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111 Westwood Place, Suite 400
Brentwood, TN 37027
615.221.2250
brookdale.com
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L e t t e r t o s h a r e h o l d e r s
2014 was a transformational year for Brookdale
that will unlock tremendous value for shareholders
and benefit our residents and their families in new
and profound ways.
Our merger with Emeritus effectively doubled our size,
creating the only coast-to-coast, full-spectrum senior
living solutions company in America. Brookdale is
now the largest senior living solutions provider in
the country operating the only nationwide network
of senior living communities with fully integrated
ancillary services across the continuum of care.
However, let me be clear: our goal is not to be
the biggest, but to be the best.
( continued on page 1 )
Brookdale 2014AR Design2 covers .25" spine.indd 1
5/10/15 1:24 PM
ABOUT BROOKDALE SENIOR LIVING
Brookdale Senior Living Inc. is the leading
operator of senior living communities
throughout the United States. The company is
committed to providing senior living solutions
primarily within properties that are designed,
purpose-built and operated to provide
the highest-quality service, care and living
accommodations for residents. Currently,
Brookdale operates independent living,
assisted living, and dementia-care communities
and continuing care retirement centers, with
approximately 1,150 communities in 47 states
and the ability to serve approximately 111,000
residents. Through its ancillary services
program, the company also offers a range of
outpatient therapy, home health, personalized
living and hospice services.
111,000
RESIDENTS
1,150
COMMUNITIES
47STATES
82,000
ASSOCIATES
Board of Directors
Jeffrey R. Leeds, Chairman 1, 2, 4
Former Chief Financial Officer,
GreenPoint Financial Corporation
Granger Cobb, Director
Former Chief Executive Officer,
Emeritus Corporation
Frank M. Bumstead, Director 2, 4
Chairman and Principal Shareholder,
Flood, Bumstead, McCready &
McCarthy, Inc.
Mark J. Parrell, Director 3
Executive Vice President and
Chief Financial Officer,
Equity Residential
The Honorable Jackie M. Clegg,
Director 1, 2, 4
Managing Partner,
Clegg International Consultants, LLC
William G. Petty, Jr., Director 3
Partner,
Beecken Petty O’Keefe & Company
James R. Seward, Director 1, 3
Private Investor
T. Andrew Smith, Director
Chief Executive Officer,
Brookdale Senior Living Inc.
Lee S. Wielansky, Director 3
Chairman and CEO,
Midland Development Group, Inc.
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and Corporate
Governance Committee
Executive Officers
T. Andrew Smith
Chief Executive Officer
Mark W. Ohlendorf
President & Chief Financial Officer
Gregory B. Richard
Executive Vice President & Chief
Operating Officer
Corporate Data
Corporate Office
111 Westwood Place, Suite 400
Brentwood, TN 37027
615.221.2250
www.brookdale.com
Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
800.937.5449
Bryan D. Richardson
Executive Vice President & Chief
Administrative Officer
Kristin A. Ferge
Executive Vice President, Chief
Accounting Officer and Treasurer
Glenn O. Maul
Executive Vice President
& Chief People Officer
Tricia A. Conahan
Executive Vice President
& Chief Marketing Officer
George T. Hicks
Executive Vice President – Finance
H. Todd Kaestner
Executive Vice President –
Corporate Development
Stock Listing
NYSE: BKD
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
2015 Annual Meeting
June 30, 2015 • 10:00 a.m. CDT
Brookdale Senior Living
111 Westwood Place
Brentwood, TN 37027
615.221.2250
Governance
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, www.brookdale.com.
Brookdale 2014AR Design2 covers .25" spine.indd 2
5/10/15 1:24 PM
( continued from cover )
Brookdale is in the business of helping people
age well. Our mission remains constant – Enriching
the lives of those we serve with compassion, respect,
excellence and integrity – and we strive every day
to provide the highest level of quality service. That
focus on serving our residents and their families is
always at the core of what we do, and it underscores
every decision we make.
By definition we meet our residents at a
transitional time in their lives. The decisions we
help them make about aging are often wrapped
up in emotion and almost always involve family
members, who are dealing with their own
emotions. That’s why Brookdale views both
residents and their family members as
our customers.
Brookdale helps people make good choices by
offering residents and their families the largest
range of senior care solutions with the largest
network of senior living communities to meet
their ever-changing needs. Our help is based on
our knowledge and concern for the people we
serve. Our business is all about people. We put
our residents first because Brookdale is literally
their new home, and we become a part of their
extended family. Each and every day is an
opportunity for our associates to connect with
our residents and their families in a profound
and personal way. Serving our residents and
their families is our number one priority.
P
h
o
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o
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P
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Brookdale Chief Executive Officer T. Andrew Smith visits residents
at Brookdale Green Hills Cumberland in Nashville, Tennessee.
1
53%
of our Residents are
in Assisted Living
2
We serve the nation’s aging population against
the backdrop of a rapidly growing market
driven by the inevitability of demographic
change. The senior population is growing three
times faster than the general population in
America. By 2030, the number of seniors is
projected to increase from six percent to nine
percent of the population and it is anticipated
approximately 70% of those seniors will need
an average of three years of some form of senior
care. At the same time, the number of potential
family caregivers is dropping rapidly as a result
of long-term trends in family size, work patterns
and geographic dispersion.
These demographic trends signal large and
sustained growth in the size of the senior living
market in America, which is already $55 billion
annually. Yet, this is a highly fragmented
industry. Brookdale is the largest provider by
several multiples, but we represent only 10% of
the market. As such, we are well positioned to
maintain and expand our share of the market as
it continues to grow at an accelerating rate.
Three strategic pillars set
Brookdale apart:
Leveraging the Advantages of Scale –
We believe the advantages of scale will
increasingly differentiate Brookdale and support
our growth. Through the merger with Emeritus,
we added more than 500 new communities to
our network and expanded our operations to
encompass 330 markets in 47 states. More than
10 million Americans over the age of 75 live
within ten miles of a Brookdale community.
Just as significant, over half of their adult
children also live within that same ten-mile
radius. Leveraging the benefits of our expanded
coverage and density, we are continuing our
initiatives to create the only national senior
living brand, with the goal of making Brookdale
synonymous with high quality, safe and trusted
senior living.
3xBrookdale is three times
the size of the next largest
senior housing operator
Congratulations to 21 Brookdale skilled nursing communities that received the highest possible
overall rating of five stars from U.S. News & World Report in its seventh annual Best Nursing Homes
review. U.S. News awarded communities that received the highest rating in Feb. 2015 from Centers
for Medicare and Medicaid Services (CMS).
US News and World Report and the Best Rankings design and logo are trademarks or registered
trademarks of US News & World Report LP in the United States and other countries.
3
By 2050, there could be 88.5 million Americans age 65+. That’s more
than twice as many as in 2010. We are getting ready for more residents.
Our merger with Emeritus also accelerates
the expansion of our unique ancillary services
platform. We expect to initiate much of
the rollout of our home health, outpatient
therapy and hospice services within Emeritus
communities during 2015. The addition of
Nurse on Call to Brookdale Healthcare Services
also immediately increased our presence beyond
the walls of our communities and creates a
longer-term opportunity for us to expand our
brand into the general community in markets
where we have concentration.
Putting Our Knowledge and Experience to
Work Creating New Innovations in Care –
As a result of our size and scale, we have more
talent under one brand than any other provider.
This gives Brookdale a unique opportunity to
transform the senior living industry through
innovation to the services we deliver and where
we deliver them.
Within our resident population alone,
we estimate there is an aggregate annual
expenditure on healthcare services of more than
$4.5 billion. While we earn a small portion of
these expenditures through our current ancillary
services platform, we are well positioned to
develop innovative new products and services
to address our residents’ healthcare and other
needs. For example, we see opportunities to
add vision, audiology, pharmacy, dentistry and
durable medical equipment services to our
ancillary platform. We are actively exploring
and piloting differentiated Medicare Advantage
plans to serve our customers. Outside of
healthcare, we see meaningful opportunities to
create partnerships to provide needed financial
services to our customers, such as insurance,
banking and wealth management.
Also, in order to leverage our geographical
scale, we intend to package many of these
4
By 2050, there could be 88.5 million Americans age 65+. That’s more
than twice as many as in 2010. We are getting ready for more residents.
services in offerings outside our campuses and
into local communities similar to our existing
initiatives with Brookdale Healthcare Services
and Nurse on Call. This opportunity includes
transportation services, medicine management,
adult day care and meal services. By providing
outstanding services to people within
their homes, we expect to develop trusted
relationships before they and their families ever
make any decisions about moving to a senior
living community.
Investing in Our People and Culture
of Service – I am very proud of the way
our associates have stepped up to meet the
challenge of our transformational merger.
While there is much still to be done, we made
significant progress in 2014. Our teams joined
forces to align our culture of service and caring
so we can continue to help people age well. The
combination of remarkable talent in the two
companies provides new avenues for associate
development opportunities as well as enhanced
support systems to assist them in their jobs.
Although Brookdale is a national company,
we serve people locally. Our local associates
provide the care, and the personal touch,
for our residents every day. They see their
profession as more than a job. It’s a calling, and
the compassion they bring to work every day
ultimately drives the success of our company.
So I am pleased that, during the fourth quarter,
1,000th Wish of a
LifetimeTM Granted
Wish of a Lifetime™ marked a milestone when it granted it’s 1000th Wish to a deserving senior
since the non-profit’s start-up in 2008. In partnership with Brookdale, Wish of a Lifetime™
reconnected two high school football rivals who haven’t seen one another in 64 years – one
being the first African American drafted into the NFL. Freedom Plaza resident, 87-year-old
Carl Beisecker, wished to reunite with old friend and football legend, George Taliaferro.
George and his wife traveled from Indiana to Arizona to spend some time with Carl – just
before this year’s Super Bowl in the Phoenix area. Freedom Plaza is a Brookdale community.
Wish of a Lifetime is a trademark or registered trademark of Wish of a Lifetime, a Colorado corporation, in the United States and other countries.
5
%
29
of our Residents are in
Independent Living
6
we revamped our Associate Foundations
program to upgrade the training for all of our
new community associates in 2015. This is
part of our effort to provide our associates with
better training and tools so they can deliver the
effective and compassionate services and care
our residents want and need.
Our focus on helping the best people do their
best work is rewarded every day when our
associates take the time to reach out and connect
with our residents and their families. These
daily encounters, large and small, make all the
difference in the world to everyone involved.
Put simply, it is people serving people. And
while our mission is to enrich the lives of those
we serve, part of the magic in what we do is that
we enrich our lives as well.
In summary, Brookdale is the right company,
at the right time to be the leader of an industry
with very favorable industry dynamics: growing
demographics, a $55 billion market that will
expand rapidly, unmatched geographic presence
and density with 10 million seniors living
within 10 miles of one of our communities,
and only a 10% market share, giving us ample
room to grow. We are well-positioned and
well-prepared to take advantage of the growth
opportunities before us, by the scale and scope
of our footprint; by innovating in big and
small ways; and, finally, by our unwavering
commitment to our residents and their families
and our associates.
We thank you, our fellow shareholders, for your
investment in Brookdale and your confidence in
our prospects for further growth and increased
shareholder value.
Sincerely,
T. Andrew Smith
Chief Executive Officer
Horizon Bay Plano dining associate Donell “DJ” Akers received a Hero Award for the loving
attitude and giving nature he demonstrates daily in his community both on and off the clock.
He has taken the time to educate himself about those living with Alzheimer’s and other
dementias and treats residents with exceptional kindness daily, often visiting with them during
his personal time. The ALFA Hero Award is presented to an individual who is committed to the
core values of senior living: choice, independence, dignity and quality of life.
Forward-Looking Statements
Certain statements in this 2014 Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those
forward-looking statements are subject to various risks and uncertainties and 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 senior living industry, cost savings and the demand for senior housing; our expectations regarding our growth prospects; our plans to
expand our offering of ancillary (therapy, home health, personalized living and hospice) and other products and services; our expectations regarding our sales, marketing and
branding initiatives and their impact on our results; and our expectations regarding the integration of Emeritus Corporation. See “Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995” beginning on page 4 and “Risk Factors” beginning on page 23 of the enclosed Annual Report on Form 10-K for important factors
which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements.
Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management’s views as of the date of this 2014 Annual Report.
We cannot guarantee future results, levels of activity, performance or achievements, and we expressly disclaim any obligation to release publicly any updates or revisions
to any forward-looking statements contained in this 2014 Annual Report to reflect any change in our expectations with regard thereto or change in events, conditions or
circumstances on which any statement is based.
7
Financial Highlights
As of and for the years ended
December 31,
2014
2013
(in thousands, except per share data)
Selected Operating Data
$
Total revenue
$
(Loss) income from operations
Net loss attributable to Brookdale common stockholders
$
Net loss per share attributable to Brookdale common stockholders, basic and diluted $
Adjusted EBITDA(1)
$
Cash From Facility Operations(2)
$
Selected Balance Sheet Data
Property, plant and equipment and leasehold intangibles, net
Cash and cash equivalents
Total assets
Debt and capital and financing lease obligations
Brookdale stockholders’ equity
Weighted average shares used in computing basic and diluted net loss per share
$
$
$
$
$
3,831,706
(84,905)
(148,990)
(1.01)
490,675
218,342
8,389,505
104,083
10,521,363
6,265,956
2,881,724
148,185
Stock Performance Data
Closing share price on December 31, 2014
Closing share price on December 31, 2013
$
36.67
$
$
$
$
$
$
$
$
$
$
$
$
2,891,966
131,288
(3,584)
(0.03)
463,219
294,023
3,895,475
58,511
4,737,757
2,636,578
1,020,937
123,671
27.18
(1) Adjusted EBITDA is a measure of financial and operating performance that is not calculated in accordance with U.S. generally accepted accounting principles
(“GAAP”). Adjusted EBITDA should not be viewed in isolation or as a substitute for net income, income from operations or cash flows provided by or used in
operations, as calculated and presented in accordance with GAAP. Adjusted EBITDA is a key measure of the Company’s financial and 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), net of amortization of (above) below market rents; 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) CFFO is a measurement of liquidity that is not calculated in accordance with GAAP and should not be viewed in isolation as a substitute for cash flows provided by or
used in operations, as calculated and presented 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.
See “Non-GAAP Financial Measures” beginning on page 67 of the enclosed Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA and CFFO to net income
(loss) and net cash provided by (used in) operating activities, respectively.
200
150
250
Brookdale Senior Living
Russell 2000
S&P 500
S&P Healthcare
Peer Group
Comparison of 5 Year Cumulative Total Return
The graph compares the 5-year cumulative total
return for Brookdale common stock with the
comparable cumulative return of the Russell 2000
Index, the S&P 500 Index, the S&P Health Care
Index and a peer group of companies composed
of Capital Senior Living Corporation, Five
Star Quality Care, Inc., HCP, Inc., and Ventas,
Inc. The peer group does not include Emeritus
Corporation, which had previously been included
in the peer group, because Emeritus was acquired
by Brookdale in July 2014. The graph assumes
$100 was invested on December 31, 2009 in
each of Brookdale, the three indices and the peer
group and that all dividends were reinvested.
For 2015, the Company has determined to use
the S&P 500 Index and S&P Health Care Index,
which will replace the Russell 2000 Index and
the peer group, as a result of the substantial
increase in Brookdale’s market capitalization
following its acquisition of Emeritus during 2014.
The comparisons in this graph are required by
the SEC and are not intended to forecast or be
indicative of possible future performance of
Brookdale shares or the referenced indices.
Brookdale Senior Living 100.00
100.00
Russell 2000
100.00
S&P 500
100.00
S&P Health Care
100.00
Peer Group
12/2009
100
50
8
12/2010
12/2011
12/2012
12/2013
12/2014
117.70
126.86
115.06
102.90
127.25
95.60
121.56
117.49
116.00
145.67
139.20
141.43
136.30
136.75
173.49
149.42
196.34
180.44
193.45
154.06
201.59
205.95
205.14
242.46
197.88
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, 2014
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 30, 2014, the last business day of the registrant's most recently
completed second fiscal quarter, was approximately $4.2 billion. The market value calculation was determined using a per share price of $33.34, 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 19, 2015, 183,504,959 shares of the registrant's common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).
Certain sections of the registrant's Definitive Proxy Statement relating to its 2015 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
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
Executive Officers of the Registrant
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
3
PAGE
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21
23
38
39
40
40
41
42
43
73
74
116
116
116
117
118
118
119
119
120
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Those forward-looking statements are subject to various risks and uncertainties and 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, taxes, capital
deployment, returns on invested capital and CFFO; 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, personalized 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 in this Annual Report on Form 10-K); and our expectations regarding the integration of Emeritus and the transactions with HCP. Forward-
looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend,"
"expect," "endeavor," "seek," "anticipate," "estimate," "overestimate," "underestimate," "believe," "project," "predict," "continue," "plan," "target" or other similar
words or expressions. Forward-looking statements are based on certain assumptions or estimates, discuss future expectations, describe future plans and
strategies, contain projections of results of operations or of financial condition, or state other forward-looking information. Our ability to predict results or
the actual effect of future plans or strategies is inherently uncertain. Although we believe that expectations reflected in any forward-looking statements are
based on reasonable assumptions, we can give no assurance that our expectations will be attained and actual results and performance could differ materially
from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances
to differ from the forward-looking statements 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 integration of Emeritus and the transactions with HCP, including in respect of unanticipated difficulties and/or
expenditures relating to such transactions; the impact of such transactions on the Company's 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, including those set forth under "Item 1A. Risk Factors" contained in this Annual Report on Form 10-K. When
considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned
not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this Annual Report on Form
10-K. We cannot guarantee future results, levels of activity, performance or achievements, and we expressly disclaim any obligation to release publicly any
updates or revisions to any forward-looking statements contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard
thereto or change in events, conditions or circumstances on which any statement is based.
4
Item 1.
Business.
PART I
Unless otherwise specified, references to "Brookdale," "we," "us," "our" or "the Company" in this Annual Report on Form 10-K mean Brookdale Senior Living
Inc. together with its consolidated subsidiaries.
Overview
Our Business
As of December 31, 2014, we are the largest operator of senior living communities in the United States based on total capacity, with 1,143 communities in 46
states and the ability to serve approximately 111,000 residents. We offer our residents access to a full continuum of services across the most attractive
sectors of the senior living industry. We operate independent living, assisted living and dementia-care communities and continuing care retirement centers
("CCRCs"). Through our ancillary services program, we also offer a range of outpatient therapy, home health, personalized living and hospice services to
residents of many of our communities and to seniors living outside of our communities.
As of December 31, 2014, we owned or leased 982 communities with 83,176 units and provided management services with respect to 161 communities with
27,683 units for third parties or unconsolidated ventures in which we have an ownership interest. As of December 31, 2014, we operated 148 retirement
center communities with 26,514 units, 915 assisted living communities with 62,697 units and 80 CCRCs with 21,648 units. We offer therapy services to
approximately 54,000 of our units and home health services to approximately 56,000 of our units. The majority of our units are located in campus settings or
communities containing multiple services, including CCRCs. During the year ended December 31, 2014, we generated approximately 80.7% of our resident
fee revenues from private pay customers. For the year ended December 31, 2014, 39.2% of our resident and management fee revenues were generated from
owned communities, 49.4% from leased communities, 10.1% from our Brookdale Ancillary Services business and 1.3% from management fees from
communities we operate on behalf of third parties or unconsolidated ventures.
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, renovating, redeveloping and repositioning our existing communities, and acquiring additional operating companies and communities.
5
Developments during 2014
During 2014, we announced and completed several transactions as part of our long-term objectives to grow our revenues, Adjusted EBITDA, Cash From
Facility Operations and Facility Operating Income. 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 Adjusted EBITDA and Facility Operating Income and a reconciliation of
net cash provided by operating activities to Cash From Facility Operations.
· Emeritus Merger. On July 31, 2014, we acquired Emeritus Corporation ("Emeritus"), a senior living service provider focused on operating residential
style communities throughout the United States, for approximately $3.0 billion consisting of the issuance of our stock with a fair value of approximately
$1.6 billion and our assumption of approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness. At the closing of the merger,
the size of our consolidated portfolio increased by 493 communities, 182 of which were owned and 311 of which were subject to leases that we directly
or indirectly assumed in the merger. The Emeritus communities provide independent living, assisted living, memory care and, to a lesser extent, skilled
nursing care.
The merger significantly increased our scale and provides us the opportunity to leverage this scale to build our national brand and provide greater organic
growth, achieve greater operating efficiencies, and drive new innovations to serve our residents. In addition, the merger provided us entry into 10 new
states and significantly increased our presence in many high-population states, especially in the west and northeast. Enhanced geographic coverage and
density is a contributing factor to our ability to increase our operating efficiencies and may provide additional opportunities for growth from markets with
clusters of assets. The merger also enables us to expand our therapy, home health and hospice ancillary programs into the Emeritus communities and
accelerate the introduction of Emeritus' Nurse on Call home health services into our major markets.
Since the closing of our acquisition of Emeritus, we have executed on our plans to integrate Emeritus into our systems and infrastructure platform as
rapidly as prudently possible. In January 2015, we completed the third of our four cutover waves of integration activities. We expect the fourth wave to be
completed in the late summer of 2015, though the overall integration effort will continue throughout 2015. Once wave four is complete, we will have a
common systems and infrastructure platform and will be able to manage our business more uniformly across our entire system.
· HCP Ventures and Lease Amendments. On August 29, 2014, we completed transactions with HCP, Inc. ("HCP") pursuant to which we and HCP entered
into two ventures and amended the terms of certain existing triple net leases between us and HCP (including those acquired in the Emeritus merger). Each
of the ventures uses a "RIDEA" structure, whereby we and HCP invested in an "opco" entity and a "propco" entity. The propco owns most of the applicable
communities and leases such communities to the opco pursuant to long-term leases entered into at the closing. The opco owns the remainder of the
applicable communities not owned by the propco, and at the closing the opco engaged an affiliate of ours to manage all of the owned and leased
communities pursuant to management agreements with 15-year terms subject to certain extension options. The transactions with HCP provide us a
strategic capital platform to continue to grow in the senior housing industry and to deliver the best, high-quality solutions for our current residents and
address the growing population of seniors.
