2018
ANNUAL REPORT
Brookdale associate and her mom, a resident
Our Mission
Enriching the lives of those we serve with compassion,
respect, excellence and integrity
Our Vision
To be the nation’s first choice in senior living
Bringing New Life to Senior Living®
Brookdale Senior Living is the leading operator of senior living communities throughout the United
States — a responsibility we take pride in. For more than 40 years we’ve put our residents first, providing
them with the service, care and living accommodations that meet their specific needs.
We offer our residents access to a wide range of services across the most attractive sectors of the senior
living industry. We operate and manage Independent Living, Assisted Living, Alzheimer’s and Dementia Care
and Continuing Care Retirement Communities (CCRCs).
We also offer a range of home health, hospice, outpatient therapy and private duty home care services to
residents of many of our communities and to seniors living outside of our communities.
Forward-Looking Statements
Certain statements in the Letter to Shareholders included in this 2018 Annual Report may constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These 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 the creation of shareholder value; our strategy; our operational,
talent, sales and marketing initiatives; our expectations regarding the senior living industry, senior housing
competition, occupancy and pricing, the demand for senior housing and demographic trends; our
expectations regarding our operating results; and our ability to anticipate, manage and address industry
trends and their effect on our business.
See “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” on page 4 and
“Risk Factors” beginning on page 20 of the Annual Report on Form 10-K included in this 2018 Annual
Report 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 such forward-looking statements.
Readers are cautioned not to place undue reliance on any of such forward-looking statements, which reflect
our management's views as of the date of this 2018 Annual Report. We cannot guarantee future results,
levels of activity, performance or achievements, and except as required by law, we expressly disclaim any
obligation to release publicly any updates or revisions to any such forward-looking statements to reflect
any change in our expectations with regard thereto or change in events, conditions or circumstances on
which any statement is based.
2
BROOKDALE ANNUAL REPORT - 2018
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders,
As I write this letter and reflect on the past year, it’s exciting to
see the progress we’ve made on our strategic plan, introduced
in February 2018. A year and a half ago, the Board selected
the best path for Brookdale shareholders. By taking the
long-term view, the Board focused on creating value for our
shareholders through a mission-driven purpose of enriching
the lives of seniors. Today, Brookdale is in a strong position
with significant momentum as we enter the next phase of
growth in the senior living industry.
When we introduced a pivot in our strategy from a national
to a “win locally” community focus, we were returning to
what historically made us successful. We are grateful to
the shareholders who have stayed with Brookdale through
these turnaround efforts and are pleased to welcome further
investment from existing and new shareholders.
We have embraced our vision to be the nation’s first choice in senior living, and more than
ever we see how critical our work is as growing demographics bring us a Silver Wave of
seniors who want and need our services.
Since I was appointed CEO last year, our whole team has worked
hard to turn around performance in a host of ways, including
simplifying our portfolio of communities, refining our go-to-
market strategy and ultimately running a more efficient and
effective organization. The Board and I recognized that swift and
pervasive action had to be taken, and I believe we have done
just that. To rally our 60,000 associates to focus on what matters
most, we aligned our efforts into three strategic pillars: Associates,
Residents and Shareholders. Let me share the key successes for
each of these pillars.
When we introduced
a pivot in our strategy
from a national
to a “win locally”
community focus, we
were returning to
what historically
made us successful.
Attract, engage, develop and retain the best associates
The core of our business is people taking care of people. For us to deliver on this
commitment, we are investing in talent to have the industry’s best people taking care of our
residents and patients; 2019 is the third and final year of our above-industry investments in
our community associates.
As of June 30, 2019, we have seen more than 2,100 former associates return to work at
Brookdale and total associate turnover in the second quarter improved by 5%. These facts
speak for themselves — we are building a culture that people want to participate in.
3
3
This continuity enables associates to connect and build relationships with our residents, patients
and their families through compassion, respect, excellence and integrity.
As we create this team for our future, Brookdale is also proud to be an organization that champions
diversity. Today, 50% of our executive officers and half of our board members are women.
Diversity in leadership is important in any industry, but it is even more critical in healthcare,
where approximately 65% of care recipients and 75% of caregivers are female, and women make
90% of healthcare decisions. Our leadership now better reflects our mix of associates, residents,
patients and their families, and we will strive to continue to improve the overall diversity of the
entire Brookdale team.
Earn resident and family trust and endorsements
We are working to change the way people view the “senior housing” or
“retirement home” industry. Our core business is providing senior living
so our residents can thrive in a social setting and live their best lives. We
want our residents, patients and their families to look to Brookdale as a
trusted source, in the same way that our own family members look to
Move-ins showed
positive year-over-year
growth for the first
time since the third
quarter of 2017.
each of us for help and support. We have been winning this trust by providing high-quality care
and personalized services to residents and patients.
Since the beginning of our turnaround, we have significantly reduced same community controllable
move-outs. In addition, second quarter 2019 same community move-ins showed positive year-
over-year growth for the first time since the third quarter of 2017. And the most exciting news
within this strategy is the results from our Net Promoter Score®, or NPS®, a significant measure
of customer satisfaction. More than 50,000(!) surveys were completed this year by residents
and their families, and our NPS increased over 20% since our last survey. I cannot think of more
compelling proof that our focused efforts to improve these relationships are working.
Deliver attractive and sustainable long-term returns for our shareholders
The above two strategies are the leading indicators that set the path for sustainable financial
performance. We must “win locally” and leverage scale effectively to drive revenue growth and
profitability. By bringing our mission to more seniors and charging a fair price for our services, we
are confident that we will create more margin that will drive value for our shareholders.
Net Promoter Score® and NPS® are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Sytems, Inc.
4
BROOKDALE ANNUAL REPORT - 2018
One of the first steps we announced last year was a real estate strategy designed to deliver
$250 million of net proceeds. Since then, Brookdale has been engaged in significant portfolio
optimization efforts, including owned asset sales and lease terminations. Today, our portfolio is
nearly 30% smaller than it was when the Emeritus deal was completed. We have been intentionally
building a diversified portfolio with tremendous opportunity and operating leverage and are
pleased to be approaching our net proceeds goal.
Another integral component of this strategy is the significant investments we are making to
improve our communities. These highly targeted investments are necessary for long-term value,
viability and leadership, which continue to help us attract and retain residents.
While the competitive landscape has been challenging, we see favorable industry dynamics in the
near future. In our business, we are seeing the green shoots of growth. Our occupancy growth
turned positive earlier in 2019 than in the past few years, our communities have pricing and
occupancy headroom and, importantly, our business has tremendous upside. I often speak about
the approach of the Silver Wave demographic growth of seniors. Let me provide you context:
over the next five years our target senior population* will grow 40%. Now that is something to
be excited about!
Brookdale’s Future
This letter is not only an opportunity to reflect, but also a chance to “look beyond the horizon”
and chart the path of what the business can become over the longer term. We are in the midst
of building a better Brookdale: to be a more closely integrated healthcare partner within the
communities we serve and to innovative companies that help seniors live their best lives. As we
move into the future, our scale and expertise give us an unmatched opportunity to extend and
enhance the lives of seniors and, in doing so, create significant value for our shareholders.
At Brookdale Senior Living, I am inspired each and every day by the actions of our Brookdale
team, from serving our nation’s seniors with the respect and dignity they deserve to providing
their families with the support and understanding they need. On behalf of the Board of Directors
and all of us at Brookdale, we thank you for your support.
Sincerely,
Lucinda M. Baier
President and Chief Executive Officer
* Target senior population defined as age 75+ with an annual income of $50,000 or greater and within the United States.
5
FINANCIAL HIGHLIGHTS
As of and for the years ended
December 31,
(in thousands, except per share data and community data)
2018
2017
Selected Operating Data
Total revenue
Income (loss) from operations(1)
Net income (loss)(1)
Net income (loss) attributable to Brookdale common stockholders(1)
Basic and diluted net income (loss) per share attributable to
Brookdale common stockholders(1)
Weighted average shares used in computing basic and diluted net
loss per share
Adjusted EBITDA(2)
Net cash provided by operating activities(3)
Adjusted Free Cash Flow(2)(3)
Brookdale’s proportionate share of Adjusted Free Cash Flow of
unconsolidated ventures(2)
Selected Balance Sheet Data
Property, plant and equipment and leasehold intangibles, net
Cash and cash equivalents
Marketable securities
Total assets
Debt and capital and financing lease obligations
Total Brookdale stockholders’ equity
Stock Data
Closing share price on December 31
Community Data (period end)
Total number of communities operated and managed
Total number of units operated and managed
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,531,426 $
4,747,116
(594,249) $
(270,045)
(528,352) $
(571,606)
(528,258) $
(571,419)
(2.82) $
(3.07)
187,468
186,155
509,591 $
203,961 $
19,755 $
638,566
378,359
109,248
22,022 $
35,416
5,275,427 $
5,852,145
398,267 $
14,855 $
222,647
291,796
6,467,260 $
7,675,449
4,514,656 $
5,142,291
1,018,903 $
1,530,728
6.70 $
9.70
892
84,279
1,023
100,582
(1) Includes the impact of $489.9 million and $409.8 million of non-cash impairment charges during the year ended December 31, 2018 and 2017,
respectively. See Note 5 to the consolidated financial statements beginning on page 100 of the Annual Report on Form 10-K included in this 2018
Annual Report for more information.
(2) Adjusted EBITDA and Adjusted Free Cash Flow are financial measures that are not calculated in accordance with U.S. Generally Accepted
Accounting Principles (GAAP). See "Non-GAAP Financial Measures" beginning on page 72 of the Annual Report on Form 10-K included in this
2018 Annual Report for the Company's definitions of its non-GAAP financial measures, reconciliations of such measures to their most comparable
GAAP financial measures and other important information regarding the use of the Company's non-GAAP financial measures.
(3) The Company adopted ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")
on January 1, 2018 and has applied ASU 2016-15 retrospectively for all periods presented. See Note 2 to the consolidated financial statements
beginning on page 84 of the Annual Report on Form 10-K included in this 2018 Annual Report for more information.
6
BROOKDALE ANNUAL REPORT - 2018
Making an impact:
the power of a life well-lived
How often do you step back and take
inventory of the impact of your life?
Whether that impact is through a career choice, an
individual accomplishment or helping another person,
chances are you probably haven’t given it much thought.
Serving our nation’s seniors every day,
we have the privilege of hearing our
residents’ life stories. We learn about who
they are, and they share their hopes and dreams with
us. Most importantly, our residents and their families
place their trust in us, and we don’t take that trust for
granted. Each day we help seniors live their best lives.
Maybe the real impact of a lifetime
is in the small moments, the things
you do to help others rippling out and
impacting many more lives. History may not remember
all of our residents, but we certainly will. They have had a
profound impact on us, and we hope we’ve had a similar
impact on them.
Here are stories from three of our residents:
7
7
Louise
It was 1943, and Louise was a senior in high school in Bakersfield,
California, when a teacher approached her and asked if she wanted
to help make airplanes.
“I had just turned 18, and there were no boys at school. They had all
gone to war,” Louise said.
She graduated Thursday and started her job Monday, sinking and
counter-sinking rivets to help build Boeing B-17s at the Vega Aircraft
plant, which later became Lockheed.
“I’ve been so blessed in my life,” Louise said. “At the time, we just
thought about what we needed to do for our country, but now I
think how wonderful that we were forerunners to what the girls are
doing now.”
Louise married and raised a family in Bakersfield. She and her
husband started the town’s first car rental company and ran the
“I’ve been here just
over four years,
and I’ve helped
four other residents
move in. That’s how
enthusiastic I am
about living here!”
business together for more than 20 years. When her husband of more than 65 years passed
away, Louise’s kids started to worry about her living alone and trying to keep up a big house
all by herself. “My son said, ‘You’ve got to get out of this area.’ So we started looking at senior
living communities.” After looking at several places, Louise and her son found Brookdale.
“We knew as soon as we walked in. My son said, ‘This is it.’ We had looked at so many places,
but when we came here we just knew,” Louise recalled. “This is the greatest place I’ve ever
been. I’ve been here just over four years, and I’ve helped four other residents move in. That’s
how enthusiastic I am about living here!”
When asked where she finds potential new residents, Louise said she meets them at her beauty
shop. “I meet older ladies like me, who are in the same boat I was in. They’ve lost a husband or
a loved one, and they’re mixed up about what to do next.”
And Louise is more than happy to share how much she loves her community. “When they ask
me where I live, I tell them Brookdale and give them my whole spiel.”
In fact, Louise is known as the Sunshine Chairman at her Brookdale community. With her joyful
energy and spirit, she helps new residents get settled in, and each night at dinner she says
hello to each table in the dining room.
“I’ve always just loved people,” Louise said. “And here at Brookdale I’ve started a new chapter
in my life. And I absolutely love it.”
8
BROOKDALE ANNUAL REPORT - 2018
Janie
Janie, a resident at Brookdale in Oregon, is originally from Los Angeles,
California, where she worked for the Southern California Gas Company
for more than 30 years.
“In 1978, I was the first woman to be hired as an appliance repair
representative for the company,” Janie said. “I went around and fixed
water heaters, furnaces and stoves in people’s homes.”
When Janie suffered a stroke in 2016, she became bed-ridden. “They
said I would never walk again,” Janie recalled.
“Brookdale gave me
my life back!”
Janie’s niece, who lives in Oregon wanted Janie to move closer, so
they could visit more often. That’s when they found Brookdale.
After Janie's stroke, her quality of life was difficult to endure. She never left her bed. She ate in
bed and received sponge baths. Janie was living, but not really thriving.
When she moved into Brookdale, community associates were determined to change all that.
They worked with Janie one day at a time to get her out of bed and back on her feet. With help
Janie learned to walk again, and her world opened up with new possibilities and a new sense of
purpose. Over time she was able to shower again and go to the dining room for meals.
Now Janie can join friends for picnics in the park, shopping trips and museum visits. She is
also enjoying fun new activities and hobbies, like laughing yoga, painting classes and flower-
arranging workshops.
“Brookdale gave me my life back!” said Janie. “And I am so grateful.”
9
9
Jack
Born in 1927, Jack grew up in St. Louis during the Great Depression.
When war broke out in 1941, Jack was too young to enlist. He had
to wait until 1945, when he joined the Navy. But the war ended in
August 1945 with Jack still in boot camp, so while many servicemen
and women were coming home, Jack shipped out to the South Pacific
to help with post-war logistics.
When he was discharged a year later, Jack came home and enrolled in
Washington University where he studied business.
In 1948, Jack married his high school sweetheart, Isabelle, and pursued
his dream of setting up his own grocery store. Isabelle became a realtor,
and she and Jack raised three children together: two daughters and a
son. After 25 challenging years in the grocery business, Isabelle finally
convinced Jack to begin a new career — in real estate appraisals.
He built a successful business in a booming real estate market before
retiring in 2007. That’s when Jack decided to follow his passion for
music and begin to learn to play new instruments.
"There's only one
suggestion I would
share with Brookdale.
I would tell Brookdale
to change their name
to 'home', because
that's how I feel when
I walk through the
door here — like I’m
home.”
Following a slip on the ice on his way to the mailbox in 2011, Jack knew it was time to downsize.
He and Isabelle moved to Brookdale just outside of St. Louis. There, Jack continues to enjoy
music, and he even plays in a band consisting of community residents. The drums, banjo, guitar
and saxophone are just a few of the instruments he’s picked up.
“I have fun with all of the activities here, especially music, and the food is delicious,” he said. “The
kitchen staff goes out of their way to make us our favorites.”
Sadly, after 72 years of marriage, Isabelle passed away in July. But Jack continues to stay positive
and find ways to give back to others both through his music and with little gifts for other residents
that he and his daughters bring back from their shopping trips.
“Above all, remember the other guy. And remember your family,” Jack said. “Say hello to your
neighbor in the morning, because for some people, that can mean everything.”
10
BROOKDALE ANNUAL REPORT - 2018
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, 2018
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller
reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Non-accelerated filer [ ]
Accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 29, 2018, the last business day of
the registrant's most recently completed second fiscal quarter, was approximately $1.7 billion. The market value calculation was
determined using a per share price of $9.09, 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 only, 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 Company's outstanding common
stock.
As of February 12, 2019, 186,599,616 shares of the registrant's common stock, $0.01 par value, were outstanding (excluding
unvested restricted shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders, or an amendment
to this Form 10-K, to be filed with the SEC within 120 days of December 31, 2018, are incorporated by reference into Part III of
this Annual Report on Form 10-K.
TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
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
Exhibits, Financial Statement Schedules
Form 10-K Summary
3
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5
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37
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41
75
77
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124
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125
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129
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. These 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. 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," "believe," "project," "predict," "continue,"
"plan," "target" or other similar words or expressions. Although these forward looking statements are based on assumptions and
expectations that we believe are reasonable, we can give no assurance that our assumptions or 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, events which adversely affect the ability of seniors to afford our resident fees and entrance fees,
including downturns in the economy, national or local housing markets, consumer confidence or the equity markets and
unemployment among family members; changes in reimbursement rates, methods or timing under governmental reimbursement
programs including the Medicare and Medicaid programs; the impact of ongoing healthcare reform efforts; the effects of continued
new senior housing construction and development, oversupply and increased competition; disruptions in the financial markets that
affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; the risks associated with
current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs,
fuel and other energy costs, interest rates and tax rates; our ability to generate sufficient cash flow to cover required interest and
long-term lease payments and to fund our planned capital projects; the effect of our indebtedness and long-term leases on our
liquidity; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained
therein), including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such
agreements and the risk of loss of our property securing leases and indebtedness due to any resulting lease terminations and
foreclosure actions; increased competition for or a shortage of personnel, wage pressures resulting from increased competition,
low unemployment levels, minimum wage increases and changes in overtime laws, and union activity; failure to maintain the
security and functionality of our information systems or to prevent a cybersecurity attack or breach; our ability to complete pending
or expected disposition or other transactions on agreed upon terms or at all, including in respect of the satisfaction of closing
conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to
the timing of closing, and our ability to identify and pursue any such opportunities in the future; our ability to obtain additional
capital on terms acceptable to us; our ability to complete our capital expenditures in accordance with our plans; our ability to
identify and pursue development, investment and acquisition opportunities and our ability to successfully integrate acquisitions;
competition for the acquisition of assets; delays in obtaining regulatory approvals; risks associated with the lifecare benefits offered
to residents of certain of our entrance fee CCRCs; terminations, early or otherwise, or non-renewal of management agreements;
conditions of housing markets, regulatory changes and acts of nature in geographic areas where we are concentrated; terminations
of our resident agreements and vacancies in the living spaces we lease; departures of key officers and potential disruption caused
by changes in management; risks related to the implementation of our strategy, including initiatives undertaken to execute on our
strategic priorities and their effect on our results; actions of activist stockholders; market conditions and capital allocation decisions
that may influence our determination from time to time whether to purchase any shares under our existing share repurchase program
and our ability to fund any repurchases; our ability to maintain consistent quality control; a decrease in the overall demand for
senior housing; 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; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations;
unanticipated costs to comply with legislative or regulatory developments; 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.
Our Business
As of December 31, 2018, we are the largest operator of senior living communities in the United States based on total capacity,
with 892 communities in 45 states and the ability to serve approximately 84,000 residents. We offer our residents access to a full
continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living,
assisted living, memory care and continuing care retirement communities ("CCRCs"). We also offer a range of home health,
hospice and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities.
We believe that we operate in the most attractive sectors of the senior living industry, and our goal is to be the first choice in senior
living by being the nation’s most trusted and effective senior living provider and employer. With our range of community and
service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time. Our community
and service offerings combine housing with hospitality and healthcare services. Our senior living communities offer residents a
supportive home-like setting, assistance with activities of daily living ("ADL") such as eating, bathing, dressing, toileting and
transferring/walking and, in certain communities, licensed skilled nursing services. We also provide home health, hospice and
outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. 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, which we believe enables them to 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.
Strategy
Our strategy is to win locally by providing choices for high quality care and personalized service by caring associates while
leveraging our industry-leading scale and experience. We believe that successfully executing on our strategy will improve our
operations and provide attractive long-term returns to our stockholders. Our strategy is focused on three priorities:
• Associates. Brookdale’s culture is based on servant leadership, and our associates are the key to attracting and caring for
residents and patients and improving our operations. Through this strategic priority, we intend to attract, engage, develop and
retain the best associates by maintaining a compelling value proposition in the areas of compensation, leadership, career
growth and meaningful work. We continue to execute on our three-year plan initiated in 2017 to invest above the industry to
improve our associate total rewards program and our performance management, training and development program for our
community leaders and staff. We believe engaged associates lead to an enhanced resident experience and lower turnover,
leading to improved operations.
• Residents, Patients and Their Families. Brookdale continues to be driven by its mission to enrich the lives of those we serve
with compassion, respect, excellence and integrity. We believe that earning the trust of our residents, patients and their families
will allow us to build relationships that create passionate advocates and generate referrals. Through this strategic priority, we
intend to provide excellent customer service and expand referral development programs in order to earn the trust of our
customers and the communities in which we operate and ultimately increase our move-ins and reduce our controllable move-
outs.
• Winning Locally and Leveraging Scale Effectively. We intend to win locally while also leveraging our scale. With this priority,
we are committed to completing our community-level capital expenditures as planned, maintaining the quality of our
communities and their operations, and aligning our sales, marketing and operations teams to drive top line performance. We
also are executing on plans to improve our sales process, to prioritize communities with the most opportunities for
improvements and to ensure that our communities are ready for new competition.
In the near term, we plan to focus on our operations improvement and the expansion of our healthcare services to residents and
seniors living outside of our communities. We also plan to make significant additional near-term investments in our communities,
including increased spend attributable to major building infrastructure projects, in order to ensure that our communities are in
appropriate physical condition to support our strategy and to protect the value of our community portfolio. We also plan to complete
our remaining real estate transactions announced in 2018. This plan includes the terminations of management arrangements on
5
communities that we previously leased or managed on behalf of former unconsolidated ventures and exercising our options to
cause terminations of our triple-net lease obligations on communities with annual base rent of up to $35 million. We will also
continue to invest in our Program Max initiative through which we expand, renovate, reposition or redevelop selected existing
senior living communities.
Over the longer term, we plan to further invest for growth and opportunistically return capital to stockholders while maintaining
a strong balance sheet. We plan to explore additional products and services that we may offer to our residents and, where
opportunities arise, pursue development, investment and acquisition opportunities such as selective acquisitions of senior living
communities and operating companies. Any such activity may be pursued on our own or through venture investments with third
parties. In addition, we will continue to evaluate our owned and leased community portfolios for opportunities to better align our
communities to our strategy.
We believe that our successful execution on these strategic priorities and our longer-term plans will allow us to achieve our goal
to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer.
Recent Developments
Portfolio Optimization and Other Transaction Updates
We have significantly reduced the size of our community portfolio following our acquisition of Emeritus Corporation in 2014.
Our acquisition of Emeritus had increased our consolidated community portfolio by 493 communities and significantly increased
our scale and provided us entry into 10 new states. Following our integration of Emeritus, during 2016 through 2018 we undertook
an initiative to optimize our community portfolio under which we disposed of owned and leased communities and restructured
leases in order to simplify and streamline our business, increase the quality and durability of our cash flow, improve our liquidity,
and reduce our debt and lease leverage. Further, in 2018 we evaluated our owned-community portfolio for opportunities to monetize
select high-value communities.
From 2016 through 2018, we disposed of an aggregate of 75 owned communities as a result of these initiatives and other transactions
(50 in 2016, 3 in 2017 and 22 in 2018). We also entered into agreements with our largest lessors that restructured a significant
portion of our triple-net lease obligations. As a result of the transactions with HCP, Inc. announced in 2016 and 2017 and Ventas,
Inc. and Welltower Inc. announced in 2018, as well as other lease expirations and terminations, our triple-net lease obligations on
an aggregate of 201 communities were terminated from 2016 to 2018 (7 in 2016, 105 in 2017 and 89 in 2018). During this period
we also sold our ownership interests in seven unconsolidated ventures and acquired six communities that we previously leased or
managed. As of December 31, 2018, we owned 344 communities, leased 343 communities, managed 18 communities on behalf
of unconsolidated ventures, and managed 187 communities on behalf of third parties. The charts below show the foregoing changes
in our portfolio from December 31, 2015 to December 31, 2018.
During the year ending December 31, 2019, we expect to close on the dispositions of 13 owned communities classified as held
for sale as of December 31, 2018. For the year we also anticipate terminations of our management arrangements with third parties
as we transition to new operators our interim management on formerly owned or leased communities and our management on
certain former unconsolidated ventures in which we sold our interest. The closings of the various pending and expected transactions
6
are, or will be, subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory
approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a summary of the
foregoing completed and expected transactions and their impact on our results of operations.
Increased Competitive Pressures
New openings of senior housing communities has subjected the senior housing industry and us to increased competitive pressures
in recent years. Data from the National Investment Center for the Seniors Housing & Care Industry ("NIC") shows that industry
occupancy began to decrease starting in 2016 as a result of new openings and oversupply. During and since 2016 we have
experienced an elevated rate of competitive new openings, with significant new competition opening in several of our markets,
which has adversely affected our occupancy, revenues, results of operations and cash flow. We expect the elevated rate of competitive
new openings and pressures on our occupancy and rate growth to continue through 2019. Such increased level of new openings,
as well as lower levels of unemployment generally, have also contributed to wage pressures and increased competition for
community leadership and personnel. We continue to address new competition by focusing on operations with the objective to
ensure high customer satisfaction, retain key leadership and actively engage district and regional management in community
operations; enhancing our local and national marketing and public relations efforts; and evaluating current community position
relative to competition and repositioning if necessary (e.g., services, amenities, programming and price). We also continue to
execute on our 3-year plan initiated in 2017 to invest above industry to improve the total rewards program and performance
management, training and development program for our community leaders and staff.
Planned Capital Expenditures
During 2018 we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that
our communities are in appropriate physical condition to support our strategy and determining what additional investments are
needed to protect the value of our community portfolio. As a result of that review, we have budgeted to make significant additional
near-term investments in our communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our
full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million.
For 2019, this includes an increase of approximately $75 million in our community-level capital expenditures relative to 2018,
primarily attributable to major building infrastructure projects. We anticipate that our 2019 capital expenditures will be funded
from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility. We expect that
our 2020 community-level capital expenditures will continue to be elevated relative to 2018, but lower than 2019.
The Senior Living Industry
The senior living industry has undergone dramatic growth in the last twenty years, marked by the emergence of assisted living
communities in the mid-1990s, and it remains highly fragmented with numerous local and regional operators. According to NIC
data, there were more than 2,300 local and regional senior housing operators as of December 31, 2018, of which more than 90%
operated five or fewer communities. 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 senior housing industry was affected negatively by the downturn in the general economy, which resulted
in a near halt in construction of new communities. The industry experienced a slow recovery in occupancy and rate growth
beginning in 2010 according to NIC. In more recent years, as the economy has improved and demographic trends favorable to the
industry have drawn nearer, the industry has attracted increased investment resulting in increased construction and development
of new senior housing supply. New openings of senior housing communities and oversupply have subjected the senior housing
industry to increased competitive pressures in recent years. Data from NIC shows that industry occupancy began to decrease
starting in 2016 as a result of new openings and oversupply.
We believe that a number of trends will contribute to the continued growth of the senior living industry in coming years. As a
result of scientific and medical breakthroughs over the past 30 years, seniors are 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 housing and healthcare services to continue to increase in future years. The primary market of the senior living industry
is individuals age 80 and older. According to United States Census data, that group’s population is projected to increase by nearly
50% to a population of 20 million by 2030.
We believe the senior living industry has been and will continue to be impacted by several other trends. Although seniors are living
longer, they are experiencing soaring rates of Alzheimer’s and other dementias and the growing burden of chronic diseases and
7
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 therefore look for alternatives outside of their family for 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.
Challenges in our industry include increased state and local regulation of the assisted living, memory care 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. Like
other companies, our financial results may be negatively impacted by increasing salaries, wages and benefits costs for our associates.
Increases in the costs of food, utilities, insurance, and real estate taxes may also have a negative impact on our financial results.
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. We cannot predict what action, if any, Congress will
take on reimbursement policies of the Medicare or Medicaid programs or what future rule changes the Centers for Medicare &
Medicaid Services ("CMS") will implement. Changes in the reimbursement rates or methods or timing of government
reimbursement programs could adversely affect our revenues, results of operations and cash flow.
Competition
The senior living industry is highly competitive. We compete with numerous organizations, including not-for-profit entities, that
offer similar communities and services, such as home health care and hospice 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 independent living, assisted living and memory care sectors of the senior living industry are not substantial.
Consequently, we may encounter competition that could limit our ability to attract new residents and associates, to retain existing
residents and associates, and to raise or maintain resident fees and expand our business, which could have a material adverse effect
on our occupancy, revenues, results of operations and cash flows. Our major publicly-traded senior housing competitors are Capital
Senior Living Corporation and Five Star Senior Living, Inc. Our major private senior housing competitors include Holiday
Retirement, Life Care Services, LLC, and Sunrise Senior Living, LLC, as well as a large number of not-for-profit entities.
Over the long term we plan to evaluate and, where opportunities arise, pursue development, investment and acquisition opportunities
such as selective acquisitions of senior living communities and operating companies. The market for acquiring and/or operating
senior living communities is highly competitive, and 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. In addition, several publicly-traded and non-traded
real estate investment trusts, or REITs, and private equity firms have similar objectives as we do, along with greater financial
resources and/or lower costs of capital than we are able to obtain. 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 of which are HCP, Inc., Ventas, Inc. and Welltower Inc.
Our History
Brookdale Senior Living Inc. was formed as a Delaware corporation in June 2005 for the purpose of combining two leading senior
living operating companies, Brookdale Living Communities, Inc. and Alterra Healthcare Corporation, which 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, another leading senior living provider that had been
operating independently since 1978. On September 1, 2011, we completed the acquisition of Horizon Bay, which was the then-
ninth largest operator of senior living communities in the United States. On July 31, 2014, we completed our acquisition by merger
of Emeritus Corporation, which was the then-second largest operator of senior living communities in the United States.
Segments
As of December 31, 2018, we had five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs;
Health Care 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. Prior to this Annual Report on Form 10-K, we referred to the Independent Living segment as our
Retirement Centers segment, the Assisted Living and Memory Care segment as our Assisted Living segment, and the Health Care
Services segment as our Brookdale Ancillary Services segment. The name changes had no effect on the underlying methodology
related to, or results of operations of, our segments.
8
Communities that we own or lease are included in the Independent Living, Assisted Living and Memory Care, or CCRC segment,
as applicable. The home health, hospice and outpatient therapy services provided to our residents and seniors living outside of our
communities are generally included in the Health Care Services segment, while skilled nursing and inpatient healthcare services
provided in our skilled nursing units are included in the CCRC segment. Communities that we manage on behalf of third parties
or unconsolidated ventures in which we have an ownership interest are included in the Management Services segment. The chart
below shows the number of communities and units within each of our senior housing and Management Services segments as of
December 31, 2018.
Segments
Independent Living
Assisted Living and Memory Care
CCRCs
Managed
Total
Communities
Units
% of Total
Units
Average
Number of
Units per
Community
68
593
26
205
892
12,419
37,500
6,573
27,787
84,279
14.7%
44.5%
7.8%
33.0%
100.0%
183
63
253
136
94
For the year ended December 31, 2018, we generated 81.5% of our resident fee revenue from private pay customers, 15.1% from
government reimbursement programs (primarily Medicare) and 3.4% from other payor sources. Approximately 44.7% of our
resident fee revenue was generated from owned communities, 42.6% was generated from leased communities and 12.7% was
generated from our Health Care Services segment. The chart below shows the percentage of our resident fee and management fee
revenue attributable to each of our segments for the year ended December 31, 2018.
Segments
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Management Fees
Revenue
$
599,977
1,995,851
416,408
436,975
71,986
% of Total
Revenue
17.0%
56.8%
11.8%
12.4%
2.0%
Total resident fee and management fee revenue
$
3,521,197
100.0%
Further operating results and financial metrics from our five 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.
Our Community Offerings
We offer a variety of senior living communities in locations across the United States. The communities we operate and manage
consist of independent living, assisted living and memory care communities, and CCRCs. The majority of our units are organized
in campus-like settings or stand-alone communities containing multiple service levels.
Independent Living Communities
Our independent living communities are primarily designed for middle to upper income seniors who desire an upscale residential
environment providing the highest quality of service. A number of our independent living residents relocate to one of our
communities in order to be in a metropolitan area that is closer to their adult children. The majority of our independent living
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, 2018 approximately 78.5% of all of the units at our independent living communities
were independent living units, with the balance of the units licensed for assisted living and memory care.
Our independent living communities generally are large multi-story buildings averaging 183 units with extensive common areas
and amenities. Residents may choose from studio, one-bedroom and two-bedroom units, depending upon the specific community.
9
Each independent living 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
personal 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 independent living communities that include assisted living also provide residents with
personal care service options to provide assistance with ADLs. The levels of care provided to residents vary from community to
community depending, among other things, upon the licensing requirements and healthcare regulations of the state in which the
community is located.
Residents in our independent living 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 and separate assisted living dining rooms and activity areas.
Assisted Living and Memory Care Communities
Our assisted living and memory care communities offer housing and 24-hour assistance with ADLs to mid-acuity frail and elderly
residents. Residents typically enter an assisted living or memory care community due to a relatively immediate need for services
that may have been triggered by a medical event. Our assisted living and memory care communities include both freestanding,
multi-story communities with more than 50 beds, and smaller, freestanding single story communities. 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 provide memory care services at freestanding memory care communities that are specially designed for residents with
Alzheimer's and other dementias. Our freestanding memory care communities have approximately 20 to 70 beds and some are
part of a campus-like setting which includes a freestanding assisted living community. As of December 31, 2018, we provide
memory care services at 462 of our communities, aggregating 11,860 memory care units across our segments. These communities
include 115 freestanding memory care communities with 4,473 units included in our Assisted Living and Memory Care segment.
All residents at our assisted living and memory care communities are eligible to 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 dementias. In addition, we offer at additional cost, higher levels of personal care services to residents at these communities
who are very physically frail or 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 units typically require higher levels of
personal care and services than in assisted living 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.
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 Alzheimer's and dementia care services. Our CCRC residents are generally
senior citizens who are seeking a community that offers 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.
Seventeen of our CCRCs, of which 16 are included in the Management Services segment, allow for residents in the independent
living units to pay a one-time upfront entrance fee, typically $100,000 to $400,000, 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
10
in various states. 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 resale of the unit, or in some agreements, upon the resale
of a comparable unit or 12 months after the resident vacates the unit. 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.
Our Healthcare Services Offerings
Through our Health Care Services segment we currently provide home health, hospice and outpatient therapy services, as well as
education and wellness programs, to residents of many of our communities and to seniors living outside of our communities. As
of December 31, 2018, our Health Care Services segment platform included networks in 28 states with the ability to provide home
health services to approximately 60% of our units, hospice services to approximately 20% of our units, and outpatient therapy to
approximately 15% of our units. Skilled nursing and inpatient healthcare services provided in our skilled nursing units are included
in the CCRC segment. During the year ended 2018, we generated approximately 55% of our Health Care Services segment revenue
from residents at our communities and approximately 45% from our patients outside our communities.
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. Our hospice services include clinical and skilled care, as well as spiritual
and emotional counseling. Our outpatient therapy services include physical therapy, occupational therapy and speech language
pathology services and other specialized therapy. The majority of our home health, hospice and outpatient therapy services are
reimbursed by government reimbursement programs, primarily Medicare, and non-covered services are paid directly by residents
from private pay sources. Our education and wellness programs focus on wellness and physical fitness to allow residents to maintain
maximum independence. These services provide many continuing education opportunities for seniors and their families through
health fairs, seminars, and other consultative interactions. We believe that our integrated healthcare services offerings are unique
among senior housing operators and that we have a significant advantage over our senior housing competitors with respect to
providing such services because of our established infrastructure, scale and experience.
Management Services
As of December 31, 2018, we managed 18 communities on behalf of unconsolidated ventures and 187 communities on behalf of
third parties, which represented approximately 33.0% of our senior housing capacity. The chart below shows the type and number
of communities and units contained in our Management Services segment as of December 31, 2018 and the percentage of our
management fee revenue attributable to such communities for the year ended December 31, 2018.
Community Type
Independent Living
Assisted Living and Memory Care
CCRCs
Total
Communities
31
134
40
205
Units
5,434
10,907
11,446
27,787
% of Total
Units
Management
Fees
% of Total
Management
Fees
19.5%
39.3%
41.2%
100.0%
11,538
25,119
35,329
71,986
16.0%
34.9%
49.1%
100.0%
Under our management arrangements, we receive management fees, which are generally determined by an agreed upon percentage
of gross revenues (as defined in the management arrangement), as well as reimbursed expenses, which represent the reimbursement
of certain expenses we incur on behalf of the owners. A majority of our management arrangements as of December 31, 2018 are
interim management arrangements entered into in connection with prior lease terminations that may be terminated by either party
on short notice and without any reason, have a remaining term of approximately one year or less, or may be terminated by the
owner within the next approximately one-year or less. Generally either party to our management arrangements may terminate
upon the occurrence of an event of default caused by the other party, generally subject to cure rights. Several long-term agreements
also provide for early termination rights of the owner which may in some cases require an early termination fee. In some cases,
subject to our cure rights, if any, 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. 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
11
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, the management agreement generally may
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.
Termination, early or otherwise, or non-renewal of, or renewal on less-favorable terms, of our management arrangements could
cause an unexpected loss in revenues and would negatively impact our results of operations and cash flows.
Approximately 50 of our management arrangements as of December 31, 2018 are interim in nature and were entered into with
respect to communities for which leases have been terminated or sales of owned communities. We may enter into such arrangements
in connection with future lease terminations or sales of owned communities. Pursuant to these arrangements, we have agreed to
manage such formerly-leased or formerly-owned communities until the communities have been transitioned to new managers.
Generally either party may terminate these interim management arrangements on short notice and for any reason, and we expect
most of the arrangements as of December 31, 2018 to be terminated during 2019.
During the year ended December 31, 2018, approximately 60.7% of our management fees revenue was derived from services
provided to unconsolidated ventures in which HCP, Inc. held an interest, including 29.8% of our management fees revenue derived
from services provided to our unconsolidated CCRC venture in which we share control with HCP, Inc.
Competitive Strengths
We believe our national network of senior living communities and healthcare services networks are well positioned to benefit
from the future 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 and our Board of Directors have extensive
experience in the senior living, healthcare and real estate industries, including the operation and management of a broad range
of senior living assets.
• Geographically diverse, high-quality, purpose-built communities. As of December 31, 2018, we are the largest operator of
senior living communities in the United States based on total capacity, with 892 communities in 45 states and the ability to
serve approximately 84,000 residents.
• Ability to provide a broad spectrum of care. Given our diverse mix of independent living, assisted living and memory care
communities and CCRCs, as well as our healthcare services offerings, we are able to meet a wide range of our residents’ and
patients’ 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 while continuing a local-community focus. The
size of our business allows us to realize cost savings, economies of scale in the procurement of goods and services, and access
to favorable debt and financing terms. Our scale also allows us to achieve increased efficiencies with respect to various
corporate functions. We negotiate contracts for food, insurance and other goods and services with the advantages that scale
provides. In addition, we leverage our centralized corporate functions such as finance, human resources, legal, information
technology and marketing. We intend to utilize our expertise and size to capitalize on economies of scale resulting from our
national platform and to enhance our residents’ and patients’ experiences. We believe that our geographic footprint and
centralized infrastructure provide us with a significant operational advantage over local and regional operators of senior living
communities.
