REGIONAL HEALTH PROPERTIES, INC. Forward Looking Statements
This Quarterly Report and certain information incorporated herein by reference contain forward-looking statements and information within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management's plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company's future filings with theSEC , in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "seek," "plan," "project," "continue," "predict," "will," and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company's current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made. All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. The Company's actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company's critical accounting policies and risks and uncertainties related to, but not limited to, the operating results of the Company's tenants, the overall industry environment and the Company's financial condition. These and other risks and uncertainties are described in more detail in the Annual Report and in Part II, Item 1A of this Quarterly Report, as well as other reports that the Company files with theSEC . Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company's views as of any subsequent date. The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with theSEC that discuss factors germane to the Company's business.
Overview
Regional Health , through its subsidiaries, is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. Our business primarily consists of leasing and subleasing healthcare facilities to third-party tenants. As ofMarch 31, 2020 , the Company owned, leased, or managed for third parties 24 facilities primarily in the Southeast. The operators of the Company's facilities provide a range of health care and related services to patients and residents, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents.
Risks and Uncertainties
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, also known as COVID-19, a global pandemic. The COVID-19 pandemic has led governments and other authorities inthe United States to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. The COVID-19 pandemic and the measures to protect its spread have adversely affected our business in the quarter endedMarch 31, 2020 , and we expect will continue to adversely affect our business in the quarter endingJune 30, 2020 and beyond, for a variety of reasons, including those discussed below and elsewhere in this Quarterly Report. Our tenants' operations have been, and we expect will continue to be, materially and adversely affected by the COVID-19 pandemic due to, among other things, decreased occupancy and increased operating costs (including costs due to the implementation of additional safety protocols and procedures, purchases of personal protective equipment, increased staffing to allow facilities to adhere to social distancing and infection control protocols, and premium pay and incentive pay for the staff), which may affect our tenants' ability to make rental payments to us pursuant to their lease agreements. 27 -------------------------------------------------------------------------------- The COVID-19 pandemic also could cause temporary closures of nursing facilities, operated by our tenants, which also may affect our tenants' ability to make rental payments to us pursuant to their lease agreements. In addition, our tenants' operations could be further disrupted if any of their employees, or the employees of their vendors, have, or are suspected of having, COVID-19. This could cause, and in some cases have caused, our tenants or their vendors to experience staffing shortages, and this could potentially require our tenants and their vendors to close parts of or entire facilities, distribution centers, or other buildings to disinfect any affected areas. We could also be adversely affected if government authorities impose upon our tenants, or their vendors, certain restrictions due to COVID-19. These restrictions may be in the form of mandatory closures, requested voluntary closures, bans on new admissions, restricted operations, or restrictions on the importation of necessary equipment or supplies which may adversely affect our tenants' operations and their ability to make rental payments to us. In addition, family members may elect to keep nursing facility residents at home during the COVID-19 pandemic, thus reducing our tenants' revenue. Currently, a number of our tenants have stopped admitting new patients due to COVID-19 infections and hence their revenues have declined. As a result of COVID-19, our tenants may face lawsuits for alleged negligence associated with their responses to the emergency. The costs associated with defending, settling, or paying damages from such claims could negatively impact our tenants' operating budgets and affect their ability to meet their obligations under our leases. Further, we may be