BROOKDALE SENIOR LIVING INC. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various risks and uncertainties and include all statements that are not
historical statements of fact and those regarding our intent, belief or
expectations, including those related to the COVID-19 pandemic. Forward-looking
statements are generally identifiable by use of forward-looking terminology such
as "may," "will," "should," "could," "would," "potential," "intend," "expect,"
"endeavor," "seek," "anticipate," "estimate," "believe," "project," "predict,"
"continue," "plan," "target," or other similar words or expressions. These
forward-looking statements are based on certain assumptions and expectations,
and our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Although we believe that expectations
reflected in any forward-looking statements are based on reasonable assumptions,
we can give no assurance that our assumptions or expectations will be attained,
and actual results and performance could differ materially from those projected.
Factors which could have a material adverse effect on our operations and future
prospects or which could cause events or circumstances to differ from the
forward-looking statements include, but are not limited to: the impacts of the
COVID-19 pandemic, including the response efforts of federal, state, and local
government authorities, businesses, individuals and us, on our business, results
of operations, cash flow, liquidity, and our strategic initiatives, including
plans for future growth, which will depend on many factors, some of which cannot
be foreseen, including the duration, severity, and breadth of the pandemic and
any resurgence of the disease, the impact of COVID-19 on the nation's economy
and debt and equity markets and the local economies in our markets, the
development and availability of COVID-19 testing, therapeutic agents, and
vaccines and the prioritization of such resources among businesses and
demographic groups, government financial and regulatory relief efforts that may
become available to business and individuals, including our ability to qualify
for and satisfy the terms and conditions of financial relief; perceptions
regarding the safety of senior living communities during and after the pandemic,
changes in demand for senior living communities and our ability to adapt our
sales and marketing efforts to meet that demand, changes in the acuity levels of
our new residents, the disproportionate impact of COVID-19 on seniors generally
and those residing in our communities, the duration and costs of our response
efforts, including increased equipment, supplies, labor, litigation, testing,
and other expenses, the impact of COVID-19 on our ability to complete
financings, refinancings, or other transactions (including dispositions) or to
generate sufficient cash flow to cover required interest and lease payments and
to satisfy financial and other covenants in our debt and lease documents,
increased regulatory requirements, including unfunded mandatory testing,
increased and enforcement actions resulting from COVID-19, including those that
may limit our collection efforts for delinquent accounts and the frequency and
magnitude of legal actions and liability claims that may arise due to COVID-19
or our response efforts; events which adversely affect the ability of seniors to
afford resident fees, including downturns in the economy, housing markets,
consumer confidence or the equity markets and unemployment among family members,
which may be adversely impacted by the pandemic; changes in reimbursement rates,
methods or timing under governmental reimbursement programs including the
Medicare and Medicaid programs; the impact of ongoing healthcare reform efforts;
the effects of senior housing construction and development, oversupply and
increased competition; disruptions in the financial markets, including those
related to the pandemic, that affect our ability to obtain financing or extend
or refinance debt as it matures and our financing costs; the risks associated
with current global economic conditions, including changes related to the
pandemic, and general economic factors such as inflation, the consumer price
index, commodity costs, fuel and other energy costs, costs of salaries, wages,
benefits, and insurance, interest rates, and tax rates; the impact of seasonal
contagious illness or an outbreak of COVID-19 or other contagious disease in the
markets in which we operate; our ability to generate sufficient cash flow to
cover required interest and long-term lease payments and to fund our planned
capital projects, which may be adversely affected by the pandemic; the effect of
our indebtedness and long-term leases on our liquidity; the effect of our
non-compliance with any of our debt or lease agreements (including the financial
covenants contained therein), including the risk of lenders or lessors declaring
a cross default in the event of our non-compliance with any such agreements and
the risk of loss of our property securing leases and indebtedness due to any
resulting lease terminations and foreclosure actions; the effect of our
borrowing base calculations and our consolidated fixed charge coverage ratio on
availability under our revolving credit facility; the potential phasing out of
LIBOR which may increase the costs of our debt obligations; increased
competition for or a shortage of personnel, wage pressures resulting from
increased competition, low unemployment levels, minimum wage increases and
changes in overtime laws, and union activity; failure to maintain the security
and functionality of our information systems, to prevent a cybersecurity attack
or breach, or to comply with applicable privacy and consumer protection laws,
including HIPAA; our inability to achieve or maintain profitability; our ability
to complete pending or expected disposition, acquisition, or other transactions
on agreed upon terms or at all, including in respect of the satisfaction of
closing conditions, the risk that regulatory approvals are not obtained or are
subject to unanticipated conditions, and uncertainties as to the timing of
closing, and our ability to identify and pursue any such opportunities in the
future; our ability to obtain additional capital on terms acceptable to us; our
ability to complete our capital expenditures in accordance with our plans; our
ability to identify and pursue development, investment and acquisition
opportunities and our ability to successfully integrate acquisitions;
competition for the acquisition of assets; delays in obtaining regulatory
approvals; terminations, early or otherwise, or non-renewal of management
agreements; conditions of housing markets, regulatory changes, acts of nature,
and the effects of climate change in geographic areas where we are concentrated;
terminations of our resident agreements and vacancies in the living
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spaces we lease, which may be adversely impacted by the pandemic; departures of
key officers and potential disruption caused by changes in management; risks
related to the implementation of our strategy, including initiatives undertaken
to execute on our strategic priorities and their effect on our results; actions
of activist stockholders, including a proxy contest; market conditions and
capital allocation decisions that may influence our determination from time to
time whether to purchase any shares under our existing share repurchase program
and our ability to fund any repurchases; our ability to maintain consistent
quality control; a decrease in the overall demand for senior housing, which may
be adversely impacted by the pandemic; environmental contamination at any of our
communities; failure to comply with existing environmental laws; costs to defend
against, or an adverse determination or resolution of, complaints filed against
us; the cost and difficulty of complying with increasing and evolving
regulation; costs to respond to, and adverse determinations resulting from,
government reviews, audits and investigations; unanticipated costs to comply
with legislative or regulatory developments; as well as other risks detailed
from time to time in our filings with the Securities and Exchange Commission
("SEC"), including those set forth under "Item 1A. Risk Factors" contained in
our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II,
"Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.
When considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in such SEC filings. Readers are
cautioned not to place undue reliance on any of these forward-looking
statements, which reflect management's views as of the date of this Quarterly
Report on Form 10-Q. We cannot guarantee future results, levels of activity,
performance or achievements, and, except as required by law, we expressly
disclaim any obligation to release publicly any updates or revisions to any
forward-looking statements contained in this Quarterly Report on Form 10-Q to
reflect any change in our expectations with regard thereto or change in events,
conditions or circumstances on which any statement is based.
30
--------------------------------------------------------------------------------Overview
As ofJune 30, 2020 , we are the largest operator of senior living communities inthe United States based on total capacity, with 737 communities in 44 states and the ability to serve approximately 65,000 residents. We offer our residents access to a broad continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). We also offer a range of home health, hospice, and outpatient therapy services to more than 17,000 patients as of that date. Our goal is to be the first choice in senior living by being the nation's most trusted and effective senior living provider and employer. With our range of community and service offerings, we believe that we are positioned to take advantage of favorable demographic trends over time. Our community and service offerings combine housing with hospitality and healthcare services. Our senior living communities offer residents a supportive home-like setting, assistance with activities of daily living such as eating, bathing, dressing, toileting, transferring/walking, and, in certain communities, licensed skilled nursing services. We also provide home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to age-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives.
COVID-19 Pandemic
The United States broadly continues to experience the COVID-19 pandemic, which has significantly disrupted, and likely will continue to significantly disrupt for some period, our nation's economy, the senior living industry, and our business. Although a significant portion of our corporate support associates began working from home inMarch 2020 , we continue to serve and care for seniors through the pandemic. Due to the average age and prevalence of chronic medical conditions among our residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. The health and wellbeing of our residents, patients, and associates is and has been our highest priority. We initiated our COVID-19 preparation efforts inJanuary 2020 and continue to actively monitor requirements and guidance of federal, state, and local governments and agencies, including theU.S. Centers for Disease Control and Prevention andU.S. Centers for Medicare & Medicaid Services ("CMS"), and adapt our policies and procedures when applicable. Our response efforts center on infection prevention and control protocols. We have enhanced and reinforced training our associates in such protocols. Seeking to prevent the introduction of COVID-19 into our communities, and to help control further exposure to infections within communities, inMarch 2020 we began restricting visitors at all our communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and requiring new residents and residents returning from a hospital or nursing home to isolate in their apartment for fourteen days. Upon confirmation of positive COVID-19 exposure at a community, we follow government guidance regarding minimizing further exposure, including associates' adhering to personal protection protocols, restricting new resident admissions, and in some cases isolating residents. These restrictions were in place across our portfolio for the three months endedJune 30, 2020 . More recently, in response to federal, state, and local efforts to reopen the economies surrounding our communities, we have adopted a framework for determining when to ease restrictions at each of our communities based on several criteria, including regulatory requirements and guidance, completion of baseline testing at the community, and the community having no current confirmed positive COVID-19 cases. Beginning inJuly 2020 , we began offering residents at some of our communities outdoor visits with families, reduced capacity communal dining, and limited communal activities programming. Due to the vulnerable nature of our residents, we expect many of the foregoing restrictions will continue at our communities for some time, even as federal, state, and local stay-at-home and social distancing orders and recommendations are relaxed. InApril 2020 , we proactively commenced a resident and associate testing program for our communities. We conducted the testing program in conjunction with state and local testing requirements at several of our communities. We undertook the program to identify positive, but asymptomatic, individuals, to better understand how our infection protocols are working, and to help minimize the exposure to residents and associates of someone known to be COVID positive. We have completed baseline testing at all of our communities. To date, the program has accumulated over 100,000 test results. Less than 1% of our residents as ofJuly 31, 2020 are currently confirmed positive for COVID-19. Based on results of our program and other testing, around 3% of our residents who have lived with us anytime during 2020 have tested positive. Further testing, whether undertaken proactively or as a result of regulatory requirements, may result in significant additional expense, additional temporary restrictions on move-ins at affected 31 --------------------------------------------------------------------------------
communities, continued need for isolating positive residents, increased use of personal protection equipment by our associates, and increased labor costs.
The pandemic and related infection prevention and control protocols within senior living communities have significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. We believe potential residents and their families are more cautious regarding moving into senior living communities while the pandemic continues, and such caution may persist for some time. In response to these developments, we have redesigned our sales process to include virtual tours, video engagement, and outdoor prospective resident meetings, enhanced and adapted our marketing programs to address the social distancing environment, and sought to strengthen our relationships with referral partners. We cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic's effect on demand may adversely affect the amount of resident fees we are able to collect from our residents. We are accepting new residents to most of our communities, which as ofJuly 31, 2020 includes 85% of our communities. The pandemic and our response efforts began to adversely impact our occupancy and resident fee revenue significantly duringMarch 2020 , as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. During the three months endedJune 30, 2020 , the year-over-year decrease in monthly move-ins of our same-community portfolio ranged from approximately 65% inApril 2020 to approximately 35% inJune 2020 , and was approximately 40% forJuly 2020 . Lower move-in activity was partially offset by lower than normal controllable move-out activity. As a result, our same community weighted average monthly occupancy declined from 83.0% inMarch 2020 to 77.8% inJune 2020 , and was 76.8% inJuly 2020 . We estimate that the pandemic and our response efforts resulted in$43.1 million of lost resident fee revenue in our same-community portfolio for the three months endedJune 30, 2020 . Further deterioration of our resident fee revenue will result from lower move-in activity and the resident attrition inherent in our business, which may increase due to the impacts of COVID-19. Lower controllable move-out activity during the pandemic may continue to partially offset future adverse revenue impacts. Our home health average daily census also began to decrease inMarch 2020 due to lower occupancy in our communities and fewer elective medical procedures and hospital discharges, resulting in an 18.7% year-over-year decline in home health average daily census for the three months endedJune 30, 2020 . We expect home health average daily census to begin to recover during the six months endedDecember 31, 2020 with gradual improvements to elective medical procedures, hospital discharges, and senior housing occupancy. Facility operating expense for the three and six months endedJune 30, 2020 includes$60.6 million and$70.6 million , respectively, of incremental direct costs to prepare for and respond to the pandemic, including costs for acquisition of additional personal protective equipment ("PPE"), medical equipment, and cleaning and disposable food service supplies, enhanced cleaning and environmental sanitation costs, increased labor expense, increased workers compensation and health plan expense, increased insurance premiums and retentions, consulting and professional services costs, and costs for COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs are likely to be substantial. As described further below, we also recorded non-cash impairment charges in our operating results of$76.7 million for the three months endedMarch 31, 2020 for our operating lease right-of-use assets and property, plant and equipment and leasehold intangibles, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities for which assets were impaired. We have taken, and continue to take, actions to enhance and preserve our liquidity in response to the pandemic. We drew$166.4 million on our revolving credit facility, inMarch 2020 , and we suspended repurchases under our existing share repurchase program. During the three months endedJune 30, 2020 , we accepted$33.5 million of cash for grants under thePublic Health and Social Services Emergency Fund (the "Emergency Fund ") and$85.0 million of accelerated/advanced Medicare payments, and we deferred$26.5 million of the employer portion of social security payroll taxes. Each of these programs were created or expanded under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), as described below. We also have delayed or canceled a number of elective capital expenditure projects resulting in an approximate$50 million reduction to our pre-pandemic full-year 2020 capital expenditure plans. OnJuly 26, 2020 , we entered into definitive agreements with Ventas, Inc. ("Ventas") to restructure our 120 community (10,174 units) triple-net master lease arrangements as further described below. Pursuant to the multi-part transaction, among other things, we paid a$119.2 million one-time cash payment to Ventas, reduced our initial annual minimum rent under the amended and restated master lease to$100 million effectiveJuly 1, 2020 , and removed the prior requirements that we satisfy financial covenants and that we maintain a security deposit with Ventas. The annual minimum rent under the amended and restated master lease reflects a reduction of approximately$86 million over the next twelve months. As ofJune 30, 2020 , our total liquidity was$600.2 million , consisting of$452.4 million of unrestricted cash and cash equivalents,$109.9 million of marketable securities, and$37.9 million of additional availability on our revolving credit facility. As ofJune 30, 2020 ,$166.4 million of borrowings were outstanding on the revolving credit facility. We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses and elective capital expenditures, continuing to evaluate 32 --------------------------------------------------------------------------------
our financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic.
