UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 20182020
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1‑168171-16817
FIVE STAR SENIOR LIVING INC.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland | 04-3516029 |
| (State or Other Jurisdiction of Incorporation or Organization) | 04‑3516029
(IRS Employer Identification No.) |
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)
617‑796‑8387
(Registrant’s Telephone Number,Including Area Code): 617‑796‑8387
Securities registered pursuant to Section 12(b) of the Act:
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| Title Of Each Class | | Trading Symbol(s) | | Name Ofof Each Exchange Onon Which Registered |
| Common Stock | | FVE | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. x☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b‑2 of the Exchange Act.
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Large accelerated filer¨ | ☐ | Accelerated filer¨ | Non‑accelerated☐
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Non-accelerated filerx | ☒ | Smaller reporting companyx | ☒ |
| | Emerging growth company¨ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ¨☐ No x☒
The aggregate market value of the voting shares of common stock, $.01 par value, or common shares, of the registrant held by non-affiliates was $39.3$73.0 million based on the $1.50$3.90 closing price per common share on The Nasdaq Stock Market LLC on June 29, 2018.30, 2020. For purposes of this calculation, an aggregate of 2,123,189203,390 common shares held directly by, or by affiliates of, the directors and the officers of the registrant, plus 4,235,00010,691,658 common shares held by Senior Housing PropertiesDiversified Healthcare Trust and 17,999,9991,972,783 common shares held by ABP AcquisitionsAcquisition LLC, have been included in the number of common shares held by affiliates.
Number of the registrant’s common shares outstanding as of February 27, 2019: 50,845,152.20, 2021: 31,678,649.
References in this Annual Report on Form 10‑K to the Company, Five Star, we, us or our includemean Five Star Senior Living Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to our definitive Proxy Statement for the 20192021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2018.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, "WILL", "MAY" AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:
OUR ABILITY TO CONTINUE AS A GOING CONCERN,
OUR ABILITY TO OPERATE OUR SENIOR LIVING COMMUNITIES PROFITABLY,
OUR ABILITY TO OBTAIN AND MAINTAIN A REVOLVING CREDIT FACILITY THAT PROVIDES US WITH SUFFICIENT FINANCING ON SATISFACTORY TERMS,
OUR ABILITY TO MEET OUR RENT AND DEBT OBLIGATIONS OR OBTAIN RELIEF FROM THOSE OBLIGATIONS,
OUR ABILITY TO ACCESS OR RAISE DEBT OR EQUITY CAPITAL,
OUR EXPECTATION TO FOCUS OUR EXPANSION ACTIVITIES ON INTERNAL GROWTH FROM OUR EXISTING SENIOR LIVING COMMUNITIES AND THE HEALTHCARE SERVICES THAT WE MAY PROVIDE,
OUR ABILITY TO INCREASE THE NUMBER OF SENIOR LIVING COMMUNITIES WE OPERATE AND RESIDENTS WE SERVE AND TO GROW OUR OTHER SOURCES OF REVENUES, INCLUDING REVENUES FROM REHABILITATION AND WELLNESS SERVICES AND OTHER SERVICES WE MAY PROVIDE,
WHETHER THE AGING U.S. POPULATION AND INCREASING LIFE SPANS OF SENIORS WILL INCREASE THE DEMAND FOR SENIOR LIVING COMMUNITIES, WELLNESS CENTERS AND OTHER MEDICAL AND HEALTHCARE RELATED PROPERTIES AND HEALTHCARE SERVICES,
OUR ABILITY TO COMPLY AND TO REMAIN IN COMPLIANCE WITH APPLICABLE MEDICARE, MEDICAID AND OTHER FEDERAL AND STATE REGULATORY, RULE MAKING AND RATE SETTING REQUIREMENTS,
OUR ABILITY TO SELL COMMUNITIES WE OFFER FOR SALE,
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP INTEREST IN AND OTHER RELATIONSHIPS WITH AFFILIATES INSURANCE COMPANY, OR AIC, AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,
THE IMPACT OF THE PATIENT PROTECTION AND AFFORDABLE CARE ACT, AS AMENDED BY THE HEALTHCARE AND EDUCATION RECONCILIATION ACT, OR COLLECTIVELY, THE ACA, OR THE POSSIBLE FUTURE REPEAL, REPLACEMENT OR MODIFICATION OFTHE ACA, AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS ON US,
THE CURRENT EVALUATION BY OUR INDEPENDENT DIRECTORS AND THE INDEPENDENT TRUSTEES OF SENIOR HOUSING PROPERTIES TRUST, OR SNH, REGARDING OUR LEASE AND MANAGEMENT ARRANGEMENTS WITH SNH, AND
OTHER MATTERS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS,
Warning Concerning Forward-Looking Statements
RESULTS OF OPERATIONS, FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
THE IMPACT OF CONDITIONS IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR RESIDENTS AND OTHER CUSTOMERS,This Annual Report on Form 10-K contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Annual Report on Form 10-K relate to various aspects of our business, including:
COMPETITION WITHIN THE SENIOR LIVING AND OTHER HEALTHCARE RELATED SERVICES BUSINESSES,
OUR OPERATING LEVERAGE,•The duration, severity and geographic reach of the novel coronavirus SARS-CoV-2, or COVID-19, pandemic, or the Pandemic, and its impact on our and Diversified Healthcare Trust's, or DHC's, business, results, operations and liquidity, and the impact of the Pandemic on the senior living industry in general,
SENIORS' DELAYING OR FORGOING MOVING TO SENIOR LIVING COMMUNITIES OR PURCHASING HEALTHCARE SERVICES FROM US,
INCREASES IN TORT AND INSURANCE LIABILITY COSTS,•The development, availability, effectiveness and impact of COVID-19 vaccines and therapeutic treatments on public health and safety, economic conditions, the senior living industry and our business,
INCREASES IN OUR LABOR COSTS OR IN COSTS WE PAY FOR GOODS AND SERVICES,
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING DIRECTORS, SNH, THE•Our expectations regarding pent-up demand, impacts of information technology and our competitive advantages in the senior living industry,
•Our ability to attract and retain qualified and skilled employees, particularly at our senior living communities,
•Our ability to operate our senior living communities profitably,
•Our ability to grow revenues at the senior living communities we manage and to increase the fees we earn from managing senior living communities,
•Our expectation to focus our expansion activities on internal growth from our existing senior living communities and clinics we operate and other ancillary services we may provide,
•Our ability to increase the number of senior living communities we operate and residents we serve, and to grow our other sources of revenues, including rehabilitation and wellness services and other services we may provide,
•Whether the aging U.S. population and increasing life spans of older adults will increase the demand for senior living communities and health and wellness centers,
•Our ability to comply and to remain in compliance with applicable Medicare, Medicaid and other federal and state regulatory, rulemaking and rate setting requirements,
•Our belief regarding the adequacy of our existing cash flows from operations, unrestricted cash on hand and amounts available under our credit facility to support our business,
•Our expectations regarding the impact of seasonal differences on our revenues and operating cash flows,
•Our expectations that we will be able to pass through to our residents and clients costs we may incur from the impact of climate change,
•Our ability to sell communities we may offer for sale, and
•Our ability to access or raise debt or equity capital.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. A summary of the risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, cash flows, liquidity and prospects identified in Part I, Item IA. "Risk Factors" in this Annual Report on Form 10-K include, but are not limited to:
•The impact of conditions in the economy and the capital markets on us and our residents, clients and other customers,
•Competition within the senior living and other health and wellness related services businesses,
•Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services from us,
•Increases in our labor costs or in costs we pay for goods and services,
•Increases in tort and insurance liability costs,
•Our operating and debt leverage,
•Actual and potential conflicts of interest with our related parties, including our Managing Directors, DHC, The RMR GROUPGroup LLC, ORor RMR LLC, ABP TRUST, AIC AND OTHERS AFFILIATED WITH THEM,Trust and others affiliated with them,
CHANGES IN MEDICARE OR MEDICAID POLICIES AND REGULATIONS, INCLUDING THOSE THAT MAY RESULT FROM THE ACA OR THE POSSIBLE FUTURE REPEAL, REPLACEMENT OR MODIFICATION OF THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS,
DELAYS OR NONPAYMENTS OF GOVERNMENT PAYMENTS TO US THAT COULD RESULT FROM GOVERNMENT SHUTDOWNS OR OTHER CIRCUMSTANCES,•Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations, which could result in reduced Medicare or Medicaid rates, a failure of such rates to cover our costs or limit the scope or funding of either or both programs, or reductions in private insurance utilization and coverage,
COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT COULD AFFECT OUR SERVICES OR IMPOSE REQUIREMENTS, COSTS AND ADMINISTRATIVE BURDENS THAT MAY REDUCE OUR ABILITY TO PROFITABLY OPERATE OUR BUSINESS,
•Delays or nonpayment of government payments to us,
CONTINUED EFFORTS BY THIRD PARTY PAYERS TO REDUCE HEALTHCARE COSTS, AND•Compliance with, and changes to, federal, state and local laws and regulations that could affect our services or impose requirements, costs and administrative burdens that may reduce our ability to profitably operate our business,
ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.