subject to increased claims brought against us in lawsuits and other legal proceedings arising out of our alleged actions or the alleged actions of our tenants for which they have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such pending or future litigation could materially adversely affect us. If our tenants are unable to make rental payments to us pursuant to their lease obligations, whether due to the tenants' decrease in revenues or otherwise, then, in some cases, we may have to restructure tenants' long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place. While the Company has received most of its rental receipts from tenants through the date of this Quarterly Report, there are a number of uncertainties the Company faces as it considers the potential impact of COVID-19 on its business, including the length of census disruption, elevated COVID-19 operating costs related to personal protection equipment, cleaning supplies, virus testing and increased overtime due to staff illness and the extent to which federal and state funding support will offset these incremental costs for our tenants. We also do not know the number of facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19, and while we have requested reporting from operators of their numbers of cases and CMS has required additional reporting by operators, we may not receive accurate information on the number of cases, which could result in a delay in reporting. We expect to see continued increased clinical protocols for infection control within facilities and increased monitoring of employees, guests and other individuals entering facilities; however, we do not yet know if future reimbursement rates will be sufficient to cover the increased costs of enhanced infection control and monitoring. Portfolio
The following table provides summary information regarding the number of
facilities and related licensed beds/units as of
Managed for Third
Owned Leased Parties Total
Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units
State
Alabama 2 230 - - - - 2 230
Georgia 3 395 8 884 - - 11 1,279
North Carolina 1 106 - - - - 1 106
Ohio 4 291 1 99 3 332 8 722
South Carolina 2 180 - - - - 2 180
Total 12 1,202 9 983 3 332 24 2,517
Facility Type
Skilled Nursing 10 1,016 9 983 2 249 21 2,248
Assisted Living 2 186 - - - - 2 186
Independent Living - - - - 1 83 1 83
Total 12 1,202 9 983 3 332 24 2,517
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The following table provides summary information regarding the number of
facilities and related licensed beds/units by operator affiliation as of
Number of
Operator Affiliation Facilities (1) Beds / Units
C.R. Management 6 689
Aspire 5 390
Wellington Health Services 2 342
Peach Health 3 266
Symmetry Healthcare (2) 2 180
Beacon Health Management 2 212
Vero Health (2) 1 106
Subtotal 21 2,185
Regional Health Managed 3 332
Total 24 2,517
(1) Represents the number of facilities leased or subleased to separate tenants,
of which each tenant is an affiliate of the entity named in the table above.
For a more detailed discussion, see Note 7 - Leases located in Part I, Item
1, "Financial Statements", of this Quarterly Report; Part II, Item 8,
"Financial Statements and Supplementary Data", Note 7 - Leases included in
the Annual Report; and "Portfolio of Healthcare Investments" included in Part
I, Item 1, "Business" included in the Annual Report.
(2) On
Trace Facility to
Note 7 - Leases to our consolidated financial statements in Part I, Item 1,
"Financial Statements (unaudited)" in this Quarterly Report.
Portfolio Occupancy Rates
The following table provides summary information regarding our portfolio facility-level occupancy rates for the periods shown:
For the Twelve Months Ended
June 30, September 30, December 31, March 31,
Operating Metric (1) 2019 2019 2019 2020
Occupancy (%) 80.2 % 80.3 % 80.0 % 79.9 %
(1) Excludes three managed facilities in
transitioned on
transitioned on
facility sold on
Omega in the first quarter of 2019. Occupancy percentages are based on
licensed beds.
Lease Expiration
The following table provides summary information regarding our lease expirations
for the years shown as of
Licensed Beds Annual Lease Revenue (1)
Number of Amount
Facilities Amount Percent (%) '000's Percent (%)
2023 1 62 2.8 % 263 1.6 %
2024 1 126 5.8 % 965 5.8 %
2025 2 269 12.3 % 2,221 13.3 %
2026 - - 0.0 % - 0.0 %
2027 8 884 40.4 % 7,748 46.4 %
2028 4 328 15.0 % 2,352 14.1 %
2029 1 106 4.9 % 538 3.2 %
Thereafter 4 410 18.8 % 2,601 15.6 %
Total 21 2,185 100.0 % $ 16,688 100.0 %
(1) Straight-line rent.
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Acquisitions
There were no acquisitions during the three months endedMarch 31, 2020 orMarch 31, 2019 . For historical information regarding the Company's acquisitions, see Part II, Item 8, "Financial Statements and Supplementary Data", Note 10 - Acquisitions and Dispositions included in the Annual Report.