DuringMarch 2020 , we completed our financing plans in the regular course of business, including closing three non-recourse mortgage debt financing transactions totaling$208.5 million with the proceeds used to refinance the majority of our 2020 maturities and to partially fund our acquisitions of 26 communities completed during the three months endedMarch 31, 2020 . As ofJune 30, 2020 , our remaining 2020 and 2021 maturities (after giving effect to the multi-part transaction with Ventas onJuly 26, 2020 ) are$36.4 million and$254.1 million , respectively, which are primarily non-recourse mortgage debt maturities. Availability under the revolving credit facility will vary from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and our consolidated fixed charge coverage ratio. To the extent the outstanding borrowings on the credit facility exceed future borrowing base calculations, we would be required to repay the difference to restore the outstanding balance to the new borrowing base. During 2019, the parties entered into an amendment to the credit facility agreement that provides for availability calculations to be made at additional consolidated fixed charge coverage ratio thresholds, with a minimum required consolidated fixed charge coverage ratio of 1.00. For the twelve months endedJune 30, 2020 , the consolidated fixed charge coverage ratio was 1.28. Due primarily to the impacts of the COVID-19 pandemic, and based upon our current estimate of cash flows, we have determined that it is probable that we will not satisfy the minimum consolidated fixed charge coverage ratio covenant under the credit facility for one or more quarterly determination dates in the first half of 2021 without further action on our part. Failure to satisfy the minimum ratio would result in the availability under the revolving credit facility being reduced to zero and a requirement to repay the$166.4 million of borrowings outstanding on the revolving credit facility. As a result, we have continued efforts on our plan to refinance the assets currently securing the credit facility. We currently anticipate that such refinancings will be completed and the proceeds of such refinancings, together with cash on hand, will be sufficient to repay the$166.4 million balance on the revolving credit facility and terminate the facility without payment of a premium or penalty. However, there can be no assurance that any such additional financing will be available or on terms that are acceptable to us, in which case we would expect to take other mitigating actions prior to the maturity dates. Based upon our current liquidity and estimated cash flows, we have estimated that we would be unable to repay a portion of the 2021 maturities and the borrowings outstanding on the revolving credit facility as they become due without refinancing these maturities or obtaining additional financing proceeds. We have continued efforts on our plan to refinance the assets currently securing the credit facility and to refinance the substantial majority of the remaining 2020 and 2021 maturities with non-recourse mortgage debt. We currently anticipate that it is probable that such refinancings will be completed and the proceeds of such refinancings, together with cash on hand, will be sufficient to repay the$166.4 million balance on the revolving credit facility and terminate the facility without payment of a premium or penalty and to pay our contractual obligations as they come due over the next twelve months. However, there is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, in which case we would expect to take other mitigating actions prior to the maturity dates. In response to the pandemic, onMarch 27, 2020 , the President signed the CARES Act into law, which was amended and expanded by the Paycheck Protection Program and Health Care Enhancement Act signed into law onApril 24, 2020 . The legislation provides liquidity and financial relief to certain businesses, among other things. The impacts to us of certain provisions of the CARES Act are summarized below.
• During the three months ended
cash for grants from the
to provide grants or other funding mechanisms to eligible healthcare
providers for healthcare related expenses or lost revenues attributable to
COVID-19. Approximately $28.8 million of the grants were made available
pursuant to the
based primarily on our relative share of aggregate 2019 Medicare
fee-for-service reimbursements and generally related to home health, hospice,
outpatient therapy, and skilled nursing care provided through our Health Care
Services and CCRCs segments. Approximately
made available pursuant to the
certified skilled nursing facilities, with amounts determined using a
per-facility and per-bed model. During
grants pursuant to the
amount of such grants are expected to be based on 2% of a portion of our 2018
gross revenues from patient care, and we expect to receive up to
approximately $50 million of grants from this allocation.
The grants received are subject to the terms and conditions of the program,
including that such funds may only be used to prevent, prepare for, and respond
to COVID-19 and will reimburse only for healthcare related expenses or lost
revenues that are attributable to COVID-19. During the three months ended June
30, 2020 , we recognized $26.4 million of the grants as
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other operating income based upon our estimates of our satisfaction of the
conditions of the grants during such period. As of June 30, 2020 , $7.1 million
of unrecognized grants were included in refundable fees and deferred revenue
within our condensed consolidated balance sheets and are expected to be
recognized in other operating income during the six months ended December 31,
2020 .
HHS continues to evaluate and provide allocations of, and regulation and
guidance regarding, grants made under the Emergency Fund . We intend to pursue
additional funding that may become available pursuant to the Emergency Fund .
However, there can be no assurance that we will qualify for, or receive, grants
in the amount we expect or that future funding programs will be made available
for which we qualify.
• During the three months ended
the Accelerated and Advance Payment Program administered by CMS, which was
temporarily expanded by the CARES Act. Recoupment of accelerated/advanced
payments are required to begin 120 days after their issuance through offsets
of new Medicare claims, and all accelerated/advanced payments are due 210
days following their issuance.
• Under the CARES Act, we have elected to defer payment of the employer portion
of social security payroll taxes incurred from
2020. One-half of such deferral amount will become due on each of December
31, 2021 and
million under the program and intend to defer an additional approximately
million of the employer portion of payroll taxes estimated to be incurred for
the six months ending
• The CARES Act temporarily suspended the 2% Medicare sequestration for the
period
Care Services segment. This suspension had a favorable impact of
on the segment's resident fee revenue for the three months ended
2020, and we estimate that the suspension will have a
impact on the segment's resident fee revenue for the six months ended
December 31, 2020 .
• We continue to evaluate our eligibility to claim the employee retention tax
credit under the CARES Act for certain of our associates. The refundable tax
credit is available to employers that fully or partially suspend operations
during any calendar quarter in 2020 due to orders from an appropriate
governmental authority limiting commerce, travel, or group meetings due to
COVID-19, and is equal to 50% of qualified wages paid after
through
credits of
will qualify for, or receive, tax credits in the amount we expect.
We cannot predict with reasonable certainty the impacts that COVID-19 ultimately
will have on our business, results of operations, cash flow, and liquidity, and
our response efforts may continue to delay or negatively impact our strategic
initiatives, including plans for future growth. The ultimate impacts of COVID-19
will depend on many factors, some of which cannot be foreseen, including the
duration, severity, and breadth of the pandemic and any resurgence of the
disease; the impact of COVID-19 on the nation's economy and debt and equity
markets and the local economies in our markets; the development and availability
of COVID-19 testing, therapeutic agents, and vaccines and the prioritization of
such resources among businesses and demographic groups; government financial and
regulatory relief efforts that may become available to business and individuals,
including our ability to qualify and satisfy the terms and conditions of
financial relief; perceptions regarding the safety of senior living communities
during and after the pandemic; changes in demand for senior living communities
and our ability to adapt our sales and marketing efforts to meet that demand;
the impact of COVID-19 on our residents' and their families' ability to afford
our resident fees, including due to changes in unemployment rates, consumer
confidence, and equity markets caused by COVID-19; changes in the acuity levels
of our new residents; the disproportionate impact of COVID-19 on seniors
generally and those residing in our communities; the duration and costs of our
response efforts, including increased equipment, supplies, labor, litigation,
testing, and other expenses; the impact of COVID-19 on our ability to complete
financings, refinancings, or other transactions (including dispositions) or to
generate sufficient cash flow to cover required interest and lease payments and
to satisfy financial and other covenants in our debt and lease documents;
increased regulatory requirements, including unfunded, mandatory testing;
increased enforcement actions resulting from COVID-19, including those that may
limit our collection efforts for delinquent accounts; and the frequency and
magnitude of legal actions and liability claims that may arise due to COVID-19
or our response efforts.
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Transaction Activity and Impact of Dispositions on Results of Operations
During the period fromJanuary 1, 2019 throughJune 30, 2020 , we acquired 26 formerly leased communities, disposed of 15 owned communities (1,707 units), and sold our ownership interest in our unconsolidated entry fee CCRC Venture (the "CCRC Venture") with Healthpeak Properties, Inc. ("Healthpeak"), and our triple-net lease obligations on 12 communities (789 units) were terminated. OnJuly 26, 2020 , we entered into definitive agreements with Ventas to restructure our 120 community (10,174 units) triple-net master lease arrangements. In addition, we conveyed to Ventas five communities and will manage the communities following the closing. Summaries of the significant transactions impacting the periods presented, and the impacts of dispositions of owned and leased communities on our results of operations, are included below. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for more details regarding the terms of such transactions, including transactions we entered into with Healthpeak during 2019. During the next 12 months, we expect to close on the dispositions of two owned unencumbered communities (417 units) classified as held for sale as ofJune 30, 2020 and the termination of our lease obligation on two communities (148 units). We also anticipate terminations of certain of our management arrangements with third parties as we transition to new operators our management on certain former unconsolidated ventures in which we sold our interest and our interim management on formerly leased communities. The closings of the various pending and expected transactions described herein are, or will be, 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.
Summaries of Transactions
• Healthpeak: On
including a Master Transactions and Cooperation Agreement (the "MTCA") and an
Equity Interest Purchase Agreement (the "Purchase Agreement"), providing for
a multi-part transaction with Healthpeak. The parties subsequently amended
the agreements to include one additional entry fee CCRC community as part of
the sale of our interest in the CCRC Venture (rather than removing the
community from the CCRC Venture for joint marketing and sale). The components
of the multi-part transaction include:
• CCRC Venture Transaction: Pursuant to the Purchase Agreement, on January
31, 2020, Healthpeak acquired our 51% ownership interest in the CCRC
Venture, which held 14 entry fee CCRCs (6,383 units), for a purchase price
of
adjustment paid to Healthpeak during the three months ended
(representing an aggregate valuation of
subject to a net working capital adjustment). We recognized a
million gain on sale of assets for the six months ended
we derecognized the net equity method liability for the sale of the
ownership interest in the CCRC Venture. At the closing, the parties
terminated the existing management agreements on the 14 entry fee CCRCs,
Healthpeak paid us a
and we transitioned operations of the entry fee CCRCs to a new operator.
We recognized
months ended
of our interest in the CCRC Venture and the
termination fees generated approximately
in three months ended
losses generated and tax loss carryforwards (including our capital loss
carryforward that was generated in 2018) to offset the taxable gain on
this transaction. Prior to the January 31, 2020 closing, the parties movedthe remaining two entry fee CCRCs (889 units) into a new unconsolidated
venture on substantially the same terms as the CCRC Venture to accommodate
the sale of such two communities expected to occur in 2021. Subsequent to
these transactions, we will have exited substantially all of our entry fee
CCRC operations.
• Master Lease Transactions. Pursuant to the MTCA, on
parties amended and restated our existing master lease pursuant to which
we continue to lease 25 communities (2,711 units) from Healthpeak, and we
acquired 18 formerly leased communities (2,014 units) from Healthpeak, at
which time the 18 communities were removed from the master lease. At the
closing, we paid
our annual rent under the amended and restated master lease. We funded the
community acquisitions with
financing and the proceeds from the multi-part transaction. In addition,
Healthpeak has agreed to terminate the lease for one leased community (159
units). With respect to the continuing 24 communities (2,552 units), our
amended and restated master lease: (i) has an initial term to expire on
December 31, 2027 , subject to two extension options at our election forten years each, which must be exercised with respect to the entire pool of
leased communities; (ii) the initial annual base rent for the 24
communities is $41.7 million and is subject to an escalator of 2.4% per
annum on April 1st of each year; and (iii) Healthpeak has agreed to make
available up to
period related to the 24 communities at an initial lease rate of 7.0%. As
a result of the community acquisition
35-------------------------------------------------------------------------------- transaction, we recognized a$19.7 million gain on debt extinguishment and derecognized the$105.1 million carrying amount of financing lease obligations for eight communities which were previously subject to sale-leaseback transactions in which we were deemed to have continuing involvement. During the three months endedMarch 31, 2020 , we obtained$30.0 million of additional non-recourse mortgage financing on the acquired communities.
