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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________ 
Commission File Number: 001-36499 
New Senior Investment Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
80-0912734
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
55 West 46th Street, New York, NY
 
10036
(Address of principal executive offices)
 
(Zip Code)
(646) 822-3700
(Registrant’s telephone number, including area code) 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 

 Securities registered pursuant to Section 12(b) of the Act:

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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




Title of each class:            Trading Symbol:        Name of each exchange on which registered:
Common Stock, $0.01 par value per share         SNR         New York Stock Exchange (NYSE)

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

Common stock, $0.01 par value per share: 82,209,844 shares outstanding as of April 26, 2019.



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

our ability to successfully manage the recent transition to self-management and its impact on our business and operations;
our ability to comply with the terms of our financings, which depends in part on the performance of our operators;
any increase in our borrowing costs as a result of rising interest rates or other factors;
our ability to pay down, refinance, restructure or extend our indebtedness as it becomes due or as needed to comply with the terms of our covenants or to facilitate our ability to sell assets;
our ability to manage our liquidity and sustain distributions to our stockholders, particularly in light of the cash shortfall described in our risk factors under Item 1A. and under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”;
our dependence on our property managers and tenant to operate our properties successfully and in compliance with the terms of our agreements with them, applicable law and the terms of our financings;
factors affecting the performance of our properties, such as increases in costs (including, but not limited to, the costs of labor, supplies, insurance and property taxes);
concentration risk with respect to Holiday Retirement (“Holiday”), which, for the three months ended March 31, 2019, accounted for 84.2% of net operating income (“NOI”) from our Managed Properties segments;
risks associated with a change of control in the ownership or senior management of Holiday;
our ability and the ability of our property managers and tenant to obtain and maintain adequate property, liability and other insurance from reputable, financially stable providers;
changes of federal, state and local laws and regulations relating to employment, fraud and abuse practices, Medicaid reimbursement and licensure, etc., including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations or our property managers or tenant;
the ability of our property managers and tenant to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to us and third parties;
the quality and size of our investment pipeline, our ability to execute investments at attractive risk-adjusted prices, our ability to finance our investments on favorable terms, and our ability to deploy investable cash in a timely manner;
our ability to sell properties on favorable terms and to realize the anticipated benefits from any such dispositions;
changes in economic conditions generally and the real estate, senior housing and bond markets specifically;
our stock price performance and any disruption or lack of access to the capital markets or other sources of financing;
the impact of any current or future legal proceedings and regulatory investigations and inquiries on us, FIG LLC (our “Former Manager”) or our operators;
our ability to maintain effective internal control over financial reporting and our reliance on our operators for timely delivery of accurate property-level financial results;
our ability to maintain our qualification as a Real Estate Investment Trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business; and
our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”) and the fact that maintaining such exemption imposes limits on our business strategy.

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




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

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

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

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

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
 
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding contractual provisions are required to make the statements in this report not misleading.



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

INDEX
  
 
PAGE
PART I.   
 
1
 
1
 
2
 
3
 
4
 
6
 
6
 
6
 
8
 
10
 
11
 
12
 
13
 
13
 
15
 
16
 
18
 
19
20
30
31
32
32
32
49
50
50
50
51
 
53



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Real estate investments:
 

 
 

Land
$
177,956

 
$
177,956

Buildings, improvements and other
2,344,954

 
2,335,813

Accumulated depreciation
(379,065
)
 
(358,368
)
Net real estate property
2,143,845

 
2,155,401

Acquired lease and other intangible assets
8,638

 
8,638

Accumulated amortization
(2,966
)
 
(2,877
)
Net real estate intangibles
5,672

 
5,761

Net real estate investments
2,149,517

 
2,161,162

 
 
 
 
Cash and cash equivalents
41,519

 
72,422

Receivables and other assets, net
54,832

 
52,674

Total Assets
$
2,245,868

 
$
2,286,258

 
 
 
 
Liabilities, Redeemable Preferred Stock and Equity
 

 
 

Liabilities
 

 
 

Debt, net
$
1,882,636

 
$
1,884,882

Due to affiliates

 
26,245

Accrued expenses and other liabilities
62,040

 
52,679

Total Liabilities
1,944,676

 
1,963,806

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Redeemable preferred stock, $0.01 par value with $100 liquidation preference, 400,000 shares authorized, issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
40,598

 
40,000

 
 
 
 
Equity


 


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

 

Common stock, $0.01 par value, 2,000,000,000 shares authorized, 82,209,844 and 82,148,869 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
822

 
821

Additional paid-in capital
898,858

 
898,135

Accumulated deficit
(639,086
)
 
(616,504
)
Total Equity
260,594

 
282,452

 
 
 
 
Total Liabilities, Redeemable Preferred Stock and Equity
$
2,245,868

 
$
2,286,258


See notes to consolidated financial statements (unaudited).

1

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



 
Three Months Ended March 31,
 
2019
 
2018
Revenues
 

 
 

Resident fees and services
$
116,037

 
$
75,343

Rental revenue
1,582

 
23,875

Total revenues
117,619

 
99,218

 
 
 
 
Expenses
 

 
 

Property operating expense
77,347

 
52,099

Depreciation and amortization
20,787

 
26,725

Interest expense
23,719

 
21,923

General and administrative expense
4,984

 
3,752

Acquisition, transaction and integration expense
650

 
2,888

Management fees and incentive compensation to affiliate

 
3,752

Other expense
1,245

 
1,380

Total expenses
$
128,732

 
$
112,519

Loss before income taxes
(11,113
)
 
(13,301
)
Income tax expense
80

 
48

Net loss
$
(11,193
)
 
$
(13,349
)
Deemed dividend on redeemable preferred stock
(598
)
 

Net loss attributable to common stockholders
$
(11,791
)
 
$
(13,349
)
 
 
 
 
Net loss per share of common stock
 
 
 
Basic and diluted (A)
$
(0.14
)
 
$
(0.16
)
 
 
 
 
Weighted average number of shares of common stock outstanding
 
 
 
Basic and diluted (B)
82,203,069

 
82,148,869

 
 
 
 
Dividends declared per share of common stock
$
0.13

 
$
0.26

 

(A)
Basic earnings per share (“EPS”) is calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period.
(B)
All outstanding options and restricted stock awards were excluded from the diluted share calculation as their effect would have been anti-dilutive.

See notes to consolidated financial statements (unaudited).

2

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



 
 
 Common Stock
 
 
 
 
 
 
 
 
 Shares
 
 Amount
 
Accumulated Deficit
 
Additional Paid-in Capital
 
 Total Equity
Balance at December 31, 2018
 
82,148,869

 
$
821

 
$
(616,504
)
 
$
898,135

 
$
282,452

Amortization of equity-based compensation
 

 

 

 
449

 
449

Directors shares issued
 
60,975

 
1

 

 
274

 
275

Dividends declared - common stock
 

 

 
(10,687
)
 

 
(10,687
)
Dividends declared - restricted stock award
 

 

 
(104
)
 

 
(104
)
Deemed dividend on redeemable preferred stock
 

 

 
(598
)
 

 
(598
)
Net loss
 

 

 
(11,193
)
 

 
(11,193
)
Balance at March 31, 2019
 
82,209,844

 
$
822


$
(639,086
)
 
$
898,858

 
$
260,594

 

 
 
 Common Stock
 
 
 
 
 
 
 
 
 Shares
 
 Amount
 
Accumulated Deficit
 
Additional Paid-in Capital
 
 Total Equity
Balance at December 31, 2017
 
82,148,869

 
$
821

 
$
(393,068
)
 
$
898,132

 
$
505,885

Fair value of stock options issued
 

 

 

 
3

 
3

Dividends declared - common stock
 

 

 
(21,359
)
 

 
(21,359
)
Net loss
 

 

 
(13,349
)
 

 
(13,349
)
Balance at March 31, 2018
 
82,148,869

 
$
821

 
$
(427,776
)
 
$
898,135

 
$
471,180


See notes to consolidated financial statements (unaudited).