FOR EXAMPLE:•Our exposure to litigation and regulatory and government proceedings due to the nature of our business, including adverse determinations resulting from government reviews, audits and investigations and unanticipated costs to comply with legislative or regulatory developments,
ANY ACTIONS WE MAY TAKE TO ADDRESS THE CURRENT SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN MAY NOT BE SUCCESSFUL. FURTHER, ANY SUCH ACTIONS THAT MAY ADDRESS THAT CONCERN MAY ONLY PROVIDE RELIEF IN THE SHORT TERM AND COULD INCREASE OUR FUTURE COSTS AND THEREBY PREVENT OR LIMIT OUR ABILITY TO OPERATE PROFITABLY IN THE INTERMEDIATE OR LONGER TERM,•Ongoing healthcare reform efforts, including continued efforts by third-party payers to reduce costs, and
OUR LEASE AND MANAGEMENT ARRANGEMENTS WITH SNH ARE CURRENTLY BEING EVALUATED BY OUR INDEPENDENT DIRECTORS AND SNH’S INDEPENDENT TRUSTEES. AS A RESULT, THERE MAY BE AGREED CHANGES TO OUR ARRANGEMENTS WITH SNH IN THE FUTURE. ANY FUTURE CHANGES TO SUCH ARRANGEMENTS WILL BE SUBJECT TO THE APPROVAL OF OUR INDEPENDENT DIRECTORS. WE CANNOT BE SURE THAT ANY CHANGES TO THESE ARRANGEMENTS WILL BE AGREED TO OR OCCUR,•Acts of terrorism, outbreaks of so-called pandemics or other human-made or natural disasters beyond our control.
OUR CREDIT FACILITY MATURES ON JUNE 28, 2019, AND WE ARE CURRENTLY EVALUATING OPTIONS TO REFINANCE OUR CREDIT FACILITY. WE MAY BE UNABLE TO REPAY AMOUNTS OUTSTANDING ON OUR CREDIT FACILITY AT THAT TIME OR TO REFINANCE OUR CREDIT FACILITY OR OBTAIN ADDITIONAL DEBT FINANCING,For example:
•Challenging conditions in the senior living industry continue to exist and our business and operations remain subject to substantial risks, many of which are beyond our control. As a result, our operations may not be profitable in the future and we may realize losses,
•We may not successfully execute our strategic growth initiatives,
•Our ability to operate senior living communities or rehabilitation and wellness services clinics profitably and increase the revenues generated by us depends upon many factors, including our ability to integrate new communities into our existing operations, as well as some factors that are beyond our control, such as the demand for our services arising from economic conditions generally and competition from other providers of services to older adults. We may not be able to successfully integrate, operate, compete and profitably manage our senior living communities,
•We expect to enter into additional management arrangements with DHC for additional senior living communities that DHC owns or may acquire in the future. However, we cannot be sure that we will enter any additional management arrangements with DHC,
•Our belief that the aging of the U.S. population and increasing life spans of older adults will increase demand for senior living communities and services may not be realized or may not result in increased demand for our services,
•Our investments in our workforce and continued focus on reducing team member turnover by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits, as well as our innovative
efforts to attract talent, may not be successful and may not result in the benefits we expect to achieve through such investments,
OUR ABILITY TO OPERATE SENIOR LIVING COMMUNITIES PROFITABLY DEPENDS UPON MANY FACTORS, INCLUDING OUR ABILITY TO INTEGRATE NEW COMMUNITIES INTO OUR EXISTING OPERATIONS, AS WELL AS SOME FACTORS WHICH ARE BEYOND OUR CONTROL, SUCH AS THE DEMAND FOR OUR SERVICES ARISING FROM ECONOMIC CONDITIONS GENERALLY AND COMPETITION FROM OTHER PROVIDERS OF SENIOR LIVING SERVICES. WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE, OPERATE, COMPETE AND PROFITABLY MANAGE OUR SENIOR LIVING COMMUNITIES,
•Our marketing initiatives may not succeed in increasing our occupancy and revenues, and they may cost more than any increased revenues they may generate,
WE EXPECT TO ENTER ADDITIONAL OPERATING ARRANGEMENTS WITH SNH FOR ADDITIONAL SENIOR LIVING COMMUNITIES THAT SNH OWNS OR MAY ACQUIRE IN THE FUTURE. HOWEVER, WE CANNOT BE SURE THAT WE WILL ENTER ANY ADDITIONAL OPERATING ARRANGEMENTS WITH SNH,
•Our strategic investments to enhance efficiencies in, and benefits from, our purchasing of services may not be successful or generate the returns we expect,
OUR BELIEF THAT THE AGING OF THE U.S. POPULATION AND INCREASING LIFE SPANS OF SENIORS WILL INCREASE DEMAND FOR SENIOR LIVING COMMUNITIES AND SERVICES MAY NOT BE REALIZED OR MAY NOT RESULT IN INCREASED DEMAND FOR OUR SERVICES,
OUR MARKETING INITIATIVES MAY NOT SUCCEED IN INCREASING OUR OCCUPANCY AND REVENUES, AND THEY MAY COST MORE THAN ANY INCREASED REVENUES THEY MAY GENERATE,•Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening housing market conditions, higher levels of unemployment among our customers or their family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the revenues and profitability of our business,
AT DECEMBER•Customers who pay for our services with their private resources may become unable to afford our services, resulting in decreased revenues at our senior living communities and rehabilitation and wellness services clinics and other ancillary services we provide,
•The various federal and state government agencies that pay us for the services we provide to some of our customers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us. On December 2, 2020, CMS issued a final rule that, among other things, reduces Medicare payments that will reduce revenues related to outpatient therapy on or after January 1, 2021 by 9.5%. On December 27, 2020, the reduction was cut to 3.5% as a result of the Consolidated Appropriations Act.