Significant experience in providing healthcare services. Through our Health Care Services segment, we provide a range of
home health, hospice, outpatient therapy, education, wellness and other services to residents of certain of our communities
and to seniors outside our communities, which we believe is a distinct competitive difference among senior housing operators.
We have significant experience in providing these services and expect to receive additional revenues as we expand our offerings
of these services to additional residents and seniors living outside of our communities.
Seasonality
Our seniors housing business has typically experienced some seasonality, which we experience in certain regions more than others,
due to weather patterns, geography and higher incidence and severity of flu and other illnesses during winter months. Although
our seasonal pattern varies from year to year, our average monthly occupancy generally begins to decline sequentially during the
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fourth quarter of the year, and we generally expect average monthly occupancy to begin to increase towards the end of the second
quarter each year.
Operations
Operations Overview
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. Further, we believe our centralized support
infrastructure allows our community-based leaders and personnel to focus on resident care and family connections.
Consolidated Corporate Operations Support
We have developed a centralized support 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 procurement, 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
have also established company-wide policies and procedures relating to, among other things: resident care; community design
and community operations; billing 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.
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 continue to take actions intended to simplify the role of our Executive Directors to
allow them to focus on our residents and their families and our associates. We believe that the quality of our communities, coupled
with our competitive compensation philosophy and our ability to provide industry-leading systems and training, has enabled us
to attract high-quality, professional community Executive Directors.
Depending upon the size of the community, each Executive Director is supported by key leaders, a Health and Wellness Director
(or nursing director) and/or a Sales Director. The Health and Wellness Director or nursing director is directly responsible for day-
to-day care of residents. The Sales Director oversees the community’s sales, marketing and community outreach programs. Other
key positions supporting each community may include individuals responsible for food service, healthcare services, activities,
housekeeping, and maintenance.
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 regular 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
programs are 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
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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 efforts are intended to create awareness of our Brookdale brand and services to motivate individuals interested in
senior living to visit our communities. We target a variety of constituents who have a role in the decision-making process for senior
housing and our healthcare services, including potential residents, their family members and referral sources, including the medical
community (hospital discharge planners, physicians, skilled nursing facilities, home health agencies and social workers),
professional organizations, employer groups, clergy, area agencies for the elderly, and paid referral organizations. Our marketing
staff develops overall strategies for promoting our communities at the local and national level and monitors the success of our
multi-layered marketing efforts, including local media and outreach programs, internet advertising, social media, print advertising,
e-mail, direct mail, signage and special events, such as health fairs and community receptions. We utilize contact centers and the
Brookdale website to handle hundreds of thousands of customer inquiries to schedule visits directly to our communities. Certain
resident referral programs have been established and promoted at many communities within the limitations of federal and state
laws.
We will continue to leverage our brand recognition while pursuing a multi-layered marketing approach. We have a Network Selling
methodology, aimed at optimizing the customer experience as they consider the many options and care levels that we provide
within the markets we serve. With our selling model, sales associates are organized to support communities directly as well as
coordinate the sales efforts of multiple communities where we have density within markets. Additionally, we have segmented our
communities to optimize levels of price, service offerings, amenities and programs offered based on local demand and supply so
that we can create differentiated value to meet the needs of our customers.
Employees
As of December 31, 2018, we had approximately 43,200 full-time employees and approximately 22,200 part-time employees, of
which approximately 560 work in our Brentwood, Tennessee headquarters office and approximately 570 work in our Milwaukee,
Wisconsin office. We currently consider our relationship with our employees to be good. During 2018 we eliminated our smaller
regional support offices.
Industry Regulation
The regulatory environment surrounding the senior living industry continues to intensify in the number and type of laws and
regulations affecting it. 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 governing Medicare and Medicaid, which
regulate 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; staffing; physical plant specifications; furnishing
of resident units; food and housekeeping services; emergency evacuation plans; emergency power generator requirements;
professional licensing and certification of staff; and resident rights and responsibilities. In several of the states there are different
levels of care that can be provided based on the level of licensure. In several of the states in which we operate or intend to operate,
assisted living and memory care communities, home health agencies and/or skilled nursing facilities require a certificate of need
before the community or agency 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.
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Unannounced surveys or inspections may occur annually or bi-annually, or following a regulator's receipt of a complaint about
the provider. From time to time in the ordinary course of business, we receive survey reports from state regulatory bodies resulting
from such inspections or surveys. Most inspection deficiencies are resolved through a plan of corrective action relating to the
community's operations, but the reviewing agency may have the authority to take further action against a licensed or certified
community or agency, 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 reimbursement
programs or imposition of other sanctions, including criminal penalties. Loss, suspension or modification of a license may also
cause us to default under our debt and lease documents 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 and
memory care even if the community or any of its residents do not receive federal or state funds.
Regulation of the senior living industry is evolving at least partly because of the growing interests of a variety of advocacy
organizations and political movements attempting to standardize regulations for certain segments of the industry, particularly
assisted living and memory care. Our operations could suffer if future regulatory developments, such as federal assisted living
and memory care 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. 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. 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 healthcare 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 healthcare fraud. With respect to our participation in
federal healthcare 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 healthcare provider has defrauded the government and seek treble damages
for false claims and the payment of additional monetary civil penalties. 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.
Additionally, since we operate communities that participate in federal and/or state healthcare reimbursement programs, 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.
Violation of any of these laws can result in loss of licensure, citations, sanctions and other criminal or civil fines and penalties,
the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid programs, which
may also cause us to default under our debt and lease documents and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by healthcare 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
healthcare 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 reimbursement programs, which may also
cause us to default under our leases and loan agreements and/or trigger cross-defaults. Adverse consequences may also result if
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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 United States
Department of Health and Human Services has issued rules pursuant to HIPAA relating to the privacy of such information. Rules
that became effective in 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 2005. To the
best of our knowledge, we are in compliance with these rules.
Medicare and Medicaid Programs
We rely on reimbursement from government programs, including the Medicare program and, to a lesser extent, Medicaid programs,
for a portion of our revenues. Reimbursements from Medicare and Medicaid represented 12.4% and 2.7%, respectively, of our
total resident fee revenues for the year ended December 31, 2018. During the period, Medicare reimbursements represented 81.7%
of our Health Care Services segment revenue, and Medicare and Medicaid reimbursements represented 20.9% of our CCRCs
segment revenue.
Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and certain
disabled persons. We receive revenue for our home health, hospice, skilled nursing and outpatient therapy services from Medicare.
Medicaid is a medical assistance program administered by each state, funded with federal and state funds pursuant to which
healthcare benefits are available to certain indigent or disabled patients. We receive reimbursements under Medicaid (including
state Medicaid waiver programs) for many of our assisted living and memory care communities.
These government reimbursement programs are highly regulated, involve significant administrative discretion, and are subject to
frequent and substantial legislative, administrative and interpretive changes, which may significantly affect reimbursement rates
and the methods and timing of payments made under these programs. Continuing efforts of government to contain healthcare costs
could materially and adversely affect us, and reimbursement levels may not remain at levels comparable to present levels or may
not be sufficient to cover the costs allocable to patients eligible for reimbursement.
Medicare reimbursement for home health and skilled nursing services is subject to fixed payments under the Medicare prospective
payment systems. In accordance with Medicare laws, CMS makes annual adjustments to Medicare payment rates in many
prospective payment systems under what is commonly known as a “market basket update.” Each year, the Medicare Payment
Advisory Commission (“MedPAC”), a commission chartered by Congress to advise it on Medicare payment issues, recommends
payment policies to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt MedPAC
recommendations and based on previous years, there can be no assurance that Congress will adopt MedPAC’s recommendations
in any given year.
Medicaid reimbursement rates for many of our assisted living and memory care communities also are based upon fixed payment
systems. Generally, these rates are adjusted annually for inflation. However, those adjustments may not reflect actual increases of
the cost of providing healthcare services. In addition, Medicaid reimbursement can be impacted negatively by state budgetary
pressures, which may lead to reduced reimbursement or delays in receiving payments.
Audits and Investigations
As a result of our participation in the Medicare and Medicaid programs, we are subject to various government reviews, audits and
investigations to verify our compliance with these programs and applicable laws and regulations. CMS has engaged a number of
third party firms, including Recovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program
Integrity Contractors (UPIC) to conduct extensive reviews of claims data to evaluate the appropriateness of billings submitted for
payment. Audit contractors may identify overpayments based on coverage requirements, billing and coding rules or other risk
areas. In addition to identifying overpayments, audit contractors can refer suspected violations of law to government enforcement
authorities. An adverse determination of government reviews, audits and investigations may result in citations, sanctions and other
criminal or civil fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare
and Medicaid programs. Our costs to respond to and defend any such audits, reviews and investigations may be significant and
are likely to increase in the current enforcement environment, and any resulting sanctions or criminal, civil or regulatory penalties
could have a material adverse effect on our business, financial condition, results of operations and cash flow.
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The Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act
To help fund the expansion of healthcare coverage to previously uninsured people, the Patient Protection and Affordable Care Act
and the Healthcare Education and Reconciliation Act of 2010 (collectively, the “Affordable Care Act”), which became law in
2010, provides for certain reforms to the healthcare delivery and payment system aimed at increasing quality and reducing costs.
As it relates to our business, the Affordable Care Act provides for reductions to the annual market basket payment updates for
home health and hospice agencies and additional annual “productivity adjustment” reductions to the annual market basket payment
update as determined by CMS for skilled nursing facilities (beginning in federal fiscal year 2012), hospice agencies (beginning
in federal fiscal year 2013), and home health agencies (beginning in federal fiscal year 2015). These reductions have, and could
in the future, result in lower reimbursement than the previous year. The Affordable Care Act also provides for new transparency,
reporting, and certification requirements for skilled nursing facilities.
Furthermore, the Affordable Care Act mandates changes to home health and hospice benefits under Medicare. For home health,
the Affordable Care Act mandates creation of a value-based purchasing program, development of quality measures, a decrease in
home health reimbursement beginning with federal fiscal year 2014 that was phased-in over a four-year period, a reduction in the
outlier cap, and reinstatement of a 3% add-on payment for home health services delivered to residents in rural areas on or after
April 1, 2010 and before January 1, 2016. The Affordable Care Act also requires the Secretary of HHS to test different models for
delivery of care, some of which would involve home health services. It also requires the Secretary to establish a national pilot
program for integrated care for patients with certain conditions, bundling payment for acute hospital care, physician services,
outpatient hospital services, and post-acute care services, which would include home health. The Affordable Care Act further
directed the Secretary of HHS to rebase payments for home health, which resulted in a decrease in home health reimbursement
that began in 2014 and was phased-in over a four-year period. The Secretary is also required to conduct a study to evaluate costs
and quality of care among efficient home health agencies regarding access to care and treating Medicare beneficiaries with varying
severity levels of illness and to provide a report to Congress.
Potential efforts in the Congress to alter, amend, repeal or replace the Affordable Care Act, or to fail to fund various aspects of
the Affordable Care Act, create additional uncertainty about the ultimate impact of the Affordable Care Act on us and the healthcare
industry. The healthcare reforms and changes resulting from the Affordable Care Act, as well as other similar healthcare reforms,
including any potential change in the nature of services we provide, the methods or amount of payment we receive for such services,
and the underlying regulatory environment, could adversely affect our business, revenues, results of operations and cash flows.
The Improving Medicare Post-Acute Care Transformation Act of 2014
The Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”), which became law in 2014, requires
standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of post-
acute care, including home health, hospice and skilled nursing. The IMPACT Act will require such agencies and facilities to begin
reporting standardized patient assessment data, new quality measures, and resource use measures. Failure to report such data when
required would subject an agency or facility to a two percent reduction in market basket prices then in effect. The IMPACT Act
further requires HHS and MedPAC to study, and report to Congress by 2022 regarding alternative post-acute care payment models,
including payment based upon individual patient characteristics and not care setting. The IMPACT Act also includes provisions
impacting Medicare-certified hospices, including increasing survey frequency to once every 36 months, imposing a medical review
process for facilities with a high percentage of stays in excess of 180 days, and updating the annual aggregate Medicare payment
cap.
The Medicare Access and CHIP Reauthorization Act of 2015
The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) became law in 2015. The legislation, among other
things, permanently replaced the sustainable growth rate formula previously used to determine updates to Medicare fee schedule
payments with quality and value measurements and participation in alternate payment models; extended the Medicare Part B
outpatient therapy cap exception process until December 31, 2017; extended the 3% add-on payment for home health services
delivered to residents in rural areas until December 31, 2017; and set payment updates for post-acute providers at 1% after other
adjustments required by the Affordable Care Act for 2018. As part of federal budget legislation that became law on February 9,
2018, the Medicare Part B cap on outpatient therapy services was permanently repealed effective January 1, 2018.
Home Health Claim Review Demonstrations
In 2016, CMS announced that it would implement a 3-year Medicare pre-claim review demonstration for home health services
in the states of Illinois, Florida, Texas, Michigan and Massachusetts. The pre-claim review is a process through which a request
for provisional affirmation of coverage is submitted for review before a final claim is submitted for payment. CMS began the pre-
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claim review demonstration in Illinois in August 2016, which CMS paused in April 2017. The pre-claim review demonstration
resulted in increased administrative costs and reimbursement delays for our Illinois home health agency. In December 2018, CMS
indicated it was continuing the process for obtaining approval under the Paperwork Reduction Act of a 5-year Medicare claim
review demonstration for Illinois, which would be further expanded to Florida, Texas, North Carolina and Ohio. Under this Review
Choice Demonstration as currently proposed, providers would have an initial choice of three options for review: pre-claim review,
post-payment review, or minimal post-payment review with a 25% payment reduction for all home health services. We derive a
significant portion of our home health revenue from these states. If implemented, the claim review demonstrations could adversely
affect our revenue, results of operations and cash flows.
Home Health Value-Based Purchasing
On January 1, 2016, CMS implemented Home Health Value-Based Purchasing ("HHVBP"). The HHVBP model was designed to
give Medicare certified home health agencies incentives or penalties, through payment bonuses, to give higher quality and more
efficient care. HHVBP was rolled out to nine pilot states: Arizona, Florida, Iowa, Maryland, Massachusetts, Nebraska, North
Carolina, Tennessee and Washington, six of which Brookdale currently has home health operations. Bonuses and penalties began
in 2018 with the maximum of plus or minus 3% and are scheduled to grow to plus or minus 8% by 2022. Payment adjustments
are calculated based on performance in 20 measures which include current Quality of Patient Care and Patient Satisfaction star
measures, as well as measures based on submission of data to a CMS web portal.
The Bipartisan Budget Act of 2018
The Bipartisan Budget Act of 2018 (the “BBA”), enacted in February 2018, includes several provisions impacting Medicare
reimbursement to home health, hospice, and outpatient therapy providers. With respect to home health providers, the BBA (1)
will base payment on a 30-day episode of care beginning January 1, 2020, coupled with annual determinations by CMS to ensure
budget neutrality (including taking into account provider behavior), (2) will eliminate retroactive payment adjustments based upon
the level of therapy services required beginning January 1, 2020, (3) extends the 3% add-on payment for home health services
provided to residents in rural areas beginning January 1, 2018, coupled with a reduction and phase out of such add-on payment
over the following four fiscal years, and (4) will establish a market basket update of 1.5% for the year beginning January 1, 2020.
With respect to hospice providers, the BBA establishes a new payment policy related to early discharges to hospice care from
hospitals. This policy imposed a financial penalty on hospitals for each early discharge to hospice care beginning October 1, 2018.
With respect to outpatient therapy providers, the BBA permanently repeals the Medicare Part B outpatient therapy cap effective
January 1, 2018 and continues the targeted medical review process with a reduction of the applicable threshold triggering such
review to $3,000 effective January 1, 2018.
CMS Final Rule 1689-FC for Medicare Home Health Prospective Payment
In July 2018, CMS issued proposed payment changes for Medicare home health providers for 2019 and 2020. For 2019, CMS
estimates that the net impact of the payment provisions of the proposed changes will result in an increase of 2.2% in reimbursement
to home health providers and finalizes the methodology used to determine the rural add-on payment for 2019 through 2022 as
well as regulations text changes regarding certifying and recertifying patient eligibility for Medicare home health services and
remote patient monitoring. Additionally, the proposed rule includes changes to the home health prospective payment system
("HHPPS") case-mix adjustment methodology through the use of a new Patient-Driven Grouping Model ("PDGM") for home
health payments. This change is proposed to be implemented January 1, 2020 and also includes a change in the unit of payment
from 60-day episodes of care to 30-day episodes of care.
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. 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. 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
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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, financial condition, results
of operations and cash flow.
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.
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. 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.
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Available Information
Information regarding our community and service offerings can be found at our web site, www.brookdale.com. 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/investor. The information within, or
that can be accessed through, our web site addresses 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/
investor. Our Code of Ethics for Chief Executive and Senior Financial Officers, which applies to our President and Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer and Treasurer is also available on our web site.
Item 1A.
Risk Factors.
Risks Related to Our Business and Industry
Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford
our 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, revenues, results of operations and
cash flow 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,
revenues, results of operations and cash flow could decline.
Changes in the reimbursement rates or methods or timing of payment from government reimbursement programs, including
the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our senior living
and healthcare services could adversely affect our revenues, results of operations and cash flow.
We rely on reimbursement from government programs, including Medicare and Medicaid, for a portion of our revenues, and we
cannot provide assurance that reimbursement levels will not decrease in the future, which could adversely affect our revenues,
results of operations and cash flow. Reimbursements from Medicare and Medicaid represented 12.4% and 2.7%, respectively, of
our total resident fee revenues for the year ended December 31, 2018. During such period, Medicare reimbursements represented
81.7% of our Health Care Services segment revenue, and Medicare and Medicaid reimbursements represented 20.9% of our CCRC
segment revenue. See “Item 1. Business-Government Regulation” for more information regarding these programs, including the
impact of recent legislation on such programs.
Congress continues to discuss medical spending reduction measures, leading to a high degree of uncertainty regarding potential
reforms to government reimbursement programs, including Medicare and Medicaid. These discussions, along with other recent
reforms and continuing efforts to reform government reimbursement programs, both as part of the Affordable Care Act and
otherwise, could result in major changes in the healthcare delivery and reimbursement systems on both the national and state
levels. Weak economic conditions also could adversely affect federal and state budgets, which could result in attempts to reduce
or eliminate payments for federal and state reimbursement programs, including Medicare and Medicaid.
Though we cannot predict what reform proposals will be adopted or finally implemented, healthcare reform and regulations may
have a material adverse effect on our business, financial position, results of operations, and cash flow through, among other things,
decreasing funds available for our services or increasing our operating costs. Continuing efforts of government to contain healthcare
costs could materially and adversely affect us, and reimbursement levels may not remain at levels comparable to present levels
or may not be sufficient to cover the costs allocable to patients eligible for reimbursement.
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The impact of ongoing healthcare reform efforts on our business cannot accurately be predicted.
The healthcare industry in the United States is subject to fundamental changes due to ongoing healthcare reform efforts and related
political, economic and regulatory influences. Notably, the Affordable Care Act resulted in expanded healthcare coverage to
millions of previously uninsured people beginning in 2014 and has resulted in significant changes to the United States healthcare
system. To help fund this expansion, the Affordable Care Act outlines certain reductions for Medicare reimbursed services, including
skilled nursing, home health, hospice and outpatient therapy services, as well as certain other changes to Medicare payment
methodologies. This comprehensive healthcare legislation has resulted and will continue to result in extensive rulemaking by
regulatory authorities, and also may be altered, amended, repealed or replaced. It is difficult to predict the full impact of the
Affordable Care Act due to the complexity of the law and implementing regulations, as well our inability to foresee how CMS
and other participants in the healthcare 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 reimbursement 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 or any amended or replacement legislation may increase our
costs, adversely affect our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our
business.
In addition to its impact on the delivery and payment for healthcare, the Affordable Care Act and the implementing regulations
have resulted and may continue to result in increases to our costs to provide healthcare 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 or
any amended or replacement legislation impacting the provision of health insurance by employers, which could result in additional
expense and adversely affect our results of operations and cash flow.
Continued new senior housing construction and development, and increased competition, has had and may continue to have
an adverse effect on our occupancy, revenues, results of operations and cash flow.
The senior living industry is highly competitive. We compete with numerous organizations, including not-for-profit entities, that
offer similar communities and services, such as home health care and hospice 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 independent living, assisted living and memory care sectors of the senior living industry are not substantial.
In addition, over the last several years there has been an increase in the construction of new senior housing communities as the
industry has attracted increased investment. During and since 2016 we have experienced an elevated rate of competitive new
openings, with significant new competition opening in several of our markets, which has adversely affected our occupancy,
revenues, results of operations and cash flow. We expect the elevated rate of competitive new openings and pressures on our
occupancy and rate growth to continue through 2019, although we cannot provide assurance that these will subside according to
our expectations since the senior living industry may become more competitive in the future. Such new competition that we have
encountered or may encounter could limit our ability to attract new residents and associates, to retain existing residents and
associates, and to raise or maintain resident fees or expand our business, which could have a material adverse effect on our
occupancy, revenues, results of operations and cash flow.
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.
The United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions,
which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen
considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings
less attractive, and in some cases resulted in the unavailability of financing. 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 liquidity, financial condition and the market price of our common stock.
As of December 31, 2018, we had two principal corporate-level debt obligations: our secured revolving credit facility providing
commitments of $250 million and our separate unsecured letter of credit facility providing for up to $66.2 million of letters of
credit. We also had $3.5 billion principal amount of mortgage financing outstanding as of such date. If we are unable to extend or
refinance any of these facilities or other debt 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 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.
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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), which are currently operating under a conservatorship begun in
2008 and conducting business under the direction of the Federal Housing Finance Agency. Reform efforts related to Fannie Mae
and Freddie Mac 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.
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 forego, delay or
abandon some or all of our planned capital expenditures or any development, investment or acquisition opportunities that we
identify, which could adversely affect our revenues, results of operations and cash flow.
General economic factors could adversely affect our financial performance and other aspects of our business.
General economic conditions, such as inflation, the consumer price index, commodity costs, fuel and other energy costs, costs of
salaries, wages, benefits and insurance, interest rates, and tax rates, affect our facility operating, facility lease, general and
administrative and other 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 could result in defaults of
the related debt or leases and cross-defaults under our other debt or lease documents, which would adversely affect our capital
structure, financial condition, results of operations and cash flow.
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 revolving line of credit and future credit
facilities we may obtain. In addition, our required lease payments are generally subject to an escalator that is either fixed or tied
to changes in leased property revenue or the consumer price index. 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 revenue
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 many of our outstanding debt and lease documents contain cross-default and cross-
collateralization provisions, a default by us related to one community could affect a significant number of our other communities
and their corresponding financing arrangements and leases. In the event of such a default, we may not be able to obtain a waiver
from the lender or lessor on terms acceptable or favorable to us, or at all, which would have a negative impact on our capital
structure and financial condition.
Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business.
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 lease obligations 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 (should we initiate dividend payments in the future) may be limited.
•
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Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our leases depends
upon our future cash flow 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 or leases, 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 could
result in an adverse effect on our future ability to generate revenues and our results of operations and cash flow. Any contemplated
financing, refinancing, restructuring, or sale of assets might not be available on economically favorable terms to us.
Our debt and lease documents contain financial and other covenants, including 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 documents could result in the acceleration of our indebtedness and
cash lease obligations, the foreclosure of our mortgaged communities, the termination of our leasehold interests, and/or cross-
defaults under our other debt or lease documents, any of which could materially and adversely impact our capital structure,
financial condition, results of operations, cash flow and liquidity and interfere with our ability to pursue our strategy.
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain
prescribed minimum net worth and stockholders’ equity levels and debt service and lease coverage ratios, and requiring us not to
exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or
entity basis. 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. The debt service and lease 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. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring
us to comply with Medicare or Medicaid provider requirements.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents.
Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could
cause a default under other debt and lease documents (including documents with other lenders and lessors).
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 pursue our strategy. In addition, certain of our outstanding indebtedness and leases 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. In certain circumstances, the consent of the applicable lender or lessor may be based on the lender’s
or lessor’s sole discretion. Our inability to obtain the consent of applicable lenders and landlords in connection with our pursuit
of any such transactions may forestall our ability to consummate such transactions. Furthermore, the costs of obtaining such
consents may reduce the value that our stockholders may realize in any such transactions.
The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities
are leased through an indivisible lease. Due to the nature of such master leases, it is difficult to restructure the composition of our
leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default
related to an individual property or limited number of properties within a master lease portfolio could result in a default on the
entire master lease portfolio.
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of
our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions
in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness
or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold
interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities
and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions
in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we
would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
In addition, certain of our master leases and management agreements 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.
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These radius restrictions could negatively affect our ability to expand or develop or acquire senior housing communities and
operating companies.
Lease obligations and mortgage debt 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.
Lease obligations and mortgage debt increase our risk of loss because defaults on leases or indebtedness secured by properties
may result in lease terminations by lessors and foreclosure actions by lenders. 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 results of
operations and cash flow. Further, because many of our outstanding debt and lease documents contain cross-default and cross-
collateralization provisions, a default by us related to one community could affect a significant number of our other communities
and their corresponding financing arrangements and leases.
In addition, our leases generally provide for renewal or extension options and, in certain cases, purchase options. These options
typically 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, results of operations and cash flow
could be adversely affected.
Increases in market interest rates could significantly increase the costs of our debt obligations, which could adversely affect
our results of operations and cash flow.
Our variable-rate debt obligations and any such obligations incurred in the future expose us to interest rate risk. Although we have
interest rate cap agreements in place for a majority of our variable-rate debt, these agreements only limit our exposure to increases
in interest rates above certain levels and generally must be renewed every two to three years. Increases in prevailing interest rates
will increase our payment obligations on our existing variable-rate obligations to the extent they are un-hedged and may increase
our future borrowing and hedging costs, which would negatively impact our results of operations and cash flow.
Increased competition for, or a shortage of, personnel, and wage pressures resulting from increased competition, low
unemployment levels, minimum wage increases, changes in overtime laws, and union activity may have an adverse effect on
our business, results of operations and cash flow.
Our success depends on our ability to retain and attract qualified management and other 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 and service, social services and financial performance. Depending
upon the size of the community, each Executive Director is supported by key leaders, a Health and Wellness Director (or nursing
director) and/or a Sales Director. The Health and Wellness Director or nursing director is directly responsible for day-to-day care
of residents. The Sales Director oversees the community’s sales, marketing and community outreach programs. Other key positions
supporting each community may include individuals responsible for food service, healthcare services, activities, housekeeping,
and maintenance.
We compete with various healthcare service providers, other senior living providers and hospitality and food services companies
in retaining and attracting qualified personnel. Increased competition for, or a shortage of, nurses, therapists or other personnel,
low levels of unemployment, or general inflationary pressures have required and may require in the future that we enhance our
pay and benefits package to compete effectively for such personnel. In addition, we have experienced and may continue to
experience wage pressures due to minimum wage increases mandated by state and local laws and the proposed increase to the
salary thresholds for overtime exemptions under the Fair Labor Standards Act, which the Department of Labor is currently
contemplating. It is unclear what rule changes the Department of Labor will adopt. If such rule changes result in higher operating
costs, we may not be able to offset the added costs resulting from competitive, inflationary or regulatory pressures by increasing
the rates we charge to our residents or our service charges, which would negatively impact our results of operations and cash flow.
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Turnover rates of our personnel and the magnitude of the shortage of nurses, therapists or other personnel varies substantially
from market to market. If we fail to attract and retain qualified personnel, our ability to conduct our business operations effectively,
our overall operating results and cash flow 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. 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 results of operations and cash flow would be negatively affected.
Failure to maintain the security and functionality of our information systems, or to prevent a cybersecurity attack or breach,
could adversely affect our business, reputation and relationships with our residents, patients and employees and subject us to
remediation costs, government inquiries and liabilities under data and consumer protection laws, any of which could materially
and adversely impact our revenues, results of operations, cash flow and liquidity.
We are dependent on the proper function and availability of our information systems, including hardware, software, applications
and electronic data storage, to store, process and transmit our business information, including proprietary business information
and personally identifiable information of our residents, patients and employees. Though we have taken steps to protect the
cybersecurity and physical security of our information systems, there can be no assurance that our security measures and disaster
recovery plan will prevent damage to, or interruption or breach of, our information systems.
Because the techniques used to obtain unauthorized access to systems change frequently and may be difficult to detect for long
periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition,
components of our information systems that we develop or procure from third parties may contain defects in design or manufacture
or other problems that could unexpectedly compromise the security or functionality of our information systems. Unauthorized
parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through
fraud or other forms of deceiving our employees or contractors such as email phishing attacks. As cyber threats continue to evolve,
we may be required to expend significant additional resources to continue to modify or enhance our cybersecurity or to investigate
and remediate any cybersecurity vulnerabilities, attacks or incidents.
In addition, we rely on software support of third parties to secure and maintain our information systems. Our inability, or the
inability of these third parties, to continue to maintain and upgrade our information systems could disrupt or reduce the efficiency
of our operations. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems
and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.
Failure to maintain the security and functionality of our information systems, or to prevent a cybersecurity attack or other
unauthorized access to our information systems, could expose us to a number of adverse consequences, many of which are not
insurable, including: (i) interruptions to our business, (ii) the theft, destruction, loss, misappropriation, or release of sensitive
information, including proprietary business information and personally identifiable information of our residents, patients and
employees, (iii) significant remediation costs; (iv) negative publicity which could damage our reputation and our relationships
with our residents, patients, employees and referral sources, (v) litigation and potential liability under privacy, security and consumer
protection laws or other applicable laws, and (vi) government inquiries which may result in sanctions and other criminal or civil
fines or penalties. Any of the foregoing could materially and adversely impact our revenues, results of operations, cash flow and
liquidity.
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 liquidity, cash flow
and business operations going forward or otherwise achieve profitability, our stock price could be adversely affected.
Pending disposition transactions are, and any future disposition transactions will be, subject to various closing conditions,
including the receipt of regulatory approvals where applicable, likely will result in reductions to our revenue and may negatively
impact our results of operations and cash flow.
During 2019, we expect to close on the dispositions of 13 owned communities classified as held for sale as of December 31, 2018.
For the year we also anticipate terminations of our management arrangements with third parties as we transition to new operators
our interim management on formerly owned or leased communities and our management on certain former unconsolidated ventures
in which we sold our interest. Over the longer term, we may dispose of owned or leased communities through asset sales and lease
terminations and expirations. The closings of any such transactions, or those that we identify in the future, generally are or will
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be subject to closing conditions, which may include the receipt of regulatory approvals, and we cannot provide assurance that any
such transactions will close or, if they do, when the actual closings will occur. The sales price for pending or future dispositions
may not meet our expectations due to the underlying performance of such communities or conditions beyond our control, and we
may be required to take impairment charges in connection with such sales if the carrying amounts of such assets exceed the
proposed sales prices, which could adversely affect our financial condition and results of operations. Further, we cannot provide
assurance that we will be successful in identifying and pursuing disposition opportunities on terms that are acceptable to us, or at
all. We may be required to pay significant amounts to restructure or terminate leases and we may be required to take charges in
connection with such activity, which could adversely affect our financial condition and results of operations.
Completion of the dispositions of communities through sales or lease terminations and the termination of our management
arrangements, including pending transactions and those we enter into in the future, likely will result in reductions to our revenue
and may negatively impact our results of operations and cash flow. Further, if we are unable to reduce our general and administrative
expense with respect to completed dispositions and management arrangement terminations in accordance with our expectations,
we may not realize the expected benefits of such transactions, which could negatively impact our anticipated results of operations
and cash flow.
We may need additional capital to fund our operations and capital expenditures plans, to pursue expansion of our healthcare
services, and to pursue any development, investment and acquisition opportunities, and we may not be able to obtain it on terms
acceptable to us, or at all.
Execution on our strategy, completing our capital expenditure plans, pursuing expansion of our healthcare services to residents
and seniors living outside our communities, and pursuing any other development, investment and acquisition opportunities that
we may identify may require additional capital. 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 plans or opportunities. 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.
Failure to complete our capital expenditures in accordance with our plans may adversely affect our anticipated revenues,
results of operations and cash flow.
Our planned full-year 2019 non-development capital expenditures are approximately $250 million net of anticipated lessor
reimbursements, and such projects include those related to maintenance, renovations, upgrades and other major building
infrastructure projects for our communities. Our full-year 2019 non-development capital expenditure plans include a significant
increase over the prior year primarily attributable to major building infrastructure projects that we identified as part of our intensive
review of capital expenditures needed to ensure that our communities are in appropriate physical condition to support our strategy
and to determine what additional investments are needed to protect the value of our community portfolio. In addition, our planned
full-year 2019 development capital expenditures are approximately $30 million net of anticipated lessor reimbursements, and such
projects include those for community expansions and major community redevelopment and repositioning projects, including our
Program Max initiative through which we expand, renovate, reposition or redevelop selected existing senior living communities.
Our capital projects are in various stages of planning and development and are subject to a number of factors over which we may
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 provide assurance that we will undertake or complete all of our planned capital expenditures, or that we will not
experience delays in completing those projects. In addition, we may incur substantial costs prior to achieving stabilized occupancy
for certain capital projects and cannot assure you that these costs will not be greater than we have anticipated. We also cannot
provide assurance that any of our capital projects will be economically successful or provide a return on investment in accordance
with our plans or at all. Furthermore, our failure to complete, or delays in completing, our planned community-level capital
expenditures could harm the value of our communities and our revenues, results of operations and cash flow.
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To the extent we identify and pursue any future development, investment or acquisition opportunities, we may encounter
difficulties in acquiring communities at attractive prices or integrating acquisitions with our operations, which may adversely
affect our financial condition, results of operations and cash flow.
Over the longer term, we plan to explore additional products and services that we may offer to our residents and, where opportunities
arise, pursue development, investment and acquisition opportunities such as acquisitions of senior living communities and operating
companies. We may not be able to identify any such opportunities on attractive terms and that are compatible with our strategy.
To the extent we identify any such opportunities and enter into definitive agreements in connection therewith, we cannot provide
assurance that the transactions will be completed. Failure to complete transactions after we have entered into definitive agreements
may result in significant expenses to us.
To the extent we identify and close on any future development, investment or acquisition opportunities, the integration of such
products, services, communities or operating companies into our existing business may result in unforeseen difficulties, divert
managerial attention or require significant financial or other resources. Further, any such closings may require us to incur additional
indebtedness and contingent liabilities and may result in unforeseen expenses or compliance issues, which may adversely affect
our revenue growth, results of operations and cash flow. Moreover, any future development, investment or acquisition transactions
may not generate any additional income for us or provide any benefit to our business.
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, and private equity firms 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. There is significant competition among potential acquirers in
the senior living industry, including publicly-traded and non-traded REITs and private equity firms, and there can be no assurance
that we will be able to successfully complete acquisitions, which could limit our ability to grow our business. 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.
Delays in obtaining regulatory approvals could hinder our plans to continue to expand our healthcare services, which could
negatively impact our anticipated revenues, results of operations and cash flow.
We plan to continue to expand our healthcare services to additional residents and seniors living outside of our 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 such services in accordance with our plans, which could negatively impact our
anticipated revenues, results of operations and cash flow.
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.
We manage entry fee CCRCs on behalf of our venture with HCP, and we operate an additional entry fee CCRC. 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 certain number of free days in the community's health center during the resident's lifetime and/or a discounted rate for such
services. 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 cash flow of these communities and the venture could be adversely affected.
Residents of these entrance fee communities are guaranteed a living unit and nursing care at the community during their lifetime,
even if the resident exhausts his or her financial resources and becomes unable to satisfy his or her obligations to the community.
In addition, in the event a resident requires nursing care and there is insufficient capacity for the resident in the nursing facility at
the community where the resident lives, the community must contract with a third party to provide such care. Although we screen
potential residents to ensure that they have adequate assets, income, and reimbursements from government programs and third
parties to pay their obligations to the entrance fee communities during their lifetime, we cannot provide assurance that such assets,
income, and reimbursements will be sufficient in all cases. If insufficient, we or the entrance fee CCRC venture, as applicable,
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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 cash flow of these communities
and the venture would be adversely affected.
Termination, early or otherwise, or non-renewal of, or renewal on less-favorable terms, of our management arrangements will
cause a loss in revenues and may negatively impact our results of operations and cash flow.
As of December 31, 2018, we managed 18 communities on behalf of unconsolidated ventures and 187 communities on behalf of
third parties, which represented approximately 33.0% of our total senior housing capacity. Under our management arrangements,
we receive management fees, which are generally determined by an agreed upon percentage of gross revenues (as defined in the
management arrangement), as well as reimbursed expenses, which represent the reimbursement of certain expenses we incur on
behalf of the owners. A majority of our management arrangements as of December 31, 2018 are interim management arrangements
entered into in connection with prior lease terminations that may be terminated by either party on short notice and without any
reason, have a remaining term of approximately one year or less, or may be terminated by the owner within the next approximately
one-year or less. Generally either party to our management arrangements may terminate upon the occurrence of an event of default
caused by the other party, generally subject to cure rights. Several long-term agreements also provide for early termination rights
of the owner which may in some cases require an early termination fee. In some cases, subject to our cure rights, if any, 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. 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, the management agreement generally may 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. During the year ending December 31, 2019, we
anticipate terminations of our management arrangements with third parties as we transition to new operators our interim
management on formerly owned or leased communities and our management on certain former unconsolidated ventures in which
we sold our interest. Termination, early or otherwise, or non-renewal of, or renewal on less-favorable terms, of our management
arrangements will 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, which could negatively impact our revenues, results of operations and cash flow.
We have a high concentration of communities in various geographic areas, including the states of California, Florida and Texas.
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 and memory care 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, results of
operations and cash flow. In addition, given the location of our communities, we are particularly susceptible to revenue loss, cost
increase or damage caused by severe weather conditions or natural disasters such as hurricanes, wildfires, earthquakes or tornados.
Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase in the cost of insurance.
Termination of our resident agreements and vacancies in the living spaces we lease could adversely affect our occupancy,
revenues, results of operations and cash flow.
State regulations governing assisted living and memory care 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 and memory care 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 and memory care residents to stay in those living spaces for longer periods of time. Our independent
living 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 occupancy, revenues, results of operations and cash flow 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
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difficult to predict. As a result, the living spaces we lease may be unoccupied for a period of time, which could adversely affect
our occupancy, revenues, results of operations and cash flow.
The inability of seniors to sell real estate may delay their moving into our communities, which could negatively impact our
occupancy rates, revenues, results of operations and cash flow.
Downturns in the housing markets could adversely affect the ability (or perceived ability) of seniors to afford our resident fees
and entrance 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 or their homes' values decrease, these difficulties could impact their ability to
relocate into our communities or finance their stays at our communities with private resources. A downturn in the housing market
could be initiated or exacerbated by a rising interest rate environment. If national or local housing markets experience protracted
volatility, our occupancy rates, revenues, results of operations and cash flow could be negatively impacted.
The transition of management or unexpected departure of our key officers could harm our business.
We are dependent on the efforts of our senior management. During the past several years we have undergone changes in our senior
management and may in the future experience further changes. The transition of management, the unforeseen loss or limited
availability of the services of any of our executive leaders, 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.
Our execution of our strategy may not be successful, and initiatives undertaken to execute on our strategic priorities may
adversely affect our business, financial condition, results of operations, cash flow and the price of our common stock.