3

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


 
Three Months Ended March 31,
 
2019
 
2018
Cash Flows From Operating Activities
 

 
 

Net loss
$
(11,193
)
 
$
(13,349
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation of tangible assets and amortization of intangible assets
20,787

 
26,749

Amortization of deferred financing costs
1,208

 
2,132

Amortization of deferred revenue, net
613

 
331

Non-cash straight line rental revenue
(173
)
 
(3,326
)
Provision for bad debt

 
345

Amortization of equity-based compensation
449

 

Other non-cash expense
1,058

 
1,322

Changes in:
 

 
 

Receivables and other assets, net
(4,099
)
 
(796
)
Due to affiliates
(25,995
)
 
(593
)
Accrued expenses and other liabilities
6,250

 
2,915

Net cash provided by (used in) operating activities
$
(11,095
)
 
$
15,730

Cash Flows From Investing Activities
 

 
 

Capital expenditures, net of insurance proceeds
$
(6,647
)
 
$
(3,561
)
Net cash (used in) investing activities
$
(6,647
)
 
$
(3,561
)
Cash Flows From Financing Activities
 

 
 

Principal payments of mortgage notes payable and capital lease obligations
$
(2,766
)
 
$
(7,159
)
Payment of deferred financing costs
(753
)
 
(587
)
Purchase of interest rate caps
(35
)
 
(280
)
Payment of common stock dividend
(10,687
)
 
(21,359
)
Net cash (used in) financing activities
$
(14,241
)
 
$
(29,385
)
Net (decrease) in cash, cash equivalents and restricted cash
(31,983
)
 
(17,216
)
Cash, cash equivalents and restricted cash, beginning of period
92,656

 
157,485

Cash, cash equivalents and restricted cash, end of period
$
60,673

 
$
140,269

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 

Cash paid during the period for interest expense
$
22,171

 
$
19,633

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

 
$

Capital lease obligations
215

 
















4

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



 
Three Months Ended March 31,
 
2019
 
2018
Reconciliation of Cash, Cash Equivalents and Restricted Cash
 
 
 
Cash and cash equivalents
$
72,422

 
$
137,327

Restricted cash (A)
20,234

 
20,158

Total, beginning of period
$
92,656

 
$
157,485

 
 
 
 
Cash and cash equivalents
$
41,519

 
$
120,834

Restricted cash (A)
19,154

 
19,435

Total, end of period
$
60,673

 
$
140,269


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


See notes to consolidated financial statements (unaudited).


5

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)



1.
ORGANIZATION
 
New Senior is a REIT primarily focused on investing in private pay senior housing properties. As of March 31, 2019, we owned a diversified portfolio of 133 primarily private pay senior housing properties located across 37 states. We are listed on the New York Stock Exchange (“NYSE”) under the symbol “SNR” and are headquartered in New York, New York.
 
Through December 31, 2018, we were externally managed and advised by FIG LLC (the “Former Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”). On November 19, 2018, we entered into definitive agreements with the Former Manager to internalize our management, effective December 31, 2018 (the “Internalization”). In connection with the Internalization, we also entered into a Transition Services Agreement with the Former Manager to continue to provide certain services for a transition period. In connection with the termination of the Management Agreement, we (i) made a one-time cash payment of $10.0 million to the Former Manager in January 2019, and (ii) issued to the Former Manager 400,000 shares of our newly created Redeemable Series A Cumulative Perpetual Preferred Stock (the “Redeemable Preferred Stock”), with an aggregate fair value of $40.0 million.

We operate in three reportable segments: (1) Managed Independent Living (“IL”) Properties, (2) Managed Assisted Living/Memory Care (“AL/MC”) Properties, and (3) Triple Net Lease Properties.
 
Managed Properties – We have engaged property managers to manage 132 of our properties on a day-to-day basis under the Managed Properties segments. These properties consist of 102 IL facilities and 30 AL/MC facilities. Our managed properties are managed by Holiday Retirement (“Holiday”), a portfolio company that is majority-owned by private equity funds managed by an affiliate of our Former Manager (an affiliate of Fortress), FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of our Former Manager, Jerry Erwin Associates, Inc. (“JEA”), Grace Management, Inc. (“Grace”), Watermark Retirement Communities, Inc. (“Watermark”), Integral Senior Living Management, LLC (“Integral”) and Phoenix Senior Living LLC (“Phoenix”) (collectively, the “Property Managers”), under property management agreements (collectively, the “Property Management Agreements”). Under the Property Management Agreements, the Property Managers are responsible for the day-to-day operations of our senior housing properties and are entitled to a management fee in accordance with the terms of the Property Management Agreements.

Our Property Management Agreements have initial five-year or ten-year terms, with successive, automatic one-year renewal periods. We pay property management fees of 3% to 7% of gross revenues and, for certain properties, i) a property management fee based on a percentage of net operating income (“NOI”) and ii) when eligible, an incentive fee based on operating performance, pursuant to our Property Management Agreements with other managers.

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

Triple Net Lease Properties – We own one Continuing Care Retirement Community (“CCRC”) in the United States and lease this property to a healthcare operating company under a triple net lease agreement. In a triple net lease arrangement, the lessee agrees to operate and maintain the property at its own expense, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. Our triple net lease agreement has an initial term of 15 years and includes a renewal option and annual rent increases ranging from 2.75% to 3.25%.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

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

6

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


significant operating, financial and investing decisions of the entity. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included on Form 10-K for the year ended December 31, 2018, as filed with the SEC.

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

Management is required to make estimates and assumptions when preparing financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the accompanying consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from management’s estimates.

Significant Accounting Policies

Equity-Based Compensation

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

Earnings per Share

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

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

Recently Adopted Accounting Pronouncements

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

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

Lessor Accounting
As a lessor, our recognition of rental revenue remained consistent with prior accounting guidance. Rental revenue from the Triple Net Lease Properties segment is recognized on a straight-line basis over the applicable term of the lease when collectability is reasonably assured.


7

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


Resident leases within our Managed Properties segments contain service components. We elected the practical expedient to account for our resident leases as a single lease component.

Lessee Accounting
We determine if a contract is or contains a lease at inception. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use asset and lease liability are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate to determine the present value of lease payments as the rates implicit in our leases are not readily determinable. Upon adoption on January 1, 2019 and as of March 31, 2019, our operating lease right-of-use asset and lease liability are $2.6 million and $2.4 million, respectively, for our corporate office, land and equipment leases. Our operating lease right-of-use asset is included in “Buildings, improvements and other” and our operating lease liability is included in “Accrued expenses and other liabilities” on our Consolidated Balance Sheets. The weighted-average remaining lease term for our operating leases was 4.9 years and 5.1 years at March 31, 2019 and December 31, 2018, respectively. The weighted-average discount rate was 6.03% and 6.02% at March 31, 2019 and December 31, 2018, respectively.

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

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. This standard replaces the current incurred loss methodology with a methodology that reflects expected credit losses. Under this methodology, a company would recognize an impairment allowance equal to its current estimate of all contractual cash flows that it does not expect to collect from financial assets measured at amortized cost. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption is permitted beginning after December 15, 2018. We are assessing the impact this guidance may have on our consolidated financial statements.

3. SEGMENT REPORTING

We operate in three reportable business segments: Managed IL Properties, Managed AL/MC Properties and Triple Net Lease Properties. Under our Managed Properties segments, we invest in senior housing properties throughout the United States and engage property managers to manage those senior housing properties. Under our Triple Net Lease Properties segment, we invest in senior housing and healthcare properties throughout the United States and lease those properties to healthcare operating companies under triple net leases that obligate the tenants to pay all property-related expenses, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees.