• Acquisitions Pursuant to Purchase Options: On
eight formerly leased communities (336 units) from National Health Investors,
Inc. pursuant to our exercise of a purchase option for a purchase price of
the three months ended March 31, 2020 , we obtained $29.2 million of
non-recourse mortgage financing, primarily secured by the acquired
communities.
• Dispositions of Owned Communities. During the six months ended
we completed the sale of one owned community (78 units) for cash proceeds of
gain on sale of assets of
2020.
• Ventas Lease Portfolio Restructuring: On
Date"), we entered into definitive agreements with Ventas in connection with
the restructuring of our lease arrangements with Ventas, including a Master
Transaction Letter Agreement (the "Master Agreement"). Pursuant to the Master
Agreement:
• On the Effective Date the parties entered into the Amended and Restated
Restated Guaranty (the "Guaranty"), which amended and restated the prior
Lease, we continue to lease 120 communities (10,174 units) for an
aggregate initial annual minimum rent of approximately
reflects a reduction of approximately
in effect prior to the transaction. Effective on
year, beginning
to a 3% escalator. The initial term of the Master Lease ends
2025, with two 10-year extension options available to us. The annual
minimum rent for the initial lease year of any such renewal term will be
the greater of the fair market rental of the communities or the increased
annual minimum rent for such lease year applying the foregoing 3%
escalator. The Master Lease removed the prior provision that would have
automatically extended the initial term in the event of the consummation
of a change of control transaction by us. The Master Lease requires us to
spend (or escrow with Ventas) a minimum of
community-level basis and
communities, in each case per 24-month period ending
the lease term, commencing with the 24-month period ending
2021. In addition, Ventas has agreed to fund costs associated with certain
pre-approved capital expenditure projects in the aggregate amount of up to
rent under the Master Lease will increase by the amount of the
disbursement multiplied by 50% of the sum of the then current 10-year
treasury note rate and 4.5%. The transaction agreements with Ventas
further provide that the Master Lease and certain other agreements between
the parties will be cross-defaulted.
Our subsidiaries' obligations under the Master Lease are guaranteed at the parent level pursuant to the Guaranty. The Guaranty removed the prior requirements that we satisfy, at the parent level, financial covenants and that we maintain a security deposit with Ventas. The Guaranty also removed the prior right of Ventas to terminate the Master Lease on the basis of parent level financial covenants. Pursuant to the terms of the Guaranty, we may consummate a change of control transaction without the need for consent of Ventas so long as certain objective conditions are satisfied, including the post-transaction guarantor's maintaining a minimum tangible net worth of at least$600 million , having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of$25 million to Ventas. The Guaranty removed the prior provisions that would have required that such post-transaction guarantor satisfy a maximum leverage ratio level, that we fund additional capital expenditures, and that we extend the term upon the occurrence of the change in control transaction. Under the terms of the Guaranty, commencingJanuary 1, 2024 (and until such time (if any) as we exercise our lease term extension option with respect to the Master Lease), Ventas shall have the right to terminate the Master Lease (with respect to one or more communities), provided that the trailing twelve month coverage ratio of each such community is less than 0.9x and provided further that the removal and termination of any such communities does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such removal and termination.
• On the Effective Date, we entered into a Second Amended and Restated
Omnibus Agreement with Ventas, which provides that if a default occurs and
is continuing under certain other material leases or under certain
material financings and if the same continues beyond the permitted cure
period or the applicable landlord or lender exercises any material
remedies, Ventas shall have the right to transition all or a portion of
the communities from the Master Lease to a management arrangement with us
pursuant to a market management agreement (which is terminable by either
party). Notwithstanding the foregoing, Ventas may only transition
community(ies) from the Master Lease to a management arrangement if such
36--------------------------------------------------------------------------------
transition does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such transition.
• On the Effective Date, we conveyed five owned communities (471 units) to
Ventas in full release and satisfaction of
indebtedness secured by the communities. Upon closing, the parties entered
into new terminable, market rate management agreements pursuant to which
we will manage the communities. We also paid to Ventas
cash, released all security deposits under the former guaranty (which
included the release of a
payment of
credit), and issued a $45 million unsecured interest-only promissory note
to Ventas. The initial interest rate of the promissory note is 9.0% per
annum and will increase by 0.50% on each anniversary of the date of
issuance. We may prepay the outstanding principal amount in whole or inpart at any time without premium or penalty. The promissory note matures
on the earlier of December 31, 2025 or the occurrence of a change of
control transaction (as defined in the Guaranty).
• On the Effective Date, we issued to Ventas a warrant (the "Warrant") to
purchase 16.3 million shares of our common stock, $0.01 par value per
share, at a price per share of $3.00 . The Warrant is exercisable at
Ventas' option at any time and from time to time, in whole or in part,
until December 31, 2025 . The exercise price and the number of sharesissuable on exercise of the Warrant are subject to certain anti-dilution
adjustments, including for cash dividends, stock dividends, stock splits,
reclassifications, non-cash distributions, certain repurchases of common
stock and business combination transactions. To the extent that the number
of shares owned by Ventas (including shares underlying the Warrant) would
be more than 9.6% of the total combined voting power of all our classes of
capital stock or of the total value of shares of all our classes of
capital stock (the "Ownership Cap") (other than as a result of actions
taken by Ventas), we would generally be required to repurchase the number
of shares necessary to avoid Ventas exceeding the Ownership Cap unless
Ventas makes an election to require us to pay Ventas cash in lieu of
issuing shares pursuant to the Warrant in excess of the Ownership Cap. The
Warrant and the shares issuable upon exercise thereof have not been
registered under the Securities Act of 1933, as amended, and were issued
in a private placement pursuant to Section 4(a)(2) thereof. On the
Effective Date, the parties entered into a Registration Rights Agreement,
pursuant to which Ventas and its permitted transferees are entitled to
certain registration rights. Under the terms of the agreement, we are
required to use reasonable best efforts to prepare and file a shelf
registration statement with the SEC as promptly as practicable, but no
later than the close of business on the fifth day following the date on
which we file our Quarterly Report on Form 10-Q for the period ended June
30, 2020 , with respect to the shares of common stock underlying the
Warrant, and, if the registration statement is not automaticallyeffective, to have the registration statement declared effective promptly
thereafter. Ventas is entitled to customary underwritten offering,
piggyback and additional demand registration rights with respect to the
shares underlying the Warrant.
37--------------------------------------------------------------------------------
Summary of Financial Impact of Completed Dispositions
The following table sets forth, for the periods indicated, the amounts included within our consolidated financial data for the 20 communities that we disposed through sales and lease terminations during the period fromApril 1, 2019 toJune 30, 2020 through the respective disposition dates. Three Months Ended June 30, 2020 Actual Results Amounts Less Amounts Attributable to Attributable to Completed Completed (in thousands) Actual Results Dispositions Dispositions Resident fees Independent Living$ 130,278 $ -$ 130,278 Assisted Living and Memory Care 432,156 103 432,053 CCRCs 79,025 - 79,025 Senior housing resident fees$ 641,459 $ 103$ 641,356 Facility operating expense Independent Living$ 89,240 $ -$ 89,240 Assisted Living and Memory Care 344,600 647 343,953 CCRCs 74,721 - 74,721 Senior housing facility operating expense$ 508,561 $ 647$ 507,914 Cash facility lease payments$ 87,169 $ 366$ 86,803 Three Months Ended June 30, 2019 Actual Results Less Amounts Amounts
Attributable Attributable to
to Completed Completed
(in thousands) Actual Results Dispositions Dispositions
Resident fees
Independent Living $ 135,951 $ - $ 135,951
Assisted Living and Memory Care 450,225 5,809 444,416
CCRCs 101,253 9,476 91,777
Senior housing resident fees $ 687,429 $ 15,285 $ 672,144
Facility operating expense
Independent Living $ 84,492 $ - $ 84,492
Assisted Living and Memory Care 317,081 5,489 311,592
CCRCs 83,406 9,508 73,898
Senior housing facility operating expense $ 484,979 $ 14,997 $ 469,982
Cash facility lease payments $ 94,267 $ 961 $ 93,306
38-------------------------------------------------------------------------------- The following table sets forth, for the periods indicated, the amounts included within our consolidated financial data for the 27 communities that we disposed through sales and lease terminations during the period fromJanuary 1, 2019 toJune 30, 2020 through the respective disposition dates. Six Months Ended June 30, 2020 Amounts Actual Results Less Attributable to Amounts Attributable Completed to Completed (in thousands) Actual Results Dispositions Dispositions Resident fees Independent Living$ 266,140 $ - $ 266,140 Assisted Living and Memory Care 889,635 1,455 888,180 CCRCs 173,572 - 173,572 Senior housing resident fees$ 1,329,347 $ 1,455 $ 1,327,892 Facility operating expense Independent Living$ 173,688 $ - $ 173,688 Assisted Living and Memory Care 670,078 2,476 667,602 CCRCs 149,337 - 149,337 Senior housing facility operating expense$ 993,103 $ 2,476 $ 990,627 Cash facility lease payments$ 176,752 $ 964 $ 175,788 Six Months Ended June 30, 2019 Actual Results Less Amounts Attributable Amounts Attributable to Completed to Completed (in thousands) Actual Results Dispositions Dispositions Resident fees Independent Living$ 271,645 $ - $ 271,645 Assisted Living and Memory Care 908,751 19,501 889,250 CCRCs 204,980 19,354 185,626 Senior housing resident fees$ 1,385,376 $ 38,855 $ 1,346,521 Facility operating expense Independent Living$ 167,310 $ - $ 167,310 Assisted Living and Memory Care 634,908 17,668 617,240 CCRCs 165,496 19,010 146,486
Senior housing facility operating expense
36,678 $ 931,036 Cash facility lease payments$ 255,483 $ 2,388 $ 253,095 39
-------------------------------------------------------------------------------- The following table sets forth the number of communities and units in our senior housing segments disposed through sales and lease terminations during the six months endedJune 30, 2020 and twelve months endedDecember 31, 2019 : Six Months Ended Twelve Months Ended June 30, 2020 December 31, 2019 Number of communities Assisted Living and Memory Care 3 20 CCRCs - 4 Total 3 24 Total units Assisted Living and Memory Care 208 1,600 CCRCs - 827 Total 208 2,427 Other Recent Developments
Goodwill Impairment Estimates
As ofJune 30, 2020 , we had a goodwill balance of$154.1 million .Goodwill recorded in connection with business combinations is allocated to the respective reporting unit and included in our application of the provisions of ASC 350, Intangibles -Goodwill and Other.Goodwill allocated to our Independent Living and Health Care Services reporting units is$27.3 million and$126.8 million as ofJune 30, 2020 , respectively. Our interim goodwill impairment analyses did not result in any impairment charges during the six months endedJune 30, 2020 . Based on the results of our interim quantitative goodwill impairment test as ofMarch 31, 2020 , we estimated that the fair values of both our Independent Living and Health Care Services reporting units exceeded their carrying amount by approximately 20%. Additionally, we estimated that there were no significant changes to the fair values of both our Independent Living and Health Care Services reporting units during the three months endedJune 30, 2020 . Determining the fair value of a reporting unit involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, changes in reimbursement rates from Medicare for healthcare services, and changes in healthcare reform. Significant adverse changes in our future revenues and/or operating margins, significant changes in the market for senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances, including, but not limited to, increased competition, changes in reimbursement rates from Medicare for healthcare services, and changing economic or market conditions, including market control premiums, could result in changes in fair value and the determination that additional goodwill is impaired. Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there has been a decline in the fair value of our reporting units, including estimating future cash flows, and if necessary, the fair value of our assets and liabilities. As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of the fair value of our reporting units, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss. As ofMarch 31, 2020 andJune 30, 2020 , there was a wide range of possible outcomes as a result of the COVID-19 pandemic, as there was a high degree of uncertainty about its ultimate impacts. Management's estimates of the impacts of the pandemic are highly dependent on variables that are difficult to predict, as described above. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. 40 --------------------------------------------------------------------------------
Capital Expenditures
In response to the COVID-19 pandemic, we have delayed or canceled a number of elective capital expenditure projects. As a result, we expect our full-year 2020 non-development capital expenditures, net of anticipated lessor reimbursements, and development capital expenditures to be approximately$150 million and$20 million , which reflects a$40 million and$10 million reduction to our pre-pandemic plans for 2020, respectively. We anticipate that our 2020 capital expenditures will be funded from cash on hand, cash flows from operations, and reimbursements from lessors.