The success of our strategy depends on our ability to successfully identify and implement initiatives to execute on our strategic
priorities, as well as factors outside of our control. Such initiatives may not be successful in achieving our expectations or may
require more time and resources than expected to implement. There can be no assurance that our strategy or initiatives undertaken
to execute on our strategic priorities will be successful and, as a result, such initiatives may adversely affect our business, financial
condition, results of operations, cash flow and the price of our common stock.
Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources and
have an adverse effect on our business, results of operations and cash flow and the market price of our common stock.
We value constructive input from our stockholders and engage in dialogue with our stockholders regarding our governance practices,
strategy and performance. However, activist stockholders may disagree with the composition of our Board of Directors or
management, our strategy or capital allocation decisions and may seek to effect change through various strategies that range from
private engagement to public campaigns, proxy contests, efforts to force proposals or transactions not supported by our Board of
Directors and litigation. Responding to these actions may be costly and time-consuming, disrupt our operations, divert the attention
of our Board of Directors, management and our associates and interfere with our ability to pursue our strategy and to attract and
retain qualified Board and executive leadership. The perceived uncertainty as to our future direction that may result from actions
of activist stockholders may also negatively impact our ability to attract and retain residents at our communities. We cannot
provide assurance that constructive engagement with our stockholders will be successful. Any such stockholder activism may
have an adverse effect on our business, results of operations and cash flow and the market price of our common stock.
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 financial condition, results of operations
and cash flow.
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
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release or disposal was in compliance with law at the time it occurred. Although we do not believe that we have incurred such
liabilities as would have a material adverse effect on our business, financial condition and results of operations, we could be subject
to substantial future liability for environmental contamination that we have no knowledge about as of the date of this report and/
or for which we may not be at fault.
Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our
business and in our asset value, which would have an adverse effect on our financial condition, results of operations and cash
flow.
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 financial
condition, results of operations and cash flow.
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.
Significant legal actions and liability claims against us could subject us to increased operating costs and substantial uninsured
liabilities, which may adversely affect our financial condition and results of operations.
We have been and are currently involved in litigation and claims, including putative class action claims from time to time, incidental
to the conduct of our business which are generally 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. As a result, we
maintain general liability and professional liability insurance policies in amounts and with coverage and deductibles we believe
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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 and for claims or portions of claims that are not covered by such policies. If we experience
a greater number of losses than we anticipate, or if certain claims are not ultimately covered by insurance, our results of operations
and financial condition could be adversely affected.
The senior living and healthcare services businesses entail an inherent risk of liability, particularly given the demographics of our
residents and patients, 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 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, which could subject us to substantial uninsured liabilities.
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, our insurance policies’ deductibles, or self-insured retention, are accrued based on an actuarial projection of
future liabilities. If these projections are inaccurate and if there is 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.
We face periodic and routine reviews, audits and investigations by government agencies, and any adverse findings could
negatively impact our business, financial condition, results of operations and cash flow.
The senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in
reviews, audits, investigations, enforcement actions or litigation related to regulatory compliance matters. In addition, we are
subject to various government reviews, audits and investigations to verify our compliance with Medicare and Medicaid programs
and other applicable laws and regulations. CMS has engaged a number of third party firms, including Recovery Audit Contractors
(RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC), to conduct extensive
reviews of claims data to evaluate the appropriateness of billings submitted for payment. Audit contractors may identify
overpayments based on coverage requirements, billing and coding rules or other risk areas. In addition to identifying overpayments,
audit contractors can refer suspected violations of law to government enforcement authorities. An adverse determination of
government reviews, audits and investigations may result in citations, sanctions and other criminal or civil fines and penalties,
the refund of overpayments, payment suspensions, termination of participation in Medicare and Medicaid programs, and/or damage
to the Company's business reputation. Our costs to respond to and defend any such audits, reviews and investigations may be
significant and are likely to increase in the current enforcement environment, and any resulting sanctions or criminal, civil or
regulatory penalties could have a material adverse effect on our business, financial condition, results of operations and cash flow.
The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect
on our business, results of operations and cash flow.
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 there are different levels of care that can be provided based on the level of licensure. In addition, in several of the states in
which we operate or intend to operate, assisted living and memory care communities, home health and hospice agencies and/or
skilled nursing facilities require a certificate of need before the community or agency can be opened or the services at an existing
community can be expanded. 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. See “Item 1. Business-
Government Regulation” for more information regarding regulation and enforcement in our industry.
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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. 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 business, results of
operations and cash flow could be adversely affected.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of
inspections or surveys by governmental authorities and consequent citations for failure to comply with regulatory requirements.
We also expend considerable resources to respond to federal and state investigations or other enforcement action. From time to
time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such
inspections or surveys. Although most inspection deficiencies are resolved through a plan of corrective action, the reviewing
agency may have 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 reimbursement 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 default under our debt and lease documents and/or trigger cross-defaults. The failure to
comply with applicable legal and regulatory requirements 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 healthcare 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 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, since we provide services and operate communities that participate in federal and/or state healthcare reimbursement
programs, 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. Violation of any of these laws can result in loss of licensure, citations, sanctions and other criminal or civil
fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid
programs, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by healthcare 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 healthcare 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 reimbursement programs, which may also cause us to default under our debt and lease documents
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 results of operations
and financial condition.
Certain of our communities, or portions thereof, are subject to compliance 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.
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We must also comply with the Fair Housing Act, which prohibits us from discriminating against individuals on certain bases in
any of our practices if it would cause such individuals to face barriers in gaining residency in any of our communities. Additionally,
the Fair Housing Act and other state laws require that we advertise our services in such a way that we promote diversity and not
limit it. We may be required, among other things, to change our marketing techniques to comply with these requirements.
In addition, we are required to operate our communities in compliance with applicable fire and safety regulations, building codes
and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies
and bodies from time to time. Like other healthcare 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.
Following Hurricane Irma, legislation was adopted in the State of Florida in March 2018 that requires skilled nursing homes and
assisted living communities in Florida to obtain generators and fuel necessary to sustain operations and maintain comfortable
temperatures in the event of a power outage. We have made and will be required to make in 2019 an aggregate commitment of
$18.3 million to comply with these requirements. If other states or jurisdictions were to adopt similar legislation or regulation, the
cost to comply with such requirements may be substantial.
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 results of operations and financial condition.
Risks Related to Our Organization and Structure
Anti-takeover provisions in our organizational documents may discourage, delay or prevent a merger or acquisition that
investors may consider favorable or prevent the removal of our current board of directors.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws may discourage,
delay or prevent a merger or acquisition that investors may consider favorable or prevent the removal of our current board of
directors. Among these anti-takeover provisions is the classified structure of our Board of Directors pursuant to which our Board
is divided into three classes of directors and each of our directors elected at or prior to the 2018 annual meeting of stockholders
was elected to serve a three-year term. Although we are in the process of phasing out our classified board structure, our full Board
will not begin standing for annual elections until the 2021 annual meeting of stockholders. Further, until the 2021 annual meeting
of stockholders, directors may be removed from office only for cause. Additional anti-takeover provisions in our organizational
documents that will hinder takeover attempts include:
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blank-check preferred stock;
provisions preventing stockholders from calling special meetings or acting by written consent;
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, distributions 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, stockholders may be unable to resell their shares at or above their purchase price. The market price
of our common stock may 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:
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variations in our quarterly results of operations and cash flow;
changes in our operating performance and liquidity guidance;
the contents of published research reports about us or the senior living, healthcare or real estate industries 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, healthcare or real estate
industries in general;
proxy contests or other shareholder activism;
increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
downturns in the real estate market or changes in market valuations of senior living communities;
changes or proposed changes in laws or regulations affecting the senior living and healthcare industries or enforcement of
these laws and regulations, or announcements relating to these matters; and
general market and economic conditions.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, 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 shareholdings 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) without any action or approval by our stockholders. We may issue shares of common
stock in connection with development, investment and acquisition opportunities, including acquisitions of senior living
communities and operating companies. 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, 2018, approximately 186.6 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, 2018, approximately 5.8 million shares of restricted common stock were outstanding under our
2014 Omnibus Incentive Plan, and we had availability to issue approximately 8.9 million additional shares under our 2014 Omnibus
34
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. Any such annual limitations may result in our being unable to utilize all of
our net operating loss carryforwards generated in tax years prior to 2018 before their expiration.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Communities
As of December 31, 2018, we operated and managed 892 communities across 45 states, with the capacity to serve approximately
84,000 residents. As of December 31, 2018, we owned 344 communities, leased 343 communities, managed 18 communities on
behalf of unconsolidated ventures, and managed 187 communities on behalf of third parties. Substantially all of our owned
communities are subject to mortgages. The following table sets forth certain information regarding our owned, leased and managed
communities as of December 31, 2018. Occupancy data includes the impact of managed communities.
Number of Communities
State
Florida
Texas
California
Colorado
Ohio
North Carolina
Illinois
Washington
Oregon
Arizona
New York
Michigan
Tennessee
South Carolina
Kansas
Massachusetts
Georgia
Pennsylvania
New Jersey
Virginia
Alabama
Missouri
Indiana
Units
Occupancy
Owned
Leased
13,129
10,482
10,161
4,371
3,565
3,491
3,179
2,809
2,503
2,347
2,167
2,118
1,815
1,544
1,264
1,263
1,208
1,204
1,148
1,146
1,134
1,096
1,091
82%
84%
83%
82%
81%
87%
89%
90%
90%
87%
78%
83%
92%
78%
92%
79%
86%
86%
88%
86%
88%
89%
77%
35
44
58
26
11
21
7
2
14
8
14
16
9
12
5
8
3
5
7
7
7
6
2
4
32
19
27
13
16
50
10
19
15
13
9
23
10
7
11
3
3
3
5
3
—
—
8
Managed
25
26
33
14
6
1
4
—
10
1
4
1
5
10
1
4
9
1
1
2
2
3
1
Total
101
103
86
38
43
58
16
33
33
28
29
33
27
22
20
10
17
11
13
12
8
5
13
State
Oklahoma
Rhode Island
Minnesota
Connecticut
Wisconsin
Kentucky
Idaho
Maryland
Arkansas
Louisiana
New Mexico
Nevada
Mississippi
Nebraska
Utah
Montana
Delaware
Iowa
Vermont
West Virginia
New Hampshire
Wyoming
Total
Corporate Offices
Number of Communities
Units
Occupancy
Owned
Leased
1,005
907
836
828
760
692
605
560
494
486
457
408
386
379
368
238
199
106
101
93
90
46
84,279
89%
77%
75%
68%
87%
75%
92%
91%
86%
85%
72%
83%
80%
91%
69%
92%
76%
69%
92%
95%
81%
81%
84%
3
1
—
2
5
1
7
2
4
6
2
4
5
—
—
1
2
—
1
1
1
—
344
16
2
12
3
7
1
1
1
—
—
1
—
—
—
—
—
—
—
—
—
—
—
343
Managed
5
4
4
3
3
3
—
3
1
—
1
1
—
4
4
2
1
1
—
—
—
1
205
Total
24
7
16
8
15
5
8
6
5
6
4
5
5
4
4
3
3
1
1
1
1
1
892
Our main corporate offices are leased, including our 143,065 square foot headquarters facility in Brentwood, Tennessee and our
156,016 square foot shared service facility in Milwaukee, Wisconsin. During 2018, we eliminated our smaller regional support
offices.
Item 3.
Legal Proceedings.
The information contained in Note 18 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report
on Form 10-K is incorporated herein by reference.
Item 4.
Mine Safety Disclosures.
Not applicable.
36
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". As of February 12, 2019,
there were approximately 364 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 anticipate deploying capital resources to fund our planned capital expenditures, our
plans to expand our healthcare services to additional residents and seniors living outside of our communities, and to reduce our
debt and lease leverage. 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 strategy, our ability to negotiate favorable lease and other contractual terms,
anticipated operating expense levels, our capital expenditure plans, 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. 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.
37
Share Price Performance Graph
The following graph compares the five-year cumulative total return for Brookdale common stock with the comparable cumulative
return of the S&P 500 index and the S&P Health Care Index. The graph assumes that a person invested $100 in Brookdale stock
and each of the indices on December 31, 2013 and that dividends are reinvested. The comparisons in this graph are not intended
to forecast or be indicative of possible future performance of Brookdale shares or such indices.
Brookdale Senior Living Inc.
$
100.00
$
134.92
$
67.92
$
45.70
$
35.69
$
S&P 500
S&P Health Care
100.00
100.00
113.69
125.34
115.26
133.97
129.05
130.37
157.22
159.15
12/13
12/14
12/15
12/16
12/17
12/18
24.65
150.33
169.44
The performance graph and related information shall not be deemed to be filed as part of this Annual Report on Form 10-K and
do not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing by the Company
under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates them by reference
into such filing.
Recent Sales of Unregistered Securities
None.
38
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information regarding purchases of our common stock made during the quarter ended December 31,
2018 by or on behalf of the Company or any ''affiliated purchaser,'' as defined by Rule 10b-18(a)(3) of the Exchange Act:
Total
Number of
Shares
Purchased (1)
—
13,658
1,296,394
1,310,052
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs (2)
Approximate Dollar
Value of
Shares that May Yet Be
Purchased Under the
Plans or Programs ($ in
thousands) (2)
Average
Price Paid
per Share ($)
—
7.67
6.64
6.65
—
—
1,280,802
1,280,802
90,360
90,360
81,860
Period
10/1/2018 - 10/31/2018
11/1/2018 - 11/30/2018
12/1/2018 - 12/31/2018
Total
(1) Includes 1,280,802 shares purchased in open market transactions pursuant to the publicly announced repurchase program
summarized in footnote (2) below and the following number of shares withheld to satisfy tax liabilities due upon the vesting
of restricted stock: November 2018 - 13,658 shares and December 2018 - 15,592 shares. The average price paid per share for
such share withholding is based on the closing price per share on the vesting date of the restricted stock or, if such date is not
a trading day, the trading day immediately prior to such vesting date.
(2) On November 1, 2016, the Company announced that its Board of Directors had approved a share repurchase program that
authorizes the Company to purchase up to $100.0 million in the aggregate of its common stock. The share repurchase program
is intended to be implemented through purchases 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 such 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, 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. As of December 31, 2018, approximately
$81.9 million remained available under the repurchase program.
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, 2018 have been derived from our audited
financial statements. The results of operations for any particular period are not necessarily indicative of results for any future
period.
Our results reflect our acquisition by merger of Emeritus Corporation subsequent to July 31, 2014, the closing date of the transaction.
At the closing of the transaction, the size of our consolidated portfolio increased by 493 communities (44,349 units). On August
29, 2014, we completed several transactions with HCP, including our entering into an unconsolidated venture (the "CCRC Venture")
with HCP in which we obtained a 51% ownership interest and to which we contributed all but two of our legacy Brookdale entry
fee CCRCs, our entering into an unconsolidated venture (the "HCP 49 Venture") with HCP in which we obtained a 20% ownership
interest and to which HCP contributed 49 communities leased and historically operated by Emeritus, and our amending and restating
the terms of certain existing triple-net leases between us and HCP (including those acquired in the Emeritus merger). 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 subsequent to such date.
We completed dispositions, through sales and lease terminations, of 111 communities (10,848 units), 108 communities (10,325
units) and 57 communities (4,039 units) during the years ended December 31, 2018, 2017 and 2016, respectively. See Note 4 to
the consolidated financial statements for more information regarding our disposition and other transaction activity.
39
(in thousands, except per share and other
operating data)
2018
For the Years Ended December 31,
2015
2016
2017
2014
Total revenue
$ 4,531,426
$ 4,747,116
$ 4,976,980
$ 4,960,608
$ 3,831,706
Facility operating expense
2,453,328
2,602,155
2,799,402
2,788,862
2,210,368
General and administrative expense
Transaction costs
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment (1)
Loss on facility lease termination and
modification, net
Costs incurred on behalf of managed
communities
Total operating expense
Income (loss) from operations
Interest income
Interest expense
Debt modification and extinguishment costs
Equity in (loss) earnings of unconsolidated
ventures
Gain on sale of assets, net
Other non-operating income
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Net (income) loss attributable to
noncontrolling interest
Net income (loss) attributable to Brookdale
Senior Living Inc. common stockholders
Basic and diluted net income (loss) per share
attributable to Brookdale Senior Living Inc.
common stockholders
Weighted average shares of common stock
used in computing basic and diluted net
income (loss) per share
Other Operating Data:
Number of communities operated and
managed (at end of period)
Total units operated and managed
250,495
8,980
303,294
447,455
489,893
255,446
22,573
339,721
482,077
409,782
313,409
3,990
373,635
520,402
248,515
370,579
8,252
367,574
733,165
57,941
280,267
66,949
323,830
537,035
9,992
162,001
14,276
11,113
76,143
—
1,010,229
5,125,675
(594,249)
9,846
(280,269)
(11,677)
(8,804)
293,246
14,099
(577,808)
49,456
(528,352)
891,131
737,597
723,298
488,170
5,017,161
(270,045)
4,623
(326,154)
(12,409)
(14,827)
19,273
11,418
(588,121)
16,515
(571,606)
5,008,063
(31,083)
2,933
(385,617)
(9,170)
1,660
7,218
14,801
(399,258)
(5,378)
(404,636)
5,125,814
(165,206)
1,603
(388,764)
(7,020)
(804)
1,270
8,557
(550,364)
92,209
(458,155)
3,916,611
(84,905)
1,343
(248,188)
(6,387)
171
446
6,789
(330,731)
181,305
(149,426)
94
187
239
678
436
$ (528,258)
$ (571,419)
$ (404,397)
$ (457,477)
$ (148,990)
$
(2.82)
$
(3.07)
$
(2.18)
$
(2.48)
$
(1.01)
187,468
186,155
185,653
184,333
148,185
892
1,023
1,055
1,123
1,143
Period end
Weighted average
RevPAR (2)
Owned/leased communities occupancy rate
(weighted average)
RevPOR (3)
84,279
94,562
3,972
84.3%
4,712
$
$
100,582
101,779
3,890
85.0%
4,578
102,768
106,122
3,845
86.0%
4,468
107,786
109,342
3,742
86.8%
4,310
$
$
$
$
110,219
84,299
2,663
88.3%
4,357
$
$
$
$
(1) During the year ended December 31, 2018, we recorded $489.9 million of non-cash impairment charges. The impairment
charges included $351.7 million of goodwill within the Assisted Living and Memory Care segment, $78.0 million of
property, plant and equipment and leasehold intangibles for certain communities, $33.4 million related to investments in
unconsolidated ventures, $15.6 million related to assets held for sale, and $9.1 million of intangible assets for health care
licenses within the Health Care Services segment. During the year ended December 31, 2017, we recorded impairment
40
charges of $409.8 million, primarily for goodwill within the Assisted Living and Memory Care segment and property,
plant and equipment and leasehold intangibles for certain communities. During the year ended December 31, 2016, we
recorded impairment charges of $248.5 million, primarily for property, plant and equipment and leasehold intangibles
for certain communities. See Note 5 to the consolidated financial statements for more information regarding our
impairment charges.
(2) RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as
resident fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the
corresponding portfolio for the period, divided by the weighted average number of available units in the corresponding
portfolio for the period, divided by the number of months in the period.
(3) RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as
resident fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the
corresponding portfolio for the period, divided by the weighted average number of occupied units in the corresponding
portfolio for the period, divided by the number of months in the period.
(in millions)
Cash and cash equivalents
Marketable securities
Total assets
Total long-term debt and line of credit
Total capital and financing lease obligations
Total equity
As of December 31,
2018
2017
2016
2015
2014
$
$
$
$
$
$
398.3
14.9
6,467.3
3,640.2
874.5
1,018.4
$
$
$
$
$
$
222.6
291.8
7,675.4
3,870.7
1,271.6
1,530.3
$
$
$
$
$
$
216.4
$
— $
9,217.7
3,559.6
2,485.5
2,077.7
$
$
$
$
88.0
$
— $
10,048.6
3,942.8
2,489.6
2,458.7
$
$
$
$
104.1
—
10,417.5
3,597.0
2,649.2
2,882.2
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 this section and "Item 1A. Risk
Factors" of this Annual Report on Form 10-K.
As of December 31, 2018, we had five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs;
Health Care Services; and Management Services. Prior to this Annual Report on Form 10-K, we referred to the Independent
Living segment as our Retirement Centers segment, the Assisted Living and Memory Care segment as our Assisted Living segment,
and the Health Care Services segment as our Brookdale Ancillary Services segment. The name changes had no effect on the
underlying methodology related to, or results of operations of, our segments.
Executive Overview and Recent Developments
Our Business
As of December 31, 2018, we are the largest operator of senior living communities in the United States based on total capacity,
with 892 communities in 45 states and the ability to serve approximately 84,000 residents. We offer our residents access to a full
continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living,
assisted living, memory care and continuing care retirement communities ("CCRCs"). We also offer a range of home health,
hospice and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities.
We believe that we operate in the most attractive sectors of the senior living industry, and our goal is to be the first choice in senior
living by being the nation’s most trusted and effective senior living provider and employer. With our range of community and
service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time. Our community
and service offerings combine housing with hospitality and healthcare services. Our senior living communities offer residents a
supportive home-like setting, assistance with activities of daily living ("ADL") such as eating, bathing, dressing, toileting and
41
transferring/walking and, in certain communities, licensed skilled nursing services. We also provide home health, hospice and
outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. 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, which we believe enables them to 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.
Strategy
Our strategy is to win locally by providing choices for high quality care and personalized service by caring associates while
leveraging our industry-leading scale and experience. We believe that successfully executing on our strategy will improve our
operations and provide attractive long-term returns to our stockholders. Our strategy is focused on three priorities:
• Associates. Brookdale’s culture is based on servant leadership, and our associates are the key to attracting and caring for
residents and patients and improving our operations. Through this strategic priority, we intend to attract, engage, develop and
retain the best associates by maintaining a compelling value proposition in the areas of compensation, leadership, career
growth and meaningful work. We continue to execute on our three-year plan initiated in 2017 to invest above the industry to
improve our associate total rewards program and our performance management, training and development program for our
community leaders and staff. We believe engaged associates lead to an enhanced resident experience and lower turnover,
leading to improved operations.
• Residents, Patients and Their Families. Brookdale continues to be driven by its mission-to enrich the lives of those we serve
with compassion, respect, excellence and integrity. We believe that earning the trust of our residents, patients and their families
will allow us to build relationships that create passionate advocates and generate referrals. Through this strategic priority, we
intend to provide excellent customer service and expand referral development programs in order to earn the trust of our
customers and the communities in which we operate and ultimately increase our move-ins and reduce our controllable move-
outs.
• Winning Locally and Leveraging Scale Effectively. We intend to win locally while also leveraging our scale. With this priority,
we are committed to completing our community-level capital expenditures as planned, maintaining the quality of our
communities and their operations, and aligning our sales, marketing and operations teams to drive top line performance. We
also are executing on plans to improve our sales process, to prioritize communities with the most opportunities for
improvements and to ensure that our communities are ready for new competition.
In the near term, we plan to focus on our operations improvement and the expansion of our healthcare services to residents and
seniors living outside of our communities. We also plan to make significant additional near-term investments in our communities,
including increased spend attributable to major building infrastructure projects, in order to ensure that our communities are in
appropriate physical condition to support our strategy and to protect the value of our community portfolio. We also plan to complete
our remaining real estate transactions announced in 2018. This plan includes the terminations of management arrangements on
communities that we previously leased or managed on behalf of former unconsolidated ventures and exercising our options to
cause terminations of our triple-net lease obligations on communities with annual base rent of up to $35 million. We will also
continue to invest in our Program Max initiative through which we expand, renovate, reposition or redevelop selected existing
senior living communities.
Over the longer term, we plan to further invest for growth and opportunistically return capital to stockholders while maintaining
a strong balance sheet. We plan to explore additional products and services that we may offer to our residents and, where
opportunities arise, pursue development, investment and acquisition opportunities such as selective acquisitions of senior living
communities and operating companies. Any such activity may be pursued on our own or through venture investments with third
parties. In addition, we will continue to evaluate our owned and leased community portfolios for opportunities to better align our
communities to our strategy.
We believe that our successful execution on these strategic priorities and our longer-term plans will allow us to achieve our goal
to be the first choice in senior living by being the nation’s most trusted and effective senior living provider and employer.
Portfolio Optimization and Other Transaction Updates
Overview
During 2016 through 2018 we undertook an initiative to optimize our community portfolio under which we disposed of owned
and leased communities and restructured leases in order to simplify and streamline our business, to increase the quality and
42
durability of our cash flow, to improve our liquidity, and to reduce our debt and lease leverage. Further, in 2018 we evaluated our
owned-community portfolio for opportunities to monetize select high-value communities.
From 2016 through 2018, we disposed of an aggregate of 75 owned communities (5,396 units) as a result of these initiatives and
other transactions (50 in 2016, 3 in 2017 and 22 in 2018). We also entered into agreements with our largest lessors that restructured
a significant portion of our triple-net lease obligations. As a result of the transactions with HCP, Inc. (“HCP”) announced in 2016
and 2017 and Ventas, Inc. (“Ventas”) and Welltower Inc. (“Welltower”) announced in 2018, as well as other lease expirations and
terminations, our triple-net lease obligations on an aggregate of 201 communities (19,816 units) were terminated from 2016 to
2018 (7 in 2016, 105 in 2017 and 89 in 2018). During this period we also sold our ownership interests in seven unconsolidated
ventures and acquired six communities that we previously leased or managed. As of December 31, 2018, we owned 344 communities
(31,869 units), leased 343 communities (24,623 units), managed 18 communities (7,426 units) on behalf of unconsolidated ventures,
and managed 187 communities (20,361 units) on behalf of third parties.
During the year ending December 31, 2019, we expect to close on the dispositions of 13 owned communities (1,686 units) classified
as held for sale as of December 31, 2018. For the year we also anticipate terminations of our management arrangements with third
parties as we transition to new operators our interim management on formerly owned or leased communities and our management
on certain former unconsolidated ventures in which we sold our interest. The closings of the various pending and expected
transactions are, or will be, subject to the satisfaction of various closing conditions, including (where applicable) the receipt of
regulatory approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings
will occur.
Summaries of the foregoing transactions, and their impact on our results of operations, are below. See also Note 4 to the consolidated
financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the
transactions.
2018 Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018, we announced that we had entered into definitive agreements with Welltower. The components of the agreements
include:
•
Lease Terminations. The Company and Welltower agreed to early termination of our triple-net lease obligations on 37
communities (4,095 units) effective June 30, 2018. The communities were part of two lease portfolios due to mature in 2028
(27 communities; 3,175 units) and 2020 (10 communities; 920 units). We paid Welltower an aggregate lease termination fee
of $58.0 million. We agreed to manage the foregoing 37 communities on an interim basis until the communities have been
transitioned to new managers, and such communities are reported in the Management Services segment during such interim
period. We recognized a $22.6 million loss on lease termination during the year ended December 31, 2018 for the amount by
which the aggregate lease termination fee exceeded the net carrying value of our assets and liabilities under operating and
capital leases as of the lease termination date.
• Future Lease Terminations. The parties separately agreed to allow us to terminate leases with respect to, and to remove from
the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up to $5.0 million upon
Welltower's sale of such communities, and we would receive a corresponding 6.25% rent credit on Welltower's disposition
proceeds.
• RIDEA Restructuring. We sold our 20% equity interest in our Welltower RIDEA venture to Welltower effective June 30, 2018
for net proceeds of $33.5 million (for which we recognized a $14.7 million gain on sale). We agreed to continue to manage
the communities in the venture on an interim basis until the communities have been transitioned to new managers, and such
communities are reported in the Management Services segment during such interim period.
We also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities; 1,128
units). After conclusion of the foregoing lease expirations, we continue to operate 74 communities (3,683 units) under triple-net
leases with Welltower, and our remaining lease agreements with Welltower contain an objective change of control standard that
allows us to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject to
the satisfaction of certain conditions.
2018 Ventas Lease Portfolio Restructuring
On April 26, 2018, we entered into several agreements to restructure a portfolio of 128 communities (10,567 units) we leased from
Ventas as of such date, including a Master Lease and Security Agreement (the "Ventas Master Lease"). The Ventas Master Lease
43
amended and restated prior leases comprising an aggregate portfolio of 107 communities (8,459 units) into the Ventas Master
Lease. Under the Ventas Master Lease and other agreements entered into on April 26, 2018, the 21 additional communities (2,107
units) leased by us from Ventas pursuant to separate lease agreements have been or will be combined automatically into the Ventas
Master Lease upon the first to occur of Ventas' election or the repayment of, or receipt of lender consent with respect to, mortgage
debt underlying such communities (17 of which have been and four will be combined into the Ventas Master Lease). We and
Ventas agreed to observe, perform and enforce such separate leases as if they had been combined into the Ventas Master Lease
effective April 26, 2018, to the extent not in conflict with any mortgage debt underlying such communities. The transaction
agreements with Ventas further provide that the Ventas Master Lease and certain other agreements between us and Ventas will be
cross-defaulted.
The initial term of the Ventas Master Lease ends December 31, 2025, with two 10-year extension options available to us. In the
event we consummate a change of control transaction on or before December 31, 2025, the initial term of the Ventas Master Lease
will be extended automatically through December 31, 2029. The Ventas Master Lease and separate lease agreements with Ventas,
which are guaranteed at the parent level by us, provided for total rent in 2018 of $175.0 million for the 128 communities, including
the pro-rata portion of an $8.0 million annual rent credit for 2018. We will receive an annual rent credit of $8.0 million in 2019,
$7.0 million in 2020 and $5.0 million thereafter; provided, that we consummate a change of control transaction prior to 2021, the
annual rent credit will be reduced to $5.0 million. Effective on January 1, 2019 and in succeeding years, the annual minimum rent
is subject to an escalator equal to the lesser of 2.25% or four times the Consumer Price Index ("CPI") increase for the prior year
(or zero if there was a CPI decrease).
The Ventas Master Lease requires us to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month period
commencing with the 24-month period ending December 31, 2019 and thereafter each 24-month period ending December 31
during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the
first extension term (if any). If we consummate a change of control transaction, we will be required within 36 months following
the closing of such transaction to invest (or escrow with Ventas) an aggregate of $30.0 million in the communities for revenue-
enhancing capital projects.
Under the definitive agreements with Ventas, we, at the parent level, must satisfy certain financial covenants (including tangible
net worth and leverage ratios) and may consummate a change of control transaction without the need for consent of Ventas so
long as certain objective conditions are satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum
tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior
living industry, and paying a change of control fee of $25.0 million to Ventas.
At our option, which must be exercised on or before April 26, 2019, we may provide notice to Ventas of our election to direct
Ventas to market for sale one or more communities with up to approximately $30.0 million of annual minimum rent. Upon receipt
of such notice, Ventas will be obligated to use commercially reasonable, diligent efforts to sell such communities on or before
December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to sell any such community
will be subject to Ventas' receiving a purchase price in excess of a minimum sale price to be mutually agreed by us and Ventas
and to certain other customary closing conditions. Upon any such sale, such communities will be removed from the Ventas Master
Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the amount of the net sale proceeds received
by Ventas multiplied by 6.25%.
We recognized a $125.7 million non-cash loss on lease modification in the year ended December 31, 2018, primarily for the
extensions of the triple-net lease obligations for communities with lease terms that are unfavorable to us given current market
conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant
provisions of the community leases.
2017 HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, we announced that we had entered into a definitive agreement for a multi-part transaction with HCP. As
part of such transaction, we entered into an Amended and Restated Master Lease and Security Agreement (“HCP Master Lease”)
with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
• Master Lease Transactions. We and HCP amended and restated triple-net leases covering substantially all of the communities
we leased from HCP as of November 1, 2017 into the HCP Master Lease. During the year ended December 31, 2018, we
acquired two communities formerly leased (208 units) for an aggregate purchase price of $35.4 million and leases with respect
to 33 communities (3,123 units) were terminated, and such communities were removed from the HCP Master Lease, which
completed the terminations of leases as provided in the HCP Master Lease. We agreed to manage communities for which
leases were terminated on an interim basis until the communities have been transitioned to new managers, and such communities
44
are reported in the Management Services segment during such interim period. We continue to lease 43 communities pursuant
to the terms of the HCP Master Lease, which have the same lease rates and expiration and renewal terms as the applicable
prior instruments, except that effective January 1, 2018, we received a $2.5 million annual rent reduction for two communities.
The HCP Master Lease also provides that we may engage in certain change in control and other transactions without the need
to obtain HCP's consent, subject to the satisfaction of certain conditions.
• RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, HCP acquired our 10% ownership interest
in one of our RIDEA ventures with HCP in December 2017 for $32.1 million (for which we recognized a $7.2 million gain
on sale) and our 10% ownership interest in the remaining RIDEA venture with HCP in March 2018 for $62.3 million (for
which we recognized a $41.7 million gain on sale). We provided management services to 59 communities (9,585 units) on
behalf of the two RIDEA ventures as of November 1, 2017. Pursuant to the multi-part transaction agreement, we acquired
one community (137 units) for an aggregate purchase price of $32.1 million in January 2018 and three communities (650
units) for an aggregate purchase price of $207.4 million in April 2018 and retained management of 18 of such communities
(3,276 units). The amended and restated management agreements for such 18 communities have a term set to expire in 2030,
subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management
of 37 of such communities. Management agreements for 31 such communities (4,849 units) were terminated by HCP during
the year ended December 31, 2018 (for which we recognized an $8.7 million non-cash management contract termination
gain) and we expect the termination of management agreements on the remaining six communities (673 units) to occur during
2019.
We financed the foregoing community acquisitions with non-recourse mortgage financing and proceeds from the sales of our
ownership interest in the unconsolidated ventures. See Note 9 to the consolidated financial statements contained in "Item 8.
Financial Statements and Supplementary Data" for more information regarding the non-recourse first mortgage financing.
Blackstone Venture
On March 29, 2017, we and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture
(the "Blackstone Venture") that acquired 64 senior housing communities for a purchase price of $1.1 billion. We had previously
leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12
years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases, and
we contributed our leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest
in the Blackstone Venture, terminate leases, and fund our share of closing costs. As of the formation date, we continued to operate
two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a
management agreement with the venture. Two of the communities were managed by a third party for the venture.
During the third quarter of 2018, leases for the two communities owned by the Blackstone Venture were terminated, and we sold
our 15% equity interest in the Blackstone Venture to Blackstone. We paid Blackstone an aggregate fee of $2.0 million to complete
the multi-part transaction.
2016 HCP Agreements
On November 1, 2016, we announced that we had entered into agreements to, among other things, terminate triple-net leases with
respect to 97 communities that we leased from HCP, four of which were contributed to an existing unconsolidated venture in which
we held an equity interest and 64 of which were acquired by the Blackstone Venture described above. In addition to the formation
of the Blackstone Venture, the transactions included the following components with respect to 33 communities:
• We and HCP agreed to terminate triple-net leases with respect to eight communities (867 units). HCP agreed to contribute
immediately thereafter four of such communities, consisting of 527 units, to an existing unconsolidated venture with HCP in
which we held a 10% equity interest. During the three months ended December 31, 2016, the triple-net leases with respect
to seven communities (773 units) were terminated and HCP contributed four of the communities to the existing unconsolidated
venture. The triple-net lease with respect to the remaining community was terminated during January 2017.
• We and HCP agreed to terminate triple-net leases with respect to 25 communities (2,031 units). During the year ended December
31, 2017, our triple-net lease obligations with respect to such communities were terminated. We agreed to manage communities
for which leases were terminated on an interim basis until the communities were transitioned to new managers, and such
communities were reported in the Management Services segment during such interim period.
45
Completed and Planned Dispositions of Owned Communities
During the year ended December 31, 2018, we completed the sale of 22 owned communities (1,819 units) for cash proceeds of
$380.7 million, net of transaction costs. Nineteen of such dispositions were part of our plan announced in 2018, including the sale
of Brookdale Battery Park on November 1, 2018 for which we received proceeds of approximately $144 million, net of associated
debt and transaction costs, and the sale of 18 other communities on December 20, 2018 for which we received proceeds of
approximately $49 million, net of associated debt and transaction costs.
During the year ended December 31, 2017, we completed the sale of three owned communities (311 units) for cash proceeds of
$8.2 million net of associated transaction costs, and during the year ended December 2016 we completed the sale of 50 owned
communities (3,266 units) for cash proceeds of $297.9 million net of associated transaction costs.
As of December 31, 2018, 13 communities (1,686 units) were classified as held for sale, resulting in $93.1 million being recorded
as assets held for sale and $31.2 million of mortgage debt being included in the current portion of long-term debt within the
consolidated balance sheet with respect to such communities. This debt will either be repaid with the proceeds from the sales or
be assumed by the prospective purchasers. Assets held for sale as of December 31, 2018 include several communities under
contract, and we continue to market several other communities, as part of our real estate strategy announced in 2018 to sell owned
communities generating an aggregate of more than $250 million of proceeds, net of associated debt and transaction costs.
Summary of Completed and Planned Dispositions
The following tables set forth, for the periods indicated, the amounts included within our consolidated financial data for the 276
communities that we disposed through sales and lease terminations for the years ended December 31, 2018 and 2017 and 2016
through the respective disposition dates:
(in thousands)
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing resident fees
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing facility operating expense
Year Ended December 31, 2018
Amounts
Attributable to
Completed
Dispositions
Actual Results
Less Amounts
Attributable to
Completed
Dispositions
Actual Results
$
599,977
$
81,280
$
1,995,851
416,408
3,012,236
359,368
1,366,869
324,196
2,050,433
205,241
15,965
302,486
48,154
145,106
14,542
207,802
518,697
1,790,610
400,443
2,709,750
311,214
1,221,763
309,654
1,842,631
379,124
Cash lease payments
$
457,388
$
78,264
$
46
Cash lease payments
$
552,903
$
172,442
$
(in thousands)
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing resident fees
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing facility operating expense
(in thousands)
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing resident fees
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing facility operating expense
Year Ended December 31, 2017
Amounts
Attributable to
Completed
Dispositions
Actual Results
Less Amounts
Attributable to
Completed
Dispositions
Actual Results
$
654,196
$
152,190
$
2,210,688
468,994
3,333,878
382,779
1,461,630
362,832
2,207,241
423,302
78,392
653,884
90,134
294,528
68,702
453,364
Year Ended December 31, 2016
Amounts
Attributable to
Completed
Dispositions
Actual Results
Less Amounts
Attributable to
Completed
Dispositions
Actual Results
$
679,503
$
189,205
$
2,419,459
592,826
3,691,788
384,973
1,542,642
459,417
2,387,032
642,782
201,613
1,033,600
110,014
443,137
169,297
722,448
502,006
1,787,386
390,602
2,679,994
292,645
1,167,102
294,130
1,753,877
380,461
490,298
1,776,677
391,213
2,658,188
274,959
1,099,505
290,120
1,664,584
363,772
Cash lease payments
$
622,886
$
259,114
$
47
The following table sets forth the number of communities and units in our senior housing segments disposed through sales and
lease terminations during the years ended December 31, 2018, 2017 and 2016:
Number of communities
Independent Living
Assisted Living and Memory Care
CCRCs
Total
Total units
Independent Living
Assisted Living and Memory Care
CCRCs
Total
Years Ended December 31,
2018
2017
2016
17
91
3
111
2,864
7,437
547
10,848
10
86
12
108
2,078
5,858
2,389
10,325
2
52
3
57
206
2,954
879
4,039
The results of operations of the 13 communities held for sale as of December 31, 2018 are reported in the following segments
within the consolidated financial statements: Assisted Living and Memory Care (8 communities; 797 units) and CCRCs (5
communities; 889 units). The following table sets forth the amounts included within our consolidated financial data for these 13
communities for the year ended December 31, 2018:
(in thousands)
Resident fees
Assisted Living and Memory Care
CCRCs
Senior housing resident fees
Facility operating expense
Assisted Living and Memory Care
CCRCs
Senior housing facility operating expense
Other Recent Developments
Increased Competitive Pressures
Amounts
Attributable to
Planned Dispositions
$
$
$
$
19,940
42,724
62,664
18,500
39,740
58,240
New openings of senior housing communities has subjected the senior housing industry and us to increased competitive pressures
in recent years. Data from the National Investment Center for the Seniors Housing & Care Industry ("NIC") shows that industry
occupancy began to decrease starting in 2016 as a result of new openings and oversupply. During and since 2016 we have
experienced an elevated rate of competitive new openings, with significant new competition opening in several of our markets,
which has adversely affected our occupancy, revenues, results of operations and cash flow. We expect the elevated rate of competitive
new openings and pressures on our occupancy and rate growth to continue through 2019. Such increased level of new openings
and oversupply, as well as lower levels of unemployment generally, have also contributed to wage pressures and increased
competition for community leadership and personnel. We continue to address new competition by focusing on operations with
the objective to ensure high customer satisfaction, retain key leadership and actively engage district and regional management in
community operations; enhancing our local and national marketing and public relations efforts; and evaluating current community
position relative to competition and repositioning if necessary (e.g., services, amenities, programming and price). We also continue
to execute on our 3-year plan initiated in 2017 to invest above industry to improve the total rewards program and performance
management, training and development program for our community leaders and staff.