We evaluate performance of the combined properties in each reportable business segment based on segment NOI. We define NOI as total revenues less property-level operating expenses, which include property management fees and travel cost reimbursements. We believe that net income, as defined by GAAP, is the most appropriate earnings measurement. However, we believe that segment NOI serves as a useful supplement to net income because it allows investors, analysts and management to measure unlevered property-level operating results and to compare our operating results between periods and to the operating results of other real estate companies on a consistent basis. Segment NOI should not be considered as an alternative to net income as determined in accordance with GAAP.

Effective May 14, 2018, we terminated our triple net leases with respect to the properties in the Holiday Portfolio and concurrently entered into property management agreements with Holiday with respect to such properties. The NOI for such properties following the Lease Termination has been included in the Managed IL Properties segment. This resulted in a significant increase in the segment NOI of the Managed IL Properties with a corresponding decrease in the segment NOI of the Triple Net Lease Properties during the three months ended March 31, 2019.

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

8

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


 
Three Months Ended March 31, 2019
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
 
IL
 
AL/MC
 
Revenues
 

 
 
 
 

 
 

Resident fees and services
$

 
$
83,744

 
$
32,293

 
$
116,037

Rental revenue
1,582

 

 

 
1,582

Less: Property operating expense

 
50,719

 
26,628

 
77,347

Segment NOI
$
1,582

 
$
33,025

 
$
5,665

 
$
40,272

 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 
 
 

 
20,787

Interest expense
 

 
 
 
 

 
23,719

General and administrative expense
 

 
 
 
 

 
4,984

Acquisition, transaction and integration expense
 

 
 
 
 

 
650

Other expense
 
 
 
 
 
 
1,245

Total expenses
 
 
 
 
 
 
51,385

Loss before income taxes
 
 
 
 
 
 
(11,113
)
Income tax expense
 

 
 
 
 

 
80

Net loss
 

 
 
 
 

 
$
(11,193
)
 
Three Months Ended March 31, 2018
 
Triple Net Lease Properties
 
Managed Properties
 
Consolidated
 
 
IL
 
AL/MC
 
Revenues
 
 
 
 
 
 
 
Resident fees and services
$

 
$
42,555

 
$
32,788

 
$
75,343

Rental revenue
23,875

 

 

 
23,875

Less: Property operating expense

 
26,220

 
25,879

 
52,099

Segment NOI
$
23,875


$
16,335

 
$
6,909


$
47,119

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
26,725

Interest expense
 
 
 
 
 
 
21,923

General and administrative expense
 
 
 
 
 
 
3,752

Acquisition, transaction and integration expense
 
 
 
 
 
 
2,888

Management fees and incentive compensation to affiliate
 
 
 
 
 
 
3,752

Other expense
 
 
 
 
 
 
1,380

Total expenses
 
 
 
 
 
 
60,420

Loss before income taxes
 
 
 
 
 
 
(13,301
)
Income tax expense
 
 
 
 
 
 
48

Net loss
 
 
 
 
 
 
$
(13,349
)

For the three months ended March 31, 2019, no rental revenue was attributable to Holiday due to the Lease Termination in May 2018. For the three months ended March 31, 2018, rental revenue attributable to our triple net leases with Holiday accounted for 22.5% of our total revenue.


9

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


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

Amount
 
Percentage
 
Amount
 
Percentage
Managed IL Properties
$
1,779,800

 
79.2
%
 
$
1,791,707

 
78.4
%
Managed AL/MC Properties
396,526

 
17.7
%
 
400,432

 
17.5
%
Triple Net Lease Properties
57,501

 
2.6
%
 
58,270

 
2.5
%
All other assets (A)
12,041

 
0.5
%
 
35,849

 
1.6
%
Total assets
$
2,245,868

 
100.0
%
 
$
2,286,258

 
100.0
%


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

The following table presents the percentage of total revenues by geographic location:
 
As of and for the three months ended
March 31, 2019
 
As of and for the three months ended
March 30, 2018
 
Number of Communities
 
% of Total Revenue
 
Number of Communities
 
% of Total Revenue
Florida
15

 
12.0
%
 
15

 
12.9
%
California
11

 
10.9
%
 
11

 
11.6
%
Texas
13

 
9.8
%
 
13

 
9.2
%
North Carolina
9

 
7.3
%
 
9

 
7.5
%
Pennsylvania
7

 
6.4
%
 
7

 
7.2
%
Oregon
9

 
6.1
%
 
9

 
5.8
%
Other
69

 
47.5
%
 
69

 
45.8
%
Total
133

 
100.0
%
 
133

 
100.0
%


4.
REAL ESTATE INVESTMENTS
 
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
177,956

 
$

 
$
177,956

 
$
177,956

 
$

 
$
177,956

Building and improvements
2,215,706

 
(285,236
)
 
1,930,470

 
2,211,318

 
(269,137
)
 
1,942,181

Furniture, fixtures and equipment
129,248

 
(93,829
)
 
35,419

 
124,495

 
(89,231
)
 
35,264

Total real estate investments
$
2,522,910

 
$
(379,065
)
 
$
2,143,845

 
$
2,513,769

 
$
(358,368
)
 
$
2,155,401


 
Depreciation expense was $20.7 million and $21.2 million for the three months ended March 31, 2019 and 2018, respectively.


10

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


The following table summarizes our real estate intangibles:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted Average Remaining Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted Average Remaining Amortization Period
Intangible lease assets
$
8,638

 
$
(2,966
)
 
$
5,672

 
42.3 years
 
$
8,638

 
$
(2,877
)
 
$
5,761

 
42.1 years
Total intangibles
$
8,638

 
$
(2,966
)
 
$
5,672

 
 
 
$
8,638

 
$
(2,877
)
 
$
5,761

 
 


Amortization expense was $0.1 million and $5.5 million for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, no intangible lease assets were written off and for the three months ended March 31, 2018, $195.3 million of fully amortized intangible lease assets were written off.

We evaluated long-lived assets, primarily consisting of our real estate investments, for impairment indicators. In performing this evaluation, market conditions and our current intentions with respect to holding or disposing of the asset are considered. Where indicators of impairment are present, we evaluated whether the sum of the expected future undiscounted cash flows is less than book value. Based on such assessment, the future undiscounted cash flows of the underlying operations exceeds the carrying value of such real estate investments, including definite lived intangible assets. Therefore, we did not recognize any impairment loss during the three months ended March 31, 2019 and 2018.

5.
RECEIVABLES AND OTHER ASSETS, NET

 
March 31, 2019
 
December 31, 2018
Escrows held by lenders (A)
$
16,174

 
$
17,268

Prepaid expenses
8,727

 
5,451

Resident receivables, net
3,848

 
3,200

Security deposits
2,980

 
2,966

Income tax receivable
702

 
782

Assets held for sale (B)
13,223

 
13,223

Straight-line rent receivable
3,667

 
3,494

Other assets and receivables
5,511

 
6,290

Total receivables and other assets
$
54,832

 
$
52,674


(A)
Represents amounts held by lenders in tax, insurance, replacement reserve and other escrow accounts that are related to mortgage notes collateralized by New Senior’s properties.
(B)
The balances represent two properties in the Managed AL/MC Properties segment and primarily consists of the carrying value of buildings and land. We estimate the fair value of assets held for sale based on current sales price expectation less estimated cost to sell, which we deem to be classified as level 3 within the fair value hierarchy.

The following table summarizes the allowance for doubtful accounts and the related provision for uncollectible receivables: 
 
Three Months Ended March 31,
 
2019
 
2018
Balance, beginning of period
$
1,512

 
$
938

Provision for uncollectible receivables

 
345

Write-offs, net of recoveries
(892
)
 
(448
)
Balance, end of period
$
620

 
$
835




11

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


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

Straight-line Rent Receivable

Rental revenue from the Triple Net Lease Properties segment is recognized on a straight-line basis over the applicable term of the lease when collectability of substantially all rents is probable. Recognizing rental revenue on a straight-line basis typically results in recognizing revenue in excess of cash amounts contractually due from our tenants during the first half of the lease term, creating a straight-line rent receivable.

