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. 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, availability, utilization, and
efficacy 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, 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, housing markets, 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, vaccination clinic,
and other expenses, the impact of COVID-19 on our ability to complete financings
and refinancings of various assets, or other transactions (including
dispositions and our pending Health Care Services transaction) 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, government action that may limit
our collection or discharge 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
market, consumer confidence, or the equity markets and unemployment among
resident family members; 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, lower industry occupancy (including due to
the pandemic), and increased competition; 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 spaces we lease, including due to the
pandemic; limits on our ability to use net operating loss carryovers to reduce
future tax payments; 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
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; our ability to complete pending or
expected disposition, acquisition, or other transactions (including our pending
Health Care Services transaction) 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; risks related to the implementation
of our strategy, including initiatives undertaken to execute on our strategic
priorities and their effect on our results; delays in obtaining regulatory
approvals; disruptions in the financial markets or decreases in the appraised
values or performance of our communities that affect our ability to obtain
financing or extend or refinance debt as it matures and our financing costs; our
ability to generate sufficient cash flow to cover required interest and
long-term lease payments and to fund our planned capital projects; 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 indebtedness and long-term leases on our liquidity; the potential phasing
out of LIBOR which may increase the costs of our debt obligations; our ability
to obtain additional capital on terms acceptable to us; departures of key
officers and
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potential disruption caused by changes in management; increased competition for
or a shortage of personnel (including due to the pandemic), wage pressures
resulting from increased competition, low unemployment levels, minimum wage
increases and changes in overtime laws, and union activity; environmental
contamination at any of our communities; failure to comply with existing
environmental laws; an adverse determination or resolution of complaints filed
against us, including class action and stockholder derivative complaints; 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; the risks associated with current global economic
conditions 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; actions of activist stockholders, including a proxy
contest; as well as other risks detailed from time to time in our filings with
the Securities and Exchange Commission , including those set forth under "Item
1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended
December 31, 2020 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.
25
--------------------------------------------------------------------------------Overview
As ofMarch 31, 2021 , we are the largest operator of senior living communities inthe United States based on total capacity, with 695 communities in 42 states and the ability to serve approximately 60,000 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 16,000 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. 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 Update
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, the senior living industry and our business. 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 as we continue to serve and care for seniors through the pandemic. In addition to the updates below, readers are directed to the "COVID-19 Pandemic" section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 for more information about the impact of the pandemic and our response efforts on our business, results of operations, and financial condition. Vaccine Clinics Completed. We elected to work with CVS Health Corporation ("CVS") to administer vaccinations on site to our residents and associates through thePharmacy Partnership for Long-Term Care Program offered through theU.S. Centers for Disease Control and Prevention ("CDC"). We worked extensively to prepare for and host CVS clinics as quickly as possible among our approximately 700 communities, which included extensive planning, gathering insurance information, obtaining consents, scheduling appointments, holding educational sessions with residents, families, and associates, detailed coordination of traffic flow, and staffing observation areas. We hosted our first clinics onDecember 18, 2020 and had completed at least three vaccine clinics at all of our communities byApril 9, 2021 . ThroughApril 30, 2021 , our resident vaccine acceptance rate was 93%, and our COVID-19 positive resident caseload had decreased by 97% since the peak inmid-December 2020 . We continue to promote vaccine acceptance among our residents and associates and to work with state and local resources, including local health departments and pharmacies, to ensure our residents and associates can access the vaccine. Community Restrictions. To help protect our residents, patients, and associates from contracting COVID-19, we imposed significant restrictions at our communities beginning inMarch 2020 , including closing our communities to visitors and prospective residents, and in some cases restricting new resident move-ins, suspending group outings, modifying communal dining and programming to comply with social distancing and other regulatory 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. 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 presence of current confirmed COVID-19 positive cases. We may revert to more restrictive measures if the pandemic worsens, as necessary to comply with regulatory requirements, or at the direction of state or local health authorities. As ofDecember 31, 2020 , 89% of our communities were accepting new move-ins. With lower caseloads, restrictions on visits have been relaxed, and as ofApril 30, 2021 , 100% of our communities have opened for visitors and new prospects. Occupancy and Demand. According to data from theNational Investment Center for the Seniors Housing & Care Industry ("NIC"), seniors housing occupancy again decreased to a record low for the first quarter of 2021. In our consolidated seniors housing portfolio, our monthly net move-ins and move-outs turned positive inMarch 2021 for the first time since the pandemic began. Move-ins increased sequentially each month during the first quarter of 2021 and increased 29% for the first quarter of 2021 compared to the fourth quarter of 2020. Our consolidated senior housing portfolio's weighted average occupancy 26 -------------------------------------------------------------------------------- decreased 310 basis points for the first quarter of 2021 from the fourth quarter of 2020. Weighted average occupancy forMarch 2021 increased slightly sequentially and forApril 2021 increased 50 basis points sequentially, after having declined sequentially each month fromMarch 2020 throughFebruary 2021 . The table below sets forth our consolidated occupancy trend during the pandemic. Q1 Q2 Q3 Q4 Q1 January February March April 2020 2020 2020 2020 2021 2021 2021 2021 2021 Weighted average occupancy 83.2 % 78.7 % 75.3 % 72.7 % 69.6 % 70.0 % 69.4 % 69.4 % 69.9 % Month-end occupancy 82.2 % 77.8 % 75.0 % 71.5 % 70.6 % 70.4 % 70.1 % 70.6 % 71.1 % 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. Lost Revenue. Compared to our pre-pandemic expectations for fiscal 2020, we estimate that the pandemic, including the related restrictions at our communities, resulted in$117.5 million of lost resident fee revenue