New Senior Investment Group Inc. - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - New Senior Investment Group Inc.	snr-2016930exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - New Senior Investment Group Inc.	snr-2016930exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - New Senior Investment Group Inc.	snr-2016930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - New Senior Investment Group Inc.	snr-2016930exhibit311.htm

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 September 30, 2016



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.)



1345 Avenue of the Americas, New York, NY		10105
(Address of principal executive offices)		(Zip Code)

(212) 479-3140

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes No o

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 ý	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(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 o No ý

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: 82,127,247 shares outstanding as of October 27, 2016.

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,” “should,” “potential,” “intend,” “expect,” “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 operate as a standalone public company;


•	our ability to comply with the terms of our financings, any increase in our borrowing costs as a result of changes in interest rates or other factors, and 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 facilitate our ability to sell assets;


•	our ability to manage our liquidity and sustain distributions to our shareholders at the current level;


•	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), the performance of our operators, and competition for residents as a result of new construction or other factors;


•	our dependence on our property managers and tenants to operate our properties effectively and in compliance with applicable law and the terms of our financings;


•	concentration risk with respect to Holiday Retirement ("Holiday"), which, as of September 30, 2016, managed 67 of the 96 properties in our managed portfolio and leased 51 of the 58 properties in our triple net lease portfolio, and risks associated with a change of control in the ownership or senior management of Holiday;


•	the ability of our property managers and tenants to effectively conduct their operations, maintain and improve our properties, to deliver high-quality services, to attract and retain qualified personnel and to attract residents;


•	our ability and the ability of our property managers and tenants 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 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 tenants;


•	the ability of our property managers, tenants and their respective guarantors to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to us and third parties;


•	the ability and willingness of our tenants to make the rent and other payments due to us under our leases, and the possibility that our tenants will seek to renegotiate the terms of such leases;


•	our ability to reposition our leased properties on the same or better terms as we compete for tenants upon the expiration or earlier termination of our leases or with respect to additional properties that we may seek to lease in the future;


•	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 “Manager”) or our operators;


•	potential conflicts of interest relating to our external management structure or other factors, and our ability to effectively manage and resolve actual, potential or perceived conflicts of interest;


•	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.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	1
	Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2015	2
	Consolidated Statement of Changes in Equity (unaudited) for the nine months ended September 30, 2016	3
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015	4
	Notes to Consolidated Financial Statements (unaudited)	5
	Note 1. Organization	5
	Note 2. Summary of Significant Accounting Policies	5
	Note 3. Acquisitions	8
	Note 4. Segment Reporting	8
	Note 5. Real Estate Investments	11
	Note 6. Receivables and Other Assets, Net	12
	Note 7. Deferred Financing Costs	12
	Note 8. Mortgage Notes Payable, Net	13
	Note 9. Derivative Instruments	14
	Note 10. Accrued Expenses and Other Liabilities	14
	Note 11. Transactions with Affiliates	14
	Note 12. Income Taxes	17
	Note 13. Equity	18
	Note 14. Commitments and Contingencies	18
	Note 15. Subsequent Events	19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	39
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
	SIGNATURES	63

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



	September 30, 2016			December 31, 2015
Assets	(Unaudited)
Real estate investments:
Land	$	222,138		$	222,795
Buildings, improvements and other	2,557,895			2,568,133
Accumulated depreciation	(197,510		)	(129,788		)
Net real estate property	2,582,523			2,661,140
Acquired lease and other intangible assets	321,634			308,917
Accumulated amortization	(242,671		)	(166,714		)
Net real estate intangibles	78,963			142,203
Net real estate investments	2,661,486			2,803,343

Cash and cash equivalents	73,395			116,881
Straight-line rent receivables	68,379			51,916
Receivables and other assets, net	63,697			45,319
Total Assets	$	2,866,957		$	3,017,459

Liabilities and Equity
Liabilities
Mortgage notes payable, net	$	2,146,292		$	2,151,317
Due to affiliates	10,786			9,644
Accrued expenses and other liabilities	106,800			89,173
Total Liabilities	$	2,263,878		$	2,250,134

Commitments and contingencies

Equity
Preferred Stock $0.01 par value, 100,000,000 shares authorized and none outstanding as of both September 30, 2016 and December 31, 2015	$	—		$	—
Common stock $0.01 par value, 2,000,000,000 shares authorized, 82,127,247 and 85,447,551 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	821			854
Additional paid-in capital	897,947			928,654
Accumulated deficit	(295,689		)	(162,183		)
Total Equity	$	603,079		$	767,325

Total Liabilities and Equity	$	2,866,957		$	3,017,459

See notes to Consolidated Financial Statements.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Resident fees and services	$	90,217		$	76,726		$	270,220		$	187,384
Rental revenue	28,240			28,259			84,723			82,661
Total revenues	118,457			104,985			354,943			270,045

Expenses
Property operating expense	61,354			51,760			182,585			128,855
Depreciation and amortization	45,510			40,812			146,743			110,543
Interest expense	23,065			20,051			68,658			52,346
Acquisition, transaction and integration expense	364			2,373			1,770			11,490
Management fees and incentive compensation to affiliate	3,839			4,085			12,197			10,207
General and administrative expense	3,676			3,152			11,600			10,691
Loss on extinguishment of debt	—			—			—			5,091
Other expense	108			1,089			806			1,569
Total expenses	$	137,916		$	123,322		$	424,359		$	330,792

Loss Before Income Taxes	(19,459		)	(18,337		)	(69,416		)	(60,747		)
Income tax expense (benefit)	782			(378		)	31			(344		)
Net Loss	$	(20,241	)	$	(17,959	)	$	(69,447	)	$	(60,403	)

Loss Per Share of Common Stock
Basic and diluted ^(A)	$	(0.25	)	$	(0.21	)	$	(0.84	)	$	(0.82	)

Weighted Average Number of Shares of Common Stock Outstanding
Basic and diluted ^(B)	82,126,397			86,533,384			82,434,609			73,342,453

Dividends Declared Per Share of Common Stock	$	0.26		$	—		$	0.78		$	0.49


(A)	Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income 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 were excluded from the diluted share calculation as their effect would have been anti-dilutive.

See notes to Consolidated Financial Statements.

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
Equity at December 31, 2015	85,447,551		$	854		$	(162,183	)	$	928,654		$	767,325
Repurchase of common stock	(3,333,333	)	(33		)	—			(30,851		)	(30,884		)
Fair value of stock options issued	—		—			—			5			5
Director's shares issued	13,029		—			—			139			139
Dividends declared	—		—			(64,059		)	—			(64,059		)
Net loss	—		—			(69,447		)	—			(69,447		)
Equity at September 30, 2016	82,127,247		$	821		$	(295,689	)	$	897,947		$	603,079

See notes to Consolidated Financial Statements.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)



	Nine Months Ended September 30,
	2016			2015
Cash Flows From Operating Activities
Net loss	$	(69,447	)	$	(60,403	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of tangible assets and amortization of intangible assets	146,852			110,651
Amortization of deferred financing costs	7,216			6,777
Amortization of deferred community fees	(1,384		)	(1,886		)
Amortization of premium on mortgage notes payable	(447		)	228
Non-cash straight line rent	(16,463		)	(18,885		)
Loss on extinguishment of debt	—			5,091
Equity-based compensation	144			17
Provision for bad debt	1,552			1,449
Other non-cash expense	665			837
Changes in:
Receivables and other assets, net	(8,647		)	(13,148		)
Due to affiliates	1,142			4,547
Accrued expenses and other liabilities	18,503			18,641
Net cash provided by operating activities	$	79,686		$	53,916
Cash Flows From Investing Activities
Cash paid for acquisitions, net of deposits	$	—		$	(1,212,169	)
Capital expenditures	(15,753		)	(7,788		)
Funds reserved for future capital expenditures	(1,266		)	(2,003		)
Deposits refunded (paid) for real estate investments	584			(11,355		)
Net cash used in investing activities	$	(16,435	)	$	(1,233,315	)
Cash Flows From Financing Activities
Proceeds from mortgage notes payable	$	—		$	1,222,252
Principal payments of mortgage notes payable	(11,794		)	(11,683		)
Repayments of mortgage notes payable	—			(304,484		)
Payment of exit fee on extinguishment of debt	—			(1,499		)
Payment of deferred financing costs	—			(12,294		)
Payment of common stock dividend	(64,059		)	(47,820		)
Purchase of interest rate caps	—			(1,037		)
Repurchase of common stock	(30,884		)	—
Proceeds from issuance of common stock	—			276,569
Costs related to issuance of common stock	—			(10,056		)
Net cash (used in) provided by financing activities	$	(106,737	)	$	1,109,948
Net Decrease in Cash and Cash Equivalents	(43,486		)	(69,451		)
Cash and Cash Equivalents, Beginning of Period	116,881			226,377
Cash and Cash Equivalents, End of Period	$	73,395		$	156,926

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest expense	$	61,932		$	42,886
Cash paid during the period for income taxes	266			190

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Issuance of common stock	$	139		$	—
Option exercise	—			62
Other liabilities assumed with acquisitions	—			651

See notes to Consolidated Financial Statements.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


1.	ORGANIZATION

New Senior is a REIT primarily focused on investing in private pay senior housing properties. As of September 30, 2016, New Senior owned a diversified portfolio of 154 primarily private pay senior housing properties located across 37 states. The Company is listed on the New York Stock Exchange (“NYSE”) under the symbol “SNR” and is headquartered in New York, New York.

The Company operates in two reportable segments: (1) Managed Properties and (2) Triple Net Lease Properties.

Managed Properties – The Company has engaged property managers to manage 96 of its properties on a day-to-day basis under the Managed Properties segment. These properties consist of 53 dedicated independent living facilities (“IL”) and 43 properties with a combination of assisted living/memory care (“AL/MC”) facilities. The Company’s Managed Properties are managed by Holiday Retirement (“Holiday”), a portfolio company that is majority owned by private equity funds managed by an affiliate of FIG LLC (the “Manager”), a subsidiary of Fortress Investment Group LLC (“Fortress”), FHC Property Management LLC (together with its subsidiaries, “Blue Harbor”), an affiliate of the Manager, Jerry Erwin Associates, Inc. (“JEA”) and Thrive Senior Living LLC ("Thrive"), collectively, the “Property Managers,” under property management agreements (the “Property Management Agreements”). Under the Property Management Agreements, the Property Managers are responsible for the day-to-day operations of the Company’s senior housing properties and are entitled to a management fee in accordance with the terms of the Property Management Agreements.

The Company's property management agreements have initial five-year or ten-year terms, with successive, automatic one-year renewal periods. The Company pays property management fees of 5% to 7% of effective gross income pursuant to its property management agreements with Holiday and, in some cases, Holiday is eligible to earn an incentive fee based on operating performance. The Company pays property management fees of 3% to 7% of gross revenues and, for certain properties, a property management fee based on a percentage of net operating income, pursuant to its property management agreements with other managers.

Triple Net Lease Properties – The Company owns 58 properties subject to triple net lease arrangements (substantially all of which are leased to Holiday). These properties consist of 52 IL properties, 5 rental Continuing Care Retirement Communities ("CCRC") properties and 1 AL/MC property. In a triple net lease arrangement, the lessee agrees to operate and maintain the property at its own expense, including repairs, maintenance, capital expenditures, utilities, taxes, insurance and the payroll expense of property-level employees. The Company’s triple net lease agreements have initial terms of approximately 15 or 17 years and include renewal options and annual rent increases ranging from 2.5% to 4.5%.


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. New Senior consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity. As of September 30, 2016 and December 31, 2015, the Company did not have any investments in Variable Interest Entities (“VIEs”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. 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 the results of operations, financial position and cash flows in the Company's Consolidated Financial Statements on Form 10-K for the year ended December 31, 2015.

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

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

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.

Revenue Recognition

Resident Fees and Services - Resident fees and services include monthly rental revenue, care income and ancillary income recognized from the Managed Properties segment. Resident fees and services are recognized monthly as services are provided. Most lease agreements with residents are cancelable by the resident with 30 days’ notice. Ancillary income primarily relates to non-refundable community fees. Non-refundable community fees are recognized on a straight-line basis over the average length of stay of residents, which management estimates to be approximately 24 months for AL/MC properties and approximately 33 months for IL properties.

Rental Revenue - 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. Recognizing rental revenue on a straight-line basis typically results in recognizing revenue in excess of cash amounts contractually due from the Company’s tenants during the first half of the lease term, creating a straight-line rent receivable.

Acquisition Accounting

The Company has determined that all of its acquisitions should be accounted for under the acquisition method. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the respective transaction dates. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as the Company's estimates of future cash flows based on a number of factors including property operating results, known and anticipated trends, as well as market and economic conditions.

In measuring the fair value of tangible and identified intangible assets acquired and liabilities assumed, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. In the case of buildings, the fair value of the tangible assets acquired is determined by valuing the property as if it were vacant. Significant estimates impacting the measurement at fair value of the Company's real property include construction cost data and qualitative selection of comparable market transactions as well as the assessment of the relative quality and condition of the acquired properties.

Recognized intangible assets primarily include the fair value of in-place resident leases. The Company estimates the fair value of in-place leases as (i) the present value of the estimated rental revenue that would have been forgone, offset by variable costs that would have otherwise been incurred during a reasonable lease-up period, as if the acquired units were vacant and (ii) the estimated absorption costs, such as additional marketing costs that would have been incurred during the lease-up period. The acquisition fair value of the in-place lease intangibles is amortized over the average length of stay of the residents on a straight-line basis.

Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of the contingent consideration is remeasured at each reporting date with any change recorded in "Other expense" in the Consolidated Statements of Operations.

Acquisition and transaction expense includes costs related to completed and potential acquisitions and transactions and include advisory, legal, accounting, valuation and other professional or consulting fees. Integration expense includes costs directly related to the integration of acquired businesses such as lender mandated repairs, licensing, rebranding and training incurred in connection with the acquisition. Acquisition, transaction and integration costs are expensed as incurred.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09 Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB deferred the effective date of this standard by one year, which will be for fiscal years, and interim periods within those years, beginning after December 15, 2017. Additionally, during 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10 Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing and ASU 2016-12 Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which clarify the guidance on reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, and how to assess collectibility, present sales tax and treat noncash consideration. The Company is assessing the impact this guidance may have on its Consolidated Financial Statements and has not yet determined the method by which it will adopt the standard.

In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company does not expect adoption of this ASU to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 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. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is assessing the impact this guidance may have on its Consolidated Financial Statements.

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. The Company is assessing the impact this guidance may have on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. This standard addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company does not expect adoption of this ASU to have a material impact on its Consolidated Financial Statements.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


3.	ACQUISITIONS

The Company did not make any acquisitions during the nine months ended September 30, 2016.

During the nine months ended September 30, 2015, the Company acquired five portfolios representing 52 properties (49 IL, 2 AL/MC and 1 rental CCRC). The IL and AL/MC properties were integrated into the Managed Properties segment, and Holiday, Blue Harbor and Thrive manage 47, 2 and 2 of the properties, respectively. The rental CCRC was integrated into the Triple Net Lease segment.

Acquisition accounting is preliminary, pending the completion of various analyses and the finalization of estimates used in the determination of fair values. During the measurement period, additional assets or liabilities may be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The preliminary measurement of net assets acquired may be adjusted after obtaining additional information regarding, among other things, asset valuations (including market and other information with which to determine fair values), liabilities assumed and the analysis of assumed contracts. These adjustments may be significant and will be accounted for in accordance with ASU 2015-16 Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which became effective in the first quarter of 2016.

During the nine months ended September 30, 2016, measurement period adjustments were made based on the final valuation of net assets acquired. The adjustments included a decrease of $14,591 in real estate investments and an increase of $14,591 for in-place lease intangibles. If these adjustments had been recognized as of the acquisition date, the Company would have recognized additional depreciation and amortization expense in previous reporting periods, of which $2,163 and $7,444 were recorded during the three and nine months ended September 30, 2016, respectively.

The following table illustrates the pro forma effect of the acquisitions completed in the period from January 1, 2015 to September 30, 2016 on revenues and loss before income taxes, as if they had been consummated as of January 1, 2015:



	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Revenues	$	115,870		$	345,322
Loss before income taxes	(22,770		)	(85,535		)

The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred as of January 1, 2015, nor are they necessarily indicative of future operating results.


4.	SEGMENT REPORTING

As of September 30, 2016, the Company operated in two reportable business segments: Managed Properties and Triple Net Lease Properties. Under its Managed Properties segment, the Company invests in senior housing properties throughout the United States and engages property managers to manage those senior housing properties. Under its Triple Net Lease Properties segment, the Company invests in senior housing and healthcare properties throughout the United States and leases those properties to healthcare operating companies under triple net leases that obligate the tenants to pay all property-related expenses, including repairs, maintenance, capital expenditures, utilities, taxes, insurance and the payroll expense of property-level employees.

The Company evaluates the aggregate performance of the properties in each reportable business segment based on segment net operating income (“NOI”). The Company defines NOI as total revenues less property-level operating expenses, which include property management fees, payroll expense and travel cost reimbursements to affiliates. The Company believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, the Company believes 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 the Company’s 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.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

Interest expense, depreciation and amortization, general and administrative expense, acquisition, transaction and integration expense, management fees and incentive compensation to affiliate, income tax expense (benefit), other expense and discontinued operations (if any) are not allocated to individual segments for purposes of assessing segment performance. There are no intersegment sales or transfers.