We assess the collectability of straight-line rent receivables on an ongoing basis. This assessment is based on several qualitative and quantitative factors, including and as appropriate, the payment history of the triple net lease tenant, the tenant’s ability to satisfy its lease obligations, the value of the underlying collateral or deposit, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to collect substantially all rents, we recognize a charge to rental revenue for the amount we deemed uncollectible.

The following table sets forth future contracted minimum lease payments from the tenant within the Triple Net Lease Properties segment, excluding contingent payment escalations, as of March 31, 2019:
2019 (nine months)
$
4,335

2020
5,904

2021
6,066

2022
6,233

2023
6,405

Thereafter
45,469

Total future minimum lease payments
$
74,412



6.
DEBT, NET

 
March 31, 2019
 
December 31, 2018
 
Outstanding Face Amount
 
Carrying Value (A)
 
Maturity Date
 
Stated Interest Rate
 
Weighted Average Maturity (Years)
 
Outstanding Face Amount
 
Carrying Value (A)
Fixed Rate
$
464,680

 
$
462,236

 
Sep 2025
 
4.25%
 
6.3
 
$
464,680

 
$
462,139

Floating Rate (B)(C)
1,438,141

 
1,420,400

 
Dec 2021 - Nov 2025
 
1M LIBOR
+ 2.29% to
1M LIBOR
+ 2.75%
 
4.8
 
1,440,842

 
1,422,743

Total
$
1,902,821

 
$
1,882,636

 
 
 
 
 
5.1
 
$
1,905,522

 
$
1,884,882


(A)
The totals are reported net of deferred financing costs of $20.2 million and $20.6 million as of March 31, 2019 and December 31, 2018, respectively.
(B)
Substantially all of these loans have LIBOR caps that range between 3.66% and 3.75% as of March 31, 2019.
(C)
Includes $69.0 million of borrowings outstanding under our revolving credit facility secured by certain properties as of March 31, 2019 and December 31, 2018.

The carrying value of the collateral relating to the fixed rate and floating rate debt was $0.5 billion and $1.6 billion as of March 31, 2019, respectively, and $0.5 billion and $1.6 billion as of December 31, 2018, respectively.

The fair values of our debt as of March 31, 2019 and December 31, 2018 were $1.8 billion and $1.9 billion, respectively. Our debt is not measured at fair value in our Consolidated Balance Sheets. The disclosed fair value of our debt, classified as level 3 within the fair value hierarchy, is based on a discounted cash flow valuation model. Significant inputs in the model include amounts and timing of expected future cash flows and market yields which are constructed based on inputs implied from similar debt offerings.


12

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


Our debt contains various customary financial and other covenants, in some cases including Debt Service Coverage Ratio and Project Yield, as defined in the agreements. We were in compliance with the covenants in our debt agreements as of March 31, 2019.

Interest rate caps

Our interest rate caps are level 2 instruments and we estimate the fair value based on pricing models that consider inputs including forward yield curves, cap strike rates, cap volatility and discount rates. We recognized fair value losses of $0.5 million for the three months ended March 31, 2019. Fair value losses recognized for the three months ended March 31, 2018 were not material. These amounts are included in “Other expense” in our Consolidated Statements of Operations and “Other non-cash expense” in our Consolidated Statements of Cash Flows. The fair value of the interest rate caps was $0.1 million and $0.6 million as of March 31, 2019 and December 31, 2018, respectively, and is included in “Receivables and other assets, net” in our Consolidated Balance Sheets.

7.
ACCRUED EXPENSES AND OTHER LIABILITIES
 
March 31, 2019
 
December 31, 2018
Security deposits payable
$
2,683

 
$
2,766

Accounts payable
13,416

 
13,232

Mortgage interest payable
7,769

 
7,441

Deferred community fees, net
6,751

 
6,454

Rent collected in advance
3,094

 
3,843

Property tax payable
5,559

 
4,880

Operating lease liability
2,424

 

Other liabilities
20,344

 
14,063

Total accrued expenses and other liabilities
$
62,040

 
$
52,679



8.
TRANSACTIONS WITH AFFILIATES
 
The following disclosures describe transactions with Fortress, Holiday and Blue Harbor prior to the Internalization. For additional information regarding the Internalization, the termination of the Management Agreement with our Former Manager and the transition arrangements between the parties, please refer to Note 1.

Management Agreements

Prior to January 1, 2019, we were party to a management agreement (the “Management Agreement”) with the Former Manager, under which the Former Manager advised us on various aspects of our business and manages our day-to-day operations, subject to the supervision of our board of directors. For its management services, the Former Manager was entitled to a base management fee of 1.5% per annum of our gross equity. Gross equity was generally defined as the equity invested by Drive Shack Inc. (“Drive Shack”) (including cash contributed to us) as of the completion of the spin-off from Drive Shack, plus the aggregate offering price from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions (calculated without regard to depreciation and amortization) and repurchases of common stock, calculated and payable monthly in arrears in cash. We incurred $3.8 million of management fees during the three months ended March 31, 2018, under the Management Agreement, which is included in “Management fees and incentive compensation to affiliate” in our Consolidated Statements of Operations. As of December 31, 2018, we had management fee payable of $3.7 million, which is included in “Due to affiliates” in our Consolidated Balance Sheets.
 

13

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


The Former Manager was entitled to receive, on a quarterly basis, incentive compensation on a cumulative, but not compounding basis, in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) funds from operations (as defined in the Management Agreement) before the incentive compensation per share of common stock, plus (b) gains (or losses) from sales of property per share of common stock, plus (c) internal and third party acquisition-related expenses, plus (d) unconsummated transaction expenses, and plus (e) other non-routine items (as defined in the Management Agreement), exceed (2) an amount equal to (a) the weighted average value per share of the equity invested by Drive Shack in the assets of New Senior (including cash contributed to us) as of the completion of the spin-off and the price per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions, which shall be calculated without regard to depreciation and amortization and repurchases of common stock) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. The Former Manager did not earn incentive compensation during the three months ended March 31, 2018. The Former Manager was also entitled to receive, upon the successful completion of an equity offering, options with respect to 10% of the number of shares sold in the offering with an exercise price equal to the price paid by the purchaser in the offering.

Because the Former Manager’s employees performed certain legal, accounting, due diligence, asset management and other services that outside professionals or outside consultants otherwise would perform, the Former Manager was paid or reimbursed, pursuant to the Management Agreement, for the cost of performing such tasks, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis. We were also required to pay all operating expenses, except those specifically required to be borne by the Former Manager under the Management Agreement. We were required to pay expenses that include, but are not limited to, issuance and transaction costs incidental to the sourcing, evaluation, acquisition, management, disposition, and financing of our investments, legal, underwriting, sourcing, asset management and accounting and auditing fees and expenses, the compensation and expenses of independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees or agents of the Former Manager for travel on our behalf, costs associated with any computer software or hardware that was used by us, costs to obtain liability insurance to indemnify directors and officers and the compensation and expenses of our transfer agent.

For the three months ended March 31, 2018, our reimbursement to the Former Manager for costs incurred for tasks and other services performed under the Management Agreement was $2.3 million, of which $1.8 million was included in “General and administrative expense” and $0.5 million was included in “Acquisition, transaction and integration expense” in our Consolidated Statements of Operations.

As of December 31, 2018, we had reimbursements payable to the Former Manager of $2.2 million, which is included in “Due to affiliates” in our Consolidated Balance Sheets.

Property Management Agreements
 
Within our Managed Properties segment, we are party to property management agreements with Blue Harbor, an affiliate of Fortress, and Holiday, a portfolio company that is majority owned by a private equity fund managed by an affiliate of Fortress, to manage most of our senior housing properties. Pursuant to these property management agreements, we pay monthly property management fees. For AL/MC properties managed by Blue Harbor and Holiday, we pay management fees equal to 6% of effective gross income for the first two years and 7% thereafter. For IL properties managed by Blue Harbor and Holiday, we generally pay management fees equal to 5% of effective gross income. For certain property management agreements, we may also pay an incentive fee based on operating performance of the properties. No incentive fees were incurred during the three months ended March 31, 2019 and 2018. Property management fees are included in “Property operating expense” in our Consolidated Statements of Operations. Other amounts paid to managers affiliated with the Former Manager that are included in property operating expense are payroll expense and travel reimbursement costs. The payroll expense is structured as a reimbursement to the property manager, who is the employer of record.