•Our efforts to mitigate the continued effects of the Pandemic may not be sufficient,
•We believe that our insurance costs may continue to rise as a result of claims or litigation associated with the Pandemic, coupled with general market conditions prior to the Pandemic,
•We may be unable to repay or refinance our debt obligations when they become due,
•At December 31, 2018, WE HAD $29.5 MILLION OF UNRESTRICTED CASH AND CASH EQUIVALENTS. IN ADDITION, WE HAVE SOLD IMPROVEMENTS TO SNH IN THE PAST AND EXPECT TO REQUEST TO SELL ADDITIONAL IMPROVEMENTS TO SNH FOR INCREASED RENT PURSUANT TO OUR LEASES WITH SNH. THESE STATEMENTS MAY IMPLY THAT WE MAY HAVE SUFFICIENT CASH LIQUIDITY. HOWEVER, WE HAVE BEEN INCURRING OPERATING LOSSES, HAVE A LARGE ACCUMULATED DEFICIT AND HAD NEGATIVE NET CASH FLOWS FROM OUR OPERATIONS FOR THE YEAR ENDED DECEMBER2020, we had $84.4 million of unrestricted cash and cash equivalents. As of December 31, 2018. MOREOVER, OUR OPERATIONS AND BUSINESS REQUIRE SIGNIFICANT AMOUNTS OF WORKING CASH AND REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS. FURTHER, SNH IS NOT OBLIGATED TO PURCHASE IMPROVEMENTS WE MAY MAKE TO THE LEASED COMMUNITIES. ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT CASH LIQUIDITY,2020, we had no borrowings under our secured revolving credit facility, or our credit facility, letters of credit issued under the credit facility in an aggregate amount of $2.4 million and $42.1 million available for borrowing under our credit facility. In addition, we believe that we have adequate financial resources to fund our business for at least the next 12 months. However, we have incurred in prior periods and may continue to incur in future periods operating losses and we have a large accumulated deficit. Moreover, certain aspects of our operations and future growth opportunities that we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures. Further, the impact of the Pandemic and resulting economic conditions has adversely impacted us and will likely continue to do so. As a result, we may not have sufficient cash liquidity,
CIRCUMSTANCES THAT ADVERSELY AFFECT THE ABILITY OF SENIORS OR THEIR FAMILIES TO PAY FOR OUR SERVICES, SUCH AS ECONOMIC DOWNTURNS, WEAKENING HOUSING MARKET CONDITIONS, HIGHER LEVELS OF UNEMPLOYMENT AMONG OUR RESIDENTS' OR POTENTIAL RESIDENTS' FAMILY MEMBERS, LOWER LEVELS OF CONSUMER CONFIDENCE, STOCK MARKET VOLATILITY AND/OR CHANGES IN DEMOGRAPHICS GENERALLY COULD AFFECT THE PROFITABILITY OF OUR SENIOR LIVING COMMUNITIES,•Actual costs under our credit facility will be higher than LIBOR plus a premium because of other fees and expenses associated with our credit facility,
RESIDENTS WHO PAY FOR OUR SERVICES WITH THEIR PRIVATE RESOURCES MAY BECOME UNABLE TO AFFORD OUR SERVICES, RESULTING IN DECREASED OCCUPANCY AND DECREASED REVENUES AT OUR SENIOR LIVING COMMUNITIES AND OUR INCREASED RELIANCE ON LOWER RATES FROM GOVERNMENT AGENCIES AND OTHER PAYERS,
THE VARIOUS FEDERAL AND STATE GOVERNMENT AGENCIES WHICH PAY US FOR THE SERVICES WE PROVIDE TO SOME OF OUR RESIDENTS ARE CURRENTLY EXPERIENCING BUDGETARY CONSTRAINTS AND MAY LOWER THE MEDICARE, MEDICAID AND OTHER RATES THEY PAY US,•The amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility. Accordingly, the available borrowings under our credit facility at any time may be less than $65.0 million. Also, the available borrowings under our credit facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy.
WE MAY BE UNABLE TO REPAY OR REFINANCE OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
ACTUAL COSTS UNDER OUR CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR CREDIT FACILITY,•We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not be able to successfully carry out this intention. Further, market disruptions, such as may be caused and continued by the Pandemic and the current economic conditions, may significantly limit our access to capital,
IN DECEMBER 2017, WE SUBMITTED A FINAL SUPPLEMENTAL DISCLOSURE TO THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES OFFICE OF INSPECTOR GENERAL, OR THE OIG, REGARDING OUR VOLUNTARY DISCLOSURE OF CERTAIN DOCUMENTATION DEFICIENCIES RELATED TO MEDICARE RECORDS AND OTHER MATTERS AT ONE OF OUR SKILLED NURSING FACILITIES. ALTHOUGH WE HAVE ACCRUED AN ESTIMATED REVENUE RESERVE FOR HISTORICAL
•Our actions and approach to managing our insurance costs, including our operating an offshore captive insurance company and self-insuring with respect to certain liability matters, may not be successful and could result in our incurring significant costs and liabilities that we will be responsible for funding,
MEDICARE PAYMENTS WE EXPECT TO REPAY AND WE HAVE ACCRUED AN ESTIMATED RESERVE FOR ADDITIONAL ASSOCIATED COSTS WE HAVE INCURRED OR EXPECT TO INCUR, INCLUDING OIG IMPOSED PENALTIES, WE CANNOT BE SURE THAT OUR RESERVES WILL BE ADEQUATE TO COVER THE FINAL REPAYMENT OBLIGATIONS WE ARE FINALLY DETERMINED TO OWE OR ANY ADDITIONAL ASSOCIATED COSTS. ALSO, OTHER DEFICIENCIES MAY BE DISCOVERED THAT COULD INCREASE OUR LIABILITY TO THE OIG AND THE ASSOCIATED COSTS,•Contingencies in any applicable acquisition or sale agreements we or DHC have entered into, or may enter into, may not be satisfied and our and DHC’s applicable acquisitions or sales, and any related management arrangements we may expect to enter into or exit, may not occur, may be delayed or the terms of such transactions or arrangements may change,
OUR ACTIONS AND APPROACH TO MANAGING OUR INSURANCE COSTS, INCLUDING OUR OPERATING AN OFFSHORE CAPTIVE INSURANCE COMPANY AND SELF INSURING WITH RESPECT TO CERTAIN LIABILITY MATTERS, MAY NOT BE SUCCESSFUL AND COULD RESULT IN OUR INCURRING SIGNIFICANT COSTS AND LIABILITIES THAT WE WILL BE RESPONSIBLE FOR FUNDING,
CONTINGENCIES IN OUR AND SNH’S APPLICABLE ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR AND SNH’S APPLICABLE PENDING ACQUISITIONS AND SALES AND ANY RELATED LEASES, MANAGEMENT OR POOLING ARRANGEMENTS WE MAY EXPECT TO ENTER MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS OR ARRANGEMENTS MAY CHANGE,•We may be unable to meet collateral requirements related to our workers’ compensation insurance program for future policy years, which may result in increased costs for such insurance program,
WE MAY BE UNABLE TO MEET COLLATERAL REQUIREMENTS RELATED TO OUR WORKERS’ COMPENSATION INSURANCE PROGRAM FOR FUTURE POLICY YEARS, WHICH MAY RESULT IN INCREASED COSTS FOR SUCH INSURANCE PROGRAM,
WE MAY NOT BE ABLE TO SELL COMMUNITIES THAT WE MAY SEEK TO SELL ON TERMS ACCEPTABLE TO US OR OTHERWISE,•We may not be able to sell senior living communities that we own, and DHC may not be able to sell senior living communities we manage, that we or DHC may seek to sell, on acceptable terms, or we may incur losses in connection with any such sales,
WE ARE NOT CURRENTLY IN COMPLIANCE WITH THE MINIMUM BID PRICE CONTINUED LISTING STANDARD OF THE NASDAQ STOCK MARKET LLC, OR NASDAQ, AND WE CANNOT BE SURE THAT WE WILL BE ABLE TO REGAIN AND/OR MAINTAIN COMPLIANCE WITH THIS LISTING STANDARD OR THAT WE WILL OTHERWISE BE IN COMPLIANCE WITH OTHER NASDAQ LISTING STANDARDS, WHICH COULD RESULT IN THE DELISTING OF OUR COMMON SHARES FROM NASDAQ,
WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING SNH,•We believe that our relationships with our related parties, including DHC, RMR LLC, ABP TRUST, AIC AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE, ANDTrust and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize,
OUR SENIOR LIVING COMMUNITIES ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, LICENSURE AND OVERSIGHT. WE SOMETIMES EXPERIENCE DEFICIENCIES IN THE OPERATION OF OUR SENIOR LIVING COMMUNITIES, AND SOME OF OUR COMMUNITIES MAY BE PROHIBITED FROM ADMITTING NEW RESIDENTS, OR OUR LICENSE TO CONTINUE OPERATIONS AT A COMMUNITY MAY BE REVOKED. ALSO, OPERATING DEFICIENCIES OR A LICENSE REVOCATION AT ONE OR MORE OF OUR SENIOR LIVING COMMUNITIES MAY HAVE AN ADVERSE IMPACT ON OUR ABILITY TO OPERATE, OBTAIN LICENSES FOR, OR ATTRACT RESIDENTS TO, OUR OTHER COMMUNITIES.
