to Emeritus stockholders in the Merger. As a result of these issuances, our current
stockholders and Emeritus stockholders are expected to hold approximately 73% and 27%, respectively, of the combined company's outstanding common
stock immediately following completion of the Merger.
Our stockholders currently have the right to vote for directors and on other matters affecting our company. When the Merger occurs, each of our stockholders
will remain a holder of our common stock with a percentage ownership of the combined company that will be smaller than the stockholder's percentage of our
common stock prior to the Merger. As a result of this reduced ownership percentage, our stockholders will have less voting power in the combined company
than they now have with respect to us.
Risks Related to Our Business
We rely on reimbursement from governmental programs for a portion of our revenues, and will be subject to changes in reimbursement levels, which
could adversely affect our results of operations and cash flow.
We rely on reimbursement from governmental programs for a portion of our revenues, and we cannot assure you that reimbursement levels will not decrease
in the future, which could adversely affect our results of operations and cash flow. Beginning October 1, 2011, we were impacted by a reduction in the
reimbursement rates for Medicare skilled nursing patients and home health patients, as well as a negative change in the allowable method for delivering therapy
services to skilled nursing patients (resulting in increased therapy labor expense). In addition, certain per person annual limits on Medicare reimbursement for
therapy services became effective in 2006, subject to certain exceptions. These exceptions are currently scheduled to expire on March 31, 2014. If these
exceptions are modified or not extended beyond that date, our revenues and net operating income relating to our outpatient therapy services could be
materially adversely impacted.
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Effective October 1, 2012, certain Medicare Part B therapy services exceeding a specified threshold are subject to a pre-payment manual medical review
process. The review process has had an adverse effect on the provision and billing of services for patients and could negatively impact therapist productivity.
These new Medicare Part B therapy cap exception requirements, including the applicable pre-approval requirements, could also negatively impact the revenues
and net operating income relating to our outpatient therapy services business.
In addition, there continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit
payments to healthcare providers in the future. For example, based on current federal law, an automatic 2% reduction in Medicare spending was imposed
beginning on March 1, 2013. In 2012 we saw a rate reduction on MPPR which was further increased effective April 1, 2013. In addition, payments for our
outpatient therapy services are tied to Medicare's physician payment fee schedule. By statute, the physician fee schedule is subject to annual automatic
adjustment by a SGR formula that has resulted in reductions in reimbursement rates every year since 2002. However, in each case, Congress has acted to
suspend or postpone the effect of these automatic reimbursement reductions. If Congress does not extend this relief, as it has done since 2002, or
permanently modify the SGR formula by April 1, 2014, payment levels for outpatient therapy services under the physician fee schedule will be reduced at that
point by approximately 25%. We cannot predict what action, if any, Congress will take on the physician fee schedule or what future rule changes the CMS will
implement. Changes in the reimbursement policies of the Medicare program could have an adverse effect on our results of operations and cash flow.
The impact of recently enacted and ongoing health care reform efforts on our business cannot accurately be predicted.
The health care industry in the United States is subject to fundamental changes due to ongoing health care reform efforts and related political, economic and
regulatory influences. Notably, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, along with the Health Care
and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act"). The passage of the Affordable Care Act has resulted in comprehensive
reform legislation that is expected to expand health care coverage to millions of currently uninsured people beginning in 2014 and provide for significant
changes to the U.S. health care system over the next ten years. To help fund this expansion, the Affordable Care Act outlines certain reductions in Medicare
reimbursements for various health care providers, including skilled nursing facilities, as well as certain other changes to Medicare payment methodologies.
This comprehensive health care legislation provides for extensive future rulemaking by regulatory authorities, and also may be altered or amended.
It is difficult to predict the full impact of the Affordable Care Act due to the law's complexity and current lack of implementing regulations or interpretive
guidance, as well our inability to foresee how CMS and other participants in the health care industry will respond to the choices available to them under the
law. We also cannot accurately predict whether any pending legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have
on our business. Similarly, while we can anticipate that some of the rulemaking that will be promulgated by regulatory authorities will affect us and the manner
in which we are reimbursed by the federal health care programs, we cannot accurately predict today the impact of those regulations on our business. The
provisions of the legislation and other regulations implementing the provisions of the Affordable Care Act may increase our costs, decrease our revenues,
expose us to expanded liability or require us to revise the ways in which we conduct our business.
The Supreme Court's decision upholding the constitutionality of the individual mandate while striking down the provisions linking federal funding of state
Medicaid programs with a federally mandated expansion of those programs has not reduced the uncertain impact that the law will have on health care delivery
systems over the next decade. We can expect that the federal authorities will continue to implement the law, but, because of the Court's mixed ruling, the
implementation will likely take longer than originally expected, with a commensurate increase in the period of uncertainty regarding the law's full long term
financial impact on the delivery of and payment for health care.
In addition to its impact on the delivery and payment for health care, the Affordable Care Act and the implementing regulations may result in an increase in our
costs to provide health care benefits to our employees. We also may be required to make additional employee-related changes to our business as a result of
provisions in the Affordable Care Act
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impacting the provision of health insurance by employers, which could result in additional expense and adversely affect our results of operations.
Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our monthly resident fees or
entrance fees (including downturns in the economy, housing market, consumer confidence or the equity markets and unemployment among resident
family members) could cause our occupancy rates, revenues and results of operations to decline.
Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs such as
Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located
typically can afford to pay our monthly resident fees. Economic downturns, softness in the housing market, higher levels of unemployment among resident
family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to
afford our resident fees or entrance fees. If we are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the
fees associated with independent and assisted living services and other service offerings, our occupancy rates, revenues and results of operations could
decline.
The inability of seniors to sell real estate may delay their moving into our communities, which could negatively impact our occupancy rates, revenues,
cash flows and results of operations.
Downturns in the housing markets, such as the one we have recently experienced, could adversely affect the ability (or perceived ability) of seniors to afford
our entrance fees and resident fees as our customers frequently use the proceeds from the sale of their homes to cover the cost of our fees. Specifically, if
seniors have a difficult time selling their homes, these difficulties could impact their ability to relocate into our communities or finance their stays at our
communities with private resources. If the recent volatility in the housing market continues for a protracted period, our occupancy rates, revenues, cash flows
and results of operations could be negatively impacted.
Disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively
impact our liquidity, financial condition and the market price of our common stock.
In recent years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which caused
market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances materially
impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing.
Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension
of our existing debt) on reasonable terms, which may negatively affect our business.
As of December 31, 2013, we had three principal corporate-level debt obligations: our $250.0 million revolving credit facility, our $316.3 million
convertible senior notes due 2018 and separate secured and unsecured letter of credit facilities providing for up to $92.5 million of letters of credit in the
aggregate. If we are unable to extend (or refinance, as applicable) any of our debt or credit or letter of credit facilities prior to their scheduled maturity dates,
our liquidity and financial condition could be adversely impacted. In addition, even if we are able to extend or refinance our other maturing debt or credit or
letter of credit facilities, the terms of the new financing may not be as favorable to us as the terms of the existing financing.
A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further
adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common
stock. Disruptions in the financial markets could have an adverse effect on us and our business. If we are not able to obtain additional financing on favorable
terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.
General economic factors could adversely affect our financial performance and other aspects of our business.
General economic conditions, such as inflation, commodity costs, fuel and other energy costs, costs of labor,
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insurance and healthcare, interest rates, and tax rates, affect our community operating and general and administrative expenses, and we have no control or
limited ability to control such factors. In addition, current global economic conditions and uncertainties, the potential for failures or realignments of financial
institutions, and the related impact on available credit may affect us and our business partners, landlords, counterparties and residents or prospective residents
in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest
rate risk, increasing the risk that certain of our business partners, landlords or counterparties would be unable to fulfill their obligations to us, and other
impacts which we are unable to fully anticipate.
If we are unable to generate sufficient cash flow to cover required interest and lease payments, this would result in defaults of the related debt or leases
and cross-defaults under other debt or leases, which would adversely affect our ability to continue to generate income.
We have significant indebtedness and lease obligations, and we intend to continue financing our communities through mortgage financing, long-term leases and
other types of financing, including borrowings under our line of credit and future credit facilities we may obtain. We cannot give any assurance that we will
generate sufficient cash flow from operations to cover required interest, principal and lease payments. Any non-payment or other default under our financing
arrangements could, subject to cure provisions, cause the lender to foreclose upon the community or communities securing such indebtedness or, in the case
of a lease, cause the lessor to terminate the lease, each with a consequent loss of income and asset value to us. Furthermore, in some cases, indebtedness is
secured by both a mortgage on a community (or communities) and a guaranty by us and/or one or more of our subsidiaries. In the event of a default under one
of these scenarios, the lender could avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty
immediately due and payable, and requiring the respective guarantor to fulfill its obligations to make such payments. The realization of any of these scenarios
would have an adverse effect on our financial condition and capital structure. Additionally, a foreclosure on any of our properties could cause us to recognize
taxable income, even if we did not receive any cash proceeds in connection with such foreclosure. Further, because our mortgages and leases generally contain
cross-default and cross-collateralization provisions, a default by us related to one community could affect a significant number of our communities and their
corresponding financing arrangements and leases.
In recent years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which caused
market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances materially
impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing.
Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension
of our existing debt) on reasonable terms, which may negatively affect our business.
Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business and our ability to execute our growth
strategy.
Our level of indebtedness and our long-term leases could adversely affect our future operations and/or impact our stockholders for several reasons, including,
without limitation:
· We may have little or no cash flow apart from cash flow that is dedicated to the payment of any interest, principal or amortization required with
respect to outstanding indebtedness and lease payments with respect to our long-term leases;
·
·
Increases in our outstanding indebtedness, leverage and long-term leases will increase our vulnerability to adverse changes in general economic and
industry conditions, as well as to competitive pressure;
Increases in our outstanding indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures, expansions,
repositionings, new developments, acquisitions, general corporate and other purposes; and
· Our ability to pay dividends to our stockholders may be limited.
Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our leases depends upon our future performance,
which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are
beyond our control. Our business might not continue to generate cash flow at or above current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt or to make lease payments on our leases, we may be required, among other things, to seek additional financing in
the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned capital expenditures or
delay or abandon desirable acquisitions. These measures might not be sufficient to enable us to service our debt or to make lease payments on our leases. The
failure to make required payments on our debt or leases or the delay or
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abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate revenues and sustain profitability. Any
contemplated financing, refinancing or sale of assets might not be available on economically favorable terms to us. In addition, certain of our debt agreements
contain extension options. If we are not able to satisfy the conditions precedent to exercising these extension options our liquidity and financial condition
could be negatively impacted.
Our existing credit facilities, mortgage loans and lease arrangements contain covenants that restrict our operations and activities and any default
under such facilities, loans or arrangements could result in the acceleration of indebtedness, termination of the leases or cross-defaults, any of which
would negatively impact our liquidity and inhibit our ability to grow our business and increase revenues.
Our outstanding indebtedness and leases contain restrictions and covenants and require us to maintain or satisfy specified financial ratios and coverage tests,
including maintaining prescribed net worth levels, leverage ratios and debt service and lease coverage ratios on a consolidated basis, and on a community or
communities basis based on the debt or lease securing the communities. In addition, certain of our leases require us to maintain lease coverage ratios on a
lease portfolio basis (each as defined in the leases) and maintain stockholders' equity or tangible net worth amounts. The debt service coverage ratios are
generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt
(principal and interest) or lease payment. Net worth is generally calculated as stockholders' equity as calculated in accordance with GAAP, and in certain
circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue.
These restrictions and covenants may interfere with our ability to obtain financing or to engage in other business activities, which may inhibit our ability to
grow our business and increase revenues. If we fail to comply with any of these requirements, then the related indebtedness could become immediately due and
payable. We cannot assure you that we could pay this debt if it became due.
Our credit facilities, mortgage loans and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries.
Therefore, an event of default under the outstanding indebtedness or leases, subject to cure provisions in certain instances, would give the respective lenders or
lessors, as applicable, the right to declare all amounts outstanding to be immediately due and payable, terminate the lease, foreclose on collateral securing the
outstanding indebtedness and leases, and restrict our ability to make additional borrowings under the outstanding indebtedness or continue to operate the
properties subject to the lease. Certain of our outstanding indebtedness and leases contain cross-default provisions so that a default under certain outstanding
indebtedness would cause a default under certain of our leases. Certain of our outstanding indebtedness and leases also restrict, among other things, our ability
to incur additional debt.
The substantial majority of our lease arrangements are structured as master leases. Under a master lease, we may lease a large number of geographically
dispersed properties through an indivisible lease. As a result, it is difficult to restructure the composition of the portfolio or economic terms of the lease
without the consent of the landlord. Failure to comply with Medicare or Medicaid provider requirements is a default under several of our master lease and debt
financing instruments. In addition, potential defaults related to an individual property may cause a default of an entire master lease portfolio and could trigger
cross-default provisions in our outstanding indebtedness and other leases, which would have a negative impact on our capital structure and our ability to
generate future revenues, and could interfere with our ability to pursue our growth strategy.
Certain of our master leases and management agreements also contain radius restrictions, which limit our ability to own, develop or acquire new communities
within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our expansion,
development and acquisition plans.
Mortgage debt and lease obligations expose us to increased risk of loss of property, which could harm our ability to generate future revenues and could
have an adverse tax effect.
Mortgage debt and lease obligations increase our risk of loss because defaults on indebtedness secured by properties or pursuant to the terms of the lease may
result in foreclosure actions initiated by lenders or lessors and ultimately our loss of the property securing any loans for which we are in default or cause the
lessor to terminate the lease. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to
the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the
property, we would recognize taxable income on foreclosure, but would
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not receive any cash proceeds, which could negatively impact our earnings and liquidity. Further, our mortgage debt and leases generally contain cross-default
and cross-collateralization provisions and a default on one community could affect a significant number of our communities, financing arrangements and
leases.
In addition, our leases generally provide for renewal or extension options and, in certain cases, purchase options. These options generally are based upon
prescribed formulas but, in certain cases, may be at fair market value. We expect to renew, extend or exercise purchase options with respect to our leases in
the normal course of business; however, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the
conditions precedent to exercising any such renewal, extension or purchase options. Furthermore, the terms of any such options that are based on fair market
value are inherently uncertain and could be unacceptable or unfavorable to us depending on the circumstances at the time of exercise. If we are not able to
renew or extend our existing leases, or purchase the communities subject to such leases, at or prior to the end of the existing lease terms, or if the terms of
such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.
Increases in market interest rates could significantly increase the costs of our unhedged debt and lease obligations, which could adversely affect our
liquidity and earnings.
Our unhedged floating-rate debt and lease payment obligations and any unhedged floating-rate debt incurred in the future, exposes us to interest rate risk.
Therefore, increases in prevailing interest rates could increase our payment obligations, which would negatively impact our liquidity and earnings.
We have a history of losses and we may not be able to achieve profitability.
We have incurred net losses in every year since our formation in June 2005. Given our history of losses, there can be no assurance that we will be able to
achieve and/or maintain profitability in the future. If we do not effectively manage our cash flow and combined business operations going forward or otherwise
achieve profitability, our stock price would be adversely affected.
If we do not effectively manage our growth and successfully integrate new or recently-acquired or initiated operations into our existing operations, our
business and financial results could be adversely affected.
Our growth has and will continue to place significant demands on our current management resources. Our ability to manage our growth effectively and to
successfully integrate new or recently-acquired or initiated operations (including expansions, developments, acquisitions and the expansion of our ancillary
services program) into our existing business will require us to continue to expand our operational, financial and management information systems and to
continue to retain, attract, train, motivate and manage key employees. There can be no assurance that we will be successful in attracting qualified individuals to
the extent necessary, and management may expend significant time and energy attracting the appropriate personnel to manage assets we purchase in the future
and our expansion and development activities. Also, the additional communities and expansion activities will require us to maintain consistent quality control
measures that allow our management to effectively identify deviations that result in delivering care and services that are substandard, which may result in
litigation and/or loss of licensure or certification. If we are unable to manage our growth effectively, successfully integrate new or recently-acquired or
initiated operations into our existing business, or maintain consistent quality control measures, our business, financial condition and results of operations
could be adversely affected.
Delays in obtaining regulatory approvals could hinder our plans to expand our ancillary services program, which could negatively impact our
anticipated revenues, results of operations and cash flows.
We plan to continue to expand our offering of ancillary services (including therapy, home health and hospice) to additional communities. In the current
environment, it is difficult to obtain certain required regulatory approvals. Delays in obtaining required regulatory approvals could impede our ability to
expand to additional communities in accordance with our plans, which could negatively impact our anticipated revenues, results of operations and cash flows.
If we are unable to expand or redevelop our communities in accordance with our plans, our anticipated revenues and results of operations could be
adversely affected.
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We are currently working on projects that will expand, reposition or redevelop a number of our existing senior living communities over the next several years.
These projects are in various stages of development and are subject to a number of factors over which we have little or no control. These factors include the
necessity of arranging separate leases, mortgage loans or other financings to provide the capital required to complete these projects; difficulties or delays in
obtaining zoning, land use, building, occupancy, licensing, certificate of need and other required governmental permits and approvals; failure to complete
construction of the projects on budget and on schedule; failure of third-party contractors and subcontractors to perform under their contracts; shortages of
labor or materials that could delay projects or make them more expensive; adverse weather conditions that could delay completion of projects; increased costs
resulting from general economic conditions or increases in the cost of materials; and increased costs as a result of changes in laws and regulations. We cannot
assure you that we will elect to undertake or complete all of our proposed expansion, repositioning and development projects, or that we will not experience
delays in completing those projects. In addition, we may incur substantial costs prior to achieving stabilized occupancy for each such project and cannot assure
you that these costs will not be greater than we have anticipated. We also cannot assure you that any of our expansion, repositioning or development projects
will be economically successful. Our failure to achieve our expansion and development plans could adversely impact our growth objectives, and our anticipated
revenues and results of operations.
We may encounter difficulties in acquiring communities at attractive prices or integrating acquisitions with our operations, which may adversely affect
our operations and financial condition.
We will continue to selectively target strategic acquisitions as opportunities arise. Under the Merger Agreement, we are subject to a number of restrictions
limiting our ability to acquire businesses or assets. To the extent we do identify and complete any future acquisition opportunities, subject to the restrictions
set forth in the Merger Agreement, the process of identifying potential acquisition candidates, completing acquisition transactions and integrating acquired
communities into our existing operations may result in unforeseen operating difficulties, divert managerial attention or require significant financial or other
resources. These acquisitions and other future acquisitions may require us to incur additional indebtedness and contingent liabilities, and may result in
unforeseen expenses or compliance issues, which may limit our revenue growth, cash flows, and our ability to achieve profitability. Moreover, any future
acquisitions may not generate any additional income for us or provide any benefit to our business. In addition, we cannot assure you that we will be able to
locate and acquire communities at attractive prices in locations that are compatible with our strategy or that competition for the acquisition of communities
will not increase. Finally, when we are able to locate communities and enter into definitive agreements to acquire or lease them, we cannot assure you that the
transactions will be completed. Failure to complete transactions after we have entered into definitive agreements may result in significant expenses to us.
Unforeseen costs associated with the acquisition of communities could reduce our future profitability.
Our growth strategy contemplates selected future acquisitions of existing senior living operating companies and communities. Despite our extensive
underwriting and due diligence procedures, communities that we have previously acquired or may acquire in the future may generate unexpectedly low or no
returns or may not meet a risk profile that our investors find acceptable. In addition, we might encounter unanticipated difficulties and expenditures relating to
any of the acquired communities, including contingent liabilities, or newly acquired communities might require significant management attention that would
otherwise be devoted to our ongoing business. For example, a community may require capital expenditures in excess of budgeted amounts, or it may
experience management turnover that is higher than we project. These costs may negatively affect our future profitability.
Competition for the acquisition of strategic assets from buyers with lower costs of capital than us or that have lower return expectations than we do
could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.
Several real estate investment trusts, or REITs, have similar asset acquisition objectives as we do, along with greater financial resources and lower costs of
capital than we are able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to compete and
successfully implement our growth strategy. There is significant competition among potential acquirers in the senior living industry, including REITs, and
there can be no assurance that we will be able to successfully implement our growth strategy or complete acquisitions, which could limit our ability to grow
our business effectively. Partially as a result of tax law changes enacted through RIDEA, we now compete more directly with the various publicly-traded
healthcare REITs
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for the acquisition of senior housing properties.
We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us, or at all,
which may limit our ability to grow.
Continued expansion of our business through the expansion, redevelopment and repositioning of our existing communities, the development of new
communities and the acquisition of existing senior living operating companies and communities will require additional capital, particularly if we were to
accelerate our expansion and acquisition plans. Financing may not be available to us or may be available to us only on terms that are not favorable. In addition,
certain of our outstanding indebtedness and long-term leases restrict, among other things, our ability to incur additional debt. If we are unable to raise
additional funds or obtain them on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies. Further, if additional funds are
raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted. Any newly issued equity securities
may have rights, preferences or privileges senior to those of our common stock.
In addition, we are heavily dependent on mortgage financing provided by Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan
Mortgage Corporation ("Freddie Mac") (collectively, the "Agency Lenders"). The Agency Lenders are currently operating under a conservatorship begun in
2008, conducting business under the direction of the Federal Housing Finance Agency. Reform efforts related to the Agency Lenders may make such
financing sources less available or unavailable in the future and may cause us to seek alternative sources of potentially less attractive financing. There can be no
assurance that such alternative sources will be available.
We are susceptible to risks associated with the lifecare benefits that we offer the residents of our lifecare entrance fee communities.
As of December 31, 2013, we owned or leased 11 lifecare entrance fee communities that offer residents a limited lifecare benefit. Residents of these
communities pay an upfront entrance fee upon occupancy, of which a portion is generally refundable, with an additional monthly service fee while living in the
community. This limited lifecare benefit is typically (a) a certain number of free days in the community's health center during the resident's lifetime, (b) a
discounted rate for such services, or (c) a combination of the two. The lifecare benefit varies based upon the extent to which the resident's entrance fee is
refundable. The pricing of entrance fees, refundability provisions, monthly service fees, and lifecare benefits are determined utilizing actuarial projections of
the expected morbidity and mortality of the resident population. In the event the entrance fees and monthly service payments established for our communities
are not sufficient to cover the cost of lifecare benefits granted to residents, the results of operations and financial condition of these communities could be
adversely affected.
Residents of these entrance fee communities are guaranteed a living unit and nursing care at the community during their lifetime, even if the resident exhausts
his or her financial resources and becomes unable to satisfy his or her obligations to the community. In addition, in the event a resident requires nursing care
and there is insufficient capacity for the resident in the nursing facility at the community where the resident lives, the community must contract with a third
party to provide such care. Although we screen potential residents to ensure that they have adequate assets, income, and reimbursements from government
programs and third parties to pay their obligations to our communities during their lifetime, we cannot assure you that such assets, income, and
reimbursements will be sufficient in all cases. If insufficient, we have rights of set-off against the refundable portions of the residents' deposits, and would also
seek available reimbursement under Medicaid or other available programs. To the extent that the financial resources of some of the residents are not sufficient
to pay for the cost of facilities and services provided to them, or in the event that our communities must pay third parties to provide nursing care to residents
of our communities, our results of operations and financial condition would be adversely affected.
The geographic concentration of our communities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in those
areas, resulting in a decrease in our revenues or an increase in our costs, or otherwise negatively impacting our results of operations.
We have a high concentration of communities in various geographic areas, including the states of Florida, Texas, North Carolina, California, Colorado, Ohio
and Arizona. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations,
particularly with respect to assisted living communities, acts of nature and other factors that may result in a decrease in demand for senior living
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services in these states could have an adverse effect on our revenues, costs and results of operations. In addition, given the location of our communities, we are
particularly susceptible to revenue loss, cost increase or damage caused by other severe weather conditions or natural disasters such as hurricanes, earthquakes
or tornados. Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase in the cost of insurance.
Termination of our resident agreements and vacancies in the living spaces we lease could adversely affect our revenues, earnings and occupancy levels.
State regulations governing assisted living communities require written resident agreements with each resident. Several of these regulations also require that
each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, many of our assisted
living resident agreements allow residents to terminate their agreements upon 0 to 30 days' notice. Unlike typical apartment leasing or independent living
arrangements that involve lease agreements with specified leasing periods of up to a year or longer, in many instances we cannot contract with our assisted
living residents to stay in those living spaces for longer periods of time. Our retirement center resident agreements generally provide for termination of the
lease upon death or allow a resident to terminate his or her lease upon the need for a higher level of care not provided at the community. If multiple residents
terminate their resident agreements at or around the same time, our revenues, earnings and occupancy levels could be adversely affected. In addition, because
of the demographics of our typical residents, including age and health, resident turnover rates in our communities are difficult to predict. As a result, the living
spaces we lease may be unoccupied for a period of time, which could adversely affect our revenues and earnings.
Early termination or non-renewal of our management agreements could cause a loss in revenues.
We operate certain of our communities pursuant to management agreements. In some of these cases, the controlling financial interest in the community is
held by third parties and, in other cases, the community is owned in a joint venture structure in which we have an ownership interest. At December 31, 2013,
approximately 14.6% of our communities were managed for third parties or unconsolidated ventures. We obtained a significant portion of our management
agreements as a result of our acquisition of Horizon Bay in 2011. The majority of our management agreements are long-term agreements. In most cases,
either party to the agreements may terminate upon the occurrence of an event of default caused by the other party. In addition, in some cases, subject to our
rights, if any, to cure deficiencies, community owners may terminate us as manager if any licenses or certificates necessary for operation are revoked, if we do
not satisfy certain designated performance thresholds or if the community is sold to an unrelated third party (in which case we may be entitled to receive a
contractual termination fee). Also, in some instances, a community owner may terminate the management agreement relating to a particular community if we
are in default under other management agreements relating to other communities owned by the same owner or its affiliates. Certain of our management
agreements, both with joint ventures and with entities owned by third parties, provide that an event of default under the debt instruments applicable to the
ventures or the entities owned by third parties that is caused by us may also be considered an event of default by us under the relevant management agreement,
giving the non-Brookdale party to the management agreement the right to pursue the remedies provided for in the management agreement, potentially including
termination of the management agreement. Further, in the event of default on a loan, the lender may have the ability to terminate us as manager. With respect
to communities held in ventures, in some cases, the management agreement can be terminated in connection with the sale by the venture partner of its interest
in the venture or the sale of properties by the venture. Early termination of our management agreements or non-renewal or renewal on less-favorable terms
could cause a loss in revenues and could negatively impact our results of operations and cash flows.
Increases in the cost and availability of labor, including increased competition for or a shortage of skilled personnel or increased union activity, would
have an adverse effect on our profitability and/or our ability to conduct our business operations.
Our success depends on our ability to retain and attract skilled management personnel who are responsible for the day-to-day operations of each of our
communities. Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of care, social
services and financial performance. Depending upon the size of the community, each Executive Director is supported by a community staff member who is
directly responsible for day-to-day care of the residents and either community staff or regional support to oversee the community's marketing and community
outreach programs. Other key positions supporting each
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community may include individuals responsible for food service, healthcare services, therapy services, activities, housekeeping and engineering. We compete
with various health care service providers, including other senior living providers, in retaining and attracting qualified and skilled personnel. Increased
competition for or a shortage of nurses, therapists or other trained personnel, or general inflationary pressures may require that we enhance our pay and
benefits package to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge to our residents
or our service charges, which would negatively impact our results of operations. Turnover rates and the magnitude of the shortage of nurses, therapists or other
trained personnel varies substantially from market to market. Although reliable industry-wide data on key employee retention does not exist, we believe that
our employee retention rates are consistent with those of other national senior housing operators. If we fail to attract and retain qualified and skilled personnel,
our ability to conduct our business operations effectively, our ability to implement our growth strategy, and our overall operating results could be harmed.
In addition, efforts by labor unions to unionize any of our community personnel could divert management attention, lead to increases in our labor costs and/or
reduce our flexibility with respect to certain workplace rules. Recently proposed legislation known as the Employee Free Choice Act, or card check, and/or
related regulatory proposals could make it significantly easier for union organizing drives to be successful, leading to increased organizational activity, and
could give third-party arbitrators the ability to impose terms of collective bargaining agreements upon us and a labor union if we and such union are unable to
agree to the terms of a collective bargaining agreement. If we experience an increase in organizing activity, if onerous collective bargaining agreement terms
are imposed upon us, or if we otherwise experience an increase in our staffing and labor costs, our profitability and cash flows from operations would be
negatively affected.
