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EX-32.1 - EX-32.1 - FIVE STAR SENIOR LIVING INC.fve-20160630ex321b474d8.htm
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EX-31.1 - EX-31.1 - FIVE STAR SENIOR LIVING INC.fve-20160630ex311e5950c.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  DC 20549 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

04-3516029

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

 

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

 

 

(Registrant’s Telephone Number, Including Area Code): 617-796-8387

 

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  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No

 

Number of registrant’s shares of common stock, $.01 par value, outstanding as of August 3, 2016:  49,520,891.  

 

 


 

FIVE STAR QUALITY CARE, INC.

 

FORM 10-Q

 

JUNE 30, 2016

 

 

INDEX

 

 

 

 

PART I 

Financial Information

Page

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2016 and December 31, 2015

1

 

 

 

 

Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2016 and 2015

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Six Months Ended June 30, 2016 and 2015

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4. 

Controls and Procedures

28

 

 

 

 

Warning Concerning Forward Looking Statements

29

 

 

 

PART II 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 6. 

Exhibits

33

 

 

 

 

Signatures

35

 

 

 

 

 

 

 

References in this Quarterly Report on Form 10-Q to the Company, Five Star, we, us or our include Five Star Quality Care, Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

 

 


 

PART I.   Financial Information

Item 1.  Condensed Consolidated Financial Statements

 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,306

 

$

14,672

 

Accounts receivable, net of allowance of $3,631 and $3,592 at June 30, 2016 and December 31, 2015, respectively

 

 

36,909

 

 

37,829

 

Due from related persons

 

 

10,348

 

 

9,731

 

Investments in available for sale securities, of which $11,893 and $11,471 are restricted at June 30, 2016 and December 31, 2015, respectively

 

 

27,465

 

 

26,417

 

Restricted cash

 

 

11,312

 

 

3,301

 

Prepaid expenses and other current assets

 

 

18,192

 

 

19,138

 

Assets of discontinued operations

 

 

797

 

 

981

 

Total current assets

 

 

169,329

 

 

112,069

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

351,492

 

 

383,858

 

Equity investment of an investee

 

 

7,016

 

 

6,827

 

Restricted cash

 

 

2,073

 

 

2,821

 

Restricted investments in available for sale securities

 

 

19,742

 

 

23,166

 

Other long term assets

 

 

2,767

 

 

3,029

 

 

 

$

552,419

 

$

531,770

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving credit facility

 

$

10,000

 

$

50,000

 

Accounts payable and accrued expenses

 

 

78,078

 

 

93,205

 

Accrued compensation and benefits

 

 

42,128

 

 

32,127

 

Due to related persons

 

 

17,706

 

 

17,870

 

Mortgage notes payable

 

 

1,854

 

 

1,807

 

Accrued real estate taxes

 

 

11,779

 

 

12,207

 

Security deposits and current portion of continuing care contracts

 

 

5,601

 

 

6,129

 

Other current liabilities

 

 

33,483

 

 

30,399

 

Liabilities of discontinued operations

 

 

49

 

 

176

 

Total current liabilities

 

 

200,678

 

 

243,920

 

 

 

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

 

 

 

Mortgage notes payable

 

 

59,457

 

 

60,396

 

Continuing care contracts

 

 

1,090

 

 

1,267

 

Accrued self insurance obligations

 

 

36,121

 

 

37,588

 

Deferred gain on sale and leaseback transaction with Senior Housing Properties Trust

 

 

76,006

 

 

 —

 

Other long term liabilities

 

 

3,677

 

 

4,147

 

Total long term liabilities

 

 

176,351

 

 

103,398

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $.01: 75,000,000 shares authorized, 49,520,891 and 49,476,611 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

495

 

 

494

 

Additional paid in capital

 

 

359,205

 

 

358,665

 

Accumulated deficit

 

 

(187,911)

 

 

(177,622)

 

Accumulated other comprehensive income

 

 

3,601

 

 

2,915

 

Total shareholders’ equity

 

 

175,390

 

 

184,452

 

 

 

$

552,419

 

$

531,770

 

See accompanying notes.