•Our senior living communities and rehabilitation and wellness services clinics are subject to extensive government regulation, licensure and oversight. We sometimes have regulatory issues in the operation of our senior living communities and rehabilitation clinics and, as a result, some of our communities may periodically be prohibited from admitting new residents, or our license to continue operations at a community or clinic may be suspended or revoked. Also, operating deficiencies or a license revocation at one or more of our senior living communities or rehabilitation and wellness services clinics may have an adverse impact on our ability to operate, obtain licenses for, or attract residents or clients to, our other communities and clinics, and
CURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS ACTS OF TERRORISM, NATURAL DISASTERS, CHANGED MEDICARE OR MEDICAID RATES, NEW LEGISLATION, REGULATIONS OR RULE MAKING AFFECTING OUR BUSINESS, OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
THE INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM•We expect that the Pandemic will continue to adversely affect our business, operating results and financial condition, due to continual deterioration of occupancy at our senior living communities, staffing pressures and potential medical and food supply shortages as well as increased COVID-19 testing costs that may have an adverse affect on the operating costs of our senior living communities.
Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, epidemics and other widespread illnesses, changed Medicare or Medicaid rates, new legislation, regulations or rulemaking affecting our business, or changes in capital markets or the economy generally.
The information contained elsewhere in this Annual Report on Form 10‑K OR IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, ORor in our other filings with the Securities and Exchange Commission, or SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”including under the caption “Risk Factors”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THEor incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.are available on the SEC’s website at www.sec.gov.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.You should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
FIVE STAR SENIOR LIVING INC.
20182020 ANNUAL REPORT ON FORM 10‑K
Table of Contents
This Annual Report on Form 10-K includes our trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery”, Lifestyle360 and “Ageility Physical Therapy Solutions," which are our property and are protected under applicable intellectual property laws. Solely for convenience, these trademarks referred to in this Annual Report on Form 10-K may appear without the TM symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks.
PARTI
PARTI
Item 1. Business
THE COMPANYThe Company
We operate 252 senior living communities, including one active adult community, located in 31 states and provide services to approximately 21,000 residents. We also operate 244 rehabilitation and wellness services clinics located in 28 states and provide services to approximately 16,500 clients. We conduct our operations in two reportable segments: (i) senior living and (ii) rehabilitation and wellness services.
With our mission, “To honor and enrich the journey of life, one experience at a time,” our leadership team is committed to prioritizing the needs of our residents, clients and team members. We employ approximately 19,500 team members experienced in supporting older adults and we are focused on establishing ourselves as a premier provider of services to older adults.
As of December 31, 2020, our senior living segment was comprised of older adults residing in (i) 243 primarily independent and assisted living communities and (ii) 9 skilled nursing facilities, or SNFs. Our independent and assisted living communities, which includes our Bridge to Rediscovery memory care units, consist of 28,316 living units. These units include 37 continuing care retirement communities, or CCRCs, with 8,574 living units. Our 9 SNFs consist of 955 living units. As of December 31, 2020, we managed 228 senior living communities (26,969 living units), including one active adult community (167 living units), owned and operated 20 senior living communities (2,098 living units), and leased and operated 4 senior living communities (204 living units).
With the goal of offering a comprehensive suite of services, we provide our residents and others with rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from our senior living communities through Ageility Physical Therapy Solutions, or Ageility, a division of our rehabilitation and wellness services segment. As of December 31, 2020, we operated 37 inpatient clinics providing rehabilitation and wellness services in 32 of our CCRCs and 5 of our SNFs. As of December 31, 2020, we operated 207 outpatient clinics, of which 149 were clinics within our senior living communities and 58 were clinics within senior living communities operated by other providers. We provided Ageility services to approximately 16,500 clients in 2020. As of December 31, 2020, we have continued to expand our Ageility service line by starting to introduce innovative fitness and personal training offerings to complement outpatient therapy in 185 senior living and active adult communities.
According to "The Longevity Economy Outlook", from AARP and The Economist, as of December 31, 2019, the over-50 age population in the United States was comprised of 117.4 million people, or 35% of the population. The fastest growing age population in the United States is the over 85, and the second fastest is the over 100. We believe our business has the platform and service offerings to position us to support a higher quality of life for these adults as they age.
We are focused on (i) creating experiences for older adults that meet and often exceed their expectations and (ii) offering residences and services that meet the needs and demands of older adults. To that end, we collaborate and actively engage with innovative organizations. We also sponsor and pilot programs to continually evolve our service capabilities to meet the needs of our residents, clients and team members and we adapt our offerings to meet the evolving consumer demands of a growing population of older adults. In 2020, we served approximately 24,000 older adults on a daily basis by providing a variety of living experiences and services including altered services offered to adhere to rigorous infectious disease protocols as a result of the Pandemic in addition to rehabilitation and wellness services through Ageility. For residents in our assisted living and SNF communities, we offer assistance with their daily living activities, including bathing and dressing, eating, toileting and mobility assistance. In certain senior living communities, we also provide licensed skilled nursing services. In addition, we offer additional services including, but not limited to, on-site entertainment, cultural and educational activities, social opportunities and camaraderie, virtual communication, wellness programs and activities to support a healthy lifestyle, personal grooming services, telehealth visits and home health and dining services. Our focus on offering a broad array of services helps promote a greater sense of community and enable older adults to age-in-place independently. In addition, through our rehabilitation and wellness services clinics, we offer a wide range of therapeutic services, including physical, speech and occupational therapy within many of our senior living communities as well as at outpatient clinics.
Restructuring Transactions with DHC
On April 1, 2019, we entered into a transaction agreement, or the Transaction Agreement, with DHC to restructure our business arrangements with DHC, or the Restructuring Transactions, pursuant to which, effective as of January 1, 2020, or the Conversion Time:
•our five then existing master leases with DHC for 166 of DHC's senior living communities (18,636 living units) that we then leased, as well as our then existing management and pooling agreements with DHC for 78 senior living communities (10,337 living units), were terminated and replaced, or the Conversion, with new management agreements for all of these senior living communities and a related omnibus agreement, or collectively, the New Management Agreements;
•we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019, or, together, the Share Issuances; and
•as consideration for the Share Issuances, DHC provided to us $75.0 million of additional consideration by assuming certain of our working capital liabilities and through cash payments (with DHC's provision of such consideration to us, collectively with the Conversion and the Share Issuances, being included in the definition of Restructuring Transactions in this Annual Report on Form 10-K).
For more information regarding the Restructuring Transactions, see "Properties" included in Part I, Item 2, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7, of this Annual Report on Form 10-K and Notes 1 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Our History
We are a corporation that was formed under the laws of the State of Maryland in 2001. As of December 31, 2018,Effective March 3, 2017, we operated 284changed our name from Five Star Quality Care, Inc. to Five Star Senior Living Inc. We have grown primarily by leasing or managing senior living communities with 32,016 living units located in 32 states, including 255 primarily independentowned by DHC. We also offer rehabilitation and assisted living communities with 29,511 living units and 29 skilled nursing facilities, or SNFs, with 2,505 living units. As of December 31, 2018, we owned and operated 20 of thesewellness services both at our senior living communities (2,108 living units), we leased and operated 188 of theseas well as in senior living communities (20,142 living units) and we managed 76 of theseother senior living communities (9,766 living units).companies. Our 284 senior living communities included 10,895 independent living apartments, 16,389 assisted living suitesprincipal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and 4,732 SNF units. The foregoing numbers exclude living units categorized as out of service.our telephone number is (617) 796-8387.