for the first quarter of 2021. Estimated lost resident fee revenue for the first quarter of 2021 includes$94.2 million in our consolidated senior housing portfolio and$23.3 million for our Health Care Services segment. On a cumulative basis, we estimate that the pandemic has resulted in approximately$400 million of lost resident fee revenue compared to our pre-pandemic expectations for fiscal 2020. Pandemic-Related Expenses. We incurred$27.3 million of facility operating expense during the first quarter of 2021 for incremental direct costs to respond to the pandemic. Such costs include those for: acquisition of additional PPE, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. On a cumulative basis, we have incurred$152.9 million of pandemic-related facility operating expense since the beginning of fiscal 2020. We also recorded non-cash impairment charges in our operating results of$9.0 million for the three months endedMarch 31, 2021 , for our operating lease right-of-use assets, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities with impaired assets. Liquidity. As ofMarch 31, 2021 , our total liquidity was$438.9 million , consisting of$304.0 million of unrestricted cash and cash equivalents and$134.9 million of marketable securities. Our cash flows from operations, excluding management agreement termination fees and the impact of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") funding, have been insufficient to cover our operating expenses, capital expenditures, and required interest and lease payments during the pandemic. However, we were able to satisfy our liquidity needs over such period utilizing a portion of our preexisting liquidity, together with CARES Act funding. We currently estimate that our cash flows from operations, together with cash balances on hand, cash equivalents, marketable securities, and proceeds from the pending sale of 80% of the equity in our Health Care Services segment will be sufficient to fund our liquidity needs for at least the next 12 months. We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline and increasing occupancy, continuing to evaluate our financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the pandemic. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief, or that the closing of the pending transaction will be completed in accordance with our expectations, or at all, or generate cash proceeds to us in the amount we anticipate. Financial Relief. The CARES Act, signed into law onMarch 27, 2020 , and Paycheck Protection Program and Health Care Enhancement Act, signed into law onApril 24, 2020 , provide liquidity and financial relief to certain businesses, among other things. Certain impacts of such programs are provided below. •During the first quarter of 2021, we accepted$0.8 million of cash from grants from thePublic Health and Social Services Emergency Fund ("Provider Relief Fund ") administered by theU.S. Department of Health and Human Services ("HHS"), under which grants have been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The grants represented incentive payments made pursuant to the Nursing Home Infection Control Distribution, which related to our skilled nursing care provided through our CCRCs. HHS continues to evaluate future allocations under theProvider Relief Fund and the regulation and guidance regarding grants made under theProvider Relief Fund . We intend to pursue additional funding that may become available. There can be no assurance that we will qualify for, or receive, such future grants in the amount we expect, that additional restrictions on the permissible 27 --------------------------------------------------------------------------------
uses or terms and conditions of the grants will not be imposed by HHS, or that future funding programs will be made available for which we qualify.
•During the year endedDecember 31, 2020 , we received$87.5 million under the Accelerated and Advance Payment Program administered by CMS,$75.2 million of which related to our Health Care Services segment and$12.3 million related to our CCRCs segment. Recoupment of advanced payments will begin one year after payments were issued at a rate of 25% of Medicare payments for the first eleven months following the anniversary of issuance and at a rate of 50% of Medicare payments for the next six months. Any outstanding balance of advanced payments will be due following such recoupment period. Pursuant to the Purchase Agreement providing for the sale of 80% of our equity in our Health Care Services segment (as described below), our net cash proceeds at closing will include a reduction for the then outstanding balance of such advanced payments related to our Health Care Services segment. We expect recoupment of approximately$6 million of advanced payments related to our CCRCs segment during 2021, beginning in the second quarter. •During fiscal 2020, we deferred payment of$72.7 million of the employer portion of social security payroll taxes incurred fromMarch 27, 2020 throughDecember 31, 2020 pursuant to the CARES Act. One-half of such deferral amount will become due on each ofDecember 31, 2021 andDecember 31, 2022 . Pursuant to the Purchase Agreement providing for the sale of 80% of our equity in our Health Care Services segment, our net cash proceeds at closing will include a reduction for the$8.9 million of deferred payroll tax payments related to our Health Care Services segment. We expect to pay approximately$32 million of the deferred payments in bothDecember 2021 and 2022. •We are eligible to claim the employee retention credit for certain of our associates under the CARES Act. The credit for 2020 is available to employers that fully or partially suspended 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 afterMarch 12, 2020 throughDecember 31, 2020 to qualified employees, with a maximum credit of$5,000 per employee. During the first quarter of 2021, we recognized$9.0 million of employee retention credits on wages paid fromMarch 12, 2020 toSeptember 30, 2020 within other operating income. The credit was modified and extended by subsequent legislation for wages paid fromJanuary 1, 2021 throughDecember 31, 2021 , and we are assessing our eligibility to claim such credit. There can be no assurance that we will qualify for, or receive, credits in the amount or on the timing we expect. In addition to the grants described above, during the three months endedMarch 31, 2021 , we received and recognized$0.9 million of other operating income from grants from other government sources. 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, availability, utilization, and efficacy 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; 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, housing markets, 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, vaccination clinic, and other expenses; the impact of COVID-19 on our ability to complete financings and refinancings of various assets or other transactions (including dispositions and the pending sale of 80% of the equity in our Health Care Services segment) or to generate sufficient cash flow to cover required debt, 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; government action that may limit our collection or discharge 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. 28 --------------------------------------------------------------------------------
Transaction Activity
During the period fromJanuary 1, 2020 throughMarch 31, 2021 , we terminated triple-net obligations on an aggregate of 32 communities (2,890 units), including through the acquisition of 27 formerly leased communities (2,453 units), we sold three owned communities (417 units), and we sold our ownership interest in our unconsolidated entry fee CCRC venture (the "CCRC Venture") with Healthpeak Properties, Inc. ("Healthpeak"). 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. In addition, we conveyed to Ventas five communities (471 units) and manage the communities following the closing. 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, 2020 filed with theSEC onFebruary 25, 2021 for more details regarding the terms of significant transactions that occurred prior to 2021.
