Acquisitions, Dispositions and Other Significant Transactions

The Company completed dispositions, through sales and lease terminations, of 165 communities during the period from January 1, 2016 through December 31, 2017. The Company's consolidated financial statements include resident fee revenue of $172.6 million, $543.3 million, and $572.1 million, facility operating expenses of $135.0 million, $413.1 million, and $434.9 million, and cash lease payments of $39.3 million, $131.4 million and $129.5 million for the 165 communities for the years ended December 31, 2017, 2016, and 2015 respectively.

The foregoing transactions, and the Company's assets held for sale as of December 31, 2017 are described below. The closings of the various pending transactions and expected sales of assets are subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. However, there can be no assurance that the transactions will close or, if they do, when the actual closings will occur.

2017 HCP Agreements

On November 2, 2017, the Company announced that it had entered into a definitive agreement for a multi-part transaction with HCP. As part of such transaction, the Company entered into an Amended and Restated Master Lease and Security Agreement (“Master Lease”) with HCP effective as of November 1, 2017. The components of the multi-part transaction include:

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Master Lease. The Company and HCP amended and restated triple-net leases covering substantially all of the communities the Company leased from HCP as of November 1, 2017 into the Master Lease. The Company will acquire two communities for an aggregate purchase price of $35.4 million, upon which time the two communities will be removed from the Master Lease. In addition, 33 communities will be removed from the Master Lease on or before November 1, 2018. However, if HCP has not transitioned operations and/or management of such communities to a third party prior to such date, the Company will continue to operate the foregoing 33 communities on an interim basis and such communities will, from and after such time, be reported in the Management Services segment. In addition to such 35 communities, the Company continues to lease 43 communities pursuant to the terms of the Master Lease, which have the same lease rates and expiration and renewal terms as the applicable prior instruments, except that effective January 1, 2018, the Company received a $2.5 million annual rent reduction for two communities. The Master Lease also provides that the Company may engage in certain change in control and other transactions without the need to obtain HCP's consent, subject to the satisfaction of certain conditions.

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RIDEA Ventures Restructuring. Pursuant to the multi-part agreement, HCP agreed to acquire the Company's 10% ownership interest in two of the Company's existing unconsolidated ventures with HCP for $94.7 million. The Company provided management services to 59 communities on behalf of the two unconsolidated ventures as of November 1, 2017. The Company will acquire four of such communities for an aggregate purchase price of $239.5 million and will retain management of 18 of such communities. The amended and restated management agreements for such 18 communities have a term set to expire in 2030, subject to certain early termination rights. In addition, HCP will be entitled to sell or transition operations and/or management of 37 of such communities.

The Company expects to fund its acquisition of the six communities with the proceeds from the sale of its unconsolidated venture interests, cash on hand, non-recourse mortgage financing on the acquired communities and refinancing of certain other communities.

During December 2017, HCP completed its acquisition of the Company’s ownership interest in one of the unconsolidated ventures for $32.1 million and the Company recognized a $7.2 million gain on sale. The disposition of the ownership interest in the second unconsolidated venture in 2018 is anticipated to also result in the Company recording a gain in fiscal 2018 for accounting purposes. In January 2018, the Company completed its acquisition of one community from HCP. The Company expects the disposition of its ownership interest in the second unconsolidated venture and its acquisition of the remaining five communities at their estimated fair value to occur during the next three months, and expects the terminations of its triple-net leases and management agreements on 70 communities to occur in stages throughout 2018.

The Company obtained future annual cash rent reductions and waived management termination fees in the multi-part transaction. As a result, the Company reduced its lease liabilities by $9.7 million for the future annual cash rent reductions and recognized a $9.7 million deferred revenue liability for the consideration received from HCP in advance of the termination of the management agreements for the 37 communities.