	Three Months Ended September 30, 2016							Three Months Ended September 30, 2015
	Triple Net Lease Properties		Managed Properties		Consolidated			Triple Net Lease Properties		Managed Properties		Consolidated
Revenues
Resident fees and services	$	—	$	90,217	$	90,217		$	—	$	76,726	$	76,726
Rental revenue	28,240		—		28,240			28,259		—		28,259
Less: Property operating expense	—		61,354		61,354			—		51,760		51,760
Segment NOI	$	28,240	$	28,863	$	57,103		$	28,259	$	24,966	$	53,225

Depreciation and amortization					45,510							40,812
Interest expense					23,065							20,051
Acquisition, transaction and integration expense					364							2,373
Management fees and incentive compensation to affiliate					3,839							4,085
General and administrative expense					3,676							3,152
Other expense					108							1,089
Income tax expense (benefit)					782							(378		)
Net Loss					$	(20,241	)					$	(17,959	)



	Nine Months Ended September 30, 2016							Nine Months Ended September 30, 2015
	Triple Net Lease Properties		Managed Properties		Consolidated			Triple Net Lease Properties		Managed Properties		Consolidated
Revenues
Resident fees and services	$	—	$	270,220	$	270,220		$	—	$	187,384	$	187,384
Rental revenue	84,723		—		84,723			82,661		—		82,661
Less: Property operating expense	—		182,585		182,585			—		128,855		128,855
Segment NOI	$	84,723	$	87,635	$	172,358		$	82,661	$	58,529	$	141,190

Depreciation and amortization					146,743							110,543
Interest expense					68,658							52,346
Acquisition, transaction and integration expense					1,770							11,490
Management fees and incentive compensation to affiliate					12,197							10,207
General and administrative expense					11,600							10,691
Loss on extinguishment of debt					—							5,091
Other expense					806							1,569
Income tax expense (benefit)					31							(344		)
Net Loss					$	(69,447	)					$	(60,403	)

Property operating expense includes property management fees, property-level payroll expense and travel reimbursement costs. See Note 11 for additional information on these expenses related to Blue Harbor and Holiday.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

Assets by reportable business segment are reconciled to total assets as follows:



	September 30, 2016				December 31, 2015
Assets:	Amount		Percentage		Amount		Percentage
Triple Net Lease Properties	$	1,159,840	40.5	%	$	1,196,578	39.7	%
Managed Properties	1,676,099		58.5	%	1,744,540		57.8	%
All Other Assets ^(A)	31,018		1.0	%	76,341		2.5	%
Total Assets	$	2,866,957	100.0	%	$	3,017,459	100.0	%


(A)	Primarily consists of corporate cash which is not directly attributable to the Company's reportable business segments.

Rental revenue attributable to our triple net leases with Holiday accounted for 18.8% and 21.2% of the Company's total revenues for the three months ended September 30, 2016 and 2015 and 18.8% and 24.8% for the nine months ended September 30, 2016 and 2015, respectively.

The following table presents the percentage of total revenues by geographic location:



	Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2015
	Number of Communities	% of Revenue		Number of Communities	% of Revenue
Florida	26	19.7	%	26	21.4	%
Texas	19	11.9	%	17	14.0	%
California	12	10.1	%	12	9.0	%
North Carolina	9	6.4	%	9	5.5	%
Pennsylvania	7	6.1	%	7	6.4	%
Oregon	10	5.3	%	10	5.6	%
Utah	6	4.4	%	6	5.5	%
Other	65	36.1	%	65	32.6	%
Total	154	100.0	%	152	100.0	%

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


5.	REAL ESTATE INVESTMENTS



	September 30, 2016							December 31, 2015
	Gross Carrying Amount		Accumulated Depreciation			Net Carrying Value		Gross Carrying Amount		Accumulated Depreciation			Net Carrying Value
Land	$	222,138	$	—		$	222,138	$	222,795	$	—		$	222,795
Building and improvements	2,437,056		(147,465		)	2,289,591		2,455,170		(97,485		)	2,357,685
Furniture, fixtures and equipment	120,839		(50,045		)	70,794		112,963		(32,303		)	80,660
Total	$	2,780,033	$	(197,510	)	$	2,582,523	$	2,790,928	$	(129,788	)	$	2,661,140

Depreciation expense was $24,599 and $20,020 for the three months ended September 30, 2016 and 2015 and $69,019 and $50,578 for the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes the Company’s real estate intangibles:



	September 30, 2016								December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Weighted Average Amortization Period
Above/below market lease intangibles, net	$	5,868	$	(507	)	$	5,361	53.5 years	$	5,868	$	(361	)	$	5,507	52.8 years
In-place lease intangibles	309,970		(240,110		)	69,860		2.6 years	297,253		(164,772		)	132,481		2.6 years
Other intangibles	5,796		(2,054		)	3,742		9.5 years	5,796		(1,581		)	4,215		9.4 years
Total intangibles	$	321,634	$	(242,671	)	$	78,963		$	308,917	$	(166,714	)	$	142,203

Amortization expense was $20,911 and $20,792 for the three months ended September 30, 2016 and 2015 and $77,724 and $59,965 for the nine months ended September 30, 2016 and 2015, respectively. Additionally, amortization of above/below market leases was $38 and $36 for the three months ended September 30, 2016 and 2015 and $109 and $109 for the nine months ended September 30, 2016 and 2015, respectively, and is reported as a reduction to "Rental revenue" in the Consolidated Statements of Operations.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


6.	RECEIVABLES AND OTHER ASSETS, NET



	September 30, 2016		December 31, 2015
Escrows held by lenders ^(A)	$	29,790	$	19,694
Other receivables	3,284		2,996
Prepaid expenses	4,051		4,828
Resident receivables, net	2,770		2,594
Deferred tax assets, net	9,043		8,757
Security deposits	2,785		2,932
Income tax receivable	1,339		1,920
Interest rate caps	28		283
Assets held for sale ^(B)	9,357		—
Other assets	1,250		1,315
Total	$	63,697	$	45,319


(A)	Escrows held by lenders represent amounts deposited in tax, insurance, and replacement reserve escrow accounts that are related to mortgage notes collateralized by New Senior's properties.


(B)	Represents two AL/MC properties in the Managed Properties segment classified as held for sale as of September 30, 2016. The balance primarily consists of the carrying value of buildings and land as of September 30, 2016. These properties were sold on October 31, 2016; see Note 15 for further information.

The following table summarizes the allowance for doubtful accounts and the related provision for resident receivables:



	Nine Months Ended September 30,
	2016			2015
Balance, beginning of period	$	509		$	190
Provision for bad debt	1,552			1,449
Write-offs, net of recoveries	(1,028		)	(916		)
Balance, end of period	$	1,033		$	723

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


7.	DEFERRED FINANCING COSTS

The deferred financing costs summarized in the following table are presented as a reduction to "Mortgage notes payable, net" in the Consolidated Balance Sheets.



	September 30, 2016			December 31, 2015
Gross carrying amount	$	54,910		$	54,910
Accumulated amortization	(24,691		)	(17,475		)
Total	$	30,219		$	37,435

Amortization of deferred financing costs is reported within "Interest expense" in the Consolidated Statements of Operations.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


8.	MORTGAGE NOTES PAYABLE, NET



	September 30, 2016							December 31, 2015
	Outstanding Face Amount		Carrying Value ^(A)		Final Stated Maturity	Stated Interest Rate	Weighted Average Maturity (Years)	Outstanding Face Amount		Carrying Value ^(A)
Managed Properties
Fixed Rate	$	605,442	$	601,813	Dec 2018 - Sep 2025	3.65% to 6.76%	7.4	$	607,437	$	603,460
Floating Rate ^(B)	731,064		724,174		Oct 2020 - May 2022	1M LIBOR + 2.20% to 1M LIBOR + 2.70%	5.2	731,318		723,554
Triple Net Lease Properties
Fixed Rate ^(C)	686,439		669,210		Jan 2021 - Jan 2024	3.80% to 7.40%	5.5	695,984		673,732
Floating Rate	152,000		151,095		Oct 2017 - Apr 2018	3M LIBOR + 3.00% to 3M LIBOR + 3.25%	1.2	152,000		150,571
Total	$	2,174,945	$	2,146,292			5.6	$	2,186,739	$	2,151,317


(A)	The totals are reported net of deferred financing costs of $30,219 and $37,435 as of September 30, 2016 and December 31, 2015, respectively.


(B)	All of these loans have LIBOR caps that range between 3.30% and 3.80% as of September 30, 2016.


(C)	Includes loans with an outstanding face amount of $345,467 and $293,531, as of September 30, 2016, for which the Company bought down the interest rates to 4.00% and 3.80%, respectively, through January 2019. The interest rates will increase to 4.99% and 4.55%, respectively, thereafter.

In the first quarter of 2015, the Company refinanced mortgage loans of $297,030 and recognized a loss on extinguishment of debt of $5,091, which represents the write-off of related unamortized deferred financing costs, mortgage discounts, exit fees and other costs, as of the date of the refinancing, and is included in "Loss on extinguishment of debt" in the Consolidated Statements of Operations.

The carrying value of the collateral relating to the fixed rate and floating rate mortgages was $1,603,952 and $1,057,040 as of September 30, 2016 and $1,679,646 and $1,122,960 as of December 31, 2015, respectively.

The Company’s 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 September 30, 2016, the Company was in compliance with all of such covenants except the Project Yield covenant in one financing secured by a leased portfolio, where the Company will be in compliance upon either exercising its cure rights or finalizing an amendment, as described in more detail below.

The Project Yield covenant referenced above measures the leased portfolio's trailing 12-month operating results relative to the outstanding unpaid principal balance of the debt. Under the terms of the debt, the Company is entitled to cure non-compliance with this covenant by paying down the debt to the extent necessary to achieve the required project yield threshold. With respect to the September 30, 2016 test date, a prepayment of approximately $1,300 would be required to achieve compliance. The prepayment is not yet due and, prior to the due date, the Company expects to finalize an amendment to the Project Yield covenant that would reduce the threshold beginning with the September 30, 2016 test date and continuing for the remaining term of the loan. The amendment would eliminate the need to exercise a cure with respect to the September 30, 2016 test date, provided that the tenant's security deposit and other amounts posted by the tenant pursuant to the lease are escrowed with the lender.

The fair values of mortgage notes payable as of September 30, 2016 and December 31, 2015 was $2,192,611 and $2,217,464, respectively. Mortgage notes payable are not measured at fair value in the Consolidated Balance Sheets. The disclosed fair value of mortgage notes payable, 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.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


9.	DERIVATIVE INSTRUMENTS

As of September 30, 2016, the Company held interest rate caps to hedge future payments on floating rate debt obligations. The interest rate caps are carried at fair value and are included in "Receivables and other assets, net" in the Consolidated Balance Sheets. The Company estimates the fair value of these instruments using pricing models that consider forward yield curves, cap strike rates, cap volatility and discount rates, which are classified as level 2 inputs. Significant inputs to the valuation of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other pricing sources with reasonable levels of price transparency. The Company does not apply hedge accounting. The fair value adjustment on the Company's interest rate caps was a loss of $8 and $357 for the three months ended September 30, 2016 and 2015, respectively, and a loss of $255 and $837 for the nine months ended September 30, 2016 and 2015, respectively, and is included in "Other expense" in the Consolidated Statements of Operations.

The following table presents information related to the Company's outstanding interest rate caps:



	September 30, 2016		December 31, 2015
Outstanding notional amount	$	731,092	$	731,318
LIBOR cap range	3.30% to 3.80%		3.30% to 3.80%
LIBOR cap effective date range	Mar 2015 to Sep 2020		Mar 2015 to Sep 2020
Fair value	$	28	$	283


10.	ACCRUED EXPENSES AND OTHER LIABILITIES



	September 30, 2016		December 31, 2015
Security deposits payable	$	56,741	$	54,669
Accounts payable	8,771		9,552
Mortgage interest payable	6,381		6,415
Deferred community fees, net	5,464		4,450
Rent collected in advance	3,210		3,937
Property tax payable	7,419		2,564
Other liabilities ^(A)	18,814		7,586
Total	$	106,800	$	89,173


(A)	Includes liabilities held for sale of $120 related to two AL/MC properties classified as held for sale as of September 30, 2016. These properties were sold on October 31, 2016; see Note 15 for further information.


11.	TRANSACTIONS WITH AFFILIATES

Management Agreements

New Senior is party to a management agreement (the “Management Agreement”) with the Manager, under which the Manager advises the Company on various aspects of its business and manages its day-to-day operations, subject to the supervision of the Company’s board of directors. For its management services, the Manager is entitled to a base management fee of 1.5% per annum of the Company’s gross equity. Gross equity is generally defined as the equity invested by Newcastle Investment Corp. ("Newcastle") (including cash contributed to the Company) as of the completion of the spin-off from Newcastle, 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. The Company incurred management fees of $3,839 and $4,085 during the three months ended September 30, 2016 and 2015, respectively, and $11,562 and $10,207 during the nine months ended September 30, 2016 and 2015, respectively, under the Management Agreement, which are included in “Management fees and incentive compensation to affiliate” in the Consolidated Statements of Operations. As of September 30, 2016 and December 31, 2015, the Company had a payable for management fees of $1,280 and $1,349, respectively, which is included in “Due to affiliates” in the Consolidated Balance Sheets.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

The Manager is 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 Newcastle in the assets of the Company (including cash contributed to the Company) as of the completion of the spin-off and the price per share of the Company’s common stock in any offerings by the Company (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 Manager did not earn incentive compensation during the three months ended September 30, 2016 and 2015, and earned $635 and $0 during the nine months ended September 30, 2016 and 2015, respectively, which is included in "Management fees and incentive compensation to affiliate" in the Consolidated Statements of Operations. The Manager is 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 Manager’s employees perform certain legal, accounting, due diligence, asset management and other services that outside professionals or outside consultants otherwise would perform, the Manager is 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. The Company is also required to pay all operating expenses, except those specifically required to be borne by the Manager under the Management Agreement. The Company is 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 the Company’s 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 of the Company (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of the Company, the costs of printing and mailing proxies and reports to the Company’s stockholders, costs incurred by employees or agents of the Manager for travel on the Company’s behalf, costs associated with any computer software or hardware that is used by the Company, costs to obtain liability insurance to indemnify directors and officers and the compensation and expenses of the Company’s transfer agent.

The following table summarizes the Company's reimbursement to the Manager for costs incurred for tasks and other services performed by the Manager under the Management Agreement:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Included in:
General and administrative expense	$	1,843	$	1,330	$	6,115	$	4,606
Acquisition, transaction and integration expense	310		625		1,236		2,292
Total	$	2,153	$	1,955	$	7,351	$	6,898

As of September 30, 2016 and December 31, 2015, the Company had a payable for Manager reimbursements of $1,473 and $1,518, respectively, which is included in “Due to affiliates” in the Consolidated Balance Sheets.

During 2015, the Company executed a plan to centralize operations in New York, New York and relocate certain personnel from the Plano, Texas office to New York, New York. The Company determined that this plan qualified as a restructuring activity under ASC 420. While the majority of restructuring-related costs were incurred in 2015, during the nine months ended September 30, 2016, the Company incurred additional costs of $141, which primarily consist of lease-related expenses associated with the office in Plano, Texas, and are included in "Other expense" in the Consolidated Statements of Operations. The Company has incurred cumulative costs associated with the restructuring of $805. The Company does not expect to incur any material costs related to this restructuring in subsequent periods.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

Property Management Agreements

Within the Company’s Managed Properties segment, the Company is 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 its senior housing properties. Pursuant to these Property Management Agreements, the Company pays monthly property management fees. For AL/MC properties managed by Blue Harbor and Holiday, the Company pays 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, the Company generally pays management fees equal to 5% of effective gross income. For certain property management agreements, the Company may also pay an incentive fee based on operating performance of the properties. No incentive fees were incurred during the nine months ended September 30, 2016 and 2015. Property management fees are included in "Property operating expense" in the Consolidated Statements of Operations. Other amounts paid to affiliated managers 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.

The following table summarizes property management fees and reimbursements paid by the Company to Property Managers affiliated with Fortress:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Property management fees	$	5,015	$	4,267	$	14,650	$	11,023
Travel reimbursement costs	92		92		276		277
Property-level payroll expenses	$	26,418	$	23,249	$	78,262	$	59,630

As of September 30, 2016 and December 31, 2015, the Company had payables for property management fees of $1,712 and $1,689, respectively, and property-level payroll expenses of $6,321 and $5,088, respectively, which are included in “Due to affiliates” in the Consolidated Balance Sheets. The Property Management Agreements with affiliated managers have initial terms of 5 or 10 years and provide for automatic one-year extensions after the initial term, subject to termination rights.

Triple Net Lease Agreements

Within the Company’s Triple Net Lease segment, the Company is party to triple net leases with Holiday. Pursuant to the leases, the tenant is required to pay monthly rent payments in accordance with the lease terms. Such payments amounted to $17,754 and $16,989 for the three months ended September 30, 2016 and 2015, respectively, and $53,262 and $50,968 for the nine months ended September 30, 2016 and 2015, respectively.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


12.	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 the Company’s activities are conducted through its taxable REIT subsidiary ("TRS") and therefore are subject to federal and state income taxes at regular corporate tax rates.