Divestitures
Lease Termination. EffectiveJanuary 15, 2019 , the Company's lease of two skilled nursing facilities, an 115-bed skilled nursing facility located inEast Point, Georgia and an 184-bed skilled nursing facility located inAtlanta, Georgia (the "Omega Facilities"), which leases were due to expireAugust 2025 and which Omega Facilities the Company subleased to third party subtenants, was terminated by mutual consent of the Company and the lessor (affiliate ofOmega Healthcare ) and the sublessees (affiliates ofWellington Health Services ) of each of the Omega Facilities (the "Omega Lease Termination"). In connection with the Omega Lease Termination, the Company transferred approximately$0.4 million of its integral physical fixed assets at the Omega Facilities to the lessor and onJanuary 28, 2019 received from the lessor gross proceeds of approximately$1.5 million , consisting of (i) a termination fee in the amount of$1.2 million and (ii) approximately$0.3 million to satisfy other net amounts due to the Company under the leases.
There were no divestitures during the three months ended
For historical information regarding the Company's divestitures, see Part II, Item 8, "Financial Statements and Supplementary Data", Note 10 - Acquisitions and Dispositions and Note 11 - Discontinued Operations included in the Annual Report.
Critical Accounting Policies
We prepare our financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulation S-X. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, we review our judgments and estimates, including, but not limited to, those related to doubtful accounts, income taxes, stock compensation, intangible assets and loss contingencies. We base our estimates on historical experience, business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change.
For a discussion of our critical accounting policies and recent accounting pronouncements not yet adopted by the Company, see Note 1 - Organization and Significant Accounting Policies to the Company's Notes to our consolidated financial statements located in Part I, Item 1, "Financial Statements (unaudited)", of this Quarterly Report.
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth, for the periods indicated, unaudited statement
of operations items and the amounts and percentages of change of these items.
The results of operations for any particular period are not necessarily
indicative of results for any future period. The following data should be read
in conjunction with our consolidated financial statements and the notes thereto,
which are included herein.
Three Months Ended March 31,
Percent
(Amounts in 000's) 2020 2019 Change (*)
Revenues:
Rental revenues $ 4,297 $ 5,138 (16.4 )%
Management fees 244 239 2.1 %
Other revenues 7 47 (85.1 )%
Total revenues 4,548 5,424 (16.2 )%
Expenses:
Facility rent expense 1,640 1,726 (5.0 )%
Cost of management fees 151 159 (5.0 )%
Depreciation and amortization 776 1,023 (24.1 )%
General and administrative expenses 877 926 (5.3 )%
Recovery of doubtful accounts (2 ) (172 ) (98.8 )%
Other operating expenses 224 408 (45.1 )%
Total expenses 3,666 4,070 (9.9 )%
Income from operations 882 1,354 (34.9 )%
Other expense (income):
Interest expense, net 715 1,654 (56.8 )%
Loss on extinguishment of debt - 333 (100.0 )%
Gain on disposal of assets - (690 ) NM
Other expense, net 144 7 NM
Total other expense, net 859 1,304 (34.1 )%
Income from continuing operations before
income taxes 23 50 (54.0 )%
Income tax expense - 44 NM
Income from continuing operations 23 6 283.3 %
(Loss) income from discontinued operations,
net of tax (37 ) 178 (120.8 )%
Net (loss) income $ (14 ) $ 184 (107.6 )%
* Not meaningful ("NM").
Three Months Ended
Rental revenues-Rental revenue decreased by approximately$0.8 million , or 16.4%, to$4.3 million for the three months endedMarch 31, 2020 , compared with$5.1 million for the same period in 2019. The decrease reflects approximately$0.1 million related to the Omega Lease Termination and$0.8 million related to the sale of four of the Company's facilities during the second quarter of 2019 off-set by approximately$0.1 million in other increases. The Company recognizes all rental revenues on a straight line rent accrual basis, except with respect to the Mountain Trace Facility while operated by an affiliate of Symmetry for January andFebruary 2019 and the four facilities fromJanuary 2019 until their sale during the prior year second quarter, for which rental revenue was recognized based on cash received. Facility rent expense-Facility rent expense decreased by approximately$0.1 million , or 5.0%, to$1.6 million for the three months endedMarch 31, 2020 , compared with$1.7 million for the same period in 2019. The net decrease is due to the Omega Lease Termination and Covington Forbearance Agreement. Depreciation and amortization-Depreciation and amortization expense decreased by approximately$0.2 million , or 24.1%, to$0.8 million for the three months endedMarch 31, 2020 , compared with$1.0 million for the same period in 2019. The decrease is mainly due to equipment and computer related assets being fully depreciated and the cessation of depreciation and amortization on assets sold in the prior year. 31
-------------------------------------------------------------------------------- General and administrative-General and administrative costs decreased by 5.3%, to$0.9 million for the three months endedMarch 31, 2020 , compared with$0.9 million for the same period in 2019. The decrease is due to approximately$0.1 million lower business consulting and legal expenses incurred in relation to forbearance agreements with a prior lender in the prior year, off-set by an increase in employee related expenses of approximately$0.1 million .