Departure of our key officers could harm our business.
We are dependent on the efforts of our executive officers. The unforeseen loss or limited availability of the services of any of our executive officers, or our
inability to recruit and retain qualified personnel in the future, could, at least temporarily, have an adverse effect on our business, results of operations and
financial condition and be negatively perceived in the capital markets.
Environmental contamination at any of our communities could result in substantial liabilities to us, which may exceed the value of the underlying assets
and which could materially and adversely affect our liquidity and earnings.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of, or related to the release of, certain hazardous or toxic substances, that could be
located on, in, at or under a property, regardless of how such materials came to be located there. The cost of any required investigation, remediation, removal,
mitigation, compliance, fines or personal or property damages and our liability therefore could exceed the property's value and/or our assets' value. In addition,
the presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to
sell such property, to attract additional residents and retain existing residents, to borrow using such property as collateral or to develop or redevelop such
property. In addition, such laws impose liability, which may be joint and several, for investigation, remediation, removal and mitigation costs on persons who
disposed of or arranged for the disposal of hazardous substances at third party sites. Such laws and regulations often impose liability without regard to whether
the owner or operator knew of, or was responsible for, the presence, release or disposal of such substances as well as without regard to whether such release
or disposal was in compliance with law at the time it occurred. Although we do not believe that we have incurred such liabilities as would have a material
adverse effect on our business, financial condition and results of operations, we could be subject to substantial future liability for environmental contamination
that we have no knowledge about as of the date of this report and/or for which we may not be at fault.
Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our asset
value, which would have an adverse effect on our earnings and financial condition.
Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-
containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the
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environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents. Each of our
communities has an agreement with a waste management company for the proper disposal of all infectious medical waste, but the use of such waste
management companies does not immunize us from alleged violations of such laws for operations for which we are responsible even if carried out by such
waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed.
Federal regulations require building owners and those exercising control over a building's management to identify and warn their employees and certain other
employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-
containing materials in their buildings. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a
building's management may be subject to an increased risk of personal injury lawsuits. Federal, state and local laws and regulations also govern the removal,
encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in
poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a
release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to
seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and
potential asbestos-containing materials.
The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may
lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan and may result in third party litigation
for personal injury or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even
after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and
could adversely affect a community's market value.
Although we believe that we are currently in material compliance with applicable environmental laws, if we fail to comply with such laws in the future, we
would face increased expenditures both in terms of fines and remediation of the underlying problem(s), potential litigation relating to exposure to such
materials, and potential decrease in value to our business and in the value of our underlying assets. Therefore, our failure to comply with existing
environmental laws would have an adverse effect on our earnings, our financial condition and our ability to pursue our growth strategy.
We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory
framework (including legislative or regulatory efforts designed to address climate change, such as the proposed "cap and trade" legislation) could have a
material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not
currently operate may subject us to additional restrictions on the manner in which we operate our communities.
We are subject to risks associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002.
We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our
management is required to include a report with each Annual Report on Form 10-K regarding our internal control over financial reporting. We have
implemented processes documenting and evaluating our system of internal controls. Complying with these requirements is expensive, time consuming and
subject to changes in regulatory requirements. The existence of one or more material weaknesses, management's conclusion that its internal control over
financial reporting is not effective, or the inability of our auditors to express an opinion that our internal control over financial reporting is effective, could
result in a loss of investor confidence in our financial reports, adversely affect our stock price and/or subject us to sanctions or investigation by regulatory
authorities.
Risks Related to Pending Litigation
32
Complaints filed against us could, if adversely determined, subject us to a material loss.
We have been and are currently involved in litigation and claims incidental to the conduct of our business which are comparable to other companies in the
senior living and healthcare industries. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve.
Similarly, the senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in litigation related to
regulatory compliance matters. As a result, we maintain general liability and professional liability insurance policies in amounts and with coverage and
deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. Our current policies are
written on a claims-made basis and provide for deductibles for each claim. Accordingly, we are, in effect, self-insured for claims that are less than the
deductible amounts. If we experience a greater number of losses than we anticipate, or if certain claims are not ultimately covered by insurance, our results of
operation and financial condition could be adversely affected.
Risks Related to Our Industry
The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect on our business operations
and profits.
The regulatory environment surrounding the senior living industry continues to evolve and intensify in the amount and type of laws and regulations affecting it,
many of which vary from state to state. In addition, many senior living communities are subject to regulation and licensing by state and local health and social
service agencies and other regulatory authorities. In several of the states in which we operate or may operate, we are prohibited from providing certain higher
levels of senior care services without first obtaining the appropriate licenses. Also, in several of the states in which we operate or intend to operate, assisted
living communities and/or skilled nursing facilities require a certificate of need before the community can be opened or the services at an existing community
can be expanded. Furthermore, federal, state and local officials are increasingly focusing their efforts on enforcement of these laws, particularly with respect
to large for-profit, multi-community providers like us. These requirements and the increased enforcement thereof, could affect our ability to expand into new
markets, to expand our services and communities in existing markets and, if any of our presently licensed communities were to operate outside of its licensing
authority, may subject us to penalties including closure of the community. Future regulatory developments as well as mandatory increases in the scope and
severity of deficiencies determined by survey or inspection officials could cause our operations to suffer. We are unable to predict the future course of
federal, state and local legislation or regulation. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the
enforcement of existing rules, our earnings and operations could be adversely affected.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by
governmental authorities and consequent citations for failure to comply with regulatory requirements. We also expend considerable resources to respond to
federal and state investigations or other enforcement action. From time to time in the ordinary course of business, we receive deficiency reports from state
and federal regulatory bodies resulting from such inspections or surveys. Although most inspection deficiencies are resolved through an agreed-to plan of
corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified facility, which could result in the
imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of
certification as a provider under federal health care programs or imposition of other sanctions, including criminal penalties. Furthermore, certain states may
allow citations in one community to impact other communities in the state. Revocation of a license at a given community could therefore impact our ability to
obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our leases, trigger cross-defaults,
trigger defaults under certain of our credit agreements or adversely affect our ability to operate and/or obtain financing in the future. If a state were to find that
one community's citation would impact another of our communities, this would also increase costs and result in increased surveillance by the state survey
agency. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse effect on
our revenues. However, the failure to comply with applicable legal and regulatory requirements in the future could result in a material adverse effect to our
business as a whole.
There are various extremely complex federal and state laws governing a wide array of referral relationships and arrangements and prohibiting fraud by health
care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud
initiatives. Some examples
33
are the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997, and the False Claims Act, which gives
private individuals the ability to bring an action on behalf of the federal government. The violation of any of these laws or regulations may result in the
imposition of fines or other penalties that could increase our costs and otherwise jeopardize our business. Under the Deficit Reduction Act of 2005, or DRA
2005, every entity that receives at least $5.0 million annually in Medicaid payments must have established written policies for all employees, contractors or
agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal False
Claims Act, and similar state laws. Failure to comply with this new compliance requirement may potentially give rise to potential liability. DRA 2005 also
creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act.
Additionally, we provide services and operate communities that participate in federal and/or state health care reimbursement programs, which makes us subject
to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent or are for items
or services that were not provided as claimed. Similar state laws vary from state to state and we cannot be sure that these laws will be interpreted consistently
or in keeping with past practice. Violation of any of these laws can result in loss of licensure, civil or criminal penalties and exclusion of health care providers
or suppliers from furnishing covered items or services to beneficiaries of the applicable federal and/or state health care reimbursement program. Loss of
licensure may also cause us to default under our leases and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback Law, the
Stark laws and certain state referral laws. Authorities have interpreted the Federal Anti-Kickback Law very broadly to apply to many practices and relationships
between health care providers and sources of patient referral. This could result in criminal penalties and civil sanctions, including fines and possible exclusion
from government programs such as Medicare and Medicaid, which may also cause us to default under our leases and/or trigger cross-defaults. Adverse
consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with
all laws that regulate the licensure and operation of our business, it is difficult to predict how our revenues could be affected if we were subject to an action
alleging such violations.
We face periodic and routine reviews, audits and investigations under our contracts with government agencies, and these audits could have adverse
findings that may negatively impact our business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews, audits and investigations to verify our
compliance with these programs and applicable laws and regulations. We also are subject to audits under various government programs, including but not
limited to the RAC and ZPIC programs, in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to
identify potential improper payments under the Medicare program. Our costs to respond to and defend reviews, audits and investigations may be significant
and could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows. Moreover, an adverse
review, audit or investigation could result in:
·
·
·
·
required refunding or retroactive adjustment of amounts we have been paid pursuant to the federal or state programs;
state or federal agencies imposing fines, penalties and other sanctions on us;
loss of our right to participate in the Medicare program or state programs; or
damage to our business and reputation in various markets.
These results could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
34
Compliance with the Americans with Disabilities Act (especially as recently amended), Fair Housing Act and fire, safety and other regulations may
require us to make unanticipated expenditures, which could increase our costs and therefore adversely affect our earnings and financial condition.
All of our communities are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for "public
accommodations" and "commercial properties," but generally requires that buildings be made accessible to people with disabilities. Compliance with ADA
requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of damages to private
litigants.
We must also comply with the Fair Housing Act, which prohibits us from discriminating against individuals on certain bases in any of our practices if it would
cause such individuals to face barriers in gaining residency in any of our communities. Additionally, the Fair Housing Act and other state laws require that we
advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our marketing techniques to
comply with these requirements.
In addition, we are required to operate our communities in compliance with applicable fire and safety regulations, building codes and other land use regulations
and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like other health care
facilities, senior living communities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance with regulatory
requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint filed by a resident, a
family member or one of our competitors. We may be required to make substantial capital expenditures to comply with those requirements.
Capital expenditures we have made to comply with any of the above to date have been immaterial, however, the increased costs and capital expenditures that we
may incur in order to comply with any of the above would result in a negative effect on our earnings, and financial condition.
Significant legal actions and liability claims against us in excess of insurance limits could subject us to increased operating costs and substantial
uninsured liabilities, which may adversely affect our financial condition and operating results.
The senior living and healthcare services businesses entails an inherent risk of liability, particularly given the demographics of our residents, including age and
health, and the services we provide. In recent years, we, as well as other participants in our industry, have been subject to an increasing number of claims and
lawsuits alleging that our services have resulted in resident injury or other adverse effects. Many of these lawsuits involve large damage claims and significant
legal costs. Many states continue to consider tort reform and how it will apply to the senior living industry. We may continue to be faced with the threat of
large jury verdicts in jurisdictions that do not find favor with large senior living or healthcare providers. We maintain liability insurance policies in amounts
and with the coverage and deductibles we believe are adequate based on the nature and risks of our business, historical experience and industry standards. We
have formed a wholly-owned "captive" insurance company for the purpose of insuring certain portions of our risk retention under our general and professional
liability insurance programs. There can be no guarantee that we will not have any claims that exceed our policy limits in the future.
If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations
could be materially and adversely affected. In some states, state law may prohibit or limit insurance coverage for the risk of punitive damages arising from
professional liability and general liability claims and/or litigation. As a result, we may be liable for punitive damage awards in these states that either are not
covered or are in excess of our insurance policy limits. Also, the above deductibles, or self-insured retention, are accrued based on an actuarial projection of
future liabilities. If these projections are inaccurate and if there are an unexpectedly large number of successful claims that result in liabilities in excess of our
self-insured retention, our operating results could be negatively affected. Claims against us, regardless of their merit or eventual outcome, also could have a
material adverse effect on our ability to attract residents or expand our business and could require our management to devote time to matters unrelated to the
day-to-day operation of our business. We also have to renew our policies every year and negotiate acceptable terms for coverage, exposing us to the volatility
of the insurance markets, including the possibility of rate increases. There can be no assurance that we will be able to obtain liability insurance in the future or,
if available, that such coverage will be available on acceptable terms.
35
Overbuilding and increased competition may adversely affect our ability to generate and increase our revenues and profits and to pursue our business
strategy.
The senior living industry is highly competitive, and we expect that it may become more competitive in the future. We compete with numerous other
companies that provide long-term care alternatives such as home healthcare agencies, therapy services, life care at home, community-based service programs,
retirement communities, convalescent centers and other independent living, assisted living and skilled nursing providers, including not-for-profit entities. In
general, regulatory and other barriers to competitive entry in the independent living and assisted living sectors of the senior living industry are not substantial.
We have experienced and expect to continue to experience increased competition in our efforts to acquire and operate senior living communities.
Consequently, we may encounter increased competition that could limit our ability to attract new residents, raise resident fees or expand our business, which
could have a material adverse effect on our revenues and earnings.
In addition, overbuilding in the late 1990's in the senior living industry reduced the occupancy rates of many newly constructed buildings and, in some cases,
reduced the monthly rate that some newly built and previously existing communities were able to obtain for their services. This resulted in lower revenues for
certain of our communities during that time. While we believe that overbuilt markets have stabilized and should continue to be stabilized for the immediate
future, we cannot be certain that the effects of this period of overbuilding will not affect our occupancy and resident fee rate levels in the future, nor can we be
certain that another period of overbuilding in the future will not have the same effects. Moreover, while we believe that the new construction dynamics and the
competitive environments in the states in which we operate are substantially similar to the national market, taken as a whole, if the dynamics or environment
were to be significantly adverse in one or more of those states, it would have a disproportionate effect on our revenues (due to the large portion of our
revenues that are generated in those states).
Risks Related to Our Organization and Structure
If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant
corporate decisions and may result in conflicts of interest.
As of December 31, 2013, funds managed by affiliates of Fortress Investment Group LLC ("Fortress") and various principals of Fortress, in the aggregate,
beneficially own 20,285,916 shares, or approximately 16.3% of our outstanding common stock (excluding unvested restricted shares). In addition, two of our
directors are associated with Fortress and, pursuant to our Stockholders Agreement, Fortress currently has the ability to require us to nominate two individuals
designated by Fortress for election as members of our nine-member Board of Directors (subject to their election by our stockholders). As a result, Fortress
may be able to influence fundamental and significant corporate matters and transactions, including: the election of directors; mergers, consolidations or
acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated
certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Fortress's interests, including its ownership of the
North American operations of Holiday Retirement Corp., one of our competitors, may conflict with your interests. Their influence over the Company could
delay, deter or prevent acts that may be favored by our other stockholders such as hostile takeovers, changes in control of the Company and changes in
management. As a result of such actions, the market price of our common stock could decline or stockholders might not receive a premium for their shares in
connection with a change of control of the Company.
Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or
prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger or
acquisition that you may consider favorable or prevent the removal of our current board of directors and management. We have a number of anti-takeover
devices in place that will hinder takeover attempts, including:
·
·
a staggered board of directors consisting of three classes of directors, each of whom serve three-year terms;
removal of directors only for cause, and only with the affirmative vote of at least 80% of the voting interest of stockholders entitled to vote;
36
·
·
·
·
blank-check preferred stock;
provisions in our amended and restated certificate of incorporation and amended and restated by-laws preventing stockholders from calling special
meetings;
advance notice requirements for stockholders with respect to director nominations and actions to be taken at annual meetings; and
no provision in our amended and restated certificate of incorporation for cumulative voting in the election of directors, which means that the holders
of a majority of the outstanding shares of our common stock can elect all the directors standing for election.
Additionally, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, which restricts
certain business combinations with interested stockholders in certain situations, will not apply to us.
We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial
obligations.
We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating
subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial
obligations. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock
may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your
shares at or above your purchase price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
·
·
·
·
·
·
·
·
·
reaction to the proposed Merger;
variations in our quarterly operating results;
changes in our earnings estimates;
the contents of published research reports about us or the senior living industry or the failure of securities analysts to cover our common stock;
additions or departures of key management personnel;
any increased indebtedness we may incur or lease obligations we may enter into in the future;
actions by institutional stockholders;
changes in market valuations of similar companies;
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
37
·
·
·
speculation or reports by the press or investment community with respect to the Company or the senior living industry in general;
increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
changes or proposed changes in laws or regulations affecting the senior living industry or enforcement of these laws and regulations, or
announcements relating to these matters; and
·
general market and economic conditions.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, subject to the limitations set forth in the Merger Agreement, we may attempt to increase our capital resources by offering additional debt or
equity securities, including commercial paper, medium-term notes, senior or subordinated notes, convertible securities, series of preferred shares or shares of
our common stock. Upon liquidation, holders of our debt securities and preferred stock, and lenders with respect to other borrowings, would receive a
distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our
existing stockholders or reduce the market price of our common stock, or both. Shares of our preferred stock, if issued, could have a preference with respect
to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market
price of our common stock and diluting their share holdings in us.
Subject to the restrictions in the Merger Agreement, we may issue all of the shares of our common stock that are authorized but unissued (and not otherwise
reserved for issuance under our stock incentive or purchase plans or pursuant to the conversion or exercise features of our convertible senior notes and
warrants) without any action or approval by our stockholders. We intend to continue to pursue selected acquisitions of senior living communities and may
issue shares of common stock in connection with these acquisitions. Any shares issued in connection with our acquisitions or otherwise would dilute the
holdings of our current stockholders.
The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
At December 31, 2013, 124,353,674 shares of our common stock were outstanding (excluding unvested restricted shares). All of the shares of our common
stock are freely transferable, except for any shares held by our "affiliates," as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or
the Securities Act, or any shares otherwise subject to the limitations of Rule 144.
Pursuant to our Stockholders Agreement, as well as the Letter Agreement entered into in connection with the Merger, Fortress and certain of its affiliates and
permitted third-party transferees have the right, in certain circumstances, to require us to register their shares of our common stock under the Securities Act
for sale into the public markets. In connection with our obligations under the Stockholders Agreement, we have on file with the SEC an effective registration
statement permitting the resale, from time to time, of shares of common stock owned by certain affiliates and various principals of Fortress. The shares
covered by the registration statement are freely transferable pursuant to the registration statement and by subsequent purchasers that are not our affiliates.
In addition, as of March 3, 2014, we had registered under the Securities Act an aggregate of 13,700,000 shares for issuance under our Omnibus Stock
Incentive Plan, an aggregate of 1,800,000 shares for issuance under our Associate Stock Purchase Plan and an aggregate of 100,000 shares for issuance under
our Director Stock Purchase Plan. In accordance with the terms of the Omnibus Stock Incentive Plan, the number of shares available for issuance automatically
increases by the lesser of (i) 400,000 shares of common stock or (ii) 2% of the number of outstanding shares of common stock on January 1 of each year.
Subject to any restrictions imposed on the shares and options granted under our stock incentive programs, shares registered under these registration statements
will be available for sale into the public markets.
38
Our ability to use net operating loss carryovers to reduce future tax payments will be limited.
Section 382 of the Internal Revenue code contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change
in ownership of 50% of its stock over a three-year period, to utilize its net operating loss carryforward and certain built-in losses recognized in years after the
ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the
stock of a company and any change in ownership arising from a new issuance of stock by the company. We have determined that an ownership change occurred
within the second quarter of 2010, and, therefore, losses carried into the change period will be limited on a go forward basis. The annual limitation is equal to
the product of the applicable long term tax exempt rate and the value of our stock immediately before the ownership change, adjusted for certain items. The
annual limitation may be increased by certain built-in gains existing at the time of change. In addition to the 2010 ownership change, we have had previous
ownership changes.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Facilities
At December 31, 2013, we operated 649 communities across 36 states, with the capacity to serve approximately 67,000 residents. Of the communities we
operated at December 31, 2013, we owned 225, we leased 329 pursuant to operating and capital leases, and 95 were managed by us and fully or majority owned
by third parties.
The following table sets forth certain information regarding our communities at December 31, 2013:
State
Florida
Texas
Colorado
Ohio
California
Illinois
North Carolina
Michigan
Arizona
Tennessee
Virginia
Oklahoma
Kansas
Alabama
Washington
Indiana
Rhode Island
New York
Pennsylvania
Missouri
Georgia
Oregon
Minnesota
Kentucky
New Jersey
Wisconsin
South Carolina
New Mexico
Connecticut
Massachusetts
Idaho
Nevada
Louisiana
Maryland
Delaware
Mississippi
Total
Occupancy
Ownership Status
Units
Rate(1)(2)
Owned
Leased
Managed
Total
13,337
9,883
3,695
3,318
3,284
3,234
3,200
2,945
2,545
1,815
1,611
1,474
1,462
1,450
1,319
1,301
1,184
1,157
1,012
1,008
848
765
723
586
579
524
508
429
424
280
228
142
84
79
54
37
66,524
86.2%
86.5%
89.5%
87.8%
89.3%
92.5%
90.9%
88.0%
84.9%
91.2%
84.5%
85.2%
93.6%
94.3%
90.0%
86.7%
86.6%
92.7%
83.2%
87.8%
93.3%
95.9%
88.7%
87.5%
79.4%
93.1%
91.5%
84.9%
82.8%
84.3%
93.8%
91.5%
93.9%
72.6%
97.2%
65.4%
88.1%
39
36
22
6
23
12
1
4
9
5
14
4
11
10
6
4
9
1
6
6
3
6
7
2
—
2
6
2
2
2
—
2
—
1
—
1
—
225
36
33
17
16
6
9
51
24
11
8
2
16
11
3
8
8
4
10
2
—
—
5
14
2
6
11
8
1
2
1
1
2
—
—
—
1
329
26
23
8
3
3
4
—
3
3
3
1
2
2
1
2
—
4
—
1
1
2
—
1
—
1
—
—
—
—
—
—
—
—
1
—
—
95
98
78
31
42
21
14
55
36
19
25
7
29
23
10
14
17
9
16
9
4
8
12
17
2
9
17
10
3
4
1
3
2
1
1
1
1
649
(1) Includes the impact of managed properties.
(2) Represents occupancy at the end of the period.
Substantially all of our owned properties are subject to mortgages.
Corporate Offices
Our main corporate offices are all leased, including our 74,593 square foot facility in Nashville, Tennessee, our 117,609 square foot facility in Milwaukee,
Wisconsin, and our 10,655 square foot facility in Chicago, Illinois.
Item 3.
Legal Proceedings.
The information contained in Note 19 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K is incorporated
herein by reference.
Stockholder Litigation
We are aware of a lawsuit relating to the Merger Agreement filed by purported stockholders of Emeritus. On February 28, 2014, Tampa Maritime
Association / International Longshoremen's Association Pension Fund, a purported stockholder of Emeritus, filed a putative class action complaint in the
Superior Court of King County, Washington, titled Tampa Maritime Association / International Longshoremen's Association Pension Fund v. Emeritus Corp.,
et al., Case No. 14-2-06385-7-SEA, against Emeritus, the Emeritus board of directors, Brookdale and Merger Sub. The complaint alleges that the Emeritus
board of directors breached its fiduciary duties by, among other things, failing to take appropriate steps to enhance Emeritus' value and attractiveness as a
merger/acquisition candidate, not acting independently to protect the interests of Emeritus' stockholders or resolving conflicts of interest, failing to actively
engage in an auction process with third parties, and failing to disclose all material information to Emeritus' stockholders. The complaint also alleges that
Brookdale, Merger Sub and Emeritus aided and abetted the Emeritus board's alleged breaches of fiduciary duties that prevented Emeritus stockholders from
obtaining fair consideration in the Merger. The complaint seeks, among other things, injunctive relief, including rescission of the Merger, and damages,
including counsel fees and expenses.
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of March 3, 2014:
Name
T. Andrew Smith
Mark W. Ohlendorf
Gregory B. Richard
Bryan D. Richardson
Glenn O. Maul
Kristin A. Ferge
George T. Hicks
H. Todd Kaestner
Edward A. Fenoglio, Jr.
Mary Sue Patchett
Kari L. Schmidt
Age
53
53
60
55
59
40
56
58
43
51
47
Position
Chief Executive Officer
President and Chief Financial Officer
Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Administrative Officer
Executive Vice President and Chief People Officer
Executive Vice President and Treasurer
Executive Vice President – Finance
Executive Vice President – Corporate Development
Division President
Division President
Division President
T. Andrew Smith became our Chief Executive Officer in February 2013. Previously, Mr. Smith served as Executive Vice President, General Counsel and
Secretary since October 2006. In that capacity, in addition to his role in managing the Company's legal affairs, Mr. Smith was responsible for management and
oversight of the Company's corporate development functions (including acquisitions and expansion and development activity); corporate finance activities
(including capital structure, debt and lease transactions and lender/lessor relations); strategic planning; and risk management. Prior to joining Brookdale, Mr.
Smith was with Bass, Berry & Sims PLC in Nashville, Tennessee from 1985 to 2006, where he was a member of the firm's corporate and securities group and
served as the chair of the firm's healthcare group. While at Bass, Berry & Sims, Mr. Smith served ARC as outside General Counsel. Mr. Smith currently serves
as a member of the board of directors of the National Investment Center for the Seniors Housing & Care Industry and as a member of the executive board of
the American Seniors Housing Association.
Mark W. Ohlendorf has served as our President since June 2013 and as our Chief Financial Officer since March 2007. He previously served as our Co-
President from August 2005 until June 2013. Mr. Ohlendorf previously
40
served as Chief Executive Officer and President of Alterra from December 2003 until August 2005. From January 2003 through December 2003, Mr.
Ohlendorf served as Chief Financial Officer and President of Alterra, and from 1999 through 2002 he served as Senior Vice President and Chief Financial
Officer of Alterra. Mr. Ohlendorf has over 30 years of experience in the health care and long-term care industries, having held leadership positions with such
companies as Sterling House Corporation, Vitas Healthcare Corporation and Horizon/CMS Healthcare Corporation. He is a past chairman of the board of
directors of the Assisted Living Federation of America.
Gregory B. Richard has served as our Executive Vice President and Chief Operating Officer since June 2013. He previously served as our Executive Vice
President – Field Operations from January 2008 until June 2013 and as our Executive Vice President – Operations from July 2006 through December 2007.
Previously, Mr. Richard served as Executive Vice President and Chief Operating Officer of American Retirement Corporation since January 2003 and
previously served as its Executive Vice President – Community Operations since January 2000. Mr. Richard was formerly with a pediatric practice
management company from May 1997 to May 1999, serving as President and Chief Executive Officer from October 1997 to May 1999. Prior to this, Mr.
Richard was with Rehability Corporation, a publicly traded outpatient physical rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September 1992 to October 1996.
Bryan D. Richardson became our Executive Vice President in July 2006 and our Chief Administrative Officer in January 2008. Mr. Richardson also served
as our Chief Accounting Officer from September 2006 through April 2008. Previously, Mr. Richardson served as Executive Vice President – Finance and
Chief Financial Officer of ARC since April 2003 and previously served as its Senior Vice President – Finance since April 2000. Mr. Richardson was formerly
with a national graphic arts company from 1984 to 1999 serving in various capacities, including Senior Vice President of Finance of a digital prepress division
from May 1994 to October 1999, and Senior Vice President of Finance and Chief Financial Officer from 1989 to 1994. Mr. Richardson was previously with
the national public accounting firm PricewaterhouseCoopers.
Glenn O. Maul became our Executive Vice President and Chief People Officer in March 2013. Previously, Mr. Maul served as Senior Vice President –
Human Resources since joining Brookdale in April 2006. Prior to joining Brookdale, he served as Vice President – Human Resources for Sunrise Senior
Living. Mr. Maul is certified as a Senior Professional in Human Resources (SPHR).
Kristin A. Ferge became our Executive Vice President and Treasurer in August 2005. Ms. Ferge also served as our Chief Administrative Officer from March
2007 through December 2007. She previously served as Vice President, Chief Financial Officer and Treasurer of Alterra from December 2003 until August
2005. From April 2000 through December 2003, Ms. Ferge served as Alterra's Vice President of Finance and Treasurer. Prior to joining Alterra, she worked
in the audit division of KPMG LLP. Ms. Ferge is a certified public accountant.
George T. Hicks became our Executive Vice President – Finance in July 2006. Previously, Mr. Hicks served as Executive Vice President – Finance and
Internal Audit, Secretary and Treasurer of ARC since September 1993. Mr. Hicks had served in various capacities for ARC's predecessors since 1985,
including Chief Financial Officer from September 1993 to April 2003 and Vice President – Finance and Treasurer from November 1989 to September 1993.