The following table presents the expense (benefit) for income taxes:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
Current
Federal	$	95	$	—		$	95		$	—
State and local	101		83			222			187
Total current provision	196		83			317			187
Deferred
Federal	529		(427		)	(269		)	(537		)
State and local	57		(34		)	(17		)	6
Total deferred provision	586		(461		)	(286		)	(531		)
Total expense (benefit) for income taxes	$	782	$	(378	)	$	31		$	(344	)

The following table presents the significant components of deferred tax assets:



	September 30, 2016		December 31, 2015
Deferred tax assets:
Prepaid fees and rent	$	1,857	$	1,976
Net operating losses	3,858		5,175
Deferred rent	3,590		2,063
Tax credits	95		26
Other	180		70
Total deferred tax assets	9,580		9,310
Less valuation allowance	—		—
Net deferred tax assets	9,580		9,310
Deferred tax liabilities:
Depreciation and amortization	537		553
Total deferred tax liabilities	537		553
Total net deferred tax assets	$	9,043	$	8,757

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. The Company has not recorded a valuation allowance against its deferred tax assets as of September 30, 2016 as management believes that it is more likely than not that its deferred tax assets will be realized.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)


13.	EQUITY

On December 17, 2015, the board of directors authorized the Company to commence a modified “Dutch auction” self-tender offer to repurchase up to $30,000 in cash of shares of its common stock. The tender offer commenced on December 17, 2015 and expired on January 19, 2016. The Company incurred $30,884, including transaction costs, to repurchase 3,333,333 shares at a tender price of $9.00 per share.

In July 2016, the Company issued an aggregate of 13,029 shares of its common stock to its independent directors as compensation.

As of September 30, 2016, 1,302,720 shares of the Company’s common stock were held by Fortress, through its affiliates, and its principals.


14.	COMMITMENTS AND CONTINGENCIES

As of September 30, 2016, management believes there are no material contingencies that would affect the Company’s results of operations, cash flows or financial position.

Certain Obligations, Liabilities and Litigation

The Company is and may become subject to various obligations, liabilities, investigations, inquiries and litigation assumed in connection with or arising out of its acquisitions or otherwise arising in connection with its on-going business. Some of these liabilities may be indemnified by third parties. However, if these liabilities, investigations and inquiries are greater than expected or were not known to the Company at the time of acquisition, if the Company is not entitled to indemnification, or if the responsible third party fails to indemnify the Company for these liabilities, such obligations, liabilities and litigation could have a material adverse effect on the Company. In addition, in connection with the sale or leasing of properties, the Company may incur various obligations and liabilities, including indemnification obligations, relating to the operations of those properties, which could have a material adverse effect on the Company’s financial position, cash flows and results of operations.

Certain Tax-Related Covenants

If New Senior is treated as a successor to Newcastle under applicable U.S. federal income tax rules, and if Newcastle failed to qualify as a REIT for a taxable year ending on or before December 31, 2015, New Senior could be prohibited from electing to be a REIT. Accordingly, in the separation and distribution agreement entered into to effect our spin-off from Newcastle ("Separation and Distribution Agreement"), Newcastle (i) represented that it had no knowledge of any fact or circumstance that would cause New Senior to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Senior as necessary to enable New Senior to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to New Senior and its tax counsel with respect to the composition of Newcastle’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 Newcastle’s taxable years ending on or before December 31, 2015 (unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that Newcastle’s failure to maintain its REIT status will not cause New Senior 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, the Company is party to certain legal actions, regulatory investigations and claims for which third parties are contractually obligated to indemnify, defend and hold the Company harmless. While the Company is presently not being defended by any tenant and other obligated third parties in these types of matters, there is no assurance that its tenants, their affiliates or other obligated third parties will continue to defend the Company 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 the Company.

NEW SENIOR INVESTMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2016

(dollars in thousands, except share data)

Environmental Costs

As a commercial real estate owner, the Company is subject to potential environmental costs. As of September 30, 2016, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company’s financial position or results of operations.

Capital Improvement and Repair Commitments

The Company is committed to making $4,000 immediately available for capital improvements to the triple net lease properties under the Life Care Services Portfolio, of which $3,851 has been funded as of September 30, 2016. The Company also agreed to make available an additional $11,500 at certain intervals over the 15 year lease period to be used for further capital improvements. Upon funding the capital improvements, the Company will be entitled to a rent increase. Additionally, the Company is committed under the Watermark triple net lease property to make $1,000 available for lender mandated repairs, of which $334 has been funded as of September 30, 2016. The Company has also agreed to make $1,000 available for additional capital improvements during the 15 year lease period. Upon funding the capital improvements, the Company will be entitled to a rent increase.


15.	SUBSEQUENT EVENTS

These Consolidated Financial Statements include a discussion of material events, if any, which have occurred subsequent to September 30, 2016 (referred to as subsequent events) through the issuance of the Consolidated Financial Statements.

On October 31, 2016, the Company sold two AL/MC properties with a net carrying value for real estate investments of $9,312 for a purchase price of $22,975, resulting in a gain of approximately $13,000. In connection with this sale, the Company repaid $13,725 of debt associated with these properties and, pursuant to the Property Management Agreement, paid a termination fee of approximately $1,800 to Blue Harbor.

On October 31, 2016, the Company's board of directors declared a cash dividend on its common stock of $0.26 per common share for the quarter ended September 30, 2016. The dividend is payable on December 22, 2016 to shareholders of record on December 8, 2016.

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 unaudited 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 primarily focused on investing in private pay senior housing properties. As of September 30, 2016, we owned a diversified portfolio of 154 primarily private pay senior housing properties located across 37 states. We are listed on the NYSE under the symbol “SNR” and are headquartered in New York, New York.

We conduct our business through two reportable segments: Managed Properties and Triple Net Lease Properties. See our Consolidated Financial Statements and the related notes, including Note 1 included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We are externally managed and advised by an affiliate of Fortress (the "Manager") on various aspects of our business and our operations, subject to the supervision of our board of directors. For its services, the Manager is entitled to an annual management fee and is eligible for incentive compensation upon the satisfaction of certain performance thresholds, both as defined in, and in accordance with the terms of, the Management Agreement.

Acquisitions

For a discussion of acquisitions, see Note 3 included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 presents 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. New construction, as well as increased availability and popularity of home health care or other alternatives to senior housing, could impair the value of our existing portfolio by hampering occupancy and rate growth, along with increasing operating expenses. Some market participants believe that senior housing inventory growth in 2016 could outpace growth in previous years and exceed demand growth.

As a public company, our access to debt and equity capital depends, in part, on the trading price of our common stock, which, in turn, depends upon market conditions that change from time to time, such as the market’s perception of our financial condition, our growth potential and our historical and future earnings and cash distributions.

Our senior housing acquisitions completed to date have been financed with a combination of fixed and floating rate debt and cash on hand.

An increase in interest rates would increase the cost of our floating rate financings.

RESULTS OF OPERATIONS

Segment Overview

We evaluate our business operations and allocate resources based on two segments: (i) Managed Properties and (ii) Triple Net Lease Properties. Under our Managed Properties segment, we own 96 properties under property management agreements with the Property Managers. Under our Triple Net Lease Properties segment, we lease 58 of our properties under four triple net master leases.

We evaluate performance of these reportable business segments based on segment net operating income (“NOI”). We consider NOI as 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 revenue less property operating expense.

Our Managed Properties segment is comprised of primarily 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 comprises senior housing properties leased on a long-term basis, and our tenants are typically responsible for bearing operating costs including maintenance, utilities, taxes, insurance, repairs and capital improvements. Accordingly, resident fees and services, property operating expense, general and administrative expense, other income and expense and income tax expense (benefit) are relevant to the Managed Properties segment but not to the Triple Net Lease Properties segment. 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.

Three months ended September 30, 2016 compared to three months ended September 30, 2015

The following table sets forth our historical results of operations derived from our unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q.



(dollars in thousands)	Three Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			Percentage
Revenues
Resident fees and services	$	90,217		$	76,726		$	13,491		17.6	%
Rental revenue	28,240			28,259			(19		)	(0.1	)%
Total revenues	118,457			104,985			13,472			12.8	%

Expenses
Property operating expense	61,354			51,760			9,594			18.5	%
Depreciation and amortization	45,510			40,812			4,698			11.5	%
Interest expense	23,065			20,051			3,014			15.0	%
Acquisition, transaction and integration expense	364			2,373			(2,009		)	(84.7	)%
Management fees and incentive compensation to affiliate	3,839			4,085			(246		)	(6.0	)%
General and administrative expense	3,676			3,152			524			16.6	%
Other expense	108			1,089			(981		)	(90.1	)%
Total expenses	$	137,916		$	123,322		$	14,594		11.8	%

Loss before income taxes	(19,459		)	(18,337		)	(1,122		)	6.1	%
Income tax expense (benefit)	782			(378		)	1,160			NM
Net Loss	$	(20,241	)	$	(17,959	)	$	(2,282	)	12.7	%

_______________

NM – Not meaningful

The following table provides a comparison of the results of operations of our segments:



(dollars in thousands)	Three Months Ended September 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
Managed Properties
Resident fees and services	$	90,217	$	76,726	$	13,491		17.6	%
Property operating expense	61,354		51,760		9,594			18.5	%
Segment NOI for Managed Properties	28,863		24,966		3,897			15.6	%

Triple Net Lease Properties
Rental revenue	28,240		28,259		(19		)	(0.1	)%
Segment NOI for Triple Net Lease Properties	$	28,240	$	28,259	$	(19	)	(0.1	)%

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



(dollars in thousands)	Three Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			Percentage
Total Revenue	$	118,457		$	104,985		$	13,472		12.8	%

Segment NOI for Managed Properties	28,863			24,966			3,897			15.6	%
Segment NOI for Triple Net Lease Properties	28,240			28,259			(19		)	(0.1	)%
Total Segment NOI	57,103			53,225			3,878			7.3	%
Expenses
Depreciation and amortization	45,510			40,812			4,698			11.5	%
Interest expense	23,065			20,051			3,014			15.0	%
Acquisition, transaction and integration expense	364			2,373			(2,009		)	(84.7	)%
Management fees and incentive compensation to affiliate	3,839			4,085			(246		)	(6.0	)%
General and administrative expense	3,676			3,152			524			16.6	%
Other expense	108			1,089			(981		)	(90.1	)%
Income tax expense (benefit)	782			(378		)	1,160			NM
Net Loss	$	(20,241	)	$	(17,959	)	$	(2,282	)	12.7	%

_______________

NM – Not meaningful

Managed Properties

We had 96 properties under the Managed Properties segment as of September 30, 2016. We accounted for each acquisition under the acquisition method, whereby all assets acquired and liabilities assumed are recognized at their acquisition-date fair value with acquisition-related costs being expensed as incurred. The results of operations from the acquisitions are reflected in our Consolidated Financial Statements from the date of the respective acquisition.



	As of and for the three months ended September 30,
	2016		2015
Total properties	96		94
Total beds	11,545		11,387
Average occupancy rate	88.1	%	86.9	%

Same store information, as used herein, is defined as information for 64 properties owned for the entirety of comparable periods, which excludes properties classified as held for sale as of September 30, 2016. The following table presents same store Segment NOI, Segment NOI for non-same store properties and Total Segment NOI:



(dollars in thousands)	Three Months Ended September 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
Resident fees and services	$	63,629	$	62,975	$	654		1.0	%
Property operating expense	44,938		43,668		1,270			2.9	%
Same Store Segment NOI	18,691		19,307		(616		)	(3.2	)%
Segment NOI for non-Same Store properties	10,172		5,659		4,513			79.7	%
Total Segment NOI	$	28,863	$	24,966	$	3,897		15.6	%

Resident fees and services

Resident fees and services represent residents’ monthly rental and care fees. Revenue from resident fees and services increased by $13.5 million to $90.2 million for the three months ended September 30, 2016 from $76.7 million for the three months ended September 30, 2015. For the three months ended September 30, 2016, resident fees and services include revenues derived from 30 properties that were acquired during, and subsequent to, the three months ended September 30, 2015. The total bed count was 11,545 as of September 30, 2016. Average occupancy rates for the three months ended September 30, 2016 and 2015 were 88.1% and 86.9%, respectively.

Same store resident fees and services increased by $0.7 million to $63.6 million for the three months ended September 30, 2016 from $63.0 million for the three months ended September 30, 2015. This increase was primarily driven by an increase in average occupancy rates on a same store basis to 87.0% from 86.2% for the three months ended September 30, 2016 and 2015, respectively. This increase was partially offset by higher incentives.

Property operating expense

Property operating expense increased by $9.6 million to $61.4 million for the three months ended September 30, 2016 from $51.8 million for the three months ended September 30, 2015. The increase was primarily due to higher labor, utilities, food and other costs as a result of the properties that were acquired during, and subsequent to, the three months ended September 30, 2015. Property operating expense as a percent of segment revenues increased to 68.0% from 67.5% for the three months ended September 30, 2016 and 2015, respectively.

Property operating expense includes property management fees and travel reimbursements paid to Property Managers of $5.3 million and $4.4 million for the three months ended September 30, 2016 and 2015, respectively.

Same store property operating expense increased by $1.3 million to $44.9 million for the three months ended September 30, 2016 from $43.7 million for the three months ended September 30, 2015, primarily due to higher labor costs.

Segment NOI for Managed Properties

Segment NOI increased by $3.9 million to $28.9 million for the three months ended September 30, 2016 from $25.0 million for the three months ended September 30, 2015, or as a percent of resident fees and services, was 32.0% and 32.5%, respectively. The increase in segment NOI primarily reflects the impact of the properties that were acquired during, and subsequent to, the three months ended September 30, 2015.

Same store Segment NOI decreased by $0.6 million to $18.7 million for the three months ended September 30, 2016 from $19.3 million for the three months ended September 30, 2015, primarily due to higher labor costs.

Triple Net Lease Properties

Rental revenue and Segment NOI for Triple Net Lease Properties

Segment NOI was $28.2 million and $28.3 million for the three months ended September 30, 2016 and 2015, respectively. 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 repairs, maintenance, capital expenditures, utilities, taxes, insurance and the payroll expense of property-level employees.

Expenses

Depreciation and amortization

Depreciation and amortization expense increased by $4.7 million to $45.5 million for the three months ended September 30, 2016 from $40.8 million for the three months ended September 30, 2015. The increase primarily reflects the impact of properties that were acquired during, and subsequent to, the three months ended September 30, 2015 and measurement period adjustments that were made based on the final valuation of net assets acquired.

Interest expense

Interest expense increased by $3.0 million to $23.1 million for the three months ended September 30, 2016 from $20.1 million for the three months ended September 30, 2015. The net increase in mortgage notes payable, related to properties that were acquired during, and subsequent to, the three months ended September 30, 2015, resulted in increased interest expense.

The weighted average effective interest rate for the three months ended September 30, 2016 and 2015 was 4.15% and 4.06%, respectively.

Acquisition, transaction and integration expense

Acquisition, transaction and integration expense decreased by $2.0 million to $0.4 million for the three months ended September 30, 2016 from $2.4 million for the three months ended September 30, 2015. The decrease primarily reflects a decrease in acquisition-related costs due to no acquisitions being made during the three months ended September 30, 2016.

Management fees and incentive compensation to affiliate

Management fees and incentive compensation to affiliate expense decreased by $0.2 million to $3.8 million for the three months ended September 30, 2016 from $4.1 million for the three months ended September 30, 2015. The decrease is primarily attributable to our repurchase of 3.3 million shares of common stock in January 2016.

Pursuant to the management agreement with our Manager, we pay a base management fee equal to 1.5% per annum of our gross equity, which is generally the equity invested by Newcastle as of the completion of the spin-off from Newcastle, plus the aggregate offering price from stock offerings, less capital distributions (calculated without regard to depreciation and amortization) and repurchases of common stock. The Manager is also eligible to receive, on a quarterly basis, incentive compensation, to the extent that the performance threshold specified in the management agreement is satisfied.

General and administrative expense

General and administrative expense increased by $0.5 million to $3.7 million for the three months ended September 30, 2016 from $3.2 million for the three months ended September 30, 2015, primarily driven by fewer employees in 2015 due to the closing of the Plano, Texas office and higher professional fees in 2016 compared to 2015.

Other expense

Other expense decreased by $1.0 million to $0.1 million for the three months ended September 30, 2016 from $1.1 million for the three months ended September 30, 2015, primarily due to restructuring costs related to the relocation of the Plano, Texas office in 2015 and a higher fair value loss on our interest rate caps in 2015.

Income tax expense (benefit)

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. During the three months ended September 30, 2016 and 2015, our TRS recorded approximately $0.8 million and $0.4 million in income tax expense and income tax benefit, respectively, primarily due to our TRS generating earnings in 2016 compared to a loss in the comparative period in 2015.

Nine months ended September 30, 2016 compared to nine months ended September 30, 2015

The following table sets forth our historical results of operations derived from our unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q.