During the three months ended
During the next twelve months, we expect to sell 80% of our equity in our Health Care Services segment and to close on the disposition of two owned unencumbered communities (207 units) classified as held for sale as ofMarch 31, 2021 . We also anticipate terminations of certain of our management arrangements with third parties as we transition to new operators our management on certain 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.
Pending Sale of Health Care Services
OnFebruary 24, 2021 , we entered into a Securities Purchase Agreement (the "Purchase Agreement") with affiliates of HCA Healthcare, Inc. ("HCA Healthcare "), providing for the sale of 80% of our equity in our Health Care Services segment for a purchase price of$400 million in cash, subject to certain adjustments set forth in the Purchase Agreement, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment, which were$75.2 million and$8.9 million , respectively, as ofMarch 31, 2021 . We expect our net cash proceeds at the closing will be approximately$300 million , subject to the timing of closing with respect to the adjustments set forth in the Purchase Agreement. The Purchase Agreement also contains certain agreed upon indemnities for the benefit of the purchaser. The closing of the sale transaction is anticipated to occur in the early second half of 2021, subject to receipt of applicable regulatory approvals and satisfaction of other customary closing conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, at closing of the transaction, we will retain a 20% equity interest in the business. Upon closing, we expect that the results and financial position of our Health Care Services segment will be deconsolidated from our financial statements and that our interest in the joint venture will be accounted for under the equity method of accounting. We anticipate that the sale transaction will utilize a portion of our federal net operating loss carryforwards to offset the expected taxable gain on such transaction. Results of Operations As ofMarch 31, 2021 , our total operations included 695 communities with a capacity to serve approximately 60,000 residents. As of that date we owned 349 communities (31,819 units), leased 301 communities (21,127 units), and managed 45 communities (6,652 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, 2020 toMarch 31, 2021 affect the comparability of our results of operations. We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. •Senior housing 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 natural disaster expense and related insurance recoveries. 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 29 -------------------------------------------------------------------------------- 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, and certain communities that have experienced a casualty event that significantly impacts their operations. Our management uses same community operating results and data for decision making, 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 or in-process development-related capital expenditure projects. As presented herein, same community results include the direct costs incurred to respond to the COVID-19 pandemic. •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, revenue from private duty services provided to seniors living outside of our communities, and entrance fee amortization), 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 andMemory Care , and CCRCs segments. Our management uses RevPAR for decision making, and we believe 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, revenue from private duty services provided to seniors living outside of our communities, and entrance fee amortization), 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 andMemory Care , and CCRCs segments. Our management uses RevPOR for decision making, 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 andMemory Care , and CCRCs segments, and also measure this metric both 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 of our senior housing revenue performance. 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 measure.
Comparison of Three Months Ended
Summary Operating Results
The following table summarizes our overall operating results for the three
months ended
Three Months Ended
March 31, Increase (Decrease)
(in thousands) 2021 2020 Amount Percent
Total resident fees and management fees
revenue $ 672,916 $ 891,422 $ (218,506) (24.5) %
Other operating income 10,735 - 10,735 NM
Facility operating expense 556,312 588,482 (32,170) (5.5) %
Net income (loss) (108,303) 369,497 (477,800) NM
Adjusted EBITDA 34,981 185,069 (150,088) (81.1) %
The decrease in total resident fees and management fees revenue was primarily
attributable to a $118.4 million decrease in resident fees, including a 14.3%
decrease in same community RevPAR, comprised of a 1,390 basis point decrease in
same
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community weighted average occupancy and a 2.9% increase in same community
RevPOR. Revenue for home health services decreased $9.6 million , as our home
health average daily census decreased 16.9% compared to the prior year period
primarily due to the COVID-19 pandemic and lower occupancy in our communities.
Additionally, the disposition of 13 communities through sales and conveyances of
owned communities and lease terminations since the beginning of the prior year
period resulted in $15.3 million less in resident fees during the three months
ended March 31, 2021 compared to the prior year period. Management fee revenue
decreased $100.1 million primarily due to $100.0 million of management agreement
termination fees recognized for the three months ended March 31, 2020 for the
management agreement termination fee payment received from Healthpeak in
connection with the sale of our ownership interest in the CCRC Venture.