H. Todd Kaestner became our Executive Vice President – Corporate Development in July 2006. Previously, Mr. Kaestner served as Executive Vice President
– Corporate Development of ARC since September 1993. Mr. Kaestner served in various capacities for ARC's predecessors since 1985, including Vice
President – Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
Edward A. Fenoglio, Jr. became our Division President in February 2013. Mr. Fenoglio previously served as Divisional Vice President since February 2008
and as Regional Vice President of Operations from July 2006 until February 2008. Previously, he served as Regional Vice President of Operations for ARC
since 2003. Prior to that, Mr. Fenoglio served in various other capacities for ARC since joining ARC in 1997. Mr. Fenoglio is a Licensed Nursing Facility
Administrator.
Mary Sue Patchett became our Division President in February 2013. Previously, Ms. Patchett served as Divisional Vice President since joining Brookdale in
September 2011 in connection with the Horizon Bay acquisition. Ms. Patchett has over 30 years senior care and housing experience serving in leadership
roles. Previously, Ms. Patchett
41
served as Chief Operating Officer of Horizon Bay from January 2011 through August 2011 and as Senior Vice President of Operations from March 2008
through December 2011. Prior to joining Horizon Bay, she was President and owner of Patchett & Associates, Inc., a management consulting firm for seniors
housing and other healthcare companies, from 2005 until March 2008. Ms. Patchett had previously served as Divisional Vice President for Alterra for over six
years. Ms. Patchett has served on numerous industry boards and currently is serving as Chair for Florida Assisted Living Federation of America.
Kari L. Schmidt became our Division President in February 2013. Previously, Ms. Schmidt served as Divisional Vice President since February 2008 and as
Regional Vice President of Operations of Brookdale or its predecessors from June 1998 until February 2008. Prior to joining Brookdale, Ms. Schmidt served
as Regional Director of Operations for Eby Development and Management from 1996 to 1998, where she was responsible for expanding their assisted living
and memory care products into new markets.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
PART II
Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "BKD". The following table sets forth the range of high and low
sales prices of our common stock for each quarter for the last two fiscal years.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2013
High
Low
29.92 $
30.31 $
30.65 $
30.00 $
25.04
25.31
24.42
25.46
Fiscal 2012
High
Low
19.96 $
19.78 $
23.97 $
26.11 $
15.43
14.99
15.62
21.28
$
$
$
$
$
$
$
$
The closing sale price of our common stock as reported on the NYSE on February 28, 2014 was $33.54 per share. As of that date, there were approximately
415 holders of record of our common stock.
Dividend Policy
On December 30, 2008, our Board of Directors voted to suspend our quarterly cash dividend indefinitely and no dividends were declared during the last two
fiscal years. Although we anticipate that, over the longer-term, we may pay regular quarterly dividends to the holders of our common stock, over the near term
we are focused on deploying capital in the growth of our business. Accordingly, we do not expect to pay cash dividends on our common stock for the
foreseeable future.
Our ability to pay and maintain cash dividends in the future will be based on many factors, including then-existing contractual restrictions or limitations, our
ability to execute our growth strategy, our ability to negotiate favorable lease and other contractual terms, anticipated operating expense levels, the level of
demand for our units, occupancy rates, entrance fee sales results, the rates we charge, our liquidity position and actual results that may vary substantially from
estimates. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain dividends. We can give no
assurance as to our ability to pay or maintain dividends in the future. We also cannot assure you that the level of dividends will be maintained or increase over
time or that increases in demand for our units and monthly resident fees will increase our actual cash available for dividends to
42
stockholders. As we have done in the past, we may also pay dividends in the future that exceed our net income for the relevant period as calculated in
accordance with U.S. GAAP.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6.
Selected Financial Data.
The selected financial data should be read in conjunction with the sections entitled "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and our historical consolidated financial statements and the related notes included elsewhere herein. Our historical statement of
operations data and balance sheet data as of and for each of the years in the five-year period ended December 31, 2013 have been derived from our audited
financial statements.
Fiscal Year ended December 31,
(in thousands, except per share and other operating data)
Total revenue
Facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
(Gain) loss on facility lease termination
(Gain) loss on sale of communities, net
Loss (gain) on acquisition
Asset impairment
Costs incurred on behalf of managed communities
$
Total operating expense
Income from operations
Interest income
Interest expense:
Debt
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in earnings (loss) of unconsolidated ventures
Other non-operating income (expense)
Loss before income taxes
(Provision) benefit for income taxes
Net loss
Basic and diluted net loss per share
Weighted average shares of common stock used in computing
$
$
$
2013
2,891,966
1,671,945
184,548
276,729
268,757
―
―
―
12,891
345,808
2,760,678
131,288
1,339
(121,325)
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584) $
For the Years Ended December 31,
2011
2012
2010
$
2,768,738
1,630,919
178,829
284,025
252,281
(11,584)
―
636
27,677
325,016
2,687,799
80,939
4,012
(128,338)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467) $
$
2,456,483
1,508,571
148,327
274,858
268,506
―
―
(1,982)
16,892
152,566
2,367,738
88,745
3,538
(124,873)
(13,427)
(3,878)
(18,863)
1,432
56
(67,270)
(1,780)
(69,050) $
$
2,278,920
1,437,930
131,709
270,905
292,341
4,608
(3,298)
―
13,075
67,271
2,214,541
64,379
2,238
(132,641)
(8,963)
(4,118)
(1,557)
168
(1,454)
(81,948)
32,062
(49,886) $
2009
2,098,605
1,302,277
134,864
272,096
271,935
―
2,043
―
10,073
77,206
2,070,494
28,111
2,354
(128,869)
(9,505)
3,765
(1,292)
440
4,146
(100,850)
33,577
(67,273)
(0.03) $
(0.54) $
(0.57) $
(0.42) $
(0.60)
basic and diluted loss per share
123,671
121,991
121,161
120,010
111,288
Other Operating Data:
Total number of communities (at end of period)
Total units operated(1)
Period end
Weighted average
649
66,524
66,173
647
65,936
66,102
647
66,183
55,548
559
50,521
50,870
Owned/leased communities occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(2)
$
88.7%
4,383
$
88.0%
4,271
$
87.3%
4,193
$
87.1%
4,053
$
565
51,021
49,536
86.5%
3,946
43
(in millions)
Cash and cash equivalents
Total assets
Total debt
Total stockholders' equity
2013
2012
As of December 31,
2011
2010
2009
$
$
$
$
58.5 $
4,737.8 $
2,636.6 $
1,020.9 $
69.2 $
4,706.8 $
2,679.4 $
997.0 $
30.8 $
4,503.4 $
2,463.6 $
1,035.3 $
81.8 $
4,565.8 $
2,570.3 $
1,056.0 $
66.4
4,684.2
2,625.5
1,083.5
(1) Period end units operated excludes equity homes. Weighted average units operated represents the average units operated during the period, excluding
equity homes.
(2) Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of
entrance fees and Brookdale Ancillary Services segment revenue, divided by average occupied units.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with our "Selected Financial Data" and our consolidated financial statements and related
notes, included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis may contain forward-
looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's
expectations. Please see additional risks and uncertainties described in "Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995" for more information. Factors that could cause such differences include those described in "Risk Factors" which appears elsewhere in this Annual
Report on Form 10-K.
Executive Overview
On February 20, 2014, we entered into an Agreement and Plan of Merger with Emeritus Corporation providing for the merger of Emeritus with one of our
wholly owned subsidiaries, with Emeritus continuing as the surviving corporation and our wholly owned subsidiary. See "Item 1. Business — Overview — The
Pending Merger."
During 2013, we continued to make progress in implementing our long-term growth strategy, integrating previous acquisitions, and building a platform for
future growth. Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating
Income primarily through a combination of: (i) organic growth in our core business, including expense control and the realization of economies of scale; (ii)
growth through strategic capital allocation; (iii) growth through development of a market leading Brookdale brand; and (iv) growth through innovation of
product offerings, including our Brookdale Ancillary Services programs.
The table below presents a summary of our operating results and certain other financial metrics for the years ended December 31, 2013 and 2012 and the
amount and percentage of increase or decrease of each applicable item (dollars in millions).
44
Total revenue
Net loss(1)
Adjusted EBITDA
Cash From Facility Operations
Facility Operating Income
Years Ended
December 31,
Increase
(Decrease)
2013
2012
Amount
Percent
$
$
$
$
$
2,892.0 $
(3.6) $
463.2 $
294.0 $
812.2 $
2,768.7 $
(66.5) $
409.9 $
239.0 $
758.8 $
123.2
(62.9)
53.3
55.1
53.3
4.5%
(94.6)%
13.0%
23.0%
7.0%
(1) Net loss for 2013 and 2012 includes non-cash impairment charges of $12.9 million and $27.7 million, respectively.
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility
Operations is a non-GAAP financial measure we use in evaluating our liquidity. See "Non-GAAP Financial Measures" below for an explanation of how we
define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net
loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities to Cash From Facility
Operations.
During the year ended December 31, 2013, we experienced an increase in our total revenues, primarily due to increases in occupancy and average monthly
revenue per unit, including an increase in our ancillary services revenue. Total revenues for the year ended December 31, 2013 increased to $2.9 billion, an
increase of $123.2 million, or 4.5%, over our total revenues for the year ended December 31, 2012. Resident fees for the year ended December 31, 2013,
increased $102.1 million, or 4.2% from the prior year. Management fees increased $0.3 million, or 1.1%, from the prior year, and reimbursed costs incurred
on behalf of managed communities increased $20.8 million, or 6.4%.
The increase in resident fees during the year ended December 31, 2013 was primarily a result of a 2.6% increase in the average monthly revenue per unit
compared to the prior year, a 70 basis points increase in average occupancy and an increase in revenues from our ancillary services programs. Our weighted
average occupancy rate for the year ended December 31, 2013 and 2012 was 88.7% and 88.0%, respectively. The increase in our average occupancy rate was a
result of improving fundamentals, execution by our field organization and sales and marketing team and the benefit of the capital we have invested and continue
to spend on our communities.
During the year ended December 31, 2013, we also made progress in controlling our cost growth. Facility operating expenses for the year ended December
31, 2013 were $1.7 billion, an increase of $41.0 million, or 2.5%, as compared to the prior year.
Net loss for the year ended December 31, 2013 was $3.6 million, or $(0.03) per basic and diluted common share, compared to a net loss of $66.5 million, or
$(0.54) per basic and diluted common share, for the year ended December 31, 2012.
During the year ended December 31, 2013, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 13.0%, 23.0%
and 7.0%, respectively, when compared to the prior year.
During 2013, we increased our owned property portfolio by acquiring the underlying real estate associated with eight Assisted Living communities with a total
of approximately 633 units for an aggregate purchase price of $83.3 million. Six of the communities had previously been managed by us since the acquisition
of Horizon Bay in September 2011.
During the year ended December 31, 2013, we continued to expand our ancillary services offerings. During the year, we acquired two home health agencies
and one hospice agency for an aggregate purchase price of approximately $2.6 million. As of December 31, 2013, we offered therapy services to
approximately 52,000 of our units and home health services to approximately 47,000 of our units (approximately 38,000 and 34,000 of these units,
respectively, are in our consolidated portfolio). As of that date we also had eleven hospice agencies in operation. We expect to continue to expand our
ancillary services programs to additional units and to open or acquire additional home health agencies. We also expect to expand our ancillary services
programs by opening additional hospice agencies.
45
Consolidated Results of Operations
Year Ended December 31, 2013 and 2012
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of
operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our
consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions that occurred during the
respective reporting periods.
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2013
2012
Amount
Percent
Statement of Operations Data:
Revenue
Resident fees
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Total resident fees
Management services(1)
Total revenue
Expense
Facility operating expense
Retirement Centers
Assisted Living
CCRCs – Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Total facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
Asset impairment
Loss on acquisition
Gain on facility lease termination
Costs incurred on behalf of managed communities
Total operating expense
Income from operations
Interest income
Interest expense:
Debt
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in earnings (loss) of unconsolidated ventures
Other non-operating income
Loss before income taxes
Provision for income taxes
Net loss
Selected Operating and Other Data:
Total number of communities (period end)
Total units operated(2)
Period end
Weighted average
Owned/leased communities units(2)
Period end
Weighted average
$
$
526,284
1,051,868
396,975
297,756
242,150
2,515,033
376,933
2,891,966
304,002
662,190
287,949
221,363
196,441
1,671,945
184,548
276,729
268,757
12,891
―
―
345,808
2,760,678
131,288
1,339
(121,325)
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584) $
$
649
65,832
66,173
48,422
48,090
$
503,902
1,013,337
385,479
285,701
224,517
2,412,936
355,802
2,768,738
298,317
652,153
279,416
224,296
176,737
1,630,919
178,829
284,025
252,281
27,677
636
(11,584)
325,016
2,687,799
80,939
4,012
(128,338)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467) $
647
65,936
66,102
47,938
47,947
Owned/leased communities occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
88.7%
4,383
$
88.0%
$
4,271
$
46
22,382
38,531
11,496
12,055
17,633
102,097
21,131
123,228
5,685
10,037
8,533
(2,933)
19,704
41,026
5,719
(7,296)
16,476
(14,786)
(636)
(11,584)
20,792
72,879
50,349
(2,673)
(7,013)
(1,027)
1,344
1,044
4,972
2,132
(63,120)
237
(62,883)
2
(104)
71
484
143
0.7%
112
4.4%
3.8%
3.0%
4.2%
7.9%
4.2%
5.9%
4.5%
1.9%
1.5%
3.1%
(1.3%)
11.1%
2.5%
3.2%
(2.6%)
6.5%
(53.4%)
(100.0%)
(100.0%)
6.4%
2.7%
62.2%
(66.6%)
(5.5%)
(5.7%)
369.2%
472.4%
142.5%
359.5%
(97.2%)
15.6%
(94.6%)
0.3%
(0.2%)
0.1%
1.0%
0.3%
0.8%
2.6%
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2013
2012
Amount
Percent
Selected Segment Operating and Other Data:
Retirement Centers
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
Assisted Living
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
CCRCs - Rental
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
CCRCs - Entry Fee
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
Other Entry Fee Data
Non-refundable entrance fees sales
Refundable entrance fees sales(4)
Total entrance fee receipts
Refunds
Net entrance fees
Management Services
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Brookdale Ancillary Services
Outpatient Therapy treatment codes
Home Health average census
$
$
$
$
$
$
76
76
14,454
14,439
89.8%
3,381
$
14,433
14,445
89.1%
$
3,263
438
433
22,158
21,679
89.7%
4,510
$
21,551
21,625
88.9%
$
4,390
26
27
6,478
6,669
86.8%
5,715
$
6,691
6,667
86.3%
$
5,588
14
14
5,332
5,303
84.2%
5,013
$
$
44,191
48,140
92,331
(35,325)
57,006
$
95
17,410
18,083
5,263
5,210
83.7%
$
4,978
$
40,105
42,600
82,705
(27,356)
$
55,349
97
17,998
18,155
85.4%
84.5%
―
21
(6)
0.7%
118
5
607
54
0.8%
120
(1)
(213)
2
0.5%
127
―
69
93
0.5%
35
4,086
5,540
9,626
7,969
1,657
(2)
(588)
(72)
0.9%
3,325,129
4,498
3,566,654
3,710
(241,525)
788
47
―
0.1%
―
0.8%
3.6%
1.2%
2.8%
0.2%
0.9%
2.7%
(3.7%)
(3.2%)
―
0.6%
2.3%
―
1.3%
1.8%
0.6%
0.7%
10.2%
13.0%
11.6%
29.1%
3.0%
(2.1%)
(3.3%)
(0.4%)
1.1%
(6.8%)
21.2%
(1) Management services segment revenue includes reimbursements for which we are the primary obligor of costs incurred on behalf of managed
communities.
(2)
(3)
(4)
Period end units operated excludes equity homes. Weighted average units operated represents the average units operated during the period, excluding
equity homes.
Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of entrance
fees and Brookdale Ancillary Services segment revenue, divided by average occupied units.
Refundable entrance fee sales for the years ended December 31, 2013 and 2012 include amounts received from residents participating in the MyChoice
program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service
fee. MyChoice amounts received from residents totaled $19.0 million and $13.3 million for the years ended December 31, 2013 and 2012.
As of December 31, 2013, our total operations included 649 communities with a capacity to serve 66,524 residents.
Resident Fees
Resident fees increased over the prior year primarily as a result of an increase in the average monthly revenue per unit compared to the prior year period,
including an increase in revenue from our ancillary services programs, an increase in occupancy and an increase in consolidated units operated. During the
current year, revenues grew 3.4% at the 523 communities we operated during both years with a 2.4% increase in the average monthly revenue per unit
(excluding amortization of entrance fees in both instances). Occupancy increased 0.8% in these communities year over year.
Retirement Centers revenue increased $22.4 million, or 4.4%, primarily due to increases in average monthly revenue per unit and occupancy at the
communities we operated during both years.
Assisted Living revenue increased $38.5 million, or 3.8%, primarily due to increases in average monthly revenue per unit and occupancy at the communities
operated during both years, as well as the inclusion of revenue from eight communities acquired in the current year. The increase was partially offset by the
impact of the disposition of three communities subsequent to the prior year end.
CCRCs - Rental revenue increased $11.5 million, or 3.0%, primarily due to increases in average monthly revenue per unit and occupancy at the communities
we operated during both years. The increase was partially offset by the impact of the disposition of one community subsequent to the prior year end.
CCRCs - Entry Fee revenue increased $12.1 million, or 4.2%, primarily due to increases in average monthly revenue per unit and occupancy at the
communities we operated during both years and an increase in the number of units operated. The increase was partially offset by a decrease in skilled therapy
revenue due to lower Medicare reimbursement.
Brookdale Ancillary Services revenue increased $17.6 million, or 7.9%, primarily due to the roll-out of our ancillary services programs to additional units
subsequent to the prior year end. The increase was partially offset by a decrease in therapy service volume and by the impact of reimbursement changes.
48
Management Services
Total management services revenue increased $21.1 million, or 5.9%, over the prior year primarily due to additional costs incurred on behalf of managed
communities resulting from an increase in the number of communities managed during the current year prior to the acquisition of six previously managed
communities and termination of a contract of one managed community in the fourth quarter of the current year.
Facility Operating Expense
Facility operating expense increased over the prior year primarily due to an increase in salaries and wages, an increase in marketing and advertising, and
additional expenses incurred in connection with the expansion of our ancillary services programs. These increases were partially offset by a decrease in
insurance expense.
Retirement Centers operating expenses increased $5.7 million, or 1.9%, primarily due to an increase in salaries and wages due to wage increases and an
increase in marketing and advertising expense. There was also an increase in real estate tax expense year over year and an increase in food and supplies expense
driven by higher occupancy compared to the prior year. These increases were partially offset by a decrease in insurance expense.
Assisted Living operating expenses increased $10.0 million, or 1.5%, primarily due to an increase in salaries and wages due to wage increases and an increase
in marketing and advertising expense. There was also an increase in grounds maintenance and repairs expense, an increase in food and supplies expense driven
by higher occupancy compared to the prior year, and an increase in real estate tax expense year over year. These increases were partially offset by a decrease in
insurance expense.
CCRCs - Rental operating expenses increased $8.5 million, or 3.1%, primarily driven by an increase in salaries and wages due to wage rate increases and an
increase in hours worked year over year, an increase in bad debt expense compared to the prior year, an increase in healthcare supplies expense due to an
increase in occupancy and residents with higher acuity needs, and an increase in marketing and advertising expense. These increases were partially offset by a
decrease in insurance expense.
CCRCs - Entry Fee operating expenses decreased $2.9 million, or 1.3%, primarily due to a decrease in insurance expense compared to the prior year and a
decrease in future service obligations related to entrance fee contracts. These decreases were partially offset by an increase in salaries and wages due to wage
increases, an increase in marketing and advertising expense, and an increase in bad debt expense compared to the prior year.
Brookdale Ancillary Services operating expenses increased $19.7 million, or 11.1%, primarily due to an increase in expenses incurred in connection with the
continued expansion of our ancillary service programs, an increase in therapy labor expense and an increase in bad debt expense.
General and Administrative Expense
General and administrative expense increased $5.7 million, or 3.2%, primarily as the result of increases in salaries and wage expense and employee benefits
expense primarily due to increased employee headcount and increases in travel, repairs and maintenance, and marketing and advertising expenses. These
increases were partially offset by a decrease in integration, transaction-related and electronic medical records ("EMR") roll-out costs compared to the prior
year. General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash
stock-based compensation expense and integration, transaction-related and EMR roll-out costs, was 4.5% and 4.3% for the years ended December 31, 2013
and 2012, respectively, calculated as follows (dollars in thousands):
49
Resident fee revenues
Resident fee revenues under management
Total
General and administrative expenses (excluding non-cash stock-based
compensation expense and integration, transaction-related and EMR roll-out
costs)
Non-cash stock-based compensation expense
Integration, transaction-related and EMR roll-out costs
General and administrative expenses (including non-cash stock-based
compensation expense and integration, transaction-related and EMR roll-out
costs)
Facility Lease Expense
Year Ended December 31,
2013
2012
2,515,033
667,313
3,182,346
79.0% $
21.0%
100.0% $
2,412,936
638,338
3,051,274
144,100
25,978
14,470
4.5% $
0.8%
0.5%
129,844
25,520
23,465
$
$
$
79.1%
20.9%
100.0%
4.3%
0.8%
0.8%
$
184,548
5.8% $
178,829
5.9%
Facility lease expense decreased $7.3 million, or 2.6%, primarily as a result of the purchase of 12 previously leased communities in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased by $16.5 million, or 6.5%, primarily as the result of the purchase of 12 previously leased communities in the
prior year and the purchase of eight communities, including six previously managed communities, in the current year. Additionally, there was additional
depreciation in the current year resulting from increased capital expenditures year over year. These increases were partially offset by the impact of the
disposition of four communities during the current year.
Asset Impairment
During 2013, we recognized $12.9 million of impairment charges related to asset impairments for property, plant and equipment and leasehold intangibles for
certain communities primarily within the CCRCs – Rental and Assisted Living segments primarily due to the amount by which the carrying values of the assets
exceeded the estimated fair value. During 2012, we recognized $27.7 million of impairment charges related to asset impairments for property, plant and
equipment and leasehold intangibles for certain communities within the Assisted Living and Retirement Center segments. We compared the estimated fair
value of the assets to their carrying value and recorded an impairment charge for the excess of carrying value over estimated fair value.
Gain on Facility Lease Termination
During 2012, we recognized an $11.6 million net gain on facility lease termination from the reversal of deferred lease liabilities associated with twelve
previously-leased communities that were acquired during the year.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $20.8 million, or 6.4%. The increase is primarily due to an increase in the number of
communities managed during the current year prior to the acquisition of six previously managed communities and termination of a contract of one managed
community in the fourth quarter of the current year.
Interest Income
Interest income decreased $2.7 million, or 66.6%, primarily due to the liquidation of marketable securities in the prior year.
Interest Expense
Interest expense decreased $9.4 million, or 6.4%, primarily due to decreased interest expense related to our mortgage debt, which had lower interest rates year
over year and a gain recorded from the change in the fair value of interest rate swaps and caps due to an increase in interest rates since the purchase of the
instruments.
50
Income Taxes
The difference in our effective tax rates for the years ended December 31, 2013 and 2012 was due to the impact of our improved financial results under
generally accepted accounting principles. Tax expense primarily reflects our cash tax position for states that do not allow for or have suspended the use of net
operating losses for the period. We recorded a valuation allowance against deferred tax benefits generated during the current year.
Year Ended December 31, 2012 and 2011
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of
operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our
consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions that occurred during the
respective reporting periods.
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2012
2011
Amount
Percent
Statement of Operations Data:
Revenue
Resident fees
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Total resident fees
Management services(1)
Total revenue
Expense
Facility operating expense
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Total facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
Asset impairment
Loss (gain) on acquisition
Gain on facility lease termination
Costs incurred on behalf of managed communities
Total operating expense
Income from operations
Interest income
Interest expense:
Debt
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in (loss) earnings of unconsolidated ventures
Other non-operating income
Loss before income taxes
Provision for income taxes
Net loss
Selected Operating and Other Data:
Total number of communities (period end)
Total units operated(2)
Period end
Weighted average
Owned/leased communities units(2)
Period end
Weighted average
Owned/leased communities occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
$
$
503,902
1,013,337
385,479
285,701
224,517
2,412,936
355,802
2,768,738
$
473,842
964,585
364,095
282,020
205,780
2,290,322
166,161
2,456,483
30,060
48,752
21,384
3,681
18,737
122,614
189,641
312,255
298,317
652,153
279,416
224,296
176,737
1,630,919
178,829
284,025
252,281
27,677
636
(11,584)
325,016
2,687,799
80,939
4,012
(128,338)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467) $
647
65,936
66,102
47,938
47,947
275,403
624,657
247,246
213,470
147,795
1,508,571
148,327
274,858
268,506
16,892
(1,982)
—
152,566
2,367,738
88,745
3,538
(124,873)
(13,427)
(3,878)
(18,863)
1,432
56
(67,270)
(1,780)
(69,050) $
647
66,183
55,548
47,895
46,912
88.0%
4,271
$
87.3%
$
4,193
22,914
27,496
32,170
10,826
28,942
122,348
30,502
9,167
(16,225)
10,785
2,618
11,584
172,450
320,061
(7,806)
474
3,465
4,654
(3,514)
(18,642)
4,920
537
(2,322)
(261)
(2,583)
―
(247)
10,554
43
1,035
0.7%
78
$
$
51
6.3%
5.1%
5.9%
1.3%
9.1%
5.4%
114.1%
12.7%
8.3%
4.4%
13.0%
5.1%
19.6%
8.1%
20.6%
3.3%
(6.0%)
63.8%
132.1%
100.0%
113.0%
13.5%
(8.8%)
13.4%
2.8%
34.7%
(90.6%)
(98.8%)
343.6%
958.9%
(3.5%)
(14.7%)
(3.7%)
―
(0.4%)
19.0%
0.1%
2.2%
0.8%
1.9%
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2012
2011
Amount
Percent
Selected Segment Operating and Other Data:
Retirement Centers
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
Assisted Living
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
CCRCs - Rental
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
CCRCs - Entry Fee
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
Other Entry Fee Data
Non-refundable entrance fees sales
Refundable entrance fees sales(4)
Total entrance fee receipts
Refunds
Net entrance fees(5)
Management Services
Number of communities (period end)
Total units(2)
Period end
Weighted average
Occupancy rate (weighted average)
Brookdale Ancillary Services
Outpatient Therapy treatment codes
Home Health average census
$
$
$
$
$
$
76
76
―
14,433
14,445
89.1%
$
3,263
14,468
14,188
88.0%
$
3,163
(35)
257
1.1%
100
433
434
(1)
21,551
21,625
88.9%
$
4,390
21,630
21,323
88.2%
$
4,275
(79)
302
0.7%
115
27
26
1
6,691
6,667
86.3%
$
5,588
6,634
6,253
86.5%
$
5,612
14
14
5,263
5,210
83.7%
$
4,978
$
40,105
42,600
82,705
(27,356)
$
55,349
5,163
5,148
82.7%
$
5,052
$
38,378
29,611
67,989
(25,754)
$
42,235
97
97
17,998
18,155
18,288
8,636
84.5%
84.5%
57
414
(0.2%)
(24)
―
100
62
1.0%
(74)
1,727
12,989
14,716
1,602
13,114
―
(290)
9,519
―
3,566,654
3,710
3,349,854
3,330
216,800
380
52
―
(0.2%)
1.8%
1.3%
3.2%
(0.2%)
(0.4%)
1.4%
0.8%
2.7%
3.8%
0.9%
6.6%
(0.2%)
(0.4%)
―
1.9%
1.2%
1.2%
(1.5%)
4.5%
43.9%
21.6%
6.2%
31.1%
―
(1.6%)
110.2%
―
6.5%
11.4%
(1) Management services segment revenue includes reimbursements for which we are the primary obligor of costs incurred on behalf of managed
communities.
(2)
(3)
(4)
(5)
Period end units operated excludes equity homes. Weighted average units operated represents the average units operated during the period, excluding
equity homes.
Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of entrance
fees and Brookdale Ancillary Services segment revenue, divided by average occupied units.
Refundable entrance fee sales for the years ended December 31, 2012 and 2011 include amounts received from residents participating in the MyChoice
program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service
fee. MyChoice amounts received from residents totaled $13.3 million and $9.0 million for the years ended December 31, 2012 and 2011.
Includes $3.6 million and $12.6 million of first generation net entrance fee receipts (which represent initial entrance fees received from the sale of
units, net of first generation entrance fee refunds not replaced by second generation entrance fee receipts, at a recently opened entrance fee CCRC)
during the year ended December 31, 2012 and 2011, respectively.