(dollars in thousands)	Nine Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			Percentage
Revenues
Resident fees and services	$	270,220		$	187,384		$	82,836		44.2	%
Rental revenue	84,723			82,661			2,062			2.5	%
Total revenues	354,943			270,045			84,898			31.4	%

Expenses
Property operating expense	182,585			128,855			53,730			41.7	%
Depreciation and amortization	146,743			110,543			36,200			32.7	%
Interest expense	68,658			52,346			16,312			31.2	%
Acquisition, transaction and integration expense	1,770			11,490			(9,720		)	(84.6	)%
Management fees and incentive compensation to affiliate	12,197			10,207			1,990			19.5	%
General and administrative expense	11,600			10,691			909			8.5	%
Loss on extinguishment of debt	—			5,091			(5,091		)	NM
Other expense	806			1,569			(763		)	(48.6	)%
Total expenses	$	424,359		$	330,792		$	93,567		28.3	%

Loss before income taxes	(69,416		)	(60,747		)	(8,669		)	14.3	%
Income tax expense (benefit)	31			(344		)	375			NM
Net Loss	$	(69,447	)	$	(60,403	)	$	(9,044	)	15.0	%

_______________

NM – Not meaningful

The following table provides a comparison of the results of operations of our segments:



(dollars in thousands)	Nine Months Ended September 30,				Increase (Decrease)
	2016		2015		Amount		Percentage
Managed Properties
Resident fees and services	$	270,220	$	187,384	$	82,836	44.2	%
Property operating expense	182,585		128,855		53,730		41.7	%
Segment NOI for Managed Properties	87,635		58,529		29,106		49.7	%

Triple Net Lease Properties
Rental revenue	84,723		82,661		2,062		2.5	%
Segment NOI for Triple Net Lease Properties	$	84,723	$	82,661	$	2,062	2.5	%

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



(dollars in thousands)	Nine Months Ended September 30,						Increase (Decrease)
	2016			2015			Amount			Percentage
Total Revenue	$	354,943		$	270,045		$	84,898		31.4	%

Segment NOI for Managed Properties	87,635			58,529			29,106			49.7	%
Segment NOI for Triple Net Lease Properties	84,723			82,661			2,062			2.5	%
Total Segment NOI	172,358			141,190			31,168			22.1	%
Expenses
Depreciation and amortization	146,743			110,543			36,200			32.7	%
Interest expense	68,658			52,346			16,312			31.2	%
Acquisition, transaction and integration expense	1,770			11,490			(9,720		)	(84.6	)%
Management fees and incentive compensation to affiliate	12,197			10,207			1,990			19.5	%
General and administrative expense	11,600			10,691			909			8.5	%
Loss on extinguishment of debt	—			5,091			(5,091		)	NM
Other expense	806			1,569			(763		)	(48.6	)%
Income tax expense (benefit)	31			(344		)	375			NM
Net Loss	$	(69,447	)	$	(60,403	)	$	(9,044	)	15.0	%

_______________

NM – Not meaningful

Managed Properties



	As of and for the nine months ended September 30,
	2016		2015
Total properties	96		94
Total beds	11,545		11,387
Average occupancy rate	88.2	%	85.8	%

Same store information, as used herein, is defined as information for 41 properties owned for the entirety of comparable periods, which excludes properties classified as held for sale as of September 30, 2016. The following table presents same store Segment NOI, Segment NOI for non-same store properties and Total Segment NOI:



(dollars in thousands)	Nine Months Ended September 30,				Increase (Decrease)
	2016		2015		Amount			Percentage
Resident fees and services	$	132,987	$	130,991	$	1,996		1.5	%
Property operating expense	98,910		94,827		4,083			4.3	%
Same Store Segment NOI	34,077		36,164		(2,087		)	(5.8	)%
Segment NOI for non-Same Store properties	53,558		22,365		31,193			NM
Total Segment NOI	$	87,635	$	58,529	$	29,106		49.7	%

_______________

NM – Not meaningful

Resident fees and services

Resident fees and services represent residents’ monthly rental and care fees. Revenue from resident fees and services increased by $82.8 million to $270.2 million for the nine months ended September 30, 2016 from $187.4 million for the nine months ended September 30, 2015. For the nine months ended September 30, 2016, resident fees and services include revenues derived from 51 properties that were acquired during, and subsequent to, the nine months ended September 30, 2015. The total bed count was 11,545 as of September 30, 2016. Average occupancy rates for the nine months ended September 30, 2016 and 2015 were 88.2% and 85.8%, respectively.

Same store resident fees and services increased by $2.0 million to $133.0 million for the nine months ended September 30, 2016 from $131.0 million for the nine months ended September 30, 2015. This increase was primarily driven by an increase in average occupancy rates on a same store basis to 85.2% from 84.0% for the nine months ended September 30, 2016 and 2015, respectively.

Property operating expense

Property operating expense increased by $53.7 million to $182.6 million for the nine months ended September 30, 2016 from $128.9 million for the nine months ended September 30, 2015. The increase was primarily due to higher labor, utilities, food and other costs as a result of the properties that were acquired during, and subsequent to, the nine months ended September 30, 2015. Property operating expense as a percent of segment revenues decreased to 67.6% from 68.8% for the nine months ended September 30, 2016 and 2015, respectively.

Property operating expense includes property management fees and travel reimbursements paid to Property Managers of $15.5 million and $11.3 million for the nine months ended September 30, 2016 and 2015, respectively.

Same store property operating expense increased by $4.1 million to $98.9 million for the nine months ended September 30, 2016 from $94.8 million for the nine months ended September 30, 2015, primarily due to higher labor costs.

Segment NOI for Managed Properties

Segment NOI increased by $29.1 million to $87.6 million for the nine months ended September 30, 2016 from $58.5 million for the nine months ended September 30, 2015, or as a percent of resident fees and services, was 32.4% and 31.2%, respectively. The increase in segment NOI primarily reflects the impact of the properties that were acquired during, and subsequent to, the nine months ended September 30, 2015.

Same store Segment NOI decreased by $2.1 million to $34.1 million for the nine months ended September 30, 2016 from $36.2 million for the nine months ended September 30, 2015, primarily due to higher labor costs.

Triple Net Lease Properties

Rental revenue and Segment NOI for Triple Net Lease Properties

Segment NOI increased by $2.1 million to $84.7 million for the nine months ended September 30, 2016 from $82.7 million for the nine months ended September 30, 2015. The increase was due to the acquisition of a rental CCRC in the second quarter of 2015. 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 repairs, maintenance, capital expenditures, utilities, taxes, insurance and the payroll expense of property-level employees.

Expenses

Depreciation and amortization

Depreciation and amortization expense increased by $36.2 million to $146.7 million for the nine months ended September 30, 2016 from $110.5 million for the nine months ended September 30, 2015. The increase primarily reflects the impact of the properties that were acquired during, and subsequent to, the nine months ended September 30, 2015 and measurement period adjustments that were made based on the final valuation of net assets acquired.

Interest expense

Interest expense increased by $16.3 million to $68.7 million for the nine months ended September 30, 2016 from $52.3 million for the nine months ended September 30, 2015. The net increase in mortgage notes payable, related to properties that were acquired during, and subsequent to, the nine months ended September 30, 2015, resulted in increased interest expense.

The weighted average effective interest rate for the nine months ended September 30, 2016 and 2015 was 4.14% and 4.25%, respectively.

Acquisition, transaction and integration expense

Acquisition, transaction and integration expense decreased by $9.7 million to $1.8 million for the nine months ended September 30, 2016 from $11.5 million for the nine months ended September 30, 2015. The decrease primarily reflects a decrease in acquisition-related costs due to no acquisitions being made during the nine months ended September 30, 2016.

Management fees and incentive compensation to affiliate

Management fees and incentive compensation to affiliate expense increased by $2.0 million to $12.2 million for the nine months ended September 30, 2016 from $10.2 million for the nine months ended September 30, 2015. The increase is primarily attributable to the equity offering in June 2015 and incentive compensation earned by the Manager during the nine months ended September 30, 2016, partially offset by our repurchase of 3.3 million shares of common stock in January 2016.

General and administrative expense

General and administrative expense increased by $0.9 million to $11.6 million for the nine months ended September 30, 2016 from $10.7 million for the nine months ended September 30, 2015. The increase was primarily driven by a higher reimbursement to the Manager for costs incurred for services related to asset management and other corporate functions due to overall portfolio growth.

Loss on extinguishment of debt

During the nine months ended September 30, 2015, we refinanced mortgage loans of $297.0 million at a lower interest rate and recognized a loss on extinguishment of debt of $5.1 million.

Other expense

Other expense decreased by $0.8 million to $0.8 million for the nine months ended September 30, 2016 from $1.6 million for the nine months ended September 30, 2015, primarily due to higher restructuring costs related to the relocation of the Plano, Texas office in 2015 and a higher fair value loss on our interest rate caps in 2015.

Income tax expense (benefit)

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. During the nine months ended September 30, 2016 and 2015, our TRS recorded approximately $0.0 million and $0.3 million in income tax expense and income tax benefit, respectively.

OUR PORTFOLIO

Our portfolio is currently comprised of senior housing properties, including IL, AL/MC and CCRC properties. Our Manager will make decisions about our future investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may, without a stockholder vote, change the composition of our portfolio and make investments in assets that differ from, and are possibly riskier than, our current portfolio of senior housing properties.

The following table summarizes the geographic locations of our senior housing properties as of September 30, 2016:



	Managed Properties		Triple Net Lease Properties		Total
Location	Number of Communities	Number of Beds	Number of Communities	Number of Beds	Number of Communities	Number of Beds
Arizona	1	108	1	115	2	223
Arkansas	1	113	—	—	1	113
California	10	1,122	2	235	12	1,357
Colorado	1	119	4	439	5	558
Connecticut	—	—	2	276	2	276
Florida	23	3,099	3	370	26	3,469
Georgia	2	194	—	—	2	194
Hawaii	1	122	—	—	1	122
Idaho	1	121	—	—	1	121
Illinois	1	66	1	111	2	177
Indiana	1	114	—	—	1	114
Iowa	—	—	2	215	2	215
Kansas	1	117	2	238	3	355
Kentucky	—	—	1	117	1	117
Louisiana	1	118	1	103	2	221
Massachusetts	2	253	—	—	2	253
Michigan	3	418	1	121	4	539
Mississippi	1	67	1	94	2	161
Missouri	—	—	3	320	3	320
Montana	1	127	1	115	2	242
Nebraska	1	115	—	—	1	115
Nevada	1	174	1	121	2	295
New Hampshire	4	261	—	—	4	261
New York	1	118	2	234	3	352
North Carolina	7	911	2	240	9	1,151
Ohio	3	352	—	—	3	352
Oklahoma	1	120	—	—	1	120
Oregon	4	388	6	601	10	989
Pennsylvania	3	406	4	808	7	1,214
South Carolina	1	120	—	—	1	120
South Dakota	1	114	—	—	1	114
Tennessee	3	235	1	109	4	344
Texas	5	744	14	2,205	19	2,949
Utah	5	590	1	117	6	707
Virginia	2	232	1	120	3	352
Washington	2	271	—	—	2	271
Wisconsin	1	116	1	116	2	232
Total	96	11,545	58	7,540	154	19,085

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 September 30, 2016, we had approximately $73.4 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.

Our principal sources of liquidity are (i) cash flows from operations, (ii) proceeds from acquisition financing in the form of mortgage debt, and (iii) proceeds from the issuance of equity securities. Our cash flow provided by operations is primarily driven by (i) rental revenues received from residents of our managed properties, and (ii) rental revenues from the tenants of our triple net lease properties, less (i) operating expenses (primarily management fees and reimbursements to our Manager, property operating expense of our managed properties, professional fees, insurance and taxes) and (ii) interest on the mortgage notes payable. Net cash provided by operating activities (prior to payment of capital expenditures and debt service) was $79.7 million and $53.9 million for the nine months ended September 30, 2016 and 2015, respectively. Our cash flows from operating activities, less capital expenditures and debt service, have been less than the amount of distributions to our shareholders. In addition, our debt service is scheduled to increase meaningfully as a result of required amortization payments beginning in May 2017, which could reduce cash available for distributions. Our board of directors takes these and other factors into account as part of any decision to pay a dividend, and the timing and amount of any future dividend is subject to change at the discretion of our board of directors.

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, debt service 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. In addition, we may elect to meet certain liquidity requirements through proceeds from the sale of assets, borrowings and/or equity and debt offerings and/or through changes to the amount of distributions to our shareholders.

These expectations 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 "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.


•	Impact of Expected Additional Borrowings or Sales of Assets on Cash Flows: The availability and timing of and proceeds from additional borrowings 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 to a number of obligations, and a failure to satisfy certain obligations 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 September 30, 2016, we were in compliance with all of such covenants except the Project Yield covenant in one financing secured by a leased portfolio, where we will be in compliance upon either exercising our cure rights or finalizing an amendment, as described in more detail below.

The Project Yield covenant referenced above measures the leased portfolio's trailing 12-month operating results relative to the outstanding unpaid principal balance of the debt. Under the terms of the debt, we are entitled to cure non-compliance with this covenant by paying down the debt to the extent necessary to achieve the required project yield threshold. With respect to the September 30, 2016 test date, a prepayment of approximately $1.3 million would be required to achieve compliance. The prepayment is not yet due and, prior to the due date, we expect to finalize an amendment to the Project Yield covenant that would reduce the threshold beginning with the September 30, 2016 test date and continuing for the remaining term of the loan. The amendment would eliminate the need to exercise a cure with respect to the September 30, 2016 test date, provided that the tenant's security deposit and other amounts posted by the tenant pursuant to the lease are escrowed with the lender.

See Note 8 to the Consolidated Financial Statements for further information related to our mortgage notes as of September 30, 2016.

Capital Expenditures

For our Managed Properties segment, we anticipate that capital expenditures will be funded through operating cash flows from the Managed Properties. During the nine months ended September 30, 2016, we funded $15.8 million of capital expenditures.

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 tenants are unwilling or unable to fund these capital expenditure obligations under the existing lease arrangements, we may fund capital expenditures with additional borrowings or cash flow from the operations of these senior housing properties. We may also provide corresponding loans or advances to tenants which would increase the rent payable to us. For further information regarding capital expenditures related to our triple net lease properties, see "Contractual Obligations" below.

Cash Flows

The following table provides a summary of our cash flows:



(dollars in thousands)	Nine Months Ended September 30,
	2016			2015
Net cash provided by (used in)
Operating activities	$	79,686		$	53,916
Investing activities	(16,435		)	(1,233,315		)
Financing activities	(106,737		)	1,109,948
Net Decrease in Cash and Cash Equivalents	(43,486		)	(69,451		)
Cash and Cash Equivalents, Beginning of Period	116,881			226,377
Cash and Cash Equivalents, End of Period	$	73,395		$	156,926

Operating activities

Net cash provided by operating activities was $79.7 million and $53.9 million for the nine months ended September 30, 2016 and 2015, respectively. The period-over-period increase of $25.8 million was primarily due to a net increase in operating cash flows generated by the properties that were acquired during, and subsequent to, the nine months ended September 30, 2015.

Investing activities

Net cash used in investing activities was $16.4 million and $1.2 billion for the nine months ended September 30, 2016 and 2015, respectively. The period-over-period decrease of $1.2 billion was primarily due to no acquisitions closing during the nine months ended September 30, 2016, whereas during the nine months ended September 30, 2015, we acquired 52 properties for $1.2 billion.

Financing activities

Net cash used in financing activities was $106.7 million and net cash provided by financing activities was $1.1 billion for the nine months ended September 30, 2016 and 2015, respectively. The period-over-period decrease of $1.2 billion was primarily due to no acquisitions closing during the nine months ended September 30, 2016. During the nine months ended September 30, 2015, we financed the acquisition of 52 properties and refinanced debt with net proceeds of approximately $917.8 million from the issuance of mortgage debt and with net proceeds of approximately $266.5 million from the issuance of common stock. Additionally, during the nine months ended September 30, 2016, we repurchased 3.3 million shares of our common stock for approximately $30.9 million.

REIT Compliance Requirements

We are organized and conduct our operations to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains. We intend to pay dividends greater than all of our REIT taxable income to holders of our common stock in 2016, if, and to the extent, authorized by our board of directors. We note that a portion of this requirement may be able to be met in future years with stock dividends, rather than cash distributions, subject to limitations. We expect that our operating cash flows will exceed REIT taxable income due to depreciation and other non-cash deductions in computing REIT taxable income. However, before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our obligations. If we do not have sufficient liquid assets to enable us to satisfy the 90% distribution requirement, or if we decide to retain cash, we may sell assets, issue additional equity securities or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Income Tax

We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. Currently, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes at regular corporate tax rates.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2016, we do not have any off-balance sheet arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose or variable interest entities established to facilitate off-balance sheet arrangements. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.

CONTRACTUAL OBLIGATIONS

In addition to mortgage notes payable, we are a party to the Management Agreement with the Manager and property management agreements with Property Managers. See Note 14 to the Consolidated Financial Statements for information related to our capital improvement, repair and lease commitments.

INFLATION

Our triple net leases provide for either fixed increases in base rents and/or indexed escalators, based on the CPI. In our Managed Properties segment, resident agreements are generally month to month agreements affording us the opportunity to increase prices subject to market and other conditions.

NON-GAAP FINANCIAL MEASURES

A non-GAAP financial measure is a measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are not excluded from or included in the most comparable GAAP measure. We consider certain non-GAAP financial measures to be useful supplemental measures of our operating performance. GAAP accounting for real estate assets assumes that the value of real estate assets diminishes predictably over time, even though real estate values historically have risen or fallen with market conditions. As a result, many industry investors look to non-GAAP financial measures for supplemental information about real estate companies.

You should not consider non-GAAP measures as alternatives to GAAP net income, which is an indicator of our financial performance, or as alternatives to GAAP cash flow from operating activities, which is a liquidity measure, nor are non-GAAP measures necessarily indicative of our ability to satisfy our funding requirements. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP measures in conjunction with GAAP net income as presented in our Consolidated Financial Statements and other financial data included elsewhere in this report. Moreover, the comparability of non-GAAP financial measures across companies may be limited as a result of differences in the manner in which real estate companies calculate such measures.

Below is a description of the non-GAAP financial measures used by our management and reconciliations of these measures to the most directly comparable GAAP measures.

Funds From Operations and Normalized Funds From Operations

We use Funds From Operations ("FFO") and Normalized FFO as supplemental measures of our operating performance. We use the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO. NAREIT defines FFO as GAAP net income excluding gains (losses) from sales of depreciable real estate assets and impairment charges of depreciable real estate, plus real estate depreciation and amortization, and after adjustments for unconsolidated entities and joint ventures to reflect FFO on the same basis.