For the three months ended March 31, 2018, we incurred property management fees, travel reimbursement costs and property-level payroll expenses of $3.9 million, $0.1 million and $19.4 million, respectively, to property managers affiliated with the Former Manager, which are included in “Property operating expense” in our Consolidated Statements of Operations.


14

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


As of December 31, 2018, we had payables for property management fees of $2.1 million, and property-level payroll expenses of $8.2 million, which are included in “Due to affiliates” in our Consolidated Balance Sheets. The property management agreements with managers affiliated with the Former Manager have initial terms of 5 or 10 years and provide for automatic one-year extensions after the initial term, subject to termination rights. 

9.
INCOME TAXES
 
New Senior is organized and conducts its operations to qualify as a REIT under the requirements of the Internal Revenue Code of 1986, as amended (the “Code”). However, certain of our activities are conducted through our taxable REIT subsidiary (“TRS”) and therefore are subject to federal and state income taxes at regular corporate tax rates.

The following table presents the provision for income taxes:
 
Three Months Ended March 31,
 
2019
 
2018
Current
 

 
 

Federal
$

 
$
(41
)
State and local
80

 
27

Total current provision
80

 
(14
)
Deferred
 

 
 

Federal

 
58

State and local

 
4

Total deferred provision

 
62

Total provision for income taxes
$
80

 
$
48



The following table presents the significant components of deferred tax assets:
 
March 31, 2019
 
December 31, 2018
Deferred tax assets:
 
 
 
Prepaid fees and rent
$
776

 
$
770

Net operating losses
4,488

 
4,225

Deferred rent
258

 
272

Depreciation
57

 

Other
89

 
122

Total deferred tax assets
5,668

 
5,389

Less valuation allowance
(5,668
)
 
(5,354
)
Net deferred tax assets

 
35

Deferred tax liabilities:
 
 
 
Depreciation and amortization

 
35

Total deferred tax liabilities

 
35

Total net deferred tax assets
$

 
$



In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by the TRS during the periods in which temporary differences become deductible and before the net operating loss carryforward expires. We recorded a valuation allowance of $5.7 million against our net deferred tax assets as of March 31, 2019 as management believes that it is more likely than not that our net deferred tax assets will not be realized. However, the amount of the deferred tax asset considered realizable could be adjusted if (i) estimates of future taxable income during the carryforward period are reduced or increased or (ii) objective negative evidence in the form of cumulative losses is no longer present.


15

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


As of March 31, 2019, our TRS had a loss carryforward of approximately $17.9 million for federal income tax purposes and $19.3 million for state income tax purposes. The federal net operating losses will begin to expire at the end of 2034. The net operating loss carryforward can generally be used to offset future taxable income, if and when it arises.

10.
REDEEMABLE PREFERRED STOCK, EQUITY AND EARNINGS PER SHARE

Redeemable Preferred Stock

On December 31, 2018, we issued 400,000 shares of our Redeemable Preferred Stock to the Former Manager as consideration for the termination of the Management Agreement. The Redeemable Preferred Stock are non-voting and have a $100 liquidation preference. Holders of the Redeemable Preferred Stock are entitled to cumulative cash dividends at a rate per annum of 6.00% on the liquidation preference amount plus all accumulated and unpaid dividends.

In the event of any voluntary or involuntary liquidation, dissolution or winding up, the holders of shares of the Redeemable Preferred Stock will receive out of the assets of the Company legally available for distribution to its stockholders before any payment is made to the holders of any series of preferred stock ranking junior to the Redeemable Preferred Stock or to any holder of the Company’s common stock but subject to the rights of any class or series of securities ranking senior to or on parity with the Redeemable Preferred Stock, a payment per share equal to the liquidation preference plus any accumulated and unpaid dividends.

We may redeem, at any time, all but not less than all of the shares of Redeemable Preferred Stock for cash at a price equal to the liquidation preference amount of the Redeemable Preferred Stock plus all accumulated and unpaid dividends thereon (the “Redemption Price”). On or after December 31, 2020 the holders of a majority of the then outstanding shares of Redeemable Preferred Stock will have the right to require us to redeem up to 50% of the outstanding shares of Redeemable Preferred Stock, and on or after December 31, 2021, the holders of a majority of the then outstanding shares of Redeemable Preferred Stock will have the right to require us to redeem all or any portion of the outstanding shares of Redeemable Preferred Stock, in each case, for cash at the Redemption Price. Upon the occurrence of a Change of Control (as defined in the certificate of designation governing the Redeemable Preferred Stock), the Redeemable Preferred Stock is required to be redeemed in whole at the Redemption Price. Due to the ability of the holders to require us to redeem the outstanding shares, the Redeemable Preferred Stock is excluded from Equity and reflected in our Consolidated Balance Sheets at its initial fair value of $40.0 million. The carrying value of the Redeemable Preferred Stock is increased by the accumulated and unpaid dividends in the period with a corresponding increase in accumulated deficit. Accrued dividends are treated as deductions in the calculation of net income (loss) applicable to common stockholders.

The following table is a rollforward of our Redeemable Preferred Stock for the three months ended March 31, 2019:
Balance as of December 31, 2018
$
40,000

Deemed dividend on Redeemable Preferred Stock
598

Balance as of March 31, 2019
$
40,598


Amended and Restated Stock Option and Incentive Award Plan

Our board of directors adopted as of January 1, 2019 an Amended and Restated Nonqualified Stock Option and Incentive Award Plan (the “Plan”) providing for the grant of equity-based awards, including restricted stock, stock options, stock appreciation rights, performance awards and other equity-based and non-equity based awards, in each case to our directors, officers, employees, service providers, consultants and advisors. We have reserved 27,922,570 shares of our common stock for issuance under the Plan.

In January 2019, we granted 800,381 shares of restricted stock and 2,999,900 options, with a total award value of $4.8 million to officers and employees as transition awards in connection with the Internalization. The awards will vest based on service conditions and compensation expense equal to the award value will be recognized over the vesting period on a straight-line basis. As of March 31, 2019, none of the awards have fully vested. The fair value of restricted stock and options was estimated on the date of grant using a Black-Scholes option-pricing model.





16

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


The fair value of the options was determined using the following assumptions:

Options valuation date
January 1, 2019

Expected volatility
34.0
%
Expected dividend yield
9.3
%
Expected remaining term
6.0 years

Risk free rate
2.7
%
Fair value at valuation date
$
1,500


For the three months ended March 31, 2019, we recognized $0.4 million of compensation expense relating to these awards, which is included in “General and administrative expense” in our Consolidated Statements of Operations. As of March 31, 2019, the total unrecognized compensation cost related to outstanding restricted stock and options was $4.4 million, which we expect to recognize over a weighted-average period of 2.65 years.

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

Equity and Dividends

In the first quarter of 2019, strike prices for outstanding options were reduced by $0.78, reflecting the portion of our 2018 dividends which were deemed return of capital pursuant to the terms of the Plan.

In January 2019, we issued an aggregate of 60,975 shares of common stock to directors who elected shares as a form of payment for services provided in 2018.