Results of Operations
As ofJune 30, 2020 our total operations included 737 communities with a capacity to serve approximately 65,000 residents. As of that date we owned 355 communities (32,481 units), leased 305 communities (21,538 units), and managed 77 communities (10,694 units). The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period ofJanuary 1, 2019 toJune 30, 2020 affect the comparability of our results of operations, and summaries of such transactions and their impact on our results of operations are discussed above in "Transaction Activity and Impact of Dispositions on Results of Operations." We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. Our adoption and application of the new lease accounting standard impacted our results for the year endedDecember 31, 2019 due to our recognition of additional resident fee revenue and facility operating expense, which are non-cash and are non-recurring in years subsequent toDecember 31, 2019 . To aid in comparability between periods, presentations of our results on a same community basis, and RevPAR and RevPOR, exclude the impact of the lease accounting standard. • Operating results and data presented on a same community basis reflect
results and data of a consistent population of communities by excluding the
impact of changes in the composition of our portfolio of communities. The
operating results exclude hurricane and natural disaster expense and related
insurance recoveries, and for the 2019 periods, exclude the additional
resident fee revenue and facility operating expense recognized as a result of
the application of the lease accounting standard ASC 842. We define our same
community portfolio as communities consolidated and operational for the full
period in both comparison years. Consolidated communities excluded from the
same community portfolio include communities acquired or disposed of since
the beginning of the prior year, communities classified as assets held for
sale, certain communities planned for disposition, certain communities that
have undergone or are undergoing expansion, redevelopment, and repositioning
projects, certain communities that have expansion, redevelopment, and
repositioning projects that are anticipated to be under construction in the
current year, and certain communities that have experienced a casualty event
that significantly impacts their operations. Our management uses same
community operating results and data, and we believe such results and data
provide useful information to investors, because it enables comparisons of
revenue, expense, and other operating measures for a consistent portfolio
over time without giving effect to the impacts of communities that were not
consolidated and operational for the comparison periods, communities acquired
or disposed during the comparison periods (or planned for disposition), and
communities with results that are or likely will be impacted by completed,
in-process, or planned development-related capital expenditure projects. As
presented herein, same community results include the direct costs incurred to
prepare for and respond to the COVID-19 pandemic. These costs had been
excluded from same community results presented in our quarterly report on
Form 10-Q for the three months ended
• RevPAR, or average monthly senior housing resident fee revenue per available
unit, is defined as resident fee revenue for the corresponding portfolio for
the period (excluding Health Care Services segment revenue and entrance fee
amortization, and, for the 2019 periods, the additional resident fee revenue
recognized as a result of the application of the lease accounting standard
ASC 842), divided by the weighted average number of available units in the
corresponding portfolio for the period, divided by the number of months in
the period. We measure RevPAR at the consolidated level, as well as at the
segment level with respect to our Independent Living, Assisted Living and
the measure provides useful information to investors, because the measure is
an indicator of senior housing resident fee revenue performance that reflects
the impact of both senior housing occupancy and rate.
• RevPOR, or average monthly senior housing resident fee revenue per occupied
unit, is defined as resident fee revenue for the corresponding portfolio for
the period (excluding Health Care Services segment revenue and entrance fee
amortization, and, for the 2019 periods, the additional resident fee revenue
recognized as a result of the application of the lease accounting standard
ASC 842), divided by the weighted average number of occupied units in the
corresponding portfolio for the period, divided by the number of months in
the period. We measure RevPOR at the consolidated level, as well as at the
segment level with respect to our Independent Living, Assisted Living and
Memory Care , and CCRCs segments. Our management uses 41
-------------------------------------------------------------------------------- RevPOR, and we believe the measure provides useful information to investors, because it reflects the average amount of senior housing resident fee revenue we derive from an occupied unit per month without factoring occupancy rates. RevPOR is a significant driver of our senior housing revenue performance.
• Weighted average occupancy rate reflects the percentage of units at our owned
and leased communities being utilized by residents over a reporting period.
We measure occupancy rates with respect to our Independent Living, Assisted
Living and
on a consolidated senior housing and a same community basis. Our management
uses weighted average occupancy, and we believe the measure provides useful
information to investors, because it is a significant driver to senior
housing resident fee revenue.
This section includes the non-GAAP performance measure Adjusted EBITDA. See
"Non-GAAP Financial Measures" below for our definition of the measure and other
important information regarding such measure, including reconciliations to the
most comparable GAAP measures.
Comparison of Three Months Ended
Summary Operating Results
The following table summarizes our overall operating results for the three
months ended
Three Months Ended
June 30, Increase (Decrease)
(in thousands) 2020 2019 Amount Percent
Total revenue and other operating income $ 865,909 $ 1,019,457 $ (153,548 ) (15.1 )%
Facility operating expense 606,034 590,246 15,788 2.7 %
Net income (loss) (118,420 ) (56,055 ) 62,365 111.3 %
Adjusted EBITDA 44,733 104,036 (59,303 ) (57.0 )%
The decrease in total revenue and other operating income was primarily
attributable to a $110.0 million decrease in management services revenue,
including management fees and reimbursed costs incurred on behalf of managed
communities, primarily due to terminations of management agreements subsequent
to the beginning of the prior year period. Resident fees decreased $70.2
million , including a 3.5% decrease in same community RevPAR, comprised of a 480
basis points decrease in same community weighted average occupancy and a 2.3%
increase in same community RevPOR. We estimate that the COVID-19 pandemic and
our response efforts resulted in $43.1 million of lost resident fee revenue on a
same community basis for the three months ended June 30, 2020 . Estimated lost
resident fee revenue represents the difference between the actual revenue for
the period and our expectations prior to estimating the effects of COVID-19.
Revenue for home health services decreased $24.3 million , as our home health
average daily census began to decrease in March 2020 due to the COVID-19
pandemic and the implementation of the Patient-Driven Grouping Model ("PDGM"),
an alternate home health case-mix adjustment methodology with a 30-day unit of
payment, which became effective beginning January 1, 2020 . Additionally, the
disposition of 20 communities through sales of owned communities and lease
terminations since the beginning of the prior year period resulted in $15.2
million less in resident fees during the three months ended June 30, 2020
compared to the prior year period. Our total revenue and other operating income
for the three months ended June 30, 2020 includes $26.7 million of government
grants as other operating income based on our estimates of our satisfaction of
the conditions of the grants during the period.
The increase in facility operating expense was primarily attributable to an
11.3% increase in same community facility operating expense, which was primarily
due to $52.9 million of incremental costs incurred during the three months ended
June 30, 2020 to address the COVID-19 pandemic. Additionally, there was an
increase in labor expense on a same community basis arising from wage rate
increases. The increase in same community facility operating expense was
partially offset by decreases in repairs and maintenance costs due to fewer
move-ins and advertising costs during the period as we intentionally scaled back
such activities. The increase in facility operating expense was partially offset
by a decrease in labor costs for home health services as we adjusted our home
health services operational structure, to better align our facility operating
expenses and business model with the new payment model.
In addition to the foregoing factors, we recognized additional resident fee
revenue and additional facility operating expense of $5.3 million and $11.8
million , respectively, during the three months ended June 30, 2019 as a result
of the application of the new lease accounting standard effective January 1,
2019 . Same community resident fee revenue and facility operating expense
excludes $4.9 million and $10.9 million , respectively, of such additional
revenue and expenses.
42
--------------------------------------------------------------------------------
The increase in net loss was primarily attributable to a $100.6 million decrease
in reimbursed costs incurred on behalf of managed communities, as well as the
revenue and facility operating expense factors previously discussed.
The decrease in Adjusted EBITDA was primarily attributable to the revenue and
facility operating expense factors previously discussed, partially offset by a
decrease in general and administrative expense.
Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living andMemory Care , and CCRCs) on a combined basis for the three months endedJune 30, 2020 and 2019, including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. (in thousands, except communities, Three Months Ended units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease) 2020 2019 Amount Percent Resident fees$ 641,459 $ 687,429 $ (45,970 ) (6.7 )% Other operating income$ 9,698 $ -$ 9,698 NM Facility operating expense$ 508,561 $ 484,979 $ 23,582 4.9 % Number of communities (period end) 660 671 (11 ) (1.6 )% Number of units (period end) 54,019 55,209 (1,190 ) (2.2 )% Total average units 54,040 55,465 (1,425 ) (2.6 )% RevPAR$ 3,954 $ 4,097 $ (143 ) (3.5 )% Occupancy rate (weighted average) 78.7 % 83.5 % (480 ) bps n/a RevPOR$ 5,022 $ 4,909 $ 113 2.3 % Same Community Operating Results and Data Resident fees$ 597,511 $ 619,285 $ (21,774 ) (3.5 )% Other operating income$ 6,445 $ -$ 6,445 NM Facility operating expense$ 467,970 $ 420,643 $ 47,327 11.3 % Number of communities 638 638 - - Total average units 50,107 50,101 6 - RevPAR$ 3,975 $ 4,120 $ (145 ) (3.5 )% Occupancy rate (weighted average) 79.2 % 84.0 % (480 ) bps n/a RevPOR$ 5,020 $ 4,905 $ 115 2.3 % 43
--------------------------------------------------------------------------------
Independent Living Segment
The following table summarizes the operating results and data for our
Independent Living segment for the three months ended
June 30, Increase (Decrease)
2020 2019 Amount Percent
Resident fees $ 130,278 $ 135,951 $ (5,673 ) (4.2 )%
Facility operating expense $ 89,240 $ 84,492 $ 4,748 5.6 %
Number of communities (period end) 68 68 - - %
Number of units (period end) 12,534 12,460 74 0.6 %
Total average units 12,534 12,440 94 0.8 %
RevPAR $ 3,465 $ 3,592 $ (127 ) (3.5 )%
Occupancy rate (weighted average) 83.5 % 89.1 % (560 ) bps n/a
RevPOR $ 4,147 $ 4,033 $ 114 2.8 %
Same Community Operating Results and
Data
Resident fees $ 122,716 $ 126,563 $ (3,847 ) (3.0 )%
Facility operating expense $ 83,492 $ 76,796 $ 6,696 8.7 %
Number of communities 64 64 - -
Total average units 11,703 11,690 13 0.1 %
RevPAR $ 3,495 $ 3,609 $ (114 ) (3.2 )%
Occupancy rate (weighted average) 83.8 % 88.8 % (500 ) bps n/a
RevPOR $ 4,169 $ 4,063 $ 106 2.6 %
The decrease in the segment's resident fees was primarily attributable to a
decrease in the segment's same community RevPAR, comprised of a 500 basis points
decrease in same community weighted average occupancy and a 2.6% increase in
same community RevPOR. The decrease in the segment's same community weighted
average occupancy primarily reflects the impact of reduced move-in activity
related to the COVID-19 pandemic and our response efforts. We estimate that the
COVID-19 pandemic and our response efforts resulted in $6.4 million of lost
resident fee revenue on a same community basis for this segment for the three
months ended June 30, 2020 . The increase in the segment's same community RevPOR
was primarily the result of in-place rent increases.
The increase in the segment's facility operating expense was primarily
attributable to an increase in the segment's same community facility operating
expense as a result of $8.8 million of incremental direct costs to prepare for
and respond to the COVID-19 pandemic, partially offset by decreases in repairs
and maintenance costs due to fewer move-ins and advertising costs during the
period as we intentionally scaled back such activities.
In addition to the foregoing factors, we recognized additional resident fee
revenue and additional facility operating expense for this segment of
44
--------------------------------------------------------------------------------Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted
Living and
June 30, Increase (Decrease)
2020 2019 Amount Percent
Resident fees $ 432,156 $ 450,225 $ (18,069 ) (4.0 )%
Other operating income $ 152 $ - $ 152 NM
Facility operating expense $ 344,600 $ 317,081 $ 27,519 8.7 %
Number of communities (period end) 570 577 (7 ) (1.2 )%
Number of units (period end) 35,744 36,175 (431 ) (1.2 )%
Total average units 35,785 36,451 (666 ) (1.8 )%
RevPAR $ 4,025 $ 4,092 $ (67 ) (1.6 )%
Occupancy rate (weighted average) 77.8 % 82.1 % (430 ) bps n/a
RevPOR $ 5,172 $ 4,987 $ 185 3.7 %
Same Community Operating Results and
Data
Resident fees $ 424,021 $ 433,211 $ (9,190 ) (2.1 )%
Other operating income $ 151 $ - $ 151 NM
Facility operating expense $ 336,342 $ 297,421 $ 38,921 13.1 %
Number of communities 560 560 - -
Total average units 34,792 34,799 (7 ) -
RevPAR $ 4,062 $ 4,150 $ (88 ) (2.1 )%
Occupancy rate (weighted average) 78.2 % 82.6 % (440 ) bps n/a
RevPOR $ 5,191 $ 5,024 $ 167 3.3 %
The decrease in the segment's resident fees was primarily attributable to a
decrease in the segment's same community RevPAR, comprised of a 440 basis points
decrease in same community weighted average occupancy and a 3.3% increase in
same community RevPOR. The decrease in the segment's same community weighted
average occupancy primarily reflects the impact of reduced move-in activity
related to the COVID-19 pandemic and our response efforts. We estimate that the
COVID-19 pandemic and our response efforts resulted in $26.0 million of lost
resident fee revenue on a same community basis for this segment for the three
months ended June 30, 2020 . The increase in the segment's same community RevPOR
was primarily the result of in-place rent increases. Additionally, the
disposition of 16 communities since the beginning of the prior year period
resulted in $5.7 million less in resident fees during the three months ended
June 30, 2020 compared to the prior year period.
