Attached files

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EX-32.2 - SECTION 906 CFO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3222017q1.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3212017q1.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3122017q1.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Sabra Health Care REIT, Inc.sbraex3112017q1.htm
EX-12.1 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - Sabra Health Care REIT, Inc.sbraex1212017q1.htm
EX-10.7 - FORM OF AMENDMENT TO MASTER AGREEMENT - Sabra Health Care REIT, Inc.sbraex107genesisleaseamend.htm
EX-10.6 - FORM OF AMENDED AND RESTATED GUARANTY OF LEASE - Sabra Health Care REIT, Inc.sbraex106genesisguarantyof.htm
EX-10.5 - MEMORANDUM OF UNDERSTANDING SALE OR TRANSFER OR ADDITIONAL FACILITIES - Sabra Health Care REIT, Inc.sbraex105mousaletransferof.htm
EX-10.4 - AMENDED AND RESTATED MOU DISPOSITIONS - Sabra Health Care REIT, Inc.sbraex104dispositions.htm
EX-10.3 - AMENDED AND RESTATED MOU SALE - Sabra Health Care REIT, Inc.sbraex103mousale.htm
EX-10.2 - AMENDED AND RESTATED MOU BUY OUT - Sabra Health Care REIT, Inc.sbraex102moubuyout.htm
EX-10.1 - FORM OF AMENDMENT TO MASTER AGREEMENT - Sabra Health Care REIT, Inc.sbraex101genesislease.htm
EX-4.1 - SEVENTH SUPPLEMENTAL INDENTURE - Sabra Health Care REIT, Inc.sbraex41seventhsupplementa.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34950
 
 SABRA HEALTH CARE REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
 
27-2560479
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
18500 Von Karman Avenue, Suite 550
Irvine, CA 92612
(888) 393-8248
(Address, zip code and telephone number of Registrant)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  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 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
  
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of April 26, 2017, there were 65,410,668 shares of the registrant’s $0.01 par value Common Stock outstanding.



SABRA HEALTH CARE REIT, INC. AND SUBSIDIARIES
Index
 

1


References throughout this document to “Sabra,” “we,” “our,” “ours” and “us” refer to Sabra Health Care REIT, Inc. and its direct and indirect consolidated subsidiaries and not any other person.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q (this “10-Q”) contain “forward-looking” information as that term is defined by the Private Securities Litigation Reform Act of 1995. Any statements that do not relate to historical or current facts or matters are forward-looking statements. Examples of forward-looking statements include all statements regarding our expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, the expected amounts and timing of dividends and other distributions, projected expenses and capital expenditures, competitive position, growth opportunities, potential investments, plans and objectives for future operations, and compliance with and changes in governmental regulations. You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.
Our actual results may differ materially from those projected or contemplated by our forward-looking statements as a result of various factors, including, among others, the following:
our dependence on Genesis Healthcare, Inc. (“Genesis”) and certain wholly owned subsidiaries of Holiday AL Holdings LP (collectively, “Holiday”) until we are able to further diversify our portfolio;
our dependence on the operating success of our tenants;
the significant amount of and our ability to service our indebtedness;
covenants in our debt agreements that may restrict our ability to pay dividends, make investments, incur additional indebtedness and refinance indebtedness on favorable terms;
increases in market interest rates;
changes in foreign currency exchange rates;
our ability to raise capital through equity and debt financings;
the impact of required regulatory approvals of transfers of healthcare properties;
the effect of changing healthcare regulation and enforcement on our tenants and the dependence of our tenants on reimbursement from governmental and other third-party payors;
the relatively illiquid nature of real estate investments;
competitive conditions in our industry;
the loss of key management personnel or other employees;
the impact of litigation and rising insurance costs on the business of our tenants;
the effect of our tenants declaring bankruptcy or becoming insolvent;
uninsured or underinsured losses affecting our properties and the possibility of environmental compliance costs and liabilities;
the ownership limits and anti-takeover defenses in our governing documents and Maryland law, which may restrict change of control or business combination opportunities;
the impact of a failure or security breach of information technology in our operations;
our ability to find replacement tenants and the impact of unforeseen costs in acquiring new properties;
our ability to maintain our status as a real estate investment trust (“REIT”);
changes in tax laws and regulations affecting REITs; and
compliance with REIT requirements and certain tax and tax regulatory matters related to our status as a REIT.
Additional factors related to the proposed transaction with Care Capital Properties, Inc. (“CCP”) include, among others, the following:
the possibility that the parties may be unable to obtain required stockholder approvals or regulatory approvals or that other conditions to closing the transaction may not be satisfied, such that the transaction will not close or that the closing may be delayed;
the potential adverse effect on tenant and vendor relationships, operating results and business generally resulting from the proposed transaction;
the proposed transaction will require significant time, attention and resources, potentially diverting attention from the conduct of our business;
the amount of debt that will need to be refinanced or amended in connection with the proposed merger and the ability to do so on acceptable terms; 
changes in healthcare regulation and political or economic conditions; 
the anticipated benefits of the proposed transaction may not be realized;
the anticipated and unanticipated costs, fees, expenses and liabilities related to the transaction;

2


the outcome of any legal proceedings related to the transaction; and
the occurrence of any event, change or other circumstances that could give rise to the termination of the transaction agreement. 
We urge you to carefully consider these risks and review the additional disclosures we make concerning risks and other factors that may materially affect the outcome of our forward-looking statements and our future business and operating results, including those made in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 (our “2016 Annual Report on Form 10-K”) and in Part II, Item 1A, "Risk Factors" of this 10-Q, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”), including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. We caution you that any forward-looking statements made in this 10-Q are not guarantees of future performance, events or results, and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not intend, and we undertake no obligation, to update any forward-looking information to reflect events or circumstances after the date of this 10-Q or to reflect the occurrence of unanticipated events, unless required by law to do so.