48
Planned Capital Expenditures
During 2018 we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that
our communities are in appropriate physical condition to support our strategy and determining what additional investments are
needed to protect the value of our community portfolio. As a result of that review, we have budgeted to make significant additional
near-term investments in our communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our
full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million.
For 2019, this includes an increase of approximately $75 million in our community-level capital expenditures relative to 2018,
primarily attributable to major building infrastructure projects. We anticipate that our 2019 capital expenditures will be funded
from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility. We expect that
our 2020 community-level capital expenditures will continue to be elevated relative to 2018, but lower than 2019.
2018 Leadership Changes
During 2018 we made several changes to our key leadership. Our Board of Directors appointed Lucinda M. Baier, who had served
as our Chief Financial Officer since 2015, as our President and Chief Executive Officer and member of our Board of Directors
effective February 28, 2018. An interim chief financial officer joined the company in March 2018 and served until Steven E.
Swain joined the Company as our Executive Vice President and Chief Financial Officer effective September 4, 2018. In addition
to the departure of our former President and Chief Executive Officer, our former Executive Vice President and Chief Administrative
Officer and Executive Vice President and Chief People Officer stepped down from such roles in March 2018 and December 2018,
respectively.
Program Max Initiative
During 2018 we made continued 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, 2018, we invested $24.7
million on Program Max projects, net of $1.7 million of third party lessor reimbursements, which included the completion of five
conversion projects. We currently have six Program Max projects that have been approved, most of which have begun construction
and are expected to generate 69 net new units.
Tax Reform
On December 22, 2017, the President signed the Tax Cuts and Jobs Act ("Tax Act") into law. The Tax Act reformed the United
States corporate income tax code, including a reduction to the federal corporate income tax rate from 35% to 21% effective January
1, 2018. The Tax Act also eliminated alternative minimum tax (AMT) and the 20-year carryforward limitation for net operating
losses incurred after December 31, 2017, and imposes a limit on the usage of net operating losses incurred after such date equal
to 80% of taxable income in any given year. The 80% usage limit will not have an economic impact on the Company until its
current net operating losses are either utilized or expired. In addition, the Tax Act limits the annual deductibility of a corporation's
net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business
exception. The Company plans to elect the real property trade or business exception with the 2018 tax return. As such, the Company
is required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified
improvement property assets. This change reduced the Company's tax depreciation allowed by approximately $57.9 million for
the year ended December 31, 2018 and will have a similar impact on future tax depreciation deductions, as these assets are now
being depreciated over a longer period. This decrease has had an impact on the Company's taxable loss or income and in turn
impacted the Company's valuation allowance. For the year ended December 31, 2017, reasonable estimates for our state and local
provision were made based on our analysis of the Tax Act. On the basis of additional guidance issued by various state tax authorities,
these provisional amounts were adjusted in the year ended December 31, 2018. The Company recognized an additional $6.0
million of valuation allowance against the Company's state net operating losses with corresponding increase of $6.0 million in
the income tax provision. This was primarily due to expiring state net operating losses resulting from certain state taxing authorities
not adopting the federal standard of unlimited net operating loss carryovers.
49
Summary of Operating Results
The table below presents a summary of our operating results and certain other financial metrics for the years ended December 31,
2018 and 2017 and the amount and percentage of increase or decrease of each applicable item.
(in millions)
Total revenues
Facility operating expense
Net income (loss)
Net income (loss) attributable to Brookdale Senior Living
Inc. common stockholders
Adjusted EBITDA(1)
Net cash provided by operating activities
Adjusted Free Cash Flow(1)
Years Ended December 31,
Increase (Decrease)
2018
2017
Amount
Percent
$
$
$
$
$
$
$
4,531.4
$
2,453.3
$
(528.4) $
(528.3) $
$
509.6
204.0
19.8
$
$
4,747.1
$
2,602.2
$
(571.6) $
(571.4) $
$
638.6
378.4
109.2
$
$
(215.7)
(148.9)
(43.2)
(43.1)
(129.0)
(174.4)
(89.4)
(4.5)%
(5.7)%
(7.6)%
(7.6)%
(20.2)%
(46.1)%
(81.9)%
(1) Adjusted EBITDA and Adjusted Free Cash Flow are non-GAAP financial measures we use to assess our operating performance
and liquidity. See "Non-GAAP Financial Measures" below for important information regarding both measures.
During 2018, total revenues were $4.5 billion, a decrease of $215.7 million, or 4.5%, as compared to our total revenues for the
prior year. Resident fees for 2018 decreased $330.9 million, or 8.8%, from the prior year. Management fees decreased $3.9 million,
or 5.1%, from the prior year, and reimbursed costs incurred on behalf of managed communities increased $119.1 million, or 13.4%.
The decrease in resident fees during 2018 was primarily due to dispositions of 219 communities through sales and lease terminations
since the beginning of the prior year. The decrease in resident fees was partially offset by a 1.2% increase in senior housing average
monthly revenue per occupied unit (RevPOR) at the 664 communities we owned or leased during both full years.
During 2018, facility operating expense was $2.5 billion, a decrease of $148.9 million, or 5.7%, as compared to the prior year.
The decrease in facility operating expense was primarily due to the impact of disposition activity since the beginning of the prior
year. Facility operating expense increased $76.8 million, or 4.6%, at the 664 communities we owned or leased during both full
years, primarily due to an increase in labor expense arising from wage rate increases.
Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders for the year ended December 31, 2018 was
$(528.3) million, compared to net income (loss) attributable to Brookdale Senior Living Inc. common stockholders of $(571.4)
million for the prior year. Net income (loss) for the year was $(528.4) million, a decrease of 7.6% compared to net income (loss)
of $(571.6) million for the prior year. Net income (loss) for 2018 included $489.9 million of non-cash impairment expense, partially
offset by a $293.2 million net gain on sale of assets. Net income (loss) for 2017 included $409.8 million of non-cash impairment
expense. During the year ended December 31, 2018, our Adjusted EBITDA decreased by 20.2% compared to the year ended
December 31, 2017. The decrease in Adjusted EBITDA was primarily due to increases in community labor expense at the
communities operated during both full periods and disposition activity since the beginning of the prior year period. Adjusted
EBITDA includes transaction and organizational restructuring costs of $28.1 million for the year ended December 31, 2018 and
transaction and strategic project costs of $25.4 million for the year ended December 31, 2017.
During the year ended December 31, 2018, net cash provided by operating activities was $204.0 million, a decrease of $174.4
million, or 46.1%, compared to our net cash provided by operating activities for the year ended December 31, 2017. The decrease
in net cash provided by operating activities was attributable primarily to cash payments to terminate community operating leases
during the current year, an increase in facility operating expense at the communities operated during both full years, and the impact
of disposition activity. During the year ended December 31, 2018, our Adjusted Free Cash Flow was $19.8 million, a decrease of
81.9% compared to the year ended December 31, 2017.
Consolidated Results of Operations
Comparison of Year Ended December 31, 2018 and 2017
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 related notes, which are
included in "Item 8. Financial Statements and Supplementary Data."
50
As of December 31, 2018 our total operations included 892 communities with a capacity to serve approximately 84,000 residents.
(dollars in thousands, except RevPAR and RevPOR)
Years Ended December 31,
Increase (Decrease)
2018
2017
Amount
Percent (1)
Statement of Operations Data:
Revenue
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Total resident fees
Management services (2)
Total revenue
Expense
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Total facility operating expense
General and administrative expense
Transaction costs
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Loss on facility lease termination and modification, net
Costs incurred on behalf of managed communities
Total operating expense
Income (loss) from operations
Interest income
Interest expense
Debt modification and extinguishment costs
Equity in loss of unconsolidated ventures
Gain on sale of assets, net
Other non-operating income
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to Brookdale Senior Living
Inc. common stockholders
$
599,977
$
654,196
$
1,995,851
2,210,688
416,408
436,975
3,449,211
1,082,215
4,531,426
359,368
1,366,869
324,196
402,895
468,994
446,262
3,780,140
966,976
4,747,116
382,779
1,461,630
362,832
394,914
2,453,328
2,602,155
250,495
8,980
303,294
447,455
489,893
162,001
1,010,229
5,125,675
(594,249)
9,846
(280,269)
(11,677)
(8,804)
293,246
14,099
(577,808)
49,456
(528,352)
94
255,446
22,573
339,721
482,077
409,782
14,276
891,131
5,017,161
(270,045)
4,623
(326,154)
(12,409)
(14,827)
19,273
11,418
(588,121)
16,515
(571,606)
187
(54,219)
(214,837)
(52,586)
(9,287)
(330,929)
115,239
(215,690)
(23,411)
(94,761)
(38,636)
7,981
(148,827)
(4,951)
(13,593)
(36,427)
(34,622)
80,111
147,725
119,098
108,514
(324,204)
5,223
(45,885)
(732)
(6,023)
273,973
2,681
(10,313)
32,941
(43,254)
(93)
(8.3)%
(9.7)%
(11.2)%
(2.1)%
(8.8)%
11.9 %
(4.5)%
(6.1)%
(6.5)%
(10.6)%
2.0 %
(5.7)%
(1.9)%
(60.2)%
(10.7)%
(7.2)%
19.5 %
NM
13.4 %
2.2 %
(120.1)%
113.0 %
(14.1)%
(5.9)%
(40.6)%
NM
23.5 %
(1.8)%
199.5 %
(7.6)%
(49.7)%
$
(528,258) $
(571,419) $
(43,161)
(7.6)%
51
Selected Operating and Other Data:
Number of communities operated and managed (period
end)
Units operated and managed
Period end
Weighted average
Owned/leased units
Period end
Weighted average
RevPAR (3)
Owned/leased communities occupancy rate (weighted
average)
RevPOR (4)
Selected Segment Operating and Other Data:
Independent Living
Number of communities (period end)
Total units
$
$
Years Ended December 31,
Increase (Decrease)
2018
2017
Amount
Percent (1)
892
1,023
(131)
(12.8)%
84,279
94,562
56,492
63,170
3,972
84.3%
4,712
$
$
100,582
101,779
66,641
71,365
3,890
(16,303)
(7,217)
(10,149)
(8,195)
82
85.0%
4,578
$
(0.7)%
134
(16.2)%
(7.1)%
(15.2)%
(11.5)%
2.1 %
(0.8)%
2.9 %
68
84
(16)
(19.0)%
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
Assisted Living and Memory Care
Number of communities (period end)
Total units
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
CCRCs
Number of communities (period end)
Total units
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
Management Services
Number of communities (period end)
Total units
Period end
Weighted average
Occupancy rate (weighted average)
Health Care Services
Home Health average daily census
Hospice average daily census
Outpatient Therapy treatment codes
12,419
14,164
3,530
15,042
16,124
3,381
88.8%
87.7%
$
3,977
$
3,854
$
(2,623)
(1,960)
149
1.1 %
123
(17.4)%
(12.2)%
4.4 %
1.3 %
3.2 %
593
682
(89)
(13.0)%
37,500
42,229
3,939
44,773
47,523
3,877
83.0%
84.3%
$
4,747
$
4,597
$
(7,273)
(5,294)
62
(1.3)%
150
(16.2)%
(11.1)%
1.6 %
(1.5)%
3.3 %
26
6,573
6,777
5,100
28
6,826
7,718
5,032
83.2%
83.1%
$
6,132
$
6,059
$
(2)
(7.1)%
(253)
(941)
68
0.1 %
73
(3.7)%
(12.2)%
1.4 %
0.1 %
1.2 %
205
229
(24)
(10.5)%
27,787
31,392
33,941
30,414
83.9%
85.0%
(6,154)
978
(1.1)%
15,238
1,359
683,348
15,092
1,096
743,095
146
263
(59,747)
(18.1)%
3.2 %
(1.3)%
1.0 %
24.0 %
(8.0)%
52
(1) NM - Not meaningful
(2) Management services segment revenue includes management fees and reimbursements for which we are the primary obligor
of costs incurred on behalf of managed communities.
(3) RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as resident
fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the corresponding portfolio
for the period, divided by the weighted average number of available units in the corresponding portfolio for the period,
divided by the number of months in the period.
(4) RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as resident
fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the corresponding portfolio
for the period, divided by the weighted average number of occupied units in the corresponding portfolio for the period,
divided by the number of months in the period.
Resident Fees
Resident fee revenue decreased $330.9 million, or 8.8%, compared to the prior year primarily due to disposition activity through
sales and lease terminations of 219 communities since the beginning of the prior year, which generated $302.5 million of revenue
during 2018 compared to $653.9 million of revenue in the prior year. The decrease was partially offset by $32.3 million of revenue
for four communities acquired during 2018. The increases to RevPAR and RevPOR for the consolidated portfolio are primarily
due to the disposition of communities with lower RevPOR since the beginning of the prior year period. RevPOR at the 664
communities we owned or leased during both full years increased by 1.2%. Weighted average occupancy decreased 90 basis points
at the 664 communities we owned or leased during both full years, which reflects the impact of new competition in our markets.
RevPOR increased at communities that we owned or leased during both full years primarily as a result of in-place rent increases
and lower discounting.
Independent Living segment revenue decreased $54.2 million, or 8.3%, primarily due to the impact of dispositions of 27
communities since the beginning of the prior year, which generated $81.3 million of revenue during 2018 compared to $152.2
million of revenue in the prior year. The decrease was partially offset by $10.6 million of revenue for one community acquired
during 2018. Independent Living segment revenue at the communities we operated during both full years was $475.6 million
during 2018, an increase of $5.8 million, or 1.2%, over the prior year, primarily due to a 110 basis point increase in weighted
average occupancy and a 0.2% increase in RevPOR at these communities.
Assisted Living and Memory Care segment revenue decreased $214.8 million, or 9.7%, primarily due to the impact of dispositions
of 177 communities since the beginning of the prior year, which generated $205.2 million of revenue during 2018 compared to
$423.3 million of revenue in the prior year. The decrease was partially offset by $10.3 million of revenue for two communities
acquired during 2018. Assisted Living and Memory Care segment revenue at the communities we operated during both full years
was $1,734.8 million during 2018, a decrease of $3.2 million over the prior year, primarily due to a 160 basis point decrease in
weighted average occupancy at these communities, partially offset by a 1.7% increase in RevPOR at these communities.
CCRCs segment revenue decreased $52.6 million, or 11.2%, primarily due to the impact of dispositions of 15 communities since
the beginning of the prior year, which generated $16.0 million of revenue during 2018 compared to $78.4 million of revenue in
the prior year. The decrease was partially offset by $11.4 million of revenue for one community acquired during 2018. CCRCs
segment revenue at the communities we operated during both full years was $358.1 million during 2018, consistent with the prior
year and reflecting an 0.8% increase in RevPOR at these communities, partially offset by a 60 basis point decrease in weighted
average occupancy.
Health Care Services segment revenue decreased $9.3 million, or 2.1%, primarily due to a decline in home health revenue and
the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") on January 1, 2018 under
the modified retrospective approach which resulted in a $6.9 million decrease to resident fee revenue and facility operating expense.
See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more
information about ASU 2014-09. These decreases were partially offset by an increase in volume for hospice services. For home
health in 2018, CMS implemented a net 0.4% reimbursement reduction, consisting of a 1.0% market basket inflation increase,
less a 0.9% reduction to account for industry wide case-mix growth, and the sunset of the rural add-on provision. As a result, our
home health reimbursement was reduced by approximately 0.8% compared to the prior year period. In 2019, we expect our home
health reimbursement to be increased by approximately 1.0% in 2019 compared to 2018.
53
Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed
communities, increased $115.2 million, or 11.9%, over the prior year primarily due to our entry into management agreements with
the Blackstone Venture and the transition of communities previously leased from HCP and Welltower into the management services
segment on an interim basis. Reimbursed costs incurred on behalf of managed communities increased as a result of increases in
salaries and wages and other facility operating expense at the communities managed in both full years. Additionally, reimbursed
costs incurred on behalf of managed communities increased due to the impact of the adoption of ASU 2014-09 on January 1, 2018
under the modified retrospective approach. The impact to each of revenue for reimbursed costs incurred on behalf of managed
communities and reimbursed costs incurred on behalf of managed communities as a result of applying ASC 606 was an increase
of $46.1 million for 2018. See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and
Supplementary Data" for more information about ASU 2014-09. Management fees of $72.0 million for 2018 include $13.1 million
of management fees attributable to communities for which our management agreements were terminated in 2018.
Facility Operating Expense
Facility operating expense decreased $148.8 million, or 5.7%, over the prior year primarily due to disposition activity through
sales and lease terminations of 219 communities since the beginning of the prior year, which incurred $207.8 million of facility
operating expense during 2018 compared to $453.4 million of facility operating expense in the prior year. The decrease was
partially offset by an increase in labor expense at the communities we operated during both full years and by $17.9 million of
facility operating expense for four communities acquired during 2018. Facility operating expense included costs related to our
responses to hurricanes of $1.3 million in 2018 and $7.3 million in the prior year. Facility operating expense at the 664 communities
we operated during both full years increased 4.6%, over the prior year, reflecting the impact of our investment in salaries and
benefits and a tight labor market during 2018. We expect that our labor investments will continue into 2019. Additionally, costs
for information technology systems and insurance expenses increased at the communities we operated during both full years.
Independent Living segment facility operating expense decreased $23.4 million, or 6.1%, primarily driven by the impact of
dispositions of 27 communities since the beginning of the prior year, which incurred $48.2 million of facility operating expense
during 2018 compared to $90.1 million of facility operating expense in the prior year. This decrease was partially offset by an
increase in labor expense at the communities we operated during both full years and by $6.1 million of facility operating expense
for one community acquired during 2018. Independent Living segment facility operating expense at the communities we operated
during both full years was $282.2 million, an increase of $12.6 million, or 4.7%, over the prior year.
Assisted Living and Memory Care segment facility operating expense decreased $94.8 million, or 6.5%, primarily driven by the
impact of dispositions of 177 communities since the beginning of the prior year, which incurred $145.1 million of facility operating
expense in 2018 compared to $294.5 million of facility operating expense in the prior year. This decrease was partially offset by
an increase in labor expense at the communities we operated during both full years and by $5.6 million of facility operating expense
for two communities acquired during 2018. Assisted Living and Memory Care segment facility operating expense at the
communities we operated during both full years was $1,176.7 million, an increase of $53.8 million, or 4.8%, over the prior year.
CCRCs segment facility operating expense decreased $38.6 million, or 10.6%, primarily driven by the impact of dispositions of
15 communities since the beginning of the prior year, which incurred $14.5 million of facility operating expense in 2018 compared
to $68.7 million of facility operating expense in the prior year. The decrease was partially offset by $6.2 million of facility operating
expense for one community acquired during 2018. CCRCs segment facility operating expense at the communities we operated
during both full years was $282.7 million, an increase of $10.4 million, or 3.8%, over the prior year.
Health Care Services segment operating expense increased $8.0 million, or 2.0%, primarily due to an increase in labor costs arising
from wage rate increases and the expansion of our hospice services. The increase was partially offset by the impact of the adoption
of ASU 2014-09 on January 1, 2018 under the modified retrospective approach which resulted in a $6.9 million decrease to resident
fee revenue and facility operating expense. See Note 2 to the consolidated financial statements contained in "Item 8. Financial
Statements and Supplementary Data" for more information about ASU 2014-09.
General and Administrative Expense
General and administrative expense decreased $5.0 million, or 1.9%, over the prior year primarily due to a decrease in salaries
and wages expense as a result of a reduction in our corporate associate headcount pursuant to the initiative to scale our general
and administrative costs in connection with our portfolio optimization strategy. General and administrative expense included
severance costs and retention costs of $12.3 million and $6.5 million, respectively, in 2018.
54
Transaction Costs
Transaction costs decreased $13.6 million to $9.0 million. Transaction costs in 2018 primarily included direct costs related to our
assessment of options and alternatives to enhance stockholder value and community leasing activity, including lease terminations
and modifications. Transaction costs in the prior year primarily included direct costs related to the formation of the Blackstone
Venture, our assessment of options and alternatives to enhance stockholder value and community disposition activity.
Facility Lease Expense
Facility lease expense decreased $36.4 million, or 10.7%, primarily due to lease termination activity since the beginning of 2017.
Depreciation and Amortization
Depreciation and amortization expense decreased $34.6 million, or 7.2%, primarily due to disposition activity through sales and
lease terminations since the beginning of the prior year.
Goodwill and Asset Impairment
During the year ended December 31, 2018, we recorded $489.9 million of non-cash impairment charges. The impairment charges
included $351.7 million of goodwill within the Assisted Living and Memory Care segment, $78.0 million of property, plant and
equipment and leasehold intangibles for certain communities, $33.4 million related to investments in unconsolidated ventures,
$15.6 million related to communities identified as held for sale, and $9.1 million of intangible assets for health care licenses within
the Health Care Services segment.
During the year ended December 31, 2017, we recorded $409.8 million of non-cash impairment charges. The impairment charges
included $205.0 million of goodwill within the Assisted Living and Memory Care segment, $164.4 million of property, plant and
equipment and leasehold intangibles for certain communities, primarily in the Assisted Living and Memory Care segment, $25.8
million related to investments in unconsolidated ventures, and $14.6 million of intangible assets for healthcare licenses within the
Health Care Services segment.
See "Critical Accounting Policies and Estimates" below and Note 5 to the consolidated financial statements contained in "Item 8.
Financial Statements and Supplementary Data" for more information about our evaluations of goodwill and other assets for
impairment and the related impairment charges.
Loss on Facility Lease Termination and Modification, Net
Loss on facility lease termination and modification, net increased $147.7 million to $162.0 million. In 2018, we recognized a
$125.7 million loss on the restructuring of community leases with Ventas and $36.3 million of net losses on community lease
termination activity. See Note 4 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form
10-K for more information about our community lease modification and termination activity.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $119.1 million, or 13.4%, primarily due to our entry into management
agreements with the Blackstone Venture and the transition of communities previously leased from HCP and Welltower into the
management services segment on an interim basis. Additionally, costs incurred on behalf of managed communities increased as
a result of increases in salaries and wages and other facility operating expense at the communities managed in both full years and
due to the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers on January 1, 2018 under the modified
retrospective approach. The impact to each of revenue for reimbursed costs incurred on behalf of managed communities and
reimbursed costs incurred on behalf of managed communities as a result of applying ASC 606 was an increase of $46.1 million
for 2018. See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data"
for more information about ASU 2014-09.
Interest Expense
Interest expense decreased by $45.9 million, or 14.1%, primarily due to capital and financing lease termination activity since the
beginning of the prior year.
55
Equity in Earnings (Loss) of Unconsolidated Ventures
Equity in loss of unconsolidated ventures decreased by $6.0 million over the prior year primarily due to the sale of investments
in unconsolidated ventures.
Gain on Sale of Assets, Net
Gain on sale of assets, net increased $274.0 million to $293.2 million. In 2018, we recognized gains for sales of communities,
sales of investments in unconsolidated ventures, and the termination of financing leases. See Note 4 to the consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information about our disposition activity.
Income Taxes
The difference between the statutory tax rate and our effective tax rates for the years ended December 31, 2018 and 2017 is mainly
due to the impact of the Tax Act recorded in 2017 as compared to 2018. In addition, there was an increase in 2018 resulting from
additional nondeductible write-off of goodwill recorded in the year. We recorded an aggregate deferred federal, state and local tax
benefit of $52.4 million as a result of the operating loss for the year ended December 31, 2018, which included an increase in the
valuation allowance of $0.3 million. We evaluate our deferred tax assets each quarter to determine if a valuation allowance is
required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation
allowance as of December 31, 2018 and December 31, 2017 was $336.4 million and $336.1 million, respectively.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the year ended December 31, 2018
and 2017 which are included in provision for income tax for the period. Tax returns for years 2014 through 2017 are subject to
future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under
examination.
Comparison of Year Ended December 31, 2017 and 2016
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 related notes, which are
included in "Item 8. Financial Statements and Supplementary Data."
56
As of December 31, 2017 our total operations included 1,023 communities with a capacity to serve approximately 101,000 residents.
(dollars in thousands, except RevPAR and RevPOR)
Years Ended December 31,
Increase (Decrease)
2017
2016
Amount
Percent (1)
Statement of Operations Data:
Revenue
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Total resident fees
Management services (2)
Total revenue
Expense
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Total facility operating expense
General and administrative expense
Transaction costs
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Loss on facility lease termination
Costs incurred on behalf of managed communities
Total operating expense
Income (loss) from operations
Interest income
Interest expense
Debt modification and extinguishment costs
Equity in earnings (loss) of unconsolidated ventures
Gain on sale of assets, net
Other non-operating income
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to Brookdale Senior Living
Inc. common stockholders
$
654,196
$
679,503
$
2,210,688
2,419,459
468,994
446,262
3,780,140
966,976
4,747,116
382,779
1,461,630
362,832
394,914
592,826
476,833
4,168,621
808,359
4,976,980
384,973
1,542,642
459,417
412,370
2,602,155
2,799,402
255,446
22,573
339,721
482,077
409,782
14,276
891,131
5,017,161
(270,045)
4,623
(326,154)
(12,409)
(14,827)
19,273
11,418
(588,121)
16,515
(571,606)
187
313,409
3,990
373,635
520,402
248,515
11,113
737,597
5,008,063
(31,083)
2,933
(385,617)
(9,170)
1,660
7,218
14,801
(399,258)
(5,378)
(404,636)
239
(25,307)
(208,771)
(123,832)
(30,571)
(388,481)
158,617
(229,864)
(2,194)
(81,012)
(96,585)
(17,456)
(197,247)
(57,963)
18,583
(33,914)
(38,325)
161,267
3,163
153,534
9,098
(238,962)
1,690
(59,463)
3,239
(16,487)
12,055
(3,383)
188,863
21,893
166,970
(52)
(3.7)%
(8.6)%
(20.9)%
(6.4)%
(9.3)%
19.6 %
(4.6)%
(0.6)%
(5.3)%
(21.0)%
(4.2)%
(7.0)%
(18.5)%
NM
(9.1)%
(7.4)%
64.9 %
28.5 %
20.8 %
0.2 %
NM
57.6 %
(15.4)%
35.3 %
NM
167.0 %
(22.9)%
47.3 %
NM
41.3 %
(21.8)%
$
(571,419) $
(404,397) $
167,022
41.3 %
57
Selected Operating and Other Data:
Number of communities operated and managed (period
end)
Units operated and managed
Period end
Weighted average
Owned/leased units
Period end
Weighted average
RevPAR (3)
Owned/leased communities occupancy rate (weighted
average)
RevPOR (4)
Selected Segment Operating and Other Data:
Independent Living
Number of communities (period end)
Total units
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
Assisted Living and Memory Care
Number of communities (period end)
Total units
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
CCRCs
Number of communities (period end)
Total units
Period end
Weighted average
RevPAR (3)
Occupancy rate (weighted average)
RevPOR (4)
Management Services
Number of communities (period end)
Total units
Period end
Weighted average
Occupancy rate (weighted average)
Health Care Services
Home Health average daily census
Hospice average daily census
Outpatient Therapy treatment codes
Years Ended December 31,
Increase (Decrease)
2017
2016
Amount
Percent (1)
1,023
1,055
(32)
100,582
101,779
66,641
71,365
3,890
85.0%
4,578
$
$
102,768
106,122
77,135
79,932
3,845
86.0%
4,468
$
$
(2,186)
(4,343)
(10,494)
(8,567)
45
(1.0)%
110
$
$
(3.0)%
(2.1)%
(4.1)%
(13.6)%
(10.7)%
1.2 %
(1.2)%
2.5 %
84
93
(9)
(9.7)%
15,042
16,124
3,381
17,017
17,103
3,311
87.7%
89.0%
$
3,854
$
3,720
$
(1,975)
(979)
70
(1.3)%
134
(11.6)%
(5.7)%
2.1 %
(1.5)%
3.6 %
682
768
(86)
(11.2)%
44,773
47,523
3,877
50,682
52,777
3,820
84.3%
85.5%
$
4,597
$
4,468
$
(5,909)
(5,254)
57
(1.2)%
129
(11.7)%
(10.0)%
1.5 %
(1.4)%
2.9 %
28
6,826
7,718
5,032
41
(13)
(31.7)%
9,436
10,052
4,880
(2,610)
(2,334)
152
(0.7)%
235
(27.7)%
(23.2)%
3.1 %
(0.8)%
4.0 %
83.1%
83.8%
$
6,059
$
5,824
$
229
153
76
49.7 %
33,941
30,414
25,633
26,190
8,308
4,224
85.0%
87.0%
(2.0)%
15,092
1,096
744,924
15,067
767
1,713,733
25
329
(968,809)
32.4 %
16.1 %
(2.3)%
0.2 %
42.9 %
(56.5)%
58
(1) NM - Not meaningful
(2) Management services segment revenue includes management fees and reimbursements for which we are the primary obligor
of costs incurred on behalf of managed communities.
(3) RevPAR, or average monthly senior housing resident fee revenues per available unit, is defined by the Company as resident
fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the corresponding portfolio
for the period, divided by the weighted average number of available units in the corresponding portfolio for the period,
divided by the number of months in the period.
(4) RevPOR, or average monthly senior housing resident fee revenues per occupied unit, is defined by the Company as resident
fee revenues, excluding Health Care Services segment revenue and entrance fee amortization, for the corresponding portfolio
for the period, divided by the weighted average number of occupied units in the corresponding portfolio for the period,
divided by the number of months in the period.
Resident Fees
Resident fee revenue decreased $388.5 million, or 9.3%, compared to the prior year primarily due to disposition activity through
sales and lease terminations of 165 communities since the beginning of the prior year. Weighted average occupancy decreased
130 basis points at the 766 communities we owned or leased during both full years, which reflects the impact of new competition
in our markets. Additionally, Health Care Services segment revenue decreased $30.6 million, or 6.4%, primarily due to a decrease
in volume for outpatient therapy services and a decrease in reimbursement rates for home health services. The 165 communities
disposed of subsequent to the beginning of the prior year (including the 62 communities for which the financial results were
deconsolidated from our financial statements prospectively upon formation of the Blackstone Venture on March 29, 2017) generated
$172.6 million of revenue during 2017 compared to $543.3 million of revenue in the prior year. The decrease in resident fee
revenue was partially offset by a 2.5% increase in RevPOR.
Independent Living segment revenue decreased $25.3 million, or 3.7%, primarily due to the impact of dispositions of 12
communities since the beginning of the prior year, which generated $26.5 million of revenue during 2017 compared to $63.8
million of revenue in the prior year. Independent Living segment revenue at the communities we operated during both full years
was $571.7 million during 2017, an increase of $2.2 million, or 0.4%, over the prior year, primarily due to a 1.8% increase in
RevPOR at these communities, partially offset by a 120 basis point decrease in weighted average occupancy at these communities.
Assisted Living and Memory Care segment revenue decreased $208.8 million, or 8.6%, primarily due to the impact of dispositions
of 138 communities since the beginning of the prior year, which generated $97.9 million of revenue during 2017 compared to
$310.3 million of revenue in the prior year. Assisted Living and Memory Care segment revenue at the communities we operated
during both full years was $2,043.8 million during 2017, a decrease of $0.9 million over the prior year, primarily due to a 140
basis point decrease in weighted average occupancy at these communities, partially offset by a 1.8% increase in RevPOR at these
communities.
CCRCs segment revenue decreased $123.8 million, or 20.9%, primarily due to the impact of dispositions of 15 communities since
the beginning of the prior year, which generated $48.1 million of revenue during 2017 compared to $169.3 million of revenue in
the prior year. CCRCs segment revenue at the communities we operated during both full years was $368.2 million during 2017,
an increase of $4.9 million, or 1.4%, over the prior year, primarily due to a 1.7% increase in RevPOR at these communities,
partially offset by a 30 basis point decrease in weighted average occupancy at these communities.
Health Care Services segment revenue decreased $30.6 million, or 6.4%, primarily due to a decrease in volume for outpatient
therapy services and a decrease in reimbursement rates for home health services. During the three months ended December 31,
2016, we significantly reduced the number of outpatient therapy clinics located in our communities as lower reimbursement rates
and lower utilization made the business less attractive. These decreases were partially offset by an increase in volume for hospice
services. Despite an increase over the prior year period, our home health average daily census was negatively impacted by
interruptions to service by Hurricane Irma in Florida. For home health in 2017, CMS implemented a net 0.7% reimbursement
reduction, consisting of a 2.8% market basket inflation increase, less a 0.3% productivity reduction, a 2.3% rebasing adjustment,
and a 0.9% reduction to account for industry wide case-mix growth. As a result, our home health reimbursement was reduced by
approximately 3.2% compared to the prior year period.
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Management Services Revenue
Management Services segment revenue, including management fees and reimbursed costs incurred on behalf of managed
communities, increased $158.6 million, or 19.6%, over the prior year primarily due to our entry into management agreements with
the Blackstone Venture. Management fees of $75.8 million for 2017 include $5.6 million of management fees attributable to
communities for which our management agreements were terminated in 2017.
Facility Operating Expense
Facility operating expense decreased $197.2 million, or 7.0%, over the prior year. Facility operating expense in 2017 includes
$7.3 million of costs related to our response to Hurricanes Harvey and Irma. The decrease in facility operating expense was
primarily due to disposition activity through sales and lease terminations of 165 communities since the beginning of the prior year,
which incurred $135.0 million of facility operating expense during 2017 compared to $413.1 million of facility operating expense
in the prior year. Additionally, Health Care Services segment facility operating expense decreased $17.5 million, or 4.2%, primarily
due to a decrease in volume for outpatient therapy services. These decreases were partially offset by an increase in salaries and
wages arising from wage rate increases at the communities we operated during both full years and a $23.3 million increase in
insurance expense related to positive changes in the prior year to estimates in general liability and professional liability and workers
compensation expense.
Independent Living segment facility operating expense decreased $2.2 million, or 0.6%, primarily driven by the impact of
dispositions of 12 communities since the beginning of the prior year, which incurred $17.9 million of facility operating expense
during 2017 compared to $40.1 million of facility operating expense in the prior year. This decrease was partially offset by an
increase in salaries and wages arising from wage rate increases. Independent Living segment facility operating expense, excluding
costs related to hurricanes, at the communities we operated during both full years were $327.8 million, an increase of $11.0 million,
or 3.5%, over the prior year.
Assisted Living and Memory Care segment facility operating expense decreased $81.0 million, or 5.3%, primarily driven by the
impact of dispositions of 138 communities since the beginning of the prior year, which incurred $76.3 million of facility operating
expense in 2017 compared to $231.4 million of facility operating expense in the prior year. This decrease was partially offset by
an increase in salaries and wages arising from wage rate increases at the communities we operated during both full years and a
$21.0 million increase in insurance expense related to positive changes in the prior year to estimates in general liability and
professional liability and workers compensation expense. Assisted Living and Memory Care segment facility operating expense,
excluding costs related to hurricanes, at the communities we operated during both full years were $1,330.2 million, an increase
of $54.9 million, or 4.3%, over the prior year.
CCRCs segment facility operating expense decreased $96.6 million, or 21.0%, primarily driven by the impact of dispositions of
15 communities since the beginning of the prior year, which incurred $40.9 million of facility operating expense in 2017 compared
to $141.7 million of facility operating expense in the prior year. CCRCs segment facility operating expense, excluding costs related
to hurricanes, at the communities we operated during both full years were $280.2 million, an increase of $3.2 million, or 1.2%,
over the prior year.
Health Care Services segment operating expense decreased $17.5 million, or 4.2%, primarily due to a decrease in volume for
outpatient therapy services. During the three months ended December 31, 2016, we significantly reduced the number of outpatient
therapy clinics located in our communities as lower reimbursement rates and lower utilization made the business less attractive.
General and Administrative Expense
General and administrative expense decreased $58.0 million, or 18.5%, over the prior year primarily due to a $47.4 million decrease
in integration and strategic project costs. Strategic project costs were $2.8 million during 2017 compared to integration and strategic
project costs of $50.2 million in the prior year. Integration costs for 2016 include transition costs associated with organizational
restructuring (such as severance and retention payments and recruiting expenses), third party consulting expenses directly related
to the integration of acquired communities (in areas such as cost savings and synergy realization, branding and technology and
systems work), and internal costs such as training, travel and labor, reflecting time spent by Company personnel on integration
activities and projects. Strategic project costs for 2016 include costs associated with strategic projects related to refining our
strategy, building out enterprise-wide capabilities (including EMR roll-out projects) and reducing costs and achieving synergies
by capitalizing on scale. Additionally, a reduction in corporate associate headcount resulted in decreased salaries and wage expenses
in 2017.
60
Transaction Costs
Transaction costs increased $18.6 million. Transaction costs in 2017 were primarily direct costs related to the formation of the
Blackstone Venture and our assessment of options and alternatives to enhance stockholder value. Transaction costs in the prior
year were primarily direct costs related to community disposition activity.
Facility Lease Expense
Facility lease expense decreased $33.9 million, or 9.1%, primarily due to lease termination activity since the beginning of the
prior year.
Depreciation and Amortization
Depreciation and amortization expense decreased $38.3 million, or 7.4%, primarily due to disposition activity, through sales and
lease terminations, since the beginning of the prior year.
Goodwill and Asset Impairment
During the year ended December 31, 2017, we recorded $409.8 million of non-cash impairment charges. The impairment charges
included $205.0 million of goodwill within the Assisted Living and Memory Care segment, $164.4 million of property, plant and
equipment and leasehold intangibles for certain communities, primarily in the Assisted Living and Memory Care segment, $25.8
million related to investments in unconsolidated ventures, and $14.6 million of intangible assets for health care licenses within
the Health Care Services segment.