Normalized FFO, as defined below, measures the financial performance of our portfolio of assets excluding items that, although incidental to, are not reflective of the day-to-day operating performance of our portfolio of assets. We believe that Normalized FFO is useful because it facilitates the evaluation of our portfolio’s operating performance (i) between periods on a consistent basis and (ii) to the operating performance of other real estate companies. However, comparability may be limited because our calculation of NFFO may differ significantly from that of other companies.

We define Normalized FFO as FFO excluding the following income and expense items, as applicable: (a) acquisition, transaction and integration related costs and expenses; (b) the write off of unamortized discounts, premiums, deferred financing costs, or additional costs, make whole payments and penalties or premiums incurred as the result of early repayment of debt (collectively “Gain (Loss) on extinguishment of debt”); (c) incentive compensation recognized as a result of sales of property and (d) other items that we believe are not indicative of operating performance, generally reported as “Other (income) expense” in the Consolidated Statements of Operations.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) facilitates an assessment of the operating performance of our existing portfolio of assets on an unleveraged basis by eliminating the impact of our capital structure and tax position. We define Adjusted EBITDA as Normalized FFO excluding interest and taxes.

The following table sets forth a reconciliation of net loss to FFO, Normalized FFO and Adjusted EBITDA:



(dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net Loss	$	(20,241	)	$	(17,959	)	$	(69,447	)	$	(60,403	)
Depreciation and amortization	45,510			40,812			146,743			110,543
FFO	25,269			22,853			77,296			50,140
Acquisition, transaction and integration expense	364			2,373			1,770			11,490
Loss on extinguishment of debt	—			—			—			5,091
Other expense ^(A)	108			1,089			806			1,569
Normalized FFO	25,741			26,315			79,872			68,290
Interest expense	23,065			20,051			68,658			52,346
Income tax expense (benefit)	782			(378		)	31			(344		)
Adjusted EBITDA	$	49,588		$	45,988		$	148,561		$	120,292


(A)	Primarily includes changes in the fair value of financial instruments, casualty related charges and restructuring expenses.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our historical financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Our estimates are based on information available to management at the time of preparation of the financial statements, including the result of historical analysis, our understanding and experience of our operations, our knowledge of the industry and market-participant data available to us.

Actual results have historically been in line with management’s estimates and judgments used in applying each of the accounting policies described below, and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our consolidated financial statements. However, we do not expect our assessments and assumptions below to materially change in the future.

A summary of our significant accounting policies in presented in Note 2 to our Consolidated Financial Statements. The following is a summary of our accounting policies that are most effected by judgments, estimates and assumptions.

Revenue Recognition

Resident Fees and Services - Resident fees and services include monthly rental revenue, care income and ancillary income recognized from the Managed Properties segment. Resident fees and services are recognized monthly as services are provided. Most lease agreements with residents are cancelable by the resident with 30 days’ notice. Ancillary income primarily relates to non-refundable community fees. Non-refundable community fees are recognized on a straight-line basis over the average length of stay of residents, which we estimate to be approximately 24 months for AL/MC properties and approximately 33 months for IL properties.

Acquisition Accounting

We have determined that all of our acquisitions should be accounted for under the acquisition method. The accounting for acquisitions requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the respective transaction dates. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as our estimates of future cash flows based on a number of factors including property operating results, known and anticipated trends, as well as market and economic conditions.

In measuring the fair value of tangible and identified intangible assets acquired and liabilities assumed, management uses information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. In the case of real property, the fair value of the tangible assets acquired is determined by valuing the property as if it were vacant. Significant estimates impacting the measurement at fair value of our real estate property include expected future rental rates and occupancy, construction cost data and qualitative selection of comparable market transactions as well as the assessment of the relative quality and condition of our acquired properties.

Recognized intangible assets primarily include the fair value of in-place resident leases. We estimate the fair value of in-place leases as (i) the present value of the estimated rental revenue that would have been forgone, offset by variable costs that would have otherwise been incurred during a reasonable lease-up period (which we generally estimate to range between 18 and 24 months), as if the acquired units were vacant and (ii) the estimated absorption costs, such as additional marketing costs that would have been incurred during the lease-up period. The acquisition fair value of the in-place lease intangibles is amortized over the average length of stay of the residents at the senior housing properties on a straight-line basis, which is estimated to be 24 months for AL/MC and CCRC properties and 33 months for IL properties.

Contingent consideration, if any, is measured at fair value on the date of acquisition. In subsequent reporting periods, the fair value of the contingent consideration is remeasured at each reporting date, with any change recorded in other income and expense in the Consolidated Statements of Operations.

Provision for Uncollectible Receivables

We assess the collectability of our rent receivables, including that of our straight-line rent receivable, on an ongoing basis. We base our assessment on several qualitative and quantitative factors, including and as appropriate, resident and triple net lease payment history, the financial strength of the resident and of guarantors, 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 not be able to recover the full value of the receivable, we provide for a specific reserve against the portion of the receivable that we estimate may not be recoverable. Any unrecovered amount adversely impacts our cash flows, liquidity and results of operations on a dollar-for-dollar basis.

Impairment of Long Lived Assets

We periodically evaluate long-lived assets, including definite lived intangible assets, primarily consisting of our real estate investments, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations. In performing this evaluation, market conditions and our current intentions with respect to holding or disposing of the asset are considered. If the sum of the expected future undiscounted cash flows is less than book value, we recognize an impairment loss equal to the amount by which the asset’s carrying value exceeds its fair value. An impairment loss is recognized at the time any such determination is made. No impairment loss has been recognized by us since inception.

Income Taxes

As a REIT, we are generally not subject to federal income tax on income that we distribute as dividends to our stockholders. Our determination that we qualify as a REIT is based on interpretation of tax laws and our conclusion has an impact on the measurement and recognition of income tax expense. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates and distributions to stockholders would not be deductible by us in computing our taxable income. Failing to qualify as a REIT could materially and adversely affect our financial position, performance and liquidity.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the Consolidated Financial Statements for information about recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk and credit risk. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets and liabilities are for non-trading purposes only. In addition, we are exposed to liquidity risk.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates on borrowings under our mortgage loans that are floating rate obligations. These market risks result primarily from changes in LIBOR or prime rates. We continuously monitor our level of floating rate debt with respect to total debt and other factors, including our assessment of current and future economic conditions.

For fixed rate debt, interest rate fluctuations generally affect the fair value, but do not impact our earnings or cash flows. Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until such obligations mature or until we elect to prepay and refinance such obligations. If interest rates have risen at the time our fixed rate debt matures or is refinanced, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of maturity or refinancing may lower our overall borrowing costs.

For floating rate debt, interest rate fluctuations can affect the fair value, as well as earnings or cash flows. If market interest rates rise, our earnings and cash flows could be adversely affected by an increase in interest expense. In contrast, lower interest rates may reduce our borrowing costs and improve our operational results. We continuously monitor our interest rate exposure and may elect to use derivative instruments to manage interest rate risk associated with floating rate debt.

As of September 30, 2016 we had $883.1 million of floating rate debt, representing approximately 40.6% of our total indebtedness, with a weighted average rate of 3.32%. A 100 basis point change in interest rates would change annual interest expense by $8.8 million on an annualized basis.

Credit Risk

We derive a portion of our revenue from long-term triple net leases in which the minimum rental payments are fixed with scheduled periodic increases.

The properties we lease to Holiday account for a significant portion of our total revenues and net operating income, and such concentration creates credit risk. Rental revenue attributable to our triple net leases with Holiday accounted for 18.8% and 21.2% of our total revenues for the three months ended September 30, 2016 and 2015 and 18.8% and 24.8% for the nine months ended September 30, 2016 and 2015, respectively.

We could be adversely affected if Holiday becomes unable or unwilling to satisfy its obligations to us. There is no assurance that Holiday, or our other tenants, will have sufficient assets, income and access to financing to enable it to satisfy its obligations to us.

Furthermore, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization that may render certain of the remedies we may have against our counterparties unenforceable, or delay our ability to pursue such remedies.

Liquidity Risk

As described further in “Risk Factors,” the following factors could affect our liquidity, access to capital resources and our capital obligations.


•	Our stock price performance could impair our ability to access the capital markets, and any disruption to the capital markets or other sources of financing generally could also negatively affect our liquidity.


•	Our failure to comply with the terms of our financings could result in the acceleration of the requirement to repay our indebtedness or require us to seek amendments to such agreements, which we may not be able to obtain on commercially reasonable terms, if at all.

•

Because we derive substantially all of our revenues from the operators of our triple net lease and managed properties, any inability or unwillingness by these operators to satisfy their respective obligations to us or to renew their leases with us upon expiration of the terms thereof could have a material adverse effect on our liquidity, financial condition, our ability to service our indebtedness and to make distributions to our stockholders.

•

To comply with the 90% distribution requirement applicable to REITs and to avoid income and excise taxes, we must make distributions to our stockholders. Our actual distributions to stockholders have historically been higher than the REIT distribution requirement. Distributions will limit our ability to finance investments and may limit our ability to engage in transactions that are otherwise in the best interests of our stockholders. Although we do not anticipate any inability to satisfy the REIT distribution requirement, from time to time, we may not have sufficient cash or other liquid assets to do so. For example, timing differences between the actual receipt of income and actual payment of deductible expenses, on the one hand, and the inclusion of that income and deduction of those expenses in arriving at our taxable income, on the other hand, or non-deductible expenses such as principal amortization or repayments or capital expenditures in excess of non-cash deductions may cause us to fail to have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement. In the event that timing differences occur or we decide to retain cash or to distribute such greater amount as may be necessary to avoid income and excise taxation, we may seek to borrow funds, issue additional equity securities, pay taxable stock dividends, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements. Any of these actions may require us to raise additional capital to meet our obligations; however, limitations on our ability to access capital, as described above, could have an adverse effect on our ability to make required payments on our debt obligations, make distributions to our stockholders or make future investments necessary to implement our business strategy. The terms of the instruments governing our existing indebtedness restrict our ability to engage in certain types of these transactions.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

(b)

Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are and may become involved in legal proceedings, including regulatory investigations and inquiries, in the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, regulatory investigation or inquiry, in the opinion of management, we do not expect our current and any threatened legal proceedings to have a material adverse effect on our financial position or results of operations. Given the inherent unpredictability of these types of proceedings, however, it is possible that future adverse outcomes could have a material adverse effect on our financial results.

ITEM 1A. RISK FACTORS

You should carefully consider the following risks and other information in this Form 10-Q in evaluating us and our common stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into the following groups: risks related to our business, risks related to our Manager, risks related to our taxation as a REIT and risks related to our common stock. However, these categories do overlap and should not be considered exclusive.

RISKS RELATED TO OUR BUSINESS

We have limited operating history as a standalone public company and may not be able to successfully operate our business, execute our investment strategy or generate sufficient revenue to make or sustain distributions to our stockholders.

We completed our first investment in senior housing properties in July 2012 and became a standalone public company in November 2014. We have limited experience operating as a standalone public company and cannot assure you that we will be able to successfully operate our business, execute our investment strategy or generate sufficient revenue to make or sustain distributions to our stockholders at current levels.

Our results of operations and our ability to make or sustain distributions to our stockholders depend on various factors, including, without limitation, our cash flow from operations (which depends on the performance of our existing portfolio of managed assets and continued compliance by our counterparties with the terms of our triple net leases, among other factors) and items that impact our liquidity (such as the cost of capital expenditures, debt service, among other factors). Each of these factors is subject to numerous risks, as described herein. Our cash flows from operating activities, less capital expenditures and debt service, have been less than the amount of distributions to our shareholders. In addition, our debt service is scheduled to increase meaningfully as a result of required amortization payments beginning in May 2017, which could reduce cash available for distributions. Our board of directors takes these and other factors into account as part of any decision to pay a dividend, and the timing and amount of any future dividend is subject to change at the discretion of our board of directors.

Certain of our reports filed with the SEC contain financial information for periods prior to the completion of our spin-off from Newcastle Investment Corp. ("Newcastle"). Such financial information may not be indicative of the results we would have achieved as a separate standalone company and are not a reliable indicator of our future performance or results.

We did not operate as a separate, standalone company for the entirety of the historical periods presented in certain of the reports we have filed with the SEC. The financial information for such periods was derived from Newcastle’s historical financial statements. Therefore, it does not necessarily reflect what our financial condition, results of operations or cash flows would have been had we been a separate, stand-alone public company prior to our spin-off from Newcastle. This is primarily a result of the following factors:


•	Such financial information does not reflect all of the expenses we incur as a public company;

•

the working capital requirements and capital for general corporate purposes for our assets were satisfied prior to the spin-off as part of Newcastle’s corporate-wide cash management policies. Newcastle does not provide us with funds to finance our working capital or other cash requirements, so we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; and


•	our cost structure, management, financing and business operations are significantly different as a result of operating as an independent public company. These changes result in increased costs, including, but not limited to, fees paid to our Manager, legal, accounting, compliance and other costs associated with being a public company with equity securities traded on the NYSE.

Our investments are concentrated in senior housing real estate, and in certain geographic areas, and real estate investments are relatively illiquid.

We invest primarily in senior housing properties. Any factors that affect real estate and the senior housing industry will have a more pronounced effect on our portfolio relative to a portfolio of more diversified investments. In addition, the geographic concentration of our assets in Florida and Texas may result in losses due to our significant exposure to the effects of economic and real estate conditions in those markets. As of September 30, 2016, approximately 18.2% and 15.5% of the beds in our senior housing portfolios were located in Florida and Texas, respectively. In addition, during the nine months ended September 30, 2016, total revenue for our Managed Properties segment and our Triple Net Lease Properties segment derived from our properties in Florida and Texas was 19.7% and 11.9%, respectively. As a result of this concentration, a material portion of our portfolios are significantly exposed to the effects of economic and real estate conditions in those particular markets, such as the supply of competing properties, home prices, income levels, the financial condition of our tenants, and general levels of employment and economic activity, which has been, and may continue to be, adversely affected by the recent decline in oil prices. To the extent that weak economic or real estate conditions affect Florida or Texas more severely than other areas of the country, our financial performance could be negatively impacted. Some or all of these properties could be affected if these regions experience severe weather or natural disasters; delays in obtaining regulatory approvals; delays or decreases in the availability of personnel or services; and/or changes in the regulatory, political or fiscal environment.

Real estate investments are relatively illiquid, and our ability to quickly sell or exchange our properties in response to changes in economic or other conditions is limited. In the event we desire or need to sell any of our properties, the value of those properties and our ability to sell at a price or on terms acceptable to us could be adversely affected by a downturn in the real estate industry or any weakness in the senior housing industry. We cannot assure you that we will recognize the full value of any property that we sell for liquidity or other reasons, and the inability to respond quickly to changes in the performance of our investments could adversely affect our business, results of operations and financial condition.

We are dependent on our operators for the performance of our managed assets, and, as REIT, we are not able to operate our AL/MC properties.

During the nine months ended September 30, 2016, 51% of our net operating income was attributable to our managed portfolio. We have engaged third parties to operate all of our managed assets on our behalf. The income generated by our managed properties depends on the ability of our property managers to successfully manage these properties, which is a complex task. Although we have various rights pursuant to our property management agreements, we rely upon our property managers’ personnel, expertise, technical resources and information systems, compliance procedures and programs, proprietary information, good faith and judgment to manage our senior housing operations efficiently and effectively. We also rely on our property managers to provide accurate property-level financial results for our properties in a timely manner and to otherwise operate our properties in compliance with the terms of our property management agreements and all applicable laws and regulations. We rely on our property managers to attract and retain skilled management personnel and property level personnel who are responsible for the day-to-day operations of our properties. A failure to effectively manage property operating expense, including, without limitation, labor costs and resident referral fees, or significant changes in our property managers' ability to manage our properties efficiently and effectively, could adversely affect the income we receive from our properties and have a material adverse effect on us. Any adverse developments in our property managers' business and affairs or financial condition could impair such property manager's ability to manage our properties efficiently and effectively and in compliance with applicable laws, which could have a material adverse effect on our business, results of operations or financial condition.

While we monitor our property managers’ performance, we have limited recourse under our property management agreements to address poor performance. In some cases, poor performance may give rise to a termination right, but termination may be an unattractive remedy since we may not be able to identify a suitable alternative operator and transitioning management is subject to risks.

U.S. federal income tax laws generally restrict REITs and their subsidiaries from operating healthcare properties. Accordingly, as a REIT, we are not able to manage our AL/MC senior housing properties. Our AL/MC investments are structured to be compliant with the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA"), which permits a REIT to lease properties to a TRS if the TRS hires an “eligible independent contractor” (“EIK”) to manage the property. Under this structure, the REIT (i.e., a subsidiary of New Senior) is the property owner, and it leases the property to the TRS (another subsidiary of New Senior). The REIT receives rent from the TRS, and the TRS is entitled to the income from the properties, less the rent paid to the REIT and a management fee paid to the EIK. In addition, the TRS pays tax on its taxable income.

Various factors can result in our managed properties performing poorly, such as weak occupancy or increased expenses.

A failure by our operators to grow or maintain occupancy could adversely affect the net operating income generated by our managed properties. Occupancy levels at our properties may not increase, or may decline, due to a variety of factors, including, without limitation, falling home prices, declining incomes, stagnant home sales, competition from other senior housing developments, reputational issues faced by our operators, a regulatory ban on admissions or forced closure. In addition, the senior housing sector may experience a decline in occupancy due to the state of the national, regional or local economies and the associated decision of certain residents to elect home care options instead of senior housing. Occupancy levels may also decline due to seasonal contagious illnesses such as influenza. Unlike a typical apartment leasing arrangements that involve lease agreements with terms of up to a year or longer, resident agreements at our senior housing properties generally allow residents to terminate their agreements with 30 days’ notice.