As of December 31, 2018, we leased from Senior Housing Properties Trust or its subsidiaries, or SNH, 184 senior living communities pursuant to five long term leases
Our Communities and managed 76 senior living communities for the account of SNH pursuant to long term management agreements. Our Independent Directors and SNH’s independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. We cannot be sure that any changes to our arrangements with SNH will be agreed to or occur. For more information about our leases and management agreements with SNH, see “Properties—Our Leases and Management Agreements with SNH” in Part I, Item 2 of this Annual Report on Form 10-K. Services
Our present business plan contemplates the operation of owned, leased and managed and leasedprimarily independent and assisted senior living communities. Some of ourcommunities as well as CCRC's. Our senior living communities can be classified into different primary service categories; while some provide more than one type ofa single service, a majority provide multiple service levels in a single building or campus.in a campus setting.
Independent Living Communities. Independent living communities provide residents with high levels of privacy to residentsin various types of apartments and require residents to be capable of relatively high degrees of independence.independent. An independent living apartment usually bundles several non-healthcare services as part of a regular monthly charge. For example, the base charge may include one or two meals per day in a central dining room, weekly maidhousekeeping service or social director services.access to a variety of activities. Additional non-healthcare services are generally available from staff employees on a fee for service basis. In some independentIndependent living communities can provide both assisted living and skilled nursing services in separate parts of the community are dedicated to assisted living or nursing services.campus. As of December 31, 2018,2020, our operations included 10,89510,982 independent living apartmentsunits in 9795 senior living communities. Included in this total is an active adult community, which we classify as an independent living community, that has 167 living units.
Assisted Living Communities. Assisted living communities are typically comprised of one bedroomone-bedroom units, which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24-hour availability of assistance with the activities of daily living such as bathing, dressing and bathing.eating. Professional nursing and healthcare services are usually available at the community, as requested, or at regularly scheduled times. In addition, residents have access to a variety of entertainment and wellness activities. We may also provide AlzheimerAlzheimer’s or memory care services at certain of our assisted living communities.communities through our award-winning Bridge to Rediscovery program. As of December 31, 2018,2020, our operations included 16,38915,332 assisted living suites in 230 communities.219 senior living communities, of which 3,220 in 111 senior living communities are dedicated to memory care services.
Skilled Nursing Facilities. SNFs generally provide extensive nursing and healthcare services that are similar to thoseservices available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose builtpurpose-built SNF generally includes one or two beds per room with a separate bathroom in each room and shared dining facilities. SNFs are staffed by licensed nursing professionals 24 hours per day. As of December 31, 2018,2020, our operations included 4,7322,957 SNF units in 6945 senior living communities.
Our principal executive offices are
In addition to our senior living communities, we provide a comprehensive suite of rehabilitation and wellness services at our senior living communities, as well as outpatient clinics located at 400 Centre Street, Newton, Massachusetts 02458,separately from our senior living communities through our rehabilitation and wellness services segment.
Rehabilitation and Wellness Services. Through Ageility, we offer rehabilitation and wellness services, primarily in a clinical setting. Staffed with licensed therapists or other trained personnel, our telephone number is (617) 796-8387.clinics provide rehabilitation services, including physical therapy, speech therapy and occupational therapy. In addition, we offer other rehabilitation and wellness services with a hospitality approach, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, continence management programs, pain management programs, neurological rehabilitation, post-surgical or post-hospitalization services and general personal fitness and wellness programs. As of December 31, 2020, our operations included 37 inpatient clinics and 207 outpatient clinics providing rehabilitation and wellness services.
OUR GROWTH STRATEGYCurrent Industry Trends
While construction of new senior living communities has slowed during 2020, the industry has experienced several years of significant construction of new communities and other buildings to service older adults. We believe this has resulted in an oversupply and put downward pressures on occupancy and the rates that operators can charge for their services to their residents. In addition, pressures on governmental budgets have resulted in reductions or limitations on government funding growth for senior living and healthcare services, despite the agingincreasing regulatory requirements imposed on the industry. These revenue pressures have been buffeted by increased costs for labor, insurance and regulatory compliance. At the same time, older adults are delaying the age at which they move to senior living communities, or forgoing such a move entirely.
In the last ten years, the industry evolved to serve the growing number of older adults, and we expect the U.S. population will increase demand for senior living communitiesservices to increase in future years. We have searched for innovative ways to overcome the industry's challenges, including workforce shortages and services. We planlow employee retention, occupancy pressures, challenges related to profit fromnew technology and higher service level expectations.
The Pandemic has added to these challenges, altering the public perception of senior living negatively while increasing regulatory focus on the industry. The vulnerability of the demographic we serve has caused the health care aspect of the senior living industry to be pushed to the forefront, rather than its growing focus on hospitality and lifestyle. Our roots in clinical excellence have served us well through this demand by: (1) improvingtime, and allowed us to focus on the profitabilitysafety and well-being of our residents, continuously maintain compliance with changing regulations and support our front-line team members. We remain confident that the pent-up demand in the marketplace will serve those operators who have been able to maintain operational stability and focus on the customer through this challenging time and are able to evolve to meet the needs of the post-pandemic customer who will have higher expectations around safety measures, technological offerings, clinical capabilities and transparent communication.
Even before the Pandemic, demographic trends regarding aging adults had captured the attention of a number of entrepreneurs, start-ups and other companies in the technology arena, resulting in a steady stream of innovations entering the senior living space. Many of these innovations enable older adults to age in their own existing operationshomes longer. Technology is causing the industry to look at new ways of delivering care to older adults. Regardless of the influx of technology solutions that change how senior living companies deliver adult care, we believe that the senior living industry remains a person-to-person, relationship-centered business. Technology can augment, but we believe, will never replace the human touch, friendship and compassion of individuals of all ages who feel called to care for and honor the generations who came before them. We are committed to continue thoughtful and impactful investment in technology to enhance the resident experience.
To address workforce and retention challenges, senior living companies like us have looked to data-driven recruitment processes that use benchmarking and analytics to find quality candidates who stay in their roles longer. Personnel retention plans also include increasing wages, especially in geographic areas where competition for healthcare and senior living professionals is intense. Other inventive efforts to attract talent to the senior living industry include connecting to the future workforce through school partnerships and recruitment presentations.
To address occupancy challenges, we are investing in business intelligence, website enhancements, targeted content, search engine optimization strategy and targeted marketing campaigns tailored to each micro-market, to attract families and individuals searching for the services they need for their aging loved ones or themselves. In addition, we are focused on higher quality prospect engagement, beginning with high touch digital interactions and supported by increasing revenues and improving operating margins and operatingextensive sales training that focuses on research-based sales tactics to more effectively “close” the prospects generated by our digital marketing efforts.
Recent trends suggest older adults are focused on evaluating senior living communities that offer service platforms that enable individuals to live a more independent lifestyle. With a broader scope of senior living communities operating in the United States, combined with technology enablement, consumers have more options in choosing where to live as they age. This wider range of options for consumers is causing further pressure on the industry to implement innovative methods and services that provide for an exceptional customer experience and our continued focus on customer needs and ongoing investment in marketing intelligence is a direct result of our commitment to that experience.
Competition
The active adult and senior living services markets continue to be highly competitive despite the challenges experienced in the industry this year due to the Pandemic. We compete with numerous local, regional and national senior living community operators. Increasingly, we are also competing with other companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our competitors are larger and have greater financial resources than we do and some of our competitors are not-for-profit entities that have endowment income and may not face the same financial pressures that we do. In recent years, a significant number of new senior living communities have been developed, and we expect this increased development activity to continue in the future as new operators attempt to seize market share in a highly fragmented market. This activity has increased competitive pressures on us, particularly in the geographic markets where we have high qualitysenior living community concentrations. While smaller senior living operators may have struggled to deal with the impact of the Pandemic and higher operating costs, other competitors may have lower operating expenses or other cost advantages compared to us. Therefore, they may be able to provide services at a lower price than we can offer to our residents who payand clients.