CCRC Venture. At the closing, we and HCP entered into a venture with respect to certain entry fee CCRCs previously owned, leased and/or operated by
us. We own a 51% ownership interest, and HCP owns a 49% ownership interest, in each of the propco and opco. At the closing, we contributed to the
venture eight wholly-owned entities (owning eight CCRCs subject, in certain cases, to existing debt) and certain purchase options with respect to the HCP
Communities (as defined below), and HCP contributed to the venture three wholly-owned entities (owning three properties in two CCRC communities
(the "HCP Communities")). In addition, HCP contributed $323.5 million in cash and the venture completed the purchases of four communities managed by
us for an aggregate purchase price of $323.5 million immediately following the closing. Each of the communities in the venture is managed by us pursuant
to market rate management agreements entered into at the closing, and we have agreed to guarantee certain obligations of the manager under the applicable
management agreements. Each of the propco and opco is governed by a board of managers consisting of six members, with three representatives appointed
by each of us and HCP.
6
HCP 49 Venture. In addition, at the closing, we and HCP entered into a venture with respect to certain independent living, assisted living, memory care
and/or skilled nursing care communities previously owned by HCP and leased and historically operated by Emeritus. We acquired the leases though the
acquisition of Emeritus, and our entry into the venture effectively terminated the leases. HCP had granted Emeritus purchase option rights with respect to
each of the 49 communities, and these purchase options were terminated at the closing. We own a 20% ownership interest, and HCP owns an 80%
ownership interest, in each of the propco and opco. At the closing, an HCP affiliate made a loan to us at prevailing interest rates in the original principal
amount of approximately $68 million to fund our initial capital contribution to the venture. HCP contributed 49 communities to propco, and at closing,
propco leased the communities to opco. Each of the communities in the venture is managed by an affiliate of ours, and we have agreed to guarantee certain
obligations of the manager under the applicable market rate management agreements. During the three months ended December 31, 2014, we repaid the
$68 million loan from HCP primarily with the proceeds from the public equity offering completed during the third quarter of 2014.
Master Lease. Finally, at the closing, we and HCP amended and restated several triple net leases between affiliates of HCP and Emeritus, covering an
aggregate of 153 communities, together into a single master lease with the communities subject thereto separated into three pools (the "Master Lease").
The term of the Master Lease is 14 years for the pool 1 communities, 15 years for the pool 2 communities and 16 years for the pool 3 communities, with
an average of approximately fifteen years, in each case subject to 2 extension options of approximately 10 years each, and the Master Lease is guaranteed
by us. The Master Lease provided for total base rent in 2014 of approximately $158.0 million, with lower future rent payments and escalations compared
to the previously existing leases. Under the Master Lease, HCP has agreed to make available up to $100.0 million for capital expenditures related to the
communities during calendar years 2014 through 2017 at an initial lease rate of 7.0%. In addition, the Master Lease includes a purchase option in our
favor for up to 10 communities at an aggregate purchase price not to exceed $60.0 million. On December 29, 2014, we exercised this purchase option and
agreed to purchase nine communities for an aggregate purchase price of $60.0 million.
During 2014, after completion of the transactions with Emeritus and HCP, we continued our efforts to strengthen our financial position. In the fourth quarter
of 2014, we expanded and extended the maturity date of our secured credit facility, and in the third quarter of 2014 we completed a registered public equity
offering, which resulted in net proceeds of approximately $330.4 million. During the three months ended December 31, 2014, we repaid $275.9 million of
existing long-term debt with a weighted average interest rate of 5.5%, financed primarily with the proceeds of the public equity offering, and we have used and
are using the remaining net proceeds to finance the exercise of purchase options on certain communities currently leased by us and for other general corporate
purposes, which may include additional debt repayments and the acceleration of capital investments in our communities and corporate infrastructure platform.
We ended the year with $104.1 million of unrestricted cash and cash equivalents on our consolidated balance sheet and $388.4 million of availability on our
secured credit facility.
During the year, we also made additional progress on our Program Max initiative under which we expand, renovate, redevelop and reposition certain of our
existing communities where economically advantageous. For the year ended December 31, 2014, we invested $59.8 million on Program Max projects, net of
$34.6 million of third party lessor reimbursement. We completed 16 Program Max projects in 2014, which resulted in 396 net new units. We currently have
18 additional Program Max projects that have been approved, most of which have begun construction and are expected to generate 418 net new units.
7
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:
· 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. 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. 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. Through our Program Max initiative, we intend to expand, renovate,
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 we believe will
create 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 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. We will continue to roll out hospice services into our markets. In 2014, we
increased the number of markets with hospice services to 18 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 link our unique continuum of care with other post-acute care providers to provide the most effective, comprehensive set of
solutions for seniors.
8
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-1990s.
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 in 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, and 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, 2015. 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 prepayment 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 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, 2015, 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.
9
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 that 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.
On July 31, 2014, we completed the merger contemplated by that certain Agreement and Plan of Merger, dated as of February 20, 2014, by and among
Emeritus Corporation, a Washington corporation, Brookdale Senior Living Inc., and Broadway Merger Sub Corporation, a Delaware corporation and wholly-
owned subsidiary of ours, pursuant to which the subsidiary merged with and into Emeritus, with Emeritus continuing as the surviving corporation and a wholly-
owned subsidiary of ours.
Our Communities and Service Offerings
We offer a variety of senior living housing and service alternatives in communities located across the United States. Our communities consist of retirement
center communities, assisted living communities, rental CCRCs and entry fee CCRCs. We manage certain of our communities for third parties or
unconsolidated ventures in which we have an ownership interest pursuant to management agreements. In addition, through our ancillary services program, we
provide outpatient therapy, home health, personalized living and hospice services to residents of many of our communities and to seniors living outside of our
communities.
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, as of December 31, 2014 approximately 75.9% 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 179 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.
10
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.
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.
Retirement center communities that we own or lease are included in our Retirement Centers segment, and retirement center communities for which we
provide management services for third parties or unconsolidated ventures in which we have an ownership interest are included in our Management Services
segment. As of December 31, 2014, our Retirement Center segment consisted of 99 retirement center communities with 17,362 units, representing 15.7% of
our total senior living capacity, and 49 retirement center communities with 9,152 units were included in our Management Services segment, representing 8.3%
of our total senior living capacity. In the aggregate, these retirement center communities represented 23.9% 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.
We also operate 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 14 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.
Assisted living communities (including memory care communities) that we own or lease are included in our Assisted Living segment, and assisted living
communities for which we provide management services for third parties or unconsolidated ventures in which we have an ownership interest are included in
our Management Services segment. As of December 31, 2014, our Assisted Living segment consisted of 838 assisted living communities with 55,232 units,
representing 49.8% of our total senior living capacity, and 77 assisted living communities with 7,465 units were included in our Management Services
segment, representing 6.7% of our total senior living capacity. In the aggregate, these assisted living communities represented 56.6% of our total senior living
capacity.
As of December 31, 2014, we provide memory care services at 576 of our communities, aggregating 14,054 memory care units across our segments. These
communities include 128 freestanding memory care communities with 4,934 units included in our Assisted Living segment.
11
CCRCs. 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.
CCRCs that we own or lease are included in our CCRCs - Rental segment, and CCRCs for which we provide management services for third parties or
unconsolidated ventures in which we have an ownership interest are included in our Management Services segment. As of December 31, 2014, our CCRCs -
Rental segment included 45 CCRCs with 10,582 units, representing 9.5% of our total senior living capacity, and 35 CCRCs with 11,066 units were included in
our management services segment, representing 10.0% of our total senior living capacity. In the aggregate, these CCRCs represented 19.5% of our total senior
living capacity.
Eighteen of our CCRCs 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. We refer to these communities as entry fee CCRCs. 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 entrance fees are paid upon initial occupancy, the monthly fees are generally less than fees at a comparable rental community. 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. As of December 31,
2014, our CCRCs - Rental segment included three entry fee CCRCs with 1,218 units, representing 1.1% of our total senior living capacity, and 15 entry fee
CCRCs with 7,487 units were included in our Management Services segment, representing 6.8% of our total senior living capacity.
Brookdale Ancillary Services. Through our ancillary services program, we currently provide home health, therapy 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 ancillary services offerings 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.
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 segment.
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 an unconsolidated venture 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.
As of December 31, 2014, the 161 communities and 27,683 units in our Management Services segment represented 25.0% of our total senior living capacity.
As of that date, we operated 61 communities, representing 8,396 units, for third parties and 100 communities, representing 19,287 units, for unconsolidated
ventures in which we have an ownership interest. As of December 31, 2014, these communities consisted of 49 retirement center communities, 77 assisted
living communities and 35 CCRCs.
12
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. Our acquisition of Emeritus expanded our unit capacity by more than two-thirds,
provided entry into 10 new states and significantly increased our presence in high-population states, especially in the west and northeast. As of December
31, 2014, we are the largest operator of senior living communities in the United States based on total capacity, with 1,143 communities in 46 states and
the ability to serve approximately 111,000 residents.
· 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 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 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 communities, and CCRCs. 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, 2014, we had five reportable segments: Retirement Centers; Assisted Living; CCRCs – Rental; 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 five 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.
13
Operations
Operations Overview
We believe that successful senior living operators must effectively combine the expertise and business disciplines of housing, hospitality, health care, sales,
marketing, dining, finance and real estate.
We continually review opportunities to expand the types of services we provide to our residents. We seek to increase our average monthly revenue per unit
each year and seek to increase 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 and training materials, 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, family connections
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.
We are in the process of executing on our plans to integrate Emeritus into our systems and infrastructure platform. In January 2015, we completed the third of
our four cutover waves of integration activities. We expect the fourth wave to be completed in the late summer of 2015, though the overall integration effort
will continue throughout 2015. Once wave four is complete, we will have a common systems and infrastructure platform and will be able to manage our
business more uniformly across our entire system.
14
Community Staffing and Training
Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of care and 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 care and 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 housing markets, we have implemented several sales and marketing initiatives designed to increase entrance fee
sales. 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.
15
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 only major publicly-traded competitor that operates senior living
communities is Capital Senior Living Corporation. 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.
In addition, several publicly-traded and non-traded real estate investment trusts, or REITs, have similar asset acquisition objectives as we do, along with greater
financial resources and/or 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. 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 32 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 21 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, assisted living and dementia care 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, 2014, we had approximately 52,500 full-time employees and approximately 29,500 part-time employees, of which 557 work in our
Brentwood, Tennessee (a suburb of Nashville) headquarters office, 631 work in our Milwaukee, Wisconsin office and 487 work in our smaller regional
support offices and a variety of field-based management positions. We currently consider our relationship with our employees to be good.
16
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 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.
17
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 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.
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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 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.
19
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, Chief Accounting 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.
20
Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of February 24, 2015:
Name
T. Andrew Smith
Mark W. Ohlendorf
Gregory B. Richard
Bryan D. Richardson
Glenn O. Maul
Tricia A. Conahan
Kristin A. Ferge
George T. Hicks
H. Todd Kaestner
Age
54
54
60
56
60
57
41
57
59
Position
Chief Executive Officer and Director
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 Chief Marketing Officer
Executive Vice President, Chief Accounting Officer and Treasurer
Executive Vice President – Finance
Executive Vice President – Corporate Development
T. Andrew Smith has served as our Chief Executive Officer since February 2013 and a member of our Board of Directors since June 2014. He has over 25
years of experience in seniors housing, mergers and acquisitions, real estate and capital markets transactions, corporate finance and healthcare. From October
2006 to February 2013, Mr. Smith served as our Executive Vice President, General Counsel and Secretary. In addition to his role in managing our legal affairs,
Mr. Smith was responsible for the management and oversight of our corporate development functions (including acquisitions and expansion and development
activity); corporate finance (including capital structure, debt and lease transactions and lender/lessor relations); strategic planning; and risk management. Prior
to joining Brookdale, Mr. Smith served as a member of Bass, Berry & Sims PLC's corporate and securities group and as chair of the firm's healthcare group.
During his tenure at Bass, Berry & Sims (1985 to 2006), Mr. Smith represented American Retirement Corporation as outside General Counsel. He currently
serves as a member of the board of directors of the Nashville Health Care Council and the National Investment Center for the Seniors Housing & Care Industry
(NIC) and as a member of the executive board of the American Seniors Housing Association (ASHA).
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 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.
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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. While Mr. Maul has spent most of his career focusing on human resources, his early career included roles in finance and operations. Mr. Maul is
certified as a Senior Professional in Human Resources (SPHR).
Tricia A. Conahan became our Executive Vice President and Chief Marketing Officer in April 2014. Previously, she served as Chief Marketing & Sales
Officer for Grant Thornton, LLP, a global accounting/consulting firm, from 2010 until March 2014. Ms. Conahan also served as Managing Director of
Fernwood Holdings, LLC, a multi-family residential business, from 2009 until 2012. She served as Senior Vice President, Brand & Customer Acquisition for
JPMorgan Chase from 2008 through 2009 and as Head of Brand Marketing at ING Americas from 2001 through 2008. From 1999 through 2001, Ms. Conahan
served as Chief Marketing Officer for RealEstate.com. Ms. Conahan has also held marketing leadership positions at McGraw-Hill Inc., Time Warner and
Times Mirror Magazines.
Kristin A. Ferge became our Executive Vice President and Treasurer in August 2005 and became our Chief Accounting Officer in July 2014. 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.
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Item 1A.
Risk Factors.
Risks Related to Emeritus Integration
Failure to successfully integrate Emeritus into our existing business in the expected timeframe could negatively affect our share price, future business
and financial results.
The acquisition of Emeritus involves the integration of two companies that had previously operated independently. The success of the acquisition will depend,
in large part, on our ability to realize the anticipated benefits, including cost savings and synergies, from combining the businesses of Brookdale and Emeritus.
To realize these anticipated benefits, the businesses must be successfully integrated. This integration will be complex and time-consuming. The failure to
integrate successfully and to manage successfully the challenges presented by the integration process may result in us not achieving the anticipated benefits of
the acquisition.
We may incur substantial costs in connection with the integration of Emeritus.
Additional unanticipated costs may be incurred, including, without limitation, unexpected transaction costs and other expenses in the course of the integration
of our business and the business of Emeritus. We cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to
the transactions will offset the transaction and integration costs in the near term, or at all.
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, 2015. 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 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, 2015, 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.
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The impact of 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 expanded health care coverage to millions of previously 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 new or 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. Furthermore, the Supreme Court is expected to hear a challenge to the payment of subsidies to
those who purchase health insurance on federally-established exchanges, and we cannot predict the impact that the Court's decision will have on the health care
industry.
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 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 experienced beginning in 2007, 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 volatility in the housing market continues for a protracted period, our occupancy rates, revenues, cash flows
and results of operations could be negatively impacted.
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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, 2014, we had three principal corporate-level debt obligations: our $500.0 million secured credit facility, our $316.3 million 2.75%
convertible senior notes due 2018 and separate secured and unsecured letter of credit facilities providing for up to $98.7 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, 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.
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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 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 limit or restrict our operations and activities (including
our ability to borrow additional funds and engage in certain transactions without consent of the applicable lender or lessor), 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 limit or restrict, among other things,
our ability and our subsidiaries' ability to borrow additional funds, engage in a change in control transaction, dispose of all or substantially all of our or their
assets, or engage in mergers or other business combinations without consent of the applicable lender or lessor.
26
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 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.
27
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.
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. To the extent we do identify and complete any future acquisition
opportunities, 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.
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Competition for the acquisition of strategic assets from buyers with greater financial resources or 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 publicly-traded and non-traded real estate investment trusts, or REITs, have similar asset acquisition objectives as we do, along with greater financial
resources and/or 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 publicly-traded and non-traded 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 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.
Our investment in our entrance fee CCRC venture with HCP is susceptible to risks associated with the lifecare benefits offered to the residents of the
venture's lifecare entrance fee communities, and we are also susceptible to such risks for our owned and/or operated entrance fee CCRCs.
As of December 31, 2014, we managed lifecare entrance fee communities as part of our entrance fee CCRC venture with HCP, and we owned and/or operated
three other lifecare communities. Residents of these communities typically receive a limited lifecare benefit and 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 these communities are not sufficient to cover the cost of lifecare benefits granted to
residents, our interest in the results of operations and financial condition of these communities and the venture could be adversely affected.
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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 the entrance fee communities during their lifetime, we cannot assure you that such assets, income, and
reimbursements will be sufficient in all cases. If insufficient, we or the entrance fee CCRC venture, as applicable, would 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 these
communities must pay third parties to provide nursing care to residents of these communities, our interest in the results of operations and financial condition
of these communities and the venture would be adversely affected.
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 by an unconsolidated venture in which we have an ownership interest. At December 31, 2014,
we managed 161 communities, representing 25.0% of our capacity, 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 and through our entry into ventures with HCP in 2014. 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 unconsolidated 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 unconsolidated 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.
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, California, Ohio and Washington. 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 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.
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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.
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 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. 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. The new election rules recently promulgated by the National Labor Relations Board will
substantially change – and expedite – the existing union election process, thereby limiting the time available for us to attempt to persuade employees to vote
against representation. Unless enjoined by a federal court, the rules go into effect April 14, 2015. 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.
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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
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.
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Risks Related to Pending Litigation
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 that 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
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;
· damage to our business and reputation in various markets; or
· significant investment of time and money even if eventually favorably determined.
These results could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
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.
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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 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.
Compliance with the Americans with Disabilities Act, 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.
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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.
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).
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Risks Related to Our Organization and Structure
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;
· blank-check preferred stock;
· provisions 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.
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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:
· 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;
· speculation or reports by the press or investment community with respect to us 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.
37
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, 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.
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, 2014, approximately 183.5 million 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.
In addition, as of December 31, 2014, approximately 3.6 million shares of restricted common stock were outstanding under our 2014 Omnibus Incentive Plan
and our Omnibus Stock Incentive Plan, and we had availability to issue approximately 8.5 million additional shares under our 2014 Omnibus Incentive Plan, our
Associate Stock Purchase Plan, and our Director Stock Purchase Plan. The shares of our common stock issued or issuable pursuant to these plans are or will
be registered under the Securities Act, and once any restrictions imposed on the shares and options granted under these plans expire, such shares of common
stock will be available for sale into the public markets.
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 have been subject to an annual limitation. 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. The acquisition of Emeritus Corporation also resulted in an
ownership change and created an annual limitation on Emeritus' net operating losses.
Item 1B.
Unresolved Staff Comments.
None.
38
Item 2.
Properties.
Facilities
At December 31, 2014, we operated 1,143 communities across 46 states, with the capacity to serve approximately 111,000 residents. Of the communities we
operated at December 31, 2014, we owned 399, we leased 583 pursuant to operating, capital and financing leases, and 161 were managed by us for third parties
or unconsolidated ventures in which we have an ownership interest.
The following table sets forth certain information regarding our communities at December 31, 2014:
State
Florida
Texas
California
Ohio
Washington
Colorado
Arizona
Illinois
North Carolina
Oregon
Michigan
Virginia
New York
Tennessee
Indiana
South Carolina
Georgia
Oklahoma
Kansas
Massachusetts
New Jersey
Pennsylvania
Alabama
Rhode Island
Missouri
Minnesota
Kentucky
Connecticut
Wisconsin
New Mexico
Mississippi
Nevada
Maryland
Louisiana
Idaho
Arkansas
Nebraska
Utah
West Virginia
Montana
Delaware
Iowa
Wyoming
Vermont
New Hampshire
North Dakota
Total
Occupancy
Ownership Status
Units
Rate(1)(2)
Owned
Leased
Managed
Total
17,716
14,348
11,037
5,014
4,986
4,642
4,112
3,930
3,851
3,301
2,912
2,598
2,551
2,331
1,994
1,937
1,879
1,747
1,607
1,585
1,544
1,378
1,365
1,184
1,181
935
913
893
805
796
682
677
614
611
605
495
456
368
271
238
200
182
112
101
90
85
110,859
86%
87%
89%
87%
90%
86%
86%
90%
90%
94%
86%
85%
87%
89%
88%
89%
88%
87%
92%
79%
87%
85%
94%
87%
91%
88%
90%
82%
87%
77%
92%
85%
85%
86%
84%
88%
86%
88%
89%
93%
95%
80%
88%
94%
97%
86%
88%
39
56
57
27
26
14
10
16
5
10
8
10
9
17
15
10
5
9
10
10
3
7
10
6
1
2
3
1
2
6
2
5
2
1
6
7
4
0
0
1
1
2
1
0
1
1
0
399
50
44
56
28
38
20
16
10
52
32
24
7
15
16
11
20
14
21
12
5
10
3
3
4
1
15
4
7
12
4
4
5
3
1
1
0
5
2
2
2
1
0
2
0
0
1
583
32
30
11
6
3
9
5
6
1
5
3
3
3
4
3
0
4
2
2
5
2
1
1
4
2
1
1
1
2
1
0
1
3
0
0
1
0
2
0
0
0
1
0
0
0
0
161
138
131
94
60
55
39
37
21
63
45
37
19
35
35
24
25
27
33
24
13
19
14
10
9
5
19
6
10
20
7
9
8
7
7
8
5
5
4
3
3
3
2
2
1
1
1
1,143
(1) Includes the impact of managed properties.
(2) Represents occupancy at December 31, 2014.
Substantially all of our owned properties are subject to mortgages.
Corporate Offices
Our main corporate offices are all leased, including our 136,412 square foot headquarters facility in Brentwood, Tennessee (a suburb of Nashville) and our
158,201 square foot shared service facility in Milwaukee, Wisconsin. We also lease smaller regional support offices in Chicago, Seattle and Tampa.
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
In connection with our acquisition of Emeritus, three purported class action lawsuits relating to the Agreement and Plan of Merger, dated as of February 20,
2014 (the "Merger Agreement"), by and among Brookdale Senior Living Inc., Emeritus and Broadway Merger Sub Corporation ("Merger Sub"), were filed on
behalf of Emeritus shareholders in the Superior Court of King County, Washington against Emeritus, members of the Emeritus board of directors, Brookdale
Senior Living Inc. and Merger Sub (the "Defendants"), which lawsuits were subsequently consolidated into a single action captioned In re Emeritus Corp.