Alternatively, in an effort to increase occupancy or avoid a decline in occupancy, our property managers may offer incentives or discounts, which could also have a material adverse effect on our results of operations.

In terms of expenses, wages and employee benefits represent a significant part of the expense structure at our properties. Our AL/MC properties are particularly labor intensive. We rely on our property managers to attract and retain skilled management personnel and property level personnel who are responsible for the day-to-day operations of our properties, but, as the owner, we are responsible for the payroll expense of property-level employees (as well as the properties’ other operating costs).

Our property managers may be required to pay increased compensation or offer other incentives to retain key personnel and other employees. The market for qualified nurses and healthcare professionals is highly competitive. Periodic and geographic area shortages of nurses or other trained personnel may require our property managers to increase the wages and benefits offered to their employees in order to attract and retain these personnel or to hire temporary personnel, which are generally more expensive than regular employees. Employee benefits costs, including employee health insurance and workers’ compensation insurance costs, have materially increased in recent years. Increasing employee health and workers’ compensation insurance costs may materially and negatively affect the net operating income of our properties.

With respect to lesser skilled workers, our property managers may have to compete with numerous other employers, which could also place upward pressure on wages and increase turnover. In addition, certain states have recently increased or proposed to increase the minimum wage, which could increase our property operating expenses and adversely affect our results of operations. Changes in minimum wage laws can have an impact beyond the expense of minimum wage workers, because an increase in the minimum wage can result in an increase in wages for workers who are relatively close to the minimum wage.

We cannot assure you that labor costs at our properties will not increase or that any increase will be matched by corresponding increases in rates charged to residents. Any significant failure by our property managers to control labor costs or to pass on any such increased labor costs to residents through rate increases could have a material adverse effect on our business, financial condition and results of operations. In addition, if our tenants fail to attract and retain qualified personnel, their ability to satisfy their obligations to us could be impaired.

Our tenants may be unable or unwilling to satisfy their lease obligations to us, and there can be no assurance that the applicable guarantor of our leases will be able to cover any shortfall.

Certain of our properties are leased on a triple net basis to three operators, including Holiday, which is an affiliate of our Manager. Rental income from our triple net leases represented 49% of our net operating income during the nine months ended September 30, 2016, and Holiday accounted for 79% of that amount.

Our triple net leases subject us to credit risk from our tenants. Our tenants may not have sufficient assets, income and access to financing to enable them to make rental payments to us or to otherwise satisfy their respective obligations under our leases, and any inability or unwillingness by them to do so could have a material adverse effect on us. Any failure by a tenant to effectively conduct its operations or to maintain and improve our properties could adversely affect its business reputation and its ability to attract and retain residents in our properties, which could impair such tenant’s ability to generate sufficient income to satisfy its obligations to us. Our tenants have also agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses, and we cannot assure you that they will have sufficient assets, income, access to financing and insurance coverage to enable them to satisfy their respective indemnification obligations.

If any of our tenants are not able to satisfy their obligations to us, we would be entitled, among other remedies, to use any funds of such tenants then held by us and to seek recourse against the guarantor under its guaranty of the applicable lease. There can be no assurance that a guarantor will have the resources necessary to satisfy its obligations to us under its guaranty of the applicable lease in the event that a tenant fails to satisfy its lease obligations to us in full, which could have a material adverse effect on us.

We monitor credit risk in a variety of ways, including by monitoring our tenants’ compliance with the financial covenants in our leases, including the ratio of the earnings generated by the leased property to the rent required to be paid under the lease. We have observed a declining lease coverage ratio in recent quarters. As of September 30, 2016, our triple net lease portfolio had an EBITDARM coverage ratio of 1.21x, which represents a decline from 1.30x as of September 30, 2015. (This calculation differs from the calculations required by the terms of our leases.)

Under certain leases, our tenants are permitted to post and have posted “shortfall deposits” or similar obligations to cure a failure to satisfy the applicable lease coverage ratio. In addition, we have and, from time to time, may waive compliance with a lease coverage ratio or the requirement to post “shortfall deposits” or similar obligations. However, our ability to do so is limited by the terms of our financings, which require us to enforce the tenant’s obligations in a commercially reasonable manner.

We cannot assure you that our tenants will remain in compliance with any applicable financial covenants or that they will have the ability or desire to use such cure provisions in the future if needed. Our tenants may seek to renegotiate the terms of a lease to avoid the requirement to fund shortfall deposits or similar obligations, or to avoid an event of default. Our ability to change the terms of a lease is subject to the consent of our lender for the applicable financing. A failure to comply with or cure a financial covenant would generally give rise to an event of a default under a lease, and such event of default could result in an event of default under our financing for the applicable property.

We are subject to concentration risk in that Holiday accounts for a significant portion of the NOI from our Triple Net Lease segment and serves as the manager of properties representing a significant portion of the NOI from our Managed Properties segment.

For the nine months ended September 30, 2016 and 2015, Holiday accounted for 78.9% and 80.9%, respectively, of the NOI from our Triple Net Lease segment and served as the manager of properties representing 71.5% and 57.2%, respectively, of the NOI from our Managed Properties segment. As of September 30, 2016, Holiday leased 51 of the 58 properties in our Triple Net Lease segment, and managed 67 of the 96 properties in our Managed Properties segment.

As of September 30, 2016, all of our managed properties were subject to management agreements with Holiday, Blue Harbor, JEA or Thrive. We rely on our property managers’ personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our senior housing operations efficiently and effectively. We also rely on our property managers to set appropriate resident fees and to otherwise operate our senior housing communities in compliance with the terms of our property management agreements and all applicable laws and regulations. Although we have various rights as the property owner under our property management agreements, including various rights to set budget guidelines and to terminate and exercise remedies under those agreements as provided therein, any failure, inability or unwillingness on the part of our property managers to satisfy their respective obligations under those agreements, to efficiently and effectively manage our properties or to provide timely and accurate accounting information with respect thereto, could have a material adverse effect on us. In addition, Holiday has informed us of an impending change to its operating model as a result of a change in labor laws, which could adversely affect the performance of our Holiday-managed properties. Under the current operating model, Holiday staffs our facilities with live-in resident managers and, in certain cases, pays us rent for those occupied units. The change in the operating model will eliminate live-in staffing and could therefore result in decreased revenue from certain Holiday-managed properties as well as increasing staffing expense.

Our leased properties currently account for a significant portion of our total revenues and net operating income, and because our leases are triple net leases, we depend on our tenants to pay all operating costs, including repairs, maintenance, capital expenditures, utilities, taxes, insurance and payroll expense of property-level employees in connection with the leased properties. We cannot assure you that our tenants will have sufficient assets, income and access to financing to enable them to satisfy their obligations to us, and any failure, inability or unwillingness to do so could have a material adverse effect on us. In addition, although affiliates of our tenants have provided a lease guaranty in connection with their respective leases, the guarantees may not be sufficient to satisfy the tenant's obligations to us, and our tenants may not have sufficient assets, income and access to financing to enable them to satisfy their obligations to us. Our reliance on a small number of tenants for a significant portion of our total revenues and net operating income from our senior housing investments creates credit risk. If any of our tenants becomes unable or unwilling to satisfy their obligations to us, our financial condition and results of operations could be weakened.

In the event of the expiration or earlier termination of our existing leases, we may not be able to enter into new leases with terms as favorable as the terms of our existing leases.

We cannot predict whether our tenants will satisfy their obligations to us or renew their leases at the end of their lease terms, which expire at various times. If there is a default under one or more of our leases or these leases are not renewed, we would be required to find other tenants to occupy those properties or to sell them. There can be no assurance that we would be able to identify suitable replacement tenants or enter into leases with new tenants on terms as favorable to us as the current leases or that we would be able to lease those properties at all.

Our tenants may become subject to bankruptcy or insolvency proceedings.

Our tenants may not be able to meet the rent or other payments due to us, which may result in a tenant bankruptcy or insolvency, or a tenant might become subject to bankruptcy or insolvency proceedings for other reasons. Although our lease agreements provide us with the right to evict tenants, demand immediate payment of rent and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent and to exercise other rights and remedies.

We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. If we cannot transition a leased property to a new tenant, we may take possession of that property, which may expose us to certain successor liabilities. Should such events occur, our revenue and operating cash flow may be adversely affected.

Covenants in our debt instruments limit our operational flexibility (including our ability to sell assets), and breaches of these covenants could materially adversely affect our business, results of operations and financial condition.

The terms of our financings require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios, minimum tangible net worth requirements, REIT status and certain levels of debt service coverage. Our continued ability to conduct business in general is subject to compliance with these financial and other covenants, which limit our operational flexibility. For example, mortgages on our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. Covenants that limit our operational flexibility as well as defaults resulting from the breach of any of these covenants could materially adversely affect our business, results of operations and financial condition. In addition, our ability to comply with certain terms of our financings depends on the financial performance of our leased assets, which is outside of our control, and a failure to comply with such terms could result in the acceleration of the requirement to repay all or a portion of the outstanding indebtedness.

We may not be able to complete accretive acquisitions, and the acquisitions we do complete may not be successful.

We intend to acquire additional senior housing properties (market conditions permitting). However, we may not be able to consummate attractive acquisition opportunities because of market conditions, liquidity constraints, regulatory reasons or other factors, and those that we do consummate may not be successful. The current low interest rate environment may drive upward sales prices or lead to overbuilding. We might encounter unanticipated difficulties and expenditures relating to any acquired properties. Newly acquired properties might require significant management attention. We might never realize the anticipated benefits of our acquisitions. Notwithstanding pre-acquisition due diligence, we do not believe that it is possible to fully understand a property before it is operated for an extended period of time. For example, we could acquire a property that contains undisclosed defects in design or construction. In addition, after our acquisition of a property, the market in which the acquired property is located may experience unexpected changes that adversely affect the property’s value. The occupancy of properties that we acquire may decline during our ownership, and rents or returns that are in effect or expected at the time a property is acquired may decline thereafter. Also, our property operating costs for acquisitions may be higher than we anticipate and acquisitions of properties may not yield the returns we expect and, if financed using debt or new equity issuances, may result in stockholder dilution. For these reasons, among others, any acquisitions of additional properties may not succeed or may cause us to experience losses.

Our determination of how much leverage to apply to our investments may adversely affect our return on our investments and may reduce cash available for distribution.

We have leveraged our assets through a variety of borrowings. Our investment guidelines do not limit the amount of leverage we may incur. The return we are able to earn on our investments and cash available for distribution to our stockholders may be significantly reduced due to changes in market conditions, which may cause the cost of our financing to increase relative to the income that can be derived from our assets.

Our inability to obtain financing (including through refinancing existing debt) on favorable terms, if at all, may impede our ability to grow or to make distributions to our shareholders.

We may not be able to fund all future capital needs from cash retained from operations. If we are unable to generate enough cash flow, we may need to rely on external sources of capital (including debt and equity financing) to fulfill our capital requirements. If we cannot access these external sources of capital, we may not be able to make the investments needed to grow our business or to sustain distributions to shareholders at current levels. Our ability to obtain financing or refinance existing debt depends upon a number of factors, some of which we have little or no control over, including but not limited to:


•	general availability of credit and market conditions, including rising interest rates and increasing borrowing costs;


•	the market price of the shares of our equity securities and the credit ratings of our debt and preferred securities;


•	the market’s perception of our growth potential, compliance with applicable laws and our current and potential future earnings and cash distributions;


•	our degree of financial leverage and operational flexibility;


•	the financing integrity of our lenders, which might impair their ability to meet their commitments to us or their willingness to make additional loans to us, and our inability to replace the financing commitment of any such lender on favorable terms, or at all;


•	the stability in the market value of our properties;


•	the financial performance and general market perception of our property managers and tenants;


•	changes in the credit ratings on United States government debt securities or default or delay in payment by the United States of its obligations; and


•	issues facing the healthcare industry, including, but not limited to, healthcare reform and changes in government reimbursement policies.

Any limitation on our access to financing as a result of these or other factors could impede our ability to grow and have a material adverse impact on our ability to fund operations, refinance our debt obligations, fund distributions to our shareholders, acquire properties and undertake development activities.

Competition may affect our operators’ ability to meet their obligations to us or make it difficult for us to identify and purchase, or develop, suitable senior housing properties to grow our investment portfolio.

Our property managers compete with other companies on a number of different levels, including: the quality of care provided, reputation, the physical appearance of a property, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas and the financial condition of tenants and managers. A property manager’s inability to successfully compete with other companies on one or more of the foregoing levels could adversely affect the senior housing property and materially reduce our property-level net operating income.

We face significant competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our business goals and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition and development activities. If we cannot identify and purchase a sufficient quantity of senior housing properties at favorable prices or if we are unable to finance acquisitions on commercially favorable terms, it could have a material adverse effect on our business, financial condition and results of operations.

The healthcare industry is also highly competitive, and our operators may encounter increased competition for residents and patients, including with respect to the scope and quality of care and services provided, reputation and financial condition, physical appearance of the properties, price and location. The operations of our RIDEA AL/MC properties and our IL properties depend on the competiveness and financial viability of the properties. If our managers are unable to successfully compete with other operators and managers by maintaining profitable occupancy and rate levels, their ability to generate income for us may be materially adversely affected. The operations of our triple net lease tenants also depend upon their ability to successfully compete with other operators. If our tenants are unable to successfully compete, their ability to fulfill their obligations to us, including the ability to make rent payments to us, may be materially adversely affected. Future changes in government regulation may adversely affect the healthcare industry, including our senior housing properties and healthcare operations, property managers and tenants, and our property managers and tenants may not achieve and maintain occupancy and rate levels that will enable them to satisfy their obligations to us. Any adverse changes in the regulation of the healthcare industry or the competitiveness of our property managers and tenants could have a more pronounced effect on us than if we had investments outside the senior housing and healthcare industries.

Overbuilding in markets in which our senior housing properties are located could adversely affect our future occupancy rates, operating margins and profitability.

The senior housing industry generally has limited barriers to entry, and, as a consequence, the development of new senior housing properties could outpace demand. If development outpaces demand for those asset types in the markets in which our properties are located, those markets may become saturated, and we could experience decreased occupancy, reduced operating margins and lower profitability.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. In addition, as a result of any new investment in senior housing properties, we may be required to consolidate additional entities, and, therefore, to document and test effective internal controls over the financial reporting of these entities in accordance with Section 404, which we may not be able to do. Even if we are able to do so, there could be significant costs and delays, particularly if these entities were not subject to Section 404 prior to being acquired by us. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our share price and impairing our ability to raise capital.

Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

As has been widely publicized, the SEC, the Financial Accounting Standards Board (“FASB”) and other regulatory bodies that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules. Moreover, in the future these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in negative ways that we cannot predict or protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any codified changes will have on our business, results of operations, liquidity or financial condition.

We and our operators rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We and our operators rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information of the residents at our properties. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing this confidential information, such as individually identifiable information relating to financial accounts. Although we and our operators have taken steps to protect the security of the data maintained in our information systems, it is possible that such security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect our business, financial condition and results of operations.

Our operators may be faced with significant potential litigation and rising insurance costs that not only affect their ability to obtain and maintain adequate liability and other insurance, but also may affect, in the case of our triple net lease properties, their ability to pay their lease payments and generally to fulfill their insurance and indemnification obligations to us.

In some states, advocacy groups monitor the quality of care at assisted and independent living communities, and these groups have brought litigation against operators. Also, in several instances, private litigation by assisted and independent living community residents or their families have succeeded in winning very large damage awards for alleged neglect and we cannot assure you that we will not be subject to these types of claims. The effect of this litigation and potential litigation has been to, amongst other matters, materially increase the costs of monitoring and reporting quality of care compliance. The cost of liability and medical malpractice insurance has increased and may continue to increase so long as the present litigation environment in many parts of the United States continues. This may affect the ability of some of our property managers and tenants to obtain and maintain adequate liability and other insurance and manage their related risk exposures. In addition to causing some of our property managers and tenants to be unable to fulfill their insurance, indemnification and other obligations to us under their property management agreements or leases and thereby potentially exposing us to those risks, these litigation risks and costs could cause some of our tenants to become unable to pay rents due to us. Such nonpayment could potentially affect our ability to meet future monetary obligations under our financing arrangements.

The failure of our operators to comply with laws relating to the operation of our properties may have a material adverse effect on the ability of our tenants to provide its services, pay us rent, the profitability of our managed properties and the values of our properties.

We and our operators are subject to or impacted by extensive, frequently changing federal, state and local laws and regulations. Some of these laws and regulations include: state and local licensure laws; state laws related to patient abuse and neglect; laws protecting consumers against deceptive practices; laws relating to the operation of our properties and how our property managers and tenants conduct their operations, such as fire, health and safety laws and privacy laws; federal and state laws affecting communities that participate in Medicare and Medicaid; the Americans with Disabilities Act and similar state and local laws; and safety and health standards set by the Occupational Safety and Health Administration. We and our operators expend significant resources to maintain compliance with these laws and regulations, and responding to any allegations of noncompliance also results in the expenditure of significant resources. If we or our operators fail to comply with any applicable legal requirements, or are unable to cure deficiencies, certain sanctions may be imposed and, if imposed, may materially and adversely affect our tenants’ ability to pay their rent, the profitability of our managed properties, the values of our properties, our ability to complete additional acquisitions in the state in which the violation occurred, and our reputation. Further, changes in the regulatory framework could have a material adverse effect on the ability of our tenants to pay us rent (and any such nonpayment could potentially affect our ability to meet future monetary obligations under our financing arrangements), the profitability of and the values of our properties.