As of December 31, 2012, our total operations included 647 communities with a capacity to serve 66,734 residents.
Resident Fees
Resident fees increased over the prior year primarily as a result of an increase in the average monthly revenue per unit compared to the prior year period,
including growing revenues from our ancillary services programs, an increase in occupancy and a 2.2% increase in consolidated units operated. During 2012,
revenues grew 2.4% at the 531 communities we operated during both periods with a 1.6% increase in the average monthly revenue per unit (excluding
amortization of entrance fees in both instances). Occupancy increased 0.7% in these communities period over period.
Retirement Centers revenue increased $30.1 million, or 6.3%, primarily due to the inclusion of revenue from communities acquired during the prior year and
increases in occupancy and average monthly revenue per unit at the communities we operated during both years.
Assisted Living revenue increased $48.8 million, or 5.1%, primarily due to the inclusion of revenue from communities acquired during the prior year and
increases in occupancy and average monthly revenue per unit at the communities we operated during both years.
CCRCs - Rental revenue increased $21.4 million, or 5.9%, primarily due to the inclusion of revenue from
53
communities acquired during the prior year. The increase was partially offset by decreases in the average monthly revenue per unit and occupancy at the
communities we operated during both years. Revenue for the CCRCs – Rental segment was also impacted by a reduction in the reimbursement rate for
Medicare skilled nursing patients.
CCRCs - Entry Fee revenue increased $3.7 million, or 1.3%, primarily due to an increase in occupancy at the communities we operated during both periods.
The increase was partially offset by a decrease in the average monthly revenue per unit at the communities we operated during both years. Revenue for the
CCRCs – Entry Fee segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.
Brookdale Ancillary Services revenue increased $18.7 million, or 9.1%, primarily due to the roll-out of our ancillary services programs to additional units
subsequent to the prior year end. The increase was partially offset by a reduction in Medicare reimbursement rates.
Management Services
Total management services revenue increased $189.6 million, or 114.1%, over the prior year. Approximately $172.4 million of this increase is attributable to
the increase in revenue from reimbursed costs incurred on behalf of managed communities and is primarily due to the management agreements entered into or
acquired in conjunction with the Horizon Bay and HCP transactions that occurred during third quarter of 2011.
Facility Operating Expense
Facility operating expense increased over the prior-year primarily due to an increase in salaries and wages, additional expense incurred in 2012 in connection
with the continued expansion of our ancillary services programs during 2011 and 2012, increased payroll taxes and workers compensation expense, as well as
the inclusion of expenses from communities acquired during 2012. These increases were partially offset by decreases in utilities expense as a result of milder
weather in 2012 and bad debt expense.
Retirement Centers operating expenses increased $22.9 million, or 8.3%, primarily due to the inclusion of expenses from communities acquired during the
prior year, as well as increases in salaries and wages due to wage rate increases and an increase in hours worked year over year. These increases were partially
offset by a decrease in utilities expense as a result of milder weather in 2012.
Assisted Living operating expenses increased $27.5 million, or 4.4%, primarily due to the inclusion of expenses from communities acquired during the prior
year, as well as an increase in salaries and wages due to wage rate increases and an increase in hours worked year over year. These increases were partially
offset by a decrease in utilities expense as a result of milder weather in 2012.
CCRCs - Rental operating expenses increased $32.2 million, or 13.0%, primarily due to the inclusion of expenses from communities acquired during the prior
year, an increase in salaries and wages due to wage rate increases and an increase in hours worked year over year, and an increase in skilled therapy services
expense due to an adverse change in the allowable method for delivering therapy services to skilled nursing patients.
CCRCs - Entry Fee operating expenses increased $10.8 million, or 5.1%, primarily due to an increase in salaries and wages due to wage rate increases and an
increase in hours worked year over year, as well as an increase in skilled therapy services expense due to an adverse change in the allowable method for
delivering therapy services to skilled nursing patients. These increases were partially offset by a decrease in bad debt expense.
Brookdale Ancillary Services operating expenses increased $28.9 million, or 19.6%, primarily due to an increase in expenses incurred in connection with the
continued expansion of our ancillary services programs and an increase in therapy direct labor expenses.
General and Administrative Expense
General and administrative expense increased $30.5 million, or 20.6%, primarily as the result of an increase in the number of employees in connection with
the Horizon Bay and HCP transactions that occurred during the third quarter of 2011, an increase in integration, transaction-related and electronic medical
records ("EMR") roll-out costs, and an increase in non-cash stock-based compensation expense. General and administrative expense as a
54
percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash stock-based compensation expense and
integration, transaction-related and EMR roll-out costs, was 4.3% and 4.4% for the years ended December 31, 2012 and 2011, respectively, calculated as
follows (dollars in thousands):
Resident fee revenues
Resident fee revenues under management
Total
General and administrative expenses (excluding non-cash stock-based
compensation expense and integration, transaction-related and EMR roll-out
costs)
Non-cash stock-based compensation expense
Integration, transaction-related and EMR roll-out costs
General and administrative expenses (including non-cash stock-based
compensation expense and integration, transaction-related and EMR roll-out
costs)
Facility Lease Expense
Year Ended December 31,
2012
2011
2,412,936
638,338
3,051,274
79.1% $
20.9%
100.0% $
2,290,322
313,268
2,603,590
129,844
25,520
23,465
4.3% $
0.8%
0.8%
114,083
19,856
14,388
$
$
$
88.0%
12.0%
100.0%
4.4%
0.8%
0.6%
$
178,829
5.9% $
148,327
5.7%
Facility lease expense increased $9.2 million, or 3.3%, primarily as a result of the acquisition of 12 leased communities in connection with the Horizon Bay
and HCP transactions that occurred in the third quarter of 2011. These increases were partially offset by decreased lease expense as a result of the purchase of
twelve previously leased communities in 2012.
Depreciation and Amortization
Depreciation and amortization expense decreased by $16.2 million, or 6.0%, primarily as a result of the management contract and therapy services intangibles
related to a 2006 acquisition reaching full amortization during 2011.
Asset Impairment
During 2012, we recognized $27.7 million of impairment charges related to asset impairments for property, plant and equipment and leasehold intangibles for
certain communities within the Retirement Centers and Assisted Living segments primarily due to lower than expected performance of the underlying business
and the amount by which the carrying values of the assets exceed the estimated fair value. During 2011, we recognized $16.9 million of impairment charges
related to asset impairments for property, plant and equipment and leasehold intangibles for certain communities within the Assisted Living and Retirement
Center segments. We compared the estimated fair value of the assets to their carrying value and recorded an impairment charge for the excess of carrying
value over estimated fair value.
Loss (Gain) on Acquisition
During 2011, we recognized $2.0 million as a gain on acquisition related to the acquisition of Horizon Bay. The loss on acquisition recognized during the year
ended December 31, 2012 relates to the reduction of the prior-year gain for adjustments to pre-acquisition self-insurance reserves.
Gain on Facility Lease Termination
During 2012, we recognized an $11.6 million net gain on facility lease termination from the reversal of deferred lease liabilities associated with twelve
previously-leased communities that were acquired during 2012.
55
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $172.4 million, or 113.0%, primarily due to a full year of results related to management
agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions in September 2011. We added 78 new managed communities
in connection with these transactions.
Interest Income
Interest income increased $0.5 million, or 13.4%, primarily due to realized gains from the liquidation of the marketable securities – restricted in 2012.
Interest Expense
Interest expense increased $4.6 million, or 3.2%, primarily due to increased interest expense from the amortization of our debt discount on our convertible
notes issued during 2011 and increased interest expense on our line of credit, which had a higher average outstanding balance drawn year over year. These
increases were partially offset by a decrease in interest expense recorded from the change in fair value of interest rate swaps due to fewer instruments in place
during 2012.
Loss on Extinguishment of Debt
During 2011, we recognized an $18.9 million as a loss on extinguishment of debt, related to costs incurred in connection with the early repayment of first and
second mortgage notes.
Income Taxes
The increase in the effective tax rate to (2.3)% in 2012 from (2.6)% in 2011 is primarily due to a decrease in our loss before income taxes in 2012. We
recorded a valuation allowance against deferred tax benefits generated during 2012.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make
estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses. We consider an accounting estimate to be critical if
it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates that could have
been selected, could have a material impact on our consolidated results of operations or financial condition. We have identified the following critical
accounting policies that affect significant estimates and judgments.
Revenue Recognition and Assumptions at Entrance Fee Communities
Our entrance fee communities provide housing and healthcare services through entrance fee agreements with residents. Under certain of these agreements,
residents pay an entrance fee upon entering into the contract and are contractually guaranteed certain limited lifecare benefits in the form of healthcare
discounts. The recognition of entrance fee income requires the use of various actuarial estimates. We recognize this revenue by recording the non-refundable
portion of the residents' entrance fees as deferred entrance fee income and amortizing it into revenue using the straight-line method over the estimated
remaining life expectancy of each resident or couple, adjusted annually. We periodically assess the reasonableness of these mortality tables and other
actuarial assumptions, and measurement of future service obligations.
Self-Insurance Liability Accruals
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and
professional liability insurance policies for our owned, leased and managed communities under a master insurance program, our current policies provide for
deductibles for each and every claim.
56
As a result, we are effectively self-insured for claims that are less than the deductible amounts. In addition, we maintain a large-deductible workers
compensation program and a self-insured employee medical program. We have secured our obligations related to general liability, professional liability and
workers compensation programs with cash aggregating $18.6 million and letters of credit aggregating $34.2 million as of December 31, 2013. We operate a
wholly-owned captive insurance company, Senior Services Insurance Limited ("SSIL") for the purpose of insuring certain portions of the risk retention under
our general liability and professional liability insurance program, but SSIL's coverage is currently limited to claims made prior to 2010. Third-party insurers
are responsible for claim costs above program deductibles and retentions.
The cost of our employee health and dental benefits, net of employee contributions, is shared by us and our communities based on the respective number of
participants working directly either at our corporate offices or at the communities. Cash received is used to pay the actual costs of administering the program
which include paid claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by us.
Claims are paid as they are submitted to the plan administrator.
Outstanding losses and expenses for general liability and professional liability and workers compensation are estimated based on the recommendations of
independent actuaries and management's estimates. Outstanding losses and expenses for our self-insured medical program are estimated based on the
recommendation of our third party administrator.
We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator
estimates, consultants, advice from legal counsel and industry data, and adjust accruals periodically. Estimated costs related to these self-insurance programs
are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates
are updated as information is available. Changes in self-insurance reserves are recorded as an increase or decrease to expense in the period that the
determination is made.
Income Taxes
We account for income taxes under the provisions of ASC 740 Income Taxes. Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. As
of December 31, 2013 and 2012, we have a valuation allowance against deferred tax assets of approximately $72.4 million and $65.3 million, respectively.
When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would be made and reflected in income. This determination will be made by considering various factors, including the
reversal of existing temporary differences, tax planning strategies and estimates of future taxable income exclusive of the reversal of temporary differences.
We have elected the "with-and-without approach" regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes
payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is
realized after considering all other tax benefits presently available to us.
Lease Accounting
We determine whether to account for our leases as either operating or capital leases depending on the underlying terms. As of December 31, 2013, we
operated 329 communities under long-term leases with operating, capital and financing lease obligations. The determination of this classification is complex
and in certain situations requires a significant level of judgment. Our classification criteria is based on estimates regarding the fair value of the leased
communities, minimum lease payments, effective cost of funds, the economic life of the community and certain other terms in the lease agreements as stated
in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Communities under operating leases are accounted for in our
consolidated statements of operations as lease expenses for actual rent paid plus or minus straight-line adjustments for fixed or estimated minimum lease
escalators and amortization of deferred gains. For communities under capital lease and lease financing obligation arrangements, a liability is established on our
balance sheets and a corresponding long-term
57
asset is recorded. Lease payments are allocated between principal and interest on the remaining base lease obligations and the lease asset is depreciated over
the shorter of its useful life or the term of the lease. In addition, we amortize leasehold improvements purchased during the term of the lease over the shorter
of their economic life or the lease term. Sale-leaseback transactions are recorded as lease financing obligations when the transactions include a form of
continuing involvement, such as purchase options.
One of our leases provides for various additional lease payments based on changes in the interest rates on the debt underlying the lease. All of our leases
contain fixed or formula based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a
straight-line basis over the life of the lease. In addition, we recognize all rent-free or rent holiday periods in operating leases on a straight-line basis over the
lease term, including the rent holiday period.
For leases in which we are involved with the construction of the building, we account for the lease during the construction period under the provisions of ASC
840. If we conclude that we have substantively all of the risks of ownership during construction of a leased property and therefore we are deemed the owner of
the project for accounting purposes, we record an asset and related financing obligation for the amount of total project costs related to construction in
progress and the pre-existing asset. Once construction is complete, we consider the requirements under ASC 840-40 – Leases – Sale-Leaseback
Transactions. If the arrangement does not qualify for sale-leaseback accounting, we continue to amortize the financing obligation and depreciate the building
over the lease term.
Allowance for Doubtful Accounts and Contractual Adjustments
Accounts receivable are reported net of an allowance for doubtful accounts, and represent our estimate of the amount that ultimately will be realized in cash.
The allowance for doubtful accounts was $17.7 million and $15.3 million as of December 31, 2013 and 2012, respectively. The adequacy of our allowance
for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source
and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Recent changes in legislation are
not expected to have a material impact on the collectability of our accounts receivable; however, changes in economic conditions could have an impact on the
collection of existing receivable balances or future allowance calculations.
Approximately 80.0% and 80.1% of our resident fee revenues for the years ended December 31, 2013 and 2012, respectively, were derived from private pay
customers and 20.0% and 19.9% of our resident fee revenues for the years ended December 31, 2013 and 2012, respectively, were derived from services
covered by various third-party payor programs, including Medicare and Medicaid. Billings for services under third-party payor programs are recorded net of
estimated retroactive adjustments, if any, under reimbursement programs. Revenue related to these billings is recorded on an estimated basis in the period the
related services are rendered and adjusted in future periods or as final settlements are determined. We accrue contractual or cost related adjustments from
Medicare or Medicaid when assessed (without regard to when the assessment is paid or withheld), even if we have not agreed to or are appealing the
assessment. Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.
Long-Lived Assets, Goodwill and Purchase Accounting
As of December 31, 2013 and 2012, our long-lived assets were comprised primarily of $3.9 billion of net property, plant and equipment and leasehold
intangibles. In accounting for our long-lived assets, other than goodwill, we apply the provisions of ASC 360 Property, Plant and Equipment. In connection
with our formation transactions, for financial reporting purposes we recorded the non-controlling stockholders' interest at fair value. Acquisitions are
accounted for using the purchase method of accounting and the purchase prices are allocated to acquired assets and liabilities based on their estimated fair
values. Goodwill associated with our acquisition of ARC and our formation transactions was allocated to the respective reporting unit and included in our
application of the provisions of ASC 350 Intangibles – Goodwill and Other ("ASC 350"). We account for goodwill under the provisions of ASC 350. As of
December 31, 2013 and 2012, we had $109.6 million of goodwill.
We test long-lived assets other than goodwill and indefinite-lived intangible assets for recoverability annually during our fourth quarter or whenever changes in
circumstances indicate the carrying value may not be recoverable. Recoverability of an asset (group) is estimated by comparing its carrying value to the future
net undiscounted cash flows expected to be generated by the asset (group). If this comparison indicates that the carrying value of an asset
58
(group) is not recoverable, we are required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of
the asset (group) exceeds its estimated fair value. When an impairment loss is recognized for assets to be held and used, the carrying amount of those assets is
permanently adjusted and depreciated over its remaining useful life. During the years ended December 31, 2013 and 2012, we evaluated long-lived depreciable
assets and determined that the undiscounted cash flows exceeded the carrying value of these assets for all except a small number of communities. Estimated
fair values were determined and non-cash asset impairment charges of $12.9 million and $27.7 million were taken for the years ended December 31, 2013 and
2012, respectively. These impairment charges are primarily due to lower than expected performance of the underlying communities and the amount by which
the carrying values of the assets exceed the estimated fair value.
Goodwill is not amortized, but is subject to annual or more frequent impairment testing. We test goodwill for impairment annually during our fourth quarter,
or whenever indicators exist that our goodwill may not be recoverable. We first assess qualitative factors to determine whether it is necessary to perform a
two-step quantitative goodwill impairment test. Based on a qualitative assessment, it is more likely than not that its fair value is greater than its carrying
amount.
Indefinite-lived intangible assets are tested for impairment annually during our fourth quarter or more frequently as required. The impairment test consists of a
comparison of the estimated fair value of the indefinite-lived intangible asset with its carrying value. If the carrying amount exceeds its fair value, an
impairment loss is recognized for that difference.
In estimating the fair value of long-lived assets (groups) and reporting units for purposes of our goodwill impairment test, we generally use the income
approach. The income approach utilizes future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily
involve predicting an unknown future and require significant management judgments and estimates. In arriving at our cash flow projections, we consider our
historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors. Future events may
indicate differences from management's current judgments and estimates, which could, in turn, result in future impairments. Future events that may result in
impairment charges include increases in interest rates, which could impact discount rates, differences in the projected occupancy rates and changes in the cost
structure of existing communities.
In using the income approach to estimate the fair value of long-lived assets (groups) and reporting units for purposes of our goodwill impairment test, we make
certain key assumptions. Those assumptions include future revenues and future facility operating expenses, and future cash flows that we would receive upon a
sale of the communities using estimated capitalization rates. We corroborate the capitalization rates we use in these calculations with capitalization rates
observable from recent market transactions.
Where required, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The
weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
Although we make every reasonable effort to ensure the accuracy of our estimate of the fair value of our reporting units, future changes in the assumptions
used to make these estimates could result in the recording of an impairment loss.
Stock-Based Compensation
ASC 718 Compensation – Stock Compensation ("ASC 718") requires measurement of the cost of employee services received in exchange for stock
compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee's
requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when
incurred.
Certain of our employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when
achievement of performance conditions is considered probable. Consequently, our determination of the amount of stock compensation expense requires a
significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, we must make
59
estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are
updated as information is available.
Litigation
Litigation is inherently uncertain and the outcome of individual litigation matters is not predictable with assurance. As described in Note 19 to the
consolidated financial statements, we are involved in various legal actions and claims incidental to the conduct of our business which are comparable to other
companies in the senior living and healthcare industries. We have established loss provisions for matters in which losses are probable and can be reasonably
estimated. In other instances, we may not be able to make a reasonable estimate of any liability because of uncertainties related to the outcome and/or the
amount or range of losses. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition
and results of operations.
New Accounting Pronouncements
The information required by this Item is provided in Note 2 of the notes to the consolidated financial statements contained in "Item 8. Financial Statements and
Supplementary Data".
Liquidity and Capital Resources
The following is a summary of cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows (dollars
in thousands):
Cash provided by operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended
December 31,
2013
2012
$
$
366,121 $
(264,806)
(112,044)
(10,729)
69,240
58,511 $
290,969
(455,334)
202,769
38,404
30,836
69,240
The increase in cash provided by operating activities was attributable primarily to improved operating results, primarily due to increases in occupancy and
average monthly revenue per unit, including an increase in our ancillary services revenue and controlling our cost growth.
The decrease in cash used in investing activities was primarily attributable to a decrease in cash paid for acquisitions. The decrease was partially offset by an
increase in spending on property, plant, equipment, and leasehold intangibles and by additional investments in unconsolidated ventures. The current year also
includes cash received from the sale of four communities.
The change in cash related to financing activities year over year was primarily attributable to net repayment of debt, including our line of credit, and related
financing costs in connection with refinancing transactions during the current year.
Our principal sources of liquidity have historically been from:
cash balances on hand;
cash flows from operations;
proceeds from our credit facilities;
proceeds from mortgage financing or refinancing of various assets;
funds generated through joint venture arrangements or sale-leaseback transactions; and
·
·
·
·
·
· with somewhat lesser frequency, funds raised in the debt or equity markets and proceeds from the selective disposition of underperforming and/or
non-core assets.
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Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.
Our liquidity requirements have historically arisen from:
· working capital;
·
·
·
·
·
·
·
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
debt service and lease payments;
acquisition consideration and transaction costs;
cash collateral required to be posted in connection with our interest rate swaps and related financial instruments;
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
dividend payments;
purchases of common stock under our share repurchase authorizations; and
other corporate initiatives (including integration and branding).
Over the near-term, we expect that our liquidity requirements will primarily arise from:
· working capital;
·
·
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
debt service and lease payments;
capital expenditures and improvements, including the expansion, renovation, redevelopment and repositioning of our current communities and the
development of new communities;
other corporate initiatives (including information systems and branding); and
acquisition consideration and transaction costs (including transaction and integration related costs associated with the Merger).
·
·
We are highly leveraged and have significant debt and lease obligations. As of December 31, 2013, we have three principal corporate-level debt obligations:
our $250.0 million revolving credit facility, our $316.3 million convertible senior notes due 2018 and separate secured and unsecured letter of credit
facilities providing for up to $92.5 million of letters of credit in the aggregate. The remainder of our indebtedness is generally comprised of non-recourse
property-level mortgage financings.
At December 31, 2013, we had $2.3 billion of debt outstanding, excluding capital lease obligations and our line of credit, at a weighted-average interest rate of
4.5% (calculated using an imputed interest rate of 7.5% for our $316.3 million convertible senior notes due 2018). At December 31, 2013, we had $299.8
million of capital and financing lease obligations, $30.0 million was drawn on our revolving credit facility, and $72.5 million of letters of credit had been
issued under our letter of credit facilities. Approximately $202.0 million of our debt and capital lease obligations are due on or before December 31, 2014.
We also have substantial operating lease obligations and capital expenditure requirements. For the year ending December 31, 2014, we will be required to
make approximately $279.0 million of payments in connection with our existing operating leases.
We had $58.5 million of cash and cash equivalents at December 31, 2013, excluding cash and escrow deposits-restricted and lease security deposits of $136.4
million in the aggregate. As of that date, we also had $250.0 million of availability on our revolving credit facility (of which $30.0 million had been drawn as of
December 31, 2013).
At December 31, 2013, we had $576.0 million of negative working capital, which includes the classification of $168.8 million of mortgage notes payable and
$278.2 million of refundable entrance fees as current liabilities. Although the mortgage notes payable are scheduled to mature on or prior to December 31,
2014, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of
approximately $140.0 million of certain mortgages payable included in such debt until 2015, as the instruments associated with such mortgages payable
provide that we can extend the respective maturity dates for terms of one year from the existing maturity dates. We presently anticipate that we will either
satisfy the conditions precedent for extending these obligations and will exercise the extension options or we will refinance or repay the $140.0 million of
mortgage notes payable at or prior to maturity. Based upon our historical operating experience, we anticipate that only 9.0% to 12.0% of the refundable
entrance fee liabilities will actually come due, and be
61
required to be settled in cash, during the next 12 months. We expect that any entrance fee liabilities due within the next 12 months will be fully offset by the
proceeds generated by subsequent entrance fee sales. Entrance fee sales, net of refunds paid, provided $57.0 million of cash for the year ended December 31,
2013.
For the year ending December 31, 2014, we anticipate that we will make investments of approximately $165.0 million to $180.0 million for net capital
expenditures on our current portfolio (excluding expenditures related to our Program Max initiative discussed below), comprised of approximately $40.0
million to $45.0 million of net recurring capital expenditures and approximately $125.0 million to $135.0 million of expenditures relating to other major
projects (including corporate initiatives). These major projects include unusual or non-recurring capital projects, projects which create new or enhanced
economics, such as major renovations or repositioning projects at our communities, integration related expenditures (including the cost of developing
information systems), and expenditures supporting the expansion of our ancillary services programs. For the year ended December 31, 2013, we spent
approximately $42.9 million for net recurring capital expenditures and approximately $143.7 million for expenditures relating to other major projects and
corporate initiatives.
In addition, we have increased our efforts with respect to the expansion, redevelopment and repositioning of our communities through our Program Max
initiative. We anticipate making net investments of approximately $55.0 million to $65.0 million over the next 12 months in connection with recently
initiated or currently planned projects. For the year ended December 31, 2013, we spent approximately $31.8 million in connection with our Program Max
initiative, net of third party lender or lessor reimbursement.
During 2014, we anticipate that our capital expenditures will be funded from cash on hand, cash flows from operations, lessor reimbursement and amounts
drawn on our credit facility.
As opportunities arise, we plan to continue to take advantage of the fragmented senior housing and care sectors by selectively purchasing existing operating
companies, asset portfolios, home health agencies and communities. We may also seek to acquire the fee interest in communities that we currently lease or
manage. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are
insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell
additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be certain
that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing,
we may be required to delay, reduce the scope of, or eliminate one or more aspects of our business development activities, any of which could reduce the
growth of our business.
We currently estimate that our existing cash flows from operations, together with existing working capital, amounts available under our credit facility and, to a
lesser extent, proceeds from anticipated financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12
months, assuming that the overall economy does not substantially deteriorate.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, the actual level of capital expenditures, our
expansion, development and acquisition activity, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or other
principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies. Volatility in the credit and financial
markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. As a result, this may impact our
ability to grow our business, maintain capital spending levels, expand certain communities, or execute other aspects of our business strategy. In order to
continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There
can be no assurance that any such additional financing will be available or on terms that are acceptable to us.
As of December 31, 2013, we are in compliance with the financial covenants of our outstanding debt and lease agreements.
Company Indebtedness, Long-term Leases and Hedging Agreements
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Indebtedness
As of December 31, 2013, we have three principal corporate-level debt obligations: our $250.0 million revolving credit facility, our $316.3 million
convertible senior notes due 2018 and separate secured and unsecured letter of credit facilities providing for up to $92.5 million of letters of credit in the
aggregate. The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.
As of December 31, 2013 and 2012, our outstanding property-level secured debt and capital leases were $2.3 billion. In accordance with applicable accounting
pronouncements, as of December 31, 2013, the current portion of long-term debt within our consolidated financial statements reflects approximately $168.6
million and $33.4 million of our mortgage notes payable and capital lease obligations, respectively, due within the next 12 months. Although the mortgage
notes payable are scheduled to mature on or prior to December 31, 2014, we have the option, subject to the satisfaction of customary conditions (such as the
absence of a material adverse change), to extend the maturity of approximately $140.0 million of certain mortgages payable included in such debt until 2015,
as the instruments associated with such mortgages payable provide that we can extend the respective maturity dates for terms of one year from the existing
maturity dates. We presently anticipate that we will either satisfy the conditions precedent for extending these obligations and will exercise the extension
options or we will refinance or repay the $140.0 million of mortgage notes payable at or prior to maturity.
During 2013, we incurred $678.8 million of property-level debt primarily related to the financing of acquisitions, the expansion of certain communities, the
refinancing of existing debt and the releveraging of certain assets. Approximately $577.4 million of the new debt was issued at a variable interest rate and the
remaining $101.4 million was issued at a fixed interest rate. Refer to the notes to the consolidated financial statements for a detailed discussion of the new
debt and related terms.
We have secured self-insured retention risk under workers' compensation and general liability and professional liability programs with cash and letters of
credit. Cash deposits securing the programs aggregated $18.6 million and $16.1 million as of December 31, 2013 and 2012, respectively. Letters of credit
securing the programs aggregated $34.2 million and $40.7 million as of December 31, 2013 and 2012, respectively.
As of December 31, 2013, we are in compliance with the financial covenants of our outstanding debt agreements.
Credit Facilities
On March 28, 2013, we entered into a second amended and restated credit agreement with General Electric Capital Corporation, as administrative agent and
lender, and the other lenders from time to time parties thereto. The amended credit agreement extended the maturity date of the facility to March 31, 2018
and decreased the interest rate payable on advances and the fee payable on the unused portion of the facility. The amended credit agreement provided an option
to increase the committed amount initially from $230.0 million to $250.0 million, which we exercised on June 28, 2013, and provides an additional option to
increase the committed amount from $250.0 million to up to $350.0 million, subject to obtaining commitments for the amount of such increase from
acceptable lenders. The amended credit agreement also permits reduction of the committed amount or termination of the facility during the last two years of
the five year term without payment of a premium or penalty. The amended credit agreement was further amended and restated effective September 20, 2013
to, among other things, incorporate a $25.0 million swingline feature to permit same-day borrowing.
Amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin. The applicable margin varies with the percentage of the total
commitment drawn, with a 3.25% margin at 25% or lower utilization, a 3.75% margin at utilization greater than 25% but less than or equal to 50%, and a
4.25% margin at greater than 50% utilization. For purposes of determining the interest rate, in no event will LIBOR be less than 0.5% per annum. We are also
required to pay a quarterly commitment fee of 0.5% per annum on the unused portion of the facility.
The revolving line of credit can be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The facility is secured by a first priority mortgage on certain of our communities. The availability under the line will vary from time to time as it is based on
borrowing base calculations related to the appraised value and performance
63
of the communities securing the facility.
The amended credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed
charge coverage and minimum consolidated tangible net worth. A violation of any of these covenants could result in a default under the amended credit
agreement, which would result in termination of all commitments under the amended credit agreement and all amounts owing under the amended credit
agreement and certain other loan agreements becoming immediately due and payable.
As of December 31, 2013, we had an available secured line of credit with a commitment and available amount of $250.0 million (of which $30.0 million had
been drawn as of that date). We also had secured and unsecured letter of credit facilities of up to $92.5 million in the aggregate as of December 31, 2013.
Letters of credit totaling $72.5 million had been issued under these facilities as of that date.
Convertible Debt
In June 2011, we completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible senior notes (the "Notes"). We received
net proceeds of approximately $308.2 million after the deduction of underwriting commissions and offering expenses. We used a portion of the net proceeds
to pay our cost of the convertible note hedge transactions described below, taking into account our proceeds from the warrant transactions described below,
and used the balance of the net proceeds to repay existing outstanding debt.
The Notes are senior unsecured obligations and rank equally in right of payment to all of our other senior unsecured debt, if any. The Notes will be senior in
right of payment to any of our debt which is subordinated by its terms to the Notes (if any). The Notes are also structurally subordinated to all debt and other
liabilities and commitments (including trade payables) of our subsidiaries. The Notes are also effectively subordinated to our secured debt to the extent of the
assets securing such debt.
The Notes bear interest at 2.75% per annum, payable semi-annually in cash. The Notes are convertible at an initial conversion rate of 34.1006 shares of our
common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $29.325 per share), subject to adjustment.
Holders may convert their Notes at their option prior to the close of business on the second trading day immediately preceding the stated maturity date only
under the following circumstances: (i) during any fiscal quarter commencing after the fiscal quarter ending September 30, 2011, if the last reported sale price
of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of
the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (ii) during the five business day
period after any five consecutive trading day period (the "measurement period"), in which the trading price per $1,000 principal amount of notes for each
trading day of that measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion
rate on each such day; or (iii) upon the occurrence of specified corporate events. On and after March 15, 2018, until the close of business on the second
scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
Unconverted Notes mature at par in June 2018.
Upon conversion, we will satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of
cash and shares of our common stock at our election. It is our current intent and policy to settle the principal amount of the Notes (or, if less, the amount of
the conversion obligation) in cash upon conversion.
In addition, following certain corporate transactions, we will increase the conversion rate for a holder who elects to convert in connection with such
transaction by a number of additional shares of common stock as set forth in the supplemental indenture governing the Notes.
In connection with the offering of the Notes, in June 2011, we entered into convertible note hedge transactions (the "Convertible Note Hedges") with certain
financial institutions (the "Hedge Counterparties"). The Convertible Note Hedges cover, subject to customary anti-dilution adjustments, 10,784,315 shares of
common stock. We also entered into warrant transactions with the Hedge Counterparties whereby the Company sold to the Hedge Counterparties warrants to
acquire, subject to customary anti-dilution adjustments, up to 10,784,315 shares of common stock (the "Sold Warrant Transactions"). The warrants have a
strike price of $40.25 per share, subject to customary anti-dilution adjustments.
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The Convertible Note Hedges are expected to reduce the potential dilution with respect to common stock upon conversion of the Notes in the event that the
price per share of common stock at the time of exercise is greater than the strike price of the Convertible Note Hedges, which corresponds to the initial
conversion price of the Notes and is similarly subject to customary anti-dilution adjustments. If, however, the price per share of common stock exceeds the
strike price of the Sold Warrant Transactions when they expire, there would be additional dilution from the issuance of common stock pursuant to the warrants.
The Convertible Note Hedges and Sold Warrant Transactions are separate transactions (in each case entered into by us and the Hedge Counterparties), are not
part of the terms of the Notes and will not affect the holders' rights under the Notes. Holders of the Notes do not have any rights with respect to the
Convertible Note Hedges or the Sold Warrant Transactions.
These hedging transactions had a net cost of approximately $31.9 million, which was paid from the proceeds of the Notes and recorded as a reduction of
additional paid-in capital.
Long-Term Leases
As of December 31, 2013, we have 329 communities operated under long-term leases. The leases relating to these communities are generally fixed rate leases
with annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index.
For the year ended December 31, 2013, our minimum annual cash lease payments for our capital/financing leases and operating leases were $56.3 million and
$276.5 million, respectively.
As of December 31, 2013, we are in compliance with the financial covenants of our capital and operating leases.
Hedging
In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk. We have entered into certain interest rate protection
and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis. As of December 31, 2013, we have $703.2 million in aggregate
notional amount of interest rate caps, $27.0 million in aggregate notional amount of swaps and $227.0 million of variable rate debt, excluding our secured line
of credit and capital lease obligations, that is not subject to any cap or swap agreements. Refer to the notes to the consolidated financial statements for a
detailed discussion of the interest rate protection and swap agreements.
All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value.
Contractual Commitments
The following table presents a summary of our material indebtedness, including the related interest payments, lease and other contractual commitments, as of
December 31, 2013.
Contractual Obligations:
Long-term debt obligations(1)
Capital lease obligations(1)
Operating lease obligations(2)
Refundable entrance fee obligations(3)
Total contractual obligations
Total
2014
2015
2015
(dollars in millions)
2017
2018
Thereafter
Payments Due by Twelve Months Ending December 31,
$
$
2,861.1 $
452.5
1,930.5
278.2
5,522.3 $
272.2 $
56.2
296.0
35.6
660.0 $
122.5 $
54.9
274.3
35.6
487.3 $
152.7 $
47.7
270.8
35.6
506.8 $
443.4 $
75.6
254.1
35.6
808.7 $
861.7 $
35.5
237.5
35.6
1,170.3 $
1,008.6
182.6
597.8
100.2
1,889.2
Total commercial construction commitments
$
110.4 $
101.8 $
— $
— $
— $
— $
—
(1)
Includes contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31, 2013 rate after giving
effect to in-place interest rate swaps.
65
(2)
(3)
Reflects future cash payments after giving effect to non-contingent lease escalators and assumes payments on variable rate instruments at the December
31, 2013 rate. Additionally, includes a $17.0 million purchase option commitment payable in 2014.
Future refunds of entrance fees are estimated based on historical payment trends. These refund obligations are generally offset by proceeds received
from resale of the vacated apartment units. Historically, proceeds from resales of entrance fee units each year generally offset refunds paid and generate
excess cash to us.
The foregoing amounts exclude outstanding letters of credit of $72.5 million as of December 31, 2013.
Impacts of Inflation
Resident fees from the communities we own or lease and management fees from communities we manage for third parties are our primary sources of revenue.
These revenues are affected by the amount of monthly resident fee rates and community occupancy rates. The rates charged are highly dependent on local
market conditions and the competitive environment in which our communities operate. Substantially all of our retirement center, assisted living, and CCRC
residency agreements allow for adjustments in the monthly fee payable not less frequently than every 12 or 13 months which enables us to seek increases in
monthly fees due to inflation, increased levels of care or other factors. Any pricing increase would be subject to market and competitive conditions and could
result in a decrease in occupancy in the communities. We believe, however, that our ability to periodically adjust the monthly fee serves to reduce the adverse
effect of inflation. In addition, employee compensation expense is a principal element of facility operating costs and is also dependent upon local market
conditions. There can be no assurance that resident fees will increase or that costs will not increase due to inflation or other causes.
At December 31, 2013, approximately $950.5 million of our indebtedness, excluding our line of credit, bears interest at floating rates. We have mitigated our
exposure to floating rates by using interest rate swaps and interest rate caps under our debt/lease arrangements. Inflation, and its impact on floating interest
rates, could affect the amount of interest payments due on our line of credit.
Off-Balance Sheet Arrangements
The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures that are
not considered VIEs as we do not possess a controlling financial interest. We do not believe these off-balance sheet arrangements have or are reasonably likely
to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash
flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-GAAP
financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.
Adjusted EBITDA
Definition of Adjusted EBITDA
We define Adjusted EBITDA as follows:
Net income (loss) before:
·
·
·
·
provision (benefit) for income taxes;
non-operating (income) expense items;
(gain) loss on sale or acquisition of communities (including gain (loss) on facility lease termination);
depreciation and amortization (including non-cash impairment charges);
66
·
·
·
·
·
straight-line lease expense (income);
amortization of deferred gain;
amortization of deferred entrance fees;
non-cash stock-based compensation expense; and
change in future service obligation;
and including:
·
entrance fee receipts and refunds (excluding (i) first generation entrance fee receipts from the sale of units at a recently opened entrance fee CCRC
prior to stabilization and (ii) first generation entrance fee refunds not replaced by second generation entrance fee receipts at the recently opened
community prior to stabilization).
In the first quarter of 2012, we revised the definition of Adjusted EBITDA to clarify the point at which first generation entrance fee receipts and refunds at
recently opened entrance fee CCRCs will be included. We determine the stabilization date of recently opened entrance fee communities to be the first day of
the first full fiscal quarter occurring two years subsequent to the community's opening date for occupancy of all levels of care on the campus.
As a result of this change, beginning in the first quarter of 2012, we include all net entrance fee activity from a recently opened entrance fee CCRC in our non-
GAAP financial measures. For the years ended December 31, 2013 and 2012, first generation net entrance fee receipts which would have been excluded under
the previous definition of Adjusted EBITDA were $0.9 million and $3.6 million, respectively.
Management's Use of Adjusted EBITDA
We use Adjusted EBITDA to assess our overall financial and operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in
identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides
an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals
as well as achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are
needed.
Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term,
such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-
cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure. This metric measures our
financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.
Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a
monthly basis. Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material
limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net
income (loss), include:
·
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and
extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our
communities, which affects the services we provide to
67
our residents and may be indicative of future needs for capital expenditures.
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP
financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in
accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the
reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our consolidated financial statements included herein. We also strongly urge you
to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under
GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to
similarly titled measures used by other companies.
The table below shows the reconciliation of our net loss to Adjusted EBITDA for the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):
Net loss
Provision for income taxes
Other non-operating income
Equity in (earnings) loss of unconsolidated ventures
Loss on extinguishment of debt
Interest expense:
Debt
Capitalized lease obligation
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Interest income
Income from operations
Gain on facility lease termination
Loss (gain) on acquisition
Depreciation and amortization
Asset impairment
Straight-line lease expense
Amortization of deferred gain
Amortization of entrance fees
Non-cash stock-based compensation expense
Change in future service obligation
Entrance fee receipts(2)
First generation entrance fees received(3)
Entrance fee disbursements(4)
Adjusted EBITDA
Years Ended December 31(1),
2012
2013
2011
(3,584) $
1,756
(2,725)
(1,484)
1,265
96,131
25,194
17,054
(980)
(1,339)
131,288
—
—
268,757
12,891
2,597
(4,372)
(29,009)
25,978
(1,917)
92,331
—
(35,325)
463,219 $
(66,467) $
1,519
(593)
3,488
221
98,183
30,155
18,081
364
(4,012)
80,939
(11,584)
636
252,281
27,677
6,668
(4,372)
(25,362)
25,520
2,188
82,705
—
(27,356)
409,940 $
(69,050)
1,780
(56)
(1,432)
18,863
93,229
31,644
13,427
3,878
(3,538)
88,745
—
(1,982)
268,506
16,892
8,608
(4,373)
(23,966)
19,856
—
67,989
(12,617)
(24,993)
402,665
$
$
(1) The calculation of Adjusted EBITDA includes integration, transaction-related and EMR roll-out costs of $14.5 million, $23.5 million and $14.4 million
for the years ended December 31, 2013, 2012 and 2011, respectively.
(2) Includes the receipt of refundable and non-refundable entrance fees.
(3) First generation entrance fees received represents initial entrance fees received from the sale of units at a recently opened entrance fee CCRC prior to
stabilization.
68
(4) Entrance fee refunds disbursed excludes $0.8 million of first generation entrance fee refunds not replaced by second generation entrance fee receipts at a
recently opened entrance fee CCRC prior to stabilization for the year ended December 31, 2011.
Cash From Facility Operations
Definition of Cash From Facility Operations
We define Cash From Facility Operations (CFFO) as follows:
Net cash provided by (used in) operating activities adjusted for:
·
·
·
·
·
·
·
·
·
changes in operating assets and liabilities;
deferred interest and fees added to principal;
refundable entrance fees received;
first generation entrance fee receipts at a recently opened entrance fee CCRC prior to stabilization;
entrance fee refunds disbursed adjusted for first generation entrance fee refunds not replaced by second generation entrance fee receipts at the
recently opened community prior to stabilization;
lease financing debt amortization with fair market value or no purchase options;
gain (loss) on facility lease termination;
recurring capital expenditures, net;
distributions from unconsolidated ventures from cumulative share of net earnings;
· CFFO from unconsolidated ventures; and
·
other.
Recurring capital expenditures include routine expenditures capitalized in accordance with GAAP that are funded from current operations. Amounts excluded
from recurring capital expenditures consist primarily of major projects, renovations, community repositionings, expansions, systems projects or other non-
recurring or unusual capital items (including integration capital expenditures) or community purchases that are funded using lease or financing proceeds,
available cash and/or proceeds from the sale of communities that are held for sale.
In the first quarter of 2012, we revised the definition of CFFO to clarify the point at which first generation entrance fee receipts and refunds at recently opened
entrance fee CCRCs will be included. We determine the stabilization date of recently opened entrance fee communities to be the first day of the first full
fiscal quarter occurring two years subsequent to the community's opening date for occupancy of all levels of care on the campus.
As a result of this change, beginning in the first quarter of 2012, we include all net entrance fee activity from a recently opened entrance fee CCRC in our non-
GAAP financial measures. For the years ended December 31, 2013 and 2012, first generation net entrance fee receipts which would have been excluded under
the previous definition of CFFO were $0.9 million and $3.6 million, respectively.
Management's Use of Cash From Facility Operations
We use CFFO to assess our overall liquidity. This measure provides an assessment of controllable expenses and affords management the ability to make
decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance. It provides an
indicator for management to determine if adjustments to current spending decisions are needed.
This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the
organization. CFFO is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding
indebtedness (including our credit facilities and long-term leases), (ii) to review our ability to pay dividends to stockholders, (iii) to review our
69
ability to make regular recurring capital expenditures to maintain and improve our communities on a period-to-period basis, (iv) for planning purposes,
including preparation of our annual budget, (v) in making compensation determinations for certain of our associates (including our named executive officers)
and (vi) in setting various covenants in our credit agreements. These agreements generally require us to escrow or spend a minimum of between $250 and $450
per unit per year. Historically, we have spent in excess of these per unit amounts; however, there is no assurance that we will have funds available to escrow or
spend these per unit amounts in the future. If we do not escrow or spend the required minimum annual amounts, we would be in default of the applicable debt or
lease agreement which could trigger cross default provisions in our outstanding indebtedness and lease arrangements.
Limitations of Cash From Facility Operations
CFFO has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations. CFFO does
not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary
expenditures not reflected in the measure. Material limitations in making the adjustment to our cash flow from operations to calculate CFFO, and using this
non-GAAP financial measure as compared to GAAP operating cash flows, include:
·
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and
extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our
communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
We believe CFFO is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness,
including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our ability to make regular recurring
capital expenditures to maintain and improve our communities.
CFFO is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on CFFO
as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of CFFO to GAAP net cash provided by (used in)
operating activities, along with our consolidated financial statements included herein. We also strongly urge you to not rely on any single financial measure to
evaluate our business. In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to varying calculations, the CFFO
measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.
The table below shows the reconciliation of net cash provided by operating activities to CFFO for the years ended December 31, 2013, 2012 and 2011 (dollars
in thousands):
Net cash provided by operating activities
Changes in operating assets and liabilities
Refundable entrance fees received (2)(3)
First generation entrance fees received(4)
Entrance fee refunds disbursed(5)
Recurring capital expenditures, net
Lease financing debt amortization with fair market value or no purchase options
Distributions from unconsolidated ventures from cumulative share of net earnings
CFFO from unconsolidated ventures
Cash From Facility Operations
70
Years Ended December 31(1),
2012
2013
2011
366,121 $
(33,198)
48,140
—
(35,325)
(42,901)
(13,927)
(2,691)
7,804
294,023 $
290,969 $
(20,698)
42,600
—
(27,356)
(38,306)
(12,120)
(1,507)
5,376
238,958 $
268,427
20,914
29,611
(12,617)
(24,993)
(33,661)
(10,465)
(582)
3,289
239,923
$
$
(1) The calculation of Cash From Facility Operations includes integration, transaction-related and EMR roll-out costs of $14.5 million, $23.5 million and
$14.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(2) Entrance fee receipts include promissory notes issued to the Company by the resident in lieu of a portion of the entrance fees due. Notes issued (net of
collections) for the years ended December 31, 2013, 2012 and 2011 were $1.4 million, $0.2 million and $3.3 million, respectively.
(3) Total entrance fee receipts for the year ended December 31, 2013, 2012 and 2011 were $92.3 million, $82.7 million and $68.0 million, respectively,
including $44.2 million, $40.1 million and $38.4 million, respectively, of non-refundable entrance fee receipts included in net cash provided by operating
activities.
(4) First generation entrance fees received represents initial entrance fees received from the sale of units at a recently opened entrance fee CCRC prior to
stabilization.
(5) Entrance fee refunds disbursed excludes $0.8 million of first generation entrance fee refunds not replaced by second generation entrance fee receipts at a
recently opened entrance fee CCRC prior to stabilization for the year ended December 31, 2011.
Facility Operating Income
Definition of Facility Operating Income
We define Facility Operating Income as follows:
Net income (loss) before:
·
·
·
·
·
·
·
·
provision (benefit) for income taxes;
non-operating (income) expense items;
(gain) loss on sale or acquisition of communities (including gain (loss) on facility lease termination);
depreciation and amortization (including non-cash impairment charges);
facility lease expense;
general and administrative expense, including non-cash stock-based compensation expense;
change in future service obligation;
amortization of deferred entrance fee revenue; and
· management fees.
Management's Use of Facility Operating Income
We use Facility Operating Income to assess our facility operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in
identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility operations. This
measure provides an assessment of revenue generation and expense management and affords management the ability to make decisions which are expected to
facilitate meeting current financial goals as well as to achieve optimal facility financial performance. It provides an indicator for management to determine if
adjustments to current spending decisions are needed.
Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management in the
short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization
(including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure. This metric
measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses
of the organization. Facility Operating Income is one of the metrics used by our senior management and board of directors to review the financial
performance of the
71
business on a monthly basis. Facility Operating Income is also used by research analysts and investors to evaluate the performance of and value companies in
our industry by investors, lenders and lessors. In addition, Facility Operating Income is a common measure used in the industry to value the acquisition or
sales price of communities and is used as a measure of the returns expected to be generated by a community.
A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages. The debt or lease
coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as determined on
an accrual basis in accordance with GAAP). For purposes of the coverage calculation, the lender or lessor will further require a pro forma adjustment to
facility operating income to include a management fee (generally 4% to 5% of operating revenue) and an annual capital reserve (generally $250 to $450 per
unit). An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position, particularly on
a facility-by-facility basis.
Limitations of Facility Operating Income
Facility Operating Income has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material
limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial measure as compared to
GAAP net income (loss), include:
·
·
interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt
activities generally represent charges (gains), which may significantly affect our financial results; and
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our
communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-
facility basis. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and
trends affecting our business.
Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and
presented in accordance with GAAP. You should not rely on Facility Operating Income as a substitute for any such GAAP financial measure. We strongly urge
you to review the reconciliation of Facility Operating Income to GAAP net income (loss), along with our consolidated financial statements included herein.
We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Facility Operating Income is not a measure
of financial performance under GAAP and is susceptible to varying calculations, the Facility Operating Income measure, as presented in this report, may differ
from and may not be comparable to similarly titled measures used by other companies.
72
The table below shows the reconciliation of net loss to Facility Operating Income for the years ended December 31, 2013, 2012 and 2011 (dollars in
thousands):
Net loss
Provision for income taxes
Other non-operating income
Equity in (earnings) loss of unconsolidated ventures
Loss on extinguishment of debt
Interest expense:
Debt
Capitalized lease obligation
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Interest income
Income from operations
Gain on facility lease termination
Depreciation and amortization
Asset impairment
Loss (gain) on acquisition
Facility lease expense
General and administrative (including non-cash stock-based compensation expense)
Change in future service obligation
Amortization of entrance fees
Management fees
Facility Operating Income
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Years Ended December 31,
2012
2013
2011
(3,584) $
1,756
(2,725)
(1,484)
1,265
96,131
25,194
17,054
(980)
(1,339)
131,288
—
268,757
12,891
—
276,729
184,548
(1,917)
(29,009)
(31,125)
812,162 $
(66,467) $
1,519
(593)
3,488
221
98,183
30,155
18,081
364
(4,012)
80,939
(11,584)
252,281
27,677
636
284,025
178,829
2,188
(25,362)
(30,786)
758,843 $
(69,050)
1,780
(56)
(1,432)
18,863
93,229
31,644
13,427
3,878
(3,538)
88,745
—
268,506
16,892
(1,982)
274,858
148,327
—
(23,966)
(13,595)
757,785
$
$
We are subject to market risks from changes in interest rates charged on our credit facilities, other floating-rate indebtedness and lease payments subject to
floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates
and prices. As of December 31, 2013, we had approximately $1.4 billion of long-term fixed rate debt, $0.9 billion of long-term variable rate debt, excluding
our line of credit, and $299.8 million of capital and financing lease obligations. As of December 31, 2013, our total fixed-rate debt and variable-rate debt
outstanding had a weighted-average interest rate of 4.5% (calculated using an imputed interest rate of 7.5% for our $316.3 million convertible senior notes
due 2018).
We enter into certain interest rate swap agreements with major financial institutions to manage our risk on variable rate debt. Additionally, we have entered
into certain cap agreements to effectively manage our risk above certain interest rates. As of December 31, 2013, $1.4 billion, or 60.0%, of our debt,
excluding our line of credit and capital and financing lease obligations, either has fixed rates or variable rates that are subject to swap agreements. As of
December 31, 2013, $696.6 million, or 30.2%, of our debt, excluding our line of credit and capital and financing lease obligations, is subject to cap
agreements. The remaining $227.0 million, or 9.8%, of our debt is variable rate debt, not subject to any cap or swap agreements. A change in interest rates
would have impacted our annual interest expense related to all outstanding variable rate debt, excluding our line of credit and capital and financing lease
obligations, as follows (after consideration of hedging instruments currently in place): a 100 basis point increase in interest rates would have an impact of $9.4
million, a 500 basis point increase in interest rates would have an impact of $43.1 million and a 1,000 basis point increase in interest rates would have an
impact of $55.0 million.
73
Item 8.
Financial Statements and Supplementary Data.
BROOKDALE SENIOR LIVING INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Equity for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
74
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75
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77
78
79
80
81
82
113
The Board of Directors and Shareholders of Brookdale Senior Living Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Brookdale Senior Living Inc. (the Company) as of December 31, 2013 and 2012, and the
related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31,
2013. Our audits also included the financial statement schedule listed in the accompanying index to the financial statements. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at
December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control
over financial reporting as of December 31, 2013, based on criteria established in Internal Control
Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 3, 2014 expressed an unqualified opinion thereon.
-Integrated Framework issued by the Committee of
Chicago, Illinois
3 March 2014
/s/ Ernst & Young LLP
75
The Board of Directors and Shareholders of Brookdale Senior Living Inc.
Report of Independent Registered Public Accounting Firm
We have audited Brookdale Senior Living Inc.'s (the Company) internal control over financial reporting as of December 31, 2013, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO
criteria). 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 Assessment of 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
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.
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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, equity, and cash flows for
each of the three years in the period ended December 31, 2013, and our report dated March 3, 2014 expressed an unqualified opinion thereon.
Chicago, Illinois
3 March 2014
/s/ Ernst & Young LLP
76
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)
Assets
Current assets
Cash and cash equivalents
Cash and escrow deposits – restricted
Accounts receivable, net
Deferred tax asset
Prepaid expenses and other current assets, net
Total current assets
Property, plant and equipment and leasehold intangibles, net
Cash and escrow deposits – restricted
Investment in unconsolidated ventures
Goodwill
Other intangible assets, net
Other assets, net
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt
Trade accounts payable
Accrued expenses
Refundable entrance fees and deferred revenue
Tenant security deposits
Total current liabilities
Long-term debt, less current portion
Line of credit
Deferred entrance fee revenue
Deferred liabilities
Deferred tax liability
Other liabilities
Total liabilities
$
$
$
Stockholders' Equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2013 and 2012; no shares issued and
outstanding
Common stock, $0.01 par value, 200,000,000 shares authorized at December 31, 2013 and 2012; 130,155,012 and
129,117,946 shares issued and 127,726,611 and 126,689,545 shares outstanding (including 3,372,937 and 3,951,950
unvested restricted shares), respectively
Additional paid-in-capital
Treasury stock, at cost; 2,428,401 shares at December 31, 2013 and 2012
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
$
See accompanying notes to consolidated financial statements.
77
December 31,
2013
2012
58,511 $
38,191
104,262
17,643
76,255
294,862
3,895,475
57,611
44,103
109,553
158,757
177,396
4,737,757 $
201,954 $
65,840
209,479
388,400
5,171
870,844
2,404,624
30,000
86,862
154,870
81,299
88,321
3,716,820
69,240
43,096
100,401
13,377
82,924
309,038
3,879,977
62,767
31,386
109,553
159,942
154,105
4,706,768
509,543
43,184
200,895
370,755
6,521
1,130,898
2,089,826
80,000
79,010
150,788
96,187
83,073
3,709,782
—
—
1,277
2,025,471
(46,800)
(959,011)
1,020,937
4,737,757 $
1,267
1,997,946
(46,800)
(955,427)
996,986
4,706,768
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue
Resident fees
Management fees
Reimbursed costs incurred on behalf of managed communities
Total revenue
Expense
Facility operating expense (excluding depreciation and amortization of $238,153, $229,072 and
$230,414, respectively)
General and administrative expense (including non-cash stock-based compensation expense of
$25,978, $25,520 and $19,856, respectively)
Facility lease expense
Depreciation and amortization
Asset impairment
Loss (gain) on acquisition
Gain on facility lease termination
Costs incurred on behalf of managed communities
Total operating expense
Income from operations
Interest income
Interest expense:
Debt
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in earnings (loss) of unconsolidated ventures
Other non-operating income
Loss before income taxes
Provision for income taxes
Net loss
Basic and diluted net loss per share
Weighted average shares used in computing basic and diluted net loss per share
For the Years Ended
December 31,
2012
2011
2013
$
2,515,033 $
31,125
345,808
2,891,966
2,412,936 $
30,786
325,016
2,768,738
2,290,322
13,595
152,566
2,456,483
1,671,945
1,630,919
1,508,571
184,548
276,729
268,757
12,891
—
—
345,808
2,760,678
131,288
178,829
284,025
252,281
27,677
636
(11,584)
325,016
2,687,799
80,939
148,327
274,858
268,506
16,892
(1,982)
—
152,566
2,367,738
88,745
1,339
4,012
3,538
(121,325)
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584) $
(0.03) $
(128,338)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467) $
(0.54) $
123,671
121,991
(124,873)
(13,427)
(3,878)
(18,863)
1,432
56
(67,270)
(1,780)
(69,050)
(0.57)
121,161
$
$
See accompanying notes to consolidated financial statements.
78
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net loss
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities – restricted
Other
Total other comprehensive income (loss), net of tax
Comprehensive loss
For the Years Ended
December 31,
2012
2011
2013
$
(3,584) $
(66,467) $
(69,050)
—
—
—
$
(3,584) $
1,846
(831)
1,015
(65,452) $
(998)
310
(688)
(69,738)
See accompanying notes to consolidated financial statements.