We continue to address competition (i) by focusing on operations to ensure an exceptional resident experience, high customer satisfaction and team member retention through, among other things, training and development, (ii) by differentiating ourselves with private resources; (2) enteringthe innovative programs and services we offer, (iii) with enhanced marketing efforts and (iv) by evaluating the current position of our senior living communities relative to their competition. In addition, we may enter into additional arrangements with DHC for us to operate new or additional senior living communities; (3) growingcommunities, including active adult communities that DHC owns, and our ancillary servicesrelationships with DHC and RMR LLC may provide us with competitive advantages; however, DHC is not obligated to complement existingprovide us with opportunities to operate additional properties it owns. We cannot be sure that we will be able to compete successfully or operate profitably. For more information on the competitive pressures we face and associated risks, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Our Growth Strategy
We are one of the largest senior living operations, including increasingmanagement companies in the United States, based on unit count. We have been in operation for over 19 years, currently servicing approximately 21,000 older adults in our offerings of outpatient therapy services, including physical, occupational, speech and other specialized therapy services,senior living communities as well as home healthcareapproximately 16,500 clients in our Ageility clinics. As our prospective customers' demographics and conciergepsychographics change, we are focused on establishing ourselves as a premier provider of services to ourolder adults and their caregivers.
residents and to seniors living outside of our communities; and (4) continuing to develop public awareness of the Five Star Senior Living brand through various marketing efforts and initiatives.
We seek to improve the profitability ofrevenues from our existing senior living operations by increasing revenues through increases in occupancyfocusing on providing an exceptional resident experience and in the rates we charge, by improving our operating margins, by managing our expenses prudently and otherwise improving our operating efficiencies and by operating communities that provide high quality services toseeking residents who pay for our services with private resources. We have also soughtseek to improve profitability through continued strategic capital investments at our senior living communities and by investing and developinginvestments in the development of our staff, andas well as by working with our service providers to increase the desirability and competitiveness of our senior living communities. In addition to routine renovations and upgrades at our existing senior living communities, we have sought to expand our senior living communities when and as we believed demand supported opportunities for us to pursue possible additional revenues at our existing senior living communities. Sincesince January 1, 2016,2019, we have invested $96.3$8.3 million in capital improvements in our currently owned and leased senior living communities, net of amounts we sold to SNH for increased annual minimum rent. communities.
We also seek to grow our business by entering into additional long term operating arrangementslong-term management agreements for senior living communities and active adult communities where residents’ private resources account for all or a large majority of revenues. Since January 1, 2016,2019, we have commenced leasing ninebegan managing an additional senior living communities, including seven senior living communities which we sold to SNH in June 2016community and simultaneously began leasing from SNH, and we have begun managing 16 senior living communities, including six senior living communities which we sold to SNH in December 2017, January 2018 and February 2018 and simultaneously began managingan active adult community for the account of SNH. For more information about these sale transactions, see “—Our Dispositions” below.DHC. For more information about our management and prior leasing arrangements with SNH,DHC, see “Properties—"Restructuring Transactions with DHC" above and “Properties — Our SNHDHC Leases and Management Agreements with SNH”DHC” included in Part I, Item 2 of this Annual Report on Form 10-K and Note 910 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Through our ancillary services, including our rehabilitation and wellness services segment, we offerprovide diversified offerings to older adults both within our senior living communities and outside of them, including skilled rehabilitation services for short termshort-term inpatient stays, such as after joint replacement surgery;surgery, home healthcare in certain of our independent living and assisted living communities;communities, outpatient rehabilitation for people of all ages; long term skilled nursing care by highly trained professionals;focused on older adults, and concierge services.services in certain communities. The therapy services we offer include physical, occupational, speech and other specialized therapy services. The home health services we provide include nursing, physical, occupational, speech and other specialized therapy services, home health aide services, and social services, as needed. In addition, we offer personalized concierge services to accommodate our residents' residents’ specific lifestyle and needs.needs in certain communities. Concierge services include personal shopping, companion services, enhanced transportation, bedtime assistance, and personalized dining and nutrition planning, delivery and consultation. By providing residents with a range of service options as their needs change, we provide greater continuity of care, which we believe may encourage our customers to maintain residencyreside with us for a longer period of time. an extended period.
Since January 1, 2016,2019, we have opened 4978 net new rehabilitation and wellness services outpatient clinics. We also expandedcontinued to expand our rehabilitation and wellness services to senior living communities outside of our current senior living operations. Along with this expansion initiative, in July 2017,In addition, we continue to seek ways to grow our rehabilitation and wellness division rebranded itselfother ancillary services that complement our existing senior living operations to residents of the senior living communities we operate as Ageility Physical Therapy Solutions.well as older adults living outside of our communities.
We also continue to develop public awareness of the Five Star Senior Living brand through various marketing initiatives that we believe differentiate us from other senior living operators. For example, because an enjoyable dining experience is often a top priority for senior living community residents, in recent years we believe that we redefined the dining experience offered at our senior living communities by partnering with a celebrity chef and creating the “Five Star Culinary Institute” where the chefs at our senior living communities receive training. We also introducedoffer “Lifestyle360”, a wellness program focused on five dimensions of wellness (social, intellectual, spiritual, emotional and physical). We believe thesethat programs among others,like “Lifestyle360” will enhance the appeal of our senior living communities among current and prospective residents and their families and provide us with an opportunity to improve our operating performance.
Our corporate nameexpansion efforts are currently focused on internal growth through effective management of our existing portfolio, by increasing occupancy, as well as by increasing revenues from our ancillary services, such as outpatient therapy services, health and wellness, fitness and concierge services, to residents of the senior living communities we operate as well as older adults living outside of our communities. We may also agree to operate additional senior living communities and active adult communities for the account of DHC or other third parties pursuant to management arrangements and, from time to time, we may acquire and operate additional senior living communities.
Recent Developments
Portfolio Optimization Through Dispositions. We continually monitor our portfolio of senior living communities that we own or lease. We seek to dispose of, or change our method of operating, certain of our senior living communities if and when we determine it is in 2017 further reflects our best interest to do so and we are able to reach an agreement regarding the sale or change of our method of operating of such communities with our pre-existing contracting parties, including DHC. In April 2019, DHC announced a plan to sell certain properties to reduce its leverage, with a focus on not just providing high quality clinical care but also providing hospitalitythe sale of certain senior living communities. Since January 1, 2019, we have participated in the sale or closure of 34 senior living communities that DHC owned and other services to enhance the lifestyle of our residents.we operated or managed.
Portfolio Optimization Through Expansion Activities. We currently expect that our expansion activities will be focused on internal growth from our existing senior living communities plus ancillary services, and the healthcare services that we may provide and not from our acquisition of senior living communities, although we may from time to time acquireentering into additional long-term management agreements for senior living communities.
OUR DISPOSITIONS
We continually monitor our portfolio of senior living communities and our other assets, and we dispose of, or change our method of operating (e.g., from ownership to leasing or managing) certain of our senior living communities when we determine it is in our best interest to do so and are able to reach agreement with the other applicable party for the change. Since January 1, 2016,2019, we have sold, or participated in the sale of, 16began managing a senior living communities, including seven senior living communities that we sold to SNH in June 2016community and simultaneously leased back from SNH under a long term lease agreement. These 16 senior living communities also include six senior living communities that we sold to SNH and simultaneously began
managingactive adult community for SNHthe account of DHC, pursuant to a transactionmanagement agreement we entered with SNHand/or our then existing pooling agreements. We began managing the senior living community, which is located in November 2017Oregon (318 living units), in April 2019, and the active adult community, located in Texas (167 living units), in December 2019.
Effective January 1, 2020, our then existing management and pooling agreements. agreements with DHC for these communities were terminated and replaced with New Management Agreements in connection with the Restructuring Transactions.
Expansion of Rehabilitation and Wellness Services. We currently expect to continue to grow our ancillary service offerings, including rehabilitation and wellness services, by opening new clinics and expanding our fitness and other home-based service offerings. Since January 1, 2019, we have opened 78 net new rehabilitation and wellness services outpatient clinics, 17 of which were opened in 2020.