During the three months ended
The decrease in facility operating expense was primarily attributable to a
decrease in labor costs for home health services as a result of lower census and
as we adjusted our home health services operational structure to better align
our facility operating expenses and business model with the new 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 communities since the
beginning of the prior year period resulted in $13.6 million less in facility
operating expense during the three months ended March 31, 2021 compared to the
prior year period. Same community facility operating expense decreased 1.0%,
which was primarily due to decreases in food and supplies costs due to reduced
occupancy during the period, partially offset by an increase in labor costs.
Facility operating expense for the three months ended March 31, 2021 and 2020
includes $27.3 million and $10.0 million , respectively, of incremental direct
costs to respond to the COVID-19 pandemic.
The change in net income (loss) was primarily attributable to a $371.7 million
decrease in net gain on sale of assets, primarily resulting from the sale of our
interest in the CCRC Venture, as well as the net impact of the revenue, other
operating income, and facility operating expense factors previously discussed,
partially offset by a decrease in asset impairment expense compared to the prior
year period.
The decrease in Adjusted EBITDA was primarily attributable to the net impact of
the revenue (including the $100.0 million management agreement termination fee
payment received from Healthpeak), other operating income, and facility
operating expense factors previously discussed, partially offset by decreases in
cash facility operating lease payments and general and administrative expense.
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--------------------------------------------------------------------------------Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living andMemory Care , and CCRCs) on a combined basis for the three months endedMarch 31, 2021 and 2020, including operating results and data on a same community basis. See management's discussion and analysis of the operating results on an individual segment basis on the following pages. (in thousands, except communities, units, Three Months Ended occupancy, RevPAR, and RevPOR) March 31, Increase (Decrease) 2021 2020 Amount Percent Resident fees$ 577,499 $ 687,888 $ (110,389) (16.0) % Other operating income$ 8,152 $ -$ 8,152 NM Facility operating expense$ 469,281 $ 484,542 $ (15,261) (3.1) % Number of communities (period end) 650 661 (11) (1.7) % Number of units (period end) 52,946 54,037 (1,091) (2.0) % Total average units 52,971 54,184 (1,213) (2.2) % RevPAR$ 3,631 $ 4,229 $ (598) (14.1) % Occupancy rate (weighted average) 69.6 % 83.2 % (1,360) bps n/a RevPOR$ 5,219 $ 5,085 $ 134 2.6 % Same Community Operating Results and Data Resident fees$ 551,467 $ 643,232 $ (91,765) (14.3) % Other operating income$ 7,554 $ -$ 7,554 NM Facility operating expense$ 446,339 $ 450,680 $ (4,341) (1.0) % Number of communities 637 637 - - Total average units 50,455 50,458 (3) - RevPAR$ 3,643 $ 4,249 $ (606) (14.3) % Occupancy rate (weighted average) 69.5 % 83.4 % (1,390) bps n/a RevPOR$ 5,244 $ 5,097 $ 147 2.9 % 32
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Independent Living Segment
The following table summarizes the operating results and data for our
Independent Living segment for the three months ended
Three Months Ended
occupancy, RevPAR, and RevPOR) March 31, Increase (Decrease)
2021 2020 Amount Percent
Resident fees $ 118,782 $ 135,862 $ (17,080) (12.6) %
Other operating income $ 1,364 $ - $ 1,364 NM
Facility operating expense $ 82,817 $ 84,448 $ (1,631) (1.9) %
Number of communities (period end) 68 68 - -
Number of units (period end) 12,542 12,537 5 -
Total average units 12,539 12,529 10 0.1 %
RevPAR $ 3,158 $ 3,615 $ (457) (12.6) %
Occupancy rate (weighted average) 73.6 % 87.1 % (1,350) bps n/a
RevPOR $ 4,290 $ 4,151 $ 139 3.3 %
Same Community Operating Results and Data
Resident fees $ 115,625 $ 132,556 $ (16,931) (12.8) %
Other operating income $ 1,327 $ - $ 1,327 NM
Facility operating expense $ 80,367 $ 82,172 $ (1,805) (2.2) %
Number of communities 66 66 - -
Total average units 12,161 12,159 2 -
RevPAR $ 3,169 $ 3,634 $ (465) (12.8) %
Occupancy rate (weighted average) 73.6 % 87.1 % (1,350) bps n/a
RevPOR $ 4,307 $ 4,174 $ 133 3.2 %
The decrease in the segment's resident fees was primarily attributable to a
decrease in the segment's same community RevPAR, comprised of a 1,350 basis
point decrease in same community weighted average occupancy and a 3.2% 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, including the related restrictions at our
communities. The increase in the segment's same community RevPOR was primarily
the result of in-place rent increases.
The decrease in the segment's facility operating expense was primarily
attributable to a decrease in the segment's same community facility operating
expense, including decreases in food and supplies costs due to reduced occupancy
during the period. The segment's facility operating expense for the three months
ended March 31, 2021 and 2020 includes $3.0 million and $1.2 million ,
respectively, of incremental direct costs to respond to the COVID-19 pandemic.