3


PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)  
 
 
March 31, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net of accumulated depreciation of $297,405 and $282,812 as of March 31, 2017 and December 31, 2016, respectively
$
1,993,592

 
$
2,009,939

Loans receivable and other investments, net
96,489

 
96,036

Cash and cash equivalents
12,814

 
25,663

Restricted cash
9,151

 
9,002

Assets held for sale, net
2,073

 

Prepaid expenses, deferred financing costs and other assets, net
126,007

 
125,279

Total assets
$
2,240,126

 
$
2,265,919

 
 
 
 
Liabilities
 
 
 
Mortgage notes, net
$
159,905

 
$
160,752

Revolving credit facility
17,000

 
26,000

Term loans, net
336,592

 
335,673

Senior unsecured notes, net
688,879

 
688,246

Accounts payable and accrued liabilities
33,397

 
39,639

Total liabilities
1,235,773

 
1,250,310

 
 
 
 
Commitments and contingencies (Note 12)

 

 
 
 
 
Equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, 5,750,000 shares issued and outstanding as of March 31, 2017 and December 31, 2016
58

 
58

Common stock, $.01 par value; 125,000,000 shares authorized, 65,410,668 and 65,285,614 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
654

 
653

Additional paid-in capital
1,208,907

 
1,208,862

Cumulative distributions in excess of net income
(203,641
)
 
(192,201
)
Accumulated other comprehensive loss
(1,628
)
 
(1,798
)
Total Sabra Health Care REIT, Inc. stockholders’ equity
1,004,350

 
1,015,574

Noncontrolling interests
3

 
35

Total equity
1,004,353

 
1,015,609

Total liabilities and equity
$
2,240,126

 
$
2,265,919

See accompanying notes to condensed consolidated financial statements.

4


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(dollars in thousands, except per share data)  
(unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental income
$
57,224

 
$
55,312

Interest and other income
1,945

 
5,332

Resident fees and services
3,481

 
1,915

 
 
 
 
Total revenues
62,650

 
62,559

 
 
 
 
Expenses:
 
 
 
Depreciation and amortization
19,137

 
17,766

Interest
15,788

 
16,918

Operating expenses
2,420

 
1,412

General and administrative
6,873

 
4,714

Provision for doubtful accounts and loan losses
1,770

 
2,523

Impairment of real estate

 
29,811

 
 
 
 
Total expenses
45,988

 
73,144

 
 
 
 
Other income (expense):
 
 
 
Loss on extinguishment of debt

 
(556
)
Other income
2,129

 

Net loss on sale of real estate

 
(4,602
)
 
 
 
 
Total other income (expense)
2,129

 
(5,158
)
 
 
 
 
Net income (loss)
18,791

 
(15,743
)
 
 
 
 
Net loss attributable to noncontrolling interests
32

 
32

 
 
 
 
Net income (loss) attributable to Sabra Health Care REIT, Inc.
18,823

 
(15,711
)
 
 
 
 
Preferred stock dividends
(2,561
)
 
(2,561
)
 
 
 
 
Net income (loss) attributable to common stockholders
$
16,262

 
$
(18,272
)
 
 
 
 
Net income (loss) attributable to common stockholders, per:
 
 
 
 
 
 
 
Basic common share
$
0.25

 
$
(0.28
)
 
 
 
 
Diluted common share
$
0.25

 
$
(0.28
)
 
 
 
 
Weighted-average number of common shares outstanding, basic
65,354,649

 
65,248,203

 
 
 
 
Weighted-average number of common shares outstanding, diluted
65,920,486

 
65,248,203

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

5


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net income (loss)
$
18,791

 
$
(15,743
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation loss
(558
)
 
(573
)
Unrealized gain (loss) on cash flow hedges
728

 
(1,492
)
 
 
 
 
Total other comprehensive income (loss)
170

 
(2,065
)
 
 
 
 
Comprehensive income (loss)
18,961

 
(17,808
)
 
 
 
 
Comprehensive loss attributable to noncontrolling interest
32

 
32

 
 
 
 
Comprehensive income (loss) attributable to Sabra Health Care REIT, Inc.
$
18,993

 
$
(17,776
)
See accompanying notes to condensed consolidated financial statements.


6


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands, except per share data)  
(unaudited)
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
 
Balance, December 31, 2015
 
5,750,000

 
$
58

 
65,182,335

 
$
652

 
$
1,202,541

 
$
(142,148
)
 
$
(7,333
)
 
$
1,053,770

 
$
106

 
$
1,053,876

Net loss
 

 

 

 

 

 
(15,711
)
 

 
(15,711
)
 
(32
)
 
(15,743
)
Other comprehensive loss
 

 

 

 

 

 

 
(2,065
)
 
(2,065
)
 

 
(2,065
)
Amortization of stock-based compensation
 

 

 

 

 
1,938

 

 

 
1,938

 

 
1,938

Common stock issuance, net
 

 

 
90,883

 
1

 
(1,089
)
 

 

 
(1,088
)
 

 
(1,088
)
Preferred dividends
 

 

 

 

 

 
(2,561
)
 

 
(2,561
)
 

 
(2,561
)
Common dividends ($0.41 per share)
 

 

 

 

 

 
(26,859
)
 

 
(26,859
)
 

 
(26,859
)
Balance, March 31, 2016
 
5,750,000

 
$
58

 
65,273,218

 
$
653

 
$
1,203,390

 
$
(187,279
)
 
$
(9,398
)
 
$
1,007,424

 
$
74

 
$
1,007,498

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’
Equity
 
Noncontrolling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amounts
 
 
 
 
 
 
Balance, December 31, 2016
 
5,750,000

 
$
58

 
65,285,614

 
$
653

 
$
1,208,862

 
$
(192,201
)
 
$
(1,798
)
 
$
1,015,574

 
$
35

 
$
1,015,609

Net income (loss)
 

 

 

 

 

 
18,823

 

 
18,823

 
(32
)
 
18,791

Other comprehensive loss
 

 

 

 

 

 

 
170

 
170

 

 
170

Amortization of stock-based compensation
 

 

 

 

 
2,860

 

 

 
2,860

 

 
2,860

Common stock issuance, net
 

 

 
125,054

 
1

 
(2,815
)
 

 

 
(2,814
)
 

 
(2,814
)
Preferred dividends
 

 

 

 

 

 
(2,561
)
 

 
(2,561
)
 

 
(2,561
)
Common dividends ($0.42 per share)
 

 

 

 

 

 
(27,702
)
 

 
(27,702
)
 

 
(27,702
)
Balance, March 31, 2017
 
5,750,000

 
$
58

 
65,410,668

 
$
654

 
$
1,208,907

 
$
(203,641
)
 
$
(1,628
)
 
$
1,004,350

 
$
3

 
$
1,004,353

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

7


SABRA HEALTH CARE REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,

2017
 
2016
Cash flows from operating activities:

 

Net income (loss)
$
18,791

 
$
(15,743
)
Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
19,137

 
17,766

Non-cash interest income adjustments
26

 
222

Amortization of deferred financing costs
1,277

 
1,221

Stock-based compensation expense
2,588

 
1,818

Amortization of debt discount
28

 
27

Loss on extinguishment of debt

 
556

Straight-line rental income adjustments
(4,607
)
 