For more information about our dispositions,former leases and our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 and Note 1110 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Financing Sources
Our principal sources of funds to meet operating and capital expenses and debt service obligations are cash flows from operating activities, unrestricted cash balances of $84.4 million and borrowings under our $65.0 million secured revolving credit facility, which is available for general business purposes. Our credit facility matures in June 2021, and, subject to our payment of an extension fee and meeting other conditions, we have the option to extend the stated maturity date of our credit facility for a one-year period. We are required to pay interest at a rate of LIBOR plus a premium of 250 basis points per annum, or at a base rate, as defined in the agreement governing our credit facility, or our credit agreement, plus 150 basis points per annum on borrowings under our credit facility. As of December 31, 2020, the annual interest rate options were 2.64% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available borrowings under our credit facility. No principal repayment is due until maturity.
On January 1, 2020, as part of the Restructuring Transactions, we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. As consideration for the Share Issuances, DHC provided to us $75.0 million of additional consideration by assuming $51.5 million of our working capital liabilities and through cash payments. We received cash of $23.5 million from DHC during the year ended December 31, 2020 as consideration for the Share Issuances.
For more information about our management and pooling and our leasing arrangements with SNH,credit facility, see “Properties—Our Leases and Management Agreements with SNH” in Part I, Item 2 of this Annual Report on Form 10-K and Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We also regularly sell certain capital improvements to SNH thatIn the future, we make to our senior living communities that we lease from SNH. We pay increased annual rent to SNH in accordance with the terms of our leases with SNH as a result of these sales. We expect to continue to make similar capital improvement sales to SNH in the future; however, SNH is not obligated to purchase these capital improvements from us.
FINANCING SOURCES
On December 18, 2018, we amended the agreement, or our credit agreement, governing our then $100.0 million secured revolving credit facility, or our credit facility. As a result of the amendment to our credit agreement, which is now fully drawn and does not permit further borrowings, the aggregate amount of the commitments under our credit facility was reduced to $54.0 million from $100.0 million, and the stated maturity date of our credit facility was changed to June 28, 2019 from February 24, 2020. In addition, the amendment eliminated our options to extend the maturity date of our credit facility for two, one year periods, as well as request an increase in the aggregate amount of the commitments under our credit facility. The amendment also removed certain financial covenants we were previously required to comply with, including the leverage and fixed charge coverage ratios and the tangible net worth covenant. Certain other covenants and related definitions, among other provisions, included in our credit agreement were also modified pursuant to the amendment. Our credit facility, which is available for general business purposes, requires us to pay interest on outstanding borrowings under our credit facility at a rate based on, at our option, LIBOR or a base rate, plus a premium, per annum, and we are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of the available borrowings under our credit facility. Our credit facility is secured by real estate mortgages on 10 senior living communities with a combined 1,219 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral. We are currently evaluating options to refinance our credit facility. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. For more information about our credit facility, see Note 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We may also assume mortgage debt on properties we may acquire, or place mortgages on properties we own as well asor seek to obtain other additional sources of financing, in the future, including term debt or issuing equity or debt securities. We currently have mortgage debt that we assumed in connection with a previous acquisition of one of our properties.
OPERATING STRUCTUREOperating Structure
We have fivefour operating divisions. FourThree of these divisions are headed by an executive vice president at our corporate office and are responsible for senior living communities located in specified geographic regions, with each region'sregions. These three divisions constitute one of our reporting segments as of January 1, 2020. Each region’s management beingis responsible for independent living, assisted living and skilled nursing units within its specified region. Each of our senior living divisions is headed by a divisional vice president withWith extensive experience in the senior living industry, and is manageda divisional vice president manages one of our divisions from one of our regional offices. Our regional offices are responsible for ourthe senior living communities locatedwe operate within a specifieddesignated geographic region and are headedled by regional directors of operations that have extensive experience in the senior living industry. Each of our regional officeoffices is typically supported by a clinical or wellness director, a regional accounts manager, a human resources specialist, a food services specialist and a sales and marketing specialist. Regional office staff members are responsible for all of our senior living community operations within their designated geographic region, including:
•resident services;
Medicare and Medicaid billing;
•localized targeted sales and marketing;
•hiring of community personnel;
•compliance with applicable legal and regulatory requirements; and
•supporting our development and acquisition plans within their region.
Our fifthfourth division is responsible for the provision of rehabilitation and therapywellness services and is headed by a senior vice president withinat our corporate office who has extensive experience in rehabilitation and wellness services and who is supported by a network of divisional and regional directors of rehabilitation and wellness services whothat are assigned to specified geographic regions. This division constitutes our other reporting segment as of January 1, 2020.
Our corporate headquarters staff is responsible for corporate levelcorporate-level systems, policies and procedures, such as:
company wide
•company-wide policies and procedures;
•human resources;resources and team member engagement;
•marketing and communications;
•resident experience;
•information technology services;
private pay billing for our independent and assisted living communities;
•licensing and certification maintenance;
•legal services and regulatory compliance;
central purchasing;
•centralized purchasing and cash disbursements;
•financial planning and analysis;
•budgeting and supervision of maintenance and capital expenditures;
•implementation of our growth strategy; and
•accounting, auditing and finance functions, including operations, budgeting, certain accounts receivable and collections functions, accounts payable, payroll, tax and financial reporting.
As described elsewhere in this Annual Report on Form 10‑K, we have a business management agreement with The RMR Group LLC, or RMR LLC, pursuant to which RMR LLC provides to us certain business management services, including services related to compliance with various laws and rules applicable to our status as a publicly ownedpublicly-traded company, including our internal audit function, capital markets and financing activities and investor relations.
STAFFINGHuman Capital Resources
We are a service organization and our employees, which we call team members, are the foundation of our success and, in many ways, our most important asset. We are led by an experienced management team with a proven ability to manage and grow a resilient business. We focus significant attention on attracting and retaining talented and skilled team members to manage and support our operations. Our management team routinely reviews team member turnover rates at various levels of the organization.
We aim to attract team members who are uniquely suited to be successful in our business and will uphold our values. Our management teams and all of our team members are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our team members must adhere to a code of conduct that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination.
Employees and Equal Opportunity. As a service provider to a diverse group of residents and clients, much of our success is rooted in our team members’ diversity and our commitment to inclusion. We value diversity at all levels and continue to focus on extending our diversity and inclusion initiatives across our entire workforce, from working with managers to develop strategies for building diverse teams to promoting leaders from different backgrounds. We are an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity or expression, national origin, disability or protected veteran status. Throughout our organization, including our Board, we are committed to racial equality and fostering diversity and inclusion culture. We have made diversity and inclusion an important part of our hiring process and continue to evolve programs that focus on retention and development. As of December 31, 2020, approximately 77% and 42% of our approximately 19,500 team members were female and non-white, respectively. We are committed to hiring, developing and supporting a diverse and inclusive workplace.As of February 20, 2021, we had approximately 19,000 team members, including approximately 12,000 full time and 7,000 part-time. Approximately 89% of our team members work in our senior living communities, 9% in our rehabilitation and wellness services clinics, and 2% in our corporate office. The average tenure of a team member is approximately 2.1 years.
Board Diversity.As of December 31, 2020, our Board composition was 43% female.
Team Member Safety. During the year ended December 31, 2020, in response to the Pandemic, we implemented safety protocols and new procedures to protect our team members, our subcontractors and our residents and clients as well as visitors. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention, or CDC, and other public health authorities. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in all aspects of our business, and ensured our team members and subcontractors had adequate personal protective equipment, or PPE, available. During this time, many of our administrative and operational functions have required modification as well, including some of our workforce working remotely. In addition, since the summer of 2020, we have been testing our community and clinic based team members at regular intervals to curb the spread of COVID-19 and, in December 2020 we started making COVID-19 vaccinations available to our team members in our communities and clinics as well as residents. For a detailed discussion of the impact of the Pandemic on our human capital resources, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K. The Pandemic has had, and may continue to have, a materially adverse effect on our business, operations, financial results and liquidity and its duration is unknown.
Team Member Compensation. We ensure team members receive competitive salaries and we offer a broad range of company-paid benefits, which we believe are competitive with others in our industry.
