This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to help provide an understanding of our business
and results of operations. This MD&A should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. This report,
including the following MD&A, contains forward-looking statements regarding
future events or trends that should be read in conjunction with the risks,
uncertainties and other factors described under "Cautionary Note Regarding
Forward-Looking Statements" above in this Quarterly Report on Form 10-Q and
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2021 filed with the SEC on April 15, 2022. Actual results may
differ materially from those projected in such statements as a result of such
risks, uncertainties and other factors.
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and estimates, please refer
to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
There have been no significant changes to our critical accounting policies since
December 31, 2021.
Overview
The following discussion and analysis addresses (i) the Company's results of
operations for the three and six months ended June 30, 2022 and 2021, and
(ii) liquidity and capital resources of the Company.
The Company is one of the leading owner-operators of senior housing communities
in the United States. The Company's operating strategy is to provide value to
its senior living residents by offering quality senior living services at
reasonable prices, while achieving and sustaining a strong, competitive position
within its geographically concentrated regions, as well as continuing to enhance
the performance of its operations. The Company provides senior living services
to the 75+ population, including independent living, assisted living, and memory
care services at reasonable prices. Many of the Company's communities offer a
continuum of care to meet each resident's needs as they change over time. This
continuum of care, which integrates independent living, assisted living, and
memory care which may be bridged by home care through independent home care
agencies, sustains our residents' autonomy and independence based on their
physical and mental abilities.
As of June 30, 2022, the Company operated 76 senior housing communities in 18
states with an aggregate capacity of approximately 9,500 residents, including 62
owned senior housing communities and 14 communities that we manage on behalf of
third parties.
COVID-19 Pandemic
The United States broadly continues to experience the effects caused by the
COVID-19 pandemic, which significantly disrupted the nation's economy, the
senior living industry and the Company's business. The COVID-19 pandemic caused
a decline in the occupancy levels at the Company's communities, which negatively
impacted the Company's revenues and operating results, that depend significantly
on such occupancy levels. In an effort to protect its residents and employees
and slow the spread of COVID-19 and in response to quarantines, shelter-in-place
orders and other limitations imposed by federal, state and local governments,
the Company had previously restricted or limited access to its communities,
including limitations on in-person prospective resident tours and, in certain
cases, new resident admissions. As of March 31, 2022, all of the Company's
senior living communities were open for new resident move-ins, and the Company
has continued to make progress to rebuild occupancy lost during the COVID-19
pandemic. Although vaccines are now widely available, we cannot predict the
duration of the pandemic or its ongoing impact on our business. If the COVID-19
pandemic worsens, including the transmission of highly contagious variants of
the COVID-19 virus, the Company may have to impose or revert to restricted or
limited access to its communities.
The COVID-19 pandemic has required the Company to incur significant additional
operating costs and expenses in order to implement enhanced infection control
protocols and otherwise care for its residents, including increased costs and
expenses relating to supplies and personal protective equipment, testing of the
Company's residents and employees, labor and specialized disinfecting and
cleaning services, which has increased the costs of caring for the residents and
resulted in reduced occupancy at such communities. During the three months ended
June 30, 2022 and 2021, the Company incurred $0.1 million and $0.2 million,
respectively, in direct costs related to the COVID-19 pandemic. During the six
months ended June 30, 2022 and 2021, the Company incurred $0.3 million and
$1.3 million, respectively, in direct costs related to the COVID-19 pandemic.
In April 2022 and January 2021, the Company accepted $9.1 million and
$8.7 million of cash, respectively, through grants from the Public Health and
Social Services Emergency Fund's (the "Provider Relief Fund") Phases 4 and 3
General Distribution,
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respectively, which was expanded by the CARES Act to provide grants or other
funding mechanism to eligible healthcare providers for healthcare-related or
lost revenues attributable to COVID-19. Both the Phase 4 and Phase 3 Provider
Relief Funds were recorded as other income in the periods ended June 30, 2022
and 2021, respectively. The CARES Act Provider Relief Funds are grants that do
not have to be repaid provided we satisfy the terms and conditions of the CARES
Act.