We and our operators are required to comply with federal and state laws governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information. Under HIPAA, we and our operators are required to comply with the HIPAA privacy rule, security standards and standards for electronic healthcare transactions. State laws also govern the privacy of individual health information, and these laws are, in some jurisdictions, more stringent than HIPAA. Other federal and state laws govern the privacy of individually identifiable information. If we or our operators fail to comply with applicable federal or state standards, we or they could be subject to civil sanctions and criminal penalties, which could materially and adversely affect our business, financial condition and results of operations.

Some of our properties and their operations are subject to extensive regulations. Failure to comply, or allegations of failing to comply, could have a material adverse effect on us.

Various governmental authorities mandate certain physical characteristics of senior housing properties. Changes in laws and regulations relating to these matters may require significant expenditures. Our property management agreements and triple net leases generally require our operators to maintain our properties in compliance with applicable laws and regulations, and we expend resources to monitor their compliance. However, our monitoring efforts may fail to detect weaknesses in our operators’ performance on the clinical and other aspects of their duties, which could expose us to the risk of penalties, license suspension or revocation, criminal sanctions and civil litigation. Any such actions, even if ultimately dismissed or decided in our favor, could have a material adverse effect on our reputation and results of operations. In addition, our operators may neglect maintenance of our properties if they suffer financial distress. In the case of our triple net lease properties, we may agree to fund capital expenditures in return for rent increases or other concessions. Our available financial resources or those of our tenants may be insufficient to fund the expenditures required to operate our properties in accordance with applicable laws and regulations. If we fund these expenditures, our tenants’ financial resources may be insufficient to satisfy their increased rental payments to us or other incremental obligations. Failure to obtain a license or registration, or loss of a required license or registration, would prevent a property from operating in the manner intended by the property managers or tenants, which could have a material adverse effect on our property managers’ ability to generate income for us or our tenants’ ability to make rent payments to us. Any compliance issues could also make it more difficult to obtain or maintain required licenses and registrations.

Licensing, Medicare and Medicaid and other laws may also require some or all of our operators to comply with extensive standards governing their operations and such operations are subject to routine inspections. In addition, certain laws prohibit fraud by senior housing operators and other healthcare communities, including civil and criminal laws that prohibit false claims in Medicare, Medicaid and other programs that regulate patient referrals. In recent years, the federal and state governments have devoted increasing resources to monitoring the quality of care at senior housing communities and to anti-fraud investigations in healthcare operations generally. When violations of applicable laws are identified, federal or state authorities may impose civil monetary damages, treble damages, repayment requirements and criminal sanctions. In addition to these penalties, violation of any of these laws may subject our operators to exclusion from participation in any federal or state healthcare program. For example, if an operator is subject to a criminal conviction relating to the delivery of goods or services under the Medicare or Medicaid programs, the operator would be excluded from participation in those programs for five years. These fraud and abuse laws and regulations are complex, and we and our operators do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. While we do not believe our operators are in violation of these prohibitions, we cannot assure you that governmental officials charged with the responsibility of enforcing the provisions of these prohibitions will not assert that an operator is in violation of such laws and regulations. Violations of law often result in significant media attention. Healthcare communities may also be subject to license revocation or conditional licensure and exclusion from or conditional Medicare or Medicaid participation. When quality of care deficiencies or improper billing are alleged or identified, various laws, including laws prohibiting patient abuse and neglect, may authorize civil money penalties or fines; the suspension, modification or revocation of a license (which could result in the suspension of operations) or Medicare or Medicaid participation; the suspension or denial of admissions of residents; the removal of residents from properties; the denial of payments in full or in part; the implementation of state oversight, temporary management or receivership; and the imposition of criminal penalties. We, our property managers and our tenants have received inquiries and requests from various government agencies and we have in the past and may in the future receive notices of potential sanctions, and governmental authorities may impose such sanctions from time to time on our properties based on allegations of violations or alleged or actual failures to cure identified deficiencies. If imposed, such sanctions may adversely affect the profitability of managed properties, the ability to maintain managed properties (including properties unrelated to the property in question) in a given state, our ability to continue to engage certain managers and our tenants’ ability to pay rents to us (and any such nonpayment could potentially affect our ability to meet future monetary obligations or could trigger an event of default under our financing arrangements). Any such claims could also result in material civil litigation. Federal and state requirements for change in control of healthcare communities, including, as applicable, approvals of the proposed operator for licensure, certificate of need ("CON"), Medicare and Medicaid participation, and the terms of our debt may also limit or delay our ability to find substitute tenants or property managers. If any of our property managers or tenants becomes unable to operate our properties, or if any of our tenants becomes unable to pay its rent because they have violated government regulations or payment laws, we may experience difficulty in finding a substitute tenant or property manager or selling the affected property for a fair and commercially reasonable price, and the value of an affected property may decline materially.

The impact of the comprehensive healthcare regulation enacted in 2010 on us and our operators cannot accurately be predicted.

The Health Reform Laws, provide states with an increased federal medical assistance percentage under certain conditions. On June 28, 2012, The United States Supreme Court upheld the individual mandate of the Health Reform Laws but partially invalidated the expansion of Medicaid. The ruling on Medicaid expansion allows states not to participate in the expansion-and to forgo funding for the Medicaid expansion-without losing their existing Medicaid funding. Thus far, approximately one-half of the states are fully participating. Given that the federal government substantially funds the Medicaid expansion, it is unclear whether any state will pursue this option, although at least some appear to be considering this option at this time. The participation by states in the Medicaid expansion could have the dual effect of increasing our property managers’ and tenants revenues, through new patients, but further straining state budgets. While the federal government will pay for approximately 100% of those additional costs until 2016, states will be expected to begin paying for part of those additional costs in 2017. With increasingly strained budgets, it is unclear how states will pay their share of these additional Medicaid costs and what other healthcare expenditures could be reduced as a result. A significant reduction in other healthcare related spending by states to pay for increased Medicaid costs could affect our property managers’ and tenants’ revenue streams, which could materially and adversely affect our business, financial condition and results of operations.

Changes in reimbursement rates, payment rates or methods of payment from government and other third-party payors, including Medicaid and Medicare, could have a material adverse effect on us and our operators.

Certain of our operators rely on reimbursement from third-party payors, including the Medicare and Medicaid programs. Medicare and Medicaid programs, as well as numerous private insurance and managed care plans, generally require participating providers to accept government-determined reimbursement levels as payment in full for services rendered, without regard to the facility’s charges. Changes in the reimbursement rate or methods of payment from third-party payors, including Medicare and Medicaid, or the implementation of other measures to reduce reimbursements for services provided by our property managers or our tenants, could result in a substantial reduction in our and our tenant’s revenues. In addition, the implementation of the Resource Utilization Group, Version Four, or “RUG-IV,” which revises the payment classification system for skilled nursing facilities, may impact our tenants by revising the classifications of certain patients.

Additionally, revenue under third-party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement processes or as a result of post-payment audits. Payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional documentation is necessary or because certain services were not covered or were not medically necessary. We cannot assure you that our operators who currently depend on governmental or private payor reimbursement will be adequately reimbursed for the services they provide. Significant limits by governmental and private third-party payors on the scope of services reimbursed or on reimbursement rates and fees, whether from legislation, administrative actions or private payor efforts, could have a material adverse effect on liquidity, financial condition and results of operations, which could affect adversely their ability to comply with the terms of our leases and have a material adverse effect on us.

If any of our properties are found to be contaminated, or if we become involved in any environmental disputes, we could incur substantial liabilities and costs.

Under federal and state environmental laws and regulations, a current or former owner of real property may be liable for costs related to the investigation, removal and remediation of hazardous or toxic substances or petroleum that are released from or are present at or under, or that are disposed of in connection with such property. Owners of real property may also face other environmental liabilities, including government fines and penalties imposed by regulatory authorities and damages for injuries to persons, property or natural resources. Environmental laws and regulations often impose liability without regard to whether the owner was aware of, or was responsible for, the presence, release or disposal of hazardous or toxic substances or petroleum. In certain circumstances, environmental liability may result from the activities of a current or former operator of the property. Although we are generally indemnified by our property managers and tenants of our properties for contamination caused by them, these indemnities may not adequately cover all environmental costs.

Some of our senior housing properties generate infectious medical waste due to the illness or physical condition of the residents.

The management of infectious medical waste, including handling, storage, transportation, treatment and disposal, is subject to regulation under various laws, including federal and state environmental laws. These environmental laws set forth the management requirements, as well as permit, record-keeping, notice, and reporting obligations. Each of our senior housing properties has an agreement with a waste management company for the proper disposal of all infectious medical waste. The use of such waste management companies does not immunize us from alleged violations of such medical waste laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to clean up disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with these environmental laws could adversely affect our business, financial condition and results of operations. While we are not aware of non-compliance with environmental laws related to infectious medical waste at our senior housing properties, these environmental laws are amended from time to time and we cannot predict when and to what extent liability may arise. In addition, because these environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our senior housing properties.

Transfers of healthcare properties may require regulatory approvals, and these properties may not have efficient alternative uses.

Transfers of healthcare properties to successor operators frequently are subject to regulatory approvals or notifications, including, but not limited to, change of ownership approvals under a CON or determination of need laws, state licensure laws, Medicare and Medicaid provider arrangements that are not required for transfers of other types of real estate. The replacement of a healthcare property operator could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator licensed to manage the property, whether as a result of regulatory issues identified elsewhere in this report or otherwise. Alternatively, given the specialized nature of our properties, we may be required to spend substantial time and funds to adapt these properties to other uses. If we are unable to timely transfer properties to successor operators or find efficient alternative uses, our revenue and operations may be adversely affected.

There are risks related to new properties under construction or development.

In the future, we might construct one or more new properties. Any failure by us or our property managers to obtain the required license, certification, compliance programs, contracts, governmental permits and authorizations, or to obtain financing on favorable terms, may impede our ability to earn revenues on the relevant properties. Additionally, we may have to wait years for significant cash returns on newly developed properties, and if the cash flow from operations or refinancing is not sufficient, we may be forced to borrow additional money to fund our cash distributions to stockholders. Furthermore, if our financial projections with respect to a new property are inaccurate due to increases in capital costs or other factors, the property may fail to perform as we expected in analyzing our investment. State and local laws also may regulate the expansion, including the addition of new beds or services or acquisition of medical equipment, and the construction or renovation of healthcare properties, by requiring a CON or other similar approval from a state agency. Any compliance issues could also make it more difficult to obtain or maintain required licenses and registrations.

RISKS RELATED TO OUR MANAGER

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement, and the inability of our Manager to retain or obtain key personnel could delay or hinder implementation of our investment strategies, which could impair our ability to make distributions and could reduce the value of your investment.

We do not have employees. Our officers and other individuals who perform services for us are employees of our Manager, or our operators. We are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies, and our operators to conduct our business. We are subject to the risk that our Manager will terminate the Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all.

Furthermore, we are dependent on the services of certain key employees of our Manager whose compensation may be partially or entirely dependent upon the amount of incentive or management compensation earned by our Manager and whose continued service is not guaranteed, and the loss of such services could adversely affect our operations. If any of these people were to cease their affiliation with us or our Manager, either we or our Manager may be unable to find suitable replacements, and our operating results could suffer. We believe that our future success depends, in large part, upon our Manager’s ability to hire and retain highly skilled personnel. Competition for highly skilled personnel is intense, and our Manager may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled personnel, our ability to implement our investment strategies could be delayed or hindered and this could materially adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.

There are conflicts of interest in our relationship with our Manager.

Our Management Agreement with our Manager was not negotiated between unaffiliated parties, and its terms, including fees payable, although approved by the independent directors of Newcastle as fair, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates-including investment funds, private investment funds, or businesses managed by our Manager-invest in senior housing properties and whose investment objectives overlap with our investment objectives. Certain investments appropriate for us may also be appropriate for one or more of these other investment vehicles. Certain members of our board of directors and employees of our Manager who are our officers also serve as officers and/or directors of Fortress and these other entities. Although we have the same Manager, we may compete with entities affiliated with our Manager or Fortress for certain target assets. Fortress has raised two funds primarily focused on investing in senior housing properties. The first, raised in 2006 with $650 million in commitments at closing had its final liquidation in December 2014. The second, also raised in 2006, had $1.6 billion in capital commitments as of September 30, 2016 and is in the process of selling its investments, including its investments in Holiday. Certain of Fortress’s other funds also hold significant investments in senior housing. All of these funds are outside their respective investment periods, although one of these funds has approximately $120 million in unfunded commitments, which may be drawn for follow-on investments. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund. From time to time, affiliates of Fortress focus on investments in assets with a similar profile as our target assets that we may seek to acquire. These affiliates may have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. Fortress had approximately $70.1 billion of assets under management as of September 30, 2016. In addition, with respect to funds in the process of selling investments, our Manager may be incentivized to regard the sale of such assets to New Senior positively, particularly if a sale to an unrelated third party would result in a loss of fees to our Manager.

Our Management Agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives. Our Manager may engage in additional investment opportunities related to senior housing in the future, which may cause our Manager to compete with us for investments or result in a change in our current investment strategy. In addition, our certificate of incorporation provides that if Fortress or an affiliate or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Fortress or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of ours and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Fortress or its affiliates pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our investment guidelines) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, such as our acquisitions of sizeable portfolios of assets from Holiday, which may present an actual, potential or perceived conflict of interest. Actual, potential or perceived conflicts have given, and in the future could give, rise to investor dissatisfaction, settlements with stockholders, litigation or regulatory inquiries or enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.

The management compensation structure that we have agreed to with our Manager, as well as compensation arrangements that we may enter into with our Manager in the future (in connection with new lines of business or other activities), may incentivize our Manager to invest in high risk investments. In addition to its management fee, our Manager is currently entitled to receive incentive compensation. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of such measures at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative than lower-yielding investments. Moreover, because our Manager receives compensation in the form of options in connection with the completion of our equity offerings, our Manager may be incentivized to cause us to issue additional stock, which could be dilutive to existing stockholders.

It would be difficult and costly to terminate our Management Agreement with our Manager.

It would be difficult and costly for us to terminate our Management Agreement with our Manager. After its initial ten-year term, the Management Agreement will be automatically renewed for one-year terms unless terminated (i) by a majority vote of at least two-thirds of our independent directors, or by a vote of the holders of a simple majority of the outstanding shares of our common stock, that there has been unsatisfactory performance by our Manager that is materially detrimental to us or (ii) a determination by a simple majority of our independent directors that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination by continuing to provide the services under the Management Agreement at a fee that a simple majority of our independent directors have reasonably determined to be fair. Our Manager will be provided 60 days’ prior notice of any termination and will be paid a termination fee equal to the amount of the management fee earned by the Manager during the 12-month period preceding such termination. In addition, following any termination of the Management Agreement, our Manager may require us to purchase its right to receive incentive compensation at a price determined as if our assets were sold for their then current fair market value or otherwise we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost to us of terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause.

Our board of directors has approved broad investment guidelines for our Manager and do not approve each investment decision made by our Manager. In addition, we may change our investment strategy without a stockholder vote, which may result in our making investments that are different, riskier or less profitable than our current investments.

Our Manager is authorized to follow broad investment guidelines. Consequently, our Manager has great latitude in determining the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories of assets that may differ from those in which we currently invest. Our board of directors will periodically review our investment guidelines and our investment portfolio. However, our board of directors does not review or pre-approve each proposed investment or our related financing arrangements. In addition, in conducting periodic reviews, our board of directors relies primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to unwind by the time they are reviewed by our board of directors even if the transactions contravene the terms of the Management Agreement. In addition, we may change our investment strategy, including our target asset classes, without a stockholder vote.

Our investment strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may involve additional risks depending upon the nature of the assets in which we invest and our ability to finance such assets on a short- or long-term basis. Investment opportunities that present unattractive risk-return profiles relative to other available investment opportunities under particular market conditions may become relatively attractive under changed market conditions, and changes in market conditions may therefore result in changes in the investments we target. Decisions to make investments in new asset categories present risks that may be difficult for us to adequately assess and could therefore impair our ability to make distributions to our shareholders or have adverse effects on our liquidity or financial condition. A change in our investment strategy may also increase our exposure to interest rate, real estate market or credit market fluctuations. In addition, a change in our investment strategy may increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such assets could adversely affect our results of operations and our financial condition.

Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our investments.

Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of our subsidiaries, to our board of directors, or our or any subsidiary’s stockholders or partners for any acts or omissions by our Manager, its members, managers, sub-advisers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees, sub-advisers and each other person, if any, controlling our Manager, harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.

Our Manager’s due diligence of investment opportunities or other transactions may not identify all pertinent risks, which could materially affect our business, financial condition, liquidity and results of operations.

Any purchase price we agree to pay to acquire a senior living facility or other investment will be based on projections of the asset’s future financial performance, and actual results may differ materially from our projections. Our Manager intends to conduct due diligence with respect to each investment opportunity it pursues on our behalf. It is possible that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the investment and will rely on information provided by the target of the investment. In addition, if investment opportunities are scarce, the process for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct a due diligence investigation may be limited, and we would be required to make investment decisions based upon a less thorough diligence process than would otherwise be the case. Accordingly, investments and other transactions that initially appear to be viable may prove not to be over time, due to the limitations of the due diligence process or other factors.

Because we are dependent upon our Manager and its affiliates to conduct our operations, any adverse changes in the financial health of our Manager or its affiliates or our relationship with them could hinder our Manager’s ability to successfully manage our operations.