(5,593
)
Provision for doubtful accounts and loan losses
1,770

 
2,523

Change in fair value of contingent consideration
(822
)
 

Net loss on sales of real estate

 
4,602

Impairment of real estate

 
29,811

Changes in operating assets and liabilities:


 


Prepaid expenses and other assets
(1,414
)
 
(5,900
)
Accounts payable and accrued liabilities
(4,605
)
 
(5,430
)
Restricted cash
(731
)
 
(1,154
)

 
 

Net cash provided by operating activities
31,438

 
24,726

Cash flows from investing activities:

 

Origination and fundings of loans receivable
(508
)
 
(5,850
)
Origination and fundings of preferred equity investments
(51
)
 
(984
)
Additions to real estate
(520
)
 
(474
)
Repayment of loans receivable
118

 
8,874

Net proceeds from the sale of real estate

 
398


 
 

Net cash (used in) provided by investing activities
(961
)
 
1,964

Cash flows from financing activities:

 

Net repayments of revolving credit facility
(9,000
)
 
(57,000
)
Proceeds from term loans

 
69,360

Principal payments on mortgage notes
(1,021
)
 
(1,022
)
Payments of deferred financing costs
(109
)
 
(5,885
)
Issuance of common stock, net
(3,224
)
 
(1,274
)
Dividends paid on common and preferred stock
(29,993
)
 
(29,301
)

 
 

Net cash used in financing activities
(43,347
)
 
(25,122
)

 
 

Net (decrease) increase in cash and cash equivalents
(12,870
)
 
1,568

Effect of foreign currency translation on cash and cash equivalents
21

 
131

Cash and cash equivalents, beginning of period
25,663

 
7,434


 
 

Cash and cash equivalents, end of period
$
12,814

 
$
9,133

Supplemental disclosure of cash flow information:

 

Interest paid
$
18,127

 
$
19,459

See accompanying notes to condensed consolidated financial statements.

8


SABRA HEALTH CARE REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.     BUSINESS
Overview
Sabra Health Care REIT, Inc. (“Sabra” or the “Company”) was incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Sun”) and commenced operations on November 15, 2010 following Sabra's separation from Sun (the "Separation Date"). Sabra elected to be treated as a real estate investment trust (“REIT”) with the filing of its U.S. federal income tax return for the taxable year beginning January 1, 2011. Sabra believes that it has been organized and operated, and it intends to continue to operate, in a manner to qualify as a REIT. Sabra’s primary business consists of acquiring, financing and owning real estate property to be leased to third party tenants in the healthcare sector. Sabra primarily generates revenues by leasing properties to tenants and operators throughout the United States and Canada. Sabra owns substantially all of its assets and properties and conducts its operations through Sabra Health Care Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), of which Sabra is the sole general partner and Sabra's wholly owned subsidiaries are currently the only limited partners, or by subsidiaries of the Operating Partnership. The Company’s investment portfolio is primarily comprised of skilled nursing/transitional care facilities, senior housing facilities, an acute care hospital leased to third-party operators; senior housing facilities operated by third-party property managers pursuant to property management agreements (“Managed Properties”); investments in loans receivable; and preferred equity investments.
2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Sabra and its wholly owned subsidiaries as of March 31, 2017 and December 31, 2016 and for the periods ended March 31, 2017 and 2016. All significant intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results for such periods. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
GAAP requires the Company to identify entities for which control is achieved through voting rights or other means and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. If the Company were determined to be the primary beneficiary of the VIE, the Company would consolidate investments in the VIE. The Company may change its original assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity's equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary.
The Company identifies the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis.

9


As of March 31, 2017, the Company determined it was the primary beneficiary of two variable interest entities—a senior housing facility and an exchange accommodation titleholder variable interest entity—and has consolidated the operations of these facilities in the accompanying condensed consolidated financial statements. As of March 31, 2017, the Company determined that operations of the entities were not material to the Company’s results of operations, financial condition or cash flows.
As it relates to investments in loans, in addition to the Company's assessment of VIEs and whether the Company is the primary beneficiary of those VIEs, the Company evaluates the loan terms and other pertinent facts to determine if the loan investment should be accounted for as a loan or as a real estate joint venture. If an investment has the characteristics of a real estate joint venture, including if the Company participates in the majority of the borrower's expected residual profit, the Company would account for the investment as an investment in a real estate joint venture and not as a loan investment. Expected residual profit is defined as the amount of profit, whether called interest or another name, such as an equity kicker, above a reasonable amount of interest and fees expected to be earned by a lender. At March 31, 2017, none of the Company's investments in loans are accounted for as real estate joint ventures.
As it relates to investments in joint ventures, the Company assesses any limited partners' rights and their impact on the presumption of control of the limited partnership by any single partner. The Company reassesses its determination of which entity controls the joint venture if: there is a change to the terms or in the exercisability of the rights of any partners, the sole general partner increases or decreases its ownership of limited partnership interests, or there is an increase or decrease in the number of outstanding limited partnership interests. The Company also applies this guidance to managing member interests in limited liability companies.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Recently Issued Accounting Standards Update
Between May 2014 and May 2016, the FASB issued three Accounting Standards Update (“ASU”) changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) and (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within, beginning after December 15, 2017. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08 and ASU 2016-12, assumed the deferred effective date enforced by ASU 2015-14. Early adoption of the Revenue ASUs is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in the Revenue ASUs using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the second half of 2017. As the primary source of revenue for the Company is generated through leasing arrangements, which are excluded from the Revenue ASUs, the Company expects that the impact of the Revenue ASUs to the Company will be limited to the recognition of non-lease revenue, such as certain resident fees in its Managed Properties structures (a portion of which are not generated through leasing arrangements) and therefore are not expected to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes guidance related to accounting for leases. ASU 2016-02 updates guidance around the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The objective of ASU 2016-02 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. ASU 2016-02 does not fundamentally change lessor accounting, however, some changes have been made to lessor accounting to conform and align that guidance with the lessee

10


guidance and other areas within GAAP. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements when adopted.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. To be a business without outputs, there will now need to be an organized workforce. ASU 2017-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-01 on October 1, 2016 on a prospective basis. The Company expects that the majority of its future acquisitions of real estate will be accounted for as asset acquisitions under the new guidance. This adoption will impact how the Company accounts for acquisition pursuit costs and contingent consideration which may result in lower expensed acquisition pursuit costs and eliminate fair value adjustments related to future contingent consideration arrangements.