The Company elected to utilize the CARES Act payroll tax deferral program to
delay payment of a portion of its payroll taxes incurred from April 2020 through
December 2020. The Company repaid one-half of the deferral amount in December
2021 and the other half will become due on December 31, 2022. At June 30, 2022
and December 31, 2021, the Company had $3.7 million in deferred payroll taxes,
which was included in accounts payable and accrued expenses.
CARES Act Provider Relief Funds are subject to the terms and conditions of the
program, including stringent restrictions that funds may only be used to
reimburse COVID-19 related expenses or lost revenue that are attributable to
COVID-19 and have not been reimbursed from other sources or that other sources
are not obligated to reimburse. While we intend to pursue additional funding
that may become available, there can be no assurances that we will qualify for,
or receive, any additional relief funds in the future.
Significant Financial and Operational Highlights
Operations
Weighted average occupancy for the three months ended June 30, 2022 and 2021 for
the 60 communities owned by the Company during both periods was 83.2% and 78.1%,
respectively, reflecting continued occupancy recovery. The average monthly
rental rate for the three months ended June 30, 2022 was higher by 440 basis
points when compared to the three months ended June 30, 2021.
Weighted average occupancy for the six months ended June 30, 2022 and 2021 for
the 60 communities owned by the Company during both periods was 82.7% and 76.8%,
respectively, reflecting continued occupancy recovery. The average monthly
rental rate for the six months ended June 30, 2022 was higher by 370 basis
points when compared to the six months ended June 30, 2021.
During the three and six months ended June 30, 2022, the Company continued to be
impacted by the senior living industry's workforce challenges related to limited
staff availability, which required the use of overtime, shift bonuses and
contract labor to properly support our senior living communities and residents.
2022 Mortgage Refinance
In March 2022, the Company completed the refinancing of certain existing
mortgage debt ("Refinance Facility") for ten of its communities. The Refinance
Facility includes an initial term loan of $80 million. In addition, $10 million
is available as delayed loans that can be borrowed upon achieving and
maintaining certain financial covenant requirements and up to an additional
uncommitted $40 million may be available to fund future growth initiatives. In
addition, the Company provided a limited payment guaranty ("Limited Payment
Guaranty") of 33%, that reduces to 25% and then to 10%, of the then outstanding
balance of the Refinance Facility if the Company achieves certain financial
covenants maintained over a certain time period. As defined and required in the
Limited Payment Guaranty, the Company is required to maintain certain covenants
including maintaining Tangible Net Worth of $150 million and Liquid Assets of at
least $13 million. This amount is inclusive of a $1.5 million debt service
reserve fund provided by the Company at the closing of the Refinance Facility
and is included in restricted cash.
The Refinance Facility also requires the financial performance of the ten
communities to achieve certain financial covenants, including a minimum debt
service coverage ratio and a minimum debt yield (as defined in the Loan
Agreement) with a first measurement date as of June 30, 2022 and quarterly
measurement dates thereafter. As of June 30, 2022, the Company was in compliance
with such financial covenants. We can provide no assurance that financial
covenants will be met in the future.
The Refinance Facility carries an initial interest rate of one-month SOFR plus
3.50%, subject to a SOFR floor of 0.25% and a lower margin spread of 3.25% or
3.00% if the Company achieves and maintains certain financial covenants. The
Refinancing Facility requires that the Company purchase and maintain an interest
rate cap facility during the term of the Refinancing Facility. The Company is in
process of obtaining the interest rate cap facility in compliance with the
lender's requirement.
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Results of Operations
Three months ended June 30, 2022 as compared to three months ended June 30, 2021
Revenues
Resident revenue for the three months ended June 30, 2022 was $52.0 million as
compared to $46.6 million for the three months ended June 30, 2021, an increase
of $5.4 million, or 11.6%. The increase in revenue was primarily due to
increased occupancy, increased average rent rates and the acquisition of two new
communities in early 2022.
Management fee revenue for the three months ended June 30, 2022, decreased by
$0.2 million as compared to the three months ended June 30, 2021, primarily as a
result of managing fewer communities in 2022.
Community reimbursement revenue for the three months ended June 30, 2022 was
$7.0 million as compared to $10.1 million for the three months ended June 30,
2021, a decrease of $3.1 million. The decrease was primarily a result of
transitioning six Fannie Mae communities to other operators during the
three-month period ended June 30, 2021.