Shareholder Litigation, No. 14-2-06385-7 SEA (the "Washington Action"). The complaints allege that the Emeritus board of directors breached its fiduciary
duties to Emeritus' shareholders by, among other things, failing to maximize shareholder value in connection with the merger or to engage in a fair sale process
before approving the merger and by failing to disclose all material information concerning the merger to Emeritus' shareholders. The three complaints also
allege that Brookdale Senior Living Inc., Emeritus and Merger Sub aided and abetted Emeritus' board of directors' alleged breaches of fiduciary duties. The
complaints seek, among other things, injunctive relief, including rescission of the merger, and damages, including counsel fees and expenses. On June 26,
2014, the Defendants entered into a memorandum of understanding (the "Memorandum of Understanding") with respect to a proposed settlement of the
Washington Action, pursuant to which the parties agreed, among other things, that Brookdale Senior Living Inc. and Emeritus would make certain supplemental
disclosures related to the proposed merger, which supplemental disclosures were made by Brookdale Senior Living Inc. in a Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 27, 2014 and incorporated by reference into Brookdale Senior Living Inc.'s Registration Statement on
Form S-4 and the joint proxy statement/prospectus of Brookdale Senior Living Inc. and Emeritus included therein. The parties have agreed to use their
collective best efforts to obtain final approval of the settlement and the dismissal of the Washington Action with prejudice. The parties have finalized a
stipulation of settlement, which is subject to customary conditions, including final court approval following notice to Emeritus' shareholders. As explained in
the Memorandum of Understanding, if the settlement is finally approved by the Washington court, the parties anticipate that it will resolve and release all
claims in all actions pursuant to terms that will be disclosed to former Emeritus shareholders prior to final approval of the settlement. In addition, in
connection with the settlement, the parties contemplate that plaintiffs' counsel in the Washington Action will file a petition in the Washington court for an
award of attorneys' fees and expenses to be paid by Brookdale Senior Living Inc. Brookdale Senior Living Inc. will pay or cause to be paid any attorneys' fees
and expenses awarded by the Washington court. There can be no assurance that the Washington court will approve the settlement. In such event, the proposed
settlement as contemplated by the Memorandum of Understanding may be terminated.
Item 4. Mine Safety Disclosures.
Not applicable.
40
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
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 2014
High
Low
34.37 $
34.80 $
36.18 $
37.03 $
26.11
29.50
32.02
30.12
Fiscal 2013
High
Low
29.92 $
30.31 $
30.65 $
30.00 $
25.04
25.31
24.42
25.46
$
$
$
$
$
$
$
$
The closing sale price of our common stock as reported on the NYSE on February 19, 2015 was $36.90 per share. As of that date, there were approximately
378 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 since that time.
Although we anticipate that, in 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 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.
41
Item 6.
Selected Financial Data.
This selected financial data should be read in conjunction with the information contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our historical consolidated financial statements and related notes included in "Item 8. Financial Statements and
Supplementary Data." 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, 2014 have been derived from our audited financial statements.
Our 2014 results reflect our acquisition of Emeritus subsequent to July 31, 2014, the closing date of the merger. In addition, with respect to the communities
contributed to the CCRC Venture and HCP 49 Venture and communities subject to the Master Lease, our results reflect our previously existing ownership,
lease and/or management interests through August 29, 2014, and reflect our venture and management interests and amended lease terms for the remainder of
the period. We contributed all but two of our entry fee CCRCs to the CCRC Venture on August 29, 2014, at which time the contributed CCRCs were
deconsolidated.
$
(in thousands, except per share and other operating data)
Total revenue
Facility operating expense
General and administrative expense
Transaction costs
Facility lease expense
Depreciation and amortization
(Gain) loss on facility lease termination
Gain on sale of communities, net
Loss (gain) on acquisition
Asset impairment
Costs incurred on behalf of managed communities
Total operating expense
(Loss) income from operations
Interest income
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt premium
(discount)
Change in fair value of derivatives
Debt modification and extinguishment costs
Equity in earnings (loss) of unconsolidated ventures
Other non-operating income (expense)
Loss before income taxes
Benefit (provision) for income taxes
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to Brookdale Senior Living Inc. common
$
2014
3,831,706
2,210,368
280,267
66,949
323,830
537,035
—
―
—
9,992
488,170
3,916,611
(84,905)
1,343
For the Years Ended December 31,
2012
2013
2011
$
2,891,966
1,671,945
180,627
3,921
276,729
268,757
―
―
―
12,891
345,808
2,760,678
131,288
1,339
$
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
$
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
2010
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
(128,002)
(109,998)
(96,131)
(25,194)
(98,183)
(30,155)
(93,229)
(31,644)
(102,245)
(30,396)
(7,477)
(2,711)
(6,387)
171
7,235
(330,731)
181,305
(149,426)
436
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584)
―
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467)
―
(13,427)
(3,878)
(18,863)
1,432
56
(67,270)
(1,780)
(69,050)
―
(8,963)
(4,118)
(1,557)
168
(1,454)
(81,948)
32,062
(49,886)
―
stockholders
$
(148,990) $
(3,584) $
(66,467) $
(69,050) $
(49,886)
Basic and diluted net loss per share attributable to Brookdale
Senior Living Inc. common stockholders
$
(1.01) $
(0.03) $
(0.54) $
(0.57) $
(0.42)
Weighted average shares of common stock used in computing
basic and diluted net loss per share
148,185
123,671
121,991
121,161
120,010
Other Operating Data:
Total number of communities (at end of period)
Total units operated(1)
Period end
Weighted average
1,143
110,219
84,299
649
66,832
66,173
647
65,936
66,102
647
66,183
55,548
Owned/leased communities occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(2)
88.3%
4,357
$
88.7%
4,383
$
88.0%
4,271
$
87.3%
4,193
$
559
50,521
50,870
87.1%
4,053
42
(in millions)
Cash and cash equivalents
Total assets
Total long-term debt and line of credit
Total capital and financing lease obligations
Total equity
2014
2013
As of December 31,
2012
2011
2010
$
$
$
$
$
104.1 $
10,521.4 $
3,616.7 $
2,649.2 $
2,882.2 $
58.5 $
4,737.8 $
2,366.8 $
299.8 $
1,020.9 $
69.2 $
4,706.8 $
2,359.6 $
319.8 $
997.0 $
30.8 $
4,503.4 $
2,115.4 $
348.2 $
1,035.3 $
81.8
4,565.8
2,199.1
371.2
1,056.0
(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.
This discussion and analysis should be read in conjunction with the information contained in "Item 6. Selected Financial Data" and our historical
consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data." 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
"Item 1A. Risk Factors" of this Annual Report on Form 10-K.
Executive Overview and Recent Developments
As of December 31, 2014, we are the largest operator of senior living communities in the United States based on total capacity, with 1,143 communities in 46
states and the ability to serve approximately 111,000 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, 2014, we operated in five business segments: Retirement Centers, Assisted Living, Continuing Care
Retirement Communities ("CCRCs") - Rental, Brookdale Ancillary Services and Management Services.
As of December 31, 2014, we owned or leased 982 communities with 83,176 units and provided management services with respect to 161 communities with
27,683 units for third parties or unconsolidated ventures in which we have an ownership interest. As of December 31, 2014, we operated 148 retirement
center communities with 26,514 units, 915 assisted living communities with 62,697 units and 80 CCRCs with 21,648 units. We offer therapy services to
approximately 54,000 of our units and home health services to approximately 56,000 of our units. The majority of our units are located in campus settings or
communities containing multiple services, including CCRCs. During the year ended December 31, 2014, we generated approximately 80.7% of our resident
fee revenues from private pay customers. For the year ended December 31, 2014, 39.2% of our resident and management fee revenues were generated from
owned communities, 49.4% from leased communities, 10.1% from our Brookdale Ancillary Services business and 1.3% from management fees from
communities we operate on behalf of third parties or unconsolidated ventures.
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 (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.
During 2014, we announced and completed several transactions as part of our long-term objectives to grow our revenues, Adjusted EBITDA, Cash From
Facility Operations and Facility Operating Income. These transactions, described further below, include our acquisition of Emeritus Corporation ("Emeritus")
and our entry into two ventures and a master lease with HCP, Inc. ("HCP"). 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.
43
· Emeritus Merger. On July 31, 2014, we acquired Emeritus, a senior living service provider focused on operating residential style communities throughout
the United States, for approximately $3.0 billion consisting of the issuance of our stock with a fair value of approximately $1.6 billion and our assumption
of approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness. At the closing of the merger, the size of our consolidated
portfolio increased by 493 communities, 182 of which were owned and 311 of which were subject to leases that we directly or indirectly assumed in the
merger. The Emeritus communities provide independent living, assisted living, memory care and, to a lesser extent, skilled nursing care. The merger
significantly increased our scale and provides us the opportunity to leverage this scale to build our national brand and provide greater organic growth,
achieve greater operating efficiencies, and drive new innovations to serve our residents. In addition, the merger provided us entry into 10 new states and
significantly increased our presence in many high-population states, especially in the west and northeast. Enhanced geographic coverage and density is a
contributing factor to our ability to increase our operating efficiencies and may provide additional opportunities for growth from markets with clusters of
assets. The merger also enables us to expand our therapy, home health and hospice ancillary programs into the Emeritus communities and accelerate the
introduction of Emeritus' Nurse on Call home health services into our major markets. The results of Emeritus' operations have been included in the
consolidated financial statements subsequent to the acquisition date.
Since the closing of our acquisition of Emeritus, we have executed on our plans to integrate Emeritus into our systems and infrastructure platform as
rapidly as prudently possible. In January 2015, we completed the third of our four cutover waves of integration activities. We expect the fourth wave to be
completed in the late summer of 2015, though the overall integration effort will continue throughout 2015. Once wave four is complete, we will have a
common systems and infrastructure platform and will be able to manage our business more uniformly across our entire system.
During the fourth quarter of 2014, we experienced lower than expected occupancy rates, mostly concentrated in legacy Emeritus communities and
attributable to lower than expected levels of move-ins. As part of the integration, we created a number of new reporting relationships for our sales and
operational teams, and former Emeritus sales teams acclimated to new systems and processes. In addition, our lead generation was temporarily reduced as
we worked through relationships with referral sources and as we combined the Brookdale and Emeritus websites and lead banks. The combination of these
factors adversely impacted our incremental move-ins during the fourth quarter of 2014, while our move-out activity was within our normal seasonal
pattern. We believe we are making progress towards normalization of our move-ins. In addition, we have accelerated our capital expenditures on legacy
Emeritus communities to provide our sales force and our residents a more attractive product, and we plan to fully or partially renovate more than 150
legacy Emeritus communities during 2015.
· HCP Ventures and Lease Amendments. On August 29, 2014, we completed transactions with HCP pursuant to which we and HCP entered into two
ventures and amended the terms of certain existing triple net leases between us and HCP (including those acquired in the Emeritus merger). Each of the
ventures uses a "RIDEA" structure, whereby we and HCP invested in an "opco" entity and a "propco" entity. The propco owns most of the applicable
communities and leases such communities to the opco pursuant to long-term leases entered into at the closing. The opco owns the remainder of the
applicable communities not owned by the propco, and at the closing the opco engaged an affiliate of ours to manage all of the owned and leased
communities pursuant to management agreements with 15-year terms subject to certain extension options. The transactions with HCP provide us a
strategic capital platform to continue to grow in the senior housing industry and to deliver the best, high-quality solutions for our current residents and
address the growing population of seniors.
44
CCRC Venture. At the closing, we and HCP entered into a venture with respect to certain entry-fee CCRCs previously owned, leased and/or operated by
us. We own a 51% ownership interest, and HCP owns a 49% ownership interest, in each of the propco and opco (together, the "CCRC Venture"). At the
closing, we contributed to the CCRC Venture eight wholly-owned entities (owning eight CCRCs subject, in certain cases, to existing debt) and certain
purchase options with respect to the HCP Communities (as defined below), and HCP contributed to the CCRC Venture three wholly-owned entities
(owning three properties in two CCRC communities (the "HCP Communities")). In addition, HCP contributed $323.5 million in cash and the CCRC
Venture completed the purchases of four communities managed by us for an aggregate purchase price of $323.5 million immediately following the
closing. Each of the communities in the venture is managed by us pursuant to market rate management agreements entered into at the closing, and we have
agreed to guarantee certain obligations of the manager under the applicable management agreements. Each of the propco and opco is governed by a board
of managers consisting of six members, with three representatives appointed by each of us and HCP.
HCP 49 Venture. In addition, at the closing, we and HCP entered into a venture with respect to 49 independent living, assisted living, memory care and/or
skilled nursing care communities previously owned by HCP and leased and historically operated by Emeritus. We acquired the leases though our
acquisition of Emeritus, and our entry into the venture effectively terminated the leases. HCP had granted Emeritus purchase option rights with respect to
each of the 49 communities, and these purchase options were terminated at the closing. We own a 20% ownership interest, and HCP owns an 80%
ownership interest, in each of the propco and opco (together, the "HCP 49 Venture"). At the closing, an HCP affiliate made a loan to us at prevailing
interest rates in the original principal amount of approximately $68 million to fund our initial capital contribution to the HCP 49 Venture. HCP
contributed 49 communities to propco, and at closing propco leased the communities to opco. Each of the communities in the HCP 49 Venture is
managed by an affiliate of ours, and we have agreed to guarantee certain obligations of the manager under the applicable market rate management
agreements. During the three months ended December 31, 2014, we repaid the $68 million loan from HCP primarily with the proceeds from the public
equity offering completed during the third quarter of 2014.
Master Lease. Finally, at the closing, we and HCP amended and restated several triple net leases between affiliates of HCP and Emeritus, covering an
aggregate of 153 communities, together into a single master lease with the communities subject thereto separated into three pools (the "Master Lease").
The term of the Master Lease is 14 years for the pool 1 communities, 15 years for the pool 2 communities and 16 years for the pool 3 communities, with
an average of approximately fifteen years, in each case subject to 2 extension options of approximately 10 years each, and the Master Lease is guaranteed
by us. The Master Lease provided for total base rent in 2014 of approximately $158.0 million, with lower future rent payments and escalations compared
to the previously existing leases. Under the Master Lease, HCP has agreed to make available up to $100.0 million for capital expenditures related to the
communities during calendar years 2014 through 2017 at an initial lease rate of 7.0%. In addition, the Master Lease includes a purchase option in our
favor for up to ten communities at an aggregate purchase price not to exceed $60.0 million. On December 29, 2014, we exercised this purchase option
and agreed to purchase nine communities for an aggregate purchase price of $60.0 million.
During 2014, after completion of the transactions with Emeritus and HCP, we continued our efforts to strengthen our financial position. In the fourth quarter
of 2014, we expanded and extended the maturity date of our secured credit facility, and in the third quarter of 2014 we completed a registered public equity
offering, which resulted in net proceeds of approximately $330.4 million. During the three months ended December 31, 2014, we repaid $275.9 million of
existing long-term debt with a weighted average interest rate of 5.5%, financed primarily with the proceeds of the public equity offering, and we have used and
are using the remaining net proceeds to finance the exercise of purchase options on certain communities currently leased by us and for other general corporate
purposes, which may include additional debt repayments and the acceleration of capital investments in our communities and corporate infrastructure platform.
We ended the year with $104.1 million of unrestricted cash and cash equivalents on our consolidated balance sheet and $388.4 million of availability on our
secured credit facility.
During the year, we also made additional progress on our Program Max initiative under which we expand, renovate, redevelop and reposition certain of our
existing communities where economically advantageous. For the year ended December 31, 2014, we invested $59.8 million on Program Max projects, net of
$34.6 million of third party lessor reimbursement. We completed 16 Program Max projects in 2014, which resulted in 396 net new units. We currently have
18 additional Program Max projects that have been approved, most of which have begun construction and are expected to generate 418 net new units.
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.
45
The table below presents a summary of our operating results and certain other financial metrics for the years ended December 31, 2014 and 2013 and the
amount and percentage of increase or decrease of each applicable item (dollars in millions).
Years Ended
December 31,
Increase
(Decrease)
2014
2013
Amount
Percent
Total revenue
Facility Operating Expense
Net loss attributable to Brookdale Senior Living, Inc. common stockholders
Adjusted EBITDA
Cash From Facility Operations
Facility Operating Income
$
$
$
$
$
$
3,831.7 $
2,210.4 $
(149.0) $
490.7 $
218.3 $
1,070.4 $
2,892.0 $
1,671.9 $
(3.6) $
463.2 $
294.0 $
812.2 $
939.7
538.4
145.4
27.5
(75.7)
258.2
32.5%
32.2%
NM
5.9%
(25.7)%
31.8%
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 2014, total revenues were $3.8 billion, an increase of $939.7 million, or 32.5%, over the prior year. The inclusion of Emeritus' operations since July
31, 2014 contributed $785.5 million to the increase in revenue. Excluding the effects of the Emeritus merger, our total revenues increased $154.2 million in
2014, or 5.3%, over the prior year. Resident fee revenue for 2014 increased $786.3 million, or 31.3%, from the prior year. Management fees increased $11.1
million, or 35.7%, from the prior year, and reimbursed costs on behalf of managed communities increased $142.4 million, or 41.2%. The increase in resident
fee revenue during 2014 was primarily due to the inclusion of Emeritus' operating results since July 31, 2014. The increase in management fees and
reimbursed costs on behalf of managed communities is primarily due to our assumption of management agreements as part of our acquisition of Emeritus and
our entry into management agreements with the CCRC Venture and HCP 49 Venture.
During 2014, facility operating expenses were $2.2 billion, an increase of $538.4 million, or 32.2%, compared to the prior year. Facility operating expenses
increased $511.7 million during 2014 due to the inclusion of Emeritus' operating results since July 31, 2014. Excluding the effects of our acquisition of
Emeritus, facility operating expenses increased $26.3 million, or 1.6%, as we continued to control our cost growth.
Net loss attributable to Brookdale Senior Living Inc. common stockholders for 2014 was $149.0 million, or $1.01 per basic and diluted common share,
compared to a net loss attributable to Brookdale Senior Living Inc. common stockholders of $3.6 million, or $0.03 per basic and diluted common share, for
2013.
46
During 2014, our Cash From Facility Operations decreased 25.7%, while Adjusted EBITDA and Facility Operating Income increased 5.9% and 31.8%,
respectively, when compared to the prior year. Adjusted EBITDA and Cash From Facility Operations include integration, transaction and electronic medical
records ("EMR") roll-out costs of $146.4 million for the year ended December 31, 2014 and $14.5 million for the year ended December 31, 2013.
Consolidated Results of Operations
Year Ended December 31, 2014 and 2013
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 in "Item 8. Financial Statements and Supplementary Data."
Our 2014 results reflect our acquisition of Emeritus subsequent to July 31, 2014, the closing date of the merger. In addition, with respect to the communities
contributed to the CCRC Venture and HCP 49 Venture and communities subject to the Master Lease, our results reflect our previously existing ownership,
lease and/or management interests through August 29, 2014, and reflect our venture and management interests and amended lease terms for the remainder of
the period. We contributed all but two of our entry fee CCRCs to the CCRC Venture on August 29, 2014, at which time the contributed CCRCs were
deconsolidated. The results of the entry fee CCRCs contributed to the CCRC Venture are reported in the CCRCs - Entry Fee segment for the time periods
prior to being contributed to the CCRC Venture. The results of the two CCRCs that were not contributed to the CCRC Venture are included in the CCRCs -
Entry Fee segment for the six month period ended June 30, 2014 and the CCRCs - Rental segment for the six month period ended December 31, 2014 based
on how operating results are being reviewed by the chief operating decision maker following the creation of the CCRC Venture.
During 2014, two communities were moved from the Retirement Centers segment to the Assisted Living segment and one community was moved from the
Retirement Centers segment to the CCRCs - Rental segment to more accurately reflect the underlying product offering of the communities. The movement
did not change our reportable segments, but it did impact the revenues and expenses reported within the Retirement Centers, Assisted Living and CCRCs -
Rental segments. Revenue and expenses for the year ended December 31, 2013 have not been recast.
47
At December 31, 2014 our total operations included 1,143 communities with a capacity to serve 110,859 residents.
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2014
2013
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
Transaction costs
Facility lease expense
Depreciation and amortization
Asset impairment
Costs incurred on behalf of managed communities
Total operating expense
(Loss) income from operations
Interest income
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt premium (discount)
Change in fair value of derivatives
Debt modification and extinguishment costs
Equity in earnings of unconsolidated ventures
Other non-operating income
Loss before income taxes
Benefit (provision) for income taxes
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to Brookdale Senior Living, Inc. common stockholders
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)
$
582,312
1,685,563
493,173
202,414
337,835
3,301,297
530,409
3,831,706
333,429
1,077,074
371,512
153,981
274,372
2,210,368
280,267
66,949
323,830
537,035
9,992
488,170
3,916,611
(84,905)
1,343
(128,002)
(109,998)
(7,477)
(2,711)
(6,387)
171
7,235
(330,731)
181,305
(149,426)
436
(148,990) $
1,143
110,219
84,299
82,984
63,710
88.3%
$
4,357
$
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
180,627
3,921
276,729
268,757
12,891
345,808
2,760,678
131,288
1,339
(96,131)
(25,194)
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584)
—
(3,584) $
649
65,832
66,173
48,422
48,090
56,028
633,695
96,198
(95,342)
95,685
786,264
153,476
939,740
29,427
414,884
83,563
(67,382)
77,931
538,423
99,640
63,028
47,101
268,278
(2,899)
142,362
1,155,933
(216,193)
4
31,871
84,804
(9,577)
3,691
5,122
(1,313)
4,510
328,903
183,061
145,842
436
146,278
494
44,387
18,126
34,562
15,620
88.7%
$
4,383
(0.4)%
(26)
$
$
$
48
10.6%
60.2%
24.2%
(32.0)%
39.5%
31.3%
40.7%
32.5%
9.7%
62.7%
29.0%
(30.4)%
39.7%
32.2%
55.2%
NM
17.0%
99.8%
(22.5)%
41.2%
41.9%
(164.7)%
0.3%
33.2%
336.6%
(56.2)%
376.6%
404.9%
(88.5)%
165.5%
NM
NM
NM
100.0%
NM
76.1%
67.4%
27.4%
71.4%
32.5%
(0.5)%
(0.6)%
(dollars in thousands, except average monthly revenue per unit)
Years Ended
December 31,
Increase
(Decrease)
2014
2013
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
$
$
$
$
$
$
99
76
17,315
15,558
89.5%
$
3,485
14,454
14,439
89.8%
$
3,381
838
438
55,189
36,350
88.7%
$
4,356
22,158
21,679
89.7%
$
4,510
45
26
10,480
8,298
85.8%
$
5,757
6,478
6,669
86.8%
$
5,715
23
2,861
1,119
(0.3)%
104
400
33,031
14,671
(1.0)%
(154)
19
4,002
1,629
(1.0)%
42
30.3%
19.8%
7.7%
(0.3)%
3.1%
91.3%
149.1%
67.7%
(1.1)%
(3.4)%
73.1%
61.8%
24.4%
(1.2)%
0.7%
—
14
(14)
(100.0)%
(5,332)
(1,799)
1.0%
90
(100.0)%
(33.9)%
1.2%
1.8%
—
3,504
85.2%
$
5,103
$
32,704
20,342
53,046
(25,865)
$
27,181
161
27,235
20,589
5,332
5,303
84.2%
$
5,013
$
44,191
48,140
92,331
(35,325)
$
57,006
95
17,410
18,083
(11,487)
(27,798)
(39,285)
(9,460)
(29,825)
66
9,825
2,506
(26.0)%
(57.7)%
(42.5)%
(26.8)%
(52.3)%
69.5%
56.4%
13.9%
1.3%
(8.2)%
85.5%
86.5%
85.4%
1.1%
3,053,436
8,345
3,325,129
4,498
(271,693)
3,847
49
(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, 2014 and 2013 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 $2.9 million and $19.0 million for the years ended December 31, 2014 and 2013, respectively.