3.    REAL ESTATE PROPERTIES HELD FOR INVESTMENT
The Company’s real estate properties held for investment (excluding properties classified as held for sale as of March 31, 2017) consisted of the following (dollars in thousands):
As of March 31, 2017
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Transitional Care
 
96

 
10,689

 
$
1,038,815

 
$
(195,942
)
 
$
842,873

Senior Housing(1)
 
75

 
7,109

 
1,032,562

 
(82,451
)
 
950,111

Managed Properties(1)
 
10

 
888

 
157,573

 
(7,901
)
 
149,672

Acute Care Hospital
 
1

 
70

 
61,640

 
(10,849
)
 
50,791

 
 
182

 
18,756

 
2,290,590

 
(297,143
)
 
1,993,447

Corporate Level
 
 
 
 
 
407

 
(262
)
 
145

 
 
 
 
 
 
$
2,290,997

 
$
(297,405
)
 
$
1,993,592

As of December 31, 2016
Property Type
 
Number of
Properties
 
Number of
Beds/Units
 
Total
Real Estate
at Cost
 
Accumulated
Depreciation
 
Total
Real Estate
Investments, Net
Skilled Nursing/Transitional Care
 
97

 
10,819

 
$
1,042,754

 
$
(190,038
)
 
$
852,716

Senior Housing(1)
 
83

 
7,855

 
1,153,739

 
(80,449
)
 
1,073,290

Managed Properties
 
2

 
134

 
34,212

 
(1,682
)
 
32,530

Acute Care Hospital
 
1

 
70

 
61,640

 
(10,387
)
 
51,253

 
 
183

 
18,878

 
2,292,345

 
(282,556
)
 
2,009,789

Corporate Level
 
 
 
 
 
406

 
(256
)
 
150

 
 
 
 
 
 
$
2,292,751

 
$
(282,812
)
 
$
2,009,939



11


 
March 31, 2017
 
December 31, 2016
Building and improvements
$
1,981,783

 
$
1,983,769

Furniture and equipment
85,622

 
85,196

Land improvements
3,475

 
3,744

Land
220,117

 
220,042

 
2,290,997

 
2,292,751

Accumulated depreciation
(297,405
)
 
(282,812
)
 
$
1,993,592

 
$
2,009,939

(1) On March 1, 2017, the Company transitioned eight senior housing facilities into a managed property structure whereby the Company owns the operations of the facilities and the facilities are operated by a third-party property manager.
Contingent Consideration Arrangements
In connection with three of its real estate acquisitions, the Company entered into contingent consideration arrangements. Under the contingent consideration arrangements, the Company may pay out additional amounts based on incremental value created through the improvement of operations of the acquired facility (a contingent consideration liability). The estimated value of the contingent consideration liabilities at the time of purchase was $3.2 million. The contingent consideration amounts would be determined based on portfolio performance and the facility achieving certain performance hurdles during 2017. During the three months ended March 31, 2017, one earn-out arrangement expired and resulted in a $0 payout and a second earn-out arrangement was terminated in connection with the transition of the eight senior housing facilities to Managed Properties. To determine the value of the remaining contingent consideration arrangement, the Company used significant inputs not observable in the market to estimate the contingent consideration, made assumptions regarding the probability of the facility achieving the incremental value and then applied an appropriate discount rate. As of March 31, 2017, based on the performance of this facility, the contingent consideration liability had an estimated value of $0. During the three months ended March 31, 2017, the Company recorded an adjustment to decrease the contingent consideration liability by $0.8 million and included this amount in other income on the accompanying condensed consolidated statements of income (loss).
Operating Leases
As of March 31, 2017, nearly all of the Company’s real estate properties (excluding 10 Managed Properties) were leased under triple-net operating leases with expirations ranging from one to 16 years. As of March 31, 2017, the leases had a weighted-average remaining term of nine years. The leases include provisions to extend the lease terms and other negotiated terms and conditions. The Company, through its subsidiaries, retains substantially all of the risks and benefits of ownership of the real estate assets leased to the tenants. In addition, the Company may receive additional security under these operating leases in the form of letters of credit and security deposits from the lessee or guarantees from the parent of the lessee. Security deposits received in cash related to tenant leases are included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets and totaled $2.0 million as of March 31, 2017 and $2.7 million as of December 31, 2016. As of March 31, 2017, the Company had a $3.3 million reserve for unpaid cash rents and a $1.9 million reserve associated with accumulated straight-line rental income. As of December 31, 2016, the Company had a $3.2 million reserve for unpaid cash rents and a $3.7 million reserve associated with accumulated straight-line rental income.
The following table provides information regarding significant tenant relationships as of March 31, 2017 (dollars in thousands):
 
 
 
 
Three Months Ended March 31, 2017
 
 
Number of Investments
 
Rental Revenue
 
% of Total Revenue
 
 
 
 
 
 
 
Genesis Healthcare, Inc.
 
78

 
$
19,955

 
31.9
%
Holiday AL Holdings, LP
 
21

 
9,813

 
15.7

NMS Healthcare
 
5

 
7,505

 
12.0

 
 
 
 
 
 
 
The Company has entered into memoranda of understanding with Genesis to market for sale 35 skilled nursing facilities and the Company has made certain other lease and corporate guarantee amendments for the remaining 43 facilities leased to Genesis. On April 1, 2017, the Company completed the sale of one of these facilities. Marketing of the remaining 34 facilities is ongoing and is expected to be completed in the second half of 2017; provided, however that there can be no assurances that the Company will successfully complete these sales on the terms or timing contemplated by the memoranda of understanding, or at all.