The increase in the segment's facility operating expense was primarily
attributable to an increase in the segment's same community facility operating
expense, including $38.0 million of incremental direct costs to prepare for and
respond to the COVID-19 pandemic, and an increase in labor expense arising from
wage rate increases. The increase in the segment's same community facility
operating expense was partially offset by decreases in repairs and maintenance
costs due to fewer move-ins and advertising costs during the period as we
intentionally scaled back such activities. Additionally, the disposition of
communities since the beginning of the prior year period resulted in $4.8
million less in facility operating expense during the three months ended June
30, 2020 compared to the prior year period.
In addition to the foregoing factors, we recognized additional resident fee
revenue and additional facility operating expense for this segment of
45
--------------------------------------------------------------------------------CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the three months endedJune 30, 2020 and 2019, including operating results and data on a same community basis. (in thousands, except communities, Three Months Ended units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease) 2020 2019 Amount Percent Resident fees$ 79,025 $ 101,253 $ (22,228 ) (22.0 )% Other operating income$ 9,546 $ -$ 9,546 NM Facility operating expense$ 74,721 $ 83,406 $ (8,685 ) (10.4 )% Number of communities (period end) 22 26 (4 ) (15.4 )% Number of units (period end) 5,741 6,574 (833 ) (12.7 )% Total average units 5,721 6,574 (853 ) (13.0 )% RevPAR$ 4,572 $ 5,081 $ (509 ) (10.0 )% Occupancy rate (weighted average) 74.0 % 80.6 % (660 ) bps n/a RevPOR$ 6,181 $ 6,305 $ (124 ) (2.0 )% Same Community Operating Results and Data Resident fees$ 50,774 $ 59,511 $ (8,737 ) (14.7 )% Other operating income$ 6,294 $ -$ 6,294 NM Facility operating expense$ 48,136 $ 46,426 $ 1,710 3.7 % Number of communities 14 14 - - Total average units 3,612 3,612 - - RevPAR$ 4,686 $ 5,492 $ (806 ) (14.7 )% Occupancy rate (weighted average) 72.9 % 82.0 % (910 ) bps n/a RevPOR$ 6,430 $ 6,701 $ (271 ) (4.0 )% The decrease in the segment's resident fees was primarily attributable to a decrease in the segment's same community RevPAR, comprised of a 910 basis points decrease in same community weighted average occupancy and a 4.0% decrease in same community RevPOR. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic and our response efforts. We estimate that the COVID-19 pandemic and our response efforts resulted in$10.7 million of lost resident fee revenue on a same community basis for this segment for the three months endedJune 30, 2020 . The decrease in the segment's same community RevPOR was primarily the result of a mix shift away from skilled nursing within the segment, partially offset by in-place rent increases. Additionally, the disposition of four communities since the beginning of the prior year period resulted in$9.5 million less in resident fees during the three months endedJune 30, 2020 compared to the prior year period. The decrease in the segment's facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in$9.5 million less in facility operating expense during the three months endedJune 30, 2020 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment's same community facility operating expense as a result of$6.1 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic, partially offset by decreases in labor expense arising from fewer hours worked and healthcare supplies costs during the period as we intentionally scaled back such costs for the reduced occupancy.
In addition to the foregoing factors, we recognized additional resident fee
revenue and additional facility operating expense for this segment of
46
--------------------------------------------------------------------------------Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health
Care Services segment for the three months ended
Three Months Ended
treatment codes) June 30, Increase (Decrease)
2020 2019 Amount Percent
Resident fees $ 90,170 $ 114,434 $ (24,264 ) (21.2 )%
Other operating income $ 16,995 $ - $ 16,995 NM
Facility operating expense $ 97,473 $ 105,267 $ (7,794 ) (7.4 )%
Home health average daily census 12,980 15,966 (2,986 ) (18.7 )%
Hospice average daily census 1,646 1,540 106 6.9 %
The decrease in the segment's resident fees was primarily attributable to a decrease in revenue for home health services, as our home health average daily census began to decrease inMarch 2020 due to the COVID-19 pandemic, as referrals declined significantly due to suspension of elective medical procedures and hospital discharges increased due to stay-at-home orders and recommendations. Additionally, the implementation of the Patient-Driven Grouping Model ("PDGM"), an alternate home health case-mix adjustment methodology with a 30-day unit of payment, which became effective beginningJanuary 1, 2020 , resulted in a decrease in revenue for home health services. The decrease in resident fees was partially offset by an increase in volume and related revenues for hospice services. We estimate that the COVID-19 pandemic and our response efforts resulted in$14.8 million of lost resident fee revenue for the three months endedJune 30, 2020 . The decrease in the segment's facility operating expense was primarily attributable to a decrease in labor costs for home health services as we adjusted our home health services operational structure, to better align our facility operating expenses and business model with the new payment model. The decrease in the segment's facility operating expense was partially offset by$3.1 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic and an increase in labor costs for hospice services arising from wage rate increases and the expansion of our hospice services throughout 2019.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the three months endedJune 30, 2020 and 2019. (in thousands, except communities, Three Months Ended units, and occupancy) June 30, Increase (Decrease) 2020 2019 Amount Percent Management fees$ 6,076 $ 15,449 $ (9,373 ) (60.7 )% Reimbursed costs incurred on behalf of managed communities$ 101,511 $ 202,145 $
(100,634 ) (49.8 )%
Number of communities (period end) 77 138 (61 ) (44.2 )% Number of units (period end) 10,694 21,451 (10,757 ) (50.1 )% Total average units 10,905 22,464 (11,559 ) (51.5 )% The decrease in management fees was primarily attributable to the transition of management arrangements on 87 net communities since the beginning of the prior year period, generally for management arrangements on certain former unconsolidated ventures in which we sold our interest and interim management arrangements on formerly leased communities. Management fees of$6.1 million for the three months endedJune 30, 2020 include$1.8 million of management fees attributable to communities for which our management agreements were terminated during such period or we expect the terminations of our management agreements to occur in the next approximately 12 months, including management arrangements on certain former unconsolidated ventures in which we sold our interest, management agreements on communities owned by unconsolidated ventures, and interim management arrangements on formerly leased communities. 47 -------------------------------------------------------------------------------- The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating
results for the three months ended
Three Months Ended
(in thousands) June 30, Increase (Decrease)
2020 2019 Amount Percent
General and administrative
expense $ 52,518 $ 57,576 $ (5,058 ) (8.8 )%
Facility operating lease expense 62,379 67,689 (5,310 ) (7.8 )%
Depreciation and amortization 93,154 94,024 (870 ) (0.9 )%
Asset impairment 10,290 3,769 6,521 173.0 %
Loss (gain) on facility lease
termination and modification,
net - 1,797 (1,797 ) (100.0 )%
Costs incurred on behalf of
managed communities 101,511 202,145 (100,634 ) (49.8 )%
Interest income 2,243 2,813 (570 ) (20.3 )%
Interest expense (52,422 ) (62,828 ) (10,406 ) (16.6 )%
Gain (loss) on debt modification
and extinguishment, net (157 ) (2,672 ) (2,515 ) (94.1 )%
Equity in earnings (loss) of
unconsolidated ventures 438 (991 ) 1,429 NM
Gain (loss) on sale of assets,
net (1,029 ) 2,846 (3,875 ) NM
Other non-operating income
(loss) 988 3,199 (2,211 ) (69.1 )%
Benefit (provision) for income
taxes (8,504 ) (633 ) 7,871 NM
General and Administrative Expense. The decrease in general and administrative
expense was primarily attributable to a reduction in our travel costs as we
intentionally scaled back such activities, a reduction in our incentive
compensation costs, and a reduction in our corporate headcount as we scaled our
general and administrative costs in connection with community dispositions. The
decrease was partially offset by a $2.7 million increase in transactional and
organizational restructuring costs compared to the prior period, to $3.4 million
for the three months ended June 30, 2020 . Transaction costs include those
directly related to acquisition, disposition, financing and leasing activity,
and stockholder relations advisory matters, and are primarily comprised of
legal, finance, consulting, professional fees and other third party costs.
Organizational restructuring costs include those related to our efforts to
reduce general and administrative expense and our senior leadership changes,
including severance costs. We expect transaction and organizational
restructuring costs will be higher in the three months ending September 30, 2020
including such costs incurred with respect to the transaction with Ventas
announced on July 27, 2020 .
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to the acquisition of formerly leased communities since the beginning of the prior year period.
Asset Impairment. During the current year period, we recorded$10.3 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic. During the prior year period, we recorded$3.8 million of non-cash impairment charges. See Note 6 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about the impairment charges. Costs Incurred on Behalf of Managed Communities. The decrease in costs incurred on behalf of managed communities was primarily due to terminations of management agreements subsequent to the beginning of the prior year period.
Interest Expense. The decrease in interest expense was primarily due to a decrease in interest expense on long-term debt, reflecting the impact of lower interest rates, and the acquisition of communities previously subject to financing leases since the beginning of the prior year period.
Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the three months endedJune 30, 2020 and 2019 was primarily due to the annualized effective rate for 2020. 48 -------------------------------------------------------------------------------- We recorded an aggregate deferred federal, state, and local tax benefit of$26.7 million as a result of the operating loss for the three months endedJune 30, 2020 , which was offset by an increase in the valuation allowance of$33.2 million . The change in the valuation allowance for the three months endedJune 30, 2020 resulted from the anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of$13.0 million as a result of the operating loss for the three months endedJune 30, 2019 . The tax benefit was offset by an increase in the valuation allowance of$13.3 million .
Comparison of Six Months Ended
Summary Operating Results
The following table summarizes our overall operating results for the six months
ended
Six Months Ended
June 30, Increase (Decrease)
(in thousands) 2020 2019 Amount Percent
Total revenue and other operating income $ 1,880,048 $ 2,061,501 $ (181,453 ) (8.8 )%
Facility operating expense 1,194,516 1,176,340 18,176 1.5 %
Net income (loss) 251,077 (98,661 ) 349,738 NM
Adjusted EBITDA 229,802 220,619 9,183 4.2 %
The decrease in total revenue and other operating income was primarily
attributable to an $111.1 million decrease in management services revenue,
including management fees and reimbursed costs incurred on behalf of managed
communities, primarily due to terminations of management agreements subsequent
to the beginning of the prior year period, partially offset by $100.0 million of
management fee revenue during the three months ended March 31, 2020 for the
management termination fee payment from Healthpeak. Resident fees decreased
$97.0 million , including a $42.5 million decrease for home health services, as
our home health average daily census began to decrease in March 2020 due to the
COVID-19 pandemic and the implementation of the Patient-Driven Grouping Model
("PDGM"), an alternate home health case-mix adjustment methodology with a 30-day
unit of payment, which became effective beginning January 1, 2020 . Additionally,
the disposition of 27 communities through sales of owned communities and lease
terminations since the beginning of the prior year period resulted in $37.4
million less in resident fees during the six months ended June 30, 2020 compared
to the prior year period. Same community RevPAR decreased 0.7%, comprised of a
280 basis points decrease in same community weighted average occupancy and a
2.7% increase in same community RevPOR. We estimate that the COVID-19 pandemic
and our response efforts resulted in $45.5 million of lost resident fee revenue
on a same community basis for the six months ended June 30, 2020 . Our total
revenue and other operating income for the six months ended June 30, 2020
includes $26.7 million of government grants as other operating income based on
our estimates of our satisfaction of the conditions of the grants during the
period.
The increase in facility operating expense was primarily attributable to a 9.2%
increase in same community facility operating expense, which was primarily due
to $62.0 million of incremental costs incurred during the six months ended June
30, 2020 to address the COVID-19 pandemic. Additionally, there was an increase
in labor expense arising from wage rate increases, an increase in employee
benefit expense, and an extra day of expense due to the leap year . The increase
was partially offset by the disposition of communities since the beginning of
the prior year period, which resulted in $34.2 million less in facility
operating expense during the six months ended June 30, 2020 compared to the
prior year period.
In addition to the foregoing factors, we recognized additional resident fee
revenue and additional facility operating expense of $8.1 million and $21.0
million , respectively, during the six months ended June 30, 2019 as a result of
the application of the new lease accounting standard effective January 1, 2019 .
Same community resident fee revenue and facility operating expense excludes $7.4
million and $19.3 million , respectively, of such additional revenue and
expenses.
The increase in net income was primarily attributable to a $369.8 million
increase in net gain on sale of assets, resulting from our sale of our interest
in the CCRC Venture, offset by the net revenue and facility operating expense
factors previously discussed.
The increase in Adjusted EBITDA was primarily attributable to the management termination fee, offset by the other revenue and facility operating expense factors previously discussed.