As a result of the modification of the remaining lease term for communities subject to capital leases, the Company reduced the carrying value of capital lease obligations and assets under capital leases by $145.6 million in 2017. The transactions related to the terminations of the leases for 33 communities in 2018 for accounting purposes are anticipated to result in the Company recording a gain in fiscal 2018 for the amount by which the carrying value of the operating and capital and financing lease obligations for the 33 communities exceed the carrying value of the Company's assets and liabilities under operating and capital and financing leases at the lease termination date. As of December 31, 2017, the $395.0 million carrying value of the lease obligations for the 33 communities exceed the $347.0 million carrying value of the assets under operating and capital and financing leases by approximately $48.0 million, primarily for 20 communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement for accounting purposes.

The results of operations for the 33 communities to be disposed through lease terminations are reported within the following segments within the consolidated financial statements: Retirement Centers (five communities), Assisted Living (27 communities), and CCRCs-Rental (one community). With respect to such 33 communities and the 37 managed communities for which the Company's management will be terminated, the Company's consolidated financial statements include resident fee revenue of $143.9 million and $151.7 million, management fees of $10.1 million and $11.8 million, facility operating expenses of $94.5 million and $92.6 million, and cash lease payments of $48.3 million and $44.8 million for the years ended December 31, 2017 and 2016, respectively.

2016 HCP Agreements

On November 1, 2016, the Company announced that it had entered into agreements to, among other things, terminate triple-net leases with respect to 97 communities that it leased from HCP, four of which were contributed to an existing unconsolidated venture in which the Company holds an equity interest and 64 of which were acquired by the Blackstone Venture described below. In addition to the formation of the Blackstone Venture, the transactions included the following components with respect to 33 communities:

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The Company and HCP agreed to terminate triple-net leases with respect to eight communities. HCP agreed to contribute immediately thereafter four of such communities to an existing unconsolidated venture with HCP in which the Company has a 10% equity interest. During the three months ended December 31, 2016, the triple-net leases with respect to seven communities were terminated and HCP contributed four of the communities to the existing unconsolidated venture. The triple-net lease with respect to the remaining community was terminated during January 2017. The results of operations of the eight communities are reported in the following segments within the consolidated financial statements through the respective disposition dates: Assisted Living (six communities), Retirement Centers (one community) and CCRCs-Rental (one community).

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The Company and HCP agreed to terminate triple-net leases with respect to 25 communities. During the year ended December 31, 2017, the Company's triple-net lease obligations with respect to 25 communities were terminated. Following such terminations the Company continues to operate certain of these communities on an interim basis, and such communities are reported in the Management Services segment from and after termination of such triple-net lease obligations. The results and financial position of the 25 communities for which leases were terminated were deconsolidated from the Company prospectively upon termination of the triple-net lease obligations. The Company derecognized the $145.3 million carrying value of the assets under financing leases and the $156.7 million carrying value of financing lease obligations for 21 communities which were previously subject to sale-leaseback transactions in which the Company was deemed to have continuing involvement. For accounting purposes, the Company recognized a sale for these 21 communities and recorded an $11.4 million gain within gain on sale of assets for the year ended December 31, 2017.

Formation of Venture with Blackstone during 2017

On March 29, 2017, the Company and affiliates of Blackstone Real Estate Advisors VIII L.P. (collectively, "Blackstone") formed a venture (the “Blackstone Venture”) that acquired 64 senior housing communities for a purchase price of $1.1 billion. The Company had previously leased the 64 communities from HCP under long-term lease agreements with a remaining average lease term of approximately 12 years. At the closing, the Blackstone Venture purchased the 64-community portfolio from HCP subject to the existing leases, and the Company contributed its leasehold interests for 62 communities and a total of $179.2 million in cash to purchase a 15% equity interest in the Blackstone Venture, terminate leases, and fund its share of closing costs. As of the formation date, the Company continued to operate two of the communities under lease agreements and began managing 60 of the communities on behalf of the venture under a management agreement with the venture. The two remaining leases will be terminated, pending certain regulatory and other conditions, at which point the Company will manage the communities. Two of the communities are managed by a third party for the venture.