Earnings per Share

For the three months ended March 31, 2019 and 2018, basic and diluted net loss per share was computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. The following table sets forth the computation of basic and diluted loss per share of common stock for the three months ended March 31, 2019 and 2018 (in thousands, except per share amounts):


17

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


 
Three Months Ended March 31,
 
2019
 
2018
Numerator
 
 
 
Net loss
$
(11,193
)
 
$
(13,349
)
Deemed dividend on redeemable preferred stock
(598
)
 

Net loss attributable to common stockholders
$
(11,791
)
 
$
(13,349
)
 
 
 
 
Denominator
 
 
 
Basic weighted average common shares outstanding
82,203,069

 
82,148,869

Dilutive common shares - restricted stock and option awards (A)

 

Diluted weighted average common shares outstanding
82,203,069

 
82,148,869

 
 
 
 
Net loss per share of common stock
 
 
 
Basic
$
(0.14
)
 
$
(0.16
)
Diluted
$
(0.14
)
 
$
(0.16
)
(A)
During the three months ended March 31, 2019 and 2018, 892,626 and 589,178 dilutive shares, respectively, were excluded given our loss position, so basic and diluted EPS were the same for each reporting period.

11.
COMMITMENTS AND CONTINGENCIES
 
As of March 31, 2019, management believes there are no material contingencies that would affect our results of operations, cash flows or financial position.
 
Certain Obligations, Liabilities and Litigation
 
We are and may become subject to various obligations, liabilities, investigations, inquiries and litigation assumed in connection with or arising from our on-going business, as well as acquisitions, sales, leasing and other activities. These obligations and liabilities (including the costs associated with investigations, inquiries and litigation) may be greater than expected or may not be known in advance. Any such obligations or liabilities could have a material adverse effect on our financial position, cash flows and results of operations, particularly if we are not entitled to indemnification, or if a responsible third party fails to indemnify us.
  
Certain Tax-Related Covenants
 
If we are treated as a successor to Drive Shack under applicable U.S. federal income tax rules, and if Drive Shack failed to qualify as a REIT for a taxable year ending on or before December 31, 2015, we could be prohibited from electing to be a REIT. Accordingly, in the separation and distribution agreement entered into to effect our spin-off from Drive Shack (“Separation and Distribution Agreement”), Drive Shack (i) represented that it had no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Senior as necessary to enable us to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to us and our tax counsel with respect to the composition of Drive Shack’s income and assets, the composition of its stockholders and its operation as a REIT, and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Drive Shack’s taxable years ending on or before December 31, 2015 (unless Drive Shack obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that Drive Shack’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above).

Proceedings Indemnified and Defended by Third Parties

From time to time, we are party to certain legal actions, regulatory investigations and claims for which third parties are contractually obligated to indemnify, defend and hold us harmless. While we are presently not being defended by any tenant and other obligated third parties in these types of matters, there is no assurance that our tenants, their affiliates or other obligated third parties will

18

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019
(dollars in tables in thousands, except share data)


continue to defend us in these matters, or that such parties will have sufficient assets, income and access to financing to enable them to satisfy their defense and indemnification obligations to us.

Environmental Costs
 
As a commercial real estate owner, we are subject to potential environmental costs. As of March 31, 2019, management is not aware of any environmental concerns that would have a material adverse effect on our financial position or results of operations.

Capital Improvement and Repair Commitments
 
We have agreed to make $1.0 million available for capital improvements during the 15 year lease period to the triple net lease property under Watermark, none of which has been funded as of March 31, 2019. Upon funding these capital improvements, we will be entitled to a rent increase.

Leases

As the lessee, we currently lease our corporate office space located in New York, New York under an operating lease agreement. The lease requires fixed monthly rent payments, expires on June 30, 2024 and does not have any renewal option. We also currently lease equipment (dishwashers, copy machines and buses) used at certain of our Managed Properties under operating lease agreements. Our leases have remaining lease terms ranging from one month to 5.3 years. We do not include any renewal options in our lease terms for calculating our lease liability as we are not reasonably certain if we will exercise these renewal options at this time.

As of March 31, 2019, our future minimum lease payments under our operating leases are as follows:
Year
Operating Leases
2019 (nine months)
$
488

2020
599

2021
552

2022
489

2023
466

Thereafter
545

Total future minimum lease payments
$
3,139

Less imputed interest
(715
)
Total operating lease liability
$
2,424



12.
SUBSEQUENT EVENTS

These consolidated financial statements include a discussion of material events, if any, which have occurred subsequent to March 31, 2019 (referred to as subsequent events) through the issuance of the consolidated financial statements.

On May 1, 2019, our board of directors declared a cash dividend on our common stock of $0.13 per share for the quarter ended March 31, 2019. The dividend is payable on June 21, 2019 to stockholders of record on June 7, 2019.

On April 23, 2019, we reached an agreement to settle a derivative lawsuit brought on behalf of the Company against members of our board of directors, Fortress and its affiliates, and Holiday. The settlement provides for the payment of $53.0 million to us, which will be reduced by the plaintiff’s fee and expense of $14.5 million, and is subject to the approval of the Delaware Court of Chancery.
 


19


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Senior. The following should be read in conjunction with the consolidated financial statements and notes thereto included within this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in Part II, Item 1A “Risk Factors.”
 
OVERVIEW
 
Our Business
 
We are a REIT with a portfolio of 133 senior housing properties located across the United States. We are the only pure play senior housing REIT and one of the largest owners of senior housing properties. We are listed on the NYSE under the symbol “SNR” and are headquartered in New York, New York.
 
We conduct our business through three reportable segments: Managed IL Properties, Managed AL/MC Properties and Triple Net Lease Properties. See our consolidated financial statements and the related notes included in Part I, Item 1.

Recent Developments

Through December 31, 2018, we were externally managed and advised by an affiliate of Fortress Investment Group LLC (the “Former Manager”). On November 19, 2018, we entered into definitive agreements with the Former Manager to internalize our management, effective December 31, 2018 (the “Internalization”). In connection with the Internalization, we also entered into a Transition Services Agreement with the Former Manager to continue to provide certain services for a transition period.

During the first quarter of 2019, we transitioned nine managed properties to new operators. Four properties were transitioned to Integral, three properties were transitioned to Grace, and two properties were transitioned to Phoenix.

MARKET CONSIDERATIONS

Senior housing is a $300 billion market, and ownership of senior housing assets is highly fragmented. Given these industry fundamentals and compelling demographics that are expected to drive increased demand for senior housing, we believe the senior housing industry could present attractive investment opportunities. However, increased competition from other buyers of senior housing assets, as well as liquidity constraints and other factors, could impair our ability to source attractive investment opportunities within the senior housing industry and thus to seek investments in the broader healthcare industry. There can be no assurance that any investments we may make will be successful, and investments in asset classes other than senior housing could involve additional risks and uncertainties.

According to data from the National Investment Center for Seniors Housing and Care (“NIC”), occupancy in the first quarter decreased 20 basis points year over year. New Senior’s occupancy results underperformed the industry in the first quarter of 2019, with same store managed occupancy down 30 basis points year over year.

Industry occupancy for independent living (“IL”) facilities was down 10 basis points year over year, while industry occupancy for assisted living (“AL”) facilities was down 20 basis points year over year. Industry occupancy is expected to remain flat over the next four quarter for IL, and to increase 30 basis points for AL.

Industry-wide, new supply remains elevated but continues to decrease. Units under construction represent 6.2% of inventory, but the ratio has decreased 110 basis points from a peak in the third quarter of 2016. The ratio of AL construction to inventory (7.0%) remains significantly higher than that for IL (5.6%).

Pressures from new competition remain significant for AL facilities in particular, including for some of those in our managed portfolio. Industry-wide for AL facilities, occupancy is near its lowest level since 2006 and labor cost growth is near its highest level since 2007. However, industry rate growth has continued to improve throughout 2018, increasing 3.0% year over year, with IL (up 3.5%) outperforming AL (up 2.5%).


20


The value of our existing portfolio could be impacted by new construction, as well as increased availability and popularity of home health care or other alternatives to senior housing, by hampering occupancy and rate growth, along with increasing operating expenses.
  