We are dependent on our Manager and its affiliates to manage our operations and acquire and manage our investments. Under the direction of our board of directors, and subject to our investment guidelines, our Manager makes all decisions with respect to the management of our company. To conduct its operations, our Manager depends upon the fees and other compensation that it receives from us in connection with managing our company and from other entities and investors with respect to investment management services it provides. Any adverse changes in the financial condition of our Manager or its affiliates, or our relationship with our Manager, could hinder our Manager’s ability to successfully manage our operations, which would materially adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders. For example, adverse changes in the financial condition of our Manager could limit its ability to attract key personnel.

RISKS RELATED TO OUR TAXATION AS A REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders. Newcastle’s failure to qualify as a REIT could cause us to lose our REIT status.

We are organized and conduct our operations to qualify as a REIT for U.S. federal income tax purposes. Our ability to satisfy the REIT asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or more of our investments may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, there can be no assurance that the Internal Revenue Service (“IRS”) will not contend that our investments violate the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock. Unless entitled to relief under certain provisions of the Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT.

If Newcastle failed to qualify as a REIT for a taxable year ending on or before December 31, 2015, the rule against re-electing REIT status following a loss of such status would also apply to us if we were treated as a successor to Newcastle for U.S. federal income tax purposes. Although Newcastle has provided (i) a representation in the Separation and Distribution Agreement that it had no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT and (ii) a covenant in the Separation and Distribution Agreement to use its reasonable best efforts to maintain its REIT status for each of Newcastle’s taxable years ending on or before 2015 (unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’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), no assurance can be given that such representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to seek damages from Newcastle, there can be no assurance that such damages, if any, would appropriately compensate us. In addition, if Newcastle were to fail to qualify as a REIT despite its reasonable best efforts, we would have no claim against Newcastle.

Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.

The NYSE requires, as a condition to the listing of our shares, that we maintain our REIT status. Consequently, if we fail to maintain our REIT status, our shares would promptly be delisted from the NYSE, which would decrease the trading activity of such shares. This could make it difficult to sell shares and would likely cause the market volume of the shares trading to decline.

If we were delisted as a result of losing our REIT status and desired to relist our shares on the NYSE, we would have to reapply to the NYSE to be listed as a domestic corporation. As the NYSE’s listing standards for REITs are less onerous than its standards for domestic corporations, it would be more difficult for us to become a listed company under these heightened standards. We might not be able to satisfy the NYSE’s listing standards for a domestic corporation. As a result, if we were delisted from the NYSE, we might not be able to relist as a domestic corporation, in which case our shares could not trade on the NYSE.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

Dividends payable to domestic stockholders that are individuals, trusts and estates are generally taxed at reduced tax rates. Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may be adversely affected by the favorable tax treatment given to non-REIT corporate dividends, which could affect the value of our real estate assets negatively.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully monitored on a continuing basis, and there can be no assurance that our Manager’s personnel responsible for doing so will be able to successfully monitor our compliance.

REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, excluding any net capital gain, in order for corporate income tax not to apply to earnings that we distribute. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code. Certain of our assets may generate substantial mismatches between taxable income and available cash. As a result, the requirement to distribute a substantial portion of our REIT taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements. Further, amounts distributed will not be available to fund investment activities. If we fail to obtain debt or equity capital in the future, it could limit our ability to satisfy our liquidity needs, which could adversely affect the value of our common stock.

We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and not including net capital gain) each year to our stockholders. To qualify for the tax benefits accorded to REITs, we intend to make distributions to our stockholders in amounts such that we distribute an amount at least equal to all or substantially all of our REIT taxable income each year, subject to certain adjustments. However, our ability to make distributions may be adversely affected by the risk factors described herein.

The stock ownership limit imposed by the Code for REITs and our certificate of incorporation may inhibit market activity in our stock and restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after our first taxable year. Our certificate of incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the aggregate value of our outstanding capital stock, treating classes and series of our stock in the aggregate. Our board of directors may grant an exemption in its sole discretion, subject to such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Moreover, if a REIT distributes less than 85% of its ordinary income, 95% of its capital gain net income plus any undistributed shortfall from prior year (“Required Distribution”) to its stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then it is required to pay an excise tax on 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, our TRS will be subject to corporate level income tax at regular rates.

Complying with the REIT requirements may negatively impact our investment returns or cause us to forego otherwise attractive opportunities, liquidate assets or contribute assets to the TRS.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. As a result of these tests, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, forego otherwise attractive investment opportunities, liquidate assets in adverse market conditions or contribute assets to a TRS that is subject to regular corporate federal income tax. Our ability to acquire investments will be subject to the applicable REIT qualification tests, and we may have to hold these interests through our TRS, which would negatively impact our returns from these assets. In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive investments.

Complying with the REIT requirements may limit our ability to hedge effectively.

The existing REIT provisions of the Code may substantially limit our ability to hedge our operations because a significant amount of the income from those hedging transactions is likely to be treated as non-qualifying income for purposes of both REIT gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions). As a result, we may have to limit our use of certain hedging techniques or implement those hedges through total return swaps. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to comply with these limitations, we could lose our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause, and not due to willful neglect, and we meet certain other technical requirements. Even if our failure were due to reasonable cause, we might incur a penalty tax.

Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Neither ordinary nor capital gain distributions with respect to our stock nor gain from the sale of stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

•

part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; and


•	part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock.

The tax on prohibited transactions will limit our ability to engage in certain transactions which would be treated as prohibited transactions for U.S. federal income tax purposes.

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property that is held primarily for sale to customers in the ordinary course of our trade or business. We might be subject to this tax if we were to dispose of our property in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes.

We generally intend to conduct our operations so that no significant asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain sales at the REIT level, even though the sales might otherwise be beneficial to us. In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. The 100% prohibited transaction tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to prevent prohibited transaction characterization.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

The lease of our properties to a TRS is subject to special requirements.

Under the provisions of RIDEA, we currently lease certain “qualified healthcare properties” (which generally include assisted living properties but not independent living properties) to our TRS (or a limited liability company of which the TRS is a member). The TRS, in turn, contracts with a third party operator to manage the healthcare operations at these properties. The rents paid by the TRS in this structure will be treated as qualifying rents from real property for purposes of the REIT requirements only if (i) they are paid pursuant to an arm’s-length lease of a qualified healthcare property and (ii) the operator qualifies as an “eligible independent contractor” with respect to the property. An operator will qualify as an eligible independent contractor if it meets certain ownership tests with respect to us, and if, at the time the operator enters into the property management agreement, the operator is actively engaged in the trade or business of operating qualified healthcare properties for any person who is not a related person to us or the TRS. If any of the above conditions were not satisfied, then the rents would not be considered income from a qualifying source for purposes of the REIT rules, which could cause us to incur penalty taxes or to fail to qualify as a REIT.

RISKS RELATED TO OUR COMMON STOCK

There can be no assurance that the market for our stock will provide you with adequate liquidity, which may make it difficult for you to sell the common stock when you want or at prices you find attractive.

The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control. These factors include, without limitation:


•	a shift in our investor base;


•	our quarterly or annual earnings, or those of other comparable companies;


•	actual or anticipated fluctuations in our operating results;


•	changes in accounting standards, policies, guidance, interpretations or principles;


•	announcements by us or our competitors of significant investments, acquisitions or dispositions;


•	the failure of securities analysts to cover our common stock;


•	changes in earnings estimates by securities analysts or our ability to meet those estimates;


•	the operating and stock price performance of other comparable companies;


•	overall market fluctuations; and


•	general economic conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Your percentage ownership in our Company may be diluted in the future.

Your percentage ownership in our Company may be diluted in the future because of equity awards that we expect will be granted to our Manager, to the directors, officers and employees of our Manager who perform services for us, and to our directors, officers and employees, as well as other equity instruments such as debt and equity financing. Our board of directors has approved a 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, tandem awards and other equity-based and non-equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and advisors of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and advisors. We have reserved shares of our common stock for issuance under the Plan. On the first day of each fiscal year beginning during the ten-year term of the Plan and beginning with calendar year 2015, that number will be increased by a number of shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year. Upon the successful completion of an offering of our common stock by us, we will issue to our Manager options (including cash-settled options) equal to 10% of the number of shares sold in the offering. Our board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

We may incur or issue debt or issue equity, which may negatively affect the market price of our common stock.

We may in the future incur or issue debt or issue equity or equity-related securities. Upon our liquidation, lenders and holders of our debt and holders of our preferred stock (if any) would receive a distribution of our available assets before common stockholders. Any future incurrence or issuance of debt would increase our interest cost and could adversely affect our results of operations and cash flows. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional issuances of common stock, directly or through convertible or exchangeable securities (including limited partnership interests in our operating partnership), warrants or options, will dilute the holdings of our existing common stockholders and such issuances, or the perception of such issuances, may reduce the market price of our common stock. Any preferred stock issued by us would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to incur or issue debt or issue equity or equity-related securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future incurrence or issuance of debt or issuance of equity or equity-related securities will adversely affect the market price of our common stock.

We have not established a minimum distribution payment level, and we cannot assure you of our ability to pay distributions in the future.

Our board of directors reviews our dividend policy from time to time and has not established a minimum distribution payment level. Any decision by our board of directors to declare a distribution is based upon a number of factors, including our results of operations, financial condition and liquidity projections, restrictions under Delaware law or any applicable debt covenants, our taxable income, the annual distribution requirements under the REIT provisions of the Code, and other factors our board of directors deems relevant.

Our cash flows from operating activities, less capital expenditures and debt service, have been less than the amount of distributions to our shareholders. In addition, our debt service is scheduled to increase meaningfully as a result of required amortization payments beginning in May 2017, which could reduce cash available for distributions. Our board of directors takes these and other factors into account as part of any decision to pay a dividend, and the timing and amount of any future dividend is subject to change at the discretion of our board of directors.

Furthermore, while we are required to make distributions in order to maintain our REIT status (as described above under “Risks Related to our Taxation as a REIT-We may be unable to generate sufficient revenue from operations to pay our operating expenses and to pay distributions to our stockholders”), we may elect not to maintain our REIT status, in which case we would no longer be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the price of our common stock. No assurance can be given that we will pay any dividends on shares of our common stock in the future.

We may in the future choose to pay dividends in our own stock, in which case you could be required to pay income taxes in excess of the cash dividends you receive.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

It is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our floating rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Our certificate of incorporation, bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:


•	a classified board of directors with staggered three-year terms;


•	amendment of provisions in our certificate of incorporation and bylaws regarding the election of directors, classes of directors, the term of office of directors, the filling of director vacancies and the resignation and removal of directors only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;


•	amendment of provisions in our certificate of incorporation regarding corporate opportunity only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;


•	removal of directors only for cause and only with the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote in the election of directors;


•	our board of directors to determine the powers, preferences and rights of our preferred stock and to issue such preferred stock without stockholder approval;


•	advance notice requirements applicable to stockholders for director nominations and actions to be taken at annual meetings; and


•	a prohibition, in our certificate of incorporation, stating that no holder of shares of our common stock will have cumulative voting rights in the election of directors, which means that the holders of a majority of the issued and outstanding shares of common stock can elect all the directors standing for election.

Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is considered favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or a change in our management and board of directors and, as a result, may adversely affect the market price of our common stock and stockholders’ ability to realize any potential change of control premium.

ERISA may restrict investments by plans in our common stock.

A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment is consistent with the fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including whether such investment might constitute or give rise to a prohibited transaction under ERISA, the Code or any substantially similar federal, state or local law and, if so, whether an exemption from such prohibited transaction rules is available.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not make any stock repurchases during the three months ended September 30, 2016.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Exhibits filed with this Form 10-Q:
2.1	Separation and Distribution Agreement dated October 16, 2014, between the Registrant and Newcastle Investment Corp. (incorporated by reference to Newcastle Investment Corp.’s Report on Form 10-Q, Exhibit 2.2, filed on November 5, 2014).
2.2	Purchase and Sale Agreement, dated as of June 22, 2015, by and among the purchaser named therein and the sellers named therein (incorporated by reference to New Senior’s Report on Form 8-K, Exhibit 2.1, filed on June 22, 2015).
3.1	Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to New Senior’s Report on Form 10-Q, Exhibit 3.1, filed on November 25, 2014).
3.2	Amended and Restated Bylaws of the Registrant (incorporated by reference to New Senior’s Report on Form 10-Q, Exhibit 3.2, filed on November 25, 2014).
10.1	Management Agreement between the Registrant and FIG LLC (incorporated by reference to the Registrant's Current Report on Form 8-K, filed November 12, 2014).
10.2	Form of Indemnification Agreement by and between New Senior Investment Group Inc. and its directors and officers (incorporated by reference to Amendment No. 1 to the Registrant's Registration Statement on Form 10, filed July 29, 2014).
10.3	New Senior Investment Group Inc. Nonqualified Stock Option and Incentive Award Plan (incorporated by reference to New Senior's report on Form 10-Q, Exhibit 10.3, filed on November 25, 2014).
10.4	Purchase and Sale Agreement, dated November 18, 2013, by and between the Sellers named therein and the Purchasers named therein (incorporated by reference to Newcastle Investment Corp.’s Report on Form 10-K, Exhibit 10.16, filed on March 3, 2014).
10.5	Master Lease, dated December 23, 2013, by and among the Landlords named therein and NCT Master Tenant I LLC (incorporated by reference to Newcastle Investment Corp.’s Report on Form 10-K, Exhibit 10.17, filed on March 3, 2014).
10.6	Guaranty of Lease, dated December 23, 2013, by Holiday AL Holdings LP in favor of the Landlords named therein (incorporated by reference to Newcastle Investment Corp.’s Report on Form 10-K, Exhibit 10.18, filed on March 3, 2014).
10.7	Purchase and Sale Agreement, dated as of December 21, 2014, by and among the Purchasers named therein and the Sellers named therein, each of which is an affiliate of Hawthorn Retirement Group LLC (incorporated by reference to New Senior’s Report on Form 10-K, Exhibit 10.17, filed on February 26, 2015).
10.8	Multifamily Loan and Security Agreement - Seniors Housing, dated as of March 27, 2015, by and between NIC 11 Ashford Court Owner LLC, a Delaware limited liability company, as Borrower (“Borrower”), and Walker & Dunlop, LLC, as Lender (“Lender”) (incorporated by reference to New Senior’s Report on Form 8-K, Exhibit 10.1, filed on May 14, 2015).
10.9	Multifamily Note - Floating Rate, dated March 27, 2015, executed by Borrower in favor of Lender, as defined in Exhibit 10.8 (incorporated by reference to New Senior’s Report on Form 8-K, Exhibit 10.2, filed on May 14, 2015).
10.10	Multifamily Loan and Security Agreement - Seniors Housing dated as of August 12, 2015, by and between SNR 27 Alexis Gardens Owner LLC, a Delaware limited liability company, as Borrower (“Borrower”), and Walker & Dunlop, LLC, as Lender (“Lender”) (incorporated by reference to New Senior’s report on Form 8-K, Exhibit 10.1, filed August 17, 2015).
10.11	Multifamily Note - Fixed Rate Defeasance, dated as of August 12, 2015, executed by Borrower in favor of Lender, as defined in Exhibit 10.10 (incorporated by reference to New Senior’s report on Form 8-K, Exhibit 10.2, filed August 17, 2015).
10.12	Settlement Agreement, dated as of February 23, 2016, by and among the Registrant and Levin Capital Strategies, L.P. and the other persons listed on Schedule A thereto (incorporated by reference to New Senior's report on Form 10-K, Exhibit 10.12, filed on February 26, 2016).
31.1	Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.



101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.
*	XBRL (Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
**	The schedules to the Purchase Agreement included as Exhibit 2.2 have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of such schedules to the SEC upon request.

The following Master Lease and Guaranty of Lease are substantially identical in all material respects, except as to the parties thereto, to the Master Lease and Guaranty of Lease that are filed as Exhibits 10.5 and 10.6, respectively, hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:

Master Lease, dated December 23, 2013, by and among the Landlords named therein and NCT Master Tenant II LLC.

Guaranty of Lease, dated December 23, 2013, by Holiday AL Holdings LP in favor of the Landlords named therein.

In accordance with Instruction 2 to Item 601 of Regulation S-K, the Company has filed only one of 52 Multifamily Loan and Security Agreements dated as of March 27, 2015 and the related Multifamily Notes as Exhibit 10.8 and Exhibit 10.9, respectively, as the omitted Multifamily Loan and Security Agreements and the related Multifamily Notes are substantially identical in all material respects to the loan and note included as Exhibit 10.8 and Exhibit 10.9, respectively, except as to the borrower thereto, the principal amount and certain property-specific provisions.

In accordance with Instruction 2 to Item 601 of Regulation S-K, the Company has filed only one of 28 Multifamily Loan and Security Agreements dated as of August 12, 2015 and the related Multifamily Notes as Exhibit 10.10 and Exhibit 10.11, respectively, as the omitted Multifamily Loan and Security Agreements and the related Multifamily Notes are substantially identical in all material respects to the loan and note included as Exhibit 10.10 and Exhibit 10.11, respectively, except as to the borrower thereto, the principal amount and certain property-specific provisions.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:



	NEW SENIOR INVESTMENT GROUP INC.

	By:	/s/ Susan Givens
	Susan Givens
	Chief Executive Officer

	November 2, 2016

	By:	/s/ Bhairav Patel
	Bhairav Patel
	Interim Chief Financial Officer, Treasurer and Principal Accounting Officer

	November 2, 2016

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