The results and financial position of the 62 communities for which leases were terminated were deconsolidated from the Company prospectively upon formation of the Blackstone Venture. The results of operations of such 62 communities were reported in the following segments within the consolidated financial statements through the formation date: Assisted Living (47 communities), Retirement Centers (eight communities) and CCRCs-Rental (seven communities). The Company's interest in the venture is accounted for under the equity method of accounting. Under the terms of the venture agreement, the Company may be entitled to distributions which are less than or in excess of the Company's 15% equity interest based upon specified performance criteria.

Initially, the Company determined that the contributed carrying value of the Company's investment in the Blackstone Venture was $66.8 million, representing the amount by which the $179.2 million cash contribution exceeded the carrying value of the Company's liabilities under operating, capital and financing leases contributed by the Company net of the carrying value of the assets under such operating, capital and financing leases. However, the Company estimated the fair value of its 15% equity interest in the Blackstone Venture at inception to be $47.1 million. As a result, the Company recorded a $19.7 million charge within asset impairment expense for the three months ended March 31, 2017 for the amount of the contributed carrying value in excess of the estimated fair value of the Company's investment.

Additionally, these transactions related to the Blackstone Venture required the Company to record a significant increase to the Company's existing tax valuation allowance, after considering the change in the Company's future reversal of estimated timing differences resulting from these transactions, primarily due to removing the deferred positions related to the contributed leases. During the three months ended March, 31, 2017, the Company recorded a provision for income taxes to establish an additional $85.0 million of valuation allowance against its federal and state net operating loss carryforwards and tax credits as the Company anticipates these carryforwards and credits will not be utilized prior to expiration. See Note 16 for more information about the Company's deferred income taxes.

Dispositions of Owned Communities and Other Lease Terminations during 2017

During the year ended December 31, 2017, the Company completed the sale of three communities for net cash proceeds of $8.2 million and the Company terminated leases for 17 communities otherwise than in connection with the transactions with Blackstone and HCP described above. The Company recognized $14.3 million of net loss on facility lease termination for the year ended December 31, 2017, primarily from the write-off of assets subject to terminated lease agreements. The results of operations of the 17 communities are reported in the following segments within the consolidated financial statements through the respective termination dates: Retirement Centers (two communities), Assisted Living (14 communities), and CCRCs-Rental (one community).

Assets Held for Sale as of December 31, 2017

As of December 31, 2017, $106.4 million was recorded as assets held for sale and $30.1 million of mortgage debt was included in the current portion of long-term debt within the consolidated balance sheet with respect to the 15 communities held for sale as of such date. This debt will either be repaid with the proceeds from the sales or be assumed by the prospective purchasers. The results of operations of the 15 communities are reported in the following segments within the consolidated financial statements: Assisted Living (12 communities) and CCRCs-Rental (three communities). The 15 communities had resident fee revenue of $49.5 million and $51.5 million and facility operating expenses of $43.8 million and $44.6 million for the years ended December 31, 2017 and 2016, respectively.

Dispositions of Owned Communities during 2016

During the three months ended March 31, 2016, the Company sold seven of the 17 communities held for sale as of December 31, 2015 for an aggregate sales price of $46.7 million. The results of operations of these communities are reported in the Assisted Living and CCRCs-Rental segments within the consolidated financial statements through the respective disposition dates. The remaining 10 communities were classified as held for sale as of December 31, 2016.

During the three months ended June 30, 2016, the Company entered into an agreement with a third party to sell a 12-state portfolio of 44 owned communities for an aggregate sales price of $252.5 million. During the three months ended September 30, 2016, the Company sold 32 of these communities for an aggregate sales price of $177.5 million. During the three months ended December 31, 2016, the Company sold nine of these communities for an aggregate sales price of $47.7 million. The results of operations of these 41 communities are reported within the Assisted Living segment within the consolidated financial statements through the respective disposition dates. During the three months ended December 31, 2016, the agreement was amended to remove one community from the portfolio, and the aggregate sales price of the portfolio was decreased by $4.7 million. The remaining two communities within the portfolio were classified as held for sale as of December 31, 2016.