49
--------------------------------------------------------------------------------Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living andMemory Care , and CCRCs) on a combined basis for the six months endedJune 30, 2020 and 2019 including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. (in thousands, except communities, Six Months Ended units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease) 2020 2019 Amount Percent Resident fees$ 1,329,347 $ 1,385,376 $ (56,029 ) (4.0 )% Other operating income$ 9,698 $ -$ 9,698 NM Facility operating expense$ 993,103 $ 967,714 $ 25,389 2.6 % Number of communities (period end) 660 671 (11 ) (1.6 )% Number of units (period end) 54,019 55,209 (1,190 ) (2.2 )% Total average units 54,112 55,963 (1,851 ) (3.3 )% RevPAR$ 4,092 $ 4,100 $ (8 ) (0.2 )% Occupancy rate (weighted average) 81.0 % 83.5 % (250 ) bps n/a RevPOR$ 5,054 $ 4,909 $ 145 3.0 % Same Community Operating Results and Data Resident fees$ 1,234,565 $ 1,243,404 $ (8,839 ) (0.7 )% Other operating income$ 6,445 $ -$ 6,445 NM Facility operating expense$ 913,589 $ 836,479 $ 77,110 9.2 % Number of communities 638 638 - - Total average units 50,111 50,097 14 - RevPAR$ 4,106 $ 4,137 $ (31 ) (0.7 )% Occupancy rate (weighted average) 81.4 % 84.2 % (280 ) bps n/a RevPOR$ 5,047 $ 4,914 $ 133 2.7 % 50
--------------------------------------------------------------------------------
Independent Living Segment
The following table summarizes the operating results and data for our
Independent Living segment for the six months ended
Six Months Ended
units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease)
2020 2019 Amount Percent
Resident fees $ 266,140 $ 271,645 $ (5,505 ) (2.0 )%
Other operating income $ - $ - $ - NM
Facility operating expense $ 173,688 $ 167,310 $ 6,378 3.8 %
Number of communities (period end) 68 68 - - %
Number of units (period end) 12,534 12,460 74 0.6 %
Total average units 12,532 12,435 97 0.8 %
RevPAR $ 3,540 $ 3,597 $ (57 ) (1.6 )%
Occupancy rate (weighted average) 85.3 % 89.4 % (410 ) bps n/a
RevPOR $ 4,149 $ 4,023 $ 126 3.1 %
Same Community Operating Results and
Data
Resident fees $ 250,659 $ 253,385 $ (2,726 ) (1.1 )%
Other operating income $ - $ - $ - NM
Facility operating expense $ 162,656 $ 152,121 $ 10,535 6.9 %
Number of communities 64 64 - -
Total average units 11,705 11,685 20 0.2 %
RevPAR $ 3,569 $ 3,614 $ (45 ) (1.2 )%
Occupancy rate (weighted average) 85.6 % 89.2 % (360 ) bps n/a
RevPOR $ 4,172 $ 4,053 $ 119 2.9 %
The decrease in the segment's resident fees was primarily attributable to the
additional resident fee revenue for this segment of $3.3 million during the six
months ended June 30, 2019 as a result of the application of the new lease
accounting standard effective January 1, 2019 and a decrease in the segment's
same community RevPAR, comprised of a 360 basis points decrease in same
community weighted average occupancy and a 2.9% increase in same community
RevPOR. The decrease in the segment's same community weighted average occupancy
primarily reflects the impact of reduced move-in activity related to the
COVID-19 pandemic and our response efforts. We estimate that the COVID-19
pandemic and our response efforts resulted in $6.9 million of lost resident fee
revenue on a same community basis for this segment for the six months ended June
30, 2020 . The increase in the segment's same community RevPOR was primarily the
result of in-place rent increases.
The increase in the segment's facility operating expense was primarily
attributable to an increase in the segment's same community facility operating
expense, including $9.9 million of incremental direct costs to prepare for and
respond to the COVID-19 pandemic, an increase in labor expense arising from wage
rate increases, an increase in employee benefit expense, and an extra day of
expense due to the leap year . These increases in the segment's same community
facility operating expense were partially offset by decreases in repairs and
maintenance costs due to fewer move-ins during the period as we intentionally
scaled back such activities.
We recognized additional resident fee revenue and additional facility operating
expense for this segment of $3.3 million and $5.7 million , respectively, during
the six months ended June 30, 2019 as a result of the application of the new
lease accounting standard effective January 1, 2019 . Same community resident fee
revenue and facility operating expense for this segment excludes approximately
$3.1 million and $5.4 million , respectively, of such additional revenue and
expenses.
51
--------------------------------------------------------------------------------Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living andMemory Care segment for the six months endedJune 30, 2020 and 2019, including operating results and data on a same community basis. (in thousands, except communities, Six Months Ended units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease) 2020 2019 Amount Percent Resident fees$ 889,635 $ 908,751 $ (19,116 ) (2.1 )% Other operating income$ 152 $ -$ 152 NM Facility operating expense$ 670,078 $ 634,908 $ 35,170 5.5 % Number of communities (period end) 570 577 (7 ) (1.2 )% Number of units (period end) 35,744 36,175 (431 ) (1.2 )% Total average units 35,864 36,964 (1,100 ) (3.0 )% RevPAR$ 4,134 $ 4,081 $ 53 1.3 % Occupancy rate (weighted average) 79.9 % 81.8 % (190 ) bps n/a RevPOR$ 5,175 $ 4,987 $ 188 3.8 % Same Community Operating Results and Data Resident fees$ 871,629 $ 868,798 $ 2,831 0.3 % Other operating income$ 151 $ -$ 151 NM Facility operating expense$ 654,941 $ 591,394 $ 63,547 10.7 % Number of communities 560 560 - - Total average units 34,794 34,800 (6 ) - RevPAR$ 4,175 $ 4,161 $ 14 0.3 % Occupancy rate (weighted average) 80.3 % 82.7 % (240 ) bps n/a RevPOR$ 5,197 $ 5,036 $ 161 3.2 % The decrease in the segment's resident fees was primarily attributable to the disposition of 22 communities since the beginning of the prior year period, which resulted in$18.0 million less in resident fees during the six months endedJune 30, 2020 compared to the prior year period. The decrease in resident fees was partially offset by the increase in the segment's same community RevPAR, comprised of a 3.2% increase in same community RevPOR and a 240 basis points decrease in same community weighted average occupancy. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic and our response efforts. We estimate that the COVID-19 pandemic and our response efforts resulted in$27.6 million of lost resident fee revenue on a same community basis for this segment for the six months endedJune 30, 2020 . The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including$45.5 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic, and an increase in labor expense arising from wage rate increases, increased contract labor costs, an increase in employee benefit expense, and an extra day of expense due to theleap year . The increase in the segment's same community facility operating expense was partially offset by decreases in repairs and maintenance costs due to fewer move-ins during the period as we intentionally scaled back such activities. The increase in facility operating expense was partially offset by the disposition of communities since the beginning of the prior year period, which resulted in$15.2 million less in facility operating expense during the six months endedJune 30, 2020 compared to the prior year period. In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately$3.6 million and$12.8 million , respectively, during the six months endedJune 30, 2019 as a result of the application of the new lease accounting standard effectiveJanuary 1, 2019 . Same community resident fee revenue and facility operating expense for this segment excludes approximately$3.5 million and$12.2 million , respectively, of such additional revenue and expenses. 52 --------------------------------------------------------------------------------
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the six months endedJune 30, 2020 and 2019, including operating results and data on a same community basis. (in thousands, except communities, Six Months Ended units, occupancy, RevPAR, and RevPOR) June 30, Increase (Decrease) 2020 2019 Amount Percent Resident fees$ 173,572 $ 204,980 $ (31,408 ) (15.3 )% Other operating income$ 9,546 $ -$ 9,546 NM Facility operating expense$ 149,337 $ 165,496 $ (16,159 ) (9.8 )% Number of communities (period end) 22 26 (4 ) (15.4 )% Number of units (period end) 5,741 6,574 (833 ) (12.7 )% Total average units 5,716 6,564 (848 ) (12.9 )% RevPAR$ 5,034 $ 5,156 $ (122 ) (2.4 )% Occupancy rate (weighted average) 78.2 % 81.7 % (350 ) bps n/a RevPOR$ 6,438 $ 6,308 $ 130 2.1 % Same Community Operating Results and Data Resident fees$ 112,277 $ 121,221 $ (8,944 ) (7.4 )% Other operating income$ 6,294 $ -$ 6,294 NM Facility operating expense$ 95,992 $ 92,964 $ 3,028 3.3 % Number of communities 14 14 - - Total average units 3,612 3,612 - - RevPAR$ 5,181 $ 5,594 $ (413 ) (7.4 )% Occupancy rate (weighted average) 77.5 % 83.2 % (570 ) bps n/a RevPOR$ 6,672 $ 6,725 $ (53 ) (0.8 )% The decrease in the segment's resident fees was primarily attributable to the disposition of five communities since the beginning of the prior year period, which resulted in$19.4 million less in resident fees during the six months endedJune 30, 2020 compared to the prior year period. Additionally, there was a decrease in the segment's same community RevPAR, comprised of a 570 basis points decrease in same community weighted average occupancy and a 0.8% decrease in same community RevPOR. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic and our response efforts. We estimate that the COVID-19 pandemic and our response efforts resulted in$11.0 million of lost resident fee revenue on a same community basis for this segment for the six months endedJune 30, 2020 . The decrease in the segment's same community RevPOR was primarily the result of a mix shift away from skilled nursing within the segment, partially offset by in-place rent increases. The decrease in the segment's facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year period, which resulted in$19.0 million less in facility operating expense during the six months endedJune 30, 2020 compared to the prior year period. The decrease in facility operating expense was partially offset by an increase in the segment's same community facility operating expense, including$6.5 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic, partially offset by decreases in labor expense arising from fewer hours worked and healthcare supplies costs during the period as we intentionally scaled back such costs for the reduced occupancy. In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately$1.1 million and$2.5 million , respectively, during the six months endedJune 30, 2019 as a result of the application of the new lease accounting standard effectiveJanuary 1, 2019 . Same community resident fee revenue and facility operating expense for this segment excludes approximately$0.8 million and$1.7 million , respectively, of such additional revenue and expenses. 53 --------------------------------------------------------------------------------
Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health
Care Services segment for the six months ended
Six Months Ended
treatment codes) June 30, Increase (Decrease)
2020 2019 Amount Percent
Resident fees $ 184,989 $ 225,966 $ (40,977 ) (18.1 )%
Other operating income $ 16,995 $ - $ 16,995 NM
Facility operating expense $ 201,413 $ 208,626 $ (7,213 ) (3.5 )%
Home health average daily census 13,500 15,935 (2,435 ) (15.3 )%
Hospice average daily census 1,672 1,485 187 12.6 %
The decrease in the segment's resident fees was primarily attributable to a
decrease in revenue for home health services, which reflects the implementation
of the Patient-Driven Grouping Model ("PDGM"), an alternate home health case-mix
adjustment methodology with a 30-day unit of payment, which became effective
beginning January 1, 2020 . Additionally, our home health average daily census
also began to decrease in March 2020 due to the COVID-19 pandemic, as referrals
declined significantly due to suspension of elective medical procedures and
hospital discharges increased due to stay-at-home orders and recommendations.
The decrease in resident fees was partially offset by an increase in volume for
hospice services. We estimate that the COVID-19 pandemic and our response
efforts resulted in $17.9 million of lost resident fee revenue for the six
months ended June 30, 2020 .
The decrease in the segment's facility operating expense was primarily
attributable to a decrease in labor costs for home health services as we
adjusted our home health services operational structure, to better align our
facility operating expenses and business model with the new payment model. The
decrease in the segment's facility operating expense was partially offset by
$3.5 million of incremental direct costs to prepare for and respond to the
COVID-19 pandemic and an increase in labor costs for hospice services arising
from wage rate increases and the expansion of our hospice services throughout
2019.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management
Services segment for the six months ended
Six Months Ended
units, and occupancy) June 30, Increase (Decrease)
2020 2019 Amount Percent
Management fees $ 114,791 $ 31,192 $ 83,599 NM
Reimbursed costs incurred on behalf of
managed communities $ 224,228 $ 418,967 Number of communities (period end) 77 138 (61 ) (44.2 )% Number of units (period end) 10,694 21,451 (10,757 ) (50.1 )% Total average units 12,115 23,755 (11,640 ) (49.0 )% The increase in management fees was primarily attributable to the$100.0 million management termination fee payment received from Healthpeak during the three months endedMarch 31, 2020 . We have completed the transition of management arrangements on 128 net communities since the beginning of the prior year period, generally for interim management arrangements on former unconsolidated ventures in which we sold our interest and interim management arrangements on formerly leased or owned communities. Management fees of$114.8 million for the six months endedJune 30, 2020 include$102.2 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately$3.3 million of management fees attributable to communities that we expect the terminations of our management agreements to occur in the next approximately 12 months, including management agreements on certain former unconsolidated ventures in which 54 --------------------------------------------------------------------------------
we sold our interest, management agreements on communities owned by unconsolidated ventures, and interim management arrangements on formerly leased communities.