Recovery of doubtful accounts-The prior period gain is related to the collection of amounts owed to the Company under tenant payment plans previously not considered collectible.
Other operating expenses-Other operating expenses decreased by approximately$0.2 million , or 45.1%, to$0.2 million for the three months endedMarch 31, 2020 , compared with$0.4 million for the same period in 2019. In the prior period the Company incurred an additional$0.2 million legal expenses in relation to lease negotiations. Interest expense, net-Interest expense decreased by approximately$1.0 million , or 56.8%, to$0.7 million for the three months endedMarch 31, 2020 , compared with$1.7 million for the same period in 2019. The decrease is due to repayment of significant debt in the prior year. Loss on extinguishment of debt-The loss from extinguishment of debt decreased by approximately$0.3 million , or 100.0% for the three months endedMarch 31, 2020 . The prior period expenses were due to a substantial change in debt terms pursuant to a forbearance agreement with a prior lender. Gain on disposal of Assets-The gain on disposal of assets decreased by approximately$0.7 million for the three months endedMarch 31, 2020 , The gain on disposal of assets of$0.7 million in the prior period is due to the Omega Lease Termination.
Other expense, net-During the current period, the Company has retained professional services to assist with the restructure of the Company's capital structure.
Loss (income) Discontinued operations, net of tax-The loss from discontinued
operations increased by
Liquidity and Capital Resources
Overview
The Company is undertaking measures to grow its operations, streamline its cost infrastructure and otherwise increase liquidity by: (i) refinancing or repaying debt to reduce interest costs and mandatory principal repayments, with such repayment to be funded through potentially expanding borrowing arrangements with certain lenders or raising capital through the issuance of securities after restructuring of the Company's capital structure; (ii) increasing future lease revenue through acquisitions and investments in existing properties; (iii) modifying the terms of existing leases; (iv) replacing certain tenantswho default on their lease payment terms; and (v) reducing other and general and administrative expenses. Management anticipates access to several sources of liquidity, including cash on hand, cash flows from operations, and debt refinancing during the twelve months from the date of this filing. AtMarch 31, 2020 , the Company had$4.0 million in unrestricted cash,$7.5 million current assets and$13.8 million in current liabilities and negative working capital of approximately$0.1 million which excludes$6.2 million of current operating lease obligation. During the three months endedMarch 31, 2020 , the Company generated positive cash flow from continuing operations of$0.3 million and anticipates continued positive cash flow from operations in the future.
Debt Covenant Compliance
As of
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Series A Preferred Dividend Suspension
OnJune 8, 2018 , the Board indefinitely suspended quarterly dividend payments with respect to the Series A Preferred Stock. Such dividends are currently in arrears with respect to the fourth quarter of 2017, all quarters of 2018, all quarters of 2019, and the first and second quarters of 2020. The Board plans to revisit the dividend payment policy with respect to the Series A Preferred Stock on an ongoing basis. The Board believes that the dividend suspension will provide the Company with additional funds to meet its ongoing liquidity needs. As the Company has failed to pay cash dividends on the outstanding Series A Preferred Stock in full for more than four dividend periods, the annual dividend rate on the Series A Preferred Stock for the fifth and future missed dividend periods has increased to 12.875%, which is equivalent to$3.22 per share each year, commencing on the first day after the missed fourth quarterly payment (October 1, 2018 ) and continuing until the second consecutive dividend payment date following such time as the Company has paid all accumulated and unpaid dividends on the Series A Preferred Stock in full in cash.
