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 nine months ended September 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 September 30, 2022, the Company operated 76 senior housing communities in
18 states with an aggregate capacity of approximately 8,000 residents, including
62 owned senior housing communities and 14 communities that we manage on behalf
of third parties.
COVID-19 Pandemic
The COVID-19 pandemic significantly disrupted the nation's economy, the senior
living industry and the Company's business beginning in March 2020. 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 month
periods ended September 30, 2022 and 2021, the Company incurred $0.1 million and
$0.4 million, respectively, in direct costs related to the COVID-19 pandemic.
During the nine months ended September 30, 2022 and 2021, the Company incurred
$0.4 million and $1.7 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. No grants were received during the three months ended
September 30, 2022 and September 30, 2021. 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 September 30,
2022 and December 31, 2021, the Company had $3.7 million in deferred payroll
taxes, which was included in 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 September 30, 2022 and
2021 for the 60 communities owned by the Company during both periods was 83.7%
and 81.0%, respectively, reflecting continued occupancy recovery. The average
monthly rental rate for these communities for the three months ended
September 30, 2022 was higher by 290 basis points when compared to the three
months ended September 30, 2021.
Weighted average occupancy for the nine months ended September 30, 2022 and 2021
for the 60 communities owned by the Company during both periods was 83.1% and
78.2%, respectively, reflecting continued occupancy recovery. The average
monthly rental rate for these communities for the nine months ended
September 30, 2022 was higher by 340 basis points when compared to the nine
months ended September 30, 2021.
During the three and nine months ended September 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 the life of the loan. 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, which is inclusive of a $1.5 million debt service reserve
provided by the Company at the closing of the Refinance Facility. The debt
services reserve may be released upon terms described in the Loan Agreement and
is included in restricted cash.
The Refinance Facility also requires the financial performance of the ten
communities to meet 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 September 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 September 30, 2022 as compared to three months ended
September 30, 2021
Revenues
Resident revenue for the three months ended September 30, 2022 was $52.5 million
as compared to $49.0 million for the three months ended September 30, 2021, an
increase of $3.5 million, or 7.2%. 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 September 30, 2022 decreased
by $0.4 million as compared to the three months ended September 30, 2021,
primarily as a result of managing fewer communities in 2022.
Managed community reimbursement revenue for the three months ended September 30,
2022 was $7.7 million as compared to $7.9 million for the three months ended
September 30, 2021, representing a decrease of $0.2 million. The decrease was
primarily a result of transitioning five Fannie Mae communities to other
operators during the three-month period ended September 30, 2021.
Expenses
Operating expenses for the three months ended September 30, 2022 were $43.1
million as compared to $40.7 million for the three months ended September 30,
2021, an increase of $2.4 million or 5.9%. The increase is primarily due to a
$2.6 million increase in labor and employee-related expenses, a $0.4 million
increase in utility costs, and a $0.3 million increase in food expenses,
partially offset by the $1.0 million energy provider settlement from winter
storm Uri expensed in Q3 2021.
General and administrative expenses for the three months ended September 30,
2022 were $5.9 million as compared to $7.5 million for the three months ended
September 30, 2021, representing a decrease of $1.6 million. This decrease is
primarily due to a $1.2 million decrease in stock-based compensation expense
from prior year due to forfeiture credits in connection with executive personnel
changes in September 2022, and a $0.4 million net decrease in recurring
corporate expenses.
Managed community reimbursement expense for the three months ended September 30,
2022 was $7.7 million as compared to $7.9 million for the three months ended
September 30, 2021, representing a decrease of $0.2 million. The decrease was
primarily a result of transitioning of five Fannie Mae communities to other
operators during the three-month period ended September 30, 2021.
Interest expense for the three months ended September 30, 2022 was $8.2 million
as compared to $9.7 million for the three months ended September 30, 2021,
representing a decrease of $1.5 million due to lower overall borrowings in 2022,
partially offset by increased interest rates associated with the Company's
variable rate mortgages.
Gain on extinguishment of debt was $54.1 million for the three months ended
September 30, 2021. The 2021 gain related to the derecognition of notes payable
and liabilities as a result of the transition of legal ownership of five
communities to Fannie Mae, the holder of the related non-recourse debt.