Resident Fee Revenue
Resident fee revenue increased $786.3 million in 2014, or 31.3%, over the prior year primarily due to the inclusion of revenue from communities acquired
(including communities acquired as part of the Emeritus transaction) and new units added to existing communities since the end of 2013, partially offset by the
effect of the contribution of entry fee CCRCs to the CCRC Venture. During 2014, revenues grew 2.9% at the 500 communities we owned or leased during
both years, with a 3.4% increase in the average monthly revenue per unit (excluding amortization of entrance fees in both instances). Occupancy in these 500
communities decreased 0.5% over the prior year.
Retirement Centers segment revenue increased $56.0 million in 2014, or 10.6%, over the prior year primarily due to the inclusion of revenue from
communities acquired during 2014. The inclusion of Emeritus' operating results since July 31, 2014 contributed $49.5 million to the increase in revenue.
Excluding the effects of our acquisition of Emeritus, Retirement Centers segment revenue increased $6.5 million in 2014, or 1.2%, over the prior year
primarily due to an increase in average monthly revenue per unit at the communities we operated during both years, offset in part by the reclassification of two
communities from this segment into the Assisted Living segment and one community from this segment to the CCRCs - Rental segment during 2014.
Assisted Living segment revenue increased $633.7 million in 2014, or 60.2%, over the prior year primarily due to the inclusion of revenue from communities
acquired during 2014. The inclusion of Emeritus' operating results since July 31, 2014 contributed $573.3 million to the increase in revenue. Excluding the
effects of our acquisition of Emeritus, Assisted Living segment revenue increased $60.4 million in 2014, or 5.7%, over the prior year primarily due to an
increase in average monthly revenue per unit at the communities we operated during both years. Additionally, Assisted Living segment revenue increased due
to the impact of the reclassification of two communities from the Retirement Centers segment into this segment during 2014. The increase was partially
offset by a decrease in occupancy at the communities we operated during both periods.
CCRCs - Rental segment revenue increased $96.2 million in 2014, or 24.2%, over the prior year primarily due to the inclusion of revenue from communities
acquired during 2014. The inclusion of Emeritus' operating results since July 31, 2014 contributed $70.3 million to the increase in revenue. Excluding the
effects of our acquisition of Emeritus, revenue increased $25.9 million in 2014, or 6.5%, over the prior year primarily due to the reclassification of two
communities into this segment from the CCRCs - Entry Fee segment beginning with the third quarter of 2014 and an increase in average monthly revenue per
unit at the communities we operated during both years. The increase was partially offset by a decrease in occupancy at the communities we operated during
both periods.
CCRCs - Entry Fee segment revenue decreased $95.3 million in 2014, or 32.0%, over the prior year primarily due to the contribution of all but two of our
entry fee CCRCs to the CCRC Venture and the reclassification of the two remaining CCRCs from this segment into the CCRCs - Rental segment beginning
with the third quarter of 2014.
Brookdale Ancillary Services segment revenue increased $95.7 million in 2014, or 39.5%, over the prior year primarily due to the inclusion of $76.8 million
of revenues related to Nurse on Call, which we acquired as part of our acquisition of Emeritus. Excluding the effects of our acquisition of Emeritus, Brookdale
Ancillary Services segment revenue increased $18.9 million in 2014, or 7.8%, over the prior year driven by an increase in home health average census and the
roll-out of our hospice services to additional units in 2014. The increase was partially offset by a decrease in therapy service volume during 2014.
50
Management Services Revenue
Management Services segment revenue, including reimbursed costs incurred on behalf of managed communities, increased $153.5 million in 2014, or 40.7%,
over the prior year. The increase in management fees and reimbursed costs on behalf of managed communities is primarily due to our assumption of
management agreements as part of our acquisition of Emeritus and our entry into management agreements with the CCRC Venture and HCP 49 Venture.
Facility Operating Expense
Facility operating expense increased $538.4 million in 2014, or 32.2%, over the prior year primarily due to the impact of our acquisition of Emeritus.
Retirement Centers segment operating expenses increased $29.4 million in 2014, or 9.7%, over the prior year primarily due to the inclusion of operating
expenses from communities acquired during 2014. Of the increase, $25.9 million was attributable to the inclusion of the operating results of Emeritus since
July 31, 2014. Excluding the effects of our acquisition of Emeritus, operating expenses increased $3.5 million driven by an increase in salaries and wages due
to wage rate increases and an increase in advertising expense. The increase was offset in part by the reclassification of two communities from this segment
into the Assisted Living segment and one community from this segment to the CCRCs - Rental segment during 2014.
Assisted Living segment operating expenses increased $414.9 million in 2014, or 62.7%, over the prior year primarily due to the inclusion of operating
expenses from communities acquired during 2014. Of the increase, $370.7 million was attributable to the inclusion of the operating results of Emeritus since
July 31, 2014. Excluding the effects of our acquisition of Emeritus, operating expenses increased by $44.2 million driven by an increase in salaries and wages
due to wage rate increases, an increase in insurance expense and an increase in advertising expense. Additionally, Assisted Living segment operating expenses
increased due to the impact of the reclassification of two communities from the Retirement Centers segment into this segment during 2014.
CCRCs - Rental segment operating expenses increased $83.6 million in 2014, or 29.0%, over the prior year primarily due to the inclusion of operating
expenses from communities acquired during 2014. Of the increase, $52.9 million was attributable to the inclusion of the operating results of Emeritus since
July 31, 2014. The remaining $30.7 million increase was primarily due to the reclassification of two communities into this segment from the CCRCs - Entry
Fee segment beginning with the third quarter of 2014.
CCRCs - Entry Fee segment operating expenses decreased $67.4 million in 2014, or 30.4%, over the prior year primarily due to the contribution of all but two
of our entry fee CCRCs to the CCRC Venture and the reclassification of the two remaining CCRCs from this segment into the CCRCs - Rental segment
beginning with the third quarter of 2014.
Brookdale Ancillary Services segment operating expenses increased $77.9 million in 2014, or 39.7%, over the prior year primarily due to the inclusion of
expenses related to Nurse on Call (which we acquired in connection with our acquisition of Emeritus) and an increase in expenses incurred in connection with
higher census and the continued expansion of our ancillary services programs, partially offset by a decrease in bad debt expense.
General and Administrative Expense
General and administrative expense increased $99.6 million in 2014, or 55.2%, over the prior year primarily as a result of an increase in integration costs and
the addition of employees associated with our acquisition of Emeritus. Integration costs include third-party expenses directly related to the integration of
Emeritus as well as internal costs such as labor, reflecting time spent by our personnel on integration and transaction activity. Transaction costs relating to our
acquisition of Emeritus (and the completion of the transactions during 2014 with HCP) are reported separately from general and administrative expense, as
further discussed below.
Transaction Costs
Transaction costs for 2014 were $66.9 million, an increase from $4.0 million in the prior year. The increase is a result of transaction fees and direct
acquisition costs related to our acquisition of Emeritus and the completion of the transactions with HCP during 2014, including expenses such as lender costs
and legal, banking, accounting and consulting fees.
Facility Lease Expense
Facility lease expense increased $47.1 million in 2014, or 17.0%, over the prior year primarily due to the inclusion of lease expense from leases assumed as
part of our acquisition of Emeritus.
51
Depreciation and Amortization
Depreciation and amortization expense increased $268.3 million in 2014, or 99.8%, over the prior year primarily due to the acquisition of communities in
2014, driven by amortization of in-place lease intangibles acquired as part of our acquisition of Emeritus, partially offset by the contribution of previously
owned communities to the CCRC Venture in August 2014. Additionally, depreciation expense increased in 2014 as a result of increased capital expenditures
compared to the prior year.
Asset Impairment
During 2014 and 2013, we recorded impairment charges of $10.0 million and $12.9 million, respectively, related to asset impairment for property, plant and
equipment and leasehold intangibles for certain communities. These impairment charges are primarily due to lower than expected performance of the
underlying communities. 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.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $142.4 million, or 41.2%, primarily due to the our assumption of management agreements as part
of our acquisition of Emeritus and our entry into management agreements with the CCRC Venture and HCP 49 Venture.
Interest Expense
Interest expense increased $110.8 million in 2014, or 80.6%, over the prior year primarily due to our assumption of Emeritus' debt and capital and financing
lease obligations, which increased interest expense by $25.0 million and $85.1 million, respectively (including the impact of non-cash interest expense related
to the amortization of debt discounts and premiums recorded).
Income Taxes
The difference in our effective tax rates for the years ended December 31, 2014 and 2013 was primarily due to the reversal of the valuation allowance that had
been recorded against our deferred tax assets. As a result of the acquisition of Emeritus, we recorded deferred tax liabilities in excess of deferred tax assets
that reflect the difference between the fair market value of the acquired assets over the historical basis of the acquired assets. We determined that it is more
likely than not that our federal net operating loss carryforwards and a majority of our state net operating loss carryforwards and tax credits will be utilized in
the future, based on the future reversal of these deferred tax liabilities. As a result, during 2014 we recorded an aggregate deferred federal, state and local
income tax benefit of $64.2 million from the release of the valuation allowance against certain deferred tax assets. Additionally, we recorded an aggregate
deferred federal, state and local tax benefit of $94.1 million as a result of the operating loss for the year ended December 31, 2014. Our 2014 effective rate
was also impacted by certain transaction expenses that were incurred as part of acquisition of Emeritus that are required to be capitalized for income tax
purposes. We do not expect that we will become a federal cash income tax payer until 2017, at the earliest.
52
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 in "Item 8. Financial Statements and Supplementary Data." Our results reflect the
inclusion of acquisitions that occurred during the respective reporting periods.
As of December 31, 2013, our total operations included 649 communities with a capacity to serve 66,524 residents.
(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
Transaction costs
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
Capital and financing lease obligation
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives
Debt modification and extinguishment costs
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
Owned/leased communities occupancy rate (weighted average)
Senior Housing average monthly revenue per unit(3)
$
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
180,627
3,921
276,729
268,757
12,891
—
—
345,808
2,760,678
131,288
1,339
(96,131)
(25,194)
(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
(98,183)
(30,155)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467) $
647
65,936
66,102
47,938
47,947
88.7%
4,383
$
88.0%
$
4,271
$
$
$
53
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
1,798
3,921
(7,296)
16,476
(14,786)
(636)
(11,584)
20,792
72,879
50,349
(2,673)
(2,052)
(4,961)
(1,027)
1,344
1,044
4,972
2,132
(63,120)
237
(62,883)
―
(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%
1.0%
NM
(2.6)%
6.5%
(53.4)%
(100.0)%
(100.0)%
6.4%
2.7%
62.2%
(66.6)%
(2.1)%
(16.5)%
(5.7)%
369.2%
472.4%
142.5%
359.5%
(97.2)%
15.6%
(94.6)%
―
(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
14,454
14,439
89.8%
3,381
$
438
22,158
21,679
76
14,433
14,445
89.1%
$
3,263
433
21,551
21,625
89.7%
4,510
$
88.9%
$
4,390
26
6,478
6,669
86.8%
5,715
$
14
5,332
5,303
84.2%
5,013
$
$
44,191
48,140
92,331
(35,325)
57,006
$
95
17,410
18,083
27
6,691
6,667
86.3%
$
5,588
14
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
54
—
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,
respectively.
Resident Fee Revenue
Resident fee revenue increased $102.1 million in 2013, or 4.2%, over the prior year primarily as a result of an increase in the average monthly revenue per
unit compared to the prior year, including an increase in revenue from our ancillary services programs, an increase in occupancy and an increase in
consolidated units operated. During 2013, 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 segment revenue increased $22.4 million in 2013, or 4.4%, over the prior year primarily due to increases in average monthly revenue per
unit and occupancy at the communities we operated during both years.
Assisted Living segment revenue increased $38.5 million in 2013, or 3.8%, over the prior year 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 2013. The increase was
partially offset by the impact of the disposition of three communities during 2013.
CCRCs - Rental segment revenue increased $11.5 million in 2013, or 3.0%, over the prior year 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 during
2013.
CCRCs - Entry Fee segment revenue increased $12.1 million in 2013, or 4.2%, over the prior year 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 segment revenue increased $17.6 million in 2013, or 7.9%, over the prior year 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.
Management Services Revenue
Total management services revenue increased $21.1 million in 2013, 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 2013 prior to the acquisition of six previously managed
communities and termination of a contract of one managed community in the fourth quarter of 2013.
Facility Operating Expense
Facility operating expense increased $41.0 million in 2013, or 2.5%, 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 segment operating expenses increased $5.7 million in 2013, or 1.9%, over the prior year 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.
55
Assisted Living segment operating expenses increased $10.0 million in 2013, or 1.5%, over the prior year 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 segment operating expenses increased $8.5 million in 2013, or 3.1%, over the prior year 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 segment operating expenses decreased $2.9 million in 2013, or 1.3%, over the prior year 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 segment operating expenses increased $19.7 million in 2013, or 11.1%, over the prior year 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 $1.8 million in 2013, or 1.0%, over the prior year 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 and EMR roll-out costs compared to the prior year.
Facility Lease Expense
Facility lease expense decreased $7.3 million in 2013, or 2.6%, over the prior year primarily as a result of the purchase of 12 previously leased communities
in 2012.
Depreciation and Amortization
Depreciation and amortization expense increased by $16.5 million in 2013, or 6.5%, over the prior year primarily as the result of the purchase of 12
previously leased communities in 2012 and the purchase of eight communities, including six previously managed communities, in 2013. Additionally, there
was additional depreciation in 2013 resulting from increased capital expenditures year over year. These increases were partially offset by the impact of the
disposition of four communities during 2013.
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 12
previously-leased communities that were acquired during the year.
56
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $20.8 million in 2013, or 6.4% over the prior year. The increase is primarily due to an increase in
the number of communities managed during 2013 prior to the acquisition of six previously managed communities and termination of a contract of one
managed community in the fourth quarter of 2013.
Interest Income
Interest income decreased $2.7 million in 2013, or 66.6%, over the prior year primarily due to the liquidation of marketable securities in the prior year.
Interest Expense
Interest expense decreased $9.4 million in 2013, or 6.4%, over the prior year 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.
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 2013.
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 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. We contributed all but two of our entry fee CCRCs to the CCRC Venture on August 29, 2014, at which time the contributed CCRCs were
deconsolidated.
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 communities under a master insurance program, our current policies provide for deductibles for each and
every claim.
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 $19.6 million, deposits aggregating $51.9 million and letters of credit aggregating $33.8 million as of
December 31, 2014. 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.
57
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 and management's estimates.
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 Accounting Standards Codification ("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, 2014 and 2013, we have a valuation allowance against deferred tax assets of approximately $9.2
million and $72.4 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 or financing leases depending on the underlying terms. As of December 31,
2014, we operated 583 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.
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 as well as amortization of above/below market rents and deferred gains. For
communities under capital and financing lease obligation arrangements, a liability is established on our balance sheets and a corresponding long-term asset is
recorded. Lease payments are allocated between principal and interest on the remaining base lease obligations. For capital lease assets, 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. For financing lease assets,
the asset is depreciated over the useful life of the asset. 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.
58
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 $26.5 million and $17.7 million as of December 31, 2014 and 2013, 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 80.7% and 80.0% of our resident fee revenues for the years ended December 31, 2014 and 2013, respectively, were derived from private pay
customers and 19.3% and 20.0% of our resident fee revenues for the years ended December 31, 2014 and 2013, 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 and Goodwill
As of December 31, 2014 and 2013, our long-lived assets were comprised primarily of $8.4 billion and $3.9 billion of net property, plant and equipment and
leasehold intangibles, respectively. In accounting for our property, plant and equipment and leasehold intangibles, we apply the provisions of ASC 360,
Property, Plant and Equipment. 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 recorded in connection with business combinations is 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, 2014 and 2013, we had goodwill balances of $736.8 million and $109.6 million, respectively. The increase in
goodwill during the year ended December 31, 2014 is attributed to goodwill recorded in connection with our acquisition of Emeritus.
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 (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 2014, 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 we recorded non-cash asset impairment charges of $10.0 million, $12.9 million and $27.7 million for 2014, 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.
We test goodwill for impairment annually during our fourth quarter, or whenever indicators exist that suggest 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. We are 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. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the reporting unit to which the
goodwill has been assigned with the reporting unit's carrying value.
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.
59
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
60
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
See Note 2 of the notes to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for a discussion of new
accounting pronouncements.
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 (in
thousands):
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Net increase (decrease) 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,
2014
2013
$
$
242,652 $
(314,882)
117,802
45,572
58,511
104,083 $
366,121
(264,806)
(112,044)
(10,729)
69,240
58,511
The decrease in cash provided by operating activities of $123.5 million was primarily attributable to an increase in integration and transaction costs in 2014.
Integration costs include third-party expenses directly related to the integration of Emeritus as well as internal costs such as labor, reflecting time spent by our
personnel on integration and transaction activity. Transaction costs relate to our acquisition of Emeritus and the completion of the transactions during 2014
with HCP.
The increase in cash used in investing activities of $50.1 million was primarily attributable to an increase in spending on property, plant, and equipment, and
leasehold intangibles in 2014.
The change in cash provided by (used in) financing activities year over year was primarily attributable to the receipt of $330.4 million of net proceeds from a
public equity offering of approximately 10.3 million shares of common stock.
Our principal sources of liquidity have historically been from:
· cash balances on hand;
· cash flows from operations;
· funds generated through unconsolidated venture arrangements;
· proceeds from our credit facilities;
· proceeds from mortgage financing, refinancing of various assets 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.
61
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 and integration 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, information systems 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 existing communities;
· cash funding needs of our unconsolidated ventures for operating, capital expenditure and financing needs; and
· other corporate initiatives (including integration, information systems and branding).
We are highly leveraged and have significant debt and lease obligations. As of December 31, 2014, we have three principal corporate-level debt obligations:
our $500.0 million secured credit facility, our $316.3 million 2.75% convertible senior notes due 2018, and our separate secured and unsecured letter of
credit facilities providing for up to $98.7 million of letters of credit in the aggregate. The remainder of our indebtedness is generally comprised of
approximately $3.2 billion of non-recourse property-level mortgage financings as of December 31, 2014.
At December 31, 2014, we had $3.5 billion of debt outstanding, excluding capital and financing lease obligations and our secured credit facility, at a weighted-
average interest rate of 5.0% (calculated using an imputed interest rate of 7.5% for our 2.75% convertible senior notes due 2018). At December 31, 2014, we
had $2.6 billion of capital and financing lease obligations, $100.0 million was drawn on our secured credit facility, and $72.7 million of letters of credit had
been issued under our letter of credit facilities. Approximately $272.3 million of our debt and capital lease obligations are due on or before December 31,
2015. We also have substantial operating lease obligations and capital expenditure requirements. For the year ending December 31, 2015, we will be required
to make approximately $396.0 million of payments in connection with our existing operating leases.
At December 31, 2014, we had $263.0 million of negative working capital. We had $104.1 million of cash and cash equivalents at December 31, 2014,
excluding cash and escrow deposits-restricted and lease security deposits of $151.5 million in the aggregate. As of that date, we also had $388.4 million of
availability on our secured credit facility.
On September 12, 2014, we completed a public equity offering of 10,298,506 shares of common stock resulting in net proceeds of approximately $330.4
million. During the three months ended December 31, 2014, we repaid $275.9 million of existing long-term debt with a weighted average interest rate of 5.5%
(including the $68 million loan from HCP used to fund our initial capital contribution to the HCP 49 Venture), financed primarily with the proceeds of the
public equity offering, and we have used and are using the remaining net proceeds to finance the exercise of purchase options on certain communities currently
leased by us and for other general corporate purposes, which may include additional debt repayments and the acceleration of capital investments in our
communities and corporate infrastructure platform.
One of our primary growth strategies is growing the business through strategic capital allocation. During 2014 we made progress on this objective by making
significant investments in our communities. We look at our capital deployment in two ways: (1) investment in our existing assets through capital expenditures
for recurring capital, corporate capital and other major projects and (2) investment in our existing assets through our Program Max initiative. On some of our
leased communities, certain of our capital spend is subject to third party lessor funding.
62
Investments in our current portfolio are comprised of recurring capital expenditures and 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 reposition projects
at our communities, integration related expenditures (including the cost of developing information systems), and expenditures supporting the expansion of our
ancillary services programs.
Through our Program Max initiative, we intend to expand, renovate, redevelop and reposition certain of our legacy communities and the newly acquired
Emeritus communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level
of service for residents to meet the evolving needs of our customers. These Program Max projects 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. In 2014 we completed 16 projects
which resulted in 396 net new units. We currently have 18 Program Max projects that have been approved, most of which have begun construction and are
expected to generate 418 net new units.
The following table summarizes our actual 2014 and anticipated 2015 capital expenditures for our consolidated communities (dollars in millions):
Recurring(1)
EBITDA-enhancing / Major Projects(2)
Program Max(2)
Corporate, integration and other
Total capital expenditures
Actual 2014
$
50.8 $
Anticipated
2015 Range
75.0 - 77.0
109.2 210.0 - 215.0
94.4 125.0 - 175.0
49.8 108.0 - 117.0
304.2 $ 518.0 - 584.0
$
(1) Payments are included in Cash From Facility Operations.
(2) Amounts shown are amounts of gross capital expenditures. Certain capital expenditures are subject to third party lessor funding. For the year ended
December 31, 2014 we received $34.6 million of lessor reimbursements. For 2015 we anticipate receiving approximately $115.0 million - $170.0
million of lessor reimbursements for both categories in the table.