During the year ended December 31, 2016, we recorded impairment charges of $248.5 million. We recorded property, plant and
equipment and leasehold intangibles impairment charges of $166.2 million for the year ended December 31, 2016, primarily due
to lower than expected operating performance at certain properties and to reflect the amount by which the carrying values of assets
exceeded their estimated fair value. We recorded $15.8 million of impairment charges related to communities identified as assets
held for sale, primarily due to excess of carrying value, including allocated goodwill, over the estimated selling price less costs
to dispose. We recorded $36.8 million of impairment charges related to investments in unconsolidated ventures, primarily due to
lower than expected operating performance at the communities owned by the unconsolidated ventures and these charges reflect
the amount by which the carrying values of the investments exceeded their estimated fair value. Additionally, we recorded $28.2
million and $1.5 million of impairment charges related to community purchase options and healthcare licenses, respectively. These
impairment charges were primarily due to lower than expected operating performance at the communities subject to the community
purchase options and reflect the amount by which the carrying values of the community purchase options exceeded their estimated
fair value.
See "Critical Accounting Policies and Estimates" below and Note 5 to the consolidated financial statements contained in "Item 8.
Financial Statements and Supplementary Data" for more information about our evaluations of goodwill and other assets for
impairment and the related impairment charges.
Loss on Facility Lease Termination
Loss on facility lease termination increased $3.2 million, or 28.5%, primarily due to increased lease termination activity.
Costs Incurred on Behalf of Managed Communities
Costs incurred on behalf of managed communities increased $153.5 million, or 20.8%, primarily due to our entry into management
agreements with the Blackstone Venture.
Interest Expense
Interest expense decreased by $59.5 million, or 15.4%, primarily due to lease termination activity since the beginning of the prior
year.
Equity in Earnings (Loss) of Unconsolidated Ventures
Equity in earnings (loss) of unconsolidated ventures decreased by $16.5 million over the prior year. Equity in loss of unconsolidated
ventures of $14.8 million in 2017 includes losses for the Blackstone Venture, which was formed subsequent to the prior year, and
61
the impact of additional interest expense incurred as a result of non-recourse mortgage financing obtained by the CCRC Venture
subsequent to the prior year.
Gain on Sale of Assets, Net
Gain on sale of assets, net increased $12.1 million, or 167.0%, primarily due to an $11.4 million gain on sale of assets recognized
during 2017 for the termination of financing lease obligations for 21 communities which were previously subject to sale-leaseback
transactions in which the Company was deemed to have continuing involvement for accounting purposes.
Other Non-operating Income
Other non-operating income decreased by $3.4 million, or 22.9%, primarily due to decreased insurance recoveries for property
losses.
Income Taxes
On December 22, 2017, the President signed into law the Tax Act, a bill reforming the US corporate income tax code which,
among other reforms, reduced our federal corporate tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018.
The carrying value of our deferred tax assets and liabilities is determined by the enacted federal corporate income tax rate.
Consequently, changes in the federal corporate income tax rate impacted the carrying value of our net deferred tax liability position
subsequent to the enactment date. Under the new federal corporate income tax rate of 21%, net deferred income tax assets decreased
by $108.1 million and our valuation allowance decreased by $172.2 million. In addition to the impact of the federal corporate
income tax rate, the change in corporate tax law reduced our valuation allowance by an additional $50.6 million. The net effect
of the tax reform enactment on our consolidated financial statements was a benefit of $114.7 million which was reflected in our
consolidated statement of operations for the year ended December 31, 2017. Reasonable estimates for our state and local provision
were made based on our analysis of tax reform. These provisional amounts were adjusted during the year ended December 31,
2018. Please see Note 16 to the consolidated financial statements for a discussion of the adjustment.
For the year ended December 31, 2017 we recorded an aggregate deferred federal, state and local tax benefit of $15.3 million,
which consists of a $148.9 million benefit as a result of the operating loss for the year, which was partially offset by a $110.4
million expense related to revaluation of our net deferred tax assets and liabilities under the Tax Act. Further offsetting the aggregate
deferred benefit was an increase in the valuation allowance of $246.0 million before consideration of the Tax Act. The impact of
the Tax Act resulted in a reduction of our valuation allowance of $222.8 million, with a $172.2 million reduction due to rate and
$50.6 million reduction primarily as a result of the changes anticipated to the use of net operating losses generated after December
31, 2017. We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it
is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of December 31,
2017 and 2016 was $336.1 million and $264.3 million, respectively, as described in Note 16 to the consolidated financial statements.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the years ended December 31, 2017
and 2016 which are included in provision for income tax for the period. Tax returns for years 2013 through 2016 are subject to
future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under
examination.
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)
Year Ended December 31,
Increase (Decrease)
2018
2017
Amount
Percent
Net cash provided by operating activities
$
203,961
$
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of
year
288,774
(325,063)
167,672
$
378,359
(602,333)
229,198
5,224
(174,398)
891,107
(554,261)
162,448
282,546
277,322
5,224
(46.1)%
147.9 %
(241.8)%
NM
1.9 %
59.3 %
Cash, cash equivalents and restricted cash at end of year
$
450,218
$
282,546
$
167,672
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The decrease in net cash provided by operating activities of $174.4 million was attributable primarily to cash payments to terminate
community operating leases during the current year, an increase in facility operating expense at the communities operated during
both full years, and the impact of disposition activity through sales and lease terminations since the beginning of the prior year.
The change in net cash provided by (used in) investing activities of $891.1 million was primarily attributable to a $429.3 million
increase in net proceeds from the sale of assets, net sales of $278.5 million of marketable securities during the current year, net
purchases of $291.2 million of marketable securities during the prior year, and our contribution of $179.2 million in connection
with the formation of the Blackstone Venture during the prior year. These changes were partially offset by $271.8 million of cash
paid for the acquisition of six communities.
The change in net cash (used in) provided by financing activities was primarily attributable to our cash settlement of the aggregate
principal amount of the $316.3 million of 2.75% convertible senior notes during June 2018, the repayment of mortgage debt for
community dispositions, and a decrease in proceeds from debt compared to the prior year.
Our principal sources of liquidity have historically been from:
•
•
•
•
•
•
•
cash balances on hand, cash equivalents and marketable securities;
cash flows from operations;
proceeds from our credit facilities;
funds generated through unconsolidated venture arrangements;
proceeds from mortgage financing, refinancing of various assets or sale-leaseback transactions;
funds raised in the debt or equity markets; and
proceeds from the disposition of assets.
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, severance costs, general and administrative
expense and supply costs;
debt service and lease payments;
acquisition consideration, lease termination and restructuring costs, and transaction and integration costs;
capital expenditures and improvements, including the expansion, renovation, redevelopment and repositioning of our
current communities and the development of new communities;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
purchases of common stock under our share repurchase authorizations;
other corporate initiatives (including integration, information systems, branding and other strategic projects); and
prior to 2009, dividend payments.
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, severance costs, general and administrative
expense and supply costs;
debt service and lease payments;
transaction costs and expansion of our healthcare services;
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;
cash collateral required to be posted in connection with our financial instruments and insurance programs;
purchases of common stock under our share repurchase authorization; and
other corporate initiatives (including information systems and other strategic projects).
We are highly leveraged and have significant debt and lease obligations. As of December 31, 2018, we had two principal corporate-
level debt obligations: our secured credit facility providing commitments of $250.0 million and our separate unsecured letter of
credit facility providing for up to $66.2 million of letters of credit. As of December 31, 2018, 94.9%, or $3.5 billion, of our total
debt obligations represent non-recourse property-level mortgage financings.
63
As of December 31, 2018, we had $3.6 billion of debt outstanding, excluding capital and financing lease obligations, at a weighted-
average interest rate of 4.8%. No balance was drawn on our secured credit facility as of December 31, 2018. As of December 31,
2018, we had $0.9 billion of capital and financing lease obligations and $106.8 million of letters of credit had been issued under
our secured credit facility and separate unsecured letter of credit facility. For the year ending December 31, 2019, we will be
required to make approximately $88.3 million and $310.3 million of cash payments in connection with our existing capital and
financing leases and our operating leases, respectively.
Total liquidity of $592.5 million as of December 31, 2018 included $398.3 million of unrestricted cash and cash equivalents
(excluding restricted cash and lease security deposits of $100.2 million in the aggregate), $14.9 million of marketable securities,
and $179.4 million of availability on our secured credit facility.
As of December 31, 2018, we had $0.7 million of positive working capital. Due to the nature of our business, it is not unusual to
operate in the position of negative working capital because we collect revenues much more quickly, often in advance, than we are
required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current
liabilities. Our operations generally result in a very low level of current assets primarily stemming from our deployment of cash
to pay down long-term liabilities, to fund capital expenditures, and to pursue transaction opportunities. As of December 31, 2018,
the current portion of long-term debt was $294.4 million, including $31.2 million of mortgage debt related to 13 communities
classified as held for sale as of December 31, 2018.
Our capital expenditures are comprised of community-level, corporate and development capital expenditures. Community-level
capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence, including
for unit turnovers (subject to a $500 floor)) and community renovations, apartment upgrades and other major building infrastructure
projects. Corporate and other capital expenditures include those for information technology systems and equipment, the expansion
of our support platform and healthcare services programs, and the remediation or replacement of assets as a result of casualty
losses. Development capital expenditures include community expansions and major community redevelopment and repositioning
projects, including our Program Max initiative, and the development of new communities.
Through our Program Max initiative, we intend to expand, renovate, redevelop and reposition certain of our 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. We currently have six Program Max projects that have been approved, most of which have begun construction
and are expected to generate 69 net new units.
Following Hurricane Irma in 2017, legislation was adopted in the State of Florida in March 2018 that requires skilled nursing
homes and assisted living and memory care communities in Florida to obtain generators and fuel necessary to sustain operations
and maintain comfortable temperatures in the event of a power outage. Our impacted Florida communities must comply with the
requirements by January 1, 2019, subject to extension in certain circumstances. We made approximately $12.1 million of capital
expenditures in 2018, and we expect to make approximately $4.5 million of capital expenditures in 2019, to comply with this
legislation. In addition, our 2018 non-development capital expenditures included approximately $5.4 million of capital expenditures
at our communities for remediation costs related to Hurricanes Irma and Harvey.
The following table summarizes our actual 2018 capital expenditures for our consolidated business:
(in millions)
Community-level capital expenditures, net (1)
Corporate (2)
Non-development capital expenditures, net (3)
Development capital expenditures, net (4)
Total capital expenditures, net
Actual 2018
128.8
53.4
182.2
24.7
206.9
$
$
(1) Reflects the amount invested, net of lessor reimbursements of $12.2 million.
(2) Includes $17.5 million of remediation costs at our communities resulting from Hurricanes Harvey and Irma and for the
acquisition of emergency power generators at our impacted Florida communities. Amounts exclude reimbursement from our
property and casualty insurance policies of approximately $1.3 million.
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(3) Amount is included in Adjusted Free Cash Flow.
(4) Reflects the amount invested, net of lessor reimbursements of $1.7 million.
During 2018 we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that
our communities are in appropriate physical condition to support our strategy and determining what additional investments are
needed to protect the value of our community portfolio. As a result of that review, we have budgeted to make significant additional
near-term investments in our communities, a portion of which will be reimbursed by our lessors. In the aggregate, we expect our
full-year 2019 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $250 million.
For 2019, this includes an increase of approximately $75 million in our community-level capital expenditures relative to 2018,
primarily attributable to major building infrastructure projects. We also expect our full-year 2019 development capital expenditures,
net of anticipated lessors reimbursements, to be approximately $30 million. We anticipate that our 2019 capital expenditures will
be funded from cash on hand, cash flows from operations, and, if necessary, amounts drawn on our secured credit facility. With
this additional investment in our communities, we expect our Adjusted Free Cash Flow to be negative for 2019. In addition, we
expect that our 2020 community-level capital expenditures will continue to be elevated relative to 2018, but lower than 2019.
Execution on our strategy, including completing our capital expenditure plans and pursuing expansion of our healthcare services,
may require additional capital. 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, we may need to sell additional
equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership 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. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock.
If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to forego, delay or abandon our
plans.
We currently estimate that our existing cash flows from operations, together with cash on hand, amounts available under our
secured credit facility and proceeds from anticipated dispositions of owned communities and financings and refinancings of various
assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming a relatively stable macroeconomic
environment.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level
of capital expenditures, general economic conditions and the cost of capital. Volatility in the credit and financial markets may
have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Shortfalls in cash
flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to maintain capital
spending levels, to execute on our strategy or to pursue lease restructuring, development or acquisitions that we may identify. 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.
Company Indebtedness, Long-Term Leases and Hedging Agreements
Indebtedness
As of December 31, 2018, we had two principal corporate-level debt obligations: our secured credit facility providing commitments
of $250.0 million and our separate unsecured letter of credit facility providing for up to $66.2 million of letters of credit. As of
December 31, 2018, 94.9%, or $3.5 billion, of our total debt obligations represent non-recourse property-level mortgage financings.
Credit Facilities
On December 5, 2018, we entered into a Fifth Amended and Restated Credit Agreement with Capital One, National Association,
as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto (the “Amended
Agreement”). The Amended Agreement amended and restated in its entirety our Fourth Amended and Restated Credit Agreement
dated as of December 19, 2014 (the “Original Agreement”). The Amended Agreement provides commitments for a $250 million
revolving credit facility with a $60 million sublimit for letters of credit and a $50 million swingline feature. We have a one-time
right under the Amended Agreement to increase commitments on the revolving credit facility by an additional $100 million, subject
to obtaining commitments for the amount of such increase from acceptable lenders. The Amended Agreement provides us a one-
time right to reduce the amount of the revolving credit commitments, and we may terminate the revolving credit facility at any
time, in each case without payment of a premium or penalty. The Amended Agreement extended the maturity date of the Original
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Agreement from January 3, 2020 to January 3, 2024 and decreased the interest rate payable on drawn amounts. Amounts drawn
under the facility will continue to bear interest at 90-day LIBOR plus an applicable margin; however, the Amended Agreement
reduced the applicable margin from a range of 2.50% to 3.50% to a range of 2.25% to 3.25%. The applicable margin varies based
on the percentage of the total commitment drawn, with a 2.25% margin at utilization equal to or lower than 35%, a 2.75% margin
at utilization greater than 35% but less than or equal to 50%, and a 3.25% margin at utilization greater than 50%. A quarterly
commitment fee continues to be payable on the unused portion of the facility at 0.25% per annum when the outstanding amount
of obligations (including revolving credit and swingline loans and letter of credit obligations) is greater than or equal to 50% of
the revolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the revolving
credit commitment amount.
The credit facility is 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 and grant negative pledges in connection
therewith (rather than mortgaging such communities), provided that not more than 10% of the borrowing base may result from
communities subject to negative pledges. Availability under the revolving credit will vary from time to time based on borrowing
base calculations related to the appraised value and performance of the communities securing the credit facility and our consolidated
fixed charge coverage ratio.
The Amended Agreement contains typical affirmative and negative covenants, including financial covenants with respect to
minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. Amounts drawn on the credit facility
may be used for general corporate purposes.
As of December 31, 2018, no borrowings were outstanding on the revolving credit facility, $40.7 million of letters of credit were
outstanding, and the revolving credit facility had $179.4 million of availability. We also had a separate unsecured letter of credit
facility providing for up to $66.2 million of letters of credit as of December 31, 2018. Letters of credit totaling $66.1 million had
been issued under the separate facility as of that date.
Long-Term Leases
As of December 31, 2018, we operated 343 communities under long-term leases (252 operating leases and 91 capital and financing
leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous
communities are leased through an indivisible lease. We typically guarantee the performance and lease payment obligations of
our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition
of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of
default related to an individual property or limited number of properties within a master lease portfolio may result in a default on
the entire master lease portfolio.
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. We are responsible for all operating costs, including repairs, property
taxes and insurance. The initial lease terms primarily vary from 10 to 20 years and generally include renewal options ranging from
5 to 20 years. The remaining initial lease terms vary from less than 1 year to 14 years and generally provide for renewal or extension
options and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions,
maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring us to
maintain prescribed minimum net worth and stockholders’ equity levels and lease coverage ratios, and not to exceed prescribed
leverage ratios as further described below. In addition, our lease documents generally contain non-financial covenants, such as
those requiring us to comply with Medicare or Medicaid provider requirements. Certain leases contain cure provisions, which
generally allow us to post an additional lease security deposit if the required covenant is not met.
In addition, certain of our master leases and management agreements 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 ability to expand or develop or acquire senior housing communities and
operating companies.
For the year ended December 31, 2018, our cash lease payments for our capital and financing leases and our operating leases were
$132.5 million and $324.9 million, respectively. For the year ending December 31, 2019, we will be required to make approximately
$88.3 million and $310.3 million of cash lease payments in connection with our existing capital and financing leases and our
operating leases, respectively. Our capital expenditure plans for 2019 include required minimum spend of approximately $12
66
million for capital expenditures under certain of our community leases, and thereafter we are required to spend an average of
approximately $20 million per year under the initial lease terms of such leases.
Debt and Lease Covenants
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain
prescribed minimum net worth and stockholders’ equity levels and debt service and lease coverage ratios, and requiring us not to
exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or
entity basis. 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. The debt service and lease 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. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring
us to comply with Medicare or Medicaid provider requirements.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents.
Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could
cause a default under other debt and lease documents (including documents with other lenders and lessors).
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of
our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions
in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness
or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold
interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities
and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions
in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we
would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
As of December 31, 2018, we are in compliance with the financial covenants of our debt agreements and long-term leases.
Derivative Instruments
In the normal course of business, we enter into interest rate agreements with major financial institutions to effectively manage our
risk above certain interest rates on variable rate debt. As of December 31, 2018, $1.1 billion of our long-term debt, excluding
capital and financing lease obligations, is variable rate debt subject to interest rate cap agreements. The remaining $276.2 million
of our long-term variable rate debt is not subject to any interest rate cap 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, 2018.
(in millions)
Total
2019
2020
2021
2022
2023
Thereafter
Payments Due during the Year Ending December 31,
Contractual Obligations:
Long-term debt and line of
credit obligations (1)
Capital and financing lease
obligations (2)
Operating lease obligations (2)
Total contractual
obligations
Total commercial
$ 4,669.3
$
474.9
$
546.7
$
473.7
$
442.0
$
376.6
$
2,355.4
1,503.8
2,272.0
88.3
310.3
98.5
307.5
90.2
290.7
91.6
291.1
93.1
285.7
1,042.1
786.7
$ 8,445.1
$
873.5
$
952.7
$
854.6
$
824.7
$
755.4
$
4,184.2
construction commitments $
13.7
$
13.7
$
— $
— $
— $
— $
—
67
(1) Includes contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31,
2018 rate.
(2) Reflects future cash payments after giving effect to non-contingent lease escalators and assumes payments on variable rate
instruments at the December 31, 2018 rate. Additionally, the contractual obligation amounts include the residual value for
financing lease obligations.
The foregoing amounts exclude outstanding letters of credit aggregating to $106.8 million as of December 31, 2018.
Impacts of Inflation
Resident fees and management fees are our primary sources of revenue. These revenues are affected by the amount of the monthly
resident fee rates we charge and community occupancy rates. The rates charged at communities are highly dependent on local
market conditions and the competitive environment in which the communities operate. Substantially all of our senior housing
residency agreements allow for adjustments in the monthly fee payable 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 increases 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, salaries, wages and benefits costs
are a principal element of facility operating expense and are also dependent upon local market conditions and general inflationary
pressures. There can be no assurance that monthly resident fee rates can be increased, or that costs will not increase, above inflation
rates whether due to inflation or other causes.
Increases in prevailing interest rates as a result of inflation or other factors will increase our payment obligations on our variable-
rate obligations to the extent they are un-hedged and may increase our future borrowing and hedging costs. Although we have
interest rate cap agreements in place for a majority of our variable-rate debt, these agreements only limit our exposure to increases
in interest rates above certain levels and generally must be renewed every two to three years. As of December 31, 2018, $276.2
million of our outstanding variable-rate indebtedness is not subject to interest rate cap agreements.
Off-Balance Sheet Arrangements
As of December 31, 2018, 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 6 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.
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
estimates and judgments.
Self-Insurance Liability Accruals
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain
general liability and professional liability insurance policies for our owned, leased and managed communities under a master
insurance program, our current policies provide for deductibles for each and every claim. As a result, we are effectively self-
insured for claims that are less than the deductible amounts. In addition, we maintain a high-deductible workers compensation
program. Third-party insurers are responsible for claim costs above program deductibles and retentions.
The cost of our employee health and dental benefits, net of employee contributions, is shared by us and our communities based
on the respective number of participants working directly either at our corporate offices or at the communities. Cash received is
used to pay the actual costs of administering the program which include paid claims, third-party administrative fees, network
68
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. 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 becomes available.
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, 2018 and 2017, we have a valuation allowance against deferred tax assets of approximately $336.4 million and
$336.1 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 and timing of existing temporary
differences, tax planning strategies and estimates of future taxable income exclusive of the reversal of temporary differences,
although we are currently precluded under GAAP from considering estimates of future taxable income in our analysis due to our
cumulative historical operating losses.
Lease Accounting
We determine whether to account for our leases as either operating, capital, or financing leases depending on the underlying terms.
As of December 31, 2018, we operated 343 communities under long-term leases with operating, capital and financing lease
obligations. The determination of this classification requires 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 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.
Goodwill Impairment
As of December 31, 2018 and 2017, we had goodwill balances of $154.1 million and $505.8 million, respectively. 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 test goodwill for impairment annually during our fourth quarter, or whenever indicators of impairment arise. Factors we
consider important in our analysis of whether an indicator of impairment exists include a significant decline in our stock price or
market capitalization for a sustained period since the last testing date, significant underperformance relative to historical or projected
future operating results and significant negative industry or economic trends. We first assess qualitative factors to determine
whether it is necessary to perform a quantitative goodwill impairment test. 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. We are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative
assessment, that it is more likely than not that its fair value is less than its carrying amount. The fair values used in the quantitative
goodwill impairment test 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. We also consider market based measures such as earnings multiples in our analysis of estimated fair values of
our reporting units. If the quantitative goodwill impairment test results in a reporting unit's carrying amount exceeding its estimated
69
fair value, an impairment charge will be recorded based on the difference, with the impairment charge limited to the amount of
goodwill allocated to the reporting unit.
In estimating the fair value of our reporting units for purposes of our quantitative goodwill impairment testing, we utilize the
income approach, which includes future cash flow projections that are developed internally. Any estimates of future cash flow
projections necessarily involve predicting unknown future circumstances and events 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. In using the income approach to estimate the fair value
of reporting units for purposes of our goodwill impairment testing, we make certain key assumptions. Those assumptions include
future revenues, facility operating expenses, and cash flows, including sales proceeds that we would receive upon a sale of the
communities using estimated capitalization rates. We corroborate the estimated capitalization rates we use in these calculations
with capitalization rates observable from recent market transactions. 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. We also consider market based
measures such as earnings multiples in our analysis of estimated fair values of our reporting units.
During the three months ended September 30, 2017, we identified qualitative indicators of impairment of our goodwill, including
a significant decline in our stock price and market capitalization for a sustained period since the last testing date, significant
underperformance relative to historical and projected operating results, and an increased competitive environment in the senior
living industry. Based upon our qualitative assessment, we performed an interim quantitative goodwill impairment test as of
September 30, 2017, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has
been assigned with the reporting unit's carrying value. Based on the results of the quantitative goodwill impairment test, we
determined that the carrying amount of our Assisted Living and Memory Care reporting unit exceeded its estimated fair value by
$205.0 million as of September 30, 2017. As a result, we recorded a non-cash impairment charge of $205.0 million to goodwill
within the Assisted Living and Memory Care operating segment for the three months ended September 30, 2017. As of September
30, 2017, we concluded that there was no impairment of goodwill for the Independent Living and Health Care Services reporting
units.
During 2018, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price
and market capitalization for a sustained period during the three months ended March 31, 2018. As a result, we performed an
interim quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of
each reporting unit to which the goodwill has been assigned with the reporting unit's carrying value. In estimating the fair value
of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included
future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we
determined that the carrying value of our Assisted Living and Memory Care segment exceeded its estimated fair value by more
than the $351.7 million carrying value as of March 31, 2018. As a result, we recorded a non-cash impairment charge of $351.7
million to goodwill within the Assisted Living and Memory Care segment for the three months ended March 31, 2018.
As of October 1, 2018 and December 31, 2018, we concluded that there was no impairment of goodwill for the Independent Living
and Health Care Services reporting units. Based on the results of the annual quantitative goodwill impairment test, we determined
that the estimated fair value of our Health Care Services reporting unit exceeded its carrying value by approximately 17%. Goodwill
allocated to our Health Care Services reporting units is $126.8 million as of December 31, 2018.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, which we believe to be
reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growth rates and
operating margins used to calculate projected future cash flows and risk-adjusted discount rates. 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 capitalization and discount rates,
differences in the projected occupancy rates and changes in the cost structure of existing communities. Significant adverse changes
in our future revenues and/or operating margins, significant changes in the market for senior housing or the valuation of the real
estate of senior living communities, as well as other events and circumstances, including but not limited to increased competition
and changing economic or market conditions, including market control premiums, could result in changes in fair value and the
determination that additional goodwill is impaired.
Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there has been
a decline in the fair value of our reporting units, including estimating future cash flows, and if necessary, the fair value of our
assets and liabilities. As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize
material impairment charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of
70
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.
Property, Plant and Equipment and Leasehold Intangibles Impairment
As of December 31, 2018 and 2017, our long-lived assets were comprised primarily of $5.3 billion and $5.9 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 assigned to acquired assets and liabilities based on their estimated fair values.
We test property, plant and equipment and leasehold intangibles for recoverability annually during our fourth quarter or whenever
changes in circumstances indicate the carrying value may not be recoverable. Recoverability of an asset is estimated by comparing
its carrying value to the future net undiscounted cash flows expected to be generated by the asset, calculated utilizing the lowest
level of identifiable cash flows. If this comparison indicates that the carrying value of an asset 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 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.
In estimating the recoverability of property, plant and equipment and leasehold intangibles for purposes of our impairment testing,
we utilize future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily
involve predicting unknown future circumstances and events 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. In estimating the future cash flows of asset groups for purposes of
our property, plant and equipment and leasehold intangibles impairment test, we make certain key assumptions. Those assumptions
include future revenues, facility operating expenses, and cash flows, including sales proceeds that we would receive upon a sale
of the communities using estimated capitalization rates. We corroborate the estimated capitalization rates we use in these
calculations with capitalization rates observable from recent market transactions.
Determining the future cash flows of an asset group involves the use of significant estimates and assumptions, which we believe
to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include revenue growth rates
and operating margins used to calculate projected future cash flows. 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 capitalization rates, differences in the projected occupancy rates
and changes in the cost structure of existing communities. Significant adverse changes in our future revenues and/or operating
margins, significant changes in the market for senior housing or the valuation of the real estate of senior living communities, as
well as other events and circumstances, including but not limited to increased competition and changing economic or market
conditions, could result in changes in estimated future cash flows and the determination that additional assets are impaired.
During 2018, 2017 and 2016 we evaluated long-lived depreciable assets and determined in each year 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 for these certain properties and we recorded asset impairment charges of $78.0 million, $164.4 million and $166.2
million for 2018, 2017 and 2016, respectively, for property, plant and equipment and leasehold intangibles. These impairment
charges are primarily due to our decision to dispose of assets, either through sales or lease terminations, or lower than expected
performance of the underlying communities and equal the amount by which the carrying values of the assets exceed the estimated
fair value.
Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there has been
a decline in the fair value of our assets, including estimating future cash flows, and if necessary, the fair value of our assets. As
we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment
charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of the future cash flows
of assets, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for a
discussion of new accounting pronouncements.
71
Non-GAAP Financial Measures
This Annual Report on Form 10-K contains financial measures utilized by management to evaluate our operating performance
and liquidity that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). Each of these
measures, Adjusted EBITDA and Adjusted Free Cash Flow, should not be considered in isolation from or as superior to or as a
substitute for net income (loss), income (loss) from operations, net cash provided by (used in) operating activities, or other financial
measures determined in accordance with GAAP. We use these 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.
We strongly urge you to review the reconciliations of Adjusted EBITDA from our net income (loss), our Adjusted Free Cash Flow
from our net cash provided by (used in) operating activities, and our proportionate share of Adjusted Free Cash Flow of
unconsolidated ventures from such ventures' net cash provided by (used in) operating activities, along with our consolidated
financial statements included herein. We also strongly urge you not to rely on any single financial measure to evaluate our business.
We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA and Adjusted Free Cash
Flow may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-
GAAP measures in the same manner.
Adjusted EBITDA
Definition of Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before: provision (benefit) for income taxes; non-operating (income) expense
items; depreciation and amortization (including non-cash impairment charges); (gain) loss on sale or acquisition of communities
(including gain (loss) on facility lease termination and modification); straight-line lease expense (income), net of amortization of
(above) below market rents; amortization of deferred gain; non-cash stock-based compensation expense; and change in future
service obligation.
Management's Use of Adjusted EBITDA
We use Adjusted EBITDA to assess our overall 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 operating goals as well as achieve optimal operating 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 operating 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 operating performance based on operational
factors that management can impact in the short-term, namely revenues and the cost structure or expenses of the organization.
Adjusted EBITDA is one of the metrics used by senior management and our Board of Directors to review the operating performance
of the business on a regular basis. We believe that 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. Material limitations in making the adjustments to our net income (loss)
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 (or facility lease termination and modification) and extinguishment of debt activities generally
represent charges (gains), which may significantly affect our operating results; and
depreciation and amortization and asset impairment represent the wear and tear and/or reduction in value of our
communities and other assets, which affects the services we provide to residents and may be indicative of future needs
for capital expenditures.
72
We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because it is helpful in identifying
trends in our day-to-day performance since the items excluded have little or no significance to our day-to-day operations and it
provides an assessment of our revenue and expense management.
The table below reconciles Adjusted EBITDA from net income (loss).
(in thousands)
Net income (loss)
(Benefit) provision for income taxes
Equity in loss (earnings) of unconsolidated ventures
Debt modification and extinguishment costs
(Gain) loss on sale of assets
Other non-operating income
Interest expense
Interest income
Income (loss) from operations
Depreciation and amortization
Goodwill and asset impairment
Loss on facility lease termination and modification, net
Straight-line lease (income) expense
Amortization of deferred gain
Non-cash stock-based compensation expense
Adjusted EBITDA (1)
Years Ended December 31,
$
2018
(528,352) $
(49,456)
8,804
2017
(571,606) $
(16,515)
14,827
11,677
(293,246)
(14,099)
280,269
(9,846)
(594,249)
447,455
489,893
162,001
(17,218)
(4,358)
26,067
12,409
(19,273)
(11,418)
326,154
(4,623)
(270,045)
482,077
409,782
14,276
(20,990)
(4,366)
27,832
2016
(404,636)
5,378
(1,660)
9,170
(7,218)
(14,801)
385,617
(2,933)
(31,083)
520,402
248,515
11,113
(6,097)
(4,372)
32,285
$
509,591
$
638,566
$
770,763
(1) The calculation of Adjusted EBITDA includes transaction and organizational restructuring costs of $28.1 million for the year
ended December 31, 2018, transaction and strategic project costs of $25.4 million for the year ended December 31, 2017 and
integration, transaction and strategic project costs of $54.2 million for the year ended December 31, 2016. Transaction costs
include third party costs directly related to acquisition and disposition activity, community financing and leasing activity, our
assessment of options and alternatives to enhance stockholder value, and stockholder relations advisory matters, and are
primarily comprised of legal, finance, consulting, professional fees and other third party costs. Organizational restructuring
costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes,
including severance and retention costs. Strategic project costs include costs associated with certain strategic projects related
to refining our strategy, building out enterprise-wide capabilities (including the EMR roll-out project) and reducing costs and
achieving synergies by capitalizing on scale. Integration costs include transition costs associated with organizational
restructuring (such as severance and retention payments and recruiting expenses), third party consulting expenses directly
related to the integration of acquired communities (in areas such as cost savings and synergy realization, branding and
technology and systems work), and internal costs such as training, travel and labor, reflecting time spent by Company personnel
on integration activities and projects.
Adjusted Free Cash Flow
Definition of Adjusted Free Cash Flow
We define Adjusted Free Cash Flow as net cash provided by (used in) operating activities before: changes in operating assets and
liabilities; gain (loss) on facility lease termination and modification; and distributions from unconsolidated ventures from
cumulative share of net earnings; plus: proceeds from refundable entrance fees, net of refunds; and property insurance proceeds;
less: lease financing debt amortization and Non-Development CapEx. Non-Development CapEx is comprised of corporate and
community-level capital expenditures, including those related to maintenance, renovations, upgrades and other major building
infrastructure projects for our communities. Non-Development CapEx does not include capital expenditures for community
expansions and major community redevelopment and repositioning projects, including our Program Max initiative, and the
development of new communities. Amounts of Non-Development CapEx are presented net of lessor reimbursements in the
calculation of Adjusted Free Cash Flow.
73
Our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures is calculated based on our equity ownership
percentage and in a manner consistent with the definition of Adjusted Free Cash Flow for our consolidated entities. Our investments
in our unconsolidated ventures are accounted for under the equity method of accounting and, therefore, our proportionate share
of Adjusted Free Cash Flow of unconsolidated ventures does not represent cash available to our consolidated business except to
the extent it is distributed to us.
We adopted ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")
on January 1, 2018 and have applied ASU 2016-15 retrospectively for all periods presented. Among other things, ASU 2016-15
provides that debt prepayment and extinguishment costs will be classified within financing activities in the statement of cash
flows. We have identified $11.7 million and $7.9 million of cash paid for debt modification and extinguishment costs for the years
ended December 31, 2017 and 2016, respectively, which we have retrospectively classified as cash flows from financing activities,
resulting in a corresponding increase to the amount of net cash provided by operating activities for such periods. We did not change
our definition of Adjusted Free Cash Flow upon our adoption of ASU 2016-15. Following our adoption of ASU 2016-15, the
amount of Adjusted Free Cash Flow increased $11.7 million and $7.9 million for the years ended December 31, 2017 and 2016,
respectively. See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary
Data" for more information about ASU 2016-15.
Management's Use of Adjusted Free Cash Flow
We use Adjusted Free Cash Flow 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.
Adjusted Free Cash Flow measures our liquidity based on operational factors that management can impact in the short-term,
namely the cost structure or expenses of the organization. Adjusted Free Cash Flow 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,
(ii) to review our ability to pay dividends to stockholders or engage in share repurchases, (iii) to review our ability to make capital
expenditures, including development capital expenditures, (iv) for other corporate planning purposes and/or (v) in making
compensation determinations for certain of our associates (including our named executive officers).
Limitations of Adjusted Free Cash Flow
Adjusted Free Cash Flow has limitations as an analytical tool. Material limitations in making the adjustments to our net cash
provided by (used in) operating activities to calculate Adjusted Free Cash Flow and using this non-GAAP financial measure as
compared to GAAP net cash provided by (used in) operating activities, include:
• Adjusted Free Cash Flow does not represent cash available for dividends or discretionary expenditures, since we have
mandatory debt service requirements and other non-discretionary expenditures not reflected in this measure; and
•
the cash portion of non-recurring charges related to gain (loss) on lease termination and extinguishment of debt activities
generally represent charges (gains), which may significantly affect our financial results.
In addition, our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures has limitations as an analytical tool
because such measure does not represent cash available directly for use by our consolidated business except to the extent actually
distributed to us, and we do not have control, or we share control in determining, the timing and amount of distributions from our
unconsolidated ventures and, therefore, we may never receive such cash.
We believe Adjusted Free Cash Flow 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 or engage in share repurchases, (3) our ability to make capital expenditures, including developmental
capital expenditures, and (4) the underlying value of our assets, including our interests in real estate.
We believe presentation of our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures is useful to investors
since such measure reflects the cash generated by the operating activities of the unconsolidated ventures for the reporting period
and, to the extent such cash is not distributed to us, it generally represents cash used or to be used by the ventures for the repayment
of debt, investing in expansions or acquisitions, reserve requirements, or other corporate uses by such ventures, and such uses
reduce our potential need to make capital contributions to the ventures of our proportionate share of cash needed for such items.
74
The table below reconciles our Adjusted Free Cash Flow from our net cash provided by operating activities.
(in thousands)
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Net cash provided by operating activities
Changes in operating assets and liabilities
Proceeds from refundable entrance fees, net of refunds
Lease financing debt amortization
Loss on facility lease termination and modification, net
Distributions from unconsolidated ventures from cumulative share of net
earnings
Non-development capital expenditures, net
Property insurance proceeds
Adjusted Free Cash Flow (1)
$
$
$
Years Ended December 31,
2018
2017
2016
203,961
$
$
$
288,774
(325,063)
167,672
203,961
38,833
(422)
(59,808)
21,044
(2,896)
(182,249)
1,292
$
$
$
378,359
(602,333)
229,198
5,224
378,359
(15,851)
(2,179)
(64,906)
—
(8,258)
(186,467)
8,550
373,651
171,798
(422,108)
123,341
373,651
76,252
(901)
(63,267)
11,113
(23,544)
(220,767)
9,137
$
19,755
$
109,248
$
161,674
(1) The calculation of Adjusted Free Cash Flow includes transaction and organizational restructuring costs of $28.1 million for
the year ended December 31, 2018, transaction and strategic project costs of $25.4 million for the year ended December 31,
2017 and integration, transaction and strategic project costs of $54.2 million for the year ended December 31, 2016.
The table below reconciles our proportionate share of Adjusted Free Cash Flow of unconsolidated ventures from net cash provided
by operating activities of such unconsolidated ventures. For purposes of this presentation, amounts for each line item represent
the aggregate amounts of such line items for all of our unconsolidated ventures.
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Net cash provided by operating activities
Changes in operating assets and liabilities
Proceeds from refundable entrance fees, net of refunds
Non-development capital expenditures, net
Property insurance proceeds
$
$
$
Years Ended December 31,
$
$
$
2018
145,087
(60,489)
(77,986)
6,612
145,087
(1,361)
(19,983)
(69,180)
1,535
$
$
$
2017
269,755
(1,213,549)
1,022,544
78,750
269,755
(13,184)
(17,366)
(100,621)
2,425
2016
198,524
(100,712)
(88,262)
9,550
198,524
(2,508)
(7,675)
(98,305)
—
Adjusted Free Cash Flow of unconsolidated ventures
$
56,098
$
141,009
$
90,036
Brookdale weighted average ownership percentage
39.3%
25.1%
36.2%
Brookdale's proportionate share of Adjusted Free Cash Flow of
unconsolidated ventures
$
22,022
$
35,416
$
32,630
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risks from changes in interest rates charged on our credit facilities and other variable-rate indebtedness.
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, 2018, we had approximately $2.3 billion of long-term fixed rate debt and $1.4
75
billion of long-term variable rate debt. As of December 31, 2018, our total fixed-rate debt and variable-rate debt outstanding had
a weighted-average interest rate of 4.8%.
In the normal course of business, 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, 2018, $2.3 billion, or 62.0%, of our long-
term debt, excluding our capital and financing lease obligations, has fixed rates. As of December 31, 2018, $1.1 billion, or 30.4%,
of our long-term debt, excluding capital and financing lease obligations, is variable rate debt subject to interest rate cap agreements.
The remaining $276.2 million, or 7.6%, of our long-term debt is variable rate debt not subject to any interest rate cap agreements.
Our outstanding variable rate debt is indexed to LIBOR, and accordingly our annual interest expense related to variable rate debt
is directly affected by movements in LIBOR. After consideration of hedging instruments currently in place, increases in LIBOR
of 100, 200 and 500 basis points would have resulted in additional annual interest expense of $14.1 million, $26.7 million and
$37.2 million, respectively. Certain of the Company's variable debt instruments include springing provisions that obligate the
Company to acquire additional interest rate caps in the event that LIBOR increases above certain levels, and the implementation
of those provisions would result in additional mitigation of interest costs.