33
--------------------------------------------------------------------------------Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living andMemory Care segment for the three months endedMarch 31, 2021 and 2020, including operating results and data on a same community basis. (in thousands, except communities, units, Three Months Ended occupancy, RevPAR, and RevPOR) March 31, Increase (Decrease) 2021 2020 Amount Percent Resident fees$ 386,938 $ 457,479 $ (70,541) (15.4) % Other operating income$ 5,104 $ -$ 5,104 NM Facility operating expense$ 320,609 $ 325,478 $ (4,869) (1.5) % Number of communities (period end) 562 571 (9) (1.6) % Number of units (period end) 35,082 35,789 (707) (2.0) % Total average units 35,110 35,944 (834) (2.3) % RevPAR$ 3,673 $ 4,242 $ (569) (13.4) % Occupancy rate (weighted average) 68.3 % 81.9 % (1,360) bps n/a RevPOR$ 5,376 $ 5,178 $ 198 3.8 % Same Community Operating Results and Data Resident fees$ 381,448 $ 444,269 $ (62,821) (14.1) % Other operating income$ 4,967 $ -$ 4,967 NM Facility operating expense$ 315,009 $ 316,338 $ (1,329) (0.4) % Number of communities 556 556 - - Total average units 34,508 34,513 (5) - RevPAR$ 3,685 $ 4,291 $ (606) (14.1) % Occupancy rate (weighted average) 68.3 % 82.2 % (1,390) bps n/a RevPOR$ 5,396 $ 5,221 $ 175 3.4 % The decrease in the segment's resident fees was primarily attributable to a decrease in the segment's same community RevPAR, comprised of a 1,390 basis point decrease in same community weighted average occupancy and a 3.4% 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, including the related restrictions at our communities. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases. Additionally, the disposition of 11 communities (869 units) since the beginning of the prior year period resulted in$7.3 million less in resident fees during the three months endedMarch 31, 2021 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$7.0 million less in facility operating expense during the three months endedMarch 31, 2021 compared to the prior year period. The decrease in the segment's same community facility operating expense was primarily attributable to decreases in food and supplies costs due to reduced occupancy during the period, partially offset by an increase in labor costs. The segment's facility operating expense for the three months endedMarch 31, 2021 and 2020 includes$18.9 million and$7.7 million , respectively, of incremental direct costs to respond to the COVID-19 pandemic. 34 --------------------------------------------------------------------------------
CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the three months endedMarch 31, 2021 and 2020, including operating results and data on a same community basis. (in thousands, except communities, units, Three Months Ended occupancy, RevPAR, and RevPOR) March 31, Increase (Decrease) 2021 2020 Amount Percent Resident fees$ 71,779 $ 94,547 $ (22,768) (24.1) % Other operating income$ 1,684 $ -$ 1,684 NM Facility operating expense$ 65,855 $ 74,616 $ (8,761) (11.7) % Number of communities (period end) 20 22 (2) (9.1) % Number of units (period end) 5,322 5,711 (389) (6.8) % Total average units 5,322 5,711 (389) (6.8) % RevPAR$ 4,473 $ 5,496 $ (1,023) (18.6) % Occupancy rate (weighted average) 68.5 % 82.4 % (1,390) bps n/a RevPOR$ 6,534 $ 6,669 $ (135) (2.0) % Same Community Operating Results and Data Resident fees$ 54,394 $ 66,407 $ (12,013) (18.1) % Other operating income$ 1,260 $ -$ 1,260 NM Facility operating expense$ 50,963 $ 52,170 $ (1,207) (2.3) % Number of communities 15 15 - - Total average units 3,786 3,786 - - RevPAR$ 4,789 $ 5,847 $ (1,058) (18.1) % Occupancy rate (weighted average) 67.1 % 82.4 % (1,530) bps n/a RevPOR$ 7,133 $ 7,093 $ 40 0.6 % The decrease in the segment's resident fees was primarily attributable to a decrease in the segment's same community RevPAR, comprised of a 1,530 basis point decrease in same community weighted average occupancy and a 0.6% 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, including the related restrictions at our communities. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases, partially offset by a mix shift from less skilled nursing services within the segment. Additionally, the disposition of two communities (456 units) since the beginning of the prior year period resulted in$8.0 million less in resident fees during the three months endedMarch 31, 2021 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$6.6 million less in facility operating expense during the three months endedMarch 31, 2021 compared to the prior year period and a decrease in the segment's same community facility operating expense. The decrease in the segment's same community facility operating expense was primarily attributable to decreases in healthcare supplies and food costs due to the reduced occupancy during the period and decreases in labor expense arising from fewer hours worked. The segment's facility operating expense for the three months endedMarch 31, 2021 and 2020 includes$4.0 million and$0.7 million , respectively, of incremental direct costs to respond to the COVID-19 pandemic. 35
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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
(in thousands, except census) March 31, Increase (Decrease)
2021 2020 Amount Percent
Resident fees $ 86,851 $ 94,819 $ (7,968) (8.4) %
Other operating income $ 2,583 $ - $ 2,583 NM
Facility operating expense $ 87,031 $ 103,940 $ (16,909) (16.3) %
Home health average daily census 11,647 14,020 (2,373) (16.9) %
Hospice average daily census 1,509 1,698 (189) (11.1) %
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 decreased compared to the prior year period primarily due to the COVID-19
pandemic and lower occupancy in our communities.