1


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

    

Six Months Ended June 30,

 

 

    

2016

    

2015

 

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior living revenue

 

$

279,023

 

$

277,935

 

$

559,113

 

$

553,108

 

Management fee revenue

 

 

2,815

 

 

2,699

 

 

5,619

 

 

5,222

 

Reimbursed costs incurred on behalf of managed communities

 

 

61,095

 

 

61,635

 

 

122,413

 

 

117,912

 

Total revenues

 

 

342,933

 

 

342,269

 

 

687,145

 

 

676,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior living wages and benefits

 

 

135,892

 

 

136,351

 

 

271,696

 

 

269,604

 

Other senior living operating expenses

 

 

71,934

 

 

71,245

 

 

141,675

 

 

143,470

 

Costs incurred on behalf of managed communities

 

 

61,095

 

 

61,635

 

 

122,413

 

 

117,912

 

Rent expense

 

 

50,117

 

 

49,657

 

 

100,212

 

 

99,285

 

General and administrative expenses

 

 

17,573

 

 

18,181

 

 

35,676

 

 

36,163

 

Depreciation and amortization expense

 

 

9,850

 

 

8,123

 

 

19,449

 

 

16,218

 

Long lived asset impairment

 

 

 —

 

 

 —

 

 

306

 

 

 —

 

Total operating expenses

 

 

346,461

 

 

345,192

 

 

691,427

 

 

682,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(3,528)

 

 

(2,923)

 

 

(4,282)

 

 

(6,410)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, dividend and other income

 

 

264

 

 

243

 

 

529

 

 

463

 

Interest and other expense

 

 

(1,511)

 

 

(1,137)

 

 

(3,012)

 

 

(2,491)

 

Gain on early extinguishment of debt

 

 

 —

 

 

692

 

 

 —

 

 

692

 

Gain on sale of available for sale securities reclassified from accumulated other comprehensive income

 

 

344

 

 

18

 

 

235

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and equity in earnings of an investee

 

 

(4,431)

 

 

(3,107)

 

 

(6,530)

 

 

(7,708)

 

Provision for income taxes

 

 

(3,486)

 

 

(280)

 

 

(3,775)

 

 

(584)

 

Equity in earnings of an investee

 

 

17

 

 

23

 

 

94

 

 

95

 

Loss from continuing operations

 

 

(7,900)

 

 

(3,364)

 

 

(10,211)

 

 

(8,197)

 

Income (loss) from discontinued operations

 

 

234

 

 

(546)

 

 

(78)

 

 

(1,015)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,666)

 

$

(3,910)

 

$

(10,289)

 

$

(9,212)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding—basic and diluted

 

 

48,813

 

 

48,399

 

 

48,802

 

 

48,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.16)

 

$

(0.07)

 

$

(0.21)

 

$

(0.17)

 

Discontinued operations

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.02)

 

Net loss per share—basic and diluted

 

$

(0.16)

 

$

(0.08)

 

$

(0.21)

 

$

(0.19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

2


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2016

    

2015

 

2016

    

2015

 

Net loss

 

$

(7,666)

 

$

(3,910)

 

$

(10,289)

 

$

(9,212)

 

Other comprehensive (loss) income :

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on investments in available for sale securities, net of tax of $545,  $0,  $545 and $0, respectively

 

 

(99)

 

 

(576)

 

 

826

 

 

(126)

 

Equity in unrealized gain (loss) of an investee

 

 

43

 

 

(64)

 

 

95

 

 

(19)

 

Realized gain on investments in available for sale securities reclassified and included in net loss, net of tax

 

 

(344)

 

 

(18)

 

 

(235)

 

 

(38)

 

Other comprehensive (loss) income

 

 

(400)

 

 

(658)

 

 

686

 

 

(183)

 

Comprehensive loss

 

$

(8,066)

 

$

(4,568)

 

$

(9,603)

 

$

(9,395)

 

See accompanying notes.