79
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2013, 2012 and 2011
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In-
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
124,317 $
1,243 $ 1,904,144 $
(29,187) $
(819,910) $
(327) $ 1,055,963
—
—
97
—
—
—
68
2,089
—
(1,217)
—
125,354
—
—
74
1,261
—
—
19,856
—
—
—
—
(69,050)
—
—
19,856
(69,050)
1
1,537
—
—
—
—
10
76,801
(77,007)
45,066
1,258
(10)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,538
76,801
(77,007)
45,066
1,258
—
—
—
—
1,254
—
—
(825)
1,970,820
—
(17,613)
—
(46,800)
—
—
—
(888,960)
(998,000)
—
310
(1,015)
(998)
(17,613)
(515)
1,035,299
—
—
—
13
25,520
—
1,401
(100)
—
—
—
—
—
(66,467)
—
—
—
—
126,689
—
—
1,267
—
305
1,997,946
—
—
(46,800)
—
—
(955,427)
—
—
62
976
—
—
—
—
10
—
25,978
—
1,503
(10)
54
—
—
—
—
—
—
(3,584)
—
—
—
127,727 $
1,277 $ 2,025,471 $
(46,800) $
(959,011) $
See accompanying notes to consolidated financial statements.
80
—
—
—
—
1,846
(831)
—
25,520
(66,467)
1,401
(87)
1,846
(526)
996,986
—
—
25,978
(3,584)
1,503
—
—
—
—
54
— $ 1,020,937
Balances at January 1, 2011
Compensation expense related to
restricted stock grants
Net loss
Common stock issued in
connection with an acquisition
Equity component of convertible
notes, net
Purchase of bond hedge
Issuance of warrants
Issuance of common stock under
Associate Stock Purchase Plan
Restricted stock, net
Unrealized loss on marketable
securities – restricted
Purchase of treasury stock
Other
Balances at December 31, 2011
Compensation expense related to
restricted stock grants
Net loss
Issuance of common stock under
Associate Stock Purchase Plan
Restricted stock, net
Unrealized gain on marketable
securities – restricted
Other
Balances at December 31, 2012
Compensation expense related to
restricted stock grants
Net loss
Issuance of common stock under
Associate Stock Purchase Plan
Restricted stock, net
Other
Balances at December 31, 2013
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss on extinguishment of debt
Depreciation and amortization
Asset impairment
Equity in (earnings) loss of unconsolidated ventures
Distributions from unconsolidated ventures from cumulative share of net earnings
Amortization of deferred gain
Amortization of entrance fees
Proceeds from deferred entrance fee revenue
Deferred income tax (benefit) provision
Change in deferred lease liability
Change in fair value of derivatives and amortization
(Gain) loss on sale of assets
Loss (gain) on acquisition
Gain on facility lease termination
Lessor cash reimbursement for tenant incentive
Change in future service obligation
Non-cash stock-based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets, net
Accounts payable and accrued expenses
Tenant refundable fees and security deposits
Deferred revenue
Net cash provided by operating activities
Cash Flows from Investing Activities
Increase in lease security deposits and lease acquisition deposits, net
Decrease (increase) in cash and escrow deposits — restricted
Purchase of marketable securities — restricted
Sale of marketable securities — restricted
Additions to property, plant and equipment, and leasehold intangibles, net
Acquisition of assets, net of related payables and cash received
Purchase of Horizon Bay Realty, L.L.C., net of cash acquired
Payments on notes receivable, net
Investment in unconsolidated ventures
Distributions received from unconsolidated ventures
Proceeds from sale of assets, net
Other
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from debt
Repayment of debt and capital lease obligations
Proceeds from line of credit
Repayment of line of credit
Proceeds from issuance of convertible notes, net
Issuance of warrants
Purchase of bond hedge
Payment of financing costs, net of related payables
Refundable entrance fees:
Proceeds from refundable entrance fees
Refunds of entrance fees
Cash portion of loss on extinguishment of debt
Purchase of derivatives and payment of swap termination
Purchase of treasury stock
Other
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
For the Years Ended
December 31,
2012
2013
2011
$
(3,584) $
(66,467) $
(69,050)
1,265
285,811
12,891
(1,484)
2,691
(4,372)
(29,009)
44,191
(183)
2,597
(980)
(972)
—
—
—
(1,917)
25,978
—
(5,449)
7,483
33,837
(792)
(1,881)
366,121
(2,051)
10,726
—
—
(257,527)
(34,686)
—
168
(17,172)
1,600
34,136
—
(264,806)
662,934
(724,133)
425,000
(475,000)
—
—
—
(11,576)
221
270,362
27,677
3,488
1,507
(4,372)
(25,362)
40,105
(525)
6,668
364
332
636
(11,584)
—
2,188
25,520
(487)
(3,415)
8,687
4,854
(1,547)
12,119
290,969
(7,999)
(4,810)
(1,557)
35,124
(208,412)
(272,523)
—
131
(5,368)
350
9,243
487
(455,334)
372,291
(191,835)
375,000
(360,000)
—
—
—
(5,563)
48,140
(35,325)
(502)
(2,863)
—
1,281
(112,044)
(10,729)
69,240
58,511 $
42,600
(27,356)
(118)
(1,908)
—
(342)
202,769
38,404
30,836
69,240 $
$
18,863
281,933
16,892
(1,432)
1,282
(4,373)
(23,966)
38,378
383
8,608
3,878
(1,180)
(1,982)
—
1,251
—
19,856
—
(5,367)
(22,934)
13,721
(2,186)
(4,148)
268,427
(3,088)
56,176
(32,724)
1,431
(160,131)
(88,682)
5,516
1,484
(13,990)
206
30,817
(914)
(203,899)
482,669
(898,565)
225,000
(160,000)
308,212
45,066
(77,007)
(8,712)
29,611
(25,754)
(17,040)
(99)
(17,613)
(1,287)
(115,519)
(50,991)
81,827
30,836
See accompanying notes to consolidated financial statements.
81
1. Description of Business and Organization
BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is a leading owner and operator of senior living communities throughout the United States. The
Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest quality service, care
and living accommodations for residents. The Company owns, leases and operates retirement centers, assisted living and dementia-care communities and
continuing care retirement centers ("CCRCs"). Through Brookdale Ancillary Services, the Company also offers a range of outpatient therapy, home health and
hospice services, primarily to residents of its communities.
The Company was formed as a Delaware corporation on June 28, 2005. Under its Certificate of Incorporation, the Company was initially authorized to issue up
to 5,000,000 shares of common stock and 5,000,000 shares of preferred stock. On September 30, 2005, the Company's Certificate of Incorporation was
amended and restated to authorize up to 200,000,000 shares of common stock and 50,000,000 shares of preferred stock.
2. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles
("GAAP"). The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence
over governance and operation, are accounted for by the equity method.
The Company continually evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 810 - Consolidation of Variable Interest Entities ("ASC 810"). ASC 810 broadly
defines a VIE as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an
entity that most significantly impact the entity's economic performance or (ii) the equity investment at risk is insufficient to finance that entity's activities
without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following
characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to
absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company performs this analysis on an ongoing basis and
consolidates any VIEs where it is determined to be the primary beneficiary. At December 31, 2013, the Company did not have any unconsolidated VIEs.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, goodwill and
asset impairments, future service obligations, self-insurance reserves, performance-based compensation, the allowance for doubtful accounts, depreciation and
amortization, income taxes and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that
the Company may undertake in the future, actual results may differ from the original estimates.
82
Revenue Recognition
Resident Fees
Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed
monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.
Entrance Fees
Certain of the Company's communities have residency agreements which require the resident to pay an upfront fee prior to occupying the community. In
addition, in connection with the Company's MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return for a
reduced monthly service fee. The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the
resident based on an actuarial valuation. The refundable portion of a resident's entrance fee is generally refundable within a certain number of months or days
following contract termination or upon the sale of the unit. The refundable portion of the fee is not amortized and included in refundable entrance fees. All
refundable amounts due to residents at any time in the future are classified as current liabilities.
Community Fees
Substantially all community fees received are non-refundable and are recorded initially as deferred revenue. The deferred amounts, including both the deferred
revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the implied
contractual terms of the resident lease.
Management Fees
Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage of
gross revenues (as defined).
Reimbursed Costs Incurred on Behalf of Managed Communities
The Company manages certain communities under contracts which provide for payment to the Company of a monthly management fee plus reimbursement of
certain operating expenses. Where the Company is the primary obligor with respect to any such operating expenses, the Company recognizes revenue when the
goods have been delivered or the service has been rendered and the Company is due reimbursement. Such revenue is included in "reimbursed costs incurred on
behalf of managed communities" on the consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed
communities" on the consolidated statements of operations.
Purchase Accounting
In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities
assumed, the Company makes estimates of fair value using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities
and/or independent appraisals. The Company allocates the purchase price of communities based on their fair values in accordance with the provisions of ASC
805 - Business Combinations ("ASC 805"). The determination of fair value involves the use of significant judgment and estimation. The Company determines
fair values as follows:
Current assets and current liabilities assumed are valued at carryover basis which approximates fair value.
Property, plant and equipment are valued utilizing discounted cash flow projections of future revenue and costs, and capitalization and discount rates using
current market conditions.
83
The Company allocates a portion of the purchase price to the value of resident leases acquired based on the difference between the communities valued with
existing in-place leases adjusted to market rental rates and the communities valued with current leases in place based on current contractual terms. Factors
management considers in its analysis include an estimate of carrying costs during the expected lease-up periods considering current market conditions and
costs to execute similar resident leases. In estimating carrying costs, management includes estimates of lost rentals during the lease-up period and estimated
costs to execute similar leases. The value of in-place leases is amortized to expense over the remaining initial term of the respective leases.
Leasehold operating intangibles are valued utilizing discounted cash flow projections that assume certain future revenues and costs over the remaining lease
term. The value assigned to leasehold operating intangibles is amortized on a straight-line basis over the lease term.
Community purchase options are valued at the estimated value of the underlying community less the cost of the option payment discounted at current market
rates. Management contracts and other acquired contracts are valued at a multiple of management fees and operating income or are valued utilizing discounted
cash flow projections that assume certain future revenues and costs over the remaining contract. The assets are then amortized over the estimated term of the
agreement.
Long-term debt assumed is recorded at fair market value based on the current market rates and collateral securing the indebtedness. Any debt premium or
discount recorded is amortized over the related debt maturity period.
Capital lease obligations are valued based on the present value of the minimum lease payments applying a discount rate equal to the Company's estimated
incremental borrowing rate at the date of acquisition.
Deferred entrance fee revenue is valued at the estimated cost of providing services to residents over the terms of the current contracts to provide such
services. Refundable entrance fees are valued at cost pursuant to the resident lease plus the resident's share of any appreciation of the community unit at the
date of acquisition, if applicable.
A deferred tax liability is recognized at statutory rates for the difference between the book and tax bases of the acquired assets and liabilities.
The excess of the fair value of liabilities assumed and cash paid over the fair value of assets acquired is allocated to goodwill.
Contingent consideration is valued using a probability-weighted discounted cash flow model.
Deferred Costs
Deferred financing and lease costs are recorded in other assets and amortized on a straight-line basis, which approximates the effective yield method, over the
term of the related debt or lease.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences
between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The Company has elected the "with-and-without approach" regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce
taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax
benefit is realized after considering all other tax benefits presently available.
84
Fair Value of Financial Instruments
ASC 820 - Fair Value Measurement ("ASC 820") establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Cash and cash equivalents and cash and escrow deposits – restricted are reflected in the accompanying consolidated balance sheets at amounts considered by
management to reasonably approximate fair value due to the short maturity.
The Company's derivative assets and liabilities include interest rate swaps and caps that effectively convert a portion of the Company's variable rate debt to
fixed rate debt. The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable
market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy. The Company considers its own credit risk as
well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change
in fair value of derivatives and amortization in the current period statement of operations.
The Company estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company's current borrowing rate for debt
with similar maturities and collateral securing the indebtedness. The Company had outstanding debt with a carrying value of approximately $2.6 billion and
$2.7 billion as of December 31, 2013 and 2012, respectively. Fair value approximated carrying value in both years. The Company's fair value of debt
disclosure is classified within Level 2 of the valuation hierarchy.
Cash and Cash Equivalents
The Company defines cash and cash equivalents as cash and investments with maturities of 90 days or less when purchased.
Cash and Escrow Deposits – Restricted
Cash and escrow deposits – restricted consist principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and consist
of the following (dollars in thousands):
85
Current:
Real estate taxes
Tenant security deposits
Insurance reserves
Entrance fees
Replacement reserve and other
Subtotal
Long term:
Insurance reserves
Debt service and other deposits
Subtotal
Total
Accounts Receivable
December 31,
2013
2012
$
$
9,252 $
1,541
11,226
6,264
9,908
38,191
11,227
46,384
57,611
95,802 $
11,502
2,015
12,892
4,159
12,528
43,096
5,188
57,579
62,767
105,863
Accounts receivable are reported net of an allowance for doubtful accounts, to represent the Company's estimate of the amount that ultimately will be realized
in cash. The allowance for doubtful accounts was $17.7 million and $15.3 million as of December 31, 2013 and 2012, respectively. The adequacy of the
Company's allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable
portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any, under reimbursement programs.
Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements
are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid
or withheld). Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.
Property, Plant and Equipment and Leasehold Intangibles
Property, plant and equipment and leasehold intangibles, which include amounts recorded under capital leases, are recorded at cost. Depreciation and
amortization is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
Asset Category
Buildings and improvements
Furniture and equipment
Resident lease intangibles
Leasehold improvements
Leasehold operating intangibles
Assets under capital and financing leases
Estimated
Useful Life
(in years)
40
3 – 7
1 – 4
Shorter of the lease term or asset
useful life
Shorter of the lease term or asset
useful life
Shorter of the lease term or asset
useful life
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements, which improve and/or extend the
useful life of the asset, are capitalized and depreciated over their estimated useful life, or if the renovations or improvements are made with respect to
communities subject to an operating lease, over the shorter of the estimated useful life of the renovations or improvements, or the term of the
86
operating lease. Facility operating expense excludes depreciation and amortization directly attributable to the operation of the facility.
Long-lived assets (groups) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets held for use are assessed by a comparison of the carrying amount of the asset to the estimated future
undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of the
asset then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the asset to its carrying value,
with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts
are based on a number of assumptions such as revenue and expense growth rates, estimated holding periods and estimated capitalization rates.
Goodwill and Intangible Assets
The Company follows ASC 350 - Goodwill and Other Intangible Assets, and tests goodwill for impairment annually or whenever indicators of impairment
arise. The Company first assesses qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The
Company is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than
not that its fair value is less than its carrying amount.
Acquired intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset.
Intangible assets with definite lives are amortized over their estimated useful lives and all intangible assets are reviewed for impairment if indicators of
impairment arise. The evaluation of impairment for definite-lived intangibles is based upon a comparison of the carrying amount of the asset to the estimated
future undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of
the asset, then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its
carrying value, with any shortfall from fair value recognized as an expense in the current period.
Indefinite-lived intangible assets are not amortized but are tested for impairment annually during the fourth quarter or more frequently as required. The
impairment test consists of a comparison of the estimated fair value of the indefinite-lived intangible asset with its carrying value. If the carrying amount
exceeds its fair value, an impairment loss is recognized for that difference.
During 2013, 2012 and 2011, the Company performed its annual impairment review of goodwill and intangible assets and determined that no impairment
charge was necessary.
Amortization of the Company's definite lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets, which
are as follows:
Asset Category
Community purchase options
Other
Stock-Based Compensation
Estimated
Useful Life
(in years)
40
3 – 5
The Company follows ASC 718 - Stock Compensation ("ASC 718") in accounting for its share-based payments. This guidance requires measurement of the
cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is
recognized as compensation expense ratably over the employee's requisite service period. Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized when incurred.
87
Certain of the Company's employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost
only when achievement of performance conditions is considered probable. Consequently, the Company's determination of the amount of stock compensation
expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, the Company must
make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates
are updated as information is available.
Convertible Debt Instruments
Convertible debt instruments are accounted for under FASB ASC Topic 470-20, Debt – Debt with Conversion and Other Options. This guidance requires the
issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion, including partial cash settlement, to separately
account for the liability (debt) and equity (conversion option) components of the instruments in a manner that reflects the issuer's estimated non-convertible
debt borrowing rate.
Derivative Financial Instruments
In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company has entered into certain
interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis. All derivative instruments are recognized as
either assets or liabilities in the consolidated balance sheets at fair value. The change in mark-to-market of the value of the derivative is recorded as an
adjustment to income.
Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with major
financial institutions based upon their credit rating and other factors. Under certain circumstances, the Company may be required to replace a counterparty in
the event that the counterparty does not maintain a specified credit rating.
Obligation to Provide Future Services
Annually, the Company calculates the present value of the net cost of future services and the use of communities to be provided to current residents of certain
of its CCRCs and compares that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the net cost
of future services and the use of communities exceeds the related anticipated revenues including non-refundable deferred revenue from entrance fees, a
liability is recorded (obligation to provide future services and use of communities) with a corresponding charge to income.
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general
liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company's current
policies provide for deductibles for each and every claim. As a result, the Company is, in effect, self-insured for claims that are less than the deductible
amounts. In addition, the Company maintains a large-deductible workers compensation program and a self-insured employee medical program. The Company
reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator
estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs
are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates
are updated as information is available.
Investment in Unconsolidated Ventures
In accordance with ASC 810, the general partner or managing member of a venture consolidates the venture unless the limited partners or other members have
either (1) the substantive ability to dissolve the venture or otherwise
88
remove the general partner or managing member without cause or (2) substantive participating rights in significant decisions of the venture, including
authorizing operating and capital decisions of the venture, including budgets, in the ordinary course of business. The Company has reviewed all ventures where
it is the general partner or managing member and has determined that in all cases the limited partners or other members have substantive participating rights
such as those set forth above and, therefore, no ventures are consolidated.
The Company's reported share of earnings is adjusted for the impact, if any, of basis differences between its carrying value of the equity investment and its
share of the venture's underlying assets. The Company generally does not have future requirements to contribute additional capital over and above the original
capital commitments, and therefore, the Company discontinues applying the equity method of accounting when its investment is reduced to zero barring an
expectation of an imminent return to profitability. If the venture subsequently reports net income, the equity method of accounting is resumed only after the
Company's share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
When the majority equity partner in one of the Company's ventures sells its equity interest to a third party, the venture frequently refinances its senior debt and
distributes the net proceeds to the equity partners. All distributions received by the Company are first recorded as a reduction of the Company's investment.
Next, the Company records a liability for any contractual or implied future financial support to the venture including obligations in its role as a general partner.
Any remaining distributions are recorded as the Company's share of earnings and return on investment in unconsolidated ventures in the consolidated
statements of operations.
The Company evaluates realization of its investment in ventures accounted for using the equity method if circumstances indicate that the Company's investment
is other than temporarily impaired.
Community Leases
The Company, as lessee, makes a determination with respect to each of the community leases whether each should be accounted for as an operating lease or
capital lease. The classification criteria is based on estimates regarding the fair value of the leased community, minimum lease payments, effective cost of
funds, the economic life of the community and certain other terms in the lease agreements. In a business combination, the Company assumes the lease
classification previously determined by the prior lessee absent a modification, as determined by ASC 840 – Leases ("ASC 840"), in the assumed lease
agreement. Payments made under operating leases are accounted for in the Company's consolidated statements of operations as lease expense for actual rent
paid plus or minus a straight-line adjustment for estimated minimum lease escalators and amortization of deferred gains in situations where sale-leaseback
transactions have occurred. For communities under capital lease and lease financing obligation arrangements, a liability is established on the Company's
consolidated balance sheets representing the present value of the future minimum lease payments and a corresponding long-term asset is recorded in property,
plant and equipment and leasehold intangibles in the consolidated balance sheets. The asset is depreciated over the remaining lease term unless there is a
bargain purchase option in which case the asset is depreciated over the useful life. Leasehold improvements purchased during the term of the lease are
amortized over the shorter of their economic life or the lease term.
All of the Company's leases contain fixed or formula-based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease
payments are accounted for on a straight-line basis over the life of the lease. In addition, all rent-free or rent holiday periods are recognized in lease expense
on a straight-line basis over the lease term, including the rent holiday period.
Sale-leaseback accounting is applied to transactions in which an owned community is sold and leased back from the buyer. Under sale-leaseback accounting,
the Company removes the community and related liabilities from the consolidated balance sheets. Gain on the sale is deferred and recognized as a reduction of
facility lease expense for operating leases and a reduction of interest expense for capital leases.
For leases in which the Company is involved with the construction of the building, the Company accounts for the lease during the construction period under the
provisions of ASC 840. If the Company concludes that it has substantively all of the risks of ownership during construction of a leased property and therefore
is deemed the owner of the project for accounting purposes, it records an asset and related financing obligation for the amount of
89
total project costs related to construction in progress. Once construction is complete, the Company considers the requirements under ASC 840-40 – Leases
– Sale-Leaseback Transactions. If the arrangement qualifies for sale-leaseback accounting, the Company removes the assets and related liabilities from the
consolidated balance sheets. If the arrangement does not qualify for sale-leaseback accounting, the Company continues to amortize the financing obligation
and depreciate the assets over the lease term.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.
New Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 changes the presentation of an unrecognized tax
benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These changes require an entity to present an
unrecognized tax benefit as a liability in the financial statements if (i) a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not
available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a
tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset to
settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, an unrecognized tax benefit is required to be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The
guidance in ASU 2013-11 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2013. The
Company does not believe that the adoption of ASU 2013-11 will have a material impact on the consolidated financial statements or disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's consolidated
financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS
includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For purposes of calculating basic and diluted earnings per
share, vested restricted stock
awards are considered outstanding. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other
instruments that are convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock
equivalents include unvested restricted stock, restricted stock units and convertible debt instruments and warrants (Note 8).
During fiscal 2013, 2012 and 2011, the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock, restricted stock unit
awards and convertible debt instruments and warrants were antidilutive for the year and were not included in the computation of diluted weighted average
shares. The weighted average restricted stock and restricted stock unit awards excluded from the calculations of diluted net loss per share were 3.9 million,
4.5 million and 3.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The calculation of diluted weighted average shares excludes the impact of conversion of the Company's $316.3 million of convertible senior notes. As of
December 31, 2013, 2012 and 2011, the maximum number of shares issuable upon conversion of the notes is approximately 13.8 million (after giving effect
to additional make-whole shares issuable upon conversion in connection with the occurrence of certain events); however it is the Company's current intent and
policy to settle the principal amount of the notes in cash upon conversion. The maximum number of shares issuable upon conversion of the notes in excess of
the amount of principal that would be settled in cash is approximately 3.0 million.
90
In addition, the calculation of diluted weighted average shares excludes the impact of the exercise of warrants to acquire the Company's common stock. As of
December 31, 2013, 2012 and 2011, the number of shares issuable upon exercise of the warrants was approximately 10.8 million.
4. Acquisitions and Dispositions
2013 Acquisitions and Dispositions
Effective May 24, 2013, the Company acquired the underlying real estate interest in an entrance fee CCRC that the Company previously managed for an
aggregate purchase price of $15.4 million, which included the assumption of the existing mortgage debt and certain liabilities in addition to cash paid. The
Company will continue to manage the CCRC and report the results of operations of such community in the Management Services segment until necessary
license approvals are obtained.
Effective May 31, 2013, the Company purchased the underlying real estate in an assisted living community for a price of $2.4 million. The results of
operations of the community are reported in the Assisted Living segment.
Effective October 1, 2013, the Company acquired seven communities for an aggregate purchase price of $80.9 million. Prior to the acquisition, the Company
managed six of the communities since the acquisition of Horizon Bay Realty, L.L.C. in September 2011. The acquisition was financed with $60.8 million of
first mortgage debt through the assumption of $52.7 million of existing debt and the issuance of $8.1 million of first mortgage financing secured by one of the
communities. The balance of the purchase price was paid from cash on hand. The results of operations of the communities acquired are reported in the
Assisted Living segment.
During the year ended December 31, 2013, the Company purchased two home health agencies and one hospice agency for an aggregate purchase price of
approximately $2.6 million. The purchase price of the acquisitions has been ascribed to an indefinite useful life intangible asset and recorded on the
consolidated balance sheet under other intangible assets, net.
During the year ended December 31, 2013, the Company sold four communities for an aggregate selling price of $35.2 million. The results of operations of
the communities were previously reported in the Assisted Living and CCRCs - Rental segments.
2012 Acquisitions and Dispositions
Effective February 2, 2012, the Company acquired the underlying real estate associated with nine communities that were previously leased for an aggregate
purchase price of $121.3 million. The results of operations of these communities, prior and subsequent to the acquisition, are reported in the Retirement
Centers segment. The Company financed the transaction with $77.9 million of first mortgage financing secured by seven of the communities and $15.0 million
of seller-financing secured by two of the communities (Note 8). The purchase price of the acquisitions has primarily been ascribed to the basis of the
buildings acquired and recorded on the consolidated balance sheet under property, plant and equipment and leasehold intangibles, net.
During the month ended December 31, 2012, the Company acquired the underlying real estate interest in 12 communities that the Company previously leased
for an aggregate purchase price of $162.1 million. The results of operations of the previously leased communities are included in the consolidated financial
statements from the effective dates of the respective lease agreements and are reported in the Assisted Living and Retirement Centers segments. The purchase
price of the acquisitions has primarily been ascribed to the basis of the buildings acquired and recorded on the consolidated balance sheet under property, plant
and equipment and leasehold intangibles, net.
During the year ended December 31, 2012, the Company recognized an $11.6 million net gain on facility lease termination from the reversal of deferred lease
liabilities associated with the termination of operating lease contracts in connection with the acquisition of the underlying real estate of the previously leased
communities.
During the year ended December 31, 2012, the Company purchased four home health agencies and an existing
91
skilled nursing facility as part of its growth strategy for an aggregate purchase price of approximately $7.0 million. The purchase price of the acquisitions has
primarily been ascribed to an indefinite useful life intangible asset and recorded on the consolidated balance sheet under other intangible assets, net.
During the year ended December 31, 2012, the Company sold one community for an aggregate selling price of $8.9 million. The results of operations of the
community were previously reported in the Assisted Living segment.
5. Investment in Unconsolidated Ventures
The Company had investments in unconsolidated joint ventures of 20% and 10% in ventures owning 15 and 20 communities, respectively, at December 31,
2013.
Combined summarized financial information of the unconsolidated joint ventures accounted for using the equity method as of December 31, and for the years
then ended are as follows (dollars in thousands):
Statement of Operations Data
Total revenue
Expense
Facility operating expense
Depreciation and amortization
Interest expense
Other expense
Total expense
Other income
Net loss
Balance Sheet Data
Cash and cash equivalents
Property, plant and equipment, net
Other
Total assets
Accounts payable and accrued expenses
Long-term debt
Members' equity
Total liabilities and members' equity
2013
2012
2011
$
251,002 $
233,634 $
134,852
150,396
64,244
44,416
12,336
271,392
5,881
(14,509) $
140,950
49,142
50,825
28,112
269,029
123
(35,272) $
83,499
23,923
27,072
6,885
141,379
108
(6,419)
$
2013
23,050 $
1,094,353
143,000
1,260,403 $
75,371 $
802,627
382,405
1,260,403 $
2012
16,578
1,073,610
148,960
1,239,148
66,841
892,463
279,844
1,239,148
$
$
$
$
6. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2013 and 2012, net property, plant and equipment and leasehold intangibles, which include assets under capital leases, consisted of the
following (dollars in thousands):
92
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Resident and leasehold operating intangibles
Construction in progress
Assets under capital and financing leases
Accumulated depreciation and amortization
Property, plant and equipment and leasehold intangibles, net
2013
302,444 $
3,508,693
59,948
623,352
435,012
88,309
699,973
5,717,731
(1,822,256)
3,895,475 $
2012
296,314
3,391,667
60,186
541,585
441,603
75,419
674,492
5,481,266
(1,601,289)
3,879,977
$
$
Long-lived assets with definite useful lives are depreciated or amortized on a straight
shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise.
-line basis over their estimated useful lives (or, in certain cases, the
During the years ended December 31, 2013, 2012 and 2011, the Company evaluated property, plant and equipment and leasehold intangibles for
impairment. The Company compared the estimated fair value of the assets to their carrying value for properties with impairment indicators and recorded an
impairment charge for the excess of carrying value over fair value. For the years ended December 31, 2013, 2012 and 2011, $12.9 million primarily within
the CCRCS - Rental and Assisted Living segments, $27.7 million within the Retirement Centers and Assisted Living segments and $16.9 million within the
Retirement Centers and Assisted Living segments, respectively, of non-cash charges were recorded in the Company's operating results. These impairment
charges are primarily due to the amount by which the carrying values of the assets exceeded their estimated fair value.