The decrease in reimbursed costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year period.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating
results for the six months ended
Six Months Ended
(in thousands) June 30, Increase (Decrease)
2020 2019 Amount Percent
General and administrative
expense $ 107,113 $ 113,887 $ (6,774 ) (5.9 )%
Facility operating lease expense 126,860 136,357 (9,497 ) (7.0 )%
Depreciation and amortization 183,892 190,912 (7,020 ) (3.7 )%
Asset impairment 88,516 4,160 84,356 NM
Loss (gain) on facility lease
termination and modification,
net - 2,006 (2,006 ) (100.0 )%
Costs incurred on behalf of
managed communities 224,228 418,967 (194,739 ) (46.5 )%
Interest income 3,698 5,897 (2,199 ) (37.3 )%
Interest expense (108,782 ) (126,193 ) (17,411 ) (13.8 )%
Gain (loss) on debt modification
and extinguishment, net 19,024 (2,739 ) 21,763 NM
Equity in earnings (loss) of
unconsolidated ventures (570 ) (1,517 ) (947 ) (62.4 )%
Gain (loss) on sale of assets,
net 371,810 2,144 369,666 NM
Other non-operating income
(loss) 3,650 6,187 (2,537 ) (41.0 )%
Benefit (provision) for income
taxes 7,324 (1,312 ) 8,636 NM
General and Administrative Expense. The decrease in general and administrative
expense was primarily attributable to a reduction in our corporate headcount, as
we scaled our general and administrative costs in connection with community
dispositions, a reduction in our travel costs as we intentionally scaled back
such activities, and a reduction in our incentive compensation costs. The
decrease was partially offset by a $4.3 million increase in transactional and
organizational restructuring costs compared to the prior period, to $5.3 million
for the six months ended June 30, 2020 . Transaction costs include those directly
related to acquisition, disposition, financing and leasing activity, and
stockholder relations advisory matters, and are primarily comprised of legal,
finance, consulting, professional fees and other third party costs.
Organizational restructuring costs include those related to our efforts to
reduce general and administrative expense and our senior leadership changes,
including severance costs. We expect transaction and organizational
restructuring costs will be higher in the three months ending September 30, 2020
including such costs incurred with respect to the transaction with Ventas
announced on July 27, 2020 .
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to the acquisition of formerly leased communities and lease termination activity since the beginning of the prior year.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity through sales and lease terminations since the beginning of the prior year.
Asset Impairment. During the current year period, we recorded$88.5 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic. During the prior year period, we recorded$4.2 million of non-cash impairment charges. See Note 6 to the condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about the impairment charges. Costs Incurred on Behalf of Managed Communities. The decrease in costs incurred on behalf of managed communities was primarily due to terminations of management agreements subsequent to the beginning of the prior year period. 55 -------------------------------------------------------------------------------- Interest Expense. The decrease in interest expense was primarily due to interest expense on long-term debt, reflecting the impact of lower interest rates, and the acquisition of communities previously subject to financing leases since the beginning of the prior year period. Gain (Loss) on Debt Modification and Extinguishment, Net. The increase in gain on debt modification and extinguishment was primarily due to a$19.7 million gain on debt extinguishment recognized during the three months endedMarch 31, 2020 for the extinguishment of financing lease obligations for the acquisition from Healthpeak of eight communities which were previously subject to sale-leaseback transactions in which we were deemed to have continuing involvement. Gain (Loss) on Sale of Assets, Net. The increase in gain on sale of assets, net was primarily due to a$369.8 million gain on sale of assets recognized for the sale of our ownership interest in the CCRC Venture during the six months endedJune 30, 2020 . Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the six months endedJune 30, 2020 and 2019 was primarily due to a decrease in the valuation allowance that was a direct result of the multi-part transaction with Healthpeak. This was partially offset by the adjustment for stock-based compensation, which was greater in the six months endedJune 30, 2019 compared to the six months endedJune 30, 2020 . We recorded an aggregate deferred federal, state, and local tax expense of$64.2 million , of which,$28.9 million was recorded as a result of the benefit on our operating loss for the six months endedJune 30, 2020 . The benefit was offset by$93.1 million of tax expense that was recorded on the sale of our interest in the CCRC Venture. The tax expense was offset by a decrease in the valuation allowance of$79.5 million . The change in the valuation allowance for the six months endedJune 30, 2020 resulted from the tax impact of the Healthpeak transaction and the anticipated reversal of future tax liabilities offset by future tax deductions. We recorded an aggregate deferred federal, state, and local tax benefit of$21.2 million as a result of the operating loss for the six months endedJune 30, 2019 , which was offset by an increase in the valuation allowance of$21.7 million .
Liquidity and Capital Resources
This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures.
Liquidity and Indebtedness
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the condensed consolidated statements of cash flows, and our Adjusted Free Cash Flow:
Six Months Ended
June 30, Increase (Decrease)
(in thousands) 2020 2019 Amount Percent
Net cash provided by (used in)
operating activities $ 209,319 $ 59,119 $ 150,200 NM
Net cash provided by (used in)
investing activities (295,410 ) (80,299 ) 215,111 NM
Net cash provided by (used in)
financing activities 306,524 (104,079 ) 410,603 NM
Net increase (decrease) in cash,
cash equivalents, and restricted
cash 220,433 (125,259 ) 345,692 NM
Cash, cash equivalents, and
restricted cash at beginning of
period 301,697 450,218 (148,521 ) (33.0 )%
Cash, cash equivalents, and
restricted cash at end of period $ 522,130 $ 324,959 $ 197,171 60.7 %
Adjusted Free Cash Flow $ 118,633 $ (63,340 ) $ 181,973 NM
The increase in net cash provided by operating activities was attributable
primarily to the $100.0 million management termination fee payment received from
Healthpeak, $85.0 million of cash received under the Medicare accelerated and
advance payment program, $33.5 million of government grants accepted, and $26.5
million of social security payroll taxes deferred during the current year
period. These changes were partially offset by an increase in same community
facility operating expense, a decrease in same community revenue, and a decrease
in revenue for home health services compared to the prior year period.
56
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The increase in net cash used in investing activities was primarily attributable
to $446.7 million of cash paid for the acquisition of communities during the
current year period, a $51.2 million increase in purchases of marketable
securities compared to the prior year period, and a $30.5 million decrease in
cash proceeds from notes receivable compared to the prior year period. These
changes were partially offset by a $248.1 million increase in net proceeds from
the sale of assets, a $53.8 million increase in proceeds from sales and
maturities of marketable securities, and a $9.4 million decrease in cash paid
for capital expenditures compared to the prior year period.
The change in net cash provided by (used in) financing activities was primarily
attributable to a $315.2 million increase in debt proceeds compared to the prior
year period and $166.4 million of draws on our secured credit facility during
the current year period. These changes were partially offset by a $65.9 million
increase in repayment of debt and financing lease obligations compared to the
prior year period and a $4.1 million increase in cash paid during the current
year period for financing costs.
The increase in Adjusted Free Cash Flow was primarily attributable to the
increase in net cash provided by operating activities and a
Our principal sources of liquidity have historically been from:
• cash balances on hand, cash equivalents, and marketable securities;
• cash flows from operations;
• proceeds from our credit facilities;
• funds generated through unconsolidated venture arrangements;
• proceeds from mortgage financing, refinancing of various assets, or
sale-leaseback transactions;
• funds raised in the debt or equity markets; and
• proceeds from the disposition of assets.
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. During the three months endedJune 30, 2020 , we also have received cash grants and advanced/accelerated Medicare payments under programs expanded or created under the CARES Act, and we have elected to utilize the CARES Act payroll tax deferral program, each as described above. We continue to seek further government-sponsored financial relief related to the COVID-19 pandemic, although we cannot provide assurance that such efforts will be successful or regarding the amount of, or conditions required to qualify for, any government-sponsored relief.
Our liquidity requirements have historically arisen from:
• working capital;
• operating costs such as employee compensation and related benefits,
severance costs, general and administrative expense, and supply costs;
• debt service and lease payments;
• acquisition consideration, lease termination and restructuring costs, and
transaction and integration costs;
• capital expenditures and improvements, including the expansion,renovation, redevelopment, and repositioning of our current communities
and the development of new communities;
• cash collateral required to be posted in connection with our financial
instruments and insurance programs;
• purchases of common stock under our share repurchase authorizations;
• other corporate initiatives (including integration, information systems,
branding, and other strategic projects); and
• prior to 2009, dividend payments.
Over the near-term, we expect that our liquidity requirements will primarily arise from:
• working capital;
• operating costs such as employee compensation and related benefits,
severance costs, general and administrative expense, and supply costs,
including those related to the COVID-19 pandemic;
• debt service and lease payments;
• payment of deferred payroll taxes under the CARES Act;
• acquisition consideration;
• transaction costs and expansion of our healthcare services;
• capital expenditures and improvements, including the expansion,
renovation, redevelopment, and repositioning of our existing communities;
• cash collateral required to be posted in connection with our financial
instruments and insurance programs; and
• other corporate initiatives (including information systems and other
strategic projects).
57-------------------------------------------------------------------------------- We are highly leveraged and have significant debt and lease obligations. As ofJune 30, 2020 , we had two principal corporate-level debt obligations: our secured credit facility providing commitments of$250.0 million and our separate unsecured facility providing for up to$50.0 million of letters of credit. As ofJune 30, 2020 , we had$3.9 billion of debt outstanding, including$166.4 million drawn on our secured credit facility and excluding lease obligations, at a weighted average interest rate of 3.8%. As of such date, 92.7%, or$3.6 billion of our total debt obligations represented non-recourse property-level mortgage financings,$93.7 million of letters of credit had been issued under our secured credit facility and separate unsecured letter of credit facility, and$166.4 million was drawn on our secured credit facility. As ofJune 30, 2020 ,$1.3 billion of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining$131.0 million of our long-term variable rate debt and$166.4 million drawn on our secured credit facility are not subject to any interest rate cap agreements. As ofJune 30, 2020 , we had$2.0 billion of operating and financing lease obligations. For the twelve months endingJune 30, 2021 , we will be required to make approximately$392.6 million of cash lease payments in connection with our existing operating and financing leases, including a$119.2 million one-time cash payment to Ventas onJuly 27, 2020 (after giving effect to the multi-part transaction with Ventas onJuly 26, 2020 ). Total liquidity of$600.2 million as ofJune 30, 2020 included$452.4 million of unrestricted cash and cash equivalents (excluding restricted cash and lease security deposits of$115.5 million in the aggregate),$109.9 million of marketable securities, and$37.9 million of availability on our secured credit facility. Total liquidity as ofJune 30, 2020 increased$118.9 million from total liquidity of$481.3 million as ofDecember 31, 2019 . The increase was primarily attributable to temporary liquidity relief under the CARES Act and the transactions with Healthpeak completed during the three months endedMarch 31, 2020 , including the impact of the related financing transactions. We continue to seek opportunities to enhance and preserve our liquidity, including through reducing expenses and elective capital expenditures, continuing to evaluate our financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic. As ofJune 30, 2020 , our remaining 2020 and 2021 maturities (after giving effect to the multi-part transaction with Ventas onJuly 26, 2020 ) are$36.4 million and$254.1 million , respectively, which are primarily non-recourse mortgage debt maturities. We have continued efforts on our plan to refinance those and other maturities, including our line of credit, with non-recourse mortgage debt. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in seeking further government-sponsored financial relief or regarding the terms and conditions of any such relief. Additionally, 49 communities (3,925 units) were unencumbered by mortgage debt as ofJune 30, 2020 . We currently estimate that our existing cash flows from operations, together with cash on hand, amounts available under our secured credit facility, expected grants to be received from theEmergency Fund , proceeds from anticipated dispositions of owned communities, and financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming continued access to credit markets and the impacts of the pandemic on the economy and our industry begin to moderate in the near term. Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level of capital expenditures, general economic conditions, and the cost of capital. Volatility in the credit and financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to fund our planned capital expenditures, or to pursue any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or to fund investments to support our strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us. Capital Expenditures Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over$1,500 per occurrence, including for unit turnovers (subject to a$500 floor)) and community renovations, apartment upgrades, and other major building infrastructure projects. Corporate capital expenditures include those for information technology systems and equipment, the expansion of our support platform and healthcare services programs, and the remediation or replacement of assets as a result of casualty losses. Development capital expenditures include community expansions, major community redevelopment and repositioning projects, and the development of new communities. 58 -------------------------------------------------------------------------------- With our development capital expenditures program, we intend to expand, renovate, redevelop, and reposition certain of our communities where economically advantageous. Certain of our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These development projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications. The following table summarizes our capital expenditures for the six months endedJune 30, 2020 for our consolidated business: (in millions) Six Months EndedJune 30 ,
2020
Community-level capital expenditures, net (1) $
68.9
Corporate capital expenditures, net(2)
13.2
Non-development capital expenditures, net (3)
82.1
Development capital expenditures, net
6.8
Total capital expenditures, net $
88.9
(1) Reflects the amount invested, net of lessor reimbursements of
(2) Includes
hurricanes and other natural disasters and for the acquisition of emergency
power generators at our impacted
(3) Amount is included in Adjusted Free Cash Flow.
In response to the COVID-19 pandemic, we have delayed or canceled a number of elective capital expenditure projects. As a result, we expect our full-year 2020 non-development capital expenditures, net of anticipated lessor reimbursements, and development capital expenditures to be approximately$150 million and$20 million , which reflects a$40 million and$10 million reduction to our pre-pandemic plans for 2020, respectively. We anticipate that our 2020 capital expenditures will be funded from cash on hand, cash flows from operations, and reimbursements from lessors. Funding our planned capital expenditures, pursuing any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or funding investments to support our strategy may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon our plans.