Expenses
Operating expenses for the three months ended June 30, 2022, were $41.5 million
as compared to $37.6 million for the three months ended June 30, 2021, an
increase of $3.9 million. The increase is primarily due to a $2.9 million
increase in labor and employee-related expenses, including premium labor, and a
$0.4 million increase in food expenses.
General and administrative expenses for each of the three months ended June 30,
2022, and June 30, 2021 were $9.4 million.
Community reimbursement expense for the three months ended June 30, 2022 was
$7.0 million as compared to $10.1 million for the three months ended June 30,
2021, a decrease of $3.1 million. The decrease was primarily a result of
transitioning six Fannie Mae communities to other operators during the
three-month period ended June 30, 2021.
Interest expense for the three months ended June 30, 2022 was $7.9 million as
compared to $9.5 million for the three months ended June 30, 2021, a decrease of
$1.6 million primarily due to lower overall borrowings in 2022. Notes payable
decreased $129.4 million from June 30, 2021 to June 30, 2022.
Gain on extinguishment of debt was $67.2 million for the three months ended
June 30, 2021. The 2021 gain related to the derecognition of notes payable and
liabilities as a result of the completion of the transition of the legal
ownership of six communities to Fannie Mae, the holder of the related
non-recourse debt.
Other income for the three months ended June 30, 2022 was $8.5 million and
reflects cash received for CARES Act funding for healthcare-related expenses or
lost revenues attributable to COVID-19.
Results of Operations
Six months ended June 30, 2022 as compared to six months ended June 30, 2021
Revenues
Resident revenue for the six months ended June 30, 2022 was $102.8 million as
compared to $91.9 million for the six months ended June 30, 2021, an increase of
$10.9 million, or 11.9%. The increase in revenue was primarily due to increased
occupancy, increased average rent rates and the acquisition of two new
communities in early 2022.
Management fee revenue for the six months ended June 30, 2022 decreased by $0.7
million as compared to the six months ended June 30, 2021, primarily as a result
of managing fewer communities in 2022.
Community reimbursement revenue for the six months ended June 30, 2022 was $14.1
million as compared to $25.4 million for the six months ended June 30, 2021, a
decrease of $11.3 million. The decrease was primarily a result of transitioning
nine Fannie Mae communities to other operators during the six-month period ended
June 30, 2021.
Expenses
Operating expenses for the six months ended June 30, 2022 were $83.4 million as
compared to $74.3 million for the six months ended June 30, 2021, an increase of
$9.1 million. The increase is primarily due to a $6.2 million increase in labor
and employee-related expenses, including premium labor, and a $3.2 million
increase in all other operating expenses.
General and administrative expenses for the six months ended June 30, 2022 were
$17.7 million as compared to $16.7 million for the six months ended June 30,
2021, an increase of $1.0 million. This increase is primarily due to a
$3.4 million increase in stock-based compensation expense and a $1.6 million
decrease in payroll-related expenses.
Community reimbursement expense for the six months ended June 30, 2022 was $14.1
million as compared to $25.4 million for the six months ended June 30, 2021, a
decrease of $11.3 million. The decrease was primarily a result of transitioning
nine Fannie Mae communities to other operators during the six-month period ended
June 30, 2021.
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Interest expense for the six months ended June 30, 2022 was $15.5 million as
compared to $18.9 million for the six months ended June 30, 2021, a decrease of
$3.4 million primarily due to lower overall borrowings in 2022. Notes payable
decreased $129.4 million from June 30, 2021 to June 30, 2022.
Loss on extinguishment of debt for the six months ended June 30, 2022 was $0.6
million as compared to a gain on extinguishment of debt of $114.2 million for
the six months ended June 30, 2021, a decrease of $114.8 million. The 2022 loss
relates to the refinancing of debt. The 2021 gain related to the derecognition
of notes payable and liabilities as a result of the completion of the transition
of the legal ownership of nine communities to Fannie Mae, the holder of the
related non-recourse debt.
Other income for the six months ended June 30, 2022 and for the six months ended
June 30, 2021 was $8.7 million. Both current year and prior year periods include
cash received for CARES Act funding for healthcare-related expenses or lost
revenues attributable to COVID-19.