The decrease in the segment's facility operating expense was primarily
attributable to a decrease in labor costs for home health services as a result
of the lower census and 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 a $1.0 million increase in incremental direct
costs to respond to the COVID-19 pandemic. The segment's facility operating
expense for the three months ended March 31, 2021 and 2020 includes $1.4 million
and $0.4 million , respectively, of incremental direct costs to respond to the
COVID-19 pandemic.
As described above, we expect to sell 80% of our equity in our Health Care
Services segment pursuant to the Purchase Agreement with HCA Healthcare, which
transaction is expected to occur in the early second half of 2021. Upon closing,
we expect that the results and financial position of our Health Care Services
segment will be deconsolidated from our financial statements.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management
Services segment for the three months ended
Three Months Ended
(in thousands, except communities and units) March 31, Increase (Decrease)
2021 2020 Amount Percent
Management fees $ 8,566 $ 108,715 $ (100,149) (92.1) %
Reimbursed costs incurred on behalf of
managed communities $ 65,794 $ 122,717 $ (56,923) (46.4) %
Costs incurred on behalf of managed
communities $ 65,794 $ 122,717 $ (56,923) (46.4) %
Number of communities (period end) 45 80 (35) (43.8) %
Number of units (period end) 6,652 11,033 (4,381) (39.7) %
Total average units 8,258 13,325 (5,067) (38.0) %
The decrease in management fees was primarily attributable to $100.0 million of
management agreement termination fees recognized for the three months ended
March 31, 2020 for the management agreement termination fee payment received
from Healthpeak in connection with the sale of our ownership interest in the
CCRC Venture. As of March 31, 2021 , we have completed the transition of
management arrangements on 55 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 $8.6 million for
the three months ended March 31, 2021 include $4.6 million of management
agreement termination fees and $2.0 million of other management fees
36
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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.
The decrease in reimbursed costs and 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) March 31, Increase (Decrease)
2021 2020 Amount Percent
General and administrative expense
$ (4,652) (8.5) % Facility operating lease expense 44,418 64,481 (20,063) (31.1) % Depreciation and amortization 83,891 90,738 (6,847) (7.5) % Asset impairment 10,677 78,226 (67,549) (86.4) % Interest income 421 1,455 (1,034) (71.1) % Interest expense (48,607) (56,360) (7,753) (13.8) % Gain (loss) on debt modification and extinguishment, net - 19,181 (19,181) NM Equity in earnings (loss) of unconsolidated ventures (531) (1,008) 477 47.3 % Gain (loss) on sale of assets, net 1,112 372,839 (371,727) (99.7) % Other non-operating income (loss) 1,644 2,662 (1,018) (38.2) % Benefit (provision) for income taxes (752) 15,828 (16,580) 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 and a reduction in our travel costs as we intentionally scaled back such activities. General and administrative expense includes transaction and organizational restructuring costs of$1.9 million and$2.0 million for the three months endedMarch 31, 2021 and 2020, respectively. 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. Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to the Ventas lease portfolio restructuring during the prior year and lease termination activity since the beginning of the prior year period. Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to disposition activity since the beginning of the prior year period and leasehold improvements for certain leased communities becoming fully depreciated since the beginning of the prior year period. Asset Impairment. During the current year period, we recorded$10.7 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 and for natural disaster related property damage sustained at certain communities during the period. During the prior year period, we recorded$78.2 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.
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.
Gain (Loss) on Sale of Assets, Net. The decrease in gain on sale of assets, net was primarily due to a$370.7 million gain on sale of assets recognized for the sale of our ownership interest in the CCRC Venture during the prior year period. 37 -------------------------------------------------------------------------------- Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the three months endedMarch 31, 2021 and 2020 was primarily due to the tax impact of the multi-part transaction with Healthpeak that occurred in the three months endedMarch 31, 2020 . The impact represented the tax expense recorded on the gain of the sale of our interest in the CCRC Venture offset by a decrease in the valuation allowance that was a direct result of the multi-part transaction with Healthpeak. We recorded an aggregate deferred federal, state, and local tax benefit of$25.2 million as a result of the operating loss for the three months endedMarch 31, 2021 , which was offset by an increase in the valuation allowance of$25.5 million . We recorded an aggregate deferred federal, state, and local tax expense of$90.9 million , of which,$2.2 million was a result of the benefit on our operating loss for the three months endedMarch 31, 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$112.6 million . We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as ofMarch 31, 2021 andDecember 31, 2020 was$406.5 million and$381.0 million , respectively.
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 measure.
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:
Three Months Ended
March 31, Increase (Decrease)
(in thousands) 2021 2020 Amount Percent
Net cash provided by (used in)
operating activities $ (23,857) $ 57,479 $ (81,336) NM
Net cash provided by (used in)
investing activities (3,806) (247,927) (244,121) (98.5) %
Net cash provided by (used in)
financing activities (35,562) 347,250 (382,812) NM
Net increase (decrease) in cash, cash
equivalents, and restricted cash (63,225) 156,802 (220,027) NM
Cash, cash equivalents, and restricted
cash at beginning of period 465,148 301,697 163,451 54.2 %
Cash, cash equivalents, and restricted
cash at end of period $ 401,923 $ 458,499 $ (56,576) (12.3) %
Adjusted Free Cash Flow $ (50,674) $ 5,182 $ (55,856) NM
The change in net cash provided by (used in) operating activities was
attributable primarily to the $100.0 million management agreement termination
fee payment received from Healthpeak in connection with the sale of our
ownership interest in the CCRC Venture in the prior year period and a decrease
in same community revenue compared to the prior year period. These changes were
partially offset by a decrease in cash payments for accounts payable and accrued
expenses compared to the prior year period.