For the years ended December 31, 2013, 2012 and 2011, the Company recognized depreciation and amortization expense on its property, plant and equipment
and leasehold intangibles of $264.1 million, $248.5 million and $247.1 million, respectively.
Future amortization expense for resident and leasehold operating intangibles is estimated to be as follows (dollars in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
$
Future
Amortization
23,619
21,927
20,452
13,586
6,555
8,136
94,275
$
7. Goodwill and Other Intangible Assets, Net
The following is a summary of changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 presented on an operating
segment basis (dollars in thousands):
93
Retirement Centers
Assisted Living
Total
Gross
Carrying
Amount
December 31, 2013
Accumulated
Impairment and
Other Charges
Net
Gross
Carrying
Amount
December 31, 2012
Accumulated
Impairment and
Other Charges
$
$
7,642 $
102,680
110,322 $
(521) $
(248)
(769) $
7,121 $
102,432
109,553 $
7,642 $
102,680
110,322 $
(521) $
(248)
(769) $
Net
7,121
102,432
109,553
The following is a summary of other intangible assets at December 31, 2013 and 2012 (dollars in thousands):
Community purchase options
Health care licenses
Other
Total
December 31, 2013
December 31, 2012
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
$
$
147,610 $
33,853
3,331
184,794 $
(24,961) $
—
(1,076)
(26,037) $
122,649 $
33,853
2,255
158,757 $
147,610 $
31,082
2,585
181,277 $
(21,263) $
—
(72)
(21,335) $
Net
126,347
31,082
2,513
159,942
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2013, 2012 and 2011 was $4.7 million, $3.8 million and
$21.3 million, respectively.
Future amortization expense for intangible assets with definite lives is estimated to be as follows (dollars in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
8. Debt
Long-term Debt, Capital Leases and Financing Obligations
Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):
94
$
Future
Amortization
4,802
4,730
3,799
3,711
3,702
104,160
124,904
$
Mortgage notes payable due 2014 through 2023; weighted average interest rate of 4.12% in 2013, net of debt premium
of $1.3 million in 2013 and net of debt discount of $0.3 million in 2012 (weighted average interest rate of 4.62% in
2012)
$150,000 Series A notes payable, secured by five communities and by a $3.0 million cash collateral deposit, bearing
interest at LIBOR plus 0.88%, payable in monthly installments of principal and interest through maturity in August
2013
Discount mortgage note payable due June 2013, net of debt discount of $1.0 million in 2012 (weighted average interest
rate of 2.56% in 2012)
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae (weighted average interest rate of 1.65% in 2012), due
2032, payable in monthly installments of principal and interest through maturity, secured by the underlying assets of
the portfolio
Capital and financing lease obligations payable through 2026; weighted average interest rate of 8.14% in 2013 (weighted
average interest rate of 8.16% in 2012)
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount of $54.8 million and
$65.0 million in 2013 and 2012, respectively, interest at 2.75% per annum, due June 2018
Construction financing due 2017 through 2027; weighted average interest rate of 6.22% in 2013 (weighted average
interest rate of 8.0% in 2012)
Notes payable issued to finance insurance premiums, weighted average interest rate of 2.65% in 2013 (weighted average
December 31,
2013
2012
$
2,037,649 $
1,701,515
—
144,384
—
80,533
—
99,847
299,824
319,745
261,443
251,312
4,476
1,280
interest rate of 2.81% in 2012), due 2014
Total debt
Less current portion
Total long-term debt
3,186
2,606,578
201,954
2,404,624 $
753
2,599,369
509,543
2,089,826
$
As of December 31, 2013, the current portion of long-term debt within the Company's consolidated financial statements reflects approximately $140.0
million of mortgage notes payable due within the next 12 months. Although these debt obligations are scheduled to mature on or prior to December 31, 2014,
the Company has the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity until
2015, as the instruments associated with such mortgages payable provide that the Company can extend the respective maturity dates for terms of one year from
the existing maturity dates.
The annual aggregate scheduled maturities of long-term debt obligations outstanding as of December 31, 2013 are as follows (dollars in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total obligations
Less amount representing debt discount
Less amount representing interest (8.14%)
Total
Long-term
Debt
Capital and
Financing
Lease
Obligations Total Debt
$
179,115 $
37,687
70,725
372,162
783,047
917,546
2,360,282
(53,528)
—
$
2,306,754 $
56,157 $
54,853
47,710
75,620
35,545
182,572
452,457
—
(152,633)
299,824 $
235,272
92,540
118,435
447,782
818,592
1,100,118
2,812,739
(53,528)
(152,633)
2,606,578
95
Credit Facilities
On March 28, 2013, the Company entered into a second amended and restated credit agreement with General Electric Capital Corporation, as administrative
agent and lender, and the other lenders from time to time parties thereto. The amended credit agreement extended the maturity date of the facility to March
31, 2018 and decreased the interest rate payable on advances and the fee payable on the unused portion of the facility. The amended credit agreement provided
an option to increase the committed amount initially from $230.0 million to $250.0 million, which the Company exercised on June 28, 2013, and provides an
additional option to increase the committed amount from $250.0 million to up to $350.0 million, subject to obtaining commitments for the amount of such
increase from acceptable lenders. The amended credit agreement also permits reduction of the committed amount or termination of the facility during the last
two years of the five year term without payment of a premium or penalty. The amended credit agreement was further amended and restated effective
September 20, 2013 to, among other things, incorporate a $25.0 million swingline feature to permit same-day borrowing.
Amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin. The applicable margin varies with the percentage of the total
commitment drawn, with a 3.25% margin at 25% or lower utilization, a 3.75% margin at utilization greater than 25% but less than or equal to 50%, and a
4.25% margin at greater than 50% utilization. For purposes of determining the interest rate, in no event will LIBOR be less than 0.5% per annum. The
Company is also required to pay a quarterly commitment fee of 0.5% per annum on the unused portion of the facility.
The revolving line of credit can be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The facility is secured by a first priority mortgage on certain of the Company's communities. The availability under the line will vary from time to time as it is
based on borrowing base calculations related to the appraised value and performance of the communities securing the facility.
The credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge
coverage and minimum consolidated tangible net worth. A violation of any of these covenants could result in a default under the credit agreement, which would
result in termination of all commitments under the credit agreement and all amounts owing under the amended credit agreement and certain other loan
agreements becoming immediately due and payable.
As of December 31, 2013, the Company had an available secured line of credit with a commitment and available amount of $250.0 million (of which $30.0
million had been drawn as of that date). The Company also had secured and unsecured letter of credit facilities of up to $92.5 million in the aggregate as of
December 31, 2013. Letters of credit totaling $72.5 million had been issued under these facilities as of that date.
Convertible Debt Offering
In June 2011, the Company completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible senior notes (the "Notes"). The
Company received net proceeds of approximately $308.2 million after the deduction of underwriting commissions and offering expenses. The Company used
a portion of the net proceeds to pay the Company's cost of the convertible note hedge transactions described below, taking into account the proceeds to the
Company of the warrant transactions described below, and used the balance of the net proceeds to repay existing outstanding debt.
The Notes are senior unsecured obligations and rank equally in right of payment to all of the Company's other senior unsecured debt, if any. The Notes will be
senior in right of payment to any of the Company's debt which is subordinated by its terms to the Notes (if any). The Notes are also structurally subordinated to
all debt and other liabilities and commitments (including trade payables) of the Company's subsidiaries. The Notes are also effectively subordinated to the
Company's secured debt to the extent of the assets securing the debt.
The Notes bear interest at 2.75% per annum, payable semi-annually in cash. The Notes are convertible at an initial
96
conversion rate of 34.1006 shares of Company common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of
approximately $29.325 per share), subject to adjustment. Holders may convert their Notes at their option prior to the close of business on the second trading
day immediately preceding the stated maturity date only under the following circumstances: (i) during any fiscal quarter commencing after the fiscal quarter
ending September 30, 2011, if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a
period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable
conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the "measurement
period"), in which the trading price per $1,000 principal amount of notes for each trading day of that measurement period was less than 98% of the product of
the last reported sale price of the Company's common stock and the applicable conversion rate on each such day; or (iii) upon the occurrence of specified
corporate events. On and after March 15, 2018, until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their Notes at any time, regardless of the foregoing circumstances. Unconverted Notes mature at par in June 2018.
Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company's common stock
or a combination of cash and shares of the Company's common stock at the Company's election. It is the Company's current intent and policy to settle the
principal amount of the Notes (or, if less, the amount of the conversion obligation) in cash upon conversion.
In addition, following certain corporate transactions, the Company will increase the conversion rate for a holder who elects to convert in connection with such
transaction by a number of additional shares of common stock as set forth in the supplemental indenture governing the Notes.
The Notes were issued in an offering registered under the Securities Act of 1933, as amended (Securities Act).
In accordance with FASB guidance on the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial
settlement), the liability and equity components are separated in a manner that will reflect the entity's non-convertible debt borrowing rate when interest
expense is recognized in subsequent periods.
The Company is accreting the carrying value to the principal amount at maturity using an imputed interest rate of 7.5% (the estimated effective borrowing rate
for nonconvertible debt at the time of issuance, Level 2) over its expected life of seven years.
As of December 31, 2013, the "if converted" value of the Notes does not exceed its principal amount.
The interest expense associated with the Notes (excluding amortization of the associated deferred financing costs) was as follows (dollars in thousands):
For the Years Ended December 31,
2012
2013
2011
Coupon interest
Amortization of discount
Interest expense related to convertible notes
$
$
8,697 $
10,131
18,828 $
8,697 $
9,415
18,112 $
4,759
4,456
9,215
In connection with the offering of the Notes, in June 2011, the Company entered into convertible note hedge transactions (the "Convertible Note Hedges")
with certain financial institutions (the "Hedge Counterparties"). The Convertible Note Hedges cover, subject to customary anti-dilution
adjustments,10,784,315 shares of common stock. The Company also entered into warrant transactions with the Hedge Counterparties whereby the Company
sold to the Hedge Counterparties warrants to acquire, subject to customary anti-dilution adjustments, up to 10,784,315 shares of common stock (the "Sold
Warrant Transactions"). The warrants have a strike price of $40.25 per share, subject to customary anti-dilution adjustments.
The Convertible Note Hedges are expected to reduce the potential dilution with respect to common stock upon conversion of the Notes in the event that the
price per share of common stock at the time of exercise is greater than
97
the strike price of the Convertible Note Hedges, which corresponds to the initial conversion price of the Notes and is similarly subject to customary anti-
dilution adjustments. If, however, the price per share of common stock exceeds the strike price of the Sold Warrant Transactions when they expire, there
would be additional dilution from the issuance of common stock pursuant to the warrants.
The Convertible Note Hedges and Sold Warrant Transactions are separate transactions (in each case entered into by the Company and Hedge Counterparties),
are not part of the terms of the Notes and will not affect the holders' rights under the Notes. Holders of the Notes do not have any rights with respect to the
Convertible Note Hedges or the Sold Warrant Transactions.
These hedging transactions had a net cost of approximately $31.9 million, which was paid from the proceeds of the Notes and recorded as a reduction of
additional paid-in capital. The Company has contractual rights, and, at execution of the related agreements, had the ability to settle its obligations under the
conversion feature of the Notes, the Convertible Note Hedges and Sold Warrant Transactions, with the Company's common stock. Accordingly, these
transactions are accounted for as equity, with no subsequent adjustment for changes in the value of these obligations.
2013 Financings
On April 3, 2013, the Company obtained a $25.0 million first mortgage loan, secured by the underlying community. The loan bears interest at a variable rate
equal to 30-day LIBOR plus a margin of 275 basis points and matures in April 2018. In connection with the transaction, the Company repaid $29.0 million of
existing variable rate debt.
On April 12, 2013, the Company obtained $259.0 million in loans secured by first mortgages on 23 communities. The loans bear interest at a variable rate
equal to 30-day LIBOR plus a margin of 246 basis points. Concurrent with the closing of the loans, the Company entered into a five-year interest rate cap
agreement that caps the interest rate on the loans at 5.03%. The loans mature in May 2023 and require amortization of principal over a 30 year period.
Proceeds of the loans, together with cash on hand, were used to refinance or repay a total of $275.2 million of mortgage debt which was scheduled to mature
in May 2013 and July 2013 and variable rate tax-exempt bonds scheduled to mature in 2032.
On April 22, 2013, the Company obtained a $28.0 million first mortgage loan, secured by two communities. The loan bears interest at a variable rate equal to
30-day LIBOR plus a margin of 275 basis points and matures in April 2018. In connection with the transaction, the Company repaid $35.1 million of existing
variable rate debt.
On May 30, 2013, the Company obtained an $84.1 million first mortgage loan secured by eight of the Company's communities. The loan has a ten-year term
and bears interest at a variable rate equal to 30-day LIBOR plus a margin of 289 basis points. Concurrent with the closing of the loan, the Company entered into
a five-year interest rate cap agreement that caps the interest rate on the loan at 4.68%. Proceeds of the loan, together with cash on hand, were used to refinance
or repay $100.9 million of mortgage debt that was scheduled to mature between 2013 and 2017.
On August 1, 2013, the Company obtained $172.1 million in loans secured by first mortgages on four communities. The loans bear interest at a variable rate
equal to 30-day LIBOR plus a margin ranging from 226 to 288 basis points. The loans mature in August 2020 ($75.0 million) and August 2023 ($97.1 million)
and require amortization of principal over a 30 year period. Proceeds of the loans were used to refinance a total of $142.0 million of Series A notes payable
which were scheduled to mature on August 1, 2013.
As discussed in Note 4, the Company financed a current year acquisition with $60.8 million of first mortgage debt, including the assumption of $52.7 million
of existing debt and the issuance of $8.1 million of first mortgage financing secured by one of the communities. The assumed $52.7 million first mortgage
facility bears interest at a fixed rate of 5.75% and matures in May 2017. The $8.1 million mortgage loan used to partially finance the acquisition has a seven
year term and bears interest at a fixed rate of 5.32%.
On December 18, 2013, the Company obtained a $14.0 million first mortgage loan, secured by two communities. The loan bears interest at a fixed rate of
4.5% and matures in December 2018. In connection with the transaction, the Company repaid $14.2 million of existing variable rate debt.
98
On December 20, 2013, the Company obtained a $25.0 million first mortgage loan, secured by two communities. The loan bears interest at a fixed rate of
4.35% and matures in January 2019. In connection with the transaction, the Company repaid $30.3 million of existing variable rate debt.
2012 Financings
On January 5, 2012, the Company obtained a $63.0 million first mortgage loan, secured by the underlying community. The loan bears interest at a variable rate
equal to 30-day LIBOR plus a margin of 300 basis points and matures in January 2017. In connection with the transaction, the Company repaid $62.8 million
of existing variable rate debt.
On February 29, 2012, the Company obtained a $20.0 million first mortgage loan, secured by the underlying community. The loan bears interest at a variable
rate equal to 30-day LIBOR plus a margin of 275 basis points and matures in February 2017.
As discussed in Note 4, the Company financed an acquisition with a $77.9 million first mortgage. The first mortgage facility has a ten year term and 75% of it
bears interest at a fixed rate of 4.2% and the remaining 25% bears interest at a variable rate of 30-day LIBOR plus a margin of 276 basis points. The $15.0
million mortgage loan used to partially finance the acquisition had a two year term and bore interest at a fixed rate of 7.0%.
On June 29, 2012, the Company obtained a $15.0 million first mortgage loan, secured by two communities that the Company acquired in February 2012. The
loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 425 basis points and matures in June 2017. In connection with the transaction, the
Company repaid $15.0 million of seller-financed debt that had been obtained at the time of closing of the acquisition (Note 4).
On December 28, 2012, the Company obtained a $171.3 million first mortgage loan secured by nine of the Company's communities, including eight recently-
acquired communities. The loan has a ten-year term and bears interest at a variable rate equal to 30-day LIBOR plus a margin of 259 basis points. In
connection with the transaction, the Company repaid $37.4 million of mortgage loans scheduled to mature in 2013.
As of December 31, 2013, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.
Interest Rate Swaps and Caps
In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. Interest rate protection and swap agreements
were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions.
The following table summarizes the Company's swap instrument at December 31, 2013 (dollars in thousands):
Current notional balance
Fixed rate
Maturity date
Estimated liability fair value (included in other liabilities at December 31, 2013)
Estimated liability fair value (included in other liabilities at December 31, 2012)
The following table summarizes the Company's cap instruments at December 31, 2013 (dollars in thousands):
99
$
$
$
26,972
5.49%
2016
(1,246)
(1,833)
Current notional balance
Weighted average fixed cap rate
Earliest maturity date
Latest maturity date
Estimated asset fair value (included in other assets, net at December 31, 2013)
Estimated asset fair value (included in other assets, net at December 31, 2012)
$
703,213
4.69%
2017
2018
3,751
495
$
$
During the year ended December 31, 2013, the Company purchased six new cap agreements with an aggregate notional amount of $515.3 million for $2.9
million.
9. Accrued Expenses
Accrued expenses consist of the following components as of December 31, (dollars in thousands):
Salaries and wages
Insurance reserves
Real estate taxes
Vacation
Lease payable
Interest
Taxes payable
Other
Total
10. Commitments and Contingencies
Facility Operating Leases
2013
2012
76,278 $
31,293
25,763
25,715
9,751
7,270
1,477
31,932
209,479 $
71,567
37,717
22,178
24,697
8,915
7,644
2,469
25,708
200,895
$
$
The Company has entered into sale leaseback and lease agreements with certain real estate investment trusts (REITs). Under these agreements communities are
either sold to the REIT and leased back or a long-term lease agreement is entered into for the communities. The initial lease terms vary from 10 to 20 years
and include renewal options ranging from 5 to 30 years. The Company is responsible for all operating costs, including repairs, property taxes and insurance.
The substantial majority of the Company's lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through
an indivisible lease. The Company typically guarantees its performance and the lease payments under the master lease and the lease may include performance
covenants, such as net worth, minimum capital expenditure requirements per community per annum and minimum lease coverage ratios. Failure to comply
with these covenants could result in an event of default. Certain leases contain cure provisions generally requiring the posting of an additional lease security
deposit if the required covenant is not met.
As of December 31, 2013 and 2012, the Company operated 329 communities under long-term leases (275 operating leases and 54 capital and financing
leases). The remaining base lease terms vary from one year to 14 years and generally provide for renewal, extension and purchase options.
A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows (dollars in thousands):
100
Cash basis payment
Straight-line expense
Amortization of deferred gain
Facility lease expense
For the Years Ended
December 31,
2012
2013
$
$
278,504 $
2,597
(4,372)
276,729 $
281,729 $
6,668
(4,372)
284,025 $
2011
270,623
8,608
(4,373)
274,858
The aggregate amounts of all future minimum operating lease payments, including community and office leases, as of December 31, 2013, are as follows
(dollars in thousands):
Year Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Operating
Leases
$
$
279,011
274,338
270,833
254,088
237,477
597,771
1,913,518
The Company has a $17.0 million purchase option commitment payable for the purchase of three communities in 2014.
Other
The Company has employment or letter agreements with certain officers of the Company that grant these employees the right to receive their base salary and
continuation of certain benefits, for a defined period of time, in the event of certain terminations of the officers' employment, as described in those
agreements.
11. Self-Insurance
The Company obtains various insurance coverages from commercial carriers at stated amounts as defined in the applicable policy. Losses related to deductible
amounts are accrued based on the Company's estimate of expected losses plus incurred but not reported claims. As of December 31, 2013 and 2012, the
Company accrued $76.6 million and $77.7 million, respectively, for the self-insured portions of these programs, of which $45.3 million and $40.0 million is
classified as long-term as of December 31, 2013 and 2012, respectively.
The Company has secured self-insured retention risk under workers' compensation and general liability and professional liability programs with cash deposits
of $18.6 million and $16.1 million as of December 31, 2013 and 2012, respectively. Letters of credit securing the programs aggregated $34.2 million and
$40.7 million as of December 31, 2013 and 2012, respectively.
12. Retirement Plans
The Company maintains a 401(k) Retirement Savings Plan for all employees that meet minimum employment criteria. The plan provides that the participants
may defer eligible compensation on a pre-tax basis subject to certain Internal Revenue Code maximum amounts. The Company makes matching contributions
in amounts equal to 25% of the employee's contribution to the plan, up to a maximum of 4.0% of contributed compensation. An additional matching
contribution of 12.5%, subject to the same limit on contributed compensation, may be made at the discretion of the Company, based upon the Company's
performance. For the years ended December 31, 2013, 2012 and 2011, the Company's expense to the plan was $6.6 million, $4.8 million and $3.1 million,
respectively.
101
13. Related Party Transactions
Under the terms of the registration rights provisions of the Company's Stockholders Agreement, the Company is generally obligated to pay all fees and
expenses incurred in connection with certain public offerings by affiliates of Fortress Investment Group LLC (other than underwriting discounts, commissions
and transfer taxes).
14. Stock-Based Compensation
The Company follows ASC 718 in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in
exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably
over the employee's requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be
recognized when incurred.
For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire
award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For graded-vesting awards with performance-
based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the
award is, in substance, multiple awards once the performance target is deemed probable of achievement. Performance goals are evaluated quarterly. If such
goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized
compensation expense is reversed.
The following table sets forth information about the Company's restricted stock awards (excluding restricted stock units) (amounts in thousands):
Outstanding on January 1, 2011
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2011
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2012
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2013
Number of
Shares
Weighted
Average
Grant Date
Fair Value
3,540 $
2,091 $
(1,207) $
(202) $
4,222 $
1,592 $
(1,435) $
(427) $
3,952 $
1,328 $
(1,455) $
(452) $
3,373 $
14.76
16.20
16.43
15.34
14.93
19.20
14.28
15.62
16.67
26.98
15.08
18.87
21.12
As of December 31, 2013, there was $46.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements
granted. That cost is expected to be recognized over a weighted-average period of 2.3 years and is based on grant date fair value, net of forfeiture estimates.
The compensation cost reflects an initial estimated cumulative forfeiture rate from 0% to 10% over the requisite service period of the awards. That
102
estimate is revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.
Current year grants of restricted shares under the Company's Omnibus Stock Incentive Plan were as follows (amounts in thousands except for value per share):
Three months ended March 31, 2013
Three months ended June 30, 2013
Three months ended September 30, 2013
Three months ended December 31, 2013
Shares
Granted
Value Per
Share
Total Value
1,036 $
156 $
50 $
86 $
25.32 –
$27.36 $
26.85 −
$27.50 $
26.84 −
$29.20 $
26.92 −
$27.21 $
27,858
4,216
1,445
2,313
The Company has an employee stock purchase plan for all eligible employees. The plan became effective on October 1, 2008. Under the plan, eligible
employees of the Company can purchase shares of the Company's common stock on a quarterly basis at a discounted price through accumulated payroll
deductions. Each eligible employee may elect to deduct up to 15% of his or her base pay each quarter. Subject to certain limitations specified in the plan, on
the last trading date of each calendar quarter, the amount deducted from each participant's pay over the course of the quarter will be used to purchase whole
shares of the Company's common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that date. The
Company reserved 1,800,000 shares of common stock for issuance under the plan. The impact on the Company's current year consolidated financial
statements is not material.
15. Fair Value Measurements
The following table provides the Company's derivative assets and liabilities carried at fair value as measured on a recurring basis as of December 31, 2013
(dollars in thousands):
Derivative assets
Derivative liabilities
16. Share Repurchase Program
Total
Carrying
Value at
December 31,
2013
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
3,751 $
(1,246)
2,505 $
— $
—
— $
3,751 $
(1,246)
2,505 $
—
—
—
On August 11, 2011, the Company's board of directors approved a share repurchase program that authorizes the Company to purchase up to $100.0 million in
the aggregate of the Company's common stock. Purchases may be made from time to time using a variety of methods, which may include open market
purchases, privately negotiated transactions or block trades, or by any combination of these methods, in accordance with applicable insider trading and other
securities laws and regulations. The size, scope and timing of any purchases will be based on business, market and other conditions and factors, including
price, regulatory and contractual requirements or consents, and capital availability. The repurchase program does not obligate the Company to acquire any
particular amount of common stock and the program may be suspended, modified or discontinued at any time at the Company's discretion without prior notice.
Shares of stock repurchased under the program will be held as treasury shares.
Pursuant to this authorization, during the year ended December 31, 2011, the Company purchased 1,217,100 shares at a cost of approximately $17.6
million. No shares were purchased pursuant to this authorization during the years ended December 31, 2013 and 2012. As of December 31, 2013,
approximately $82.4 million remains available under this share repurchase authorization.
103
17. Income Taxes
The provision for income taxes is comprised of the following (dollars in thousands):
For the Years Ended December 31,
2012
2013
2011
Federal:
Current
Deferred
Total Federal
State:
Current
Deferred (included in Federal above)
Total State
Total
$
$
(312) $
183
(129)
(1,627)
—
(1,627)
(1,756) $
193 $
347
540
(2,059)
—
(2,059)
(1,519) $
631
(383)
248
(2,028)
—
(2,028)
(1,780)
A reconciliation of the provision for income taxes to the amount computed at the U.S. Federal statutory rate of 35% is as follows (dollars in thousands):
For the Years Ended December 31,
2012
2013
2011
Tax benefit at U.S. statutory rate
Credits
Valuation allowance
Return to provision
State taxes, net of federal income tax
Officer's compensation
Meals and entertainment
Expired charitable
Lobbying and political
Other, net
Unrecognized tax benefits
(Loss) gain on acquisition
Total
$
640 $
9,757
(7,097)
(2,568)
(985)
(724)
(496)
(126)
(89)
(65)
(3)
—
$
(1,756) $
22,945 $
—
(24,138)
(225)
1,258
(922)
(486)
—
—
122
193
(266)
(1,519) $
23,545
4,803
(30,489)
(1,302)
1,373
(760)
(430)
—
—
59
630
791
(1,780)
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):
104
Deferred income tax assets:
Operating loss carryforwards
Accrued expenses
Prepaid revenue
Deferred lease liability
Capital lease obligations
Tax credits
Deferred gain on sale leaseback
Total gross deferred income tax asset
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Other
Total gross deferred income tax liability
Net deferred tax liability
2013
2012
$
150,755 $
54,400
53,228
49,864
39,748
32,673
8,673
389,341
(72,366)
316,975
(374,431)
(6,200)
(380,631)
$
(63,656) $
169,792
51,124
55,386
46,541
52,720
20,551
10,127
406,241
(65,269)
340,972
(415,354)
(8,428)
(423,782)
(82,810)
A reconciliation of the net deferred tax liability to the consolidated balance sheets at December 31 is as follows (dollars in thousands):
Deferred tax asset – current
Deferred tax liability – noncurrent
Net deferred tax liability
2013
2012
$
$
17,643 $
(81,299)
(63,656) $
13,377
(96,187)
(82,810)
As of December 31, 2013 and 2012, the Company had net federal operating loss carryforwards of approximately $427.4 million and $454.6 million,
respectively, which are available to offset future taxable income through 2031. The Company concluded that the additional benefits generated during 2013 and
2012 did not meet the more likely than not criteria for realization. The conclusion was determined solely based on the reversal of current timing differences
and did not consider future taxable income to be generated by the Company. Therefore, the Company has recorded a valuation allowance of $44.7 million
against federal net operating losses at December 31, 2013. The Company continues to maintain that the deferred tax assets recorded as of December 31,
2013, primarily related to net operating losses generated prior to December 31, 2010, are more likely than not to be realized based on the reversal of deferred
tax liabilities recorded. However, if the Company continues its current trend of improved GAAP earnings before taxes, this valuation allowance may be
reduced in future years.
The Company has recorded valuation allowances of $7.0 million and $7.2 million at December 31, 2013 and 2012, respectively, against its state net operating
losses, as the Company anticipates these losses will not be utilized prior to expiration. The carryforward period for some states is considerably shorter than
the period which is allowed for federal purposes. The Company also recorded a valuation allowance against federal and state credits of $20.6 million and $8.5
million as of December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, the Company had $53.5 million and $31.9 million,
respectively, included in its net operating loss carryforward relating to restricted stock grants. Under ASC 718-10, this loss will be recorded in additional paid-
in capital in the period in which the loss is effectively used to reduce taxes payable.