Evaluation of the Company's Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the entity's current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of the Company's consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In applying applicable accounting guidance, management considered the Company's current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company's obligations due over the next twelve months, as well as the Company's recurring business operating expenses. The Company is able to conclude that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance.
For additional information regarding the Company's liquidity, see Note 3 - Liquidity and Note 9 - Notes Payable and other debt, to the Company's consolidated financial statements located in Part I, Item 1, Notes to Consolidated Financial Statements", of this Quarterly Report.
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the periods presented:
Three Months Ended March 31,
(Amounts in 000's) 2020 2019Net cash provided by operating activities - continuing operations
$ 270 $ 117
Net cash used in operating activities - discontinued operations
(405 ) (282 )
Net cash (used in) provided by investing activities - continuing operations
(157 ) 1,105
Net cash used in financing activities - continuing operations
(436 ) (2,119 )
Net cash used in financing activities - discontinued operations
- (34 )
Net change in cash and restricted cash (728 ) (1,213 )
Cash and restricted cash at beginning of period 8,038 6,486
Cash and restricted cash, ending $ 7,310 $ 5,273
Three Months Ended
Net cash provided by operating activities-continuing operations for the three months endedMarch 31, 2020 was approximately$0.3 million , consisting primarily of our income from operations less changes in working capital, and noncash charges (primarily, depreciation and amortization, and lease revenue in excess of cash received). The$0.2 million increase primarily reflects the decrease in interest payments, legal and consulting expenses related to the credit facilities the Company repaid during the second quarter of 2019 and an increase in bad debt collections partially offset by lower rent receipts. 33 -------------------------------------------------------------------------------- Net cash used in operating activities-discontinued operations for the three months endedMarch 31, 2020 was approximately$0.4 million , excluding non-cash proceeds and payments. This amount was to fund legal and associated settlement costs related to our legacy professional and general liability claims. Net cash used in investing activities-continuing operations for the three months endedMarch 31, 2020 was approximately$0.2 million . This capital expenditure was for a new sprinkler system at one of our owned properties. Net cash used in financing activities-continuing operations was approximately$0.4 million for the three months endedMarch 31, 2020 . This is the result of routine repayments of approximately$0.4 million of our debt obligations.
Three Months Ended
Net cash provided by operating activities-continuing operations for the three months endedMarch 31, 2019 was approximately$0.1 million , consisting primarily of our income from operations less changes in working capital, and noncash charges (primarily depreciation and amortization, gain on disposal of assets and accounts payable, Accrued Expenses). Net cash used in operating activities-discontinued operations for the three months endedMarch 31, 2019 was approximately$0.3 million , excluding non-cash proceeds and payments. This amount was to fund legal and associated settlement costs related to our legacy professional and general liability claims. Net cash provided by investing activities-continuing operations for the three months endedMarch 31, 2019 was approximately$1.1 million . This is the result of the$1.2 million Omega Lease Termination fee offset by$0.1 million capital expenditures on building improvements. Net cash used in financing activities-continuing operations was approximately$2.1 million for the three months endedMarch 31, 2019 . Excluding non-cash proceeds and payments, this is the result of routine repayments of approximately$1.4 million of other existing debt obligations,$0.2 million repayment of bonds principal and$0.5 million in Pinecone forbearance expense fees.
Net cash used in financing activities-discontinued operations for the three
months ended
Notes Payable and Other Debt
For information regarding the Company's debt financings, see Note 9 - Notes Payable and Other Debt, to the Company's Notes to our consolidated financial statements located in Part I, Item 1, "Financial Statements (unaudited)", of this Quarterly Report and Note 9 - Notes Payable and Other Debt to our audited consolidated financial statements included in Part II, Item 8., "Financial Statements and Supplementary Data" in the Annual Report.
Receivables
Our operations could be adversely affected if we experience significant delays in receipt of rental income from our tenants.
As of
Operating Leases
For information regarding the Company's operating leases, see Note 7 - Leases,
to the Company's Notes to consolidated financial statements located in Part I,
Item 1, "Financial Statements (unaudited)", of this Quarterly Report, and Note 7
- Leases located in Part II, Item 8, "Financial Statements and Supplementary
Data", included in the Annual Report.
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