12


The Company monitors the creditworthiness of its tenants by reviewing credit ratings (if available) and evaluating the ability of the tenants to meet their lease obligations to the Company based on the tenants’ financial performance, including the evaluation of any parent guarantees (or the guarantees of other related parties) of tenant lease obligations. Because formal credit ratings may not be available for most of the Company’s tenants, the primary basis for the Company’s evaluation of the credit quality of its tenants (and more specifically the tenants’ ability to pay their rent obligations to the Company) is the tenants’ lease coverage ratios. These coverage ratios include earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”) to rent and earnings before interest, taxes, depreciation, amortization, rent and management fees (“EBITDARM”) to rent at the lease level and consolidated EBITDAR to total fixed charges at the parent guarantor level when such a guarantee exists. The Company obtains various financial and operational information from its tenants each month and reviews this information in conjunction with the above-described coverage metrics to identify financial and operational trends, evaluate the impact of the industry's operational and financial environment (including the impact of government reimbursement), and evaluate the management of the tenant’s operations. These metrics help the Company identify potential areas of concern relative to its tenants’ credit quality and ultimately the tenants’ ability to generate sufficient liquidity to meet its obligations, including its obligation to continue to pay the rent due to the Company.
As of March 31, 2017, the future minimum rental payments from the Company’s properties held for investment under non-cancelable operating leases was as follows (in thousands):
April 1, 2017 through December 31, 2017
$
155,591

2018
212,860

2019
219,300

2020
225,378

2021
195,307

Thereafter
1,115,867

 
$
2,124,303

 
 
 
4.    ASSET HELD FOR SALE AND DISPOSITIONS
Asset Held for Sale
As of March 31, 2017, the Company determined that one skilled nursing/transitional care facility, with a net book value of $2.1 million, met the criteria to be classified as held for sale. On April 1, 2017, the facility was sold for aggregate consideration of $6.1 million.
Dispositions
During the three months ended March 31, 2016, the Company completed the sale of one skilled nursing/transitional care facility for aggregate consideration of $0.4 million after selling expenses of $0.1 million. The net book value of this facility was $5.0 million, which resulted in a $4.6 million loss on sale. The Company sold no facilities during the three months ended March 31, 2017.
Excluding the net loss on sale, the Company recognized $0.1 million of net income from the asset held for sale and the sold facility during each of the three months ended March 31, 2017 and 2016. Neither the determination of the held for sale classification nor the sale of the facility above represent a strategic shift that has or will have a major effect on the Company's operations and financial results and therefore the results of operations attributable to this facility have remained in continuing operations.


13


5.    LOANS RECEIVABLE AND OTHER INVESTMENTS
As of March 31, 2017 and December 31, 2016, the Company’s loans receivable and other investments consisted of the following (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
Investment
 
Quantity as of March 31, 2017
 
Facility Type
 
Principal Balance as of March 31, 2017 (1)
 
Book Value as of
March 31, 2017
 
Book Value as of
December 31, 2016
 
Weighted Average Contractual Interest Rate / Rate of Return
 
Weighted Average Annualized Effective Interest Rate / Rate of Return
 
Maturity Date as of March 31, 2017
Loans Receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage
 
4

 
Skilled Nursing / Senior Housing
 
$
38,308

 
$
38,341

 
$
38,262

 
9.1
%
 
8.9
%
 
11/07/16- 04/30/18
Construction
 
1

 
Senior Housing
 
1,301

 
1,351

 
842

 
8.0
%
 
7.7
%
 
03/31/21
Mezzanine
 
1

 
Senior Housing
 
9,640

 
9,653

 
9,656

 
11.0
%
 
10.8
%
 
08/31/17
Pre-development
 
3

 
Senior Housing
 
4,085

 
4,094

 
4,023

 
9.0
%
 
7.2
%
 
01/28/17-09/09/17
Debtor-in-possession
 
1

 
Acute Care Hospital
 
695

 
695

 
813

 
5.0
%
 
5.0
%
 
NA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10

 
 
 
54,029

 
54,134

 
53,596

 
9.4
%
 
9.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan loss reserve
 
 
 

 
(4,096
)
 
(2,750
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
54,029

 
$
50,038

 
$
50,846

 
 
 
 
 
 
Other Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Equity
 
12

 
Skilled Nursing / Senior Housing
 
46,079

 
46,451

 
45,190

 
12.9
%
 
12.9
%
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
22

 
 
 
$
100,108

 
$
96,489

 
$
96,036

 
11.0
%
 
10.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Principal balance includes amounts funded and accrued but unpaid interest / preferred return and excludes capitalizable fees.
As of March 31, 2017, the Company considered five loan receivable investments to be impaired. The principal balances of the impaired loans were $36.3 million and $36.4 million as of March 31, 2017 and December 31, 2016, respectively. The Company recorded a provision for loan losses of $1.5 million related to three loan receivable investments during the three months ended March 31, 2017. As of March 31, 2017, five loans receivable investments totaling $36.3 million were on nonaccrual status. During the three months ended March 31, 2017, the Company reduced its portfolio-based loan loss reserve by $0.2 million. The Company's specific loan loss reserve and portfolio-based loan loss reserve were $3.9 million and $0.2 million, respectively, as of March 31, 2017. The Company's specific loan loss reserve and portfolio-based loan loss reserve were $2.3 million and $0.4 million, respectively, as of December 31, 2016.

6.    DEBT
Mortgage Indebtedness
The Company’s mortgage notes payable consist of the following (dollars in thousands):
Interest Rate Type
Book Value as of
March 31, 2017
(1)
 
Book Value as of
December 31, 2016
 (1)
 
Weighted Average
Effective Interest Rate at
March 31, 2017
(2)
 
Maturity
Date
Fixed Rate
$
162,762

 
$
163,638

 
3.87
%
 
December 2021 - 
August 2051

(1) Principal balance does not include deferred financing costs of $2.9 million as of March 31, 2017 and December 31, 2016.
(2) Weighted average effective interest rate includes private mortgage insurance.

14


Senior Unsecured Notes
The Company’s senior unsecured notes consist of the following (dollars in thousands):
 
 
 
 
Principal Balance as of
Title
 
Maturity Date
 
March 31, 2017 (1)
 
December 31, 2016 (1)
 
 
 
 
 
 
 
5.5% senior unsecured notes due 2021 (“2021 Notes”)

 
February 1, 2021
 
$
500,000

 
$
500,000

5.375% senior unsecured notes due 2023 (“2023 Notes”)

 
June 1, 2023
 
200,000

 
200,000

 
 
 
 
 
 
 
 
 
 
 
$
700,000

 
$
700,000

 
 
 
 
 
 
 
(1) Principal balance does not include discount of $0.5 million as of March 31, 2017 and December 31, 2016, and also excludes deferred financing costs of $10.6 million and $11.2 million as of March 31, 2017 and December 31, 2016, respectively.
The 2021 Notes and the 2023 Notes (collectively, the “Senior Notes”) were issued by the Operating Partnership and Sabra Capital Corporation, wholly owned subsidiaries of the Company (the “Issuers”). The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year and the 2023 Notes accrue interest at a rate of 5.375% per annum payable semiannually on June 1 and December 1 of each year.
The obligations under the Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by Sabra and certain of Sabra’s other existing and, subject to certain exceptions, future material subsidiaries; provided, however, that such guarantees are subject to release under certain customary circumstances.  See Note 11, “Summarized Condensed Consolidating Information” for additional information concerning the circumstances pursuant to which the guarantors will be automatically and unconditionally released from their obligations under the guarantees.
The indentures governing the Senior Notes (the “Senior Notes Indentures”) include customary events of default and require the Company to comply with specified restrictive covenants. As of March 31, 2017, the Company was in compliance with all applicable financial covenants under the Senior Notes Indentures.
Revolving Credit Facility and Term Loans
On January 14, 2016, the Operating Partnership and Sabra Canadian Holdings, LLC (together, the “Borrowers”), entered into a third amended and restated unsecured credit facility (the “Credit Facility”).