During 2015, we anticipate that our capital expenditures will be funded from cash on hand, cash flows from operations, lessor reimbursements in the amount
of $115.0 million to $170.0 million, amounts drawn on construction loans and amounts drawn on our secured 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 secured 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, 2014, we are in compliance with the financial covenants of our outstanding debt and lease agreements.
63
Company Indebtedness, Long-Term Leases and Hedging Agreements
Indebtedness
As of December 31, 2014, we have three principal corporate-level debt obligations: our $500.0 million secured credit facility, our $316.3 million 2.75%
convertible senior notes due 2018 and separate secured and unsecured letter of credit facilities providing for up to $98.7 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, 2014 our
outstanding property-level secured debt was $3.2 billion.
As a result of our acquisition of Emeritus, we assumed approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness. The
mortgage loans are collateralized by a total of 179 underlying communities, bear interest either at fixed rates at a weighted average of 6.06% per annum or at
variable rates at a weighted average of 5.49% per annum (in each case, as of July 31, 2014), and have remaining maturities ranging from approximately three
months to 33 years. In addition, we incurred $283.3 million of property-level debt primarily related to the financing of community acquisitions, the expansion
of certain communities, the refinancing of existing debt and the releveraging of certain assets during 2014. Approximately $252.7 million of the new debt was
issued at a fixed interest rate and the remaining $30.6 million was issued at variable interest rates. Refer to Note 8 to the consolidated financial statements for
a detailed discussion of the significant new mortgage debt instruments and related terms.
As of December 31, 2014, we are in compliance with the financial covenants of our outstanding debt agreements.
Credit Facilities
On December 19, 2014, we entered into a Fourth Amended and Restated Credit Agreement with General Electric Capital Corporation, as administrative agent,
lender and swingline lender, and the other lenders from time to time parties thereto. The amended credit agreement amended and restated in its entirety our
previously existing Third Amended and Restated Credit Agreement dated as of September 20, 2013, which provided a total commitment amount of $250.0
million. The amended agreement provides for a total commitment amount of $500.0 million, comprised of a $100.0 million term loan drawn at closing and a
$400.0 million revolving credit facility (with a $50.0 million sublimit for letters of credit and a $50.0 million swingline feature to permit same day
borrowing) and an option to increase the revolving credit facility by an additional $250.0 million, subject to obtaining commitments for the amount of such
increase from acceptable lenders. In addition, the amended credit agreement extended the maturity date from March 31, 2018 to January 3, 2020 and
decreased the interest rate payable on drawn amounts and the fee payable on the unused portion of the facility. Amounts drawn under the facility will continue
to bear interest at 90-day LIBOR plus an applicable margin; however, the amended agreement reduces the applicable margin from a range of 3.25% to 4.25% to
a range of 2.50% to 3.50%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50% margin at utilization equal to or
lower than 35%, a 3.25% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50% margin at utilization greater than 50%. The amended
agreement also eliminates the minimum 0.5% LIBOR rate included in the prior agreement. The amended agreement reduces the quarterly commitment fee on
the unused portion of the facility from 0.50% per annum to 0.25% per annum when the outstanding amount of obligations (including revolving credit,
swingline and term loans and letter of credit obligations) is greater than or equal to 50% of the total commitment amount or 0.35% per annum when such
outstanding amount is less than 50% of the total commitment amount.
This secured credit facility may be used to finance acquisitions, fund working capital and capital expenditures and for other general corporate purposes.
The credit facility will continue to be secured by first priority mortgages on certain of our communities. In addition, the amended agreement permits us to
pledge the equity interests in subsidiaries that own other communities (rather than mortgaging such communities), provided that loan availability from pledged
assets cannot exceed 10% of loan availability from mortgaged assets. 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.
64
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, 2014, we had $388.4 million of availability on our secured credit facility. We also had secured and unsecured letter of credit facilities of
up to $98.7 million in the aggregate as of December 31, 2014. Letters of credit totaling $72.7 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. 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. In addition, Holders may convert their Notes at their option under the following circumstances: (i) during any fiscal quarter 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 the last day of such preceding fiscal
quarter; (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. As of December 31, 2014, the Notes are
not convertible. 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 we 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.
65
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, 2014, we have 583 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.
As a result of our acquisition of Emeritus on July 31, 2014, we acquired entities that are lessees under operating, capital and financing leases covering 311
communities, as well as certain other leases such as office leases and leases associated with Emeritus' Nurse on Call business. The community leases contain
customary terms, including assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions and
financial covenants. In connection with the closing of our acquisition of Emeritus, we have entered into guarantees of certain of these leases.
For the year ended December 31, 2014, our minimum annual cash lease payments for our capital and financing leases and operating leases were $139.2
million and $328.5 million, respectively. For the year ending December 31, 2015, we will be required to make approximately $247.0 million and $396.0
million of payments in connection with our existing capital and financing leases and operating leases, respectively.
As of December 31, 2014, we are in compliance with the financial covenants of our long-term leases.
Derivative Instruments
In the normal course of business, we have entered into certain interest rate protection agreements to effectively manage the risk above certain interest rates for
a portion of our variable rate debt. As of December 31, 2014, we have $846.3 million in aggregate notional amount of interest rate caps and $136.6 million of
variable rate debt, excluding our secured credit facility and capital lease obligations, that is not subject to any cap or swap agreements.
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, 2014.
Total
2015
2016
2017
(dollars in millions)
2018
2019
Thereafter
Payments Due during the Year Ending December 31,
Contractual Obligations:
Long-term debt and line
of credit obligations(1) $
4,305.2 $
314.7 $
219.2 $
696.5 $
1,391.9 $
208.1 $
1,474.8
Capital and financing
lease obligations(2)
Operating lease
obligations(2)
Refundable entrance fee
obligations(3)
Total contractual
obligations
Total commercial
construction
commitments
5,055.7
247.0
323.4
280.1
283.8
291.5
3,629.9
3,127.5
396.0
396.0
381.7
366.0
348.1
1,239.7
25.1
3.4
3.4
3.4
3.4
3.4
8.1
$
12,513.5 $
961.1 $
942.0 $
1,361.7 $
2,045.1 $
851.1 $
6,352.5
$
97.5 $
75.7 $
21.8 $
— $
— $
— $
—
66
(1)
(2)
(3)
Includes line of credit and contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31, 2014
rate.
Reflects future cash payments after giving effect to non-contingent lease escalators and assumes payments on variable rate instruments at the December
31, 2014 rate.
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 $72.7 million as of December 31, 2014.
Impacts of Inflation
Resident fees from the communities we own or lease and management fees from communities we manage for third parties or unconsolidated ventures in which
we have an ownership interest 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, 2014, approximately $962.9 million of our indebtedness, excluding our secured credit facility, bears interest at floating rates. We have
mitigated our exposure to floating rates by using interest rate caps under our debt arrangements. Inflation, and its impact on floating interest rates, could affect
the amount of interest payments due on our secured credit facility and other variable rate debt instruments.
Off-Balance Sheet Arrangements
As of December 31, 2014, we do not have an interest in any "off-balance sheet arrangements" (as defined in Item 303(a)(4) of Regulation S-K) that 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.
We own interests in certain unconsolidated ventures as described under Note 5 to the consolidated financial statements. Except in limited circumstances, our
risk of loss is limited to our investment in each venture. We also own interests in certain other unconsolidated ventures that are not considered variable
interest entities. The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated
ventures.
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);
67
· straight-line lease expense (income), net of amortization of (above) below market rents;
· 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).
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 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.
68
The table below shows the reconciliation of our net loss to Adjusted EBITDA for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Net loss
(Benefit) provision for income taxes
Other non-operating income
Equity in (earnings) loss of unconsolidated ventures
Debt modification and extinguishment costs
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt (premium) discount
Change in fair value of derivatives
Interest income
(Loss) income from operations
Gain on facility lease termination
Loss on acquisition
Depreciation and amortization
Asset impairment
Straight-line lease expense
Amortization of (above) below market lease, net
Amortization of deferred gain
Amortization of entrance fees
Non-cash stock-based compensation expense
Change in future service obligation
Entrance fee receipts(2)
Entrance fee disbursements
Adjusted EBITDA
$
$
Years Ended December 31(1),
2013
2014
(149,426) $
(181,305)
(7,235)
(171)
6,387
128,002
109,998
7,477
2,711
(1,343)
(84,905)
—
—
537,035
9,992
1,439
(3,444)
(4,372)
(21,220)
28,299
670
53,046
(25,865)
490,675 $
(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 $
2012
(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
(1) The calculation of Adjusted EBITDA includes integration, transaction and EMR roll-out costs of $146.4 million, $14.5 million and $23.5 million for the
years ended December 31, 2014, 2013 and 2012, respectively.
(2) Includes the receipt of refundable and non-refundable entrance fees.
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;
69
· 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.
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 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.
70
The table below shows the reconciliation of net cash provided by operating activities to CFFO for the years ended December 31, 2014, 2013 and 2012 (in
thousands):
Net cash provided by operating activities
Changes in operating assets and liabilities
Refundable entrance fees received(2)(3)
Entrance fee refunds disbursed
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
Years Ended December 31(1),
2013
2014
2012
242,652 $
37,099
20,342
(25,865)
(50,762)
(28,618)
(1,840)
25,334
218,342 $
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
$
$
(1) The calculation of Cash From Facility Operations includes integration, transaction and EMR roll-out costs of $146.4 million, $14.5 million and $23.5
million for the years ended December 31, 2014, 2013 and 2012, respectively.
(2) Entrance fee receipts include promissory notes issued to us by the resident in lieu of a portion of the entrance fees due. Notes issued (net of collections)
for the years ended December 31, 2014, 2013 and 2012 were $9.3 million, $1.4 million and $0.2 million, respectively.
(3) Total entrance fee receipts for the year ended December 31, 2014, 2013 and 2012 were $53.0 million, $92.3 million and $82.7 million, respectively,
including $32.7 million, $44.2 million and $40.1 million, respectively, of non-refundable entrance fee receipts included in net cash provided by operating
activities.
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;
· transaction costs;
· change in future service obligation;
· amortization of deferred entrance fee revenue; and
· management fees.
71
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
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, 2014, 2013 and 2012 (dollars in
thousands):
Net loss
(Benefit) provision for income taxes
Other non-operating income
Equity in (earnings) loss of unconsolidated ventures
Debt modification and extinguishment costs
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt (premium) discount
Change in fair value of derivatives
Interest income
(Loss) income from operations
Gain on facility lease termination
Depreciation and amortization
Asset impairment
Loss on acquisition
Facility lease expense
General and administrative (including non-cash stock-based compensation expense)
Transaction costs
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,
2013
2014
(149,426) $
(181,305)
(7,235)
(171)
6,387
128,002
109,998
7,477
2,711
(1,343)
(84,905)
—
537,035
9,992
—
323,830
280,267
66,949
670
(21,220)
(42,239)
1,070,379 $
(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
180,627
3,921
(1,917)
(29,009)
(31,125)
812,162 $
2012
(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
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, 2014, we had approximately $2.6 billion of long-term fixed rate debt, $962.9 million of long-term variable rate debt,
excluding our secured credit facility, and $2.6 billion of capital and financing lease obligations. As of December 31, 2014, our total fixed-rate debt and
variable-rate debt outstanding had a weighted-average interest rate of 5.0% (calculated using an imputed interest rate of 7.5% for our $316.3 million 2.75%
convertible senior notes due 2018).
We enter into certain interest rate cap agreements with major financial institutions to effectively manage our risk above certain interest rates on variable rate
debt. As of December 31, 2014, $2.6 billion, or 72.6%, of our long-term debt, excluding our secured credit facility and capital and financing lease obligations,
has fixed rates. As of December 31, 2014, $826.2 million, or 23.5%, of our long-term debt, excluding our secured credit facility and capital and financing
lease obligations, is subject to interest rate cap agreements. The remaining $136.6 million, or 3.9%, of our debt is variable rate debt, not subject to any interest
rate 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 secured credit facility 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 $9.5 million, a 500 basis point increase in interest rates would have an impact of $40.8 million and a
1,000 basis point increase in interest rates would have an impact of $48.2 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, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
74
PAGE
75
76
77
78
79
80
81
82
115
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, 2014 and 2013, 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,
2014. 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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2014, 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, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2015 expressed an unqualified opinion thereon.
Chicago, Illinois
24 February 2015
/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, 2014, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). 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.
As indicated in the accompanying Management's Assessment of Internal Control over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the internal controls of Emeritus Corporation, which is included in the 2014
consolidated financial statements of the Company since its acquisition on July 31, 2014 and which constituted $6.2 billion and $4.4 billion of total assets and
liabilities, respectively, as of December 31, 2014 and $785.5 million of revenues for the period then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over financial reporting of Emeritus Corporation.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, 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, 2014 and 2013 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, 2014, and our report dated February 24, 2015 expressed an unqualified opinion thereon.
Chicago, Illinois
24 February 2015
/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 Equity
Current liabilities
Current portion of long-term debt
Current portion of capital and financing lease obligations
Trade accounts payable
Accrued expenses
Refundable entrance fees and deferred revenue
Tenant security deposits
Total current liabilities
Long-term debt, less current portion
Capital and financing lease obligations, less current portion
Line of credit
Deferred entrance fee revenue
Deferred liabilities
Deferred tax liability
Other liabilities
Total liabilities
Preferred stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2014 and 2013; no shares issued and
outstanding
Common stock, $0.01 par value, 400,000,000 and 200,000,000 shares authorized at December 31, 2014 and 2013,
respectively; 189,466,395 and 130,155,012 shares issued and 187,037,994 and 127,726,611 shares outstanding
(including 3,552,143 and 3,372,937 unvested restricted shares), respectively
Additional paid-in-capital
Treasury stock, at cost; 2,428,401 shares at December 31, 2014 and 2013
Accumulated deficit
Total Brookdale Senior Living Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
77
December 31,
2014
2013
$
104,083 $
38,862
149,730
84,199
237,915
614,789
8,389,505
56,376
312,925
736,805
154,773
256,190
$ 10,521,363 $
$
159,922 $
112,343
76,314
422,654
101,613
4,916
877,762
3,356,808
2,536,883
100,000
5,877
250,469
243,474
267,849
7,639,122
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
168,592
33,362
65,840
209,479
388,400
5,171
870,844
2,138,162
266,462
30,000
86,862
154,870
81,299
88,321
3,716,820
—
—
1,870
4,034,655
(46,800)
(1,108,001)
2,881,724
517
2,882,241
$ 10,521,363 $
1,277
2,025,471
(46,800)
(959,011)
1,020,937
—
1,020,937
4,737,757
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 $503,662, $238,153 and
$229,072, respectively)
General and administrative expense (including non-cash stock-based compensation expense of
$28,299, $25,978 and $25,520, respectively)
Transaction costs
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
(Loss) income from operations
Interest income
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt premium (discount)
Change in fair value of derivatives
Debt modification and extinguishment costs
Equity in earnings (loss) of unconsolidated ventures
Other non-operating income
Loss before income taxes
Benefit (provision) for income taxes
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to Brookdale Senior Living Inc. common stockholders
For the Years Ended
December 31,
2013
2012
2014
$
3,301,297 $
42,239
488,170
3,831,706
2,515,033 $
31,125
345,808
2,891,966
2,412,936
30,786
325,016
2,768,738
2,210,368
1,671,945
1,630,919
280,267
66,949
323,830
537,035
9,992
—
—
488,170
3,916,611
(84,905)
180,627
3,921
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
1,343
1,339
4,012
(128,002)
(109,998)
(7,477)
(2,711)
(6,387)
171
7,235
(330,731)
181,305
(149,426)
436
(96,131)
(25,194)
(17,054)
980
(1,265)
1,484
2,725
(1,828)
(1,756)
(3,584)
—
$
(148,990) $
(3,584) $
(98,183)
(30,155)
(18,081)
(364)
(221)
(3,488)
593
(64,948)
(1,519)
(66,467)
—
(66,467)
Basic and diluted net loss per share attributable to Brookdale Senior Living Inc. common
stockholders
$
(1.01) $
(0.03) $
(0.54)
Weighted average shares used in computing basic and diluted net loss per share
148,185
123,671
121,991
See accompanying notes to consolidated financial statements.
78
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net loss
Other comprehensive income:
Unrealized gain on marketable securities – restricted
Other
Total other comprehensive income, net of tax
Comprehensive loss
Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to Brookdale Senior Living Inc. common stockholders
For the Years Ended
December 31,
2013
2012
2014
$
(149,426) $
(3,584) $
(66,467)
—
—
—
(149,426)
436
—
—
—
(3,584)
—
$
(148,990) $
(3,584) $
1,846
(831)
1,015
(65,452)
—
(65,452)
See accompanying notes to consolidated financial statements.
79
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2014, 2013 and 2012
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In-
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Stockholders'
Equity
Noncontrolling
Interest
Total
Equity
125,354 $
1,254 $1,970,820 $
(46,800) $
(888,960) $
(1,015) $
1,035,299 $
— $1,035,299
—
—
—
—
25,520
—
—
—
—
(66,467)
—
—
25,520
(66,467)
—
—
25,520
(66,467)
74
—
1,401
1,261
13
(100)
—
—
—
—
—
—
1,401
(87)
—
1,401
—
(87)
—
—
—
—
—
305
—
—
—
—
1,846
(831)
1,846
(526)
—
—
1,846
(526)
126,689
1,267 1,997,946
(46,800)
(955,427)
—
996,986
—
996,986
—
—
—
—
25,978
—
—
—
—
(3,584)
—
—
25,978
(3,584)
—
—
25,978
(3,584)
62
—
1,503
976
—
10
—
(10)
54
—
—
—
—
—
—
—
—
—
1,503
—
1,503
—
54
—
—
—
54
127,727
1,277 2,025,471
(46,800)
(959,011)
—
1,020,937
— 1,020,937
—
—
—
—
—
—
—
953
953
—
—
—
—
28,299
—
—
—
—
(148,990)
—
—
28,299
(148,990)
—
(436)
28,299
(149,426)
47,584
476 1,648,306
—
—
—
1,648,782
— 1,648,782
Balances at
January 1,
2012
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
Noncontrolling
interest in
Emeritus
acquisition
Compensation
expense
related to
restricted
stock grants
Net loss
Common stock
issued in
connection
with
Emeritus
acquisition
Issuance of
common
stock from
equity
offering, net
Issuance of
common
stock under
Associate
Stock
Purchase
Plan
Restricted
stock, net
Other
Balances at
December
31, 2014
10,299
103
330,283
—
—
—
330,386
—
330,386
64
—
2,004
1,364
—
14
—
(14)
306
—
—
—
—
—
—
—
—
—
2,004
—
2,004
—
306
—
—
—
306
187,038 $
1,870 $4,034,655 $
(46,800) $ (1,108,001) $
— $
2,881,724 $
517 $2,882,241
See accompanying notes to consolidated financial statements.
80
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
2013
2014
2012
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Debt modification and extinguishment costs
Depreciation and amortization, net
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
Change in deferred lease liability
Change in fair value of derivatives
(Gain) loss on sale of assets
Loss on acquisition
Gain on facility lease termination
Change in future service obligation
Non-cash stock-based compensation
Non-cash interest expense on financing leases
Amortization of (above) below market rents, net
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
Acquisition of Emeritus Corporation, 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 and financing lease obligations
Proceeds from line of credit
Repayment of line of credit
Proceeds from public equity offering, net
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
Payment on lease termination
Purchase of derivatives and payment of swap termination
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
(149,426) $
(3,584) $
(66,467)
6,387
544,512
9,992
(171)
1,840
(4,372)
(21,220)
32,704
(182,371)
1,439
2,711
(446)
—
—
670
28,299
12,647
(3,444)
—
3,510
(52,868)
16,812
(1,183)
(3,370)
242,652
(48,944)
56,935
—
—
(304,245)
(40,441)
28,429
3,269
(26,499)
12,275
4,339
—
(314,882)
326,639
(584,345)
442,000
(372,000)
330,386
(9,393)
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)
20,342
(25,865)
(4,101)
(7,750)
—
1,889
117,802
45,572
58,511
104,083 $
48,140
(35,325)
(502)
—
(2,863)
1,281
(112,044)
(10,729)
69,240
58,511 $
$
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)
42,600
(27,356)
(118)
—
(1,908)
(342)
202,769
38,404
30,836
69,240
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 the leading operator of senior living communities throughout the United States. The Company
is committed to providing senior living solutions primarily within properties that are designed, purpose-built and operated to provide the highest quality
service, care and living accommodations for residents. The Company operates independent living, assisted living and dementia-care communities and
continuing care retirement centers ("CCRCs"). Through its ancillary services program, the Company also offers a range of outpatient therapy, home health,
personalized living and hospice services.
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 ("ASC 810"). ASC 810 broadly defines a VIE as an entity in which
either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly
impact such 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 for which the
Company is determined to be the primary beneficiary. Refer to Note 5 for more information about the Company's VIE relationships.
Use of Estimates
The preparation of the consolidated 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, 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 entrance fee prior to occupying the community.
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 resale 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. The Company contributed all but two of the entry fee CCRCs to an unconsolidated
venture on August 29, 2014, at which time the contributed CCRCs were deconsolidated. See Note 4 for more information about the unconsolidated venture.
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 prices for companies or 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:
Working capital assets acquired and working capital liabilities assumed are valued on a carryover/cost basis which approximates fair value.
Property, plant and equipment are valued utilizing either a discounted cash flow projection of future revenue and costs and capitalization and discount rates
using current market conditions, or a direct capitalization method. The Company allocates the fair values of buildings acquired on an as-if-vacant basis and
depreciates the building values over the estimated remaining lives of the buildings, not to exceed 40 years. The Company determines the allocated values of
other fixed assets, such as site improvements and furniture, fixtures and equipment, based upon the replacement cost and depreciates such values over the
assets' estimated remaining useful lives as determined at the applicable acquisition date. The Company determines the value of land either by considering the
sales prices of similar properties in recent transactions or based on internal analysis of recently acquired and existing comparable properties within its
portfolio.