 

 

3


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(10,289)

 

$

(9,212)

 

Adjustments to reconcile net loss to cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,449

 

 

16,218

 

Gain on early extinguishment of debt

 

 

 —

 

 

(742)

 

Loss from discontinued operations before income tax

 

 

78

 

 

1,015

 

Gain on sale of available for sale securities reclassified from accumulated other comprehensive income

 

 

(235)

 

 

(38)

 

Loss on disposal of property and equipment

 

 

37

 

 

56

 

Long lived asset impairment

 

 

306

 

 

 —

 

Equity in earnings of an investee

 

 

(94)

 

 

(95)

 

Stock based compensation

 

 

542

 

 

788

 

Provision for losses on receivables

 

 

1,899

 

 

2,880

 

Other noncash (income) expense adjustments, net

 

 

(316)

 

 

278

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(979)

 

 

(2,565)

 

Prepaid expenses and other assets

 

 

76

 

 

(627)

 

Accounts payable and accrued expenses

 

 

(16,809)

 

 

4,081

 

Accrued compensation and benefits

 

 

10,001

 

 

10,115

 

Due to/from related persons, net

 

 

(198)

 

 

448

 

Other current and long term liabilities

 

 

(6,406)

 

 

1,358

 

Cash (used in) provided by operating activities

 

 

(2,938)

 

 

23,958

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Increase in restricted cash and investment accounts, net

 

 

(7,263)

 

 

(2,830)

 

Acquisition of property and equipment

 

 

(26,981)

 

 

(25,175)

 

Purchases of available for sale securities

 

 

(4,987)

 

 

(298)

 

Proceeds from sale of property and equipment to Senior Housing Properties Trust

 

 

11,710

 

 

8,902

 

Proceeds from sale and  leaseback transaction with Senior Housing Properties Trust

 

 

112,350

 

 

 —

 

Proceeds from sale of available for sale securities

 

 

8,685

 

 

2,817

 

Cash provided by (used in) investing activities

 

 

93,514

 

 

(16,584)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

25,000

 

 

5,000

 

Repayments of borrowings on revolving credit facility

 

 

(65,000)

 

 

(5,000)

 

Repayments of mortgage notes payable

 

 

(621)

 

 

(5,498)

 

Payment of deferred financing fees

 

 

(300)

 

 

(300)

 

Cash used in financing activities

 

 

(40,921)

 

 

(5,798)

 

 

 

 

 

 

 

 

 

Cash flows from discontinued operations:

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(12)

 

 

(536)

 

Net cash used in investing activities

 

 

(9)

 

 

(12)

 

Net cash flows used in discontinued operations

 

 

(21)

 

 

(548)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

49,634

 

 

1,028

 

Cash and cash equivalents at beginning of period

 

 

14,672

 

 

20,988

 

Cash and cash equivalents at end of period

 

$

64,306

 

$

22,016

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,952

 

$

2,088

 

Cash paid for income taxes, net

 

$

932

 

$

750

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

4


 

Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1.  Basis of Presentation and Organization

General

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, or we, us or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Certain reclassifications have been made to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation.

 

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs.  As of June 30, 2016, we operated 276 senior living communities located in 32 states with 31,191 living units, including 245 primarily independent and assisted living communities with 28,590 living units and 31 SNFs with 2,601 living units.  As of June 30, 2016, we owned and operated 26 communities (2,703 living units), we leased and operated 188 communities (20,249 living units) and we managed 62 communities (8,239 living units).  Our 276 senior living communities, as of June 30, 2016, included 10,673 independent living apartments, 15,574 assisted living suites and 4,944 skilled nursing beds.  The foregoing numbers exclude one senior living community with 32 living units that we own and which is classified as a discontinued operation and exclude living units categorized as out of service.

Segment Information

We have two operating segments: senior living communities and rehabilitation and wellness. In the senior living community segment, we operate for our own account or manage for the account of others independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under Financial Accounting Standards Board, or the FASB, Accounting Standards Codification TM, or ASC, Topic 280, Segment Reporting, and therefore we have determined that our business is comprised of one reportable segment, senior living. All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation and professional and general liability insurance programs.