Credit Facilities
Our Fifth Amended and Restated Credit Agreement withCapital One, National Association , as administrative agent, lender, and swingline lender and the other lenders from time to time parties thereto (the "Credit Agreement") provides commitments for a$250 million revolving credit facility with a$60 million sublimit for letters of credit and a$50 million swingline feature. We have a one-time right under the Credit Agreement to increase commitments on the revolving credit facility by an additional$100 million , subject to obtaining commitments for the amount of such increase from acceptable lenders. The Credit Agreement provides us a one-time right to reduce the amount of the revolving credit commitments, and we may terminate the revolving credit facility at any time, in each case without payment of a premium or penalty. The Credit Agreement matures onJanuary 3, 2024 . Amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin. The applicable margin varies based on the percentage of the total commitment drawn, with a 2.25% margin at utilization equal to or lower than 35%, a 2.75% margin at utilization greater than 35% but less than or equal to 50%, and a 3.25% margin at utilization greater than 50%. A quarterly commitment fee is payable on the unused portion of the facility at 0.25% per annum when the outstanding amount of obligations (including revolving credit and swingline loans and letter of credit obligations) is greater than or equal to 50% of the revolving credit commitment amount or 0.35% per annum when such outstanding amount is less than 50% of the revolving credit commitment amount. The credit facility is secured by first priority mortgages on certain of our communities. In addition, the Credit Agreement permits us to pledge the equity interests in subsidiaries that own other communities and grant negative pledges in connection therewith 59 -------------------------------------------------------------------------------- (rather than mortgaging such communities), provided that not more than 10% of the borrowing base may result from communities subject to negative pledges. Availability under the revolving credit facility will vary from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and our consolidated fixed charge coverage ratio. To the extent the outstanding borrowings on the credit facility exceed future borrowing base calculations, we would be required to repay the difference to restore the outstanding balance to the new borrowing base. During 2019, the parties entered into an amendment to the Credit Agreement that provides for availability calculations to be made at additional consolidated fixed charge coverage ratio thresholds.
The Credit Agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth. Amounts drawn on the credit facility may be used for general corporate purposes.
As ofJune 30, 2020 ,$166.4 million of borrowings were outstanding on the revolving credit facility,$45.5 million of letters of credit were outstanding, and the revolving credit facility had$37.9 million of availability. We also had a separate unsecured letter of credit facility providing for up to$50.0 million of letters of credit as ofJune 30, 2020 under which$48.2 million of had been issued as of that date. Long-Term Leases As ofJune 30, 2020 , we operated 305 communities under long-term leases (237 operating leases and 68 financing leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. We typically guarantee the performance and lease payment obligations of our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio. The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or leased property revenue. We are responsible for all operating costs, including repairs, property taxes, and insurance. The lease terms generally provide for renewal or extension options from 5 to 20 years, and, in some instances, purchase options. The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring us to maintain prescribed minimum net worth and stockholders' equity levels and lease coverage ratios, as further described below. In addition, our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met.
In addition, certain of our master leases and management agreements contain radius restrictions, which limit our ability to own, develop or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand, develop, or acquire senior housing communities and operating companies.
For the three and six months endedJune 30, 2020 , our cash lease payments for our operating leases were$75.5 million and$151.6 million , respectively, and for our financing leases were$16.6 million and$34.9 million , respectively. For the twelve months endingJune 30, 2021 , we will be required to make$392.6 million of cash lease payments in connection with our existing operating and financing leases, including a$119.2 million one-time cash payment to Ventas onJuly 27, 2020 (after giving effect to the multi-part transaction with Ventas onJuly 26, 2020 ). Our capital expenditure plans for 2020 include required minimum spend of approximately$17 million for capital expenditures under certain of our community leases. Additionally, we are required to spend an average of approximately$25 million per year for each of the following four years and approximately$41 million thereafter under the initial lease terms of such leases.
Debt and Lease Covenants
Certain of our debt and lease documents contain restrictions and financial
covenants, such as those requiring us to maintain prescribed minimum net worth
and stockholders' equity levels and debt service and lease coverage ratios, and
requiring us not to exceed prescribed leverage ratios, in each case on a
consolidated, portfolio-wide, multi-community, single-community, and/or entity
basis. Net worth is generally calculated as stockholders' equity as calculated
in accordance with GAAP, and in certain
60
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circumstances, reduced by intangible assets or liabilities or increased by
deferred gains from sale-leaseback transactions and deferred entrance fee
revenue. The debt service and lease coverage ratios are generally calculated as
revenues less operating expenses, including an implied management fee and a
reserve for capital expenditures, divided by the debt (principal and interest)
or lease payments. In addition, our debt and lease documents generally contain
non-financial covenants, such as those requiring us to comply with Medicare or
Medicaid provider requirements.
Our failure to comply with applicable covenants could constitute an event of
default under the applicable debt or lease documents. Many of our debt and lease
documents contain cross-default provisions so that a default under one of these
instruments could cause a default under other debt and lease documents
(including documents with other lenders and lessors).
Furthermore, our debt and leases are secured by our communities and, in certain
cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an
event of default has occurred under any of our debt or lease documents, subject
to cure provisions in certain instances, the respective lender or lessor would
have the right to declare all the related outstanding amounts of indebtedness or
cash lease obligations immediately due and payable, to foreclose on our
mortgaged communities, to terminate our leasehold interests, to foreclose on
other collateral securing the indebtedness and leases, to discontinue our
operation of leased communities, and/or to pursue other remedies available to
such lender or lessor. Further, an event of default could trigger cross-default
provisions in our other debt and lease documents (including documents with other
lenders or lessors). We cannot provide assurance that we would be able to pay
the debt or lease obligations if they became due upon acceleration following an
event of default.
As of
Contractual Commitments
Significant ongoing commitments consist primarily of leases, debt, purchase commitments, and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the "Contractual Commitments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 19, 2020 . Except as discussed therein, there were no other material changes outside the ordinary course of business in our contractual commitments during the six months endedJune 30, 2020 . As a result of the multi-part transaction with Ventas onJuly 26, 2020 , our cash lease payments were increased by$77.7 million for the year endingDecember 31, 2020 and we eliminated future cash lease payments of$89.3 million ,$90.6 million ,$92.0 million ,$93.4 million , and$94.8 million for each of the years endingDecember 31, 2021 , 2022, 2023, 2024, and 2025, respectively. Additionally, our long-term debt obligations (excluding related interest payments) decreased by$78.4 million for year endingDecember 31, 2021 , and increased by$45.0 million for the year endingDecember 31, 2025 as a result of the multi-part transaction with Ventas. See Note 17 to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about the multi-part transaction with Ventas.
Off-Balance Sheet Arrangements
As ofJune 30, 2020 , we do not have an interest in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains the financial measures Adjusted
EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with
GAAP. Presentations of these non-GAAP financial measures are intended to aid
investors in better understanding the factors and trends affecting our
performance and liquidity. However, investors should not consider these non-GAAP
financial measures as a substitute for financial measures determined in
accordance with GAAP, including net income (loss), income (loss) from
operations, or net cash provided by (used in) operating activities. We caution
investors that amounts presented in accordance with our definitions of these
non-GAAP financial measures may not be comparable to similar measures disclosed
by other companies because not all companies calculate non-GAAP measures in the
same manner. We urge investors to review the following reconciliations of these
non-GAAP financial measures from the most comparable financial measures
determined in accordance with GAAP.
61
--------------------------------------------------------------------------------Adjusted EBITDA
Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) excluding: benefit/provision for income taxes, non-operating income/expense items, and depreciation and amortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction, or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges, gain/loss on facility lease termination and modification, operating lease expense adjustment, amortization of deferred gain, change in future service obligation, non-cash stock-based compensation expense, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees, and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance. We believe that presentation of Adjusted EBITDA as a performance measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day operating decisions; (ii) it provides an assessment of operational factors that management can impact in the short-term, namely revenues and the controllable cost structure of the organization, by eliminating items related to our financing and capital structure and other items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods; and (iii) we believe that this measure is used by research analysts and investors to evaluate our operating results and to value companies in our industry. Adjusted EBITDA has material limitations as a performance measure, including: (i) excluded interest and income tax are necessary to operate our business under our current financing and capital structure; (ii) excluded depreciation, amortization, and impairment charges may represent the wear and tear and/or reduction in value of our communities, goodwill, and other assets and may be indicative of future needs for capital expenditures; and (iii) we may incur income/expense similar to those for which adjustments are made, such as gain/loss on sale of assets, facility lease termination and modification, or debt modification and extinguishment, non-cash stock-based compensation expense, and transaction and other costs, and such income/expense may significantly affect our operating results.
The table below reconciles our Adjusted EBITDA from our net income (loss).
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Net income (loss) $ (118,420 ) $ (56,055 ) $ 251,077 $ (98,661 )
Provision (benefit) for income taxes 8,504 633 (7,324 ) 1,312
Equity in (earnings) loss of
unconsolidated ventures (438 ) 991 570 1,517
Loss (gain) on debt modification and
extinguishment, net 157 2,672 (19,024 ) 2,739
Loss (gain) on sale of assets, net 1,029 (2,846 ) (371,810 ) (2,144 )
Other non-operating (income) loss (988 ) (3,199 ) (3,650 ) (6,187 )
Interest expense 52,422 62,828 108,782 126,193
Interest income (2,243 ) (2,813 ) (3,698 ) (5,897 )
Income (loss) from operations (59,977 ) 2,211 (45,077 ) 18,872
Depreciation and amortization 93,154 94,024 183,892 190,912
Asset impairment 10,290 3,769 88,516 4,160
Loss (gain) on facility lease
termination and modification, net - 1,797 - 2,006
Operating lease expense adjustment (8,221 ) (4,429 ) (14,954 ) (8,812 )
Non-cash stock-based compensation
expense 6,119 6,030 12,076 12,386
Transaction and organizational
restructuring costs 3,368 634 5,349 1,095
Adjusted EBITDA (1) $ 44,733 $ 104,036 $ 229,802 $ 220,619 (1) Adjusted EBITDA for the three and six months ended
negative non-recurring net impact of
respectively, from the application of the lease accounting standard effective
January 1, 2019 , for 62
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the six months ended
Adjusted Free Cash Flow
Adjusted Free Cash Flow is a non-GAAP liquidity measure that we define as net cash provided by (used in) operating activities before: distributions from unconsolidated ventures from cumulative share of net earnings, changes in prepaid insurance premiums financed with notes payable, changes in operating lease liability for lease termination and modification, cash paid/received for gain/loss on facility lease termination and modification, and lessor capital expenditure reimbursements under operating leases; plus: property insurance proceeds and proceeds from refundable entrance fees, net of refunds; less: non-development capital expenditures and payment of financing lease obligations. Non-development capital expenditures are comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades and other major building infrastructure projects for our communities and is presented net of lessor reimbursements. Non-development capital expenditures do not include capital expenditures for community expansions and major community redevelopment and repositioning projects, and the development of new communities. We believe that presentation of Adjusted Free Cash flow as a liquidity measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective sources of operating liquidity, and to review our ability to service our outstanding indebtedness, pay dividends to stockholders, engage in share repurchases, and make capital expenditures, including development capital expenditures; (ii) it is used as a metric in our performance-based compensation programs; and (iii) it provides an indicator to management to determine if adjustments to current spending decisions are needed. Adjusted Free Cash Flow has material limitations as a liquidity measure, including: (i) it does not represent cash available for dividends, share repurchases, or discretionary expenditures since certain non-discretionary expenditures, including mandatory debt principal payments, are not reflected in this measure; (ii) the cash portion of non-recurring charges related to gain/loss on facility lease termination and modification generally represent charges/gains that may significantly affect our liquidity; and (iii) the impact of timing of cash expenditures, including the timing of non-development capital expenditures, limits the usefulness of the measure for short-term comparisons.
The table below reconciles our Adjusted Free Cash Flow from our net cash provided by (used in) operating activities.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Net cash provided by (used in)
operating activities $ 151,840 $ 64,128 $ 209,319 $ 59,119
Net cash provided by (used in)
investing activities (47,483 ) 19,774 (295,410 ) (80,299 )
Net cash provided by (used in)
financing activities (40,726 ) (87,443 ) 306,524 (104,079 )
Net increase (decrease) in cash,
cash equivalents, and restricted
cash $ 63,631 $ (3,541 ) $
220,433
Net cash provided by (used in) operating activities$ 151,840 $ 64,128 $ 209,319 $ 59,119 Distributions from unconsolidated ventures from cumulative share of net earnings - (781 ) - (1,530 ) Changes in prepaid insurance premiums financed with notes payable (5,770 ) (6,752 ) 11,664 12,090 Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases (6,421 ) (1,000 ) (10,509 ) (1,000 ) Non-development capital expenditures, net (21,521 ) (66,464 ) (82,077 ) (121,066 ) Payment of financing lease obligations (4,677 ) (5,500 ) (9,764 ) (10,953 ) Adjusted Free Cash Flow (1)$ 113,451 $ (16,369 ) $ 118,633 $ (63,340 )
(1) Adjusted Free Cash Flow includes transaction and organizational restructuring
costs of
2020 and 2019, respectively, and
months ended June 30, 2020 and 2019, respectively; includes the $100.0
million management agreement termination fee payment received from
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Healthpeak for the six months endedJune 30, 2020 ; and includes$85.0 million of accelerated/advanced Medicare payments,$33.5 million ofEmergency Fund government grants accepted, and$26.5 million of payroll taxes deferred during the three months endedJune 30, 2020 .
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