The Credit Facility includes a revolving credit facility (the “Revolving Credit Facility”) and U.S. dollar and Canadian dollar term loans (collectively, the “Term Loans”). The Revolving Credit Facility provides for a borrowing capacity of $500.0 million and, in addition, increases the Company's U.S. dollar and Canadian dollar term loans to $245.0 million and CAD $125.0 million, respectively. Further, up to $125.0 million of the Revolving Credit Facility may be used for borrowings in certain foreign currencies. The Credit Facility also contains an accordion feature that can increase the total available borrowings to $1.25 billion, subject to terms and conditions. In addition, the Canadian dollar term loan was re-designated as a net investment hedge (see Note 7, “Derivative and Hedging Instruments” for further information).
The Revolving Credit Facility has a maturity date of January 14, 2020, and includes two six-month extension options. The Term Loans have a maturity date of January 14, 2021.
As of March 31, 2017, there was $17.0 million outstanding under the Revolving Credit Facility and $483.0 million available for borrowing.
Borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership's option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the "Base Rate"). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the credit agreement, and will range from 1.80% to 2.40% per annum for LIBOR based borrowings and 0.80% to 1.40% per annum for borrowings at the Base Rate. As of March 31, 2017, the interest rate on the Revolving Credit Facility was 2.98%. In addition, the Operating Partnership pays an unused facility fee to the lenders equal to 0.25% or 0.30% per annum, which is determined by usage under the Revolving Credit Facility.
    
The U.S. dollar term loan bears interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership’s option, either (a) LIBOR or (b) the Base Rate. The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the credit agreement, and will range from 1.75% to 2.35% per annum for LIBOR based borrowings and 0.75% to 1.35% per annum for borrowings at the Base Rate. The Canadian dollar

15


term loan bears interest on the outstanding principal amount at a rate equal to the Canadian Dollar Offer Rate (“CDOR”) plus 1.75% to 2.35% depending on the Consolidated Leverage Ratio.

On June 10, 2015, the Company entered into an interest rate swap agreement to fix the CDOR portion of the interest rate for this CAD $90.0 million term loan at 1.59%. In addition, CAD $90.0 million of the Canadian dollar term loan was designated as a net investment hedge (see Note 7, “Derivative and Hedging Instruments” for further information). On August 10, 2016, the Company entered into two interest rate swap agreements to fix the LIBOR portion of the interest rate for its $245.0 million U.S. dollar term loan at 0.90% and one interest rate swap agreement to fix the CDOR portion on CAD $35.0 million of its Canadian dollar term loan at 0.93%.

In the event that Sabra achieves investment grade ratings from at least two of S&P, Moody’s and/or Fitch, the Operating Partnership can elect to reduce the applicable percentage for LIBOR or Base Rate borrowings. If the Operating Partnership makes this election, the applicable percentage for borrowings will vary based on the Debt Ratings at each Pricing Level, as defined in the credit agreement, and will range from 0.90% to 1.70% per annum for LIBOR based borrowings under the Revolving Credit Facility, 1.00% to 1.95% per annum for LIBOR or CDOR based borrowings under the Term Loans, 0.00% to 0.70% per annum for borrowings at the Base Rate under the Revolving Credit Facility, and 0.00% to 0.95% per annum for borrowings at the Base Rate under the U.S. dollar term loan. In addition, should the Operating Partnership elect this option, the unused fee will no longer apply and a facility fee ranging between 0.125% and 0.300% per annum will take effect based on the borrowing capacity regardless of amounts outstanding under the Revolving Credit Facility.
The obligations of the Borrowers under the Credit Facility are guaranteed by Sabra and certain subsidiaries of Sabra.
The Credit Facility contains customary covenants that include restrictions or limitations on the ability to make acquisitions and other investments, pay dividends, incur additional indebtedness, engage in non-healthcare related business activities, enter into transactions with affiliates and sell or otherwise transfer certain assets as well as customary events of default. The Credit Facility also requires Sabra, through the Operating Partnership, to comply with specified financial covenants, which include a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum tangible net worth requirement. As of March 31, 2017, the Company was in compliance with all applicable financial covenants under the Credit Facility.
Interest Expense
During the three months ended March 31, 2017 and 2016, the Company incurred interest expense of $15.8 million and $16.9 million, respectively. Interest expense includes financing costs amortization of $1.3 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, the Company had $9.6 million and $13.8 million, respectively, of accrued interest included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.
Maturities
The following is a schedule of maturities for the Company’s outstanding debt as of March 31, 2017 (in thousands): 
 
 
Mortgage
Indebtedness 
 
Revolving Credit
    Facility (1)
 
Term Loans
 
Senior Notes
 
Total
April 1, 2017 through December 31, 2017
 
$
3,111

 
$

 
$

 
$

 
$
3,111

2018
 
4,270

 

 

 

 
4,270

2019
 
4,412

 

 

 

 
4,412

2020
 
4,560

 
17,000

 

 

 
21,560

2021
 
19,529

 

 
338,775

 
500,000

 
858,304

Thereafter
 
126,880

 

 

 
200,000

 
326,880

Total Principal Balance
 
162,762

 
17,000

 
338,775

 
700,000

 
1,218,537

Discount
 

 

 

 
(487
)
 
(487
)
Deferred financing costs
 
(2,857
)
 

 
(2,183
)
 
(10,634
)
 
(15,674
)
Total Debt, net
 
$
159,905

 
$
17,000

 
$
336,592

 
$
688,879

 
$
1,202,376

(1) Revolving Credit Facility is subject to two six-month extension options.