RESULTS OF OPERATIONS
 
Segment Overview
 
We evaluate our business operations and allocate resources based on three segments: (i) Managed IL Properties, (ii) Managed AL/MC Properties and (iii) Triple Net Lease Properties. Under our Managed Properties segments, we own a total of 132 properties comprising of 102 IL properties and 30 AL/MC properties, which are managed by Property Managers under property management agreements. Under our Triple Net Lease Properties segment, we own and lease one property under a triple net master lease agreement.

Effective May 14, 2018, we terminated our triple net leases with respect to the properties in the Holiday Portfolio and concurrently entered into property management agreements with Holiday with respect to such properties. The NOI for such properties following the Lease Termination has been included in the Managed IL Properties segment. This resulted in a significant increase in the segment NOI of the Managed IL Properties with a corresponding decrease in the segment NOI of the Triple Net Lease Properties during the three months ended March 31, 2019.

Net Operating Income

We evaluate performance of these reportable business segments based on segment NOI. We consider NOI an important supplemental measure used to evaluate the operating performance of our segments because it allows investors, analysts and our management to assess our unleveraged property-level operating results and to compare our operating results between periods and to the operating results of other real estate companies on a consistent basis. We define NOI as total revenues less property operating expense.

Our Managed Properties segments are comprised of independent living and assisted living senior housing properties that are operated by property managers to whom we pay a management fee. Our Triple Net Lease Properties segment is comprised of senior housing properties leased on a long-term basis, and our tenants are typically responsible for bearing property-related expenses including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. Depreciation and amortization, interest expense, acquisition, transaction and integration expense, termination fee, management fees and incentive compensation to affiliates, general and administrative expense, loss on extinguishment of debt, impairment of real estate, other expense (income), gain on sale of real estate, gain on lease termination and income tax expense (benefit) are not allocated to individual segments for purposes of assessing segment performance. Because of such differences in our exposure to property operating results, each segment requires a different type of management focus. As such, these segments are managed separately. In deciding how to allocate resources and assess performance, our chief operating decision maker regularly evaluates the performance of our reportable segments on the basis of NOI.

Same Store

Same store information is intended to enable management to evaluate the performance of a consistent portfolio of real estate in a manner that eliminates variances attributable to changes in the composition of our portfolio over time, due to sales and various other factors. Properties acquired, sold, transitioned to other operators or between segments, or classified as held for sale during the comparable periods are excluded from the same store amounts. Accordingly, same store segment results exclude the performance of the Holiday Portfolio, which was transitioned from the Triple Net Lease Properties segment to the Managed IL Properties segment as a result of the Lease Termination in May 2018.

21


Three months ended March 31, 2019 compared to three months ended March 31, 2018

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

 
Three Months Ended March 31,
 
Increase (Decrease)
(dollars in thousands)
2019
 
2018
 
Amount
 
Percentage
Segment NOI for Managed Properties
 
 
 
 


 


IL Properties
$
33,025

 
$
16,335

 
$
16,690

 
102.2
 %
AL/MC Properties
5,665

 
6,909

 
(1,244
)
 
(18.0
)%
Segment NOI for Triple Net Lease Properties
1,582

 
23,875

 
(22,293
)
 
(93.4
)%
Total segment NOI
40,272

 
47,119

 
(6,847
)
 
(14.5
)%
Expenses
 
 
 
 
 
 
 
Depreciation and amortization
20,787

 
26,725

 
(5,938
)
 
(22.2
)%
Interest expense
23,719

 
21,923

 
1,796

 
8.2
 %
General and administrative expense
4,984

 
3,752

 
1,232

 
32.8
 %
Acquisition, transaction and integration expense
650

 
2,888

 
(2,238
)
 
(77.5
)%
Management fees and incentive compensation to affiliate

 
3,752

 
(3,752
)
 
NM

Other expense
1,245

 
1,380

 
(135
)
 
(9.8
)%
Total expenses
51,385

 
60,420

 
(9,035
)
 
(15.0
)%
Loss before income taxes
(11,113
)
 
(13,301
)
 
2,188

 
(16.4
)%
Income tax expense
80

 
48

 
32

 
66.7
 %
Net loss
$
(11,193
)
 
$
(13,349
)
 
$
2,156

 
(16.2
)%
_______________
NM – Not meaningful

Managed IL Properties

The following table presents same store and total portfolio results as of and for the three months ended March 31, 2019 and 2018:
 
Same Store Portfolio
 
Total Portfolio
(dollars in thousands, except per bed data)
2019
 
2018
 
Change
 
%
 
2019
 
2018
 
Change
 
%
Resident fees and services
$
43,425

 
$
42,555

 
$
870

 
2.0
 %
 
$
83,744

 
$
42,555

 
$
41,189

 
96.8
%
Less: Property operating expense
25,905

 
26,220

 
(315
)
 
(1.2
)%
 
50,719

 
26,220

 
24,499

 
93.4
%
NOI
$
17,520

 
$
16,335

 
$
1,185

 
7.3
 %
 
$
33,025

 
$
16,335

 
$
16,690

 
102.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
51

 
51

 
 
 
 
 
102

 
51

 
 
 
 
Average available beds
6,127

 
6,126

 
 
 
 
 
11,974

 
6,126

 
 
 
 
Average occupancy (%)
86.7

 
87.3

 
 
 
 
 
87.0

 
87.3

 
 
 
 
Average monthly revenue per occupied bed
$
2,726

 
$
2,653

 
 
 
 
 
$
2,680

 
$
2,653

 
 
 
 

Resident fees and services
 
Total resident fees and services increased $41.2 million. This increase is attributable to the fees from the Holiday Portfolio, which are included in the Managed IL Properties segment following the Lease Termination.
 
Same store resident fees and services increased $0.9 million, primarily due to an increase in average rental rates.
 

22


Property operating expense
 
Property operating expense increased $24.5 million. This increase is attributable to the property operating expense related to the Holiday Portfolio, which is included in the Managed IL Properties segment following the Lease Termination.
 
Same store property operating expense decreased $0.3 million, primarily due to lower raw food costs.
 
Segment NOI
 
Total segment NOI and same store segment NOI increased by $16.7 million and $1.2 million, respectively. See above for the variance explanations.

Managed AL/MC Properties

The following table presents same store and total portfolio results as of and for the three months ended March 31, 2019 and 2018:

 
Same Store Portfolio
 
Total Portfolio
(dollars in thousands, except per bed data)
2019
 
2018
 
Change
 
%
 
2019
 
2018
 
Change
 
%
Resident fees and services
$
23,344

 
$
23,229

 
$
115

 
0.5
 %
 
$
32,293

 
$
32,788

 
$
(495
)
 
(1.5
)%
Less: Property operating expense
18,258

 
17,496

 
762

 
4.4
 %
 
26,628

 
25,879

 
749

 
2.9
 %
NOI
$
5,086

 
$
5,733

 
$
(647
)
 
(11.3
)%
 
$
5,665

 
$
6,909

 
$
(1,244
)
 
(18.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
19

 
19

 
 
 
 
 
30

 
30

 
 
 
 
Average available beds
2,297

 
2,296

 
 
 
 
 
3,418

 
3,417

 
 
 
 
Average occupancy (%)
81.6

 
82.3

 
 
 
 
 
78.2

 
80

 
 
 
 
Average monthly revenue per occupied bed
$
4,150

 
$
4,097

 
 
 
 
 
$
4,025

 
$
4,000

 
 
 
 

Resident fees and services
 
Total resident fees and services decreased $0.5 million. This decrease is attributable to a decrease in average occupancy rates, which was partially offset by an increase in average rental rates.
 
Same store resident fees and services was relatively flat as a decrease in average occupancy rates was offset by an increase in average rental rates.
 
Property operating expense
 
Property operating expense increased $0.7 million, primarily due to higher labor costs.

Same store property operating expense increased $0.8 million, primarily due to higher labor costs.
 
Segment NOI
 
Total segment NOI and same store segment NOI decreased $1.2 million and $0.6 million, respectively. See above for the variance explanations.