Note 2. Recent Accounting Pronouncements

In December 2015, we early adopted FASB Accounting Standards Update, or ASU, No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a consolidated balance sheet rather than the former presentation of separating deferred tax assets and liabilities into current and noncurrent amounts. We adopted this ASU using prospective application. Since we have recognized a full deferred tax valuation allowance since 2014 and our deferred tax assets and liabilities net to zero, the implementation of this ASU did not have a material impact on our consolidated financial statements.

On January 1, 2016, we adopted FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of ASU No. 2015-03 did not have a material impact on our condensed consolidated financial statements.  The adoption of ASU No. 2015-15 did not result in any changes in the classification of capitalized debt issuance costs related to our secured revolving credit facility.

5


 

Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this ASU did not have a material impact on our condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this ASU, but we expect the implementation of this ASU will affect available for sale equity investments that we hold.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016. We are currently assessing the potential impact the adoption of ASU No. 2016-09 will have on our condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  This ASU clarifies the principles for recognizing revenue by, among other things, removing inconsistencies in revenue requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017; however, early adoption at the original effective date is still permitted. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. We are currently evaluating the impact that the adoption of these ASUs will have on our condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires a financial asset or a group of financial assets measured at amortized cost basis, to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead reflects an entity’s current

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. This ASU is effective for reporting periods beginning after December 15, 2019. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements.

Note 3. Property and Equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2016

 

2015

Land

 

$

22,261

 

$

25,410

Buildings and improvements

 

 

302,093

 

 

338,522

Furniture, fixtures and equipment

 

 

176,800

 

 

165,497

Property and equipment, at cost

 

 

501,154

 

 

529,429

Accumulated depreciation

 

 

(149,662)

 

 

(145,571)

Property and equipment, net

 

$

351,492

 

$

383,858

 

We recorded depreciation expense relating to our property and equipment of $9,197 and $8,110 for the three months ended June 30, 2016 and 2015, respectively, and $18,143 and $15,978 for the six months ended June 30, 2016 and 2015, respectively.

 

We review the carrying value of long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying value of an asset is not recoverable, we determine the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement. As a result of our long lived assets impairment review, we recorded $306 of impairment charges to certain of our long lived assets in continuing operations for the six months ended June 30, 2016.

 

As of June 30, 2016, we had $6,136 of assets included in our property and equipment that we currently expect to request that Senior Housing Properties Trust, or, together with its subsidiaries, SNH, purchase from us for an increase in future rent; however, SNH is not obligated to purchase such amounts. Please see Note 10 for more information regarding our leases and other arrangements with SNH, including the June 2016 sale and leaseback transaction.

Note 4. Accumulated Other Comprehensive Income

The following table details the changes in accumulated other comprehensive income, net of tax, for the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

    

Equity
Investment of an
Investee

    

Investments in
Available for Sale
Securities

    

Accumulated
Other
Comprehensive
Income

Balance at January 1, 2016

 

$

30

 

$

2,885

 

$

2,915

Unrealized gain on investments, net of  tax of $0, $545 and $545, respectively

 

 

 —

 

 

826

 

 

826

Equity in unrealized gain of an investee

 

 

95

 

 

 —

 

 

95

Reclassification adjustment:

 

 

 

 

 

 

 

 

 

Realized gain on investments, net of tax

 

 

 —

 

 

(235)

 

 

(235)

Balance at June 30, 2016

 

$

125

 

$

3,476

 

$

3,601

 

Accumulated other comprehensive income represents the unrealized gains and losses of our investments, net of tax, and our share of other comprehensive income of Affiliates Insurance Company, or AIC.