16


7.    DERIVATIVE AND HEDGING INSTRUMENTS
The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign exchange rates. The Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and foreign exchange rates. The Company’s derivative financial instruments are used to manage differences in the amount of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value in the Company’s functional currency, the U.S. dollar, of the Company’s investment in foreign operations, the cash receipts and payments related to these foreign operations and payments of interest and principal under Canadian dollar denominated debt. The Company enters into derivative financial instruments to protect the value of its foreign investments and fix a portion of the interest payments for certain debt obligations. The Company does not enter into derivatives for speculative purposes.
Cash Flow Hedges
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Approximately $3.0 million of losses, which are included in accumulated other comprehensive loss, as of March 31, 2017, are expected to be reclassified into earnings in the next 12 months. In 2016 the Company terminated its interest rate cap, generating cash proceeds of $0.3 million. The balance of the loss in other comprehensive income will be reclassified to earnings through 2019.
Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on investments it holds in Canada. The Company uses cross currency interest rate swaps to hedge its exposure to changes in foreign exchange rates on these foreign investments.
The following presents the notional amount of derivatives instruments as of the dates indicated (in thousands):    
 
 
March 31, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:

 
 
 
 
Denominated in U.S. Dollars
 
$
245,000

 
$
245,000

Denominated in Canadian Dollars
 
$
125,000

 
$
125,000

 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
55,889

 
$
56,300

 
 
 
 
 
Financial instrument designated as net investment hedge:
 
 
 
 
Denominated in Canadian Dollars
 
$
125,000

 
$
125,000

 
 
 
 
 
Derivatives not designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
411

 
$

 
 
 
 
 


17


Derivative and Financial Instruments Designated as Hedging Instruments
The following is a summary of the derivative and financial instruments designated as hedging instruments held by the Company at March 31, 2017 and December 31, 2016 (in thousands):    
 
 
 
 
 
 
Fair Value
 
Maturity Dates
 
 
Type
 
Designation
 
Count
 
March 31, 2017
 
December 31, 2016
 
 
Balance Sheet Location
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Cash Flow
 
3

 
8,505

 
8,083

 
2021
 
Prepaid expenses, deferred financing costs and other assets, net
Cross currency interest rate swaps
 
Net Investment
 
2

 
2,178

 
3,157

 
2025
 
Prepaid expenses, deferred financing costs and other assets, net
 
 
 
 
 
 
$
10,683

 
$
11,240

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Cash Flow
 
1

 
$
747

 
$
716

 
2020 - 2021
 
Accounts payable and accrued liabilities
CAD Term Loan
 
Net Investment
 
1

 
93,775

 
93,000

 
2020
 
Term loans, net
 
 
 
 
 
 
$
94,522

 
$
93,716

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The following presents the effect of the Company’s derivative and financial instruments designated as hedging instruments on the condensed consolidated statements of income and the condensed consolidated statements of equity for the three months ended March 31, 2017:
 
 
Gain (Loss) Recognized in Other Comprehensive Income
(Effective Portion)
Income Statement Location
 
 
Three Months Ended March 31,
 
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
Interest Rate Products
 
$
259

 
$
(1,540
)
 
Interest Expense
Net Investment Hedges:
 
 
 
 
 
 
Foreign Currency Products
 
(916
)
 
(2,503
)
 
N/A
CAD Term Loan
 
(775
)
 
7,138

 
N/A
 
 
 
 
 
 
 
 
 
$
(1,432
)
 
$
3,095

 
 
 
 
 
 
 
 
 

 
 
Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
Income Statement Location
 
 
Three Months Ended March 31,
 
 
 
 
2017
 
2016
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
Interest Rate Products
 
$
(470
)
 
$
(173
)
 
Interest Expense
Net Investment Hedges:
 
 
 
 
 
 
Foreign Currency Products
 

 

 
N/A
CAD Term Loan
 

 

 
N/A
 
 
 
 
 
 
 
 
 
$
(470
)
 
$
(173
)
 
 
 
 
 
 
 
 
 
During the three months ended March 31, 2017, the Company determined that a portion of a cash flow hedge was ineffective and recognized $0.1 million of unrealized losses related to its interest rate swaps to other income in the condensed consolidated statements of income (loss). During the three months ended March 31, 2016, the Company recorded no hedge ineffectiveness in the condensed consolidated statements of income (loss).



18


Derivatives Not Designated as Hedging Instruments
As of March 31, 2017, the Company had one outstanding cross currency interest rate swap not designated as a hedging instrument in an asset position with a fair value of $16,000 and included this amount in prepaid expenses, deferred financing costs and other assets, net on the condensed consolidated balance sheets. During the three months ended March 31, 2017, the Company recorded $7,000 of other expense related to this derivative not designated as a hedging instrument. As of December 31, 2016, the Company's derivatives were all designated as hedging instruments.
Offsetting Derivatives
The Company enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2017 and December 31, 2016:
 
 
As of March 31, 2017
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
 
Gross Amounts of Recognized Assets / Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets / Liabilities presented in the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Offsetting Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
$
10,908

 
$

 
$
10,908

 
$
(996
)
 
$

 
$
9,912

Offsetting Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
$
996

 
$

 
$
996

 
$
(996
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
 
Gross Amounts of Recognized Assets / Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets / Liabilities presented in the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Offsetting Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
$
11,240

 
$

 
$
11,240

 
$
(716
)
 
$

 
$
10,524

Offsetting Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
$
716

 
$

 
$
716

 
$
(716
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 

Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
As of March 31, 2017, the Company had no derivatives with a fair value in a net liability position.

8.    FAIR VALUE DISCLOSURES

Financial Instruments

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments.

Financial instruments for which actively quoted prices or pricing parameters are available and whose markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments whose markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The carrying values of cash and cash equivalents, restricted cash, accounts payable,

19


accrued liabilities and the Credit Facility are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for other financial instruments are derived as follows:

Loans receivable: These instruments are presented in the accompanying condensed consolidated balance sheets at their amortized cost and not at fair value. The fair value of the loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans receivable, the underlying collateral value and other credit enhancements. As such, the Company classifies these instruments as Level 3.

Preferred equity investments: These instruments are presented in the accompanying condensed consolidated balance sheets at their cost and not at fair value. The fair value of the preferred equity investments were estimated using an internal valuation model that considered the expected future cash flows for the preferred equity investment, the underlying collateral value and other credit enhancements. As such, the Company classifies these instruments as Level 3.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying condensed consolidated balance sheets. The Company estimates the fair value of derivative instruments, including its interest rate swap and cross currency swaps, using the assistance of a third party using inputs that are observable in the market, which includes forward yield curves and other relevant information. Although the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative financial instruments utilize level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the Company has determined that its derivative financial instruments valuations in their entirety are classified in level 2 of the fair value hierarchy.