76
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, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
PAGE
78
79
80
81
82
83
84
122
77
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Brookdale Senior Living Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brookdale Senior Living Inc. (the Company) as of December
31, 2018 and 2017, the related consolidated statements of operations, equity, and cash flows for each of the three years in the
period ended December 31, 2018, and the related notes and financial statement schedule included in the Index at Item 15 (collectively
referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1993
Chicago, Illinois
February 14, 2019
78
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Brookdale Senior Living Inc.
Opinion on Internal Control over Financial Reporting
We have audited Brookdale Senior Living Inc.’s (the Company) internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements
of operations, equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and
financial statement schedule included in the Index at Item 15 and our report dated February 14, 2019 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitation of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 14, 2019
79
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)
Assets
Current assets
Cash and cash equivalents
Marketable securities
Restricted cash
Accounts receivable, net
Assets held for sale
Prepaid expenses and other current assets, net
Total current assets
Property, plant and equipment and leasehold intangibles, net
Restricted cash
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
Deferred liabilities
Deferred tax liability
Other liabilities
Total liabilities
Preferred stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2018 and
December 31, 2017; no shares issued and outstanding
Common stock, $0.01 par value, 400,000,000 shares authorized at December 31, 2018 and
December 31, 2017; 196,815,254 and 194,454,329 shares issued and 192,356,051 and
191,275,928 shares outstanding (including 5,756,435 and 4,770,097 unvested restricted shares),
respectively
Additional paid-in-capital
Treasury stock, at cost; 4,459,203 and 3,178,401 shares at December 31, 2018 and December 31,
2017, respectively
Accumulated deficit
Total Brookdale Senior Living Inc. stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
80
$
$
$
December 31,
2018
2017
$
$
$
398,267
14,855
27,683
133,905
93,117
106,189
774,016
5,275,427
24,268
27,528
154,131
51,472
160,418
6,467,260
294,426
23,135
95,049
298,227
60,414
2,080
773,331
3,345,754
851,341
262,761
18,371
197,289
5,448,847
222,647
291,796
37,189
128,961
106,435
114,844
901,872
5,852,145
22,710
129,794
505,783
67,977
195,168
7,675,449
495,413
107,088
91,825
329,966
68,358
3,126
1,095,776
3,375,324
1,164,466
224,304
70,644
214,644
6,145,158
—
—
1,968
4,151,147
1,913
4,126,549
(64,940)
(3,069,272)
1,018,903
(490)
1,018,413
6,467,260
$
(56,440)
(2,541,294)
1,530,728
(437)
1,530,291
7,675,449
$
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
$407,427, $430,288 and $469,388, respectively)
General and administrative expense (including non-cash stock-based
compensation expense of $26,067, $27,832 and $32,285, respectively)
Transaction costs
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Loss on facility lease termination and modification, net
Costs incurred on behalf of managed communities
Total operating expense
Income (loss) from operations
Interest income
Interest expense:
Debt
Capital and financing lease obligations
Amortization of deferred financing costs and debt discount
Change in fair value of derivatives
Debt modification and extinguishment costs
Equity in (loss) earnings of unconsolidated ventures
Gain on sale of assets, net
Other non-operating income
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to Brookdale Senior Living Inc. common
stockholders
Basic and diluted net income (loss) per share attributable to Brookdale
Senior Living Inc. common stockholders
$
$
For the Years Ended December 31,
2016
2017
2018
$
$
3,449,211
71,986
1,010,229
4,531,426
$
3,780,140
75,845
891,131
4,747,116
4,168,621
70,762
737,597
4,976,980
2,453,328
2,602,155
2,799,402
250,495
8,980
303,294
447,455
489,893
162,001
1,010,229
5,125,675
(594,249)
255,446
22,573
339,721
482,077
409,782
14,276
891,131
5,017,161
(270,045)
313,409
3,990
373,635
520,402
248,515
11,113
737,597
5,008,063
(31,083)
9,846
4,623
2,933
(188,505)
(83,604)
(7,757)
(403)
(11,677)
(8,804)
293,246
14,099
(577,808)
49,456
(528,352)
94
(172,635)
(140,664)
(12,681)
(174)
(12,409)
(14,827)
19,273
11,418
(588,121)
16,515
(571,606)
187
(174,027)
(202,012)
(9,400)
(178)
(9,170)
1,660
7,218
14,801
(399,258)
(5,378)
(404,636)
239
(528,258) $
(571,419) $
(404,397)
(2.82) $
(3.07) $
(2.18)
Weighted average shares used in computing basic and diluted net loss per
share
187,468
186,155
185,653
See accompanying notes to consolidated financial statements.
81
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)
Common Stock
Outstanding
Shares
Amount
Additional
Paid-In-
Capital
Treasury
Stock
Accumulated
Deficit
Stockholders'
Equity
Noncontrolling
Interest
Total
Equity
Balances at January 1, 2016
188,339
$
1,883
$ 4,069,283
$ (46,800) $ (1,565,478) $
2,458,888
$
(161) $2,458,727
Compensation expense related to
restricted stock grants
Net income (loss)
Issuance of common stock under
Associate Stock Purchase
Plan
Restricted stock, net
Purchase of treasury stock
Shares withheld for employee
taxes
Other
—
—
172
2,396
(750)
(111)
—
—
—
2
24
(8)
(1)
—
32,285
—
2,347
(24)
8
(1,639)
137
—
—
—
—
(9,640)
—
—
—
32,285
—
32,285
(404,397)
(404,397)
(239)
(404,636)
—
—
—
—
2,349
—
(9,640)
(1,640)
137
—
—
—
—
150
2,349
—
(9,640)
(1,640)
287
Balances at December 31, 2016
190,046
1,900
4,102,397
(56,440)
(1,969,875)
2,077,982
(250)
2,077,732
Compensation expense related to
restricted stock grants
Net income (loss)
Issuance of common stock under
Associate Stock Purchase
Plan
Restricted stock, net
Shares withheld for employee
taxes
Other
—
—
181
1,421
(372)
—
—
—
2
14
(3)
—
27,832
—
2,039
(14)
(5,886)
181
—
—
—
—
—
—
—
27,832
—
27,832
(571,419)
(571,419)
(187)
(571,606)
—
—
—
—
2,041
—
(5,889)
181
—
—
—
—
2,041
—
(5,889)
181
Balances at December 31, 2017
191,276
1,913
4,126,549
(56,440)
(2,541,294)
1,530,728
(437)
1,530,291
Compensation expense related to
restricted stock grants
Net income (loss)
Issuance of common stock under
Associate Stock Purchase
Plan
Restricted stock, net
Purchase of treasury stock
Shares withheld for employee
taxes
Other, net
—
—
207
2,593
(1,281)
(439)
—
—
—
1
26
—
(4)
32
26,067
—
1,468
(26)
—
(3,057)
146
—
—
—
—
(8,500)
—
—
—
26,067
(528,258)
(528,258)
—
(94)
26,067
(528,352)
—
—
—
—
280
1,469
—
(8,500)
(3,061)
458
—
—
—
—
41
1,469
—
(8,500)
(3,061)
499
Balances at December 31, 2018
192,356
$
1,968
$ 4,151,147
$ (64,940) $ (3,069,272) $
1,018,903
$
(490) $1,018,413
See accompanying notes to consolidated financial statements.
82
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Debt modification and extinguishment costs
Depreciation and amortization, net
Goodwill and asset impairment
Equity in loss (earnings) of unconsolidated ventures
Distributions from unconsolidated ventures from cumulative share of net earnings
Amortization of deferred gain
Amortization of entrance fees
Proceeds from deferred entrance fee revenue
Deferred income tax (benefit) provision
Straight-line lease (income) expense
Change in fair value of derivatives
Gain on sale of assets, net
Loss on facility lease termination and modification, net
Non-cash stock-based compensation expense
Non-cash interest expense on financing lease obligations
Non-cash management contract termination gain
Other
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets, net
Trade accounts payable and accrued expenses
Tenant refundable fees and security deposits
Deferred revenue
Net cash provided by operating activities
Cash Flows from Investing Activities
Change in lease security deposits and lease acquisition deposits, net
Purchase of marketable securities
Sale of marketable securities
Additions to property, plant and equipment and leasehold intangibles, net
Acquisition of assets, net of related payables and cash received
Investment in unconsolidated ventures
Distributions received from unconsolidated ventures
Proceeds from sale of assets, net
Property insurance proceeds
Other
Net cash provided by (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
Purchase of treasury stock
Payment of financing costs, net of related payables
Proceeds from refundable entrance fees, net of refunds
Payments for lease termination
Payments of employee taxes for withheld shares
Other
Net cash (used in) provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
$
For the Years Ended December 31,
2017
2018
2016
$
(528,352) $
(571,606) $
(404,636)
11,677
455,212
489,893
8,804
2,896
(4,358)
(1,670)
3,218
(52,367)
(17,218)
403
(293,246)
140,957
26,067
10,894
(8,724)
(1,292)
(4,964)
26,762
(60,503)
(1,046)
918
203,961
1,163
(14,823)
293,273
(225,473)
(271,771)
(9,124)
12,850
499,807
1,292
1,580
288,774
606,921
(896,744)
200,000
(200,000)
(4,256)
(16,317)
(422)
(12,548)
(3,061)
1,364
(325,063)
167,672
282,546
450,218
12,409
494,758
409,782
14,827
8,258
(4,366)
(2,901)
5,712
(15,309)
(20,990)
174
(19,273)
14,276
27,832
17,744
—
(8,819)
12,747
21,970
(4,527)
(422)
(13,917)
378,359
(2,113)
(341,187)
50,000
(213,887)
(5,196)
(199,017)
29,035
70,507
8,550
975
(602,333)
9,170
529,802
248,515
(1,660)
23,544
(4,372)
(4,195)
13,980
3,248
(6,097)
178
(7,218)
—
32,285
26,496
—
(9,137)
1,581
2,954
(83,248)
(839)
3,300
373,651
(2,225)
—
—
(333,647)
(12,157)
(13,377)
218,973
297,932
9,137
7,162
171,798
1,307,205
(1,054,161)
100,000
(100,000)
—
(17,269)
(2,179)
(552)
(5,889)
2,043
229,198
5,224
277,322
282,546
$
387,348
(469,309)
1,276,500
(1,586,500)
(9,640)
(10,857)
(901)
(9,250)
(1,640)
2,141
(422,108)
123,341
153,981
277,322
$
See accompanying notes to consolidated financial statements.
83
BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is an 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 quality service, care and living accommodations for residents. The Company operates and manages
independent living, assisted living, memory care and continuing care retirement communities ("CCRCs"). The Company also
offers a range of home health, hospice, and outpatient therapy services to residents of many of its communities and to seniors
living outside of its communities.
The Company has five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services;
and Management Services. In prior periods, the Company referred to the Independent Living segment as the Retirement Centers
segment, the Assisted Living and Memory Care segment as the Assisted Living segment, and the Health Care Services segment
as the Brookdale Ancillary Services segment. The name changes had no effect on the underlying methodology related to, or results
of operations of, the segments.
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"). Except for the changes for the impact of the recently adopted accounting
pronouncements discussed in this Note, the Company has consistently applied its accounting policies to all periods presented in
these consolidated financial statements. The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and its consolidated 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 operations, are accounted for by the equity method.
The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in
the accompanying consolidated financial statements. Noncontrolling interest represents the share of consolidated entities owned
by third parties. Noncontrolling interest is adjusted for the noncontrolling holder's share of additional contributions, distributions
and the proportionate share of the net income or loss of each respective entity.
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 with one or more of the following characteristics: (a) the total equity investment
at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders
of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights,
(ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity;
or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's
activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company
performs this analysis on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary
beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right
to receive its benefits, which are potentially significant to the VIE. Refer to Note 6 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, leasing transactions, 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.
84
Revenue Recognition
Resident Fees
Resident fee revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for the
services provided. These amounts are due from residents or third-party payors and include variable consideration for retroactive
adjustments, if any, under reimbursement programs. Performance obligations are determined based on the nature of the services
provided. Resident fee revenue is recognized as performance obligations are satisfied.
Under the Company's senior living residency agreements, which are generally for a contractual term of 30 days to one year, the
Company provides senior living services to residents for a stated daily or monthly fee. The Company recognizes revenue for
housing services under independent living, assisted living and memory care residency agreements in accordance with the provisions
of ASC 840, Leases ("ASC 840"). The Company recognizes revenue for skilled nursing residency, assistance with activities of
daily living, memory care services, inpatient therapy, healthcare, and personalized health services in accordance with the provisions
of ASC 606, Revenue from Contracts with Customers ("ASC 606"). The Company has determined that the senior living services
included under the daily or monthly fee have the same timing and pattern of transfer and are a series of distinct services that are
considered one performance obligation which is satisfied over time.
The Company enters into contracts to provide home health, hospice, and outpatient therapy services. The Company recognizes
revenue for home health, hospice, and outpatient therapy services in accordance with the provisions of ASC 606. Each service
provided under the contract is capable of being distinct, and thus, the services are considered individual and separate performance
obligations which are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives revenue for services under various third-party payor programs which include Medicare, Medicaid, and
other third-party payors. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations
are included in the determination of the estimated transaction price for providing services. The Company estimates the transaction
price based on the terms of the contract with the payor, correspondence with the payor and historical payment trends, and retroactive
adjustments are recognized in future periods as final settlements are determined.
Certain of the Company's communities have residency agreements which require the resident to pay an upfront entrance fee prior
to moving into the community, which is partially refundable in certain circumstances. 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, or in some agreements, upon the resale of a comparable unit or 12 months after the
resident vacates the unit. The refundable portion of the fee is not amortized and is included in refundable entrance fees. All
refundable amounts due to residents at any time in the future are classified as current liabilities.
Management Services
The Company manages certain communities under contracts which provide periodic management fee payments to the Company.
Management fees are generally determined by an agreed upon percentage of gross revenues (as defined in the management
agreement). Certain management contracts also provide for an annual incentive fee to be paid to the Company upon achievement
of certain metrics identified in the contract. The Company recognizes revenue for community management services in accordance
with the provisions of ASC 606. Although there are various management and operational activities performed by the Company
under the contracts, the Company has determined that all community operations management activities are a single performance
obligation, which is satisfied over time as the services are rendered. The Company estimates the amount of incentive fee revenue
expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided. The Company’s
estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the
communities for services provided and related costs incurred. 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.
Gain on Sale of Assets
The Company regularly enters into real estate transactions which may include the disposal of certain communities, including the
associated real estate. The Company recognizes income from real estate sales under ASC 610-20, Other Income - Gains and Losses
from Derecognition of Nonfinancial Assets ("ASC 610-20"). Under ASC 610-20, income is recognized when the transfer of control
occurs and the Company applies the five-step model for recognition to determine the amount and timing of income to recognize
for all real estate sales.
85
The Company accounts for the sale of equity method investments under ASC 860, Transfers and Servicing ("ASC 860"). Under
ASC 860, income is recognized when the transfer of control occurs and the Company has no continuing involvement with the
transferred financial assets.
Purchase Accounting
For the acquisition of assets that do not meet the definition of a business, the Company accounts for the transaction as an asset
acquisition at the purchase price, including acquisition costs, allocated among the acquired assets and assumed liabilities, including
identified intangible assets and liabilities, based upon the relative fair values using level 3 inputs at the date of acquisition. See
"Recently Adopted Accounting Pronouncements" in this footnote.
For acquisitions of a business, the Company accounts for the transaction as a business combination pursuant to the acquisition
method in accordance with ASC 805, Business Combinations, and assets acquired and liabilities assumed, including identified
intangible assets and liabilities, are recorded at fair value. 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 determination of fair value involves the use of significant judgment and estimation and commonly involves Level
3 fair value estimates.
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.
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 property were 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 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 operating 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 operating lease-related
intangibles to facility lease expense over the remaining life of the associated lease plus any estimated renewal periods.
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.
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 using primarily Level 2 inputs.
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.
In connection with a business combination, 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. Transaction
costs associated with business combinations are expensed as incurred.
86
Deferred Financing Costs
Third-party fees and costs incurred to obtain long-term debt are recorded as a direct adjustment to the carrying value of debt and
amortized on a straight-line basis, which approximates the effective yield method, over the term of the related debt. 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.
Stock-Based Compensation
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. Generally, 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 judgment in estimating the probability of
achievement of these performance targets.
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.
On January 1, 2017, the Company adopted Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation:
Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09") and changed its policy from estimating forfeitures
to recording forfeitures when they occur. The Company’s adoption of ASU 2016-09 did not have a material impact on its
consolidated financial statements.
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 basis 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.
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, marketable securities, and restricted cash are reflected in the accompanying consolidated balance sheets
at amounts considered by management to reasonably approximate fair value due to the short maturity.
87
Cash, Cash Equivalents and Restricted Cash
The Company defines cash and cash equivalents as cash and investments with maturities of 90 days or less when purchased.
Restricted cash consists principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and
consists of the following:
(in thousands)
Current:
December 31,
2018
2017
Real estate tax and property insurance escrows
$
18,177
$
Replacement reserve escrows
Resident deposits
Other
Subtotal
Long term:
Insurance deposits
CCRC escrows
Debt service reserve
Subtotal
Total
Marketable Securities
8,273
489
744
27,683
14,370
9,618
280
24,268
$
51,951
$
21,603
10,960
678
3,948
37,189
12,364
8,526
1,820
22,710
59,899
Investments in commercial paper and corporate bond instruments with original maturities of greater than 90 days are classified
as marketable securities.
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 $24.8 million and $23.1 million as of December 31,
2018 and 2017, 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. 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 adjustments to these accrued amounts are recorded in
net revenues when known.
Assets Held for Sale
The Company designates communities as held for sale when it is probable that the properties will be sold within one year. The
Company records these assets on the consolidated balance sheet at the lesser of the carrying value and fair value less estimated
selling costs. If the carrying value is greater than the fair value less the estimated selling costs, the Company records an impairment
charge. The Company allocates a portion of the goodwill of a reporting unit to the disposal if the disposal constitutes a business.
The Company determines the fair value of the communities based primarily on purchase and sale agreements from prospective
purchasers (Level 2 input). The Company evaluates the fair value of the assets held for sale each period to determine if it has
changed. The long-lived assets are not depreciated while classified as held for sale.
88
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 – 3
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 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, calculated utilizing
the lowest level of identifiable cash flows. 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 (Level 3).
Investment in Unconsolidated Ventures
In accordance with ASC 810, Consolidation, 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, none of these ventures
are consolidated.
The initial carrying value of investments in unconsolidated ventures is based on the amount paid to purchase the investment interest
or the carrying value of assets contributed to the unconsolidated ventures. 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.
Distributions received from an investee are recognized as a reduction in the carrying amount of the investment. If distributions
are received from an investee that would reduce the carrying amount of an equity method investment below zero, the Company
evaluates the facts and circumstances of the distributions to determine the appropriate accounting for the excess distribution,
including an evaluation of the source of the proceeds and implicit or explicit commitments to fund the investee. The excess
distribution is either recorded as a gain on investment, or in instances where the source of proceeds is from financing activities or
the Company has a significant commitment to fund the investee, the excess distribution would result in an equity method liability
and the Company would continue to record its share of the investee's earnings and losses. When the Company does not have a
significant requirement to contribute additional capital over and above the original capital commitment and the carrying value of
the investment in the unconsolidated venture is reduced to zero, the Company discontinues applying the equity method of accounting
unless the venture has 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.
89
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. A current fair value of an investment that is less than its carrying
amount may indicate a loss in value of the investment. If the Company determines that an equity method investment is other than
temporarily impaired, it is recorded at its fair value with an impairment charge recognized in asset impairment expense for the
difference between its carrying amount and fair value based on Level 3 inputs.
Goodwill and Intangible Assets
The Company follows ASC 350, Goodwill and Other Intangible Assets, and tests goodwill for impairment annually during the
fourth quarter or whenever indicators of impairment arise. Factors the Company considers important in its analysis of whether an
indicator of impairment exists include a significant decline in the Company's stock price or market capitalization for a sustained
period since the last testing date, significant underperformance relative to historical or projected future operating results and
significant negative industry or economic trends. The Company first assesses qualitative factors to determine whether it is necessary
to perform a quantitative goodwill impairment test. 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
Company is not required to calculate the fair value of a reporting unit unless the Company determines, based on a qualitative
assessment, that it is more likely than not that its fair value of a reporting unit is less than its carrying value. The fair values used
in the quantitative goodwill impairment test are estimated using Level 3 inputs 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. The Company also considers market based measures such as earnings
multiples in its analysis of estimated fair values of its reporting units. If the quantitative goodwill impairment test results in a
reporting unit's carrying value exceeding its estimated fair value, an impairment charge will be recorded based on the difference
in accordance with ASU 2017-04, Intangibles - Goodwill and Other, with the impairment charge limited to the amount of goodwill
allocated to the reporting unit.
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 value of the asset to the estimated future undiscounted net cash flows expected to be generated
by the asset (Level 3 input). If estimated future undiscounted net cash flows are less than the carrying value 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 using Level 3 inputs of the
indefinite-lived intangible asset with its carrying value. If the carrying value 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
Convertible Debt Instruments
Estimated
Useful Life
(in years)
2 – 5
3 – 9
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
90
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
becomes available.
During the years ended December 31, 2018, 2017 and 2016, the Company reduced its estimate for the amount of expected losses
for general liability and professional liability and workers compensation claims based on recent historical claims experience. The
reduction in these accrued reserves decreased facility operating expense by $14.6 million, $9.9 million and $35.4 million for the
years ended December 31, 2018, 2017 and 2016, respectively.
Lease Accounting
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, 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 minimum lease escalators and amortization of deferred gains in situations where sale-leaseback
transactions have occurred.
For capital and financing lease obligation arrangements, a liability is established on the Company's consolidated balance sheet
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 sheet. 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.
Certain of the Company's operating 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 if
certain continuing involvement criteria are met. Under sale-leaseback accounting, the Company removes the community and
related liabilities from the consolidated balance sheet. 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. In cases of sale leaseback transactions in which
the Company has continuing involvement, other than normal leasing activities, the Company does not record the sale until such
involvement terminates.
For leases in which the Company is involved with the construction of a building, the Company accounts for the leases 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 total project costs related to construction in progress. Once construction
is complete, the Company considers the requirements under ASC Subtopic 840-40. If the arrangement qualifies for sale-leaseback
accounting, the Company removes the assets and related liabilities from the consolidated balance sheet. 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.
91
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01").
ASU 2017-01 clarifies the definition of a business to assist companies in determining whether transactions should be accounted
for as an asset acquisition or a business combination. Under ASU 2017-01, if substantially all of the fair value of the assets acquired
is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business and the transaction
is accounted for as an asset acquisition. Transaction costs associated with asset acquisitions are capitalized while those associated
with business combinations are expensed as incurred. The Company adopted ASU 2017-01 on a prospective basis on January 1,
2018. The changes to the definition of a business may result in certain future acquisitions of real estate, communities or senior
housing operating companies being accounted for as asset acquisitions.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, a consensus of the FASB Emerging
Issues Task Force ("ASU 2016-18"). ASU 2016-18 intends to address the diversity in practice that exists in the classification and
presentation of changes in restricted cash on the statement of cash flows. The amendments require that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017. The Company adopted ASU 2016-18 on January 1, 2018 and the changes required by ASU 2016-18
were applied retrospectively to all periods presented. The Company has identified that the inclusion of the change in restricted
cash within the retrospective presentation of the statements of cash flows resulted in a $1.0 million increase to the amount of net
cash used in investing activities for the year ended December 31, 2017 and a $5.0 million decrease to the amount of net cash
provided by investing activities for the year ended December 31, 2016.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash
Payments ("ASU 2016-15"). ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented in
the statement of cash flows. Among other clarifications on the classification of certain transactions within the statement of cash
flows, the amendments in ASU 2016-15 provide that debt prepayment and extinguishment costs will be classified within financing
activities within the statement of cash flows. ASU 2016-15 is effective for the Company for the fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-15 on January 1, 2018 and the
changes in classification within the statement of cash flows were applied retrospectively to all periods presented. The Company's
retrospective application resulted in an $11.7 million increase to the amount of net cash provided by operating activities and an
$11.7 million decrease to the amount of net cash provided by financing activities for the year ended December 31, 2017 and a
$7.9 million increase to the amount of net cash provided by operating activities and a $7.9 million increase to the amount of net
cash used in financing activities for the year ended December 31, 2016.
In May 2014, the FASB issued ASU 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. The five step model defined by ASU 2014-09 requires the Company to (i) identify the contracts with the
customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction
price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied.
Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration
expected in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced disclosure of revenue
arrangements. ASU 2014-09 may be applied retrospectively to each prior period (full retrospective) or retrospectively with the
cumulative effect recognized as of the date of initial application (modified retrospective). ASU 2014-09, as amended, is effective
for the Company's fiscal year beginning January 1, 2018, and the Company adopted the new standard under the modified
retrospective approach. Under the modified retrospective approach, the guidance is applied to the most current period presented,
recognizing the cumulative effect of the adoption change as an adjustment to beginning retained earnings. The Company has
determined that the adoption of ASU 2014-09 did not result in an adjustment to retained earnings as of January 1, 2018.
The Company has determined that the application of ASU 2014-09 resulted in a change to the amounts of resident fee revenue
and facility operating expense with no net impact to the amount of income from operations, for the impact of implicit price
concessions on the estimation of the transaction price. The Company recognized $3.4 billion of resident fee revenue and $2.5
billion of facility operating expense for the year ended December 31, 2018. The impact to resident fee revenue and facility operating
expense as a result of applying ASC 606 was a decrease of $8.4 million for the year ended December 31, 2018.
The Company has determined that the application of ASU 2014-09 resulted in no significant change to the annual amount of
revenue recognized for management fees under the Company’s community management agreements; however, the Company
recognizes an estimated amount of incentive fee revenue earlier during the annual contract period. The Company has determined
that the application of ASU 2014-09 resulted in a change to the amounts presented for revenue recognized for reimbursed costs
incurred on behalf of managed communities and reimbursed costs incurred on behalf of managed communities with no net impact
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to the amount of income from operations, as a result of the combination of all community operations management activities as a
single performance obligation for each contract. The Company recognized $1.0 billion of revenue for reimbursed costs incurred
on behalf of managed communities and $1.0 billion of reimbursed costs incurred on behalf of managed communities for the year
ended December 31, 2018, in accordance with ASU 2014-09. The impact to revenue for reimbursed costs incurred on behalf of
managed communities and reimbursed costs incurred on behalf of managed communities as a result of applying ASC 606 was an
increase of $46.1 million for the year ended December 31, 2018.
Additionally, real estate sales are within the scope of ASU 2014-09, as amended by ASU 2017-05, Other Income - Gains and
Losses from the Derecognition of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the scope of subtopic 610-20 and
adds guidance for partial sales of nonfinancial assets. Under ASU 2014-09 and ASU 2017-05, the income recognition for real
estate sales is largely based on the transfer of control versus continuing involvement under the former guidance. As a result, more
transactions may qualify as sales of real estate and gains or losses may be recognized sooner. The Company adopted ASU 2014-09,
as amended by ASU 2017-05, under the modified retrospective approach as of January 1, 2018 and now applies the five step
revenue model to all subsequent sales of real estate.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments ("ASU 2016-13"). ASU 2016-13 replaces the current incurred loss impairment methodology for credit losses with a
methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The
Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and
disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 amends the existing accounting
principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02
requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for most leases. Additionally, ASU
2016-02 makes targeted changes to lessor accounting, including changes to align certain aspects with the revenue recognition
model, and requires enhanced disclosure of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted
Improvements ("ASU 2018-11"). ASU 2018-11 provides entities with a transition method option to not restate comparative periods
presented, but to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
In addition, ASU 2018-11 provides entities with a practical expedient allowing lessors to not separate nonlease components from
the associated lease components when certain criteria are met. ASU 2016-02 and ASU 2018-11 are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. The Company is required to adopt these lease
accounting standards effective January 1, 2019 and will utilize the modified retrospective transition method with no adjustments
to comparative periods presented. Additionally, the Company will elect the package of practical expedients within ASU 2016-02
that allows an entity to not reassess as of January 1, 2019 its prior conclusions on whether an existing contract contains a lease,
lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs. While the
Company continues to assess certain effects of adoption, it has concluded that the most significant effects relate to the recognition
of lease liabilities and right-of-use assets for operating leases on the balance sheet and additional disclosures about the Company’s
leases.
The Company currently expects that the adoption of ASU 2016-02 will result in the recognition of lease liabilities of approximately
$1.6 billion and right-of-use assets on the consolidated balance sheet for its existing community, office, and equipment operating
leases based on the remaining minimum rental payments as of January 1, 2019. Such right-of-use asset amount will be recognized
based upon the amount of the recognized lease liabilities, adjusted for accrued lease payments, intangible assets, and right of use
asset impairment charges. As of December 31, 2018, the Company had a net liability of $0.2 billion recognized on its consolidated
balance sheet for accrued lease payments and intangible assets for operating leases and the Company has concluded that the initially
recognized right-of-use assets will be $0.2 billion less than the lease liabilities recognized as of January 1, 2019. Additionally, the
Company has concluded that the previously unrecognized right-of-use assets will be reviewed for impairment effective January
1, 2019, which the Company currently expects will result in a reduction to the initially recognized right-of-use assets and a
cumulative effect adjustment to beginning retained earnings as of January 1, 2019. The Company is in the process of evaluating
the initial right-of-use asset for impairment. As a result of the Company’s planned election of the package of practical expedients
within ASU 2016-02, the Company currently expects that there will be no changes to the classification of its existing operating,
capital and financing leases as of January 1, 2019 and that there will be no changes to the amounts recognized on its balance sheet
for its existing capital and financing leases as of January 1, 2019.
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Subsequent to the adoption of ASU 2016-02, lessors are required to separately recognize and measure the lease component of a
contract with a customer utilizing the provisions of ASC 842, Leases ("ASC 842") and the nonlease components utilizing the
provisions of ASC 606. To separately account for the components, the transaction price is allocated among the components based
upon the estimated stand alone selling prices of the components. Additionally, certain components of a contract which were
previously included within the lease element recognized in accordance with ASC 840 prior to the adoption of ASU 2016-02 (such
as common area maintenance services, other basic services, and executory costs) are recognized as nonlease components subject
to the provisions of ASC 606 subsequent to the adoption of ASU 2016-02. Entities are required to recognize a cumulative effect
adjustment to beginning retained earnings as of the initial application date of ASU 2016-02 for changes to amounts recognized
for these certain components for the transition from ASC 840 to ASC 606. However, entities are permitted to elect the practical
expedient under ASU 2018-11 allowing lessors to not separate nonlease components from the associated lease components when
certain criteria are met. Entities that elect to utilize the lease/nonlease component combination practical expedient under ASU
2018-11 upon initial application of ASC 842 are required to apply the practical expedient to all new and existing transactions
within a class of underlying assets that qualify for the expedient as of the initial application date with a cumulative effect adjustment
to beginning retained earnings as of the initial application date for any changes to amounts recognized related to existing transactions.
For the year ended December 31, 2018, the Company recognized revenue for housing services under independent living, assisted
living and memory care residency agreements in accordance with the provisions of ASC 840 and the Company recognized revenue
for assistance with activities of daily living, memory care services, healthcare, and personalized health services under independent
living, assisted living and memory care residency agreements in accordance with the provisions of ASC 606.
Upon adoption of ASU 2016-02 and ASU 2018-11, the Company will elect the lessor practical expedient within ASU 2018-11
and has concluded that it will recognize, measure, present and disclose the revenue for housing services under the Company's
senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts
rather than allocating the consideration and separately accounting for it under ASC 842 and ASC 606. The Company has determined
that the housing services included under the Company’s existing independent living, assisted living and memory care residency
agreements as of January 1, 2019 have the same timing and pattern of transfer and the Company has concluded that it will recognize
the revenue for housing services under the Company's independent living, assisted living and memory care residency agreements
based upon the predominant component of the contract.
The Company has concluded that the nonlease components of the Company’s independent living, assisted living and memory care
residency agreements are the predominant component of the contract for the Company’s existing agreements as of January 1,
2019. Additionally, the Company currently expects that the nonlease components of the Company’s independent living, assisted
living and memory care residency agreements entered into in 2019 will be identified as the predominant component of such
contracts. Therefore, beginning January 1, 2019, the Company currently expects that it will recognize revenue for its independent
living, assisted living and memory care residency agreements under ASC 606 for the Company’s existing agreements as of January
1, 2019 and for agreements entered into thereafter. After the adoption of ASU 2016-02 and ASU 2018-11, the Company currently
expects the timing and pattern of revenue recognition will be substantially the same as that prior to the adoption of these standards.
As a result of the Company's planned election of the package of practical expedients within ASU 2016-02, the Company will
continue to recognize deferred revenue for existing contracts as of December 31, 2018 over the lease term. In addition, ASU
2016-02 has changed the definition of initial direct costs of a lease, with the initial direct costs that are initially deferred and
recognized over the term of the lease limited to costs that are both incremental and direct. The Company has concluded that the
contract origination costs recognized on the balance sheet as of December 31, 2018 are in excess of the initial direct costs that
would have been deferred under the provisions of ASU 2016-02. As a result of the Company’s planned election of the package of
practical expedients, the Company currently expects that the contract origination costs recognized on the balance sheet as of
December 31, 2018 will continue to be amortized during 2019 over the lease term. The Company currently expects that certain
costs previously deferred upon new contract origination will be required to be recognized within facility operating expense in
2019.
The Company is finalizing the impact of the adoption of ASU 2016-02 and 2018-11 on its consolidated balance sheet. The Company
has substantially completed the process of estimating the operating lease liabilities as of January 1, 2019, based on the remaining
minimum rental payments and the Company’s estimate of its incremental borrowing rate as of such date. The Company is in the
process of completing its estimate of impairment of its previously unrecognized right-of-use assets effective January 1, 2019. The
recognition of the related deferred income tax impact including any impact on the valuation allowance will be finalized once these
analyses are completed. The cumulative effect of the adoption will be reflected as an adjustment to beginning accumulated deficit
on the Company's balance sheet effective January 1, 2019. Additionally, the Company continues to monitor recent accounting
standard setting activities of the FASB, and the Company continues to complete its final evaluation of the impact that the adoption
of ASU 2016-02 and ASU 2018-11 will have on its disclosures.
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Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on
the Company's consolidated financial position or results of operations.
3. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock
outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For
purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding. Under the
treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are
convertible into common stock were exercised or could result in the issuance of common stock. Potentially dilutive common stock
equivalents include unvested restricted stock, restricted stock units and convertible debt instruments and warrants.
During the years ended December 31, 2018, 2017 and 2016, the Company reported a consolidated net loss. As a result of the net
loss, unvested restricted stock, restricted stock units 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 units excluded from the calculations of diluted net loss per share were 6.4 million, 5.2 million and 4.3 million for the years
ended December 31, 2018, 2017 and 2016, respectively.
The calculation of diluted weighted average shares excludes the impact of conversion of the principal amount of $316.3 million
of the Company's 2.75% convertible senior notes which were repaid in cash at their maturity on June 15, 2018. Refer to Note 9
for more information about the Company's former convertible notes. As of December 31, 2017 and 2016, the maximum number
of shares issuable upon conversion of the notes was approximately 13.8 million (after giving effect to additional make-whole
shares issuable upon conversion in connection with the occurrence of certain events). As of December 31, 2017 and 2016, the
maximum number of shares issuable upon conversion of the notes in excess of the amount of principal that would be settled in
cash was 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, 2018, 2017 and 2016, the number of shares
issuable upon exercise of the warrants was approximately 0.5 million, 10.8 million, and 10.8 million, respectively. Subsequent to
December 31, 2018, the option to exercise the remaining outstanding warrants expired unexercised.
4. Acquisitions, Dispositions and Other Significant Transactions
From 2016 through 2018, the Company disposed of an aggregate of 75 owned communities (50 in 2016, 3 in 2017 and 22 in
2018). The Company also entered into agreements with its largest lessors that restructured a significant portion of its triple-net
lease obligations. As a result of the transactions with HCP, Inc. (“HCP”) announced in 2016 and 2017 and Ventas, Inc. (“Ventas”)
and Welltower Inc. (“Welltower”) announced in 2018, as well as other lease expirations and terminations, the Company's triple-
net lease obligations on an aggregate of 201 communities were terminated from 2016 to 2018 (7 in 2016, 105 in 2017 and 89 in
2018). During this period the Company also sold its ownership interests in seven unconsolidated ventures and acquired six
communities that it previously leased or managed. As of December 31, 2018, the Company owned 344 communities, leased 343
communities, managed 18 communities on behalf of unconsolidated ventures, and managed 187 communities on behalf of third
parties.
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The following table sets forth, for the periods indicated, the amounts included within the Company's consolidated financial
statements for the 276 communities that it disposed through sales and lease terminations for the years ended December 31, 2018,
2017 and 2016 through the respective disposition dates:
(in thousands)
Resident fees
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing resident fees
Facility operating expense
Independent Living
Assisted Living and Memory Care
CCRCs
Senior housing facility operating expense
Year Ended December 31,
2018
2017
2016
$
81,280
$
152,190
$
205,241
15,965
302,486
48,154
145,106
14,542
207,802
423,302
78,392
653,884
90,134
294,528
68,702
453,364
189,205
642,782
201,613
1,033,600
110,014
443,137
169,297
722,448
259,114
Cash lease payments
$
78,264
$
172,442
$
During the year ending December 31, 2019, the Company expects to close on the dispositions of 13 owned communities classified
as held for sale as of December 31, 2018. The closings of the various pending and expected transactions are, or will be, subject
to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. However, there
can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
2018 Welltower Lease and RIDEA Venture Restructuring
On June 27, 2018, the Company announced that it had entered into definitive agreements with Welltower. The components of the
agreements include:
•
Lease Terminations. The Company and Welltower agreed to early termination of the Company's triple-net lease obligations
on 37 communities effective June 30, 2018. The communities were part of two lease portfolios due to mature in 2028
(27 communities) and 2020 (10 communities). The Company paid Welltower an aggregate lease termination fee of $58.0
million. The Company agreed to manage the foregoing 37 communities on an interim basis until the communities have
been transitioned to new managers, and such communities are reported in the Management Services segment during such
interim period. The Company recognized a $22.6 million loss on lease termination during the year ended December 31,
2018 for the amount by which the aggregate lease termination fee exceeded the net carrying value of the Company's
assets and liabilities under operating and capital leases as of the lease termination date.
• Future Lease Terminations. The parties separately agreed to allow the Company to terminate leases with respect to, and
to remove from the remaining Welltower leased portfolio, a number of communities with annual aggregate base rent up
to $5.0 million upon Welltower's sale of such communities, and the Company would receive a corresponding 6.25% rent
credit on Welltower's disposition proceeds.
• RIDEA Restructuring. The Company sold its 20% equity interest in its existing Welltower RIDEA venture to Welltower,
effective June 30, 2018 for net proceeds of $33.5 million (for which the Company recognized a $14.7 million gain on
sale). The Company agreed to continue to manage the communities in the venture on an interim basis until the communities
have been transitioned to new managers, and such communities are reported in the Management Services segment during
such interim period.
The Company also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities).