The formation of the Company, the reorganization of a predecessor company and the acquisitions of several wholly-owned subsidiaries constituted ownership
changes under Section 382 of the Internal Revenue Code, as amended. As a result, the Company's ability to utilize the net operating loss carryforward to offset
future taxable income is subject to certain limitations and restrictions. Furthermore, the Company had an ownership change under Section 382 in May 2010
which resulted in an additional annual limitation to the utilization of the net operating loss in an
105
amount of $92 million. The Company expects the net operating loss to be fully released before expiration and therefore does not anticipate a financial
statement impact as a result of the limitation.
At December 31, 2013, the Company had gross tax affected unrecognized tax benefits of $1.6 million, which, if recognized, would result in an income tax
benefit in accordance with ASC 805. Interest and penalties related to these tax positions are classified as tax expense in the Company's financial
statements. Total interest and penalties reserved is $0.6 million at December 31, 2013. Tax returns for years 2010 through 2012 are subject to future
examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination. The Company does not
expect that unrecognized tax benefits for tax positions taken with respect to 2013 and prior years will significantly change in 2014.
A reconciliation of the unrecognized tax benefits for the year 2013 is as follows (dollars in thousands):
Balance at January 1, 2013
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Balance at December 31, 2013
$
$
1,245
53
414
(156)
1,556
On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related
to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve
tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. The Company has
evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.
106
18. Supplemental Disclosure of Cash Flow Information
(dollars in thousands)
Interest paid
Income taxes paid
Write-off of deferred financing costs
Acquisitions of assets, net of related payables and cash received, net:
Cash and escrow deposits—restricted
Prepaid expenses and other current assets
Property, plant and equipment and leasehold intangibles, net
Other intangible assets, net
Other assets, net
Accrued expenses
Other liabilities
Long-term debt
Net
Purchase of Horizon Bay Realty, L.L.C., net of cash acquired:
Property, plant and equipment and leasehold intangibles, net
Cash and escrow deposits—restricted
Accounts receivable, net
Long-term debt
Accrued expenses
Other liabilities
Common stock
Additional paid-in-capital
Accumulated earnings
Net
Reinvested income on marketable securities – restricted
Supplemental Schedule of Noncash Operating, Investing and Financing Activities:
Capital leases:
Property, plant and equipment and leasehold intangibles, net
Long-term debt
Net
19. Litigation
For the Years Ended
December 31,
2012
2013
123,036 $
2,283 $
763 $
130,009 $
2,658 $
744 $
2011
125,047
2,431
2,080
466 $
(1,265)
99,657
3,517
1,611
(5,169)
—
(64,131)
34,686 $
2,169 $
(2,817)
257,772
9,575
(7,327)
(573)
3,601
10,123
272,523 $
— $
—
—
—
—
—
—
—
—
— $
— $
— $
—
—
—
—
—
—
—
—
— $
1,156 $
—
—
80,514
4,244
3,955
(31)
—
—
88,682
8,132
10,702
2,479
(1,821)
(15,141)
(6,347)
(1)
(1,537)
(1,982)
(5,516)
1,426
— $
—
— $
13,852 $
(13,852)
— $
—
—
—
$
$
$
$
$
$
$
$
$
$
The Company has been and is currently involved in litigation and claims incidental to the conduct of its business which are comparable to other companies in
the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the
senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters.
As a result, the Company maintains general liability and professional liability insurance policies in amounts and with coverage and deductibles the Company
believes are adequate, based on the nature and risks of its business, historical experience and industry standards. The Company's current policies provide for
deductibles
107
for each claim. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts.
20. Segment Information
The Company currently has six reportable segments: retirement centers; assisted living; CCRCs – rental; CCRCs – entry fee; Brookdale Ancillary Services;
and management services. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues
and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision
maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.
Retirement Centers. The Company's Retirement Centers segment includes owned or leased communities that are primarily designed for middle to upper
income senior citizens age 75 and older who desire an upscale residential environment providing the highest quality of service. The majority of the Company's
retirement center communities consist of both independent living and assisted living units in a single community, which allows residents to "age-in-place" by
providing them with a continuum of senior independent and assisted living services.
Assisted Living. The Company's Assisted Living segment includes owned or leased communities that offer housing and 24-hour assistance with activities of
daily life to mid-acuity frail and elderly residents. Assisted living communities include both freestanding, multi-story communities and freestanding single
story communities. The Company also operates memory care communities, which are freestanding assisted living communities specially designed for
residents with Alzheimer's disease and other dementias.
CCRCs - Rental. The Company's CCRCs - Rental segment includes large owned or leased communities that offer a variety of living arrangements and services
to accommodate all levels of physical ability and health. Most of the Company's CCRCs have independent living, assisted living and skilled nursing available
on one campus or within the immediate market, and some also include memory care/Alzheimer's units.
CCRCs - Entry Fee. The communities in the Company's CCRCs - Entry Fee segment are similar to those in the Company's CCRCs - Rental segment but allow
for residents in the independent living apartment units to pay a one-time upfront entrance fee, which is partially refundable in certain circumstances. The
amount of the entrance fee varies depending upon the type and size of the dwelling unit, the type of contract plan selected, whether the contract contains a
lifecare benefit for the resident, the amount and timing of refund, and other variables. In addition to the initial entrance fee, residents under all entrance fee
agreements also pay a monthly service fee, which entitles them to the use of certain amenities and services. Since entrance fees are received upon initial
occupancy, the monthly fees are generally less than fees at a comparable rental community.
Brookdale Ancillary Services. The Company's Brookdale Ancillary Services segment includes the outpatient therapy, home health and hospice services
provided to residents of many of the Company's communities, to other senior living communities that the Company does not own or operate and to seniors
living outside of the Company's communities. The Brookdale Ancillary Services segment does not include the therapy services provided in the Company's
skilled nursing units, which are included in the Company's CCRCs - Rental and CCRCs - Entry Fee segments.
Management Services. The Company's management services segment includes communities operated by the Company pursuant to management agreements.
In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a joint venture
structure in which the Company has an ownership interest. Under the management agreements for these communities, the Company receives management fees
as well as reimbursed expenses, which represent the reimbursement of expenses it incurs on behalf of the owners.
The accounting policies of the Company's reportable segments are the same as those described in the summary of significant accounting policies.
The following table sets forth selected segment financial and operating data (dollars in thousands):
108
For the Years Ended December 31,
2012
2013
2011
Revenue(1):
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Management Services(2)
Segment Operating Income(3):
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Management Services
General and administrative (including non-cash stock-based compensation expense)
Facility lease expense:
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Corporate and Management Services
Depreciation and amortization:
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
109
$
$
$
526,284 $
1,051,868
396,975
297,756
242,150
376,933
2,891,966 $
503,902 $
1,013,337
385,479
285,701
224,517
355,802
2,768,738 $
473,842
964,585
364,095
282,020
205,780
166,161
2,456,483
222,282 $
389,678
109,026
76,393
45,709
31,125
874,213
184,548
91,258
123,980
48,809
7,470
—
5,212
64,353
85,337
30,957
55,842
3,023
205,585 $
361,184
106,063
61,405
47,780
30,786
812,803
178,829
102,273
123,128
47,238
7,214
—
4,172
61,060
81,801
31,205
52,840
2,220
198,439
339,928
116,849
68,550
57,985
13,595
795,346
148,327
106,515
116,934
39,997
7,435
—
3,977
60,275
82,843
30,776
54,794
1,699
Corporate and Management Services
Asset impairment
Loss (gain) on acquisition
Gain on facility lease termination
Income from operations
Total interest expense:
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Corporate and Management Services
Total expenditures for property, plant and equipment, and leasehold intangibles:
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Corporate and Management Services
Total assets:
Retirement Centers
Assisted Living
CCRCs - Rental
CCRCs - Entry Fee
Brookdale Ancillary Services
Corporate and Management Services
29,245
12,891
—
—
$
131,288 $
23,155
27,677
636
(11,584)
80,939 $
38,119
16,892
(1,982)
—
88,745
$
$
$
$
31,286 $
51,410
17,512
11,911
—
25,280
137,399 $
63,519 $
95,829
27,134
43,019
1,855
26,171
257,527 $
29,025 $
57,634
17,336
13,792
—
28,996
146,783 $
58,876 $
68,675
21,916
24,890
6,037
28,018
208,412 $
28,444
58,453
15,324
20,316
—
19,641
142,178
45,891
43,955
20,615
16,255
2,715
30,700
160,131
As of December 31,
2013
2012
$
$
1,258,294 $
1,514,385
499,873
960,708
94,986
409,511
4,737,757 $
1,269,125
1,457,979
538,263
956,658
90,357
394,386
4,706,768
(1) All revenue is earned from external third parties in the United States.
(2) Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of
managed communities.
(3) Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).
21. Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for each of the fiscal quarters in 2013 and 2012 (in thousands, except per share amounts):
110
Revenues
Asset impairment
Income from operations
Income (loss) before income taxes
Net income (loss)
Weighted average basic earnings (loss) per share
Weighted average diluted earnings (loss) per share
Revenues
Asset impairment
Income from operations
Loss before income taxes
Net loss
Weighted average basic and diluted loss per share
22. Subsequent Events
The Pending Merger
March 31,
2013
$
712,266 $
—
38,687
4,706
3,558
0.03
0.03 $
For the Quarters Ended
June 30,
2013
September 30,
2013
December 31,
2013
716,468 $
2,154
28,435
(4,036)
(5,200)
(0.04)
(0.04) $
728,999 $
504
33,983
(7)
(967)
(0.01)
(0.01) $
734,233
10,233
30,183
(2,491)
(975)
(0.01)
(0.01)
March 31,
2012
For the Quarters Ended
June 30,
2012
September 30,
2012
December 31,
2012
682,708 $
1,083
26,523
(9,614)
(10,544)
(0.09) $
690,473 $
7,246
18,528
(18,133)
(19,015)
(0.16) $
696,145 $
—
24,269
(11,469)
(12,216)
(0.10) $
699,412
19,348
11,619
(25,732)
(24,692)
(0.20)
$
$
$
On February 20, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Emeritus Corporation, a Washington
corporation ("Emeritus"), and Broadway Merger Sub Corporation, a Delaware corporation and a wholly owned subsidiary of the Company ("Merger Sub"). The
Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Emeritus (the "Merger"),
with Emeritus continuing as the surviving corporation and wholly owned subsidiary of the Company. Pursuant to the terms and subject to the conditions set
forth in the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of common stock, par value $0.0001 per share
("Emeritus Common Stock"), of Emeritus (including each restricted share of Emeritus Common Stock, but not including any shares (x) held by the Company
or Emeritus or any of the Company's or Emeritus' wholly owned subsidiaries and (y) with respect to which appraisal rights are properly demanded and not
withdrawn under Washington law ("Dissenting Shares")), will be automatically converted into the right to receive 0.95 of a share (the "Exchange Ratio") of the
Company's common stock.
The Merger Agreement provides that each option to purchase Emeritus Common Stock, whether vested or unvested (an "Emeritus Option"), will be canceled at
the effective time of the Merger. Any Emeritus Option with an exercise price that is less than the implied dollar value of the per share consideration to be
received in the Merger (valuing the Company's common stock at its volume weighted average price over the 10 trading days preceding the consummation of
the Merger) will be converted into the right to receive a number of shares of the Company's common stock (net of any required withholding taxes) equal to the
product of (x) the number of shares of Emeritus Common Stock subject to the Emeritus Option multiplied by (y) the excess of the implied dollar value of the
per share consideration (based on the volume weighted average described above) over the exercise price of the Emeritus Option. Any Emeritus Option with an
exercise price that is equal to or greater than the implied dollar value of the per share consideration to be received in the Merger as described above will be
canceled without the payment of any consideration.
The consummation of the Merger is subject to satisfaction or waiver of certain conditions, including, among others: (i) the approval of the Company's and
Emeritus' stockholders; (ii) the absence of any law or order prohibiting the
111
closing; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iv) the receipt
of certain federal and state government approvals necessary for the ownership, operation and management of Emeritus' senior living facilities and expiration of
notice periods for the same, subject to certain exceptions; (v) the continuing effectiveness or receipt, as applicable, of certain third-party consents, subject to
certain exceptions; (vi) the accuracy of each party's representations and warranties, subject to certain materiality qualifiers; (vii) the performance in all
material respects of each party's obligations under the Merger Agreement; (viii) no more than 7.5% of the shares of Emeritus Common Stock being Dissenting
Shares; and (ix) the absence of any change, event or development that would reasonably be expected to have either a Parent Material Adverse Effect or a
Company Material Adverse Effect (each as defined in the Merger Agreement). The Merger is expected to close during the third quarter of 2014, although there
can be no assurance that the Merger will close or, if it does, when the actual closing will occur.
112
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2013
(In thousands)
Additions
Balance at
beginning of
period
Charged to
costs and
expenses
Charged
to other
accounts
Deductions
Balance at
end of
period
$
$
$
$
$
$
14,464 $
16,972 $
15,262 $
16,796
15,683
21,048
$
$
$
1,817
660
444
$
$
$
(16,105)
(18,053)
(19,026)
$
$
$
10,845 $
40,820 $
65,269 $
$29,348(1) $
26,989(4) $
7,272(6) $
1,141(2) $
(2,540)(5) $
(175)(7) $
$(514)(3) $
$
$—
$
$—
16,972
15,262
17,728
40,820
65,269
72,366
Description
Allowance for Doubtful Accounts:
Year ended December 31, 2011
Year ended December 31, 2012
Year ended December 31, 2013
Deferred Tax Valuation Allowance:
Year ended December 31, 2011
Year ended December 31, 2012
Year ended December 31, 2013
(1) Adjustment to valuation allowance for federal net operating losses and federal credits of $22,940 and $6,408, respectively.
(2) Adjustment to valuation allowance for state net operating losses of $1,141.
(3) Adjustment to valuation allowance for state credits of $514.
(4) Adjustment to valuation allowance for federal net operating losses and federal credits of $26,589 and $400, respectively.
(5) Adjustment to valuation allowance for state net operating losses of $(2,540).
(6) Adjustment to valuation allowance for federal net operating losses and federal credits of $(4,851), and $12,123, respectively.
(7) Adjustment to valuation allowance for state net operating losses of $(175).
See accompanying report of independent registered public accounting firm
113
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Management's Assessment of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded
that our internal control over financial reporting was effective as of December 31, 2013. Management reviewed the results of their assessment with our Audit
Committee. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Ernst & Young LLP, the
independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, as stated in
their report which is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of December 31, 2013, our disclosure controls and
procedures were effective.
Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B.
Other Information.
None.
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated by reference from the discussions under the headings "Proposal Number One - Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders. Pursuant to
General Instruction G(3), certain information concerning our executive officers is contained in the discussion entitled "Executive Officers of the Registrant"
under Item 4 of Part I of this report.
We have adopted a Code of Business Conduct and Ethics that applies to all employees, directors and officers, including our principal executive officer, our
principal financial officer, our principal accounting officer or controller, or persons performing similar functions, as well as a Code of Ethics for Chief
Executive and Senior Financial Officers, which applies to our Chief Executive Officer, President, Chief Financial Officer, Treasurer and Controller, both of
which are available on our website at www.brookdale.com. Any amendment to, or waiver from, a provision of such codes of ethics granted to a principal
executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions, will be posted on our website.
114
Item 11.
Executive Compensation.
The information required by this item is incorporated by reference from the discussions under the headings "Compensation of Directors" and "Compensation
of Executive Officers" in our Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the
discussion under the heading "Security Ownership of Certain Beneficial Owners and Management" in our Definitive Proxy Statement for the 2014 Annual
Meeting of Stockholders.
The following table provides certain information as of December 31, 2013 with respect to our equity compensation plans (after giving effect to shares issued
and/or vesting on such date):
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)(1)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)(2)
—
—
—
—
—
—
3,224,423
83,970
3,308,393
Plan category
Equity compensation plans approved by
security holders(3)
Equity compensation plans not approved by
security holders(4)
Total
(1)
(2)
In addition to options, warrants, and rights, our Omnibus Stock Incentive Plan allows awards to be made in the form of shares of restricted stock,
restricted stock units or other forms of equity-based compensation. As of December 31, 2013, 3,366,841 shares of unvested restricted stock and 6,096
restricted stock units issued under our Omnibus Stock Incentive Plan were outstanding. Such shares and restricted stock units are not reflected in the
table above.
The number of shares remaining available for future issuance under equity compensation plans approved by security holders consists of 1,840,974
shares remaining available for future issuance under our Omnibus Stock Incentive Plan and 1,383,449 shares remaining available for future issuance
under our Associate Stock Purchase Plan.
(3) Under the terms of our Omnibus Stock Incentive Plan, the number of shares reserved and available for issuance will increase annually each January 1 by
an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of our common stock on the last day of the
immediately preceding fiscal year.
(4)
Represents shares remaining available for future issuance under our Director Stock Purchase Plan. Under the existing compensation program for the
members of our Board of Directors, each non-affiliated director has the opportunity to elect to receive either immediately vested shares or restricted
stock units in lieu of up to 50% of his or her quarterly cash compensation. Any immediately vested shares that are elected to be received will be issued
pursuant to the Director Stock Purchase Plan. Under the director compensation program, all cash amounts are payable quarterly in arrears, with
payments to be made on April 1, July 1, October 1 and January 1. Any immediately vested shares that a director elects to receive under the Director
Stock Purchase Plan will
115
be issued at the same time that cash payments are made. The number of shares to be issued will be based on the closing price of our common stock on
the date of issuance (i.e., April 1, July 1, October 1 and January 1), or if such date is not a trading date, on the previous trading day's closing price.
Fractional amounts will be paid in cash. The Board of Directors initially reserved 100,000 shares of our common stock for issuance under the Director
Stock Purchase Plan.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the discussions under the headings "Certain Relationships and Related Transactions"
and "Director Independence" in our Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders.
Item 14.
Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the discussion under the heading "Proposal Number Two – Ratification of
Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm" in our Definitive Proxy Statement for the 2014 Annual Meeting of
Stockholders.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
1)
Our Audited Consolidated Financial Statements
Balance Sheets as of December 31, 2013 and 2012
Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011
Statements of Equity for the Years Ended December 31, 2013, 2012 and 2011
Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
2)
Exhibits – See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth
herein.
116
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
BROOKDALE SENIOR LIVING INC.
/s/ T. Andrew Smith
By:
Name: T. Andrew Smith
Title: Chief Executive Officer
Date: March 3, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
/s/ Jeffrey R. Leeds
Jeffrey R. Leeds
/s/ T. Andrew Smith
T. Andrew Smith
/s/ Mark W. Ohlendorf
Mark W. Ohlendorf
/s/ Frank M. Bumstead
Frank M. Bumstead
/s/ Jackie M. Clegg
Jackie M. Clegg
/s/ Wesley R. Edens
Wesley R. Edens
/s/ Randal A. Nardone
Randal A. Nardone
/s/ Mark J. Schulte
Mark J. Schulte
/s/ W.E. Sheriff
W.E. Sheriff
/s/ James R. Seward
James R. Seward
/s/ Samuel Waxman
Samuel Waxman
Title
Date
Non-Executive Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
117
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
March 3, 2014
EXHIBIT INDEX
Exhibit No.
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
10.3.1
10.3.2
10.3.3
10.3.4
Description
Agreement and Plan of Merger, dated as of February 20, 2014, by and among Brookdale Senior Living Inc., Emeritus Corporation and Broadway
Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 21, 2014).
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K filed on February 26, 2010).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on
July 3, 2012).
Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Amendment No. 3) (No. 333-127372) filed on November 7, 2005).
Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress
Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to the Company's Annual
Report on Form 10-K filed on March 31, 2006).
Amendment No. 1 to Stockholders Agreement, dated as of July 25, 2006, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC,
Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT Holdings LLC (incorporated by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2006).
Amendment Number Two to Stockholders Agreement, dated as of November 4, 2009 (incorporated by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q filed on November 4, 2009).
Letter Agreement, dated as of February 20, 2014, by and among Brookdale Senior Living Inc. and the Stockholders named therein (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February 21, 2014).
Indenture, dated as of June 14, 2011, between the Company and American Stock Transfer & Trust Company, LLC, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 14, 2011).
Supplemental Indenture, dated as of June 14, 2011, between the Company and American Stock Transfer & Trust Company, LLC, as Trustee
(incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 14, 2011).
Form of 2.75% Convertible Senior Note due 2018 (included as part of Exhibit 4.7).
Consent to Change of Control and Third Amendment to Master Lease, dated April 1, 2006, by and between Health Care Property Investors, Inc.,
Texas HCP Holding, L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland Real Estate Holdings, LLC, ARC Sun City Center
Real Estate Holdings, LLC, and ARC LaBarc Real Estate Holdings, LLC, on the one hand, and Fort Austin Limited Partnership, ARC Santa
Catalina, Inc., ARC Richmond Place, Inc., Freedom Village of Holland, Michigan, Freedom Village of Sun City Center, Ltd., LaBarc, L.P. and
Park Place Investments, LLC, on the other hand, and ARCPI Holdings, Inc. and American Retirement Corporation (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2006).
Second Amended and Restated Master Lease Agreement, dated as of April 7, 2006, among Health Care REIT, Inc., HCRI North Carolina
Properties III, Limited Partnership, HCRI Tennessee Properties, Inc., HCRI Indiana Properties, LLC, HCRI Wisconsin Properties, LLC, and
HCRI Texas Properties, Ltd., and Alterra Healthcare Corporation (incorporated by reference to Exhibit 10.32 to the Company's Registration
Statement on Form S-1 (No. 333-135030) filed on June 14, 2006).
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting; No Dividends)
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting; With Dividends)
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Performance/Time-Vesting; With
Dividends) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Performance/Time-Vesting; No
Dividends) (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2007).*
118
Exhibit No.
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11.1
10.11.2
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Description
Separation Agreement and General Release, dated February 7, 2008, between Brookdale Senior Living Inc. and Mark J. Schulte (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 11, 2008).
Brookdale Senior Living Inc. Associate Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on June 11, 2008).*
Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated effective June 23, 2009 (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 23, 2009).*
Employment Agreement, dated as of June 23, 2009, by and between Brookdale Senior Living Inc. and W.E. Sheriff (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 26, 2009).*
Restricted Stock Unit Agreement, dated as of June 23, 2009, by and between Brookdale Senior Living Inc. and W.E. Sheriff (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 26, 2009).*
Summary of Brookdale Senior Living Inc. Director Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-160354) filed on June 30, 2009).*
First Amendment to Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated, effective as of October 30, 2009
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2009).*
Credit Agreement, dated as of February 23, 2010, among certain subsidiaries of Brookdale Senior Living Inc., General Electric Capital
Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto (incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K filed on February 26, 2010).
First Amendment, dated as of May 5, 2010, to the Credit Agreement, dated as of February 23, 2010, among certain subsidiaries of Brookdale
Senior Living Inc., General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties
thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 6, 2010).
Form of Severance Letter and Brookdale Senior Living Inc. Severance Pay Policy, Tier I (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed on August 6, 2010).*
Amended and Restated Credit Agreement, dated as of January 31, 2011, among certain subsidiaries of Brookdale Senior Living Inc., General
Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 4, 2011).
First Amendment, dated as of February 23, 2011, to Amended and Restated Credit Agreement, dated as of January 31, 2011, among certain
subsidiaries of Brookdale Senior Living Inc., General Electric Capital Corporation, as administrative agent and lender, and the other lenders
from time to time parties thereto (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K filed on February
28, 2011).
Form of Indemnification Agreement for Directors and Officers (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K filed on February 28, 2011).*
Convertible Bond Hedge Transaction Confirmation between the Company and Bank of America, N.A., dated as of June 8, 2011 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Issuer Warrant Transaction Confirmation between the Company and Bank of America, N.A., dated as of June 8, 2011 (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Convertible Bond Hedge Transaction Confirmation between the Company and JPMorgan Chase Bank, National Association, dated as of June 8,
2011 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Issuer Warrant Transaction Confirmation between the Company and JPMorgan Chase Bank, National Association, dated as of June 8, 2011
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
119
Exhibit No.
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Description
Convertible Bond Hedge Transaction Confirmation between the Company and Royal Bank of Canada, dated as of June 8, 2011 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Issuer Warrant Transaction Confirmation between the Company and Royal Bank of Canada, dated as of June 8, 2011 (incorporated by reference
to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Convertible Bond Hedge Transaction Confirmation between the Company and Bank of America, N.A., dated as of June 15, 2011
(incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Issuer Warrant Transaction Confirmation between the Company and Bank of America, N.A., dated as of June 15, 2011 (incorporated
by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Convertible Bond Hedge Transaction Confirmation between the Company and JPMorgan Chase Bank, National Association, dated as
of June 15, 2011 (incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Issuer Warrant Transaction Confirmation between the Company and JPMorgan Chase Bank, National Association, dated as of June
15, 2011 (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Convertible Bond Hedge Transaction Confirmation between the Company and Royal Bank of Canada, dated as of June 15, 2011
(incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Additional Issuer Warrant Transaction Confirmation between the Company and Royal Bank of Canada, dated as of June 15, 2011 (incorporated
by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2011).
Master Credit Facility Agreement, dated as of July 29, 2011, by and among various subsidiaries of Brookdale Senior Living Inc. and Oak Grove
Commercial Mortgage, LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 4, 2011).
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting Form for Executive
Committee Members) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 9,
2011).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Time-Vesting Form for
Executive Vice Presidents) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on November 9,
2011).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2011 Performance-Vesting Form
for Executive Committee Members) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on
November 9, 2011).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2011 Performance-Vesting Form
for Executive Vice Presidents) (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on November
9, 2011).*
Form of Outside Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed on August 9, 2012).*
Amendment to Employment Agreement, effective as of November 5, 2012, by and between Brookdale Senior Living Inc. and W.E. Sheriff
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 9, 2012).*
Amendment to Restricted Stock Unit Agreement, effective as of November 5, 2012, by and between Brookdale Senior Living Inc. and W.E.
Sheriff (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 9, 2012).*
Employment Agreement, dated as of February 11, 2013, by and between Brookdale Senior Living Inc. and T. Andrew Smith (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 12, 2013).*
Restricted Share Agreement (Time-Vesting), dated as of February 11, 2013, by and between Brookdale Senior Living Inc. and T. Andrew Smith
(incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February 12, 2013).*
120
Exhibit No.
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
21
23
31.1
31.2
32
Description
Restricted Share Agreement (Performance-Vesting), dated as of February 11, 2013, by and between Brookdale Senior Living Inc. and T. Andrew
Smith (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February 12, 2013).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2013 Time-Vesting Form for
Executive Committee Members) (incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed on February
19, 2013).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2013 Time-Vesting Form for
Executive Vice Presidents) (incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed on February 19,
2013).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2013 Performance-Vesting Form
for Executive Committee Members) (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K filed on
February 19, 2013).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (2013 Performance-Vesting Form
for Executive Vice Presidents) (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K filed on February
19, 2013).*
Second Amended and Restated Credit Agreement, dated as of March 28, 2013, among certain subsidiaries of Brookdale Senior Living Inc.,
General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 3, 2013).
Third Amended and Restated Credit Agreement, dated as of September 20, 2013, among certain subsidiaries of Brookdale Senior Living Inc.,
General Electric Capital Corporation, as administrative agent, lender and swingline lender, and the other lenders from time to time parties
thereto (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 8, 2013).
First Amendment to Brookdale Senior Living Inc. Associate Stock Purchase Plan, effective as of December 12, 2013 (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 18, 2013).*
Voting Agreement, dated as of February 20, 2014, by and among Brookdale Senior Living Inc. and the Shareholders named therein (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 21, 2014).
Letter Agreement, dated as of February 20, 2014, by and among Brookdale Senior Living Inc. and the Stockholders named therein (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on February 21, 2014).
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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.
*
Management Contract or Compensatory Plan
121
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T. Andrew Smith, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a -15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 3, 2014
/s/ T. Andrew Smith
T. Andrew Smith
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Ohlendorf, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a -15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 3, 2014
/s/ Mark W. Ohlendorf
Mark W. Ohlendorf
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10 -K of Brookdale Senior Living Inc. (the "Company") for the fiscal year ended December 31, 2013, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), T. Andrew Smith, as Chief Executive Officer of the Company, and Mark W.
Ohlendorf, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ T. Andrew Smith
Name:
Title:
Date:
T. Andrew Smith
Chief Executive Officer
March 3, 2014
/s/ Mark W. Ohlendorf
Name: Mark W. Ohlendorf
Title:
Date:
Chief Financial Officer
March 3, 2014