In connection with a business combination, the Company may assume rights and obligations under certain lease agreements pursuant to which the Company
becomes the lessee of a given property. The Company assumes the lease classification previously determined by the prior lessee absent a modification in the
assumed lease agreement. The Company assesses assumed operating leases, including ground leases, to determine whether the lease terms are favorable or
unfavorable to the Company given current market conditions on the acquisition date. To the extent the lease terms are favorable or unfavorable relative to
market conditions on the acquisition date, the Company recognizes an intangible asset or liability at fair value. The Company amortizes any acquired lease-
related intangibles to facility lease expense over the remaining life of the associated lease plus any assumed bargain renewal periods.
83
The fair value of acquired lease-related intangibles associated with the relationship with the Company's residents, if any, reflects the estimated value of in-
place leases as represented by the cost to obtain residents and an estimated absorption period to reflect the value of the rent and recovery costs foregone
during a reasonable lease-up period as if the acquired space was vacant. The Company amortizes any acquired in-place lease intangibles to depreciation and
amortization expense over the average remaining length of stay of the residents, which is evaluated on an acquisition by acquisition basis but is generally
estimated at 12 months.
The Company estimates the fair value of purchase option intangible assets by discounting the difference between the applicable property's acquisition date fair
value and the stated or anticipated future option price.
The Company estimates the fair value of trade names using a royalty rate methodology and amortizes that value over the estimated useful life of the trade name.
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 term. The assets are then amortized over the estimated term of the
agreement.
The Company calculates the fair value of acquired long-term debt by discounting the remaining contractual cash flows of each instrument at the current market
rate for those borrowings, which the Company approximates based on the rate at which the Company would expect to incur a replacement instrument on the
date of acquisition, and recognizes any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the
instrument.
Capital lease assets are valued by the Company as a right-to-use asset. Financing lease assets are valued as if the Company owns the assets and thus are
recorded at fair value. Capital and financing lease obligations are valued based on the present value of the estimated lease payments applying a discount rate
equal to the Company's estimated incremental borrowing rate at the date of acquisition. Additionally, the valuation of financing lease obligations reflects a
residual value component.
Preacquisition contingencies are valued when considered probable and reasonably estimable, and estimated legal fees are accrued for in accordance with the
Company's existing policy. Self-insurance reserves including incurred but not reported liabilities are estimated by actuary analyses.
A deferred tax asset or liability is recognized at statutory rates for the difference between the book and tax bases of the acquired assets and liabilities. The tax
bases of assets and liabilities in the Emeritus transaction were carried over at historical values.
The excess of the fair value of liabilities assumed and common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to
goodwill, which is not amortized by the Company.
Deferred Costs
Third-party fees and costs incurred to obtain long-term debt and leases 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. Unamortized deferred financing fees are written-off if the associated debt is retired
before the maturity date. Upon the refinancing of mortgage debt or amendment of the line of credit, unamortized deferred financing fees and additional
financing costs incurred are accounted for in accordance with ASC 470-50, Debt Modifications and Extinguishments.
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 Measurements and Disclosures 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. 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 include interest rate caps that effectively manage the risk above certain interest rates for a portion of the Company's variable
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 the credit risk of its
counterparties when evaluating the fair value of its derivatives.
The Company estimates the fair value of its 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 $3.5 billion and $2.3 billion as
of December 31, 2014 and 2013, respectively. The Company had capital and financing lease obligations with a carrying value of $2.6 billion and $0.3 billion as
of December 31, 2014 and December 31, 2013, respectively. Fair value of the debt and capital and financing lease obligations approximates carrying value in
all periods. 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):
Current:
Real estate tax escrows
Replacement reserve escrows
Resident deposits
Other
Subtotal
Long term:
Letter of credit collateral
Insurance deposits
CCRC escrows
Debt service reserve
Other
Subtotal
Total
85
December 31,
2014
2013
$
$
17,926 $
15,535
1,054
4,347
38,862
21,935
19,299
13,214
1,728
200
56,376
95,238 $
9,252
9,139
8,249
11,551
38,191
19,975
11,227
26,209
—
200
57,611
95,802
Accounts Receivable, net
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 $26.5 million and $17.7 million as of December 31, 2014 and 2013, 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 and financing 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
Estimated
Useful Life
(in years)
40
3 – 7
1 – 4
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 operating lease.
Assets under capital and financing leases and leasehold improvements are depreciated over the shorter of the estimated useful life of the assets or the term of
the 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. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the
reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. The fair values used in this evaluation are estimated based upon
discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions such as
revenue and expense growth rates, capitalization rates and discount rates.
86
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.
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
Trade names
Other
Stock-Based Compensation
Estimated
Useful Life
(in years)
2 - 5
3 – 9
The Company follows ASC 718, Compensation - 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 are recognized when incurred.
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.
For all share-based 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.
Convertible Debt Instruments
Convertible debt instruments are accounted for under ASC 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.
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 high 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.
87
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 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 of an unconsolidated venture 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.
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 its community leases as to 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 residual value for financing leases and a corresponding long-term asset is recorded
in property, plant and equipment and leasehold intangibles in the consolidated balance sheets. For capital lease assets, 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. For financing lease assets, the asset is
depreciated over the useful life of the asset. 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
88
total project costs related to construction in progress. Once construction is complete, the Company considers the requirements under ASC 840-40. 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 January 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-01, Simplifying Income Statement—Presentation by Eliminating the
Concept of Extraordinary Items ("ASU 2015-01"). ASU 2015-01 is intended to reduce complexity and cost of compliance with GAAP by eliminating the
concept of extraordinary items in the statement of operations. The amendments in this update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2015, and early adoption is permitted. The Company plans to adopt ASU 2015-01 effective on January 1, 2015, and
it is not expected to have a material impact on the Company's consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-
15"). ASU 2014-15 defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going
concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company beginning in the fourth quarter of 2016. The Company is
currently evaluating the impact that the adoption of ASU 2014-15 will have on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 affects any entity that either
enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. Under ASU 2014-09, an
entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or
services. ASU 2014-09 is effective for the Company in the first quarter of 2017. The Company is currently evaluating the impact the adoption of ASU 2014-
09 will have on its consolidated financial statements and disclosures.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU
2014-08"). ASU 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a
strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU 2014-08 is effective prospectively for fiscal years
beginning after December 15, 2014 and is available for early adoption as of January 1, 2014. The Company adopted the provisions of ASU 2014-08 as of
January 1, 2014 and incorporated the provisions of this update to its consolidated financial statements upon adoption. The adoption of ASU 2014-08 did not
have a material impact on the Company's financial condition or results of operations.
In July 2013, the FASB issued ASU No. 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 Company adopted the provisions of this update as
of January 1, 2014 and incorporated the provisions of this update in its consolidated financial statements upon adoption. The adoption of ASU 2013-11 did not
have a material impact on the Company's financial condition or results of operations.
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.
89
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.
During fiscal 2014, 2013 and 2012, 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 each 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 3.6 million,
3.9 million and 4.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The calculation of diluted weighted average shares excludes the impact of conversion of the outstanding principal amount of $316.3 million of the Company's
2.75% convertible senior notes due 2018. As of December 31, 2014, 2013 and 2012, 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.
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, 2014, 2013 and 2012, the number of shares issuable upon exercise of the warrants was approximately 10.8 million. See Note 8 for more
information about the 2.75% convertible notes and warrants.
90
4. Acquisitions and Other Significant Transactions
Acquisition of Emeritus
On July 31, 2014, the Company completed the merger contemplated by that certain Agreement and Plan of Merger, dated as of February 20, 2014, (the
"Merger Agreement") by and among Emeritus Corporation ("Emeritus"), the Company, and Broadway Merger Sub Corporation, a wholly-owned subsidiary of
the Company ("Merger Sub"), pursuant to which Merger Sub merged with and into Emeritus, with Emeritus continuing as the surviving corporation and a
wholly-owned subsidiary of the Company (the "Merger"). Prior to the Merger, Emeritus was a senior living service provider focused on operating residential
style communities throughout the United States. As of July 31, 2014 Emeritus operated 493 communities, including assisted living and dementia care
communities. Many of these communities offer independent living alternatives and, to a lessor extent, skilled nursing care. As of July 31, 2014, Emeritus
owned 182 communities and leased 311 communities. Prior to the Merger, Emeritus also offered a range of outpatient therapy and home health services in
Florida, Arizona and Texas.
For accounting purposes, the Merger was accounted for by the Company as a purchase. The results of Emeritus' operations have been included in the
consolidated financial statements subsequent to July 31, 2014. Revenue and loss from operations of Emeritus included in the Company's consolidated
statements of operations for the year ended December 31, 2014 were $785.5 million and $128.2 million, respectively.
The aggregate acquisition-date fair value of the consideration transferred in the Merger was approximately $3.0 billion which consisted of the issuance of 47.6
million shares of the Company's common stock with a fair value of approximately $1.6 billion upon the cancellation of all shares of Emeritus' common stock
and stock options, as well as the Company's assumption of approximately $1.4 billion aggregate principal amount of existing mortgage indebtedness of
Emeritus. The fair value of the 47.6 million common shares issued was determined based on the closing market price of the Company's common shares on
July 31, 2014, the effective date of the Merger.
As a result of the acquisition of Emeritus, the Company acquired, directly or indirectly, entities that are lessees under operating and capital leases covering
311 communities, as well as certain other leases such as office leases and leases associated with Emeritus' Nurse on Call home health business. The
community leases contain customary terms, including assignment and change of control restrictions, maintenance and capital expenditure obligations,
termination provisions and financial covenants. In connection with the Merger, the Company entered into guarantees of certain of these leases.
The $1.4 billion aggregate principal amount of existing mortgage debt assumed, directly or indirectly, by the Company in the Merger is collateralized by a total
of 179 underlying communities, bears interest either at fixed rates at a weighted average of 6.06% per annum or at variable rates at a weighted average of
5.49% per annum (in each case, as of July 31, 2014), and had remaining maturities ranging from approximately three months to 33 years. The mortgage loans
contain customary terms including assignment and change of control restrictions, acceleration provisions and financial covenants. In connection with the
Merger, the Company entered into guarantees of certain of these debt arrangements.
Emeritus maintained general and professional liability coverage for its owned, leased and managed communities under insurance policies that provided for
self-insured retention. In certain historical periods Emeritus was uninsured for a subset of communities. In addition, it maintained a large-deductible workers
compensation and a self-insured employee medical program. Emeritus accrued for claims under these three programs and therefore maintained reserves for
liabilities related thereto. The Company acquired these liabilities as a result of the Merger, evaluated the adequacy of Emeritus' insurance reserves by
reviewing historical claims, investigating claim files with assistance from Emeritus' third party administrators and other consultants, reviewing Emeritus'
historical actuarial reports, and obtaining new actuarial valuations for claims incurred but not paid as of the date of the Merger. The Company also acquired tail
insurance to provide coverage for general and professional liability claims incurred before the Merger date but made after, and maintains reserves for
deductibles payable under the tail policies.
On June 4, 2013, in Joan Boice et al. v. Emeritus Corporation et al., the Sacramento County Superior Court entered final judgment in favor of Joan Boice
(deceased) and against Emeritus in the amount of $250,000 in compensatory damages and $23.0 million in punitive damages. Judgment was also entered in
favor of Joan Boice's three adult children for $250,000 and the court awarded the plaintiffs' lawyer over $4.1 million in attorneys' fees. The judgment accrues
interest at prescribed statutory rates. On July 8, 2013, Emeritus filed a Notice of Appeal challenging, among other things, the excessive nature of the punitive
damages award. Emeritus was required to post a bond in connection with its appeal, and made a cash deposit in the amount of $20.9 million to collateralize the
bond. The amount of the cash deposit and the reserve regarding the judgment have been contemplated in the preliminary purchase price allocation. Subsequent
to the closing of the Merger, the Company was no longer required to collateralize the bond with a cash deposit.
91
The fair values of the acquired property, plant and equipment, including communities and assets under capital and financing leases, were determined utilizing a
direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements were based on
current market conditions as of the acquisition date and are considered Level 3 measurements within the fair value hierarchy. The range of capitalization rates
utilized was 5.5% to 9.75%, depending upon the property type, geographical location, and the quality of the respective community.
The fair values of the acquired capital and financing lease obligations were determined utilizing a discounted cash flow approach considering the estimated
contractual lease payments and a market discount rate. These fair value measurements were based on current market conditions as of the acquisition date and
are considered Level 3 measurements within the fair value hierarchy. The range of discount rates utilized was 6.0% to 10.75%, depending upon the remaining
lease term, property type, geographical location, and the quality of the respective community.
The fair values of the acquired long-term debt obligations were determined utilizing a discounted cash flow approach considering the estimated contractual
long-term debt payments and a market discount rate. These fair value measurements were based on current market conditions as of the acquisition date and are
considered Level 2 measurements within the fair value hierarchy. The range of discount rates utilized was 3.0% to 7.0%, depending upon the remaining debt
term and collateral securing the indebtedness.
The table below presents at the time of the filing of this report, a preliminary allocation of purchase price to the assets acquired and liabilities assumed (in
millions):
Cash and cash equivalents
Property, plant and equipment and leasehold intangibles
Goodwill
Other intangible assets, net
Other assets, net
Trade accounts payable and accrued expenses
Long-term debt
Capital and financing lease obligations
Deferred tax liability
Other liabilities
Noncontrolling interest
Fair value of Brookdale common stock issued
$
$
28
5,506
639
259
308
(297)
(1,516)
(2,692)
(337)
(248)
(1)
1,649
The goodwill of $639.3 million is primarily attributable to the synergies expected to arise after the Merger. The Retirement Centers, Assisted Living and
Brookdale Ancillary Services segments were allocated goodwill of $20.5 million, $492.0 million and $126.8 million, respectively. The goodwill is not
deductible for tax purposes.
The allocation of fair values of the assets acquired and liabilities assumed has changed from the allocation reported in "Note 4 – Acquisitions and Other
Significant Transactions" in the Notes to Consolidated Financial Statements (Unaudited) included in Part I of our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2014 filed with the SEC on November 10, 2014. The changes to the Company's valuation assumptions were based on more
accurate information becoming available concerning the subject assets and liabilities. None of these changes had a material impact on the Company's
consolidated financial statements. The allocation of fair values is subject to further adjustment due primarily to information not readily available at the
acquisition date related to subjective reserves and property valuations and adjustments to our valuation assumptions and the related deferred tax impact. The
Company's assessment of the fair values and the allocation of the purchase price to the identified tangible and intangible assets and liabilities are its current
best estimate of fair value.
92
The following table provides the pro forma consolidated operational data as if the Company had acquired Emeritus on January 1, 2013 (unaudited, in millions,
except share and per share data):
Total revenue
Net loss attributable to common stockholders
Basic and diluted net loss per share attributable to common stockholders
Weighted average shares used in computing basic and diluted net loss per share (in thousands)
Year Ended
December 31,
2014
2013
5,055 $
(103)
4,853
(424)
(0.59) $
175,823
(2.48)
171,255
$
$
The Company incurred $57.1 million of transaction costs related to the acquisition of Emeritus for the year ended December 31, 2014. Transaction costs are
primarily comprised of transaction fees and direct acquisition costs, including legal, finance, consulting, professional fees and other third party costs. The pro
forma consolidated operational data for the year ended December 31, 2014 excludes $57.1 million of transaction costs that were directly attributable to the
Merger. The proforma consolidated operational data for the year ended December 31, 2013 includes $57.1 million of transaction costs that were directly
attributable to the Merger. On August 29, 2014, the Company completed the HCP Transactions (as defined below). The pro forma consolidated operational
data reflects the Company's full ownership interests and previously existing lease terms through the closing of the HCP Transactions on August 29, 2014 and
reflects the Company's subsequent venture arrangements and amended lease terms for the remainder of the period.
The pro forma consolidated operational data is based on assumptions and estimates considered appropriate by the Company's management; however, these pro
forma results are not necessarily indicative of the results of operations that would have been obtained had the Merger occurred at the beginning of the periods
presented, nor do they purport to represent the consolidated results of operations for future periods. The pro forma consolidated operational data does not
include the impact of any synergies that may be achieved from the acquisition of Emeritus or any strategies that management may consider in order to continue
to efficiently manage operations.
On July 30, 2014, in connection with the Merger, the Company's Certificate of Incorporation was amended to authorize up to 400 million shares of common
stock.
HCP Transactions
On August 29, 2014, the Company completed the transactions contemplated by that certain Master Contribution and Transactions Agreement (the "Master
Agreement"), dated as of April 23, 2014, by and between the Company and HCP, Inc. ("HCP"). At the closing of these transactions (the "Closing"), the
Company and HCP entered into two ventures and amended the terms of certain existing agreements between the Company and HCP ("HCP Transactions").
Each of the ventures contemplated by the Master Agreement uses a "RIDEA" structure, whereby at the Closing each of the Company and HCP invested in an
"opco" entity and a "propco" entity. The propco owns most of the applicable communities and leases such communities to the opco pursuant to long-term
leases entered into at the Closing. The opco owns the remainder of the applicable communities not owned by the propco, and at the Closing the opco engaged
an affiliate of the Company to manage all of the owned and leased communities pursuant to management agreements with 15-year terms subject to certain
extension options.
Venture Relating to Entry Fee CCRCs. At the Closing, the Company and HCP entered into a venture with respect to certain entry fee CCRCs previously
owned, leased and/or operated by the Company. The Company owns a 51% ownership interest, and HCP owns a 49% ownership interest, in each of the propco
and opco (together, the "CCRC Venture"). Pursuant to the terms of the Master Agreement, at the Closing the Company contributed to the CCRC Venture eight
wholly-owned entities (owning eight CCRCs subject, in certain cases, to existing debt) and certain purchase options with respect to the HCP Communities (as
defined below), and HCP contributed to the CCRC Venture three wholly-owned entities (owning three properties in two CCRCs (the "HCP Communities")). In
addition, HCP contributed $323.5 million in cash and the CCRC Venture completed the purchases of four communities managed by the Company for an
aggregate purchase price of $323.5 million immediately following the Closing. Each of the CCRCs in the CCRC Venture is managed by the Company pursuant
to market rate management agreements entered into at the Closing, and the Company has agreed to guarantee certain obligations of the manager under the
applicable management agreements. Each of the propco and opco is governed by a board of managers consisting of six members, with three representatives
appointed by each of the Company and HCP.
93
The results of operations and financial position of the ten previously owned or leased entry fee CCRCs, including refundable entrance fee liabilities and
deferred revenue, were in all material respects deconsolidated from the Company prospectively upon formation of the CCRC Venture. The Company's interest
in the CCRC Venture is accounted for under the equity method of accounting. The Company's investment basis in the CCRC Venture is based on the carrying
values of the net assets it contributed which is less than the Company's proportional share of underlying fair value of equity.
Venture Relating to Emeritus / HCP Communities. At the Closing, the Company and HCP entered into a venture with respect to 49 independent living,
assisted living, memory care and/or skilled nursing care communities previously owned by HCP and leased and historically operated by Emeritus. The
Company acquired the leases in the Merger, recorded them at fair value at the acquisition date, and in this transaction effectively terminated the leases;
therefore the Company has written off all of the recorded lease values in connection with this termination. The Company owns a 20% ownership interest, and
HCP owns an 80% ownership interest, in each of the propco and opco (together, the "HCP 49 Venture"). Pursuant to the terms of the Master Agreement, at the
Closing an HCP affiliate made a loan to the Company at prevailing interest rates in the original principal amount of approximately $68 million to fund the
Company's initial capital contribution to the HCP 49 Venture. HCP contributed 49 communities to propco. At the Closing, propco leased the communities to
opco. Each of the communities in the HCP 49 Venture is managed by an affiliate of the Company, and the Company has agreed to guarantee certain obligations
of the manager under the applicable market rate management agreements. During the three months ended December 31, 2014, the Company repaid the $68
million loan from HCP primarily with the proceeds from the public equity offering completed during the third quarter.
The results and financial position of the communities were, in all material respects, deconsolidated from the Company prospectively upon formation of the
HCP 49 Venture. The Company's interest in the venture is accounted for under the equity method of accounting.
Pursuant to the terms of the Master Agreement, the Company is required to pay HCP a fee related to the lease restructuring in the amount of $34
million, which fee is payable over a two-year period beginning September 30, 2014. The elimination of the recorded lease values upon termination of the
aforementioned leases approximated the $34 million liability to HCP.
Amendments to Existing Agreements (including Triple Net Leases). At the Closing, the Company and HCP amended and restated (i) that certain Master Lease
and Security Agreement, dated as of October 31, 2012, by and between Emeritus and certain affiliates of HCP, with respect to 112 communities, and (ii)
certain other triple net leases between Emeritus and affiliates of HCP, with respect to 41 communities, together into a single master lease with the
communities subject thereto separated into three pools (the "Master Lease"). The term of the Master Lease is 14 years for the pool 1 communities, 15 years
for the pool 2 communities and 16 years for the pool 3 communities, with an average of approximately 15 years, in each case subject to two extension options
of approximately 10 years each, and the Master Lease is guaranteed by the Company. The Master Lease provides for total base rent in 2014 of approximately
$158 million, with lower future rent payments and escalations compared to the previously existing leases. HCP has agreed to make available up to $100
million for capital expenditures related to the communities during calendar years 2014 through 2017 at an initial lease rate of 7.0%. The Master Lease
includes certain customary covenants, with respect to, among other things, capital expenditure requirements, restrictions on the ownership, operation and
management of competing communities and transfer restrictions (including restrictions on changes of control of the Company). The Master Lease also
includes customary events of default and remedies relating thereto. In addition, the Master Lease includes a fair value purchase option in favor of the Company
for up to ten communities at an aggregate purchase price not to exceed $60 million. As described further in Note 22, on December 29, 2014 the Company
exercised this purchase option and agreed to purchase nine communities for an aggregate purchase price of $60 million.
In connection with the transactions contemplated by the Master Agreement, at the Closing, (i) the parties terminated the purchase option rights granted by HCP
to Emeritus pursuant to 49 of the previously existing Emeritus leases, (ii) the parties agreed to modify the existing term extension hurdle and incentive
management fee structure applicable to an existing venture between the Company and HCP in respect of 20 independent living, assisted living, memory care
and/or skilled nursing care communities, and (iii) HCP released certain deposits and reserves posted by the Company and held by HCP or its affiliates in
connection with existing leases between the parties. For accounting purposes, the amended leases were treated as new leases and classified as either capital or
financing leases. The terminated purchase options were included in the determination of recorded capital or financing lease related balances.