23


Triple Net Lease Properties
 
The following table presents same store and total portfolio results as of and for the three months ended March 31, 2019 and 2018:
 
Same Store Portfolio
 
Total Portfolio
(dollars in thousands)
2019
 
2018
 
Change
 
%
 
2019
 
2018
 
Change
 
%
Rental revenue
$
1,582

 
$
1,581

 
$
1

 
0.1
%
 
$
1,582

 
$
23,875

 
$
(22,293
)
 
(93.4
)%
NOI
$
1,582

 
$
1,581

 
$
1

 
0.1
%
 
$
1,582

 
$
23,875

 
$
(22,293
)
 
(93.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
1

 
1

 
 
 
 
 
1

 
52

 
 
 
 
Average available beds
463

 
463

 
 
 
 
 
463

 
6,309

 
 
 
 
Average occupancy (%)
86.5

 
90.0

 
 
 
 
 
86.4

 
85.4

 
 
 
 
 
Total segment NOI decreased $22.3 million, primarily due to the Lease Termination effective on May 14, 2018. As a percentage of rental revenue, segment NOI was 100% of revenue for each fiscal year as the lessee operates the property and bears the related costs, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees.

Expenses
 
Depreciation and amortization
 
Depreciation and amortization decreased $5.9 million, primarily due to certain intangibles becoming fully amortized.

Interest expense
 
Interest expense increased $1.8 million, primarily due to higher interest rates. The weighted average effective interest rate for the three months ended March 31, 2019 and 2018 was 4.98% and 4.56%, respectively.

General and administrative expense
 
General and administrative expense increased $1.2 million, primarily due to additional compensation expense including the amortization of equity-based compensation as a result of the Internalization. 

Acquisition, transaction and integration expense
 
Acquisition, transaction and integration expense decreased $2.2 million, primarily due to costs associated with the strategic review during the three months ended March 31, 2018.
 
Management fees and incentive compensation to affiliate
 
Management fees and incentive compensation to affiliate decreased $3.8 million due to the termination of the Management Agreement with the Former Manager as a result of the Internalization effective December 31, 2018.

Other expense

Other expense decreased $0.1 million, primarily due to lower bank interest income.

Other

Income tax expense

We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. However, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes. Income tax expense remained unchanged during the comparative periods.


24


LIQUIDITY AND CAPITAL RESOURCES
 
Our principal liquidity needs are to (i) fund operating expenses, (ii) meet debt service requirements, (iii) fund recurring capital expenditures and investment activities, if applicable, and (iv) make distributions to stockholders. As of March 31, 2019, we had approximately $41.5 million in liquidity, consisting of unrestricted cash and cash equivalents. A portion of this amount is held in operating accounts used to fund expenses at our managed properties and, therefore, may not be available for distribution to stockholders.

Our principal sources of liquidity are (i) cash flows from operating activities, (ii) proceeds from financing in the form of mortgage debt, and, from time to time, (iii) proceeds from dispositions of assets and (iv) proceeds from the issuance of equity securities. Our cash flows from operating activities are primarily driven by (i) rental revenues and fees received from residents of our managed properties, and (ii) rental revenues from the tenant of our triple net lease property, less (iii) operating expenses (primarily general and administrative expenses, property operating expense of our managed properties, professional fees, insurance and taxes) and (iv) interest payments on the mortgage notes payable. Our principal uses of liquidity are the expenses included in cash flows from operating activities, plus capital expenditures and principal payments on debt.

We anticipate that our cash on hand combined with our cash flows provided by operating activities will be sufficient to fund our business operations, recurring capital expenditures, principal payments, and the distributions we are required to make to comply with REIT requirements over the next twelve months. Our actual distributions to stockholders have historically been higher than the REIT distribution requirement.

Our cash flow from operating activities, less capital expenditures and principal payments have been, and continue to be, less than the amount of distributions to our stockholders. We have funded the shortfall using cash on hand, including proceeds from asset sales.

On August 9, 2018, we announced that our board of directors determined to re-set the dividend on our common stock for the quarter ended June 30, 2018, to more closely align our payout ratios with our industry peers. Our cash flows from operating activities, less capital expenditures and principal payments, have been, and continue to be, less than the amount of distributions to our stockholders. There can be no assurance that we will pay cash dividends in an amount consistent with prior quarters. Any difference between the amount of any future dividend and the amount of dividends in prior quarters could be material, and there can be no assurance that our board will declare any dividend at all. See Part II, Item IA. Risk Factors, “-We have not established a minimum distribution payment level, and we cannot assure you of our ability to maintain our current distribution payment level or to pay any distributions in the future.”

On August 9, 2018, our board of directors authorized the repurchase of up to $100.0 million of the Company’s common stock over the next 12 months. Under the program, the Company may purchase its shares from time to time in the open market or in privately negotiated transactions. The amount and timing of the purchases will depend on a number of factors including the price and availability of the Company’s shares, trading volume, capital availability, Company performance and general economic and market conditions. The Company may also from time to time establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate purchases of its shares under this authorization. The stock repurchase program may be suspended or discontinued at any time.

The expectations set forth above are forward-looking and subject to a number of uncertainties and assumptions, which are described below under “Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations” as well as “Part II, Item 1A. Risk Factors.” If our expectations about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis.

Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations
 
The following factors could impact our liquidity, capital resources and capital obligations:

Access to Financing: Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with covenant terms, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto and the relative attractiveness of alternative investment or lending opportunities.


25


Impact of Expected Additional Borrowings or Sales of Assets on Cash Flows: The availability and timing of and proceeds from additional borrowings or refinancing of existing debt may be different than expected or may not occur as expected. The timing of any sale of assets, and the proceeds from any such sales, are unpredictable and may vary materially from an asset’s estimated fair value and carrying value.

Compliance with Debt Obligations: Our financings subject us and our operators to a number of obligations, and a failure to satisfy certain obligations, including (without limitation) a failure by the guarantors of our leases to satisfy certain financial covenants that depend in part on the performance of our leased assets, which is outside of our control, could give rise to a requirement to prepay outstanding debt or result in an event of default and the acceleration of the maturity date for repayment. We may also seek amendments to these debt covenants, and there can be no assurance that we will be able to obtain any such amendment on commercially reasonable terms, if at all.

Debt Obligations

Our mortgage notes payable contain various customary financial and other covenants, and in certain cases include a Debt Service Coverage Ratio, Project Yield or Minimum Net Worth and Liquid Assets provision, as defined in the agreements. As of March 31, 2019, we were in compliance with all of such covenants.

Capital Expenditures

For our Managed Properties segments, we anticipate that capital expenditures will be funded through operating cash flows from the Managed Properties. Capital expenditures, net of insurance proceeds in the Managed IL Properties and Managed AL/MC Properties segments were $5.0 million and $1.3 million, respectively, for the three months ended March 31, 2019.

With respect to our Triple Net Lease Properties segment, the terms of these arrangements typically require the tenants to fund all necessary capital expenditures in order to maintain and improve the applicable senior housing properties. To the extent that our tenant is unwilling or unable to fund these capital expenditure obligations under the existing lease arrangement, we may fund capital expenditures. We do not expect these expenditures to be material. For further information regarding capital expenditures related to our triple net lease property, see “Contractual Obligations” below and Note 11 to the consolidated financial statements.
 
Cash Flows
 
The following table provides a summary of our cash flows:
 
Three Months Ended March 31,
 
Increase (Decrease)
(dollars in thousands)
2019
 
2018
 
Amount
Net cash provided by (used in)
 
 
 
 
 
Operating activities
$
(11,095
)
 
$
15,730

 
$
(26,825
)
Investing activities
(6,647
)
 
(3,561
)
 
(3,086
)
Financing activities
(14,241
)
 
(29,385
)
 
15,144

Net decrease in cash, cash equivalents and restricted cash
(31,983
)
 
(17,216
)
 
(14,767
)
Cash, cash equivalents and restricted cash, beginning of period
92,656

 
157,485

 
(64,829
)
Cash, cash equivalents and restricted cash, end of period
$