Senior Notes: These instruments are presented in the accompanying condensed consolidated balance sheets at their outstanding principal balance, net of unamortized deferred financing costs and premiums (discounts) and not at fair value. The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades. As such, the Company classifies these instruments as Level 2.

Mortgage indebtedness: These instruments are presented in the accompanying condensed consolidated balance sheets at their outstanding principal balance, net of unamortized deferred financing costs and premiums (discounts) and not at fair value. The fair values of the Company’s mortgage notes payable were estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. As such, the Company classifies these instruments as Level 3.
The following are the face values, carrying amounts and fair values of the Company’s financial instruments as of March 31, 2017 and December 31, 2016 whose carrying amounts do not approximate their fair value (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount (1)
 
Face
Value
(2)
 
Fair
Value
 
Carrying
Amount
(1)
 
Face
Value
(2)
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
54,134

 
$
54,029

 
$
50,069

 
$
53,596

 
$
53,484

 
$
51,914

Preferred equity investments
46,451

 
46,079

 
47,363

 
45,190

 
44,882

 
48,332

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Senior Notes
688,879

 
700,000

 
707,500

 
688,246

 
700,000

 
709,500

Mortgage indebtedness
159,905

 
162,762

 
149,270

 
160,752

 
163,638

 
150,091

 
(1) Carrying amounts represent the book value of financial instruments, including unamortized premiums (discounts), but excluding related reserves.
(2) Face value represents amounts contractually due under the terms of the respective agreements.



20


The Company determined the fair value of financial instruments as of March 31, 2017 whose carrying amounts do not approximate their fair value with valuation methods utilizing the following types of inputs (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Loans receivable
$
50,069

 
$

 
$

 
$
50,069

Preferred equity investments
47,363

 

 

 
47,363

Financial liabilities:
 
 
 
 
 
 
 
Senior Notes
707,500

 

 
707,500

 

Mortgage indebtedness
149,270

 

 

 
149,270

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company at the applicable dates and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of fair value at a future date could be materially different.
Items Measured at Fair Value on a Recurring Basis
During the three months ended March 31, 2017, the Company recorded the following amounts measured at fair value (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring Basis:
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Interest rate swap
$
8,505

 
$

 
$
8,505

 
$

Cross currency swap
2,194

 

 
2,194

 

Financial liabilities:
 
 
 
 
 
 
 
Interest rate swap
747

 

 
747

 

The Company entered into contingent consideration arrangements as a result of three acquisitions of real estate (see Note 3, “Real Estate Properties Held for Investment”). During the three months ended March 31, 2017, one earn-out arrangement expired and resulted in a $0 payout and a second earn-out arrangement was terminated in connection with the transition of the eight senior housing facilities to Managed Properties. In order to determine the fair value of the Company’s remaining contingent consideration arrangements, the Company used significant inputs not observable in the market to estimate the contingent consideration. The Company used financial information provided by the facility to estimate the possible payout. As of March 31, 2017, the total contingent consideration liability had an estimated value of $0.
The following reconciliation provides the details of activity for contingent consideration liability recorded at fair value using Level 3 inputs (in thousands):
Balance as of December 31, 2016
$
818

Decrease in contingent consideration liability
(822
)
Foreign currency translation
4

Balance as of March 31, 2017
$

 
 
A corresponding amount equal to the decrease in the contingent consideration liability was included as other income on the accompanying consolidated statements of income (loss) for the three months ended March 31, 2017.


21


9.    EQUITY
Preferred Stock
On March 21, 2013, the Company completed an underwritten public offering of 5.8 million shares of 7.125% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a price of $25.00 per share, pursuant to an effective registration statement. The Company received net proceeds of $138.3 million from the offering, after deducting underwriting discounts and other offering expenses. The Company classified the par value as preferred equity on its condensed consolidated balance sheets with the balance of the liquidation preference, net of any issuance costs, recorded as an increase in paid-in capital.
The holders of the Company’s Series A Preferred Stock rank senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up of its affairs. At March 31, 2017, there were no dividends in arrears.
The Series A Preferred Stock does not have a stated maturity date, but the Company may redeem the Series A Preferred Stock on or after March 21, 2018, for $25.00 per share, plus any accrued and unpaid dividends. The Company may redeem the Series A Preferred Stock prior to March 21, 2018, in limited circumstances to preserve its status as a REIT or pursuant to a specified change of control. Upon the occurrence of a specified change of control, each holder of Series A Preferred Stock will have the right to convert some or all of the shares of Series A Preferred Stock held by such holder into a number of shares of the Company’s common stock equivalent to $25.00 plus accrued and unpaid dividends, but not to exceed a cap of 1.7864 shares of common stock per share of Series A Preferred Stock (subject to certain adjustments).
Common Stock 
The following table lists the cash dividends on common stock declared and paid by the Company during the three months ended March 31, 2017:
 
Declaration Date
 
Record Date
 
Amount Per Share
 
Dividend Payable Date
February 3, 2017
 
February 15, 2017
 
$
0.42

 
February 28, 2017
During the three months ended March 31, 2017, the Company issued 0.1 million shares of common stock as a result of restricted stock unit vestings and in connection with amounts payable under the Company's 2016 Bonus Plan pursuant to an election by certain participants to receive their bonus in the form of an equity award.
Upon any payment of shares as a result of restricted stock unit vestings, the participant is required to satisfy the related tax withholding obligation. The 2009 Performance Incentive Plan provides that the Company has the right at its option to (a) require the participant to pay such tax withholding or (b) reduce the number of shares to be delivered by a number of shares necessary to satisfy the related minimum applicable statutory tax withholding obligation. During the three months ended March 31, 2017, pursuant to advance elections made by certain participants, the Company incurred $2.6 million in tax withholding obligations on behalf of its employees that were satisfied through a reduction in the number of shares delivered to those participants.
Accumulated Other Comprehensive Loss
The following is a summary of the Company’s accumulated other comprehensive loss (in thousands):
 
 
March 31, 2017
 
December 31, 2016
Foreign currency translation loss
 
$
(3,625
)
 
$
(3,067
)
Unrealized gains on cash flow hedges
 
1,997

 
1,269

 
 
 
 
 
Total accumulated other comprehensive loss
 
$
(1,628
)
 
$
(1,798
)
 
 
 
 
 

22



10.    EARNINGS PER COMMON SHARE
The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016 (in thousands, except share and per share amounts):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Numerator
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
16,262

 
$
(18,272
)
 
 
 
 
 
Denominator
 
 
 
 
Basic weighted average common shares and common equivalents