After conclusion of the foregoing lease expirations, the Company continues to operate 74 communities under triple-net leases
with Welltower, and the Company's remaining lease agreements with Welltower contain a change of control standard that allows
the Company to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject
to the satisfaction of certain conditions.
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2018 Ventas Lease Portfolio Restructuring
On April 26, 2018, the Company entered into several agreements to restructure a portfolio of 128 communities it leased from
Ventas as of such date, including a Master Lease and Security Agreement (the "Ventas Master Lease"). The Ventas Master Lease
amended and restated prior leases comprising an aggregate portfolio of 107 communities into the Ventas Master Lease. Under the
Ventas Master Lease and other agreements entered into on April 26, 2018, the 21 additional communities leased by the Company
from Ventas pursuant to separate lease agreements have been or will be combined automatically into the Ventas Master Lease
upon the first to occur of Ventas' election or the repayment of, or receipt of lender consent with respect to, mortgage debt underlying
such communities (17 of which have been and four will be combined into the Ventas Master Lease). The Company and Ventas
agreed to observe, perform and enforce such separate leases as if they had been combined into the Ventas Master Lease effective
April 26, 2018, to the extent not in conflict with any mortgage debt underlying such communities. The transaction agreements
with Ventas further provide that the Ventas Master Lease and certain other agreements between the Company and Ventas will be
cross-defaulted.
The initial term of the Ventas Master Lease ends December 31, 2025, with two 10-year extension options available to the Company.
In the event of the consummation of a change of control transaction of the Company on or before December 31, 2025, the initial
term of the Ventas Master Lease will be extended automatically through December 31, 2029. The Ventas Master Lease and separate
lease agreements with Ventas, which are guaranteed at the parent level by the Company, provided for total rent in 2018 of $175.0
million for the 128 communities, including the pro-rata portion of an $8.0 million annual rent credit for 2018. The Company will
receive an annual rent credit of $8.0 million in 2019, $7.0 million in 2020 and $5.0 million thereafter; provided, that if a change
of control of the Company occurs prior to 2021, the annual rent credit will be reduced to $5.0 million. Effective on January 1,
2019 and in succeeding years, the annual minimum rent is subject to an escalator equal to the lesser of 2.25% or four times the
Consumer Price Index ("CPI") increase for the prior year (or zero if there was a CPI decrease).
The Ventas Master Lease requires the Company to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month
period commencing with the 24-month period ending December 31, 2019 and thereafter each 24-month period ending December
31 during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the
first extension term (if any). If a change of control of the Company occurs, the Company will be required within 36 months
following the closing of such transaction to invest (or escrow with Ventas) an aggregate of $30.0 million in the communities for
revenue-enhancing capital projects.
Under the definitive agreements with Ventas, the Company, at the parent level, must satisfy certain financial covenants (including
tangible net worth and leverage ratios) and may consummate a change of control transaction without the need for consent of Ventas
so long as certain objective conditions are satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum
tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior
living industry, and paying a change of control fee of $25.0 million to Ventas.
At the Company's option, which must be exercised on or before April 26, 2019, the Company may provide notice to Ventas of the
Company's election to direct Ventas to market for sale one or more communities with up to approximately $30.0 million of annual
minimum rent. Upon receipt of such notice, Ventas will be obligated to use commercially reasonable, diligent efforts to sell such
communities on or before December 31, 2020 (subject to extension for regulatory purposes); provided, that Ventas' obligation to
sell any such community will be subject to Ventas' receiving a purchase price in excess of a minimum sale price to be mutually
agreed by the Company and Ventas and to certain other customary closing conditions. Upon any such sale, such communities will
be removed from the Ventas Master Lease, and the annual minimum rent under the Ventas Master Lease will be reduced by the
amount of the net sale proceeds received by Ventas multiplied by 6.25%.
The Company estimated the fair value of each of the elements of the restructuring transactions. The fair value of the future lease
payments is based upon historical and forecasted community cash flows and market data, including a management fee rate of 5%
of revenue and a market supported lease coverage ratio (Level 3 inputs). The Company recognized a $125.7 million non-cash loss
on lease modification in the year ended December 31, 2018, primarily for the extensions of the triple-net lease obligations for
communities with lease terms that are unfavorable to the Company given current market conditions on the amendment date in
exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
2017 HCP Master Lease Transaction and RIDEA Ventures Restructuring
On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with
HCP. As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement
("HCP Master Lease") with HCP effective as of November 1, 2017. The components of the multi-part transaction include:
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• Master Lease Transactions. The Company and HCP amended and restated triple-net leases covering substantially all of
the communities the Company leased from HCP as of November 1, 2017 into the HCP Master Lease. During the year
ended December 31, 2018, the Company acquired two communities formerly leased for an aggregate purchase price of
$35.4 million and leases with respect to 33 communities were terminated, and such communities were removed from the
HCP Master Lease, which completed the terminations of leases as provided in the HCP Master Lease. We agreed to
manage communities for which leases were terminated on an interim basis until the communities have been transitioned
to new managers, and such communities are reported in the Management Services segment during such interim period.
The Company continues to lease 43 communities pursuant to the terms of the HCP Master Lease, which have the same
lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018,
the Company received a $2.5 million annual rent reduction for two communities. The HCP Master Lease also provides
that the Company may engage in certain change in control and other transactions without the need to obtain HCP's consent,
subject to the satisfaction of certain conditions.
• RIDEA Ventures Restructuring. Pursuant to the multi-part transaction agreement, HCP acquired the Company's 10%
ownership interest in one of the Company's RIDEA ventures with HCP in December 2017 for $32.1 million (for which
the Company recognized a $7.2 million gain on sale) and the Company's 10% ownership interest in the remaining RIDEA
venture with HCP in March 2018 for $62.3 million (for which the Company recognized a $41.7 million gain on sale).
The Company provided management services to 59 communities on behalf of the two RIDEA ventures as of November
1, 2017. Pursuant to the multi-part transaction agreement, the Company acquired one community for an aggregate purchase
price of $32.1 million in January 2018 and three communities for an aggregate purchase price of $207.4 million in April
2018 and retained management of 18 of such communities. The amended and restated management agreements for such
18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be
entitled to sell or transition operations and/or management of 37 of such communities. Management agreements for 31
such communities were terminated by HCP during the year ended December 31, 2018 (for which the Company recognized
an $8.7 million non-cash management contract termination gain) and the Company expects the termination of management
agreements on the remaining six communities to occur during 2019.
The Company financed the foregoing community acquisitions with non-recourse mortgage financing and proceeds from the sales
of its ownership interest in the unconsolidated ventures. See Note 9 for more information regarding the non-recourse first mortgage
financing.
In addition, the Company obtained future annual cash rent reductions and waived management termination fees in the multi-part
transaction. As a result of the multi-part transaction, the Company reduced its lease liabilities by $9.7 million for the future annual
cash rent reductions and recognized a $9.7 million deferred liability for the consideration received from HCP in advance of the
termination of the management agreements for the 37 communities.
As a result of the modification of the remaining lease term for communities subject to capital leases, the Company reduced the
carrying value of capital lease obligations and assets under capital leases by $145.6 million in 2017. During the year ended
December 31, 2018, the results and financial position of the 33 communities for which leases were terminated were deconsolidated
from the Company prospectively upon termination of the lease obligations. The Company derecognized the $332.8 million carrying
value of the assets under financing leases and the $378.3 million carrying value of financing lease obligations for 20 communities
which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement.
The Company recognized a sale for these 20 communities and recorded a non-cash gain on sale of assets of $44.2 million for the
year ended December 31, 2018. Additionally, the Company recognized a non-cash gain on lease termination of $1.5 million for
the year ended December 31, 2018, for the derecognition of the net carrying value of the Company's assets and liabilities under
operating and capital leases at the lease termination date.
Blackstone Venture
On March 29, 2017, the Company and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed
a venture (the “Blackstone Venture”) that acquired 64 senior housing communities for a purchase price of $1.1 billion. The Company
had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of
approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the
existing leases, and the Company contributed its leasehold interests for 62 communities and a total of $179.2 million in cash to
purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fund its share of closing costs. As of the formation
date, the Company continued to operate two of the communities under lease agreements and began managing 60 of the communities
on behalf of the venture under a management agreement with the venture. Two of the communities were managed by a third party
for the venture. The results and financial position of the 62 communities for which leases were terminated were deconsolidated
98
from the Company prospectively upon formation of the Blackstone Venture. The Company accounted for the venture under the
equity method of accounting.
Initially, the Company determined that the contributed carrying value of the Company's investment was $66.8 million, representing
the amount by which the $179.2 million cash contribution exceeded the carrying value of the Company's liabilities under operating,
capital and financing leases contributed by the Company net of the carrying value of the assets under such operating, capital and
financing leases. However, the Company estimated the fair value of its 15% equity interest in the Blackstone Venture at inception
to be $47.1 million (using Level 3 inputs). As a result, the Company recorded a $19.7 million charge within goodwill and asset
impairment expense for the three months ended March 31, 2017 for the amount of the contributed carrying value in excess of the
estimated fair value of the Company's investment.
During the three months ended March 31, 2018, the Company recorded a $33.4 million non-cash impairment charge within
goodwill and asset impairment expense to reflect the amount by which the carrying value of the investment exceeded the estimated
fair value (using Level 3 inputs).
Additionally, these transactions related to the Blackstone Venture required the Company to record a significant increase to the
Company's existing tax valuation allowance, after considering the change in the Company's future reversal of estimated timing
differences resulting from these transactions, primarily due to removing the deferred positions related to the contributed leases.
During the three months ended March, 31, 2017, the Company recorded a provision for income taxes to establish an additional
$85.0 million of valuation allowance against its federal and state net operating loss carryforwards and tax credits as the Company
anticipates these carryforwards and credits will not be utilized prior to expiration. See Note 16 for more information about the
Company's deferred income taxes.
During the third quarter of 2018, leases for the two communities owned by the Blackstone Venture were terminated and the
Company sold its 15% equity interest in the Blackstone Venture to Blackstone. The Company paid Blackstone an aggregate fee
of $2.0 million to complete the multi-part transaction and recognized a $3.8 million gain on sale of assets for the amount by which
the net carrying value of the Company's assets and liabilities disposed of exceeded the aggregate transaction cost.
2016 HCP Agreements
On November 1, 2016, the Company announced that it had entered into agreements to, among other things, terminate triple-net
leases with respect to 97 communities that it leased from HCP, four of which were contributed to a then existing unconsolidated
venture in which the Company holds an equity interest and 64 of which were acquired by the Blackstone Venture described above.
In addition to the formation of the Blackstone Venture, the transactions included the following components with respect to 33
communities:
• The Company and HCP agreed to terminate triple-net leases with respect to eight communities. HCP agreed to contribute
immediately thereafter four of such communities to a then existing unconsolidated venture with HCP in which the
Company has a 10% equity interest. During the three months ended December 31, 2016, the triple-net leases with respect
to seven communities were terminated and HCP contributed four of the communities to the unconsolidated venture. The
triple-net lease with respect to the remaining community was terminated during January 2017.
• The Company and HCP agreed to terminate triple-net leases with respect to 25 communities. During the year ended
December 31, 2017, the Company's triple-net lease obligations with respect to such communities were terminated. The
Company agreed to manage communities for which leases were terminated on an interim basis until the communities
were transitioned to new managers, and such communities were reported in the Management Services segment during
such interim period.
As a result of such transactions, during 2017 the Company derecognized the $145.3 million carrying value of the assets under
financing leases and the $156.7 million carrying value of financing lease obligations for 21 communities which were previously
subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement for accounting purposes,
and recorded an $11.4 million gain on sale of assets.
Completed and Planned Dispositions of Owned Communities
During the year ended December 31, 2018, the Company completed the sale of 22 owned communities for cash proceeds of $380.7
million, net of transaction costs, and recognized a net gain on sale of assets of $188.6 million. The Company utilized a portion of
the cash proceeds from the asset sales to repay approximately $174 million of associated mortgage debt and debt prepayment
penalties. Nineteen of such dispositions were part of the Company's plan announced in 2018, including the sale of Brookdale
99
Battery Park on November 1, 2018 for which the Company received proceeds of approximately $144 million, net of associated
debt and transaction costs, and the sale of 18 other communities on December 20, 2018 for which the Company received proceeds
of approximately $49 million, net of associated debt and transaction costs.
During the year ended December 31, 2017, the Company completed the sale of three owned communities for cash proceeds of
$8.2 million net of associated transaction costs, and during the year ended December 31, 2016, the Company completed the sale
of 50 owned communities for cash proceeds of $297.9 million net of associated transaction costs.
As of December 31, 2018, 13 communities were classified as held for sale, resulting in $93.1 million being recorded as assets
held for sale and $31.2 million of mortgage debt being included in the current portion of long-term debt within the consolidated
balance sheet with respect to such communities. This debt will either be repaid with the proceeds from the sales or be assumed
by the prospective purchasers.
5. Fair Value Measurements
Marketable Securities
As of December 31, 2018, marketable securities of $14.9 million are stated at fair value based on valuations provided by third-
party pricing services and are classified within Level 2 of the valuation hierarchy. The Company recognized gains of $1.4 million
and $0.6 million for marketable securities within interest income on the Company's consolidated statements of operations for the
years ended December 31, 2018 and 2017, respectively.
Interest Rate Derivatives
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 available 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 following table summarizes the Company's interest rate cap instruments as of December 31, 2018:
(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, 2018)
Estimated asset fair value (included in other assets, net at December 31, 2017)
Debt
$ 1,187,979
4.57%
2020
2022
150
38
$
$
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 (excluding capital
and financing lease obligations) with a carrying value of approximately $3.6 billion and $3.9 billion as of December 31, 2018 and
2017, respectively. Fair value of the debt approximates carrying value in all periods. The Company's fair value of debt disclosure
is classified within Level 2 of the valuation hierarchy.
100
Goodwill and Asset Impairment Expense
The following is a summary of goodwill and asset impairment expense.
(in millions)
Goodwill (Note 8)
Property, plant and equipment and leasehold intangibles, net (Note 7)
Investment in unconsolidated ventures (Note 6)
Other intangible assets, net (Note 8)
Assets held for sale (Note 4)
Other assets
Goodwill and asset impairment
Goodwill
For the Years Ended December 31,
2018
2017
2016
$
351.7
$
205.0
$
78.0
33.4
9.1
15.6
2.1
164.4
25.8
14.6
—
—
—
166.2
36.8
29.7
15.8
—
$
489.9
$
409.8
$
248.5
During the three months ended September 30, 2017, the Company identified qualitative indicators of impairment of goodwill,
including a significant decline in the Company's stock price and market capitalization for a sustained period since the last testing
date, significant underperformance relative to historical and projected operating results, and an increased competitive environment
in the senior living industry. Based upon the Company's qualitative assessment, the Company performed an interim quantitative
goodwill impairment test as of September 30, 2017, which included a comparison of the estimated fair value of each reporting
unit to which the goodwill has been assigned with the reporting unit's carrying value.
In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, the Company utilized
an income approach, which included future cash flow projections that are developed internally. Any estimates of future cash flow
projections necessarily involve predicting unknown future circumstances and events and require significant management judgments
and estimates. In arriving at the cash flow projections, the Company considered its historic operating results, approved budgets
and business plans, future demographic factors, expected growth rates, and other factors. In using the income approach to estimate
the fair value of reporting units for purposes of its goodwill impairment test, the Company made certain key assumptions. Those
assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that the Company
would receive upon a sale of the communities using estimated capitalization rates, all of which are considered Level 3 inputs in
the valuation hierarchy within ASC 820. The Company corroborated the estimated capitalization rates used in these calculations
with capitalization rates observable from recent market transactions. 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. The Company also considered
market based measures such as earnings multiples in its analysis of estimated fair values of its reporting units.
Based on the results of the Company's quantitative goodwill impairment test, the Company determined that the carrying value of
the Company's Assisted Living and Memory Care reporting unit exceeded its estimated fair value by $205.0 million as of September
30, 2017. As a result, the Company recorded a non-cash impairment charge of $205.0 million to goodwill within the Assisted
Living and Memory Care segment for the three months ended September 30, 2017. The Company concluded that goodwill for all
reporting units was not impaired as of October 1, 2017 (the Company's annual measurement date) and as of December 31, 2017.
During the three months ended March 31, 2018, the Company identified qualitative indicators of impairment of goodwill, including
a significant decline in the Company's stock price and market capitalization for a sustained period during the three months ended
March 31, 2018. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2018,
which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the
reporting unit's carrying value. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment
test, the Company utilized an income approach, which included future cash flow projections that are developed internally. Based
on the results of the Company's quantitative goodwill impairment test, the Company determined that the carrying value of the
Company's Assisted Living and Memory Care reporting unit exceeded its estimated fair value by more than the $351.7 million
carrying value as of March 31, 2018. As a result, the Company recorded a non-cash impairment charge of $351.7 million to
goodwill within the Assisted Living and Memory Care segment for the three months ended March 31, 2018.
The Company concluded that goodwill for all reporting units was not impaired as of October 1, 2018 (the Company's annual
measurement date) and as of December 31, 2018. Goodwill allocated to the Company's Independent Living and Health Care
Services reporting units is approximately $27.3 million and $126.8 million, respectively, as of December 31, 2018.
101
Determining the fair value of the Company’s reporting units involves the use of significant estimates and assumptions, which the
Company believes to be reasonable, that are unpredictable and inherently uncertain. These estimates and assumptions include
revenue growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. 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
capitalization and discount rates, differences in the projected occupancy rates and changes in the cost structure of existing
communities. Significant adverse changes in the Company’s future revenues and/or operating margins, significant changes in the
market for senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances,
including but not limited to increased competition and changing economic or market conditions, including market control premiums,
could result in changes in fair value and the determination that additional goodwill is impaired.
Property, Plant and Equipment and Leasehold Intangibles
During the years ended December 31, 2018, 2017 and 2016, the Company evaluated property, plant and equipment and leasehold
intangibles for impairment and identified properties with a carrying amount of the assets in excess of the estimated future
undiscounted net cash flows expected to be generated by the assets. The Company compared the estimated fair value of the assets
to their carrying value for these identified properties and recorded an impairment charge for the excess of carrying value over fair
value. The Company recorded property, plant and equipment and leasehold intangibles non-cash impairment charges in its operating
results of $78.0 million, $164.4 million and $166.2 million for the years ended December 31, 2018, 2017 and 2016, respectively,
primarily within the Assisted Living and Memory Care segment.
The fair values of the property, plant and equipment of these communities were primarily determined utilizing a direct capitalization
method considering stabilized facility operating income and market capitalization rates. These fair value measurements are
considered Level 3 measurements within the valuation hierarchy. The range of capitalization rates utilized was 6.5% to 9.0%,
depending upon the property type, geographical location, and the quality of the respective community. The Company corroborated
the estimated fair values with a sales comparison approach with information observable from recent market transactions. 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.
Investment in Unconsolidated Ventures
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. During the years ended December 31, 2018, 2017 and 2016,
the Company recorded $33.4 million, $25.8 million and $36.8 million, respectively, of non-cash impairment charges related to
investments in unconsolidated ventures. These impairment charges are primarily due to lower than expected operating performance
at the communities owned by the unconsolidated ventures and reflect the amount by which the carrying values of the investments
exceeded their estimated fair value. Refer to Note 4 for more information about the impairment of the Blackstone Venture during
2017.
Other Intangible Assets
During 2018, the Company identified indicators of impairment for the Company’s home health care licenses, including significant
underperformance relative to historical and projected operating results, the impact of lower reimbursement rates from Medicare
for home health care services, and an increased competitive environment in the home health care industry. The Company performed
a quantitative impairment test, which included a comparison of the estimated fair value of the Company’s home health care licenses
to the carrying value. In estimating the fair value of the home health licenses for purposes of the quantitative impairment test, the
Company utilized an income approach, which included future cash flow projections that are developed internally. Any estimates
of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant
management judgments and estimates. In arriving at the cash flow projections, the Company considered its historic operating
results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors, all of which
are considered Level 3 inputs in the valuation hierarchy within ASC 820.
Based on the results of the Company's quantitative impairment test, the Company determined that the carrying amount of certain
of the Company's home health care licenses exceeded their estimated fair value by $9.1 million. As a result, the Company recorded
a non-cash impairment charge of $9.1 million to intangible assets within the Health Care Services segment for the year ended
December 31, 2018.
102
During 2017, the Company identified indicators of impairment for the Company’s home health care licenses in Florida, including
significant underperformance relative to historical and projected operating results, decreases in reimbursement rates from Medicare
for home health care services, an increased competitive environment in the home health care industry, and disruption from the
impact of Hurricane Irma. The Company performed a quantitative impairment test, which included a comparison of the estimated
fair value of the Company’s home health care licenses to the carrying value. In estimating the fair value of the home health licenses
for purposes of the quantitative impairment test, the Company utilized an income approach, which included future cash flow
projections that are developed internally. In arriving at the cash flow projections, the Company considered its historic operating
results, approved budgets and business plans, future demographic factors, expected growth rates, and other factors, all of which
are considered Level 3 inputs in the valuation hierarchy within ASC 820.
Based on the results of the Company's quantitative impairment test, the Company determined that the carrying amount of certain
of the Company's home health care licenses in Florida exceeded their estimated fair value by $14.6 million. As a result, the
Company recorded a non-cash impairment charge of $14.6 million to intangible assets within the Health Care Services segment
during the year ended December 31, 2017.
During 2016, the Company recorded $28.2 million of non-cash impairment charges related to community purchase options. These
impairment charges are primarily due to lower than expected operating performance at the communities subject to the community
purchase options and reflect the amount by which the carrying values of the community purchase options exceeded their estimated
fair value. The fair values of the community purchase options were determined utilizing a direct capitalization method considering
stabilized facility operating income and market capitalization rates for the underlying property subject to the community purchase
option. These fair value measurements are considered Level 3 measurements in the valuation hierarchy within ASC 820. 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.
Assets Held for Sale
During the year ended December 31, 2018, the Company recognized $15.6 million of impairment charges related to communities
identified as held for sale, primarily due to changes in the estimated fair values. During the year ended December 31, 2017, the
Company did not record impairment expense related to communities identified as held for sale. During the year ended December
31, 2016, the Company recorded $15.8 million of non-cash impairment charges related to communities identified as held for sale,
inclusive of the allocation of goodwill to the disposed communities. These impairment charges are primarily due to the excess of
carrying value, including allocated goodwill, over the estimated selling price less costs to dispose. Refer to Note 4 for more
information about the Company's community dispositions and assets held for sale.
6. Variable Interest Entities and Investment in Unconsolidated Ventures
Variable Interest Entities
As of December 31, 2018, the Company has an equity interest in an unconsolidated VIE. The Company has determined that it
does not have the power to direct the activities of the VIE that most significantly impact its economic performance and is not the
primary beneficiary of the VIE in accordance with ASC 810. The Company's interests in the VIE are, therefore, accounted for
under the equity method of accounting.
The Company holds a 51% equity interest, and HCP owns a 49% interest, in a venture that owns and operates entry fee CCRCs
(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, mortgage debt, accounts payable, accrued expenses and refundable entrance fees.
The carrying value and classification of the related assets, liabilities and maximum exposure to loss as a result of the Company's
involvement with this VIE are summarized below as of December 31, 2018 (in millions):
VIE Type
CCRC Venture opco
Asset Type
Investment in unconsolidated ventures
Maximum
Exposure
to Loss
Carrying
Amount
$
20.7
$
20.7
103
As of December 31, 2018, the Company is not required to provide financial support, through a liquidity arrangement or otherwise,
to its unconsolidated VIE.
Investment in Unconsolidated Ventures
The Company holds a 51% equity interest in the CCRC Venture as of December 31, 2018. Refer to Note 4 for information on the
Company's investment in and sale of certain of its ownership interests in unconsolidated ventures during the years ended December
31, 2018 and 2017. Summarized financial information of all unconsolidated ventures accounted for under the equity method was
as follows (reflecting the period of the Company's ownership of an equity interest):
(in millions)
Statement of Operations Information
Resident fee revenue
Facility operating expense
Net income (loss)
(in millions)
Balance Sheet Information
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
For the Years Ended December 31,
2016
2017
2018
$
$
$
793
(592)
(39) $
$
1,354
(946)
(81) $
1,133
(779)
(4)
As of December 31,
2017
2018
$
$
66
1,148
563
715
$
$
164
4,050
672
2,813
During the year ended December 31, 2016, the CCRC Venture obtained non-recourse mortgage financing on certain communities
and received proceeds of $434.5 million. The CCRC Venture distributed the net proceeds to its investors and the Company received
proceeds of $221.6 million. As a result of the distribution, the Company's carrying value of its equity method investment in the
CCRC Venture propco was reduced below zero and the Company has recorded a $56.6 million and $49.5 million equity method
liability within other liabilities within the consolidated balance sheet as of December 31, 2018 and 2017, respectively.
Refer to Note 5 for information on impairment expense for investments in unconsolidated ventures.
7. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2018 and 2017, 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
Property, plant and equipment and leasehold intangibles
Accumulated depreciation and amortization
Property, plant and equipment and leasehold intangibles, net
As of December 31,
2018
2017
$
456,912
$
449,295
4,919,789
123,366
1,036,113
477,827
57,636
4,923,621
124,850
1,006,889
594,748
74,678
1,251,159
1,742,384
8,322,802
(3,047,375)
5,275,427
$
8,916,465
(3,064,320)
5,852,145
$
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives
(or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators
of impairment arise. Refer to Note 5 for information on impairment expense for property, plant and equipment and leasehold
intangibles.
104
For the years ended December 31, 2018, 2017 and 2016, the Company recognized depreciation and amortization expense on its
property, plant and equipment and leasehold intangibles of $444.3 million, $479.4 million and $514.2 million, respectively.
Future amortization expense for resident and leasehold operating intangibles is estimated to be as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Future
Amortization
7,960
2,213
1,310
803
803
2,705
15,794
$
$
8. Goodwill and Other Intangible Assets, Net
The following is a summary of the carrying amount of goodwill presented on an operating segment basis.
(in thousands)
Independent Living
Assisted Living and Memory Care
Health Care Services
Total
(in thousands)
Independent Living
Assisted Living and Memory Care
Health Care Services
Total
December 31, 2018
Gross
Carrying
Amount
Dispositions
and Other
Reductions
Accumulated
Impairment
Net
28,141
$
605,469
126,810
760,420
$
(820) $
(48,817)
—
(49,637) $
— $
27,321
(556,652)
—
(556,652) $
—
126,810
154,131
December 31, 2017
Gross
Carrying
Amount
Dispositions
and Other
Reductions
Accumulated
Impairment
28,141
$
605,469
126,810
760,420
$
(820) $
(48,817)
—
(49,637) $
— $
(205,000)
—
(205,000) $
Net
27,321
351,652
126,810
505,783
$
$
$
$
Goodwill is tested for impairment annually with a test date of October 1 or sooner if indicators of impairment are present. Factors
the Company considers important in its analysis, which could trigger an impairment of such assets, include significant
underperformance relative to historical or projected future operating results, significant negative industry or economic trends, a
significant decline in the Company's stock price for a sustained period and a decline in its market capitalization below net book
value. A change in anticipated operating results or the other metrics indicated above could necessitate further analysis of potential
impairment at an interval prior to the Company's annual measurement date. Refer to Note 5 for information on impairment expense
for goodwill.
105
The following is a summary of other intangible assets.
(in thousands)
Community purchase options
Health care licenses
Trade names
Management contracts
Total
(in thousands)
Community purchase options
Health care licenses
Trade names
Management contracts
Total
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
4,738
$
— $
42,323
27,800
9,610
84,471
$
—
(26,295)
(6,704)
(32,999) $
4,738
42,323
1,505
2,906
51,472
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
9,533
$
— $
50,927
27,800
11,360
99,620
$
—
(23,714)
(7,929)
(31,643) $
9,533
50,927
4,086
3,431
67,977
$
$
$
$
Amortization expense related to definite-lived intangible assets for the years ended December 31, 2018, 2017 and 2016 was $3.1
million, $5.6 million and $9.2 million, respectively. Health care licenses were determined to be indefinite-lived intangible assets
and are not subject to amortization. The community purchase options are not 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 five years and nine years, respectively. Refer to Note 5 for information on impairment expense for other intangible assets.
Future amortization expense for intangible assets with definite lives is estimated to be as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Future
Amortization
2,140
635
635
635
366
—
4,411
$
$
106
9. Debt
Long-term Debt and Capital and Financing Lease Obligations
Long-term debt and capital and financing lease obligations consist of the following:
(in thousands)
December 31,
2018
2017
Mortgage notes payable due 2019 through 2047; weighted average interest rate of 4.75% in
2018, less debt discount and deferred financing costs of $18.6 million and $16.6 million in
2018 and 2017, respectively (weighted average interest rate of 4.59% in 2017)
$
3,579,931
$
3,497,762
Capital and financing lease obligations payable through 2032; weighted average interest rate
of 7.99% in 2018 (weighted average interest rate of 6.75% in 2017)
874,476
1,271,554
Convertible notes payable in aggregate principal amount of $316.3 million, less debt
discount and deferred financing costs of $6.4 million in 2017, interest at 2.75% per annum
—
309,853
Other notes payable, weighted average interest rate of 5.85% in 2018 (weighted average
interest rate of 5.98% in 2017) and maturity dates ranging from 2019 to 2021
Total long-term debt and capital and financing lease obligations
Less current portion
Total long-term debt and capital and financing lease obligations, less current portion
$
60,249
4,514,656
317,561
4,197,095
$
63,122
5,142,291
602,501
4,539,790
As of December 31, 2018 and 2017, the current portion of long-term debt within the Company's consolidated financial statements
includes $31.2 million and $30.1 million, respectively, of mortgage notes payable secured by assets held for sale. This debt will
either be assumed by the prospective purchasers or be repaid with the proceeds from the sales. Refer to Note 4 for more information
about the Company's assets held for sale.
The annual aggregate scheduled maturities of long-term debt and capital and financing lease obligations outstanding as of
December 31, 2018 are as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total obligations
Less amount representing debt discount and deferred financing costs, net
Less amount representing interest (weighted average interest rate of 7.99%)
Total
Credit Facilities
Long-term
Debt
Capital and
Financing
Lease
Obligations
$
296,986
$
88,339
$
Total
385,325
488,321
426,248
415,238
369,510
98,516
90,242
91,632
93,103
1,041,987
1,503,819
—
(629,343)
874,476
3,078,004
5,162,646
(18,647)
(629,343)
$ 4,514,656
389,805
336,006
323,606
276,407
2,036,017
3,658,827
(18,647)
—
$ 3,640,180
$
On December 5, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement with Capital One, National
Association, as administrative agent, lender and swingline lender and the other lenders from time to time parties thereto (the
“Amended Agreement”). The Amended Agreement amended and restated in its entirety the Company's Fourth Amended and
Restated Credit Agreement dated as of December 19, 2014 (the “Original Agreement”). The Amended Agreement provides
commitments for a $250 million revolving credit facility with a $60 million sublimit for letters of credit and a $50 million swingline
feature. The Company has a one-time right under the Amended Agreement to increase commitments on the revolving credit facility
by an additional $100 million, subject to obtaining commitments for the amount of such increase from acceptable lenders. The
Amended Agreement provides the Company a one-time right to reduce the amount of the revolving credit commitments, and the
Company may terminate the revolving credit facility at any time, in each case without payment of a premium or penalty. The
107
Amended Agreement extended the maturity date of the Original Agreement from January 3, 2020 to January 3, 2024 and decreased
the interest rate payable on drawn amounts. Amounts drawn under the facility will continue to bear interest at 90-day LIBOR plus
an applicable margin; however, the Amended Agreement reduced the applicable margin from a range of 2.50% to 3.50% to a range
of 2.25% to 3.25%. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.25% margin
at utilization equal to or lower than 35%, a 2.75% margin at utilization greater than 35% but less than or equal to 50%, and a
3.25% margin at utilization greater than 50%. A quarterly commitment fee continues to be payable on the unused portion of the
facility at 0.25% per annum when the outstanding amount of obligations (including revolving credit and swingline loans and letter
of credit obligations) is greater than or equal to 50% of the revolving credit commitment amount or 0.35% per annum when such
outstanding amount is less than 50% of the revolving credit commitment amount.
The credit facility is secured by first priority mortgages on certain of the Company's communities. In addition, the Amended
Agreement permits the Company to pledge the equity interests in subsidiaries that own other communities and grant negative
pledges in connection therewith (rather than mortgaging such communities), provided that not more than 10% of the borrowing
base may result from communities subject to negative pledges. Availability under the revolving credit facility will vary from time
to time based on borrowing base calculations related to the appraised value and performance of the communities securing the
credit facility and the Company’s consolidated fixed charge coverage ratio.
The Amended Agreement contains typical affirmative and negative covenants, including financial covenants with respect to
minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. Amounts drawn on the credit facility
may be used for general corporate purposes.
As of December 31, 2018, no borrowings were outstanding on the revolving credit facility, $40.7 million of letters of credit were
outstanding, and the revolving credit facility had $179.4 million of availability. The Company also had a separate unsecured letter
of credit facility of up to $66.2 million as of December 31, 2018. Letters of credit totaling $66.1 million had been issued under
the separate facility as of that date.
2018 Financings
In April 2018, the Company obtained $247.6 million of debt secured by the non-recourse first mortgages on 11 communities. Sixty
percent of the principal amount bears interest at a fixed rate of 4.55%, and the remaining forty percent of the principal amount
bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 189 basis points. The debt matures in May 2028. The
$247.6 million of proceeds from the financing were primarily utilized to fund the acquisition of five communities from HCP and
to repay $43.0 million of outstanding mortgage debt scheduled to mature in May 2018. See Note 4 to the consolidated financial
statements for more information regarding the acquisitions of communities from HCP.
During the fourth quarter of 2018, the Company obtained $327.0 million of debt secured by the non-recourse first mortgages on
28 communities. Sixty-five percent of the principal amount bears interest at a fixed rate of 5.08%, and the remaining thirty-five
percent of the principal amount bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 216 basis points. The
debt matures in December 2028. The $327.0 million of proceeds from the financing were utilized to repay $60.4 million of
outstanding mortgage debt scheduled to mature on January 1, 2019.
During the fourth quarter of 2018, the Company repaid $307.4 million of outstanding principal balance on eleven existing loan
portfolios. The Company repaid $171.4 million to facilitate the sale of communities classified as assets held for sale and the
remaining repayments were primarily to facilitate the release of communities from their existing loan portfolios so that they could
be added to the collateral pool for the Company’s credit facility which was refinanced in December 2018. During the year ended
December 31, 2018, the Company recorded $11.7 million of debt modification and extinguishment costs on the consolidated
statement of operations for that period, primarily related to third party fees directly related to debt modifications.
2017 Financings
In June 2017, the Company obtained a $54.7 million non-recourse addition and borrow-up loan, secured by first mortgages on
seven communities. The loan bears interest at a fixed rate of 4.69% and matures on March 1, 2022.
In July 2017, the Company completed the refinancing of two existing loan portfolios secured by the non-recourse first mortgages
on 22 communities. The $221.3 million of proceeds from the refinancing were primarily utilized to repay $188.1 million and $13.6
million of mortgage debt maturing in April 2018 and January 2021, respectively. The mortgage facility has a 10 year term, and
70% of the principal amount bears interest at a fixed rate of 4.81% and the remaining 30% of the principal amount bears interest
at a variable rate of 30-day LIBOR plus a margin of 244 basis points.
108
In August 2017, the Company obtained $975.0 million of debt secured by the non-recourse first mortgages on 51 communities.
Sixty percent of the principal amount bears interest at a fixed rate, with one half of such amount bearing interest at 4.43% and
maturing in 2024 and the other one half bearing interest at 4.47% and maturing in 2027. Forty percent of the principal amount
bears interest at a variable rate equal to the 30-day LIBOR plus a margin of 241.5 basis points and matures in 2027. The $975.0
million of proceeds from the refinancing were primarily utilized to repay $389.9 million and $228.9 million of outstanding mortgage
debt scheduled to mature in August 2018 and May 2023, respectively.
During the year ended December 31, 2017, the Company recorded $12.4 million of debt modification and extinguishment costs
on the consolidated statement of operations for that period, primarily related to third party fees directly related to debt modifications.
During 2017, the Company repaid $78.9 million of outstanding principal balance on four existing loan portfolios secured by the
non-recourse first mortgages on 13 communities and the Nurse on Call business.
Convertible Debt
In June 2011, the Company completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible
senior notes due June 15, 2018 (the "Notes"). The Company repaid $316.3 million in cash to settle the Notes at their maturity on
June 15, 2018.
Financial Covenants
Certain of the Company’s debt documents contain restrictions and financial covenants, such as those requiring the Company to
maintain prescribed minimum net worth and stockholders’ equity levels and debt service ratios, and requiring the Company not
to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or
entity basis. In addition, the Company’s debt documents generally contain non-financial covenants, such as those requiring the
Company to comply with Medicare or Medicaid provider requirements.
The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable debt
documents. Many of the Company’s debt and lease documents contain cross-default provisions so that a default under one of these
instruments could cause a default under other debt and lease documents (including documents with other lenders or lessors).
Furthermore, the Company’s debt is secured by its communities and, in certain cases, a guaranty by the Company and/or one or
more of its subsidiaries.
As of December 31, 2018, the Company is in compliance with the financial covenants of its outstanding debt agreements.
10. Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
Salaries and wages
Insurance reserves
Vacation
Real estate taxes
Interest
Accrued utilities
Taxes payable
Lease payable
Other
Total
As of December 31,
2018
2017
$
88,425
$
61,150
37,109
25,302
15,458
8,883
2,782
1,532
57,586
91,784
63,309
40,281
30,743
13,745
10,807
2,636
11,942
64,719
$
298,227
$
329,966
109
11. Commitments and Contingencies
Facility Operating Leases
As of December 31, 2018, the Company operated 343 communities under long-term leases (252 operating leases and 91 capital
and financing leases). 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 the performance
and lease payment obligations of its subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult
to restructure the composition of such leased portfolios or economic terms of the leases without the consent of the applicable
landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease
portfolio may result in a default on the entire master lease portfolio.
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. The Company is responsible for all operating costs, including repairs,
property taxes and insurance. The initial lease terms primarily vary from 10 to 20 years and generally include renewal options
ranging from 5 to 20 years. The remaining initial lease terms vary from less than 1 year to 14 years and generally provide for
renewal or extension options and in some instances, purchase options.
The community leases contain other customary terms, which may include assignment and change of control restrictions,
maintenance and capital expenditure obligations, termination provisions and financial covenants, such as those requiring the
Company to maintain prescribed minimum net worth and stockholders’ equity levels and lease coverage ratios, and not to exceed
prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community and/or entity basis.
In addition, the Company’s lease documents generally contain non-financial covenants, such as those requiring the Company to
comply with Medicare or Medicaid provider requirements.
The Company’s failure to comply with applicable covenants could constitute an event of default under the applicable lease
documents. Many of the Company’s debt and lease documents contain cross-default provisions so that a default under one of these
instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
Certain leases contain cure provisions, which generally allow the Company to post an additional lease security deposit if the
required covenant is not met. Furthermore, the Company’s leases are secured by its communities and, in certain cases, a guaranty
by the Company and/or one or more of its subsidiaries.
As of December 31, 2018, the Company is in compliance with the financial covenants of its long-term leases.