94
2014 Community Acquisitions and Dispositions
In July 2014, the Company acquired the underlying real estate associated with four communities that were previously leased for an aggregate purchase price of
$51.4 million. The results of operations of three and one of these communities, prior and subsequent to the acquisition, are reported in the Retirement Centers
and Assisted Living segments, respectively. The Company financed the transactions with $17.0 million of seller-financing secured by three of the
communities. The balance of the purchase price was paid from cash on hand.
During the year ended December 31, 2014, the Company sold four communities for an aggregate selling price of $9.2 million. The results of operations of the
communities were previously reported in the Assisted Living and CCRCs - Rental segments.
Equity Offering
In September 2014, the Company completed a public equity offering of 10,298,506 shares of common stock, which yielded net proceeds of approximately
$330.4 million, net of approximately $0.4 million of costs related to the offering. During the three months ended December 31, 2014, the Company repaid
$275.9 million of existing long-term debt with a weighted average interest rate of approximately 5.5%, financed primarily with the proceeds of the public
equity offering, and the Company has used and is using net proceeds to finance the exercise of purchase options on certain communities currently leased by
the Company and for other general corporate purposes, which may include additional debt repayments and the acceleration of capital investments in the
Company's communities and corporate infrastructure platform.
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
results of operations of the community are included in the CCRCs - Entry Fee segment for the six month period ended June 30, 2014 and the CCRCs - Rental
segment for the six month period ended December 31, 2014.
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 sheets 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.
95
5. Variable Interest Entities and Investment in Unconsolidated Ventures
Variable Interest Entities
At December 31, 2014, the Company has equity interests in unconsolidated VIEs. The Company has determined that it does not have the power to direct the
activities of the VIEs that most significantly impact the VIEs' economic performance and is not the primary beneficiary of these VIEs in accordance with ASC
810. The Company's interests in the VIEs are, therefore, accounted for under the equity method of accounting.
The Company holds a 51% equity interest in the CCRC Venture. The CCRC Venture's opco has been identified as a VIE. The equity members of the CCRC
Venture's opco share certain operating rights, and the Company acts as manager to the CCRC Venture opco; however, the Company does not consolidate this
VIE because it does not have the ability to control the activities that most significantly impact this VIE's economic performance. The assets of the CCRC
Venture opco primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable and cash and cash equivalents. The obligations
of the CCRC Venture opco primarily consist of community lease obligations, accounts payable, accrued expenses and refundable entrance fees. Assets
generated by the CCRC operations (primarily rents from CCRC residents) of the CCRC Venture opco may only be used to settle its contractual obligations
(primarily the rental costs and operating expenses incurred to operate the communities). See Note 4 for more information about the Company's entry into the
CCRC Venture.
The Company holds a 20% equity interest in the HCP 49 Venture. The opco and propco of the HCP 49 Venture have been identified as VIEs. The equity
members of the HCP 49 Venture share certain operating rights and the Company acts as manager to the HCP 49 Venture opco; however, the Company does not
consolidate these VIEs because it does not have the ability to control the activities that most significantly impact the economic performance of these VIEs.
The assets of the HCP 49 Venture propco primarily consist of the senior housing communities that it owns and cash and cash equivalents. The obligations of
the HCP 49 Venture propco primarily consist of a note payable to HCP. The assets of the HCP 49 Venture opco primarily consist of the senior housing
communities that it leases, resident fees receivable and cash and cash equivalents. The obligations of the HCP 49 Venture opco primarily consist of
community lease obligations, accounts payable and accrued expenses. Assets generated by the operations of the senior housing communities (primarily rents
from senior housing residents) of the HCP 49 Venture may only be used to settle its contractual obligations (primarily the rental costs and operating expenses
incurred to operate the communities). See Note 4 for more information about the Company's entry into the HCP 49 Venture.
The carrying value and classification of the related assets, liabilities and maximum exposure to loss as a result of the Company's involvement with these VIEs
are summarized below at December 31, 2014 (in millions):
VIE
Asset
Maximum
Exposure to
Loss
Carrying
Amount
CCRC Venture opco
HCP 49 Venture opco and propco
Investment in unconsolidated ventures
Investment in unconsolidated ventures
$
$
191.9 $
70.5 $
191.9
70.5
As of December 31, 2014, the Company has not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its
unconsolidated VIEs.
Investment in Unconsolidated Ventures
The Company owns interests in the following ventures that are accounted for under the equity method as of December 31, 2014:
Venture
CCRC Venture
HCP 49 Venture
BKD-HCN venture opco and propco
S-H Twenty-One venture opco and propco
96
Ownership Percentage
51%
20%
20%
10%
6. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2014 and 2013, net property, plant and equipment and leasehold intangibles, which include assets under capital and financing leases,
consisted of the following (in thousands):
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
2014
475,485 $
5,017,991
56,515
735,837
852,746
99,408
3,057,516
10,295,498
(1,905,993)
8,389,505 $
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
$
$
During the years ended December 31, 2014, 2013 and 2012, 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. The Company recorded non-cash impairment charges in its operating results of $10.0 million for the
year ended December 31, 2014, primarily within the Retirement Centers and Assisted Living segments, $12.9 million for the year ended December 31, 2013,
primarily within the CCRCs - Rental and Assisted Living segments and $27.7 million for the year ended December 31, 2012, primarily within the Retirement
Centers and Assisted Living segments. These impairment charges are primarily due to lower than expected operating performance at these properties and
reflect the amount by which the carrying values of the assets exceeded their estimated fair value.
For the years ended December 31, 2014, 2013 and 2012, the Company recognized depreciation and amortization expense on its property, plant and equipment
and leasehold intangibles of $529.1 million, $264.1 million and $248.5 million, respectively.
Future amortization expense for resident and leasehold operating intangibles is estimated to be as follows (dollars in thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
$
Future
Amortization
264,051
23,121
16,742
9,624
5,819
18,858
338,215
$
In connection with the acquisition of Emeritus, the Company recorded intangible assets for resident-in-place leases and below market operating lease
intangibles. The Company is amortizing the resident-in-place leases and below market operating lease intangibles over their estimated weighted average useful
lives of one and nine years, respectively.
97
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, 2014 and 2013 presented on an operating
segment basis (dollars in thousands):
December 31, 2014
Gross
Carrying
Amount
Emeritus
Acquisition
Accumulated
Impairment
and Other
Charges
Net
December 31, 2013
Accumulated
Impairment
and Other
Charges
Gross
Carrying
Amount
$
7,642 $
90,640
20,499 $
491,983
(521) $
(248)
27,620 $
582,375
7,642 $
102,680
(521) $
(248)
Net
7,121
102,432
—
$
98,282 $
126,810
639,292 $
—
(769) $
126,810
736,805 $
—
110,322 $
—
(769) $
—
109,553
Retirement Centers
Assisted Living
Brookdale Ancillary
Services
Total
Goodwill is tested for impairment annually with a test date of October 1 or sooner if indicators of impairment are present. No indicators of impairment were
present during the three years ended December 31, 2014. As identified in Note 4, the purchase price allocation for the Merger is preliminary and the
finalization of such estimate may result in future adjustments to goodwill balances reported in the table above.
The following is a summary of other intangible assets at December 31, 2014 and 2013 (dollars in thousands):
Community purchase options
Health care licenses
Trade names
Other
Total
December 31, 2014
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
$
$
55,738 $
64,538
27,800
13,531
161,607 $
— $
—
(4,179)
(2,655)
(6,834) $
55,738 $
64,538
23,621
10,876
154,773 $
122,649 $
33,853
—
3,331
159,833 $
— $
—
—
(1,076)
(1,076) $
Net
122,649
33,853
—
2,255
158,757
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2014, 2013 and 2012 was $8.0 million, $4.7 million and
$3.8 million, respectively. Health care licenses were determined to be indefinite-lived intangible assets and are not subject to amortization. No indicators of
impairment were present during the year ended December 31, 2014.
In connection with the acquisition of Emeritus, the Company recorded intangible assets for community purchase options, trade names, management contracts
and health care licenses. Health care licenses were determined to be indefinite-lived intangible assets and are not subject to amortization. The lease purchase
options are not currently amortized, but will be added to the cost basis of the related communities if the option is exercised, and will then be depreciated over
the estimated useful life of the community. The Company is amortizing the trade names and management contract intangibles assets over their estimated
weighted average useful lives of three years and nine years, respectively. The weighted average amortization periods at acquisition for the other intangible
assets is three years. During the year ended December 31, 2014, the Company contributed certain community purchase options to the CCRC Venture and
terminated the community purchase option rights pursuant to 49 of the previously existing Emeritus leases in connection with closing the HCP Transactions.
See Note 4 for more information about the Company's community purchase option activity.
Future amortization expense for intangible assets with definite lives is estimated to be as follows (dollars in thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
98
$
Future
Amortization
12,193
8,165
3,726
3,717
2,638
4,058
34,497
$
8. Debt
Long-term Debt and Capital and Financing Lease Obligations
Long-term debt and capital and financing lease obligations consist of the following (dollars in thousands):
December 31,
2014
2013
Mortgage notes payable due 2015 through 2047; weighted average interest rate of 4.84% in 2014, net of debt premium
of $59.6 million in 2014 and net of debt premium of $1.3 million in 2013 (weighted average interest rate of 4.12% in
2013)
$
3,105,410 $
2,037,649
Capital and financing lease obligations payable through 2030; weighted average interest rate of 8.57% in 2014 (weighted
average interest rate of 8.14% in 2013)
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount of $43.9 million and
$54.8 million in 2014 and 2013, respectively, interest at 2.75% per annum, due June 2018
Construction financing due 2017 through 2019; weighted average interest rate of 4.90% in 2014 (weighted average
interest rate of 6.22% in 2013)
Notes payable issued to finance insurance premiums, weighted average interest rate of 2.82% in 2014 (weighted average
interest rate of 2.65% in 2013), due 2015
Other notes payable, weighted average interest rate of 4.75% in 2014 and maturity dates ranging from 2015 to 2016
Total debt and capital and financing lease obligations
Less current portion
Total long-term debt and capital and financing lease obligations
$
2,649,226
299,824
272,345
261,443
50,118
4,476
22,586
66,271
6,165,956
272,265
5,893,691 $
3,186
–
2,606,578
201,954
2,404,624
The annual aggregate scheduled maturities of long-term debt and capital and financing lease obligations outstanding as of December 31, 2014 are as follows
(dollars in thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total obligations
Less amount representing debt premium, net
Less amount representing interest (8.57%)
Total
Credit Facilities
Long-term
Debt
Capital and
Financing
Lease
Obligations Total Debt
$
151,764 $
61,515
554,036
1,301,391
149,842
1,282,464
3,501,012
15,718
—
$
3,516,730 $
246,992 $
323,446
280,077
283,757
291,493
3,629,975
5,055,740
—
(2,406,514)
2,649,226 $
398,756
384,961
834,113
1,585,148
441,335
4,912,439
8,556,752
15,718
(2,406,514)
6,165,956
On December 19, 2014, the Company entered into a Fourth Amended and Restated Credit Agreement with General Electric Capital Corporation, as
administrative agent, lender and swingline lender, and the other lenders from time to time parties thereto. The amended credit agreement amended and restated
in its entirety the Company's previously existing Third Amended and Restated Credit Agreement dated as of September 20, 2013, which provided a total
commitment amount of $250.0 million. The amended agreement provides for a total commitment amount of $500.0 million, comprised of a $100.0 million
term loan drawn at closing and a $400.0 million revolving credit facility (with a $50.0 million sublimit for letters of credit and a $50.0 million swingline
feature to permit same day borrowing) and an option to increase the revolving credit facility by an additional $250.0 million, subject to obtaining commitments
for the amount of such increase from acceptable lenders. In addition, the amended credit agreement extended the maturity date from March 31, 2018 to
January 3, 2020 and decreased the interest rate payable on drawn amounts and the fee payable on the unused portion of the facility. Amounts drawn under the
facility will continue to bear interest at 90-day LIBOR plus an applicable margin; however, the amended agreement reduces the applicable margin from a range
of 3.25% to 4.25% to a range of 2.50% to 3.50%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.50% margin
at utilization equal to or lower than 35%, a 3.25% margin at utilization greater than 35% but less than or equal to 50%, and a 3.50% margin at utilization
greater than 50%. The amended agreement also eliminates the minimum 0.5% LIBOR rate included in the prior agreement.
99
Amounts drawn on the facility may 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 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 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, 2014, the outstanding balance under this credit facility was $100.0 million. The Company also had secured and unsecured letter of credit
facilities of up to $98.7 million in the aggregate as of December 31, 2014. Letters of credit totaling $72.7 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 due 2018 (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 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 $29.33 per share), subject to
adjustment. 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. In addition, Holders may convert their Notes at their option under the following circumstances: (i) during any fiscal
quarter 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 the
last day of such preceding fiscal quarter; (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. As of December 31, 2014, the Notes are not convertible. 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 regarding the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial
settlement), the liability and equity components of the convertible debt are separated in a manner that will reflect the Company's non-convertible debt
borrowing rate when interest expense is recognized in subsequent periods.
100
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, 2014, the "if converted" value of the Notes does not exceed their 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,
2013
2014
2012
Coupon interest
Amortization of discount
Interest expense related to convertible notes
$
$
8,697 $
10,902
19,599 $
8,697 $
10,131
18,828 $
8,697
9,415
18,112
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 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 features 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.
101
2014 Financings
On April 9, 2014, the Company obtained $146.0 million in loans, secured by first mortgages, on 20 communities. The loans bear interest at a fixed rate of
4.77% and mature in May 2021. Proceeds of the loans were used to refinance $140.0 million of mortgage debt that was scheduled to mature in November
2014.
In October 2014, the Company obtained $89.7 million in supplemental loans, secured by the 21 underlying communities. The loans bear interest at a fixed rate
of approximately 4.6%.
In the fourth quarter of 2014, the Company repaid $275.9 million of existing long-term debt with a weighted average interest rate of approximately 5.5%,
including the $68 million loan from HCP used to fund the Company's initial capital contribution to the HCP 49 Venture. The Company financed the repayment
of debt primarily with the proceeds from the public equity offering completed during the third quarter. See Note 4 for more information about the HCP 49
Venture and the public equity offering.
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 2014 and July 2014 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 2013 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.
102
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.
As of December 31, 2014, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.
Interest Rate Caps
In the normal course of business, the Company has entered into certain interest rate protection agreements to effectively manage the risk above certain interest
rates for a portion of the Company's variable rate debt. The following table summarizes the Company's interest rate cap instruments at December 31, 2014
(dollars in thousands):
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, 2014)
Estimated asset fair value (included in other assets, net at December 31, 2013)
9. Accrued Expenses
Accrued expenses consist of the following components as of December 31, (in thousands):
Salaries and wages
Insurance reserves
Real estate taxes
Vacation
Interest
Accrued utilities
Lease payable
Taxes payable
Other
Total
10. Commitments and Contingencies
Facility Operating Leases
$
846,255
4.31%
2016
2018
763
3,751
$
$
2014
2013
124,935 $
116,858
43,155
43,037
12,757
12,798
30,001
2,679
36,434
422,654 $
76,278
31,293
25,763
25,715
7,270
7,616
11,973
1,477
22,094
209,479
$
$
The Company has entered into sale leaseback and lease agreements with certain real estate investment trusts ("REIT"s). 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 primarily vary from 10
to 20 years and generally 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, 2014 the Company operated 583 communities under long-term leases (342 operating leases and 241 capital and financing leases). As of
December 31, 2013 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 17 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 (above) below market rents and deferred gains are as
follows (in thousands):
103
Cash basis payment
Straight-line expense
Amortization of (above) below market rents, net
Amortization of deferred gain
Facility lease expense
For the Years Ended
December 31,
2013
2014
330,207 $
1,439
(3,444)
(4,372)
323,830 $
278,504 $
2,597
—
(4,372)
276,729 $
$
$
2012
281,729
6,668
—
(4,372)
284,025
The aggregate amounts of future minimum operating lease payments, including community and office leases, as of December 31, 2014, are as follows (dollars
in thousands):
Year Ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
Other
Operating
Leases
$
$
395,990
396,011
381,722
366,040
348,111
1,239,651
3,127,525
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. Emeritus provided professional liability
coverage for approximately one-half of its operating locations through a wholly-owned captive insurance carrier, and the captive did not itself acquire excess
professional liability coverage until October 1, 2013. Consequently, as a result of the Emeritus acquisition, the Company retains full exposure for professional
liability claims incurred at those locations before October 1, 2013 and made prior to July 31, 2014.
As of December 31, 2014 and 2013, the Company accrued reserves of $301.6 million and $76.6 million, respectively, for these programs of which $184.7
million and $45.3 million is classified as long-term liabilities as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the
Company accrued $52.7 million and $16.0 million, respectively, of estimated amounts receivable from the insurance companies under these insurance
programs.
The Company has secured self-insured retention risk under workers' compensation and general liability and professional liability programs with cash deposits
of $19.6 million and $18.6 million as of December 31, 2014 and 2013, respectively. Letters of credit securing the programs aggregated $33.8 million and
$34.2 million as of December 31, 2014 and 2013, respectively. Emeritus previously maintained workers' compensation insurance coverage through a high
deductible, collateralized insurance policy with deposits of $51.9 million as of December 31, 2014.
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 25.0% 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, 2014, 2013 and 2012, the Company's expense to the plan was $7.1 million, $6.6 million and $4.8 million,
respectively.
104
13. Related Party Transactions
Under the terms of the registration rights provisions of the Company's Stockholders Agreement, which was terminated in connection with the Merger, the
Company was 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). In connection with the Company's obligations thereunder, the Company incurred
approximately $0.4 million of expenses in 2014 related to secondary public equity offerings of Company shares by Fortress affiliates.
14. Stock-Based Compensation
The following table sets forth information about the Company's restricted stock awards (excluding restricted stock units) (share amounts in thousands):
Outstanding on January 1, 2012
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2012
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2013
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2014
Number of
Shares
Weighted
Average
Grant Date
Fair Value
4,222 $
1,592 $
(1,435) $
(427) $
3,952 $
1,328 $
(1,455) $
(452) $
3,373 $
1,662 $
(1,185) $
(298) $
3,552 $
14.93
19.20
14.28
15.62
16.67
26.98
15.08
18.87
21.12
29.79
19.58
21.02
25.70
As of December 31, 2014, there was $59.1 million of total unrecognized compensation cost related to nonvested share-based compensation awards
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 15% over the requisite service period of the awards. That
105
estimate is revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.
During 2014, grants of restricted shares under the Company's Omnibus Stock Incentive Plan and 2014 Omnibus Incentive Plan were as follows (amounts in
thousands except for value per share):
Three months ended March 31, 2014
Three months ended June 30, 2014
Three months ended September 30, 2014
Three months ended December 31, 2014
Shares
Granted
Value Per
Share
Total Value
1,028 $
42 $
560 $
32 $
27.01 –
$27.18 $
31.06 −
$33.84 $
33.42 −
$34.65 $
33.76 $
27,774
1,313
19,356
1,072
The Company has an employee stock purchase plan for all eligible employees. 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 consolidated financial statements is not material.
15. Fair Value Measurements
The following table sets forth the Company's derivative assets, consisting primarily of interest rate caps that effectively manage the risk above certain interest
rates for a portion of the Company's variable rate debt, carried at fair value as measured on a recurring basis as of December 31, 2014 (in thousands):
Total Carrying
Value at
December 31,
2014
Quoted prices
in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Derivative assets
$
763 $
— $
763 $
—
16. Share Repurchase Program
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.
No shares were purchased pursuant to this authorization during the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, approximately
$82.4 million remains available under this share repurchase authorization.
106
17. Income Taxes
The benefit (provision) for income taxes is comprised of the following (dollars in thousands):
For the Years Ended December 31,
2013
2014
2012
Federal:
Current
Deferred
Total Federal
State:
Current
Deferred (included in Federal above)
Total State
Total
$
$
1,367 $
182,371
183,738
(2,433)
—
(2,433)
181,305 $
(312) $
183
(129)
(1,627)
—
(1,627)
(1,756) $
193
347
540
(2,059)
—
(2,059)
(1,519)
A reconciliation of the benefit (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,
2013
2014
2012
Tax benefit at U.S. statutory rate
Valuation allowance
State taxes, net of federal income tax
Unrecognized tax benefits
Return to provision
Non-deductible transaction costs
Tax credits
Meals and entertainment
Tax rate changes
Officers compensation
Other, net
Lobbying and political
Expired charitable contribution
Loss on acquisition
Total
$
$
115,756 $
64,155
11,582
822
716
(6,870)
(2,222)
(946)
(718)
(751)
(118)
(101)
—
—
181,305 $
640 $
(7,097)
(985)
(3)
(2,568)
—
9,757
(496)
—
(724)
(65)
(89)
(126)
—
(1,756) $
22,945
(24,138)
1,258
193
(225)
—
—
(486)
—
(922)
122
—
—
(266)
(1,519)
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):
Deferred income tax assets:
Capital and financing lease obligations
Operating loss carryforwards
Accrued expenses
Deferred lease liability
Tax credits
Intangible assets
Deferred gain on sale leaseback
Prepaid revenue
Total gross deferred income tax asset
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Investment in unconsolidated ventures
Other
Total gross deferred income tax liability
Net deferred tax liability
107
2014
2013
$
945,000 $
227,956
146,536
77,790
34,860
17,785
7,073
5,835
1,462,835
(9,213)
1,453,622
(1,556,603)
(54,113)
(2,181)
(1,612,897)
$
(159,275) $
39,748
150,755
54,400
49,864
32,673
—
8,673
53,228
389,341
(72,366)
316,975
(374,431)
—
(6,200)
(380,631)
(63,656)
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
2014
2013
$
$
84,199 $
(243,474)
(159,275) $
17,643
(81,299)
(63,656)
As of December 31, 2014 and 2013, the Company had federal net operating loss carryforwards of approximately $766.9 million and $427.4 million,
respectively, which are available to offset future taxable income through 2034. As a result of the acquisition of Emeritus on July 31, 2014, the Company
recorded deferred tax liabilities in excess of deferred tax assets that reflect the difference between the fair market value of the acquired assets over the
historical basis of the acquired assets. The Company determined that it is more likely than not that its' federal net operating losses, the majority of state net
operating losses, and the majority of its' tax credits will be utilized in the future, based on the future reversal of these deferred tax liabilities. As a result,
during the year ended December 31, 2014 the Company recorded an aggregate deferred federal, state and local income tax benefit of $64.2 million from the
release of the valuation allowance against certain deferred tax assets. Additionally, the Company recorded an aggregate deferred federal, state and local tax
benefit of $94.1 million as a result of the operating loss for the year ended December 31, 2014.