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Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

Note 5.  Income Taxes

For the six months ended June 30, 2016, we recognized income tax expense from our continuing operations of $3,775, which consists of a current state tax payable of $4,320 related primarily to the gain on sale for tax purposes associated with the June 2016 sale and leaseback transaction discussed in Note 10, net of federal and state intraperiod tax allocation benefits totaling $545 related to the unrealized gains on our available for sale securities.  We have not recognized any federal income tax expense attributable to federal taxable income because the federal taxable income and expense in the three and six months ended June 30, 2016 was offset by our federal net operating loss carry forwards and tax credit carry forwards.  We did not recognize any income tax expense or benefit from our discontinued operations for any period presented.

 

As of June 30, 2016, after reduction for the amounts utilized to offset federal taxable income in the six months ended June 30, 2016, our federal net operating loss carry forwards, which are scheduled to begin expiring in 2033 if unused, were approximately $52,104, and our tax credit carry forwards, which begin expiring in 2027 if unused, were approximately $17,957.  We have an additional $427 of federal net operating loss carry forwards not included in the $52,104, that are attributable to unvested stock grants which will be recorded as an increase to additional paid in capital once they are realized in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. Our federal net operating loss carry forwards and tax credit carry forwards are subject to possible audit and adjustment by the Internal Revenue Service. 

 

During the year ended December 31, 2014, we determined it was more likely than not that our net deferred tax assets would not be realized and concluded that a full valuation allowance was required, which eliminated the amount of our net deferred tax assets recorded in our consolidated balance sheets.  In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit, which may affect our results of operations.

Note 6.  Earnings Per Share

We calculated basic earnings per common share, or EPS, for the three and six months ended June 30, 2016 and 2015 using the weighted average number of shares of our common stock, $.01 par value per share, or our common shares, outstanding during the periods.  Diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. The three months ended June 30, 2016 and 2015 had 930,605 and 529,217, respectively, and the  six months ended June 30, 2016 and 2015 had 936,424 and 616,541,respectively of potentially dilutive restricted unvested common shares that were not included in the calculation of diluted EPS because  to do so would have been antidilutive.    

 

The following table provides a reconciliation of loss from continuing operations and loss from discontinued operations and the number of common shares used in the calculations of diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

2015

 

 

    

Income

    

 

    

Per

    

Income

    

 

    

Per

 

 

 

(loss)

 

Shares

 

Share

 

(loss)

 

Shares

 

Share

 

Loss from continuing operations

 

$

(7,900)

 

48,813

 

$

(0.16)

 

$

(3,364)

 

48,399

 

$

(0.07)

 

Dilutive effect of unvested restricted shares

 

 

 —

 

 —

 

 

 

 

 

 —

 

 —

 

 

 

 

Diluted loss from continuing operations

 

$

(7,900)

 

48,813

 

$

(0.16)

 

$

(3,364)

 

48,399

 

$

(0.07)

 

Diluted income (loss) from discontinued operations

 

$

234

 

48,813

 

$

 —

 

$

(546)

 

48,399

 

$

(0.01)

 

 

 

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Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

 

    

Income

    

 

    

Per

    

Income

    

 

    

Per

 

 

 

(loss)

 

Shares

 

Share

 

(loss)

 

Shares

 

Share

 

Loss from continuing operations

 

$

(10,211)

 

48,802

 

$

(0.21)

 

$

(8,197)

 

48,382

 

$

(0.17)

 

Dilutive effect of unvested restricted shares

 

 

 —

 

 —

 

 

 

 

 

 —

 

 —

 

 

 

 

Diluted loss from continuing operations

 

$

(10,211)

 

48,802

 

$

(0.21)

 

$

(8,197)

 

48,382

 

$

(0.17)

 

Diluted loss from discontinued operations

 

$

(78)

 

48,802

 

$

 —

 

$

(1,015)

 

48,382

 

$

(0.02)

 

 

 

 

 

 

 

 

Note 7.  Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.