The decrease in net cash used in investing activities was primarily attributable
to $446.7 million of cash paid for the acquisition of communities during the
prior year period, a $68.0 million increase in proceeds from sales and
maturities of marketable securities, a $29.0 million decrease in cash paid for
capital expenditures, and a $9.5 million decrease in purchases of marketable
securities compared to the prior year period. These changes were partially
offset by a $300.9 million decrease in net proceeds from the sale of assets
compared to the prior year period.
The change in net cash provided by (used in) financing activities was primarily
attributable to a $453.2 million decrease in debt proceeds compared to the prior
year period and $166.4 million of draws on our former secured credit facility
during the prior year period. These changes were partially offset by a $213.3
million decrease in repayment of debt and financing lease
38
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obligations, an $18.1 million decrease in cash paid for share repurchases, and a
$5.7 million decrease in cash paid for financing costs compared to the prior
year period.
The decrease in Adjusted Free Cash Flow was primarily attributable to the change
in net cash provided by (used in) operating activities, partially offset by a
$33.1 million decrease in non-development capital expenditures, net compared to
the prior year period.
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 or refinancing of various assets; •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 2020, we also received cash grants and advanced 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. As described above, we expect to sell 80% of our equity in our Health Care Services segment pursuant to the Purchase Agreement with HCA Healthcare, which transaction is expected to occur in the early second half of 2021, for expected net cash proceeds of approximately$300 million , subject to the timing of closing with respect to the adjustments set forth in the Purchase Agreement described above. We are evaluating the use of the net proceeds from the pending Health Care Services transaction.
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, interest, 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, interest, and lease payments; •payment of deferred payroll taxes under the CARES Act; •recoupment of payments received under the Accelerated and Advance Payment Program; •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). We are highly leveraged and have significant debt and lease obligations. As ofMarch 31, 2021 , we had$3.9 billion of debt outstanding, at a weighted average interest rate of 3.6%. As of such date, 97.9%, or$3.8 billion of our total debt obligations represented non-recourse property-level mortgage financings. As ofMarch 31, 2021 ,$1.4 billion of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining$128.0 million of our long-term variable rate debt is not subject to any interest rate cap agreements. As ofMarch 31, 2021 ,$69.9 million of letters of credit and no cash borrowings 39 -------------------------------------------------------------------------------- were outstanding under our$80.0 million secured credit facility. We also had a separate secured letter of credit facility providing up to$15.0 million of letters of credit as ofMarch 31, 2021 under which$13.6 million had been issued as of that date. As ofMarch 31, 2021 , we had$1.5 billion of operating and financing lease obligations. For the twelve months endingMarch 31, 2022 , we will be required to make approximately$268.2 million of cash lease payments in connection with our existing operating and financing leases (excluding minimum lease payments related to$9.7 million of operating lease obligations included within liabilities held for sale). Total liquidity of$438.9 million as ofMarch 31, 2021 included$304.0 million of unrestricted cash and cash equivalents (excluding restricted cash and lease security deposits of$100.7 million in the aggregate) and$134.9 million of marketable securities. Total liquidity as ofMarch 31, 2021 decreased$136.6 million from total liquidity of$575.5 million as ofDecember 31, 2020 . The decrease was primarily attributable to the negative$50.7 million of Adjusted Free Cash Flow and$38.3 million of payments of mortgage debt during the three months endedMarch 31, 2021 . As ofMarch 31, 2021 , our current liabilities exceeded current assets by$42.4 million . Included in our current liabilities is$224.9 million of the current portion of long term debt which we have historically refinanced in the normal course. Our current liabilities also include$160.4 million of the current portion of operating and financing lease obligations, for which the associated right-of-use assets are excluded from current assets on our condensed consolidated balance sheets. We currently estimate that our cash flows from operations, together with cash balances on hand, cash equivalents, marketable securities, and proceeds from the pending sale of 80% of our equity in our Health Care Services segment will be sufficient to fund our liquidity needs for at least the next 12 months. We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline and increasing occupancy, 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. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief, or that the closing of the pending transaction will be completed in accordance with our expectations, or at all, or generate cash proceeds to us in the amount we anticipate. 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, as well as other factors described in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 . Disruptions in the financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing of various assets. Since the amount of mortgage financing available for our communities is generally dependent on their appraised values and performance, decreases in their appraised values, including due to adverse changes in real estate market conditions, or their performance, could result in available mortgage refinancing amounts that are less than the communities' maturing indebtedness. If we are unable to obtain refinancing proceeds sufficient to cover maturing indebtedness, our liquidity could be adversely impacted and we may seek alternative sources of financing, which may be less attractive or unavailable. Shortfalls in cash flows from estimated 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. 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 and for unit turnovers over$500 per unit) 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.
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
40
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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 three months
ended March 31, 2021 for our consolidated business:
(in millions)
Community-level capital expenditures, net(1) $ 21.9
Corporate capital expenditures, net(2) 5.6
Non-development capital expenditures, net(3) 27.5 Development capital expenditures, net
1.5
Total capital expenditures, net $ 29.0 (1)Reflects the amount invested, net of lessor reimbursements of
(2)Includes
(3)Amount is included in Adjusted Free Cash Flow.