The Company has recorded valuation allowances of $7.5 million and $7.0 million at December 31, 2014 and 2013, 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 $1.8 million and $20.6
million as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company had $112.6 million and $53.5 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 the amount of $92.0 million. The acquisition of Emeritus on July
31, 2014 resulted in an ownership change for Emeritus resulting in an annual limitation of $53.9 million on net operating losses acquired by the Company
from Emeritus. 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, 2014, the Company had gross tax affected unrecognized tax benefits of $30.2 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 consolidated financial
statements. Total interest and penalties reserved is $0.5 million at December 31, 2014. Tax returns for years 2011 through 2013 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 2014 and prior years will significantly change in 2015.
A reconciliation of the unrecognized tax benefits for the year 2014 is as follows (dollars in thousands):
Balance at January 1, 2014
Additions for tax positions taken by Emeritus
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, 2014
$
$
1,556
29,664
—
9
(1,034)
30,195
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 the Company's consolidated results of operations, cash flows or financial
position.
108
18. Supplemental Disclosure of Cash Flow Information
(dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
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 cash paid
Formation of CCRC Venture:
Property, plant and equipment and leasehold intangibles, net
Investment in unconsolidated ventures
Other intangible assets, net
Other assets, net
Long-term debt
Capital and financing lease obligations
Refundable entrance fees and deferred revenue
Other liabilities
Net cash paid
Formation of HCP 49 Venture:
Property, plant and equipment and leasehold intangibles, net
Investment in unconsolidated ventures
Long-term debt
Capital and financing lease obligations
Other liabilities
Net cash paid
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
Capital and financing leases:
Property, plant and equipment and leasehold intangibles, net
Capital and financing lease obligations
Net
Master Lease amendment:
Property, plant and equipment and leasehold intangibles, net
Other intangible assets, net
Capital and financing lease obligations
Other liabilities
Net
$
$
$
$
$
$
$
$
$
$
For the Years Ended
December 31,
2013
2014
226,594 $
2,746 $
616 $
123,036 $
2,283 $
763 $
2012
130,009
2,658
744
— $
(391)
80,330
(23,978)
(2,747)
—
(20,568)
7,795
40,441 $
(729,123) $
194,485
(56,829)
(9,137)
170,416
27,085
413,761
1,514
12,172 $
(525,446)
71,656
(67,640)
538,355
(9,034)
7,891 $
27,100 $
(27,100)
— $
385,696
(174,012)
(217,022)
5,338
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
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
— $
—
— $
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,852
(13,852)
—
—
—
—
—
—
$
— $
109
19. Litigation
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 for each claim. Accordingly, the Company is, in effect, self-insured for claims that are less than the deductible amounts.
Stockholder Litigation
In connection with the acquisition of Emeritus described in Note 4, three purported class action lawsuits relating to the Merger Agreement, by and among the
Company, Emeritus and Merger Sub, were filed on behalf of Emeritus shareholders in the Superior Court of King County, Washington against Emeritus,
members of the Emeritus board of directors, the Company and Merger Sub (the "Defendants"), which lawsuits were subsequently consolidated into a single
action captioned In re Emeritus Corp. Shareholder Litigation, No. 14-2-06385-7 SEA (the "Washington Action"). On June 26, 2014, the Defendants entered
into a memorandum of understanding (the "Memorandum of Understanding") with respect to a proposed settlement of the Washington Action, pursuant to
which the parties agreed, among other things, that the Company and Emeritus would make certain supplemental disclosures related to the proposed merger,
which supplemental disclosures were made by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission on June 27,
2014 and incorporated by reference into the Company's Registration Statement on Form S-4 and the joint proxy statement/prospectus of the Company and
Emeritus included therein. The parties have agreed to use their collective best efforts to obtain final approval of the settlement and the dismissal of the
Washington Action with prejudice. The parties have finalized a stipulation of settlement, which is subject to customary conditions, including final court
approval following notice to Emeritus' shareholders. As explained in the Memorandum of Understanding, if the settlement is finally approved by the
Washington court, the parties anticipate that it will resolve and release all claims in all actions pursuant to terms that will be disclosed to former Emeritus
shareholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs' counsel in the
Washington Action will file a petition in the Washington court for an award of attorneys' fees and expenses to be paid by the Company. The Company will pay
or cause to be paid any attorneys' fees and expenses awarded by the Washington court. There can be no assurance that the Washington court will approve the
settlement. In such event, the proposed settlement as contemplated by the Memorandum of Understanding may be terminated.
20. Segment Information
As of December, 31, 2014 the Company has five reportable segments: Retirement Centers; Assisted Living; CCRCs – Rental; 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.
Prior to August 29, 2014, the Company had an additional reportable segment, CCRCs - Entry Fee. On August 29, 2014, the Company contributed all but two of
its entry fee CCRCs to the CCRC Venture, at which time the contributed CCRCs were deconsolidated. The results of the entry fee CCRCs contributed to the
CCRC Venture are reported in the CCRCs - Entry Fee segment for the time periods prior to being contributed to the CCRC Venture. The results of the two
CCRCs that were not contributed to the CCRC Venture are included in the CCRCs - Entry Fee segment for the six month period ended June 30, 2014 and the
CCRCs - Rental segment for the six month period ended December 31, 2014, based on how operating results are being reviewed by the chief operating
decision maker following the creation of the CCRC Venture. The CCRC Venture is accounted for under the equity method of accounting. See Note 4 for more
information about the Company's entry into the CCRC Venture.
110
During 2014, two communities were moved from the Retirement Centers segment to the Assisted Living segment and one community was moved from the
Retirement Centers segment to the CCRCs – Rental segment to more accurately reflect the underlying product offering of the communities. The movement
did not change the Company's reportable segments, but it did impact the revenues and expenses reported within the Retirement Centers, Assisted Living and
CCRCs - Rental segments. Revenue and expenses for the year ended December 31, 2013 have not been recast.
Retirement Centers. The Company's Retirement Centers segment includes owned or leased communities that 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 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. As of December 31, 2014, the CCRCs - Rental segment
also includes three entry fee CCRCs.
CCRCs - Entry Fee. Prior to August 29, 2014, the Company had an additional reportable segment, CCRCs - Entry Fee. The communities in the Company's
former CCRCs - Entry Fee segment are similar to rental CCRCs 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 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 in Note 2.
The following table sets forth selected segment financial and operating data (dollars in thousands):
111
For the Years Ended December 31,
2013
2014
2012
Revenue:
Retirement Centers(1)
Assisted Living(1)
CCRCs - Rental(1)
CCRCs - Entry Fee(1)
Brookdale Ancillary Services(1)
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)
Transaction costs
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
112
$
$
$
582,312 $
1,685,563
493,173
202,414
337,835
530,409
3,831,706 $
248,883 $
608,489
121,661
48,433
63,463
42,239
1,133,168
280,267
66,949
98,321
162,575
51,523
4,362
890
6,159
86,188
317,918
60,175
37,524
4,764
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
222,282 $
389,678
109,026
76,393
45,709
31,125
874,213
180,627
3,921
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
Corporate and Management Services
Asset impairment
Loss on acquisition
Gain on facility lease termination
(Loss) 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
30,466
9,992
—
—
29,245
12,891
—
—
$
(84,905) $
131,288 $
$
$
$
$
41,906 $
140,001
28,418
7,530
823
29,510
248,188 $
76,285 $
107,037
42,412
36,575
1,805
40,131
304,245 $
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 $
23,155
27,677
636
(11,584)
80,939
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
As of December 31,
2014
2013
$
1,603,704 $
6,513,376
1,065,116
—
224,229
1,114,938
$ 10,521,363 $
1,258,294
1,514,385
499,873
960,708
94,986
409,511
4,737,757
(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 2014 and 2013 (in thousands, except per share amounts):
113
Revenues
Asset impairment
Income (loss) from operations
Loss before income taxes
Net loss
Net loss attributable to Brookdale Senior Living Inc. common stockholders
Weighted average basic and diluted loss per share
Revenues
Asset impairment
Income from operations
Income (loss) before income taxes
Net income (loss)
Net income (loss) attributable to Brookdale Senior Living Inc. common
stockholders
Weighted average basic and diluted earnings (loss) per share
22. Subsequent Events
March 31,
2014
$
747,275 $
For the Quarters Ended
June 30,
2014
September 30,
2014
1,083,935 $
748,393 $
—
32,148
(1,293)
(2,299)
(2,299)
—
30,657
(2,333)
(3,295)
(3,295)
—
(73,197)
(153,109)
(37,036)
(36,862)
$
(0.02) $
(0.03) $
(0.23) $
December 31,
2014
1,252,103
9,992
(74,513)
(173,996)
(106,796)
(106,534)
(0.58)
March 31,
2013
$
712,266 $
—
38,687
4,706
3,558
For the Quarters Ended
June 30,
2013
September 30,
2013
December 31,
2013
716,468 $
2,154
28,435
(4,036)
(5,200)
728,999 $
504
33,983
(7)
(967)
734,233
10,233
30,183
(2,491)
(975)
$
3,558
0.03 $
(5,200)
(0.04) $
(967)
(0.01) $
(975)
(0.01)
On December 29, 2014, the Company exercised its purchase option under the Master Lease with HCP. See Note 4 for more information about the Master
Lease. As a result, the Company agreed to purchase the fee simple of nine communities leased to the Company under the Master Lease for an aggregate
purchase price of $60.0 million. On December 31, 2014, the Company paid the full purchase price of $51.4 million of cash as a deposit for the purchase of
eight of the nine communities, and the Company took title to these eight communities at the closing on January 1, 2015. At such time, the Master Lease
terminated with respect to these eight communities and the annual rent for 2015 under the Master Lease was reduced by approximately $4.2 million. At
December 31, 2014, this acquisition deposit was included in prepaid expenses and other current assets, net on the Company's consolidated balance sheet.
These eight communities are located throughout the United States and operations under the previous lease terms are recorded within the Company's Assisted
Living segment within the consolidated financial statements for the fiscal year ended December 31, 2014. The acquisition of the ninth community is subject to
the satisfaction of certain closing conditions and contingencies, including the receipt of various third-party and regulatory approvals and consents. The
acquisition of the ninth community is expected to close in 2015.
In February 2015, the Company acquired the underlying real estate associated with 15 communities that were previously leased for an aggregate purchase price
of approximately $275 million. The results of operations of these communities are reported in the Retirement Centers, Assisted Living, and CCRCs – Rental
segments. The Company financed the transaction with cash on hand, amounts drawn on the secured credit facility and $20.0 million of seller financing. The
$20.0 million note has a five year term and bears interest at a fixed rate of 8.0%.
114
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2014
(In thousands)
Description
Allowance for Doubtful Accounts:
Year ended December 31, 2012
Year ended December 31, 2013
Year ended December 31, 2014
Deferred Tax Valuation Allowance:
Year ended December 31, 2012
Year ended December 31, 2013
Year ended December 31, 2014
Balance at
beginning of
period
Acquisition of
Emeritus
Additions
Charged to
costs and
expenses
Charged
to other
accounts
Deductions
Balance at
end of
period
$
$
$
$
$
$
16,972 $
15,262 $
17,728 $
— $
— $
11,087 $
15,683
21,048
20,509
$
$
$
660
444
771
$
$
$
(18,053)
(19,026)
(23,594)
$
$
$
40,820 $
65,269 $
72,366 $
— $
— $
1,002 $
26,989(1) $
7,272(3) $
$
—
(2,540)(2) $
(175)(4) $
$
—
$
—
—
$
(64,155)(5) $
15,262
17,728
26,501
65,269
72,366
9,213
(1) Adjustment to valuation allowance for federal net operating losses and federal credits of $26,589 and $400, respectively.
(2) Adjustment to valuation allowance for state net operating losses of $(2,540).
(3) Adjustment to valuation allowance for federal net operating losses and federal credits of $(4,851) and $12,123, respectively.
(4) Adjustment to valuation allowance for state net operating losses of $(175).
(5) Adjustment to reverse valuation allowance for federal and state net operating losses of $(64,155).
115
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 (2013 framework). Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2014. Management reviewed the results of their
assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2014 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.
We acquired Emeritus on July 31, 2014, and management excluded it from its assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2014. Emeritus' internal control over financial reporting is associated with total assets of $6.2 billion, liabilities of $4.4 billion
and total revenues of $785.5 million included in the consolidated financial statements of the Company and its subsidiaries as of and for the year ended
December 31, 2014.
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, 2014, 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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B.
Other Information.
None.
116
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 2015 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"
appearing after Item 1 of Part I of this Annual Report on Form 10-K.
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, Chief Accounting 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, or to any
executive officer or director, will be posted on our website.
117
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 2015 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 2015 Annual
Meeting of Stockholders.
The following table provides certain information as of December 31, 2014 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)
—
—
—
8,446,056
83,066
8,529,122
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders(3)
Total
(1) As of December 31, 2014, an aggregate of 557,963 shares of unvested restricted stock were outstanding under our 2014 Omnibus Incentive Plan, and an
aggregate of 2,994,180 shares of unvested restricted stock and 6,850 restricted stock units were outstanding under our Omnibus Stock Incentive Plan.
Such shares of restricted stock and restricted stock units are not reflected in the table above. Our 2014 Omnibus Incentive Plan allows awards to be
made in the form of options, warrants, rights, shares of restricted stock, restricted stock units and other forms of equity-based compensation.
(2)
(3)
The number of shares remaining available for future issuance under equity compensation plans approved by security holders consists of 7,127,892
shares remaining available for future issuance under our 2014 Omnibus Incentive Plan, and 1,318,164 shares remaining available for future issuance
under our Associate Stock Purchase Plan.
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 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.
118
.
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 2015 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 2015 Annual Meeting of
Stockholders.
119
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, 2014 and 2013
Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012
Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
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.
120
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: February 24, 2015
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
Title
Non-Executive Chairman of the Board
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Mark W. Ohlendorf
Mark W. Ohlendorf
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Kristin A. Ferge
Kristin A. Ferge
Executive Vice President, Chief Accounting Officer and Treasurer
(Principal Accounting Officer)
/s/ Frank M. Bumstead
Frank M. Bumstead
/s/ Jackie M. Clegg
Jackie M. Clegg
/s/ Granger Cobb
Granger Cobb
/s/ William G. Petty, Jr.
William G. Petty, Jr.
/s/ Mark J. Schulte
Mark J. Schulte
/s/ James R. Seward
James R. Seward
/s/ Samuel Waxman
Samuel Waxman
Director
Director
Director
Director
Director
Director
Director
121
Date
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
February 24, 2015
EXHIBIT INDEX
Exhibit No. Description
2.1
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1.1
Agreement and Plan of Merger, dated as of February 20, 2014, by and among Brookdale Senior Living Inc. (the "Company"), 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 (File No. 001-32641)).
Master Contribution and Transactions Agreement, dated as of April 23, 2014, by and between the Company and HCP, Inc. (incorporated by
reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q filed on August 11, 2014 (File No. 001-32641)).
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 (File No. 001-32641)).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company, dated July 30, 2014 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on August 5, 2014 (File No. 001-32641)).
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 (File No. 001-32641)).
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) filed on November 7, 2005 (File No. 333-127372)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
Form of 2.75% Convertible Senior Note due 2018 (included as part of Exhibit 4.3).
Amended and Restated Master Lease and Security Agreement, dated as of August 29, 2014, by and between HCP, Inc. and the other lessors
named therein, and Emeritus Corporation and the other lessees named therein (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32641)).†
122
Exhibit No. Description
10.1.2
10.1.3
10.2.1
10.2.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
First Amendment to Amended and Restated Master Lease and Security Agreement and Option Exercise Notice, dated as of December 29, 2014,
by and between HCP, Inc. and the Company.††
Second Amendment to Amended and Restated Master Lease and Security Agreement, dated as of January 1, 2015, by and among HCP, Inc. and
the other lessors named therein, Emeritus Corporation and the other lessees named therein, and the Company as guarantor.††
Third Amended and Restated Credit Agreement, dated as of September 20, 2013, among certain subsidiaries of the Company, 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 (File No. 001-32641)).
Fourth Amended and Restated Credit Agreement, dated as of December 19, 2014, among certain subsidiaries of the Company, 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 Current Report on Form 8-K filed on December 23, 2014 (File No. 001-32641)).
Master Credit Facility Agreement, dated as of July 29, 2011, by and among various subsidiaries of the Company 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 (File No.
001-32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
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 (File No. 001-
32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
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 (File No.
001-32641)).
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 (File No. 001-
32641)).
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 (File No. 001-32641)).
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 (File No. 001-32641)).
123
Exhibit No. Description
10.16.1
10.16.2
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30.1
10.30.2
10.31
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 (File No. 001-32641)) (the "Omnibus Stock Incentive
Plan").*
First Amendment to the Omnibus Stock Incentive Plan 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 (File No. 001-32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-
32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-32641)).*
Form of Restricted Share Agreement under the 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 (File No.
001-32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-
32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-32641)).*
Form of Restricted Share Agreement under the 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 (File No.
001-32641)).*
Form of Restricted Share Agreement under the 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 (File No. 001-32641)).*
Brookdale Senior Living Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on July 8, 2014 (File No. 001-32641)) (the "Omnibus Incentive Plan").*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for Executive Committee Members).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for Executive Vice Presidents).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for Executive Committee Members).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for Executive Vice Presidents).*
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 (File No. 001-32641)) (the "Associate Stock Purchase Plan").*
First Amendment to 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 (File No. 001-32641)).*
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 (File No. 001-32641)).*
124
Exhibit No. Description
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
21
23
31.1
31.2
32
Employment Agreement, dated as of February 11, 2013, by and between the Company 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 (File No. 001-32641)).*
Restricted Share Agreement (Time-Vesting) under the Omnibus Stock Incentive Plan, dated as of February 11, 2013, by and between the
Company 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 (File No. 001-32641)).*
Restricted Share Agreement (Performance-Vesting) under the Omnibus Stock Incentive Plan, dated as of February 11, 2013, by and between the
Company 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 (File No. 001-32641)).*
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 (File No. 001-32641)).*
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 filed on June 30, 2009 (File No. 333-160354)).*
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 (File No. 001-32641)).*
Letter Agreement, dated as of May 22, 2014, by and between the Company and Granger Cobb (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32641)).*
Restricted Share Agreement under the Omnibus Incentive Plan, dated as of July 31, 2014, by and between the Company and Granger Cobb
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-
32641)).*
Separation Agreement and General Release, dated February 7, 2008, between the Company 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 (File No. 001-32641)).*
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
Portions of this exhibit have been omitted pursuant to a request for confidential treatment, which has been granted by the SEC.
††
Portions of this exhibit have been omitted pursuant to a request for confidential treatment with the SEC.
125
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: February 24, 2015
/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: February 24, 2015
/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, 2014, 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
February 24, 2015
/s/ Mark W. Ohlendorf
Name: Mark W. Ohlendorf
Title:
Date:
Chief Financial Officer
February 24, 2015
ABOUT BROOKDALE SENIOR LIVING
Brookdale Senior Living Inc. is the leading
operator of senior living communities
throughout the United States. The company is
committed to providing senior living solutions
primarily within properties that are designed,
purpose-built and operated to provide
the highest-quality service, care and living
accommodations for residents. Currently,
Brookdale operates independent living,
assisted living, and dementia-care communities
and continuing care retirement centers, with
approximately 1,150 communities in 47 states
and the ability to serve approximately 111,000
residents. Through its ancillary services
program, the company also offers a range of
outpatient therapy, home health, personalized
living and hospice services.
111,000
RESIDENTS
1,150
COMMUNITIES
47STATES
82,000
ASSOCIATES
Board of Directors
Jeffrey R. Leeds, Chairman 1, 2, 4
Former Chief Financial Officer,
GreenPoint Financial Corporation
Granger Cobb, Director
Former Chief Executive Officer,
Emeritus Corporation
Frank M. Bumstead, Director 2, 4
Chairman and Principal Shareholder,
Flood, Bumstead, McCready &
McCarthy, Inc.
Mark J. Parrell, Director 3
Executive Vice President and
Chief Financial Officer,
Equity Residential
The Honorable Jackie M. Clegg,
Director 1, 2, 4
Managing Partner,
Clegg International Consultants, LLC
William G. Petty, Jr., Director 3
Partner,
Beecken Petty O’Keefe & Company
James R. Seward, Director 1, 3
Private Investor
T. Andrew Smith, Director
Chief Executive Officer,
Brookdale Senior Living Inc.
Lee S. Wielansky, Director 3
Chairman and CEO,
Midland Development Group, Inc.
(1) Audit Committee
(2) Compensation Committee
(3) Investment Committee
(4) Nominating and Corporate
Governance Committee
Executive Officers
T. Andrew Smith
Chief Executive Officer
Mark W. Ohlendorf
President & Chief Financial Officer
Gregory B. Richard
Executive Vice President & Chief
Operating Officer
Corporate Data
Corporate Office
111 Westwood Place, Suite 400
Brentwood, TN 37027
615.221.2250
www.brookdale.com
Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
800.937.5449
Bryan D. Richardson
Executive Vice President & Chief
Administrative Officer
Kristin A. Ferge
Executive Vice President, Chief
Accounting Officer and Treasurer
Glenn O. Maul
Executive Vice President
& Chief People Officer
Tricia A. Conahan
Executive Vice President
& Chief Marketing Officer
George T. Hicks
Executive Vice President – Finance
H. Todd Kaestner
Executive Vice President –
Corporate Development
Stock Listing
NYSE: BKD
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
2015 Annual Meeting
June 30, 2015 • 10:00 a.m. CDT
Brookdale Senior Living
111 Westwood Place
Brentwood, TN 37027
615.221.2250
Governance
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, www.brookdale.com.
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A n n u A l
R e p o R t
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111 Westwood Place, Suite 400
Brentwood, TN 37027
615.221.2250
brookdale.com
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L e t t e r t o s h a r e h o l d e r s
2014 was a transformational year for Brookdale
that will unlock tremendous value for shareholders
and benefit our residents and their families in new
and profound ways.
Our merger with Emeritus effectively doubled our size,
creating the only coast-to-coast, full-spectrum senior
living solutions company in America. Brookdale is
now the largest senior living solutions provider in
the country operating the only nationwide network
of senior living communities with fully integrated
ancillary services across the continuum of care.
However, let me be clear: our goal is not to be
the biggest, but to be the best.
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