Results of Operations
Nine months ended September 30, 2022 as compared to nine months ended
September 30, 2021
Revenues
Resident revenue for the nine months ended September 30, 2022 was $155.3 million
as compared to $140.8 million for the nine months ended September 30, 2021, an
increase of $14.5 million, or 10.3%. 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 nine months ended September 30, 2022 decreased by
$1.2 million as compared to the nine months ended September 30, 2021, primarily
as a result of managing fewer communities in 2022.
Managed community reimbursement revenue for the nine months ended September 30,
2022 was $21.8 million as compared to $33.3 million for the nine months ended
September 30, 2021, a decrease of $11.5 million. The decrease was primarily a
result of transitioning of 14 Fannie Mae communities to other operators during
the nine-month period ended September 30, 2021.
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Expenses
Operating expenses for the nine months ended September 30, 2022 were $126.6
million as compared to $115.0 million for the nine months ended September 30,
2021, an increase of $11.6 million or 10.1%. The increase is primarily due to a
$9.2 million increase in labor and employee-related expenses including premium
labor, a $1.0 million increase in food costs, and a $1.4 million increase in
other operating expenses.
General and administrative expenses for the nine months ended September 30, 2022
were $23.6 million as compared to $24.2 million for the nine months ended
September 30, 2021, a decrease of $0.6 million. This decrease is primarily due
to a $2.2 million decrease in bonuses and a $1.9 million decrease in payroll and
employee-related expenses, partially offset by a $2.2 million increase in
stock-based compensation expense and a $1.3 million increase in other expenses.
Managed community reimbursement expense for the nine months ended September 30,
2022 was $21.8 million as compared to $33.3 million for the nine months ended
September 30, 2021, a decrease of $11.5 million. The decrease was primarily a
result of transitioning 14 Fannie Mae communities to other operators during the
nine-month period ended September 30, 2021.
Interest expense for the nine months ended September 30, 2022 was $23.7 million
as compared to $28.6 million for the nine months ended September 30, 2021, a
decrease of $4.9 million, primarily due to lower overall borrowings in 2022,
partially offset by increased interest rates associated with the Company's
variable rate mortgages.
Loss on extinguishment of debt for the nine months ended September 30, 2022 was
$0.6 million as compared to a gain on extinguishment of debt of $168.3 million
for the nine months ended September 30, 2021, a decrease of $168.9 million. The
2022 loss relates to the refinancing of debt in Q1 2022. The 2021 gain related
to the derecognition of notes payable and liabilities as a result of transition
of legal ownership of fourteen communities to Fannie Mae, the holder of the
related non-recourse debt.
Other income for the nine months ended September 30, 2022 and for the nine
months ended September 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
Nine months ended September 30, 2022 as compared to nine months ended
September 30, 2021
Operating activities
Net cash provided by operating activities for the nine months ended
September 30, 2022 was $2.9 million as compared to net cash used in operating
activities of $7.2 million for the nine months ended September 30, 2021, an
increase of $10.1 million primarily due to the timing of settlements of our
receivables, current assets, and payables, as well as improved operations.
Investing activities
Net cash used in investing activities for the nine months ended September 30,
2022 was $30.7 million as compared to $7.1 million for the nine months ended
September 30, 2021 primarily due to increase in ongoing capital improvements and
renovation projects at existing communities totaling $18.3 million, and the
acquisition of two new communities in Q1 2022 for $12.3 million.
Financing activities
Net cash used in financing activities for the nine months ended September 30,
2022 was $24.3 million and primarily results from repayments of notes payable
and deferred financing costs paid, net of proceeds from notes payable, of $20.7
million, related to our 2022 debt refinancing and $3.0 million of dividends paid
to Series A Preferred Stockholders. The net cash provided by financing
activities for the nine months ended September 30, 2021 was $6.6 million and
primarily results from proceeds from notes payable, net of repayments.
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 September 30, 2022, we had $27.0 million of cash
and cash equivalents excluding our restricted cash balance of $13.8 million. 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
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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 were effective beginning June 30, 2022 and quarterly thereafter.
As of September 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. One of these financial covenants is that 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". In connection with the Refinancing Facility, the Company is
in the process of obtaining an interest rate cap to hedge against further
exposure in a rising interest rate environment.
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. There is no assurance that we will
meet such requirements or qualify for, or receive, any additional CARES Act
funds in the future, and we do not consider this to be a significant source of
liquidity in the future. In addition, the Company has historically received and
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 5. 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 September 30, 2022, which could provide a source of liquidity from new
debt. In the near term, the Company intends to finance the two Indiana
communities purchased in Q1 2022.
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