During 2016, the Company identified seven additional owned communities as held for sale. During the three months ended December 31, 2016, the Company sold three of these communities for an aggregate sales price of $33.0 million. The results of operations of these three communities are reported in the Assisted Living, CCRCs-Rental and Retirement Center segments through the respective disposition dates. The remaining four communities were classified as held for sale as of December 31, 2016. During the year ended December 31, 2016, the Company recognized $15.8 million of impairment expense related to communities identified as assets held for sale, primarily due to the excess of carrying value, including $28.6 million of allocated goodwill, over the estimated selling price less costs to dispose.

Community Acquisitions during 2015

On December 29, 2014, the Company agreed to purchase the fee simple interest of nine communities previously leased to the Company for an aggregate purchase price of $60.0 million. On December 31, 2014, the Company paid the full purchase price of $51.4 million of cash as a deposit for the purchase of eight of the nine communities, and the Company took title to these eight communities at the closing on January 1, 2015. On May 1, 2015, the Company acquired the ninth community and paid the remainder of the purchase price of $8.6 million of cash. The results of operations of these communities are reported in the Assisted Living and CCRCs-Rental segments within the consolidated financial statements.

In February 2015, the Company acquired the underlying real estate associated with 15 communities that were previously leased for an aggregate purchase price of $268.6 million. The results of operations of these communities are reported in the Retirement Centers, Assisted Living, and CCRCs-Rental segments within the consolidated financial statements for the year ended December 31, 2015. The Company financed the transaction with cash on hand, amounts drawn on the secured credit facility and $20.0 million of seller financing. The $20.0 million note has a five year term and bears interest at a fixed rate of 8.0%. The fair value of the communities acquired was determined to approximate $187.2 million. The fair values of the property, plant and equipment of the acquired communities were determined utilizing a direct capitalization method considering stabilized facility operating income and market capitalization rates. These fair value measurements were based on current market conditions as of the acquisition date and are considered Level 3 measurements within the fair value hierarchy. The range of capitalization rates utilized was 6.25% to 8.75%, depending upon the property type, geographical location, and the quality of the respective community. The Company recorded the difference between the amount paid and the estimated fair value of the communities acquired ($76.1 million) as a loss on facility lease termination on the consolidated statement of operations for the year ended December 31, 2015, which includes the reversal of $5.3 million of deferred lease liabilities associated with the termination of the operating lease agreements. The payment for the termination of the lease agreements has been included within net cash provided by operating activities within the consolidated statement of cash flows for the year ended December 31, 2015.

In October 2015, the Company acquired the underlying real estate associated with five communities that were previously leased for an aggregate purchase price of $78.4 million. The results of operations of these communities are reported in the Assisted Living segment. The Company financed the transaction with seller-financing.

Dispositions of Owned Communities during 2015

During the year ended December 31, 2015, the Company sold 17 communities for an aggregate selling price of $82.9 million. The results of operations of the communities are reported in the Retirement Centers, Assisted Living, and CCRCs-Rental segments within the consolidated financial statements through the respective disposition dates. As of December 31, 2015, the Company identified 17 communities as held for sale. As of December 31, 2015, $110.6 million was recorded as assets held for sale and $60.8 million of mortgage debt related to communities held for sale was included in the current portion of long-term debt within the Company's consolidated balance sheet. During the year ended December 31, 2015, the Company recognized $18.4 million of impairment expense related to communities sold in 2015 and $15.2 million of impairment expense related to communities identified as assets held for sale as of December 31, 2015, primarily due to the excess of carrying value, including $8.1 million of allocated goodwill, over the estimated selling price less costs to dispose.