Cash Flow Analysis
Six months ended June 30, 2022 as compared to six months ended June 30, 2021
Operating activities
Net cash used in operating activities for the six months ended June 30, 2022 was
$2.1 million as compared to net cash provided by operating activities of $7.0
million for the six months ended June 30, 2021, a decrease of $9.1 million
primarily a result of decreased cash inflows from operations in 2022 as compared
to 2021.
Investing activities
Net cash used in investing activities for the six months ended June 30, 2022 was
$24.5 million as compared to $4.8 million for the six months ended June 30, 2021
primarily due to increase in ongoing capital improvements and refurbishments at
existing communities and the acquisition of two new communities in 2022.
Financing activities
Net cash used in financing activities for the six months ended June 30, 2022 was
$19.9 million and primarily results from repayments of notes payable and
deferred financing costs paid, net of proceeds from notes payable, of $16.4
million, related to our 2022 debt refinancing and $3.0 million of dividends paid
to Series A Preferred Stockholders. The net cash used in financing activities
for the six months ended June 30, 2021 was $5.5 million and primarily results
from repayments of notes payable, net of proceeds from notes payable.
Liquidity and Capital Resources
Short-term liquidity
Our primary source of short-term liquidity is our cash and cash equivalents and
results from operations. As of June 30, 2022, we had $32.7 million of cash and
cash equivalents. Due to the continued effects of the COVID-19 pandemic, our
operations have not yet returned to 2019, pre-pandemic levels. We currently
anticipate cash flow from operations will continue to be impacted for at least
the near-term. Our known liquidity requirements primarily consist of funds
necessary to pay for operating expenses related to our communities and other
expenditures, including general and administrative expenses, interest and
scheduled principal payments on our debt and dividends on our convertible
preferred stock.
The Refinancing Facility we entered into in March 2022 contains financial
covenants that are effective beginning June 30, 2022 and quarterly thereafter.
As of June 30, 2022, the Company was in compliance with such covenants. There is
no assurance that the Company will be able to meet any financial covenant
requirements in the future. In addition, we are required to maintain cash and
cash equivalents of no less than $13 million, inclusive of a $1.5 million lender
service reserve, which is included in restricted cash.
Additional short-term sources of liquidity include grants under the CARES Act.
As described above, these grants are available to reimburse the Company for
COVID-19 related expenses. In April 2022, we received a grant of $9.1 million,
where we determined we met the CARES Act requirements which allowed the Company
to retain the funds and not repay the grant. We do not consider this to be a
significant source of liquidity in the future. There is no assurance that we
will meet such
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requirements or qualify for, or receive, any additional CARES Act funds in the
future. In addition, the Company is eligible for funding in connection with
various state programs.
Long-term liquidity
The Company, from time to time, considers and evaluates financial and capital
raising transactions related to its portfolio, including debt financing or
refinancings, purchases and sales of assets, and other transactions. If capital
were obtained through the issuance of Company equity, the issuance of Company
securities would dilute the ownership of our existing stockholders and any newly
issued securities may have rights, preferences, and/or privileges senior to
those of our common stock. There can be no assurance that the Company will
continue to generate cash flows at or above current levels, or that the Company
will be able to obtain the capital necessary to meet the Company's short and
long-term capital requirements.
In connection with the refinancing transaction in March 2022, the Company was
able to refinance certain debt due during 2022, 2023 and early 2024 with
longer-term financing that matures in 2026. In addition, $10.0 million is
available as delayed loans that can be borrowed upon achieving and maintaining
certain financial covenant requirements and up to an additional uncommitted $40
million may be available to fund future growth initiatives. There is no
assurance that we will be able to meet these financial covenant requirements.
As discussed in "Note 4. Notes Payable" of the condensed consolidated financial
statements, the Company has scheduled maturities of debt coming due in the next
five years and thereafter. The Company currently expects to be able to meet
those maturities from cash on hand, future operations and future refinancings.
The Refinance Facility matures in four years with an optional one-year extension
if certain financial performance metrics and other customary conditions are
maintained. There is no assurance that we will be able to meet such conditions
or source refinancings at the time any of our debt matures or whether the terms
of such refinancings will be comparable or satisfactory compared to our current
loans.
The Company has unencumbered properties with a net book value of $23.6 million
as of June 30, 2022, which could provide a source of liquidity from new debt.
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