 

Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

 

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Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Recurring Fair Value Measures

 

The tables below present the assets measured at fair value at June 30, 2016 and December 31, 2015 categorized by the level of inputs used in the valuation of each asset.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2016

 

    

 

 

    

Quoted Prices in

    

 

 

    

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents(1)

 

$

13,159

 

$

13,159

 

$

 —

 

$

 —

Available for sale securities:(2)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

Financial services industry

 

 

3,357

 

 

3,357

 

 

 —

 

 

 —

REIT industry

 

 

272

 

 

272

 

 

 —

 

 

 —

Other

 

 

4,857

 

 

4,857

 

 

 —

 

 

 —

Total equity securities

 

 

8,486

 

 

8,486

 

 

 —

 

 

 —

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

International bond fund(3)

 

 

2,467

 

 

 —

 

 

2,467

 

 

 —

High yield fund(4)

 

 

2,437

 

 

 —

 

 

2,437

 

 

 —

Industrial bonds

 

 

5,833

 

 

 —

 

 

5,833

 

 

 —

Government bonds

 

 

14,569

 

 

7,812

 

 

6,757

 

 

 —

Financial bonds

 

 

2,327

 

 

 —

 

 

2,327

 

 

 —

Other

 

 

11,088

 

 

 —

 

 

11,088

 

 

 —

Total debt securities

 

 

38,721

 

 

7,812

 

 

30,909

 

 

 —

Total available for sale securities

 

 

47,207

 

 

16,298

 

 

30,909

 

 

 —

Total

 

$

60,366

 

$

29,457

 

$

30,909

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

    

 

 

    

Quoted Prices in

    

 

 

    

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents(1)

 

$

5,936

 

$

5,936

 

$

 —

 

$

 —

Available for sale securities:(2)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

Financial services industry

 

 

3,746

 

 

3,746

 

 

 —

 

 

 —

REIT industry

 

 

270

 

 

270

 

 

 —

 

 

 —

Other

 

 

3,807

 

 

3,807

 

 

 —

 

 

 —

Total equity securities

 

 

7,823

 

 

7,823

 

 

 —

 

 

 —

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

International bond fund(3)

 

 

2,399

 

 

 —

 

 

2,399

 

 

 —

High yield fund(4)

 

 

2,245

 

 

 —

 

 

2,245

 

 

 —

Industrial bonds

 

 

6,007

 

 

 —

 

 

6,007

 

 

 —

Government bonds

 

 

16,612

 

 

8,661

 

 

7,951

 

 

 —

Financial bonds

 

 

3,157

 

 

 —

 

 

3,157

 

 

 —

Other

 

 

11,340

 

 

 —

 

 

11,340

 

 

 —

Total debt securities

 

 

41,760

 

 

8,661

 

 

33,099

 

 

 —

Total available for sale securities

 

 

49,583

 

 

16,484

 

 

33,099

 

 

 —

Total

 

$

55,519

 

$

22,420

 

$

33,099

 

$

 —

 


(1)

Cash equivalents consist of short term, highly liquid investments and money market funds held principally for obligations arising from our self insurance programs. Cash equivalents are reported in our condensed consolidated balance sheets as cash and cash equivalents and current and long term restricted cash.  Cash equivalents include $11,142 and $4,027 of balances that are restricted at June 30, 2016 and December 31, 2015, respectively.

 

(2)

As of June 30, 2016, our investments in available for sale securities had a fair value of $47,207 with an amortized cost of $44,529; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $2,996, net of unrealized losses of $318. As of December

10


 

Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

31, 2015, our investments in our available for sale securities had a fair value of $49,583 with an amortized cost of $48,040; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $2,113, net of unrealized losses of $570. At June 30, 2016, 17 of the securities we hold, with a fair value of $2,914, have been in a loss position for less than 12 months and 10 of the securities we hold, with a fair value of $1,316, have been in a loss position for greater than 12 months. We do not believe these securities are impaired primarily because they have not been in a loss position for what we believe to be extended periods of time, the financial conditions of the issuers of these securities remain strong with solid fundamentals, we intend to hold these securities until recovery, and other factors that support our conclusion that the loss is temporary. During the six months ended June 30, 2016 and 2015, we received gross proceeds of $8,685 and $2,817, respectively, in connection with the sales of available for sale securities and recorded gross realized gains totaling $375 and $38, respectively, and gross realized losses totaling $140 and $0, respectively. We record gains and losses on the sales of our available for sale securities using the specific identification method.