A summary of facility lease expense and the impact of straight-line adjustment and deferred gains are as follows:
(in thousands)
Cash basis payment - operating leases
Straight-line lease (income) expense
Amortization of deferred gain
Facility lease expense
For the Years Ended December 31,
2018
2017
2016
$
$
324,870
(17,218)
(4,358)
303,294
$
$
365,077
(20,990)
(4,366)
339,721
$
$
384,104
(6,097)
(4,372)
373,635
The aggregate amounts of future minimum operating lease payments, including community and office leases, as of December 31,
2018 are as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
110
$
Operating
Leases
310,340
307,493
290,661
291,113
285,723
786,647
$
2,271,977
Other
The Company has employment or letter agreements with certain officers of the Company and has adopted policies to which certain
officers of the Company are eligible to participate, which grant these employees the right to receive a portion or multiple of their
base salary, pro-rata bonus, bonus and/or 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 and policies.
12. Self-Insurance
The Company obtains various insurance coverages from commercial carriers at stated amounts as defined in the applicable policy.
Losses related to deductible amounts are accrued based on the Company's estimate of expected losses plus incurred but not reported
claims.
As of December 31, 2018 and 2017, the Company accrued reserves of $155.6 million and $165.0 million, respectively, for these
programs of which $94.5 million and $101.7 million is classified as long-term liabilities as of December 31, 2018 and 2017,
respectively. As of December 31, 2018 and 2017, the Company accrued $13.1 million and $17.5 million, respectively, of estimated
amounts receivable from the insurance companies under these insurance programs. During the years ended December 31, 2018,
2017 and 2016, the Company recorded a $14.6 million, $9.9 million and $35.4 million decrease in insurance expense from changes
in estimates, respectively, due to general liability and professional liability and workers compensation claims experience.
The Company has secured self-insured retention risk under workers' compensation programs with cash deposits of $14.7 million
and $12.7 million as of December 31, 2018 and 2017, respectively. Letters of credit securing the programs aggregated to $71.8
million as of December 31, 2018 and 2017. In addition, the Company also had deposits of $13.7 million and $33.9 million as of
December 31, 2018 and 2017, respectively, to fund claims paid under a high deductible, collateralized insurance policy.
13. 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 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, for contributions
up to a maximum of 4.0% of compensation. An additional matching contribution of 12.5%, subject to the same limit on
compensation, may be made at the discretion of the Company based upon the Company's performance. For the years ended
December 31, 2018, 2017 and 2016, the Company's expense to the plan was $8.3 million, $10.1 million and $8.2 million,
respectively.
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, except value per share)
Outstanding on January 1, 2016
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2016
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2017
Granted
Vested
Cancelled/forfeited
Outstanding on December 31, 2018
111
Number of
Shares
3,454
$
3,141
(1,242)
(745)
4,608
2,569
(1,276)
(1,131)
4,770
3,880
(1,579)
(1,315)
5,756
Weighted
Average
Grant Date
Fair Value
28.80
14.56
26.79
24.75
20.29
14.65
22.20
18.95
17.13
9.39
19.12
13.19
11.78
As of December 31, 2018, there was $41.3 million of total unrecognized compensation cost related to outstanding, unvested share-
based compensation awards. That cost is expected to be recognized over a weighted-average period of 2.6 years and is based on
grant date fair value.
During 2018, grants of restricted shares under the Company's 2014 Omnibus Incentive Plan were as follows:
(share amounts in thousands, except value per share)
Three months ended March 31, 2018
Three months ended June 30, 2018
Three months ended September 30, 2018
Three months ended December 31, 2018
Shares
Granted
Value Per
Share
Total Value
3,387
169
263
61
$
$
$
$
9.10
7.19
8.99
9.25
$
$
$
$
30,823
1,214
2,361
569
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, not to exceed 200 shares, 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. Share Repurchase Program
On November 1, 2016, the Company announced that its Board of Directors had 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. The share repurchase program
is intended to be implemented through purchases 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.
During the year ended December 31, 2018, the Company repurchased 1,280,802 shares at a weighted average price paid per share
of $6.64, for an aggregate purchase price of approximately $8.5 million. No shares were purchased pursuant to this authorization
during the year ended December 31, 2017. During the year ended December 31, 2016, the Company repurchased 750,000 shares
at a weighted average price paid per share of $12.83, for an aggregate purchase price of approximately $9.6 million. As of
December 31, 2018, approximately $81.9 million remains available under the share repurchase program.
112
16. Income Taxes
The benefit (provision) for income taxes is comprised of the following:
(in thousands)
Federal:
Current
Deferred
Total Federal
State:
Current
Deferred (included in Federal above)
Total State
Total
For the Years Ended December 31,
2018
2017
2016
$
(113) $
2,200
$
52,367
52,254
15,310
17,510
(2,798)
—
(2,798)
49,456
$
(995)
—
(995)
16,515
$
$
(12)
(3,248)
(3,260)
(2,118)
—
(2,118)
(5,378)
A reconciliation of the benefit (provision) for income taxes to the amount computed at the U.S. Federal statutory rate of 21% for
the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016, respectively, is as follows:
(in thousands)
Tax benefit at U.S. statutory rate
State taxes, net of federal income tax
Valuation allowance
Tax credits
Goodwill impairment
Impact of the Tax Act
Stock compensation
Meals and entertainment
Other, net
Total
For the Years Ended December 31,
2018
2017
2016
$
121,320
$
205,777
$
139,657
21,576
5,713
688
(88,265)
(6,042)
(4,717)
(493)
(324)
49,456
$
24,891
(246,037)
1,908
(78,515)
114,716
(4,093)
(726)
(1,406)
16,515
$
11,788
(142,862)
6,163
(10,789)
—
(5,716)
(868)
(2,751)
(5,378)
$
113
Significant components of the Company's deferred tax assets and liabilities are as follows:
(in thousands)
Deferred income tax assets:
Capital and financing lease obligations
Operating loss carryforwards
Deferred lease liability
Accrued expenses
Tax credits
Capital loss carryforward
Intangible assets
Other
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
Total gross deferred income tax liability
Net deferred tax liability
As of December 31,
2018
2017
$
165,703
$
298,255
63,263
61,309
50,462
41,413
10,133
2,872
693,410
(336,417)
356,993
(334,145)
(41,219)
(375,364)
(18,371) $
$
264,255
288,469
52,869
66,123
49,556
—
14,493
7,190
742,955
(336,087)
406,868
(477,512)
—
(477,512)
(70,644)
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act reformed the United
States corporate income tax code, including a reduction to the federal corporate income tax rate from 35% to 21% effective January
1, 2018. The Tax Act also eliminated alternative minimum tax (AMT) and the 20-year carryforward limitation for net operating
losses incurred after December 31, 2017, and imposes a limit on the usage of net operating losses incurred after such date equal
to 80% of taxable income in any given year. The 80% usage limit will not have an economic impact on the Company until its
current net operating losses are either utilized or expired. In addition, the Tax Act limits the annual deductibility of a corporation's
net interest expense unless it elects to be exempt from such deductibility limitation under the real property trade or business
exception. The Company plans to elect the real property trade or business exception with the 2018 tax return. As such, the Company
will be required to apply the alternative depreciation system ("ADS") to all current and future residential real property and qualified
improvement property assets. This change reduced the Company's tax depreciation by approximately $57.9 million for the year
ended December 31, 2018, and will have a similar impact on future tax depreciation deductions and did impact the Company’s
valuation allowance. For the year ended December 31, 2017, reasonable estimates for the Company's state and local provision
were made based on the Company's analysis of the Tax Act. On the basis of additional guidance issued by various state taxing
authorities, these provisional amounts were adjusted in the year ended December 31, 2018. The Company recognized an additional
$6.0 million of valuation allowance against the Company's state net operating losses with a corresponding increase of $6.0 million
to the income tax provision. This was primarily due to expiring state net operating losses resulting from certain state taxing
authorities not adopting the federal standard of unlimited net operating loss carryovers.
A summary of the effect of the Tax Act is as follows:
(in thousands)
Rate change - decrease in net deferred tax assets
Rate change - decrease in valuation allowance
Impact on net operating loss usage
Reduction of deferred tax asset - AMT credits
Total impact of the Tax Act on the Company's deferred taxes position
Realization of AMT credits
Net impact of the Tax Act on the Company's effect tax rate
114
For the Year Ended
December 31, 2017
$
$
108,070
(172,235)
(50,551)
2,361
(112,355)
(2,361)
(114,716)
As of December 31, 2018 and 2017, the Company had federal net operating loss carryforwards of approximately $1.2 billion each
of which are available to offset future taxable income through 2037. Additionally, as of December 31, 2018, the Company had
federal net operating loss carryforwards generated after 2017 of $33.5 million which have an indefinite life, but with usage limited
to 80% of taxable income in any given year. The Company had capital loss carryforwards of $165.0 million as of December 31,
2018, which is available to offset future capital gains through 2023. The Company determined that a valuation allowance was
required after consideration of the Company's estimated future reversal of existing timing differences as of December 31, 2018
and 2017. For the year ended December 31, 2018, the Company recorded a provision of approximately $0.3 million (including
the impact from the Tax Act) to reflect the required valuation allowance of $336.4 million as of December 31, 2018.
A summary of the change in the Company's valuation allowance is as follows:
(in thousands)
For the Years Ended December 31,
2018
2017
Increase (decrease) in valuation allowance before consideration of the Tax Act
$
Increase (decrease) due to the adoption of ASU 2016-09
Total increase (decrease) in valuation allowance
Tax Act rate change - decrease in valuation allowance
Impact on net operating loss usage
Total increase (decrease) in valuation allowance due to Tax Act
(5,713) $
—
(5,713)
—
6,042
6,042
Total increase (decrease) in valuation allowance
$
329
$
246,037
48,531
294,568
(172,235)
(50,551)
(222,786)
71,782
The Company has recorded valuation allowances of $245.3 million and $286.6 million as of December 31, 2018 and 2017,
respectively, against its federal and state net operating losses, as the Company anticipates these losses will not be utilized prior to
expiration. The Company has recorded a valuation allowance against its capital loss carryforward of $41.4 million as of
December 31, 2018, as the Company anticipates these losses will not be utilized prior to expiration. The Company also recorded
a valuation allowance against federal and state credits of $49.8 million and $49.5 million as of December 31, 2018 and 2017,
respectively. For the year ended December 31, 2017, the Company determined that a valuation allowance was required due to the
loss before income taxes, combined with the Company's estimated reversal of future timing differences as of December 31, 2017.
As a result, the Company recorded an increase to the valuation allowance of $71.8 million for the year ended December 31, 2017.
As a part of the change in 2017, the Company increased its valuation allowance by $48.5 million upon the adoption of ASU
2016-09. The $48.5 million offsets the increase to the Company's net operating loss carryforward position previously reflected in
an additional paid-in capital pool, and accordingly, did not impact the 2017 income tax position.
As of December 31, 2018 and 2017, the Company had gross tax affected unrecognized tax benefits of $18.5 million each of which,
if recognized, would result in an income tax benefit recorded in the consolidated statement of operations. 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 $0.1 million as of December 31, 2018 and 2017. As of December 31, 2018, the Company's tax returns for
years 2014 through 2017 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 2018 and prior years will significantly change in 2019.
A reconciliation of the unrecognized tax benefits is as follows:
(in thousands)
Balance at January 1,
Additions for tax positions related to the current year
Reductions for the Impact of the Tax Act
Reductions for tax positions related to prior years
Balance at December 31,
For the Years Ended December 31,
2018
2017
$
$
18,461
$
80
—
(34)
18,507
$
29,160
184
(10,859)
(24)
18,461
115
17. Supplemental Disclosure of Cash Flow Information
(in thousands)
Supplemental Disclosure of Cash Flow Information:
For the Years Ended December 31,
2016
2017
2018
Interest paid
Income taxes paid, net of refunds
Additions to property, plant and equipment and leasehold intangibles, net:
Property, plant and equipment and leasehold intangibles, net
Trade accounts payable
Net cash paid
Acquisition of assets, net of related payables and cash received:
Property, plant and equipment and leasehold intangibles, net
Other intangible assets, net
Capital and financing lease obligations
Other liabilities
Net cash paid
Proceeds from sale of assets, net:
Prepaid expenses and other assets, net
Assets held for sale
Property, plant and equipment and leasehold intangibles, net
Investments in unconsolidated ventures
Other liabilities
Long-term debt
Capital and financing lease obligations
Refundable entrance fees and deferred revenue
(Gain) loss on sale of assets, net
Loss on facility lease termination and modification, net
Net cash received
Lease termination and modification, net:
Prepaid expenses and other assets, net
Property, plant and equipment and leasehold intangibles, net
Capital and financing lease obligations
Deferred liabilities
Gain on sale of assets, net
Loss on facility lease termination and modification, net
Net cash paid (1)
Formation of the Blackstone Venture:
Prepaid expenses and other assets
Property, plant and equipment and leasehold intangibles, net
Investments in unconsolidated ventures
Capital and financing lease obligations
Deferred liabilities
Other liabilities
Net cash paid
116
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
260,706
2,058
220,810
4,663
225,473
237,563
(4,345)
36,120
2,433
294,758
1,038
221,476
(7,589)
213,887
$
$
$
$
— $
5,196
—
—
349,535
2,047
300,113
33,534
333,647
19,457
(7,300)
—
—
271,771
$
5,196
$
12,157
(4,950) $
(197,111)
(93,098)
(58,179)
1,139
—
93,514
8,632
(249,754)
—
(499,807) $
(2,804) $
(87,464)
58,099
70,835
(5,761)
34,283
(17,072) $
(20,952)
(155,723)
(52,548)
(1,058)
8,547
157,963
30,771
(19,273)
(1,162)
(70,507) $
(4,543)
(289,452)
—
—
3,281
—
—
—
(7,218)
—
(297,932)
— $
—
—
—
—
—
67,188
$
— $
— $
(8,173) $
—
—
—
—
—
(768,897)
66,816
879,959
7,504
1,998
— $
179,207
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Supplemental Schedule of Non-Cash Operating, Investing and Financing Activities:
Purchase of treasury stock:
Treasury stock
Accounts payable
Net
Assets designated as held for sale:
Prepaid expenses and other assets, net
Assets held for sale
Property, plant and equipment and leasehold intangibles, net
Goodwill
Asset impairment
Net
Lease termination and modification, net:
Prepaid expenses and other assets, net
Property, plant and equipment and leasehold intangibles, net
Capital and financing lease obligations
Deferred liabilities
Other liabilities
Gain on sale of assets, net
Loss on facility lease termination and modification, net
$
$
$
$
$
$
4,244
(4,244)
— $
(517) $
198,445
(197,928)
—
—
— $
(132,733)
165,918
(122,304)
(620)
(37,731)
127,718
Net
$
— $
— $
—
— $
—
—
—
$
199
(29,544)
29,345
—
—
— $
(145,645)
147,886
7,447
(9,688)
—
—
— $
(3,195)
278,675
(262,711)
(28,568)
15,799
—
—
—
—
—
—
—
—
—
(248) $
— $
(1)
The net cash paid to terminate community leases is presented within the consolidated statement of cash flows based upon
the lease classification of the terminated leases. Net cash paid of $54.6 million for the termination of operating leases is
presented within net cash provided by operating activities and net cash paid of $12.5 million for the termination of capital
and financing leases is presented within net cash used in financing activities for the year ended December 31, 2018.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated statement
of cash flows that sums to the total of the same such amounts shown in the consolidated statement of cash flows.
(in millions)
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash
Long-term restricted cash
Total cash, cash equivalents and restricted cash shown in the consolidated statement
of cash flows
18. Litigation
December 31,
2018
December 31,
2017
$
$
$
398,267
27,683
24,268
222,647
37,189
22,710
450,218
$
282,546
The Company has been and is currently involved in litigation and claims, including putative class action claims from time to time,
incidental to the conduct of its business which are generally 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. 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 and for claims or portions of claims that are not covered by such
policies.
117
Similarly, the senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could
result in reviews, audits, investigations, enforcement activities or litigation related to regulatory compliance matters. In addition,
as a result of the Company's participation in the Medicare and Medicaid programs, the Company is subject to various governmental
reviews, audits and investigations, including but not limited to audits under various government programs, such as the Recovery
Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC)
programs. The costs to respond to and defend such reviews, audits and investigations may be significant, and an adverse
determination could result in citations, sanctions and other criminal or civil fines and penalties, the refund of overpayments,
payment suspensions, termination of participation in Medicare and Medicaid programs, and/or damage to the Company's business
reputation.
19. Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by payor source, as the Company believes it best depicts
how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors. See details on a
reportable segment basis in the table below.
(in thousands)
Private pay
Government reimbursement
Other third-party payor programs
Total resident fee revenue
Year Ended December 31, 2018
Independent
Living
596,852
3,125
—
Assisted Living
and Memory
Care
1,923,676
$
CCRCs
Health Care
Services
Total
$
288,682
$
693
$
2,809,903
72,175
—
87,028
40,698
359,881
76,401
522,209
117,099
599,977
$
1,995,851
$
416,408
$
436,975
$
3,449,211
$
$
The Company has not further disaggregated management fee revenues and revenue for reimbursed costs incurred on behalf of
managed communities as the economic factors affecting the nature, timing, amount, and uncertainty of revenue and cash flows
do not significantly vary within each respective revenue category.
Contract Balances
The payment terms and conditions within the Company's revenue-generating contracts vary by contract type and payor source,
although terms generally include payment to be made within 30 days.
Resident fee revenue for recurring and routine monthly services is generally billed monthly in advance. Resident fee revenue for
standalone or certain healthcare services is generally billed monthly in arrears. Additionally, non-refundable community fees are
generally billed and collected in advance or upon move-in of a resident under independent living, assisted living and memory care
residency agreements for independent living, assisted living and memory care services. Amounts of revenue that are collected
from residents in advance are recognized as deferred revenue until the performance obligations are satisfied. The Company had
total deferred revenue (included within refundable entrance fees and deferred revenue, deferred liabilities, and other liabilities
within the consolidated balance sheets) of $106.4 million and $112.4 million, including $50.6 million and $49.7 million of monthly
resident fees billed and received in advance, as of December 31, 2018 and 2017, respectively. For the year ended December 31,
2018, the Company recognized $82.1 million of revenue that was included in the deferred revenue balance as of January 1, 2018.
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose amounts for remaining performance
obligations that have original expected durations of one year or less.
For the year ended December 31, 2018, the Company recognized $17.6 million of charges within facility operating expense within
the consolidated statement of operations for additions to the allowance for doubtful accounts.
20. Segment Information
The Company has five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care 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.
118
Independent Living. The Company's Independent Living segment includes owned or leased communities that are primarily designed
for middle to upper income seniors who desire an upscale residential environment providing the highest quality of service. The
majority of the Company's independent living 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.
Assisted Living and Memory Care. The Company's Assisted Living and Memory Care 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 and memory care communities include both freestanding, multi-story communities and freestanding, single story
communities. The Company also provides memory care services at freestanding memory care communities that are specially
designed for residents with Alzheimer's and other dementias.
CCRCs. The Company's CCRCs 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
and Alzheimer's services.
Health Care Services. The Company's Health Care Services segment includes the home health, hospice and outpatient therapy
services, as well as education and wellness programs, provided to residents of many of the Company's communities and to seniors
living outside of the Company's communities. The Health Care Services segment does not include the skilled nursing and inpatient
healthcare services provided in the Company's skilled nursing units, which are included in the Company's CCRCs segment.
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:
(in thousands)
Revenue:
Independent Living (1)
Assisted Living and Memory Care (1)
CCRCs (1)
Health Care Services (1)
Management Services (2)
Segment Operating Income (3):
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Management Services
General and administrative (including non-cash stock-based compensation
expense)
Transaction costs
119
For the Years Ended December 31,
2018
2017
2016
$
599,977
$
654,196
$
679,503
$
$
1,995,851
416,408
436,975
1,082,215
4,531,426
240,609
628,982
92,212
34,080
71,986
$
$
2,210,688
468,994
446,262
966,976
4,747,116
271,417
749,058
106,162
51,348
75,845
$
$
2,419,459
592,826
476,833
808,359
4,976,980
294,530
876,817
133,409
64,463
70,762
1,067,869
1,253,830
1,439,981
250,495
8,980
255,446
22,573
313,409
3,990
Facility lease expense:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
Depreciation and amortization:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
Goodwill and asset impairment:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
Loss on facility lease termination and modification, net
Income (loss) from operations
Total interest expense:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
Total capital expenditures for property, plant and equipment, and leasehold
intangibles:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
(in thousands)
Total assets:
Independent Living
Assisted Living and Memory Care
CCRCs
Health Care Services
Corporate and Management Services
120
93,496
178,716
24,856
—
6,226
91,899
261,365
53,551
3,201
37,439
2,013
436,892
6,669
9,055
35,264
117,131
185,971
29,464
—
7,155
95,226
290,344
44,294
3,723
48,490
2,968
342,788
18,083
14,599
31,344
$
$
162,001
(594,249) $
14,276
(270,045) $
58,783
$
55,436
$
174,459
26,746
—
20,281
207,861
27,665
892
34,300
120,272
193,670
51,727
—
7,966
94,049
308,639
66,431
4,075
47,208
31,384
132,389
46,329
1,596
36,817
11,113
(31,083)
56,827
249,449
39,824
1,461
38,056
$
280,269
$
326,154
$
385,617
$
51,510
$
47,309
$
125,750
26,615
902
16,033
119,717
24,297
755
29,398
59,978
156,732
37,800
1,576
44,027
$
220,810
$
221,476
$
300,113
As of December 31,
2018
2017
$
1,104,774
$
1,266,076
3,684,170
4,535,114
707,819
254,950
715,547
667,234
257,257
949,768
$
6,467,260
$
7,675,449
(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 facility operating expenses (excluding depreciation
and amortization) and costs incurred on behalf of managed communities.
21. Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for each of the fiscal quarters in 2018 and 2017:
(in thousands, except per share amounts)
Revenues
Goodwill and asset impairment
Loss on facility lease termination and modification, net
Income (loss) from operations
Gain on sale of assets, net
Income (loss) before income taxes
Net income (loss)
March 31,
2018
For the Quarters Ended
June 30,
2018
September 30,
2018
December 31,
2018
$
1,187,234
$
1,155,200
$
1,120,062
$
1,068,930
430,363
—
(413,831)
43,431
(441,649)
(457,234)
16,103
146,467
(137,589)
23,322
(181,055)
(165,509)
5,500
2,337
3,626
9,833
(54,903)
(37,140)
37,927
13,197
(46,455)
216,660
99,799
131,531
Net income (loss) attributable to Brookdale Senior
Living Inc. common stockholders
Weighted average basic and diluted income (loss) per
share
(457,188)
(165,488)
(37,121)
131,539
$
(2.45) $
(0.88) $
(0.20) $
0.70
(in thousands, except per share amounts)
Revenues
Goodwill and asset impairment
Income (loss) from operations
Income (loss) before income taxes
Net income (loss)
March 31,
2017
For the Quarters Ended
June 30,
2017
September 30,
2017
December 31,
2017
$
1,216,766
$
1,186,472
$
1,177,988
$
1,165,890
20,706
48,126
(42,333)
(126,361)
1,559
30,174
(49,072)
(46,337)
368,551
(350,970)
(445,147)
(413,929)
18,966
2,625
(51,569)
15,021
Net income (loss) attributable to Brookdale Senior
Living Inc. common stockholders
Weighted average basic and diluted income (loss) per
share
(126,304)
(46,287)
(413,885)
15,057
$
(0.68) $
(0.25) $
(2.22) $
0.08
121
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2018
(In thousands)
Description
Allowance for Doubtful Accounts:
Year ended December 31, 2016
Year ended December 31, 2017
Year ended December 31, 2018
Deferred Tax Valuation Allowance:
Year ended December 31, 2016
Year ended December 31, 2017
Year ended December 31, 2018
Additions
Balance at
beginning of
period
Charged to
costs and
expenses
Charged
to other
accounts
Deductions
$
$
$
$
$
$
26,470
27,044
23,112
121,602
264,305
336,087
$
$
$
$
$
$
30,632
25,370
17,597
$
$
$
2,680
555
7,153
142,862 (1) $
71,782 (2) $
330 (3) $
—
—
—
$
$
$
$
$
$
(32,738)
(29,857)
(23,109)
(159)
—
—
Balance at
end of
period
$
$
$
$
$
$
27,044
23,112
24,753
264,305
336,087
336,417
(1) Adjustment to valuation allowance for federal and state net operating losses and federal credits of $128,931 and $13,931,
respectively.
(2) Adjustment to valuation allowance for federal and state net operating losses of $294,568 and a reduction of $222,786 resulting
from the Tax Cuts and Jobs Act.
(3) Reduction of valuation allowance for federal and state net operating losses and federal credits of $5,919 off-set by additional
valuation allowance for federal credits of $207 and adjustments resulting from the Tax Cuts and Jobs Act of $6,042.
122
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended). Our management, under the supervision of and with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of December 31, 2018, our disclosure
controls and procedures were effective.
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). Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we 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). Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance
with respect to financial statement preparation and presentation.
Based on the Company's evaluation, management concluded that our internal control over financial reporting was effective as of
December 31, 2018. Management reviewed the results of their assessment with our Audit Committee. The effectiveness of our
internal control over financial reporting as of December 31, 2018 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.
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, 2018 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.
123
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
To the extent not set forth herein, the information required by this item is incorporated by reference from the discussions under
the headings "Election of Directors," "Corporate Governance," "Executive Officers of the Company" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders or in an
amendment to this Annual Report on Form 10-K, to be filed with the SEC within 120 days of December 31, 2018.
Our Board of Directors has 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
President and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Treasurer, both of which are available
on our website at www.brookdale.com/investor. 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.
Item 11.
Executive Compensation.
The information required by this item is incorporated by reference from the discussions under the headings "Director Compensation"
and "Executive Compensation" in our Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders or in an amendment
to this Annual Report on Form 10-K, to be filed with the SEC within 120 days of December 31, 2018.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
To the extent not set forth herein, 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 2019 Annual Meeting of Stockholders or in an amendment
to this Annual Report on Form 10-K, to be filed with the SEC within 120 days of December 31, 2018.
The following table provides certain information as of December 31, 2018 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)
—
—
—
—
—
—
8,871,506
35,936
8,907,442
Plan category
Equity compensation plans approved by
security holders (2)
Equity compensation plans not approved
by security holders (3)
Total
(1) As of December 31, 2018, an aggregate of 5,756,435 shares of unvested restricted stock were outstanding under our 2014
Omnibus Incentive Plan, and an aggregate of 6,850 vested 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 stock options, stock appreciation rights, restricted shares, restricted
stock units, unrestricted shares, performance awards and other stock-based awards.
(2) The number of shares remaining available for future issuance under equity compensation plans approved by security holders
consists of 8,237,094 shares remaining available for future issuance under our 2014 Omnibus Incentive Plan and 634,412
shares remaining available for future issuance under our Associate Stock Purchase Plan.
124
(3) 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-employee 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.
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 2019 Annual Meeting of
Stockholders or in an amendment to this Annual Report on Form 10-K, to be filed with the SEC within 120 days of December 31,
2018.
Item 14.
Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the discussion under the heading "Ratification of
Appointment of Independent Registered Public Accounting Firm for 2019" in our Definitive Proxy Statement for the 2019 Annual
Meeting of Stockholders or in an amendment to this Annual Report on Form 10-K, to be filed with the SEC within 120 days of
December 31, 2018.
125
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
The following documents are filed as part of this report:
1)
Our Audited Consolidated Financial Statements
Report of the Independent Registered Public Accounting Firm
Report of the Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
2)
Exhibits:
Exhibit No.
3.1
3.2
4.1
10.1.1
10.1.2
10.2.1
10.2.2
10.2.3
10.3
Description
Amended and Restated Certificate of Incorporation of Brookdale Senior Living Inc. (the "Company"), as
amended.
Amended and Restated Bylaws of the Company dated October 4, 2018 (incorporated by reference to Exhibit
3.2 to the Company's Current Report on Form 8-K filed on October 5, 2018 (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)).
Amended and Restated Master Lease and Security Agreement dated as of November 1, 2017, by and between
certain of the Company's affiliates named therein as lessees and HCP, Inc. and certain of its affiliates named
therein as lessors (incorporated by reference to Exhibit 10.1.1 to the Company's Annual Report on Form 10-K
filed on February 22, 2018 (File No. 001-32641)).†
First Amendment to Amended and Restated Master Lease and Security Agreement dated as of January 10, 2018,
by and between certain of the Company's affiliates named therein as lessees and HCP, Inc. and certain of its
affiliates named therein as lessors (incorporated by reference to Exhibit 10.1.2 to the Company's Annual Report
on Form 10-K filed on February 22, 2018 (File No. 001-32641)).
Master Lease and Security Agreement dated as of April 26, 2018 by and between certain of the Company's
affiliates named therein as lessees and certain of the affiliates of Ventas, Inc. named therein as lessors (the "Master
Lease") (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
August 7, 2018 (File No. 001-32641)).†
Amendment No. 1 effective September 1, 2018 to Master Lease by and between certain of the Company's
affiliates named therein as lessees and certain of the affiliates of Ventas, Inc. named therein as lessors (incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2018 (File
No. 001-32641)).†
Guaranty of Master Lease dated as of April 26, 2018 by and between the Company and certain of its affiliates
named therein and Ventas, Inc. and certain of its affiliates named therein (incorporated by reference to Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2018 (File No. 001-32641)).†
Fifth Amended and Restated Credit Agreement dated as of December 5, 2018, among certain subsidiaries of the
Company, Capital One, National Association, 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 11, 2018 (File No. 001-32641)).
126
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
Master Credit Facility Agreement (Senior Housing) dated as of August 31, 2017, by and between Jones Lang
LaSalle Multifamily, LLC and the Company's subsidiaries named as borrowers therein (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on November 7, 2017 (File No.
001-32641)).
Employment Agreement dated as of March 1, 2018 by and between the Company and Lucinda M. Baier
(incorporated by reference to Exhibit 10.49 to the Company's Amendment No. 1 to Annual Report on Form
10-K/A filed on April 24, 2018 (File No. 001-32641)).*
Offer Letter Agreement dated as of August 8, 2018 by and between the Company and Steven E. Swain
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November
6, 2018 (File No. 001-32641)).*
Amended and Restated 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 September 28, 2017 (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) (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K filed on February 25, 2015 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for Executive Vice
Presidents) (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on
February 25, 2015 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for
Executive Committee Members) (incorporated by reference to Exhibit 10.28 to the Company's Annual Report
on Form 10-K filed on February 25, 2015 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for
Executive Vice Presidents) (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K filed on February 25, 2015 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for Executive
Committee Members) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed on May 10, 2016 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for Executive Vice
Presidents) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed
on May 10, 2016 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for
Executive Committee Members) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q filed on May 10, 2016 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Performance-Vesting Form for
Executive Vice Presidents) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q filed on May 10, 2016 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2017 Time-Vesting Form for Executive
Committee Members) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q filed on May 10, 2017 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2017 Time-Vesting Form for Executive
Vice Presidents) (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
filed on May 10, 2017 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2017 Performance-Vesting Form for
Executive Committee Members) (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q filed on May 10, 2017 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2017 Performance-Vesting Form for
Executive Vice Presidents) (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q filed on May 10, 2017 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2018 Time-Vesting Form) (incorporated
by reference to Exhibit 10.47 to the Company's Amendment No. 1 to Annual Report on Form 10-K/A filed on
April 24, 2018 (File No. 001-32641)).*
127
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28.1
10.28.2
10.29.1
10.29.2
10.29.3
10.29.4
10.30
10.31
10.32
10.33
10.34.1
10.34.2
Form of Restricted Share Agreement under the Omnibus Incentive Plan (2018 Cliff-Vesting Form) (incorporated
by reference to Exhibit 10.48 to the Company's Amendment No. 1 to Annual Report on Form 10-K/A filed on
April 24, 2018 (File No. 001-32641)).*
Restricted Share Agreement under the Omnibus Incentive Plan dated as of March 5, 2018 by and between the
Company and Lucinda M. Baier (Time-Vesting) (incorporated by reference to Exhibit 10.50 to the Company's
Amendment No. 1 to Annual Report on Form 10-K/A filed on April 24, 2018 (File No. 001-32641)).*
Restricted Share Agreement under the Omnibus Incentive Plan dated as of March 5, 2018 by and between the
Company and Lucinda M. Baier (Performance-Vesting) (incorporated by reference to Exhibit 10.51 to the
Company's Amendment No. 1 to Annual Report on Form 10-K/A filed on April 24, 2018 (File No. 001-32641)).*
Restricted Share Agreement under the Omnibus Incentive Plan dated as of September 10, 2018 by and between
the Company and Steven E. Swain (Performance Vesting) (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed on November 6, 2018 (File No. 001-32641)).*
Form of Restricted Share Agreement under the Omnibus Incentive Plan (Time-Vesting Form for New Directors)
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on May 11,
2015 (File No. 001-32641)).*
Form of Outside Director Restricted Stock Unit Agreement under the Brookdale Senior Living Inc. Omnibus
Stock Incentive Plan effective June 23, 2009, as amended (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)).*
Form of Outside Director Restricted Stock Unit Agreement under the Omnibus Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2016 (File No.
001-32641)).*
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)).*
Amendment No. 1 to Severance Pay Policy, Tier I, adopted by the Company on April 23, 2015 (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 27, 2015 (File No.
001-32641)).*
Amendment No. 2 to Severance Pay Policy, Tier I, adopted by the Company on August 3, 2015 (incorporated
by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 7, 2015 (File No.
001-32641)).*
Amendment No. 3 to Severance Pay Policy, Tier I, adopted by the Company on January 19, 2017 (incorporated
by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on May 10, 2017 (File No.
001-32641)).*
Amended and Restated Tier I Severance Pay Policy dated April 15, 2018 (incorporated by reference to Exhibit
10.52 to the Company's Amendment No. 1 to Annual Report on Form 10-K filed on April 24, 2018 (File No.
001-32641)).*
Form of Retention Bonus Award Letter dated March 1, 2018 (incorporated by reference to Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q filed on May 8, 2018 (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)).*
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)).*
Amendment No. 1 to Employment Agreement dated as of April 23, 2015 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 April 27, 2015 (File No. 001-32641)).*
128
10.35
10.36
21
23
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Offer Letter Agreement dated as of March 26, 2018 by and between the Company and Teresa Sparks
(incorporated by reference to Exhibit 10.53 to the Company's Amendment No. 1 to Annual Report on Form
10-K/A filed on April 24, 2018 (File No. 001-32641)).*
Restricted Share Agreement under the Omnibus Incentive Plan, dated as of January 5, 2018, by and between
the Company and Daniel A. Decker (Performance-Vesting) (incorporated by reference to Exhibit 10.37 to the
Company's Annual Report on Form 10-K filed on February 22, 2018 (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.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
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.
Item 16.
Form 10-K Summary.
None.
129
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.
By:
/s/ Lucinda M. Baier
Name: Lucinda M. Baier
Title:
Date:
President and Chief Executive Officer
February 14, 2019
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
Title
Date
/s/ Lee S. Wielansky
Non-Executive Chairman of the Board
February 14, 2019
Lee S. Wielansky
/s/ Lucinda M. Baier
President, Chief Executive Officer and Director
February 14, 2019
Lucinda M. Baier
(Principal Executive Officer)
/s/ Steven E. Swain
Executive Vice President and Chief Financial Officer
February 14, 2019
Steven E. Swain
(Principal Financial Officer)
/s/ Dawn L. Kussow
Senior Vice President and Chief Accounting Officer
February 14, 2019
Dawn L. Kussow
(Principal Accounting Officer)
/s/ Marcus E. Bromley
Director
Marcus E. Bromley
/s/ Frank M. Bumstead
Director
Frank M. Bumstead
/s/ Jackie M. Clegg
Director
Jackie M. Clegg
/s/ Rita Johnson-Mills
Rita Johnson-Mills
Director
/s/ James R. Seward
Director
James R. Seward
/s/ Denise W. Warren
Director
Denise W. Warren
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
130
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lucinda M. Baier, 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 14, 2019
/s/ Lucinda M. Baier
Lucinda M. Baier
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven E. Swain, 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 14, 2019
/s/ Steven E. Swain
Steven E. Swain
Executive Vice President and 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, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Lucinda M. Baier,
as President and Chief Executive Officer of the Company, and Steven E. Swain, as Executive Vice President and 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/ Lucinda M. Baier
Name:
Title:
Date:
Lucinda M. Baier
President and Chief Executive Officer
February 14, 2019
/s/ Steven E. Swain
Name:
Title:
Date:
Steven E. Swain
Executive Vice President and Chief Financial Officer
February 14, 2019
[This Page Intentionally Left Blank]
[This Page Intentionally Left Blank]
BOARD OF DIRECTORS
Lee S. Wielansky, Non-Executive Chairman of the Board 3
Chairman and Chief Executive Officer,
Opportunistic Equities
The Honorable Jackie M. Clegg, Director 2, 4, 5
Managing Partner,
Clegg International Consultants, LLC
Lucinda M. Baier, Director
President and Chief Executive Officer,
Brookdale Senior Living Inc.
Rita Johnson-Mills, Director 4
Former President and Chief Executive Officer,
UnitedHealthcare Community Plan of Tennessee
Marcus E. Bromley, Director 1, 3
Former Chairman and Chief Executive Officer,
Gables Residential Trust
Frank M. Bumstead, Director 2, 4
Principal Shareholder,
Flood, Bumstead, McCready & McCarthy, Inc.
James R. Seward, Director 1, 3, 5
Private Investor
Denise W. Warren, Director 1, 2
Executive Vice President and Chief Operating Officer,
WakeMed Health & Hospitals
(1) Audit Committee (2) Compensation Committee (3) Investment Committee (4) Nominating and Corporate Governance Committee
(5) Term expiring at the 2019 Annual Meeting
EXECUTIVE OFFICERS
Lucinda M. Baier
President and Chief Executive Officer
Chad C. White
Executive Vice President, General Counsel and Secretary
Steven E. Swain
Executive Vice President and Chief Financial Officer
George T. Hicks
Executive Vice President — Finance and Treasurer
Mary Sue Patchett
Executive Vice President — Community Operations
Diane Johnson May
Executive Vice President — Human Resourses
H. Todd Kaestner
Executive Vice President — Asset Management
and Division President — Entry Fee
Anna-Gene O’Neal
Division President — Health Care Services
CORPORATE DATA
Corporate Office
111 Westwood Place
Brentwood, TN 37027
(615) 221-2250
www.brookdale.com
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Stock Listing
NYSE: BKD
Brookdale Investor Relations Contact
Kathy MacDonald
(615) 505-1968
11
Independent Auditors
Ernst & Young LLP
155 North Wacker Drive
Chicago, IL 60606
2019 Annual Meeting
October 29, 2019 | 8:00 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 its
website, www.brookdale.com/investor.
360 registered record holders as of September 9, 2019
Our CORNERSTONES:
MORE THAN A JOB, A PASSION —
Have fun and celebrate life every day.
DOING THE RIGHT THING TAKES COURAGE —
Provide meaningful rewards for associates,
residents and shareholders.
WE SUCCEED THROUGH PARTNERSHIP —
Work together as one team.
BUILT ON A FOUNDATION OF TRUST —
Listen, understand, partner and solve.
Corporate Headquarters
111 Westwood Place
Brentwood, TN 37027
(615) 221-2250
For more information, visit our website: brookdale.com
Bringing New Life to Senior Living®
©2019 Brookdale Senior Living Inc. All rights reserved.
BROOKDALE SENIOR LIVING and BRINGING NEW LIFE TO SENIOR
LIVING are the registered trademarks of Brookdale Senior Living Inc.
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