In the aggregate, we expect our full-year 2021 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately$140 million . In addition, we expect our full-year 2021 development capital expenditures to be approximately$10 million , net of anticipated lessor reimbursements, and such projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities. We anticipate that our 2021 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, 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
OnDecember 11, 2020 , we entered into a revolving credit agreement withCapital One, National Association , as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of$80 million which can be drawn in cash or as letters of credit. The agreement matures onJanuary 15, 2024 . Amounts drawn under the facility will bear interest at 30-day LIBOR plus an applicable margin which was 2.75% as ofMarch 31, 2021 . Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as ofMarch 31, 2021 . The revolving credit facility is currently secured by first priority mortgages and negative pledges on certain of our communities and restricted cash deposits. Available capacity under the facility will vary from time to time based upon borrowing base calculations related to the appraised value and performance of the communities securing the credit facility. As ofMarch 31, 2021 ,$69.9 million of letters of credit and no cash borrowings were outstanding under our$80.0 million secured credit facility. We also had a separate secured letter of credit facility providing up to$15.0 million of letters of credit as ofMarch 31, 2021 under which$13.6 million had been issued as of that date. Long-Term Leases As ofMarch 31, 2021 , we operated 301 communities under long-term leases (235 operating leases and 66 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 41 -------------------------------------------------------------------------------- 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 liquidity, net worth, and stockholders' equity levels and lease coverage ratios. In addition, our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. 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 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 months endedMarch 31, 2021 , our cash lease payments for our operating and financing leases were$53.9 million and$16.2 million , respectively. For the twelve months endingMarch 31, 2022 , we will be required to make$268.2 million of cash lease payments in connection with our existing operating and financing leases (excluding minimum lease payments related to$9.7 million of operating lease obligations included within liabilities held for sale). Our capital expenditure plans for 2021 include required minimum spend of approximately$18 million for capital expenditures under certain of our community leases. Additionally, we are required to spend an average of approximately$26 million per year for each of the following four years and approximately$17 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 liquidity, net worth, and stockholders' equity levels and debt service and lease coverage 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 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 payment. 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 and maintain insurance coverage. 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
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Contractual Commitments
Significant ongoing commitments consist primarily of leases, debt, 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 ended December 31, 2020 filed with the SEC on February 25, 2021 .
There have been no material changes outside the ordinary course of business in
our contractual commitments during the three months ended March 31, 2021 .
Off-Balance Sheet Arrangements
As ofMarch 31, 2021 , 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 withU.S. generally accepted accounting principles ("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.
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.
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--------------------------------------------------------------------------------The table below reconciles Adjusted EBITDA from net income (loss).
Three Months Ended
March 31,
(in thousands) 2021 2020
Net income (loss) $ (108,303) $ 369,497
Provision (benefit) for income taxes 752 (15,828)
Equity in (earnings) loss of unconsolidated ventures 531
1,008
Loss (gain) on debt modification and extinguishment, net -
(19,181)
Loss (gain) on sale of assets, net (1,112)
(372,839)
Other non-operating (income) loss (1,644) (2,662) Interest expense 48,607 56,360 Interest income (421) (1,455) Income (loss) from operations (61,590) 14,900 Depreciation and amortization 83,891 90,738 Asset impairment 10,677 78,226 Operating lease expense adjustment (4,664)
(6,733)
Non-cash stock-based compensation expense 4,783
5,957
Transaction and organizational restructuring costs 1,884 1,981 Adjusted EBITDA(1)$ 34,981 $ 185,069 (1) Adjusted EBITDA includes: •$10.7 million benefit for the three months endedMarch 31, 2021 of government grants and credits recognized in other operating income •$100.0 million benefit for the three months endedMarch 31, 2020 for the management agreement termination fee payment received from Healthpeak in connection with the sale of our ownership interest in the CCRC Venture
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, 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, 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; and (ii) 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 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.
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--------------------------------------------------------------------------------The table below reconciles Adjusted Free Cash Flow from net cash provided by (used in) operating activities.
Three Months Ended
March 31,
(in thousands) 2021 2020
Net cash provided by (used in) operating activities $ (23,857) $ 57,479
Net cash provided by (used in) investing activities (3,806) (247,927)
Net cash provided by (used in) financing activities (35,562) 347,250
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(63,225)
Net cash provided by (used in) operating activities $
(23,857)
Changes in prepaid insurance premiums financed with notes payable 12,985
17,434
Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases
(7,563) (4,088)
Non-development capital expenditures, net (27,450) (60,556)
Payment of financing lease obligations (4,789) (5,087)
Adjusted Free Cash Flow(1) $ (50,674) $ 5,182
(1) Adjusted Free Cash Flow includes transaction and organizational
restructuring costs of $1.9 million and $2.0 million for the three months ended
March 31, 2021 and 2020, respectively. Additionally, Adjusted Free Cash Flow
includes:
•$1.7 million benefit for the three months ended March 31, 2021 from Provider
Relief Funds and other government grants accepted
•$100.0 million benefit for the three months ended March 31, 2020 for the
management agreement termination fee payment received from Healthpeak in
connection with the sale of our ownership interest in the CCRC Venture
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