(3)

The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

 

(4)

The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly.

 

During the six months ended June 30, 2016, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value.  Accordingly, there were no transfers of assets or liabilities between levels of the fair value hierarchy during the six months ended June 30, 2016.

 

The carrying values of accounts receivable and accounts payable approximate fair value as of June 30, 2016 and December 31, 2015.  The carrying value and fair value of our mortgage notes payable were $61,311 and $66,874, respectively, as of June 30, 2016 and $62,203 and $65,999, respectively, as of December 31, 2015, and are categorized in Level 3 of the fair value hierarchy in their entirety.  We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date. 

 

Non-Recurring Fair Value Measures

 

We review the carrying value of long lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Please see Note 3 for more information regarding fair value measurements related to impairments of our long lived assets in continuing operations.

 

The fair value of assets held for sale is determined based on the use of appraisals, input from market participants, our experience selling similar assets and/or internally developed cash flow models, all of which are considered to be Level 3 fair value measurements. Please see Note 11 for more information regarding fair value measurements related to impairments of our assets held for sale.

 

Note 8.  Indebtedness

We have a $100,000 secured revolving credit facility, or our Credit Facility, that is available for general business purposes, including acquisitions. In April 2016, we extended the maturity date of our Credit Facility to April 13, 2017, and we paid a fee of $300 in connection with this extension.  We are required to pay interest at an annual rate of LIBOR plus a premium of 250 basis points, or 2.95% as of June 30, 2016, on borrowings under our Credit Facility.  We are also required to pay a quarterly fee of 0.35% per annum on the unused part of our Credit Facility. We may draw, repay and redraw funds until maturity, and no principal repayment is due until maturity.  The weighted average annual interest rate for borrowings under our Credit Facility was 3.31% and 2.74% for the six months ended June 30, 2016 and 2015, respectively.  As of June 30, 2016, we had $10,000 outstanding and an additional $76,270 available to borrow under our Credit Facility. We incurred interest expense and other associated costs related to our Credit Facility of $695 and $404 for the three months ended June 30, 2016 and 2015, respectively, and $1,332 and $1,013 for the six months ended June 30, 2016 and 2015, respectively.

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Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

We are the borrower under our Credit Facility, and certain of our subsidiaries guarantee our obligations under our Credit Facility, which is secured by real estate mortgages on 10 senior living communities with 1,178 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral. In connection with the June 2016 sale and leaseback transaction discussed in Note 10, we reduced the aggregate commitments under our Credit Facility from $150,000 to $100,000 because, as part of that transaction, we sold SNH five senior living communities that had been collateral under our Credit Facility prior to the sale. The amount of available borrowings under our Credit Facility is subject to our having qualified collateral, which is primarily based on the value of the properties securing our obligations under our Credit Facility. Accordingly, the availability of borrowings under our Credit Facility at any time may be less than $100,000.  Our Credit Facility provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us.  Our Credit Facility contains a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to pay dividends or make other distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.

 

We previously had a $25,000 secured revolving line of credit that matured on March 18, 2016, which we determined not to extend or replace. We had no borrowings outstanding under this facility during either the six months ended June 30, 2016 or 2015. We incurred associated costs related to this facility of $0 and $48 for the three months ended June 30, 2016 and 2015, respectively, and $45 and $96 for the six months ended June 30, 2016 and 2015, respectively.

 

In June 2016, we initiated a so-called “step up” letter of credit for $11,700 as security for our workers compensation insurance program collateralized by approximately $8,000 in cash equivalents.  This letter of credit matures in June 2017.  We are required to increase the collateral under this letter of credit quarterly so that the stated amount of $11,700 is met by March 2017.  The cash collateral is classified as short term restricted cash in our condensed consolidated balance sheet at June 30, 2016.  At June 30, 2016, we had seven other irrevocable standby letters of credit outstanding, totaling $1,296, which secure certain of our other obligations. During the three months ended June 30, 2016, three of these letters of credit were renewed. These letters of credit currently mature between September 2016 and May 2017 but are renewed annually. Our obligations under these letters of credit are secured by cash or cash equivalents.

 

At June 30, 2016, six of our senior living communities were encumbered by mortgages with a carrying value of $61,311: (1) two of our communities were encumbered by Federal National Mortgage Association, or FNMA, mortgages; (2) two of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgages; and (3) two of our communities was encumbered by a mortgage from a commercial lender.  These mortgages contain standard mortgage covenants.  We recorded mortgage premiums in connection with our assumption of certain of these mortgages as part of our acquisitions of the encumbered communities in order to record the assumed mortgages at their estimated fair value. We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgages.  The weighted average annual interest rate on these mortgages was 6.27% as of June 30, 2016.  Payments of principal and interest are due monthly under these mortgages until the maturities at varying dates ranging from June 2018 to September 2032.  We incurred mortgage interest expense, including premium amortization, of $802 and $683 for the three months ended June 30, 2016 and 2015, respectively, and $1,619 and $1,381 for the six months ended June 30, 2016 and 2015, respectively. Our mortgage debts require monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows for our FNMA and FMCC mortgages require applicable FNMA and FMCC approval.

As of June 30, 2016, we believe we were in compliance with all applicable covenants under our Credit Facility and mortgage debts.

 

Note 9. Off Balance Sheet Arrangements

We have pledged our accounts receivable and certain other assets, with a carrying value, as of June 30, 2016, of $15,101, arising from our operation of 26 communities owned by SNH and leased to us to secure SNH’s borrowings from its

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Tabe of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

lender, FNMA.  As of June 30, 2016, we had no other off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with SNH, The RMR Group LLC, or RMR LLC, and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our directors or officers.  For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

SNH: We were a 100% owned subsidiary of SNH until SNH distributed our common shares to its shareholders in 2001. As of June 30, 2016, SNH owned 4,235,000 of our common shares, representing approximately 8.6% of our outstanding common shares.  SNH is our largest stockholder. We are SNH’s largest tenant and we manage certain senior living communities owned by SNH.

On June 29, 2016, we entered into a transaction agreement, or the Transaction Agreement, and related agreements, or, collectively, the Transaction Documents, with SNH.  Pursuant to the Transaction Documents, among other things, on June 29, 2016, we and SNH completed a sale and leaseback transaction with respect to certain senior living communities we owned and amended the pooling arrangements related to our management of certain of the senior living communities we manage for the account of SNH.  Significant terms of the Transaction Documents are summarized below.

 

·

Pursuant to the Transaction Agreement, we and SNH entered into a purchase and sale agreement whereby SNH purchased seven of the 33 senior living communities we owned for an aggregate purchase price of $112,350, and we and SNH simultaneously entered into a new long term lease agreement, or the New Lease, whereby SNH has leased those seven senior living communities to us. 

·

Pursuant to the New Lease, we are required to pay SNH initial annual rent of $8,426, plus, beginning in 2018, percentage rent equal to 4% of the amount by which gross revenues, as defined in the New Lease, of each community exceeds gross revenues of such community in 2017.  The initial term of the New Lease expires on December 31, 2028, subject to our options to extend the term of the New Lease for two consecutive 15-year terms. Pursuant to the New Lease, we may request that SNH purchase certain improvements to the communities in return for rent increases in accordance with the formula specified in the New Lease; however, SNH is not obligated to purchase such improvements and we are not required to sell them to SNH.  Pursuant to the Transaction Agreement, SNH has the right, in connection with a financing or other capital raising transaction by it, to reassign one or more of the communities covered by the New Lease to another existing or new long term lease agreement between us and SNH.  Other terms of the New Lease are substantially similar to those of our other four preexisting long term leases with SNH, such terms being described in our Annual Report, which descriptions are incorporated herein by reference. 

·

Pursuant to the Transaction Agreement, our three existing pooling agreements with SNH that combined for certain purposes certain of our management agreements with SNH for senior living communities that i