Team Member Engagement, Education and Training. Our team member engagement initiatives align with our goal of being an employer of choice with a thriving workforce that encourages career enrichment and positions us for growth. Our recruiting programs, on-boarding and retention programs and our development and ongoing training programs currently include the following:
Team Member Engagement: Management reviews team member engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues.
Rewards: We reward team members for innovation and productivity. We have several recognition programs for team members at various levels of the organization.
Tuition Reimbursement Program: We offer tuition assistance for work-related education from accredited colleges and universities in order to deepen team members’ skill sets and support personal enrichment.
We also prioritize ongoing education and training for all team members across our organization as follows:
Training and Development: We offer a robust learning management platform to provide training and development opportunities to all team members. In 2020, team members took an average of approximately 17 hours of training assignments per year. In addition, new hires are assigned 16 hours of general orientation training.
Industry Associations & Credentials: In order to further their professional development, many of our team members seek out credentials or hold professional licenses and association memberships. Examples of credentials, professional licenses and association memberships include: Medical License, Licensed Practical Nurse, Registered Nurse, Certified Medical Assistants, Certified Physical and Occupational Therapists, Speech-Language Pathologist, Certified Fitness Trainers, Cardiopulmonary resuscitation certifications (CPR), First Aid Certification, Law License and Certified Public Accountant accreditations.
Communities and Clinics staffing: Our team members predominately work collaboratively in our communities and clinics that have different staffing requirements further described below:
Independent and Assisted Living Community Staffing. Each of our independent and assisted living communities has an executive director that is responsible for the day to dayday-to-day operations of the applicable community, including quality of care, resident services, sales and marketing, financial performance and staff supervision, as applicable. The executive director is supported by department managers who oversee the care and service of our residents, a wellness director who is responsible for coordinating the services necessary to meet the care needs of our residents and a sales director who is responsible for sales and promoting our services and brand, as applicable.brand. These communities also typically have a dining services coordinator, an activities coordinator and a property maintenance coordinator.
Skilled Nursing Facility Staffing. Each of our SNFs is managed by a state licensedstate-licensed administrator who is supported by other professional personnel, including a director of nursing, an activities director, a marketing director, a social services
director, a business office manager and physical, occupational and speech therapists. Our directors of nursing are state licensedstate-licensed nurses who supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary among our SNFs depending on the size and occupancy of, and the type of care provided at, the applicable SNF. Our SNFs also contract with physicians to serve as Medical Directors who provide certain administrative, clinical and oversight services. These communities also typically have a dining services coordinator and a property maintenance coordinator.
EMPLOYEESRehabilitation and Wellness Services Staffing. Each Ageility outpatient clinic is located within an independent living, assisted living or memory care neighborhood within a senior living community. Ageility outpatient clinics are located in select Five Star senior living communities as well as in senior living communities owned, operated or leased by other senior living companies. Each outpatient clinic has a licensed therapist functioning as a rehabilitation director or therapist assistant operating as a team leader who is responsible for operations of a clinic, including quality of care, clinical services, sales and marketing, financial performance and staff supervision. Each outpatient clinic has services available from licensed therapists or certified therapist assistants in the disciplines of physical therapy, occupational therapy and speech pathology. Therapy services are provided under a physician’s order with verified insurance coverage in place prior to beginning services.
AsAgeility inpatient clinics provide rehabilitation services to Five Star SNF’s under the direction of February 27, 2019, we had approximately 24,700 employees, including approximately 18,000 full time equivalents. We believe our relations with our employees are good.a licensed therapist acting as a rehabilitation director who is responsible for the therapy operations of the SNF. Licensed therapists or certified therapist assistants in the disciplines of physical therapy, occupational therapy and speech pathology provide therapy as ordered by a physician for residents admitted to a SNF for short-term rehabilitation as well as for those residents requiring rehabilitation services and residing under a long-term care arrangement.
GOVERNMENT REGULATION AND REIMBURSEMENTGovernment Regulation and Reimbursement
The senior living and healthcare industries are subject to extensive, frequently changing federal, state and local laws and regulations. These laws and regulations vary by jurisdiction but may address, among other things, licensure, personnel training, staffing ratios, types and quality of medical care, physical facility requirements, government healthcare program participation, fraud and abuse, payments for patient services and patient records. In addition, the spread of COVID-19, which was declared a pandemic by the World Health Organization, or WHO, on March 11, 2020, brought increased government regulation, as well as compliance burdens, in 2020.
We are subject to, and our operations must comply with, these laws and regulations. From time to time, our senior living communities receive notices from federal, state and local agencies regarding noncompliancenon-compliance with such requirements. Upon receipt of these notices, we review them for correctnessaccuracy and, based on our review, we either take corrective action or contest the allegation of noncompliance. When corrective action is required, we work with the relevant agency to address and remediate
any violations. Challenging and appealing any notices or allegations of noncompliance require the expenditure of significant legal fees and management attention. Any adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement, any penalties, repayments or sanctions, and the increasing costs of required compliance with applicable laws may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations. Also, adverse findings with regard to any one of our senior living communities may have an adverse impact on our licensing and ability to operate and attract residents to other senior living communities.
The healthcare industry depends significantly upon federal and state programs for revenues and, as a result, is affected by the budgetary policies of both the federal and state governments. Reimbursements under the Medicare and Medicaid programs for skilled nursing, physical therapy and rehabilitation and wellness services provided operating revenues at our outpatient clinics and some of our senior living communities (principally our SNFs). WeOut of our total senior living and rehabilitation and wellness services revenues, we derived approximately 23.3%26.4% and 22.9% of our consolidated senior living revenues21.3% from Medicare and Medicaid programs for the years ended December 31, 20182020 and 2017,2019, respectively. Specific to our senior living revenues, we derived approximately 1.8% and 19.7% from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively. Specific to our rehabilitation and wellness services revenues, we derived approximately 49.4% and 55.9%, from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively. Out of the total revenues earned at senior living communities we manage on behalf of DHC, they derived approximately 14.4% and 6.8% from Medicare and Medicaid programs for the years ended December 31, 2020 and 2019, respectively.
In addition to existing government regulation, we are aware of numerous healthcare regulatory initiatives and fair housing laws on the federal, state and local levels, which may affect our business operations if implemented.
COVID Pandemic. On March 13, 2020, the Pandemic was declared a National Emergency by the President of the United States effective as of March 1, 2020, and it has significantly disrupted, and likely will continue to significantly disrupt,
the United States economy, our business and the senior living industry as a whole. Federal and state governments have taken a number of actions in response. For example:
•On March 13, 2020, the Centers for Medicare & Medicaid Services, or CMS, issued a memorandum that required nursing homes to follow the CDC guidelines to, among other things, limit access to nursing homes by visitors and non-essential personnel, increase the availability of certain supplies and cancel all communal activities. On March 23, 2020, CMS issued guidance that temporarily amended the state survey inspection process for nursing homes to target and assess compliance with CDC-recommended infection control measures. On April 2, 2020, CMS issued further guidance instructing nursing homes to immediately implement symptom screening for all staff, residents and visitors, and ensure staff is using appropriate PPE when interacting with residents. The guidance also suggests that nursing homes use separate staffing teams for residents who have tested positive for COVID-19 and those who have tested negative for COVID-19.
•In 2020, the Secretary of the U.S. Department of Health and Human Services, or HHS, and CMS issued several waivers applicable to long-term care facilities, including SNFs, retroactive to March 1, 2020, and in effect through the end of the National Emergency. Under the waivers, for example: (1) the requirement that covered SNF care be preceded by an inpatient hospital stay of at least three days’ duration is waived for those Medicare beneficiaries who need to be transferred as a result of the Pandemic; (2) SNF coverage is renewed for certain Medicare beneficiaries with recently exhausted SNF benefits; (3) certain requirements related to the submission of staffing data, preadmission screenings, in-person resident groups, certain nurse aide training, and long term care facility transfer and discharge protocols is waived; (4) certain physical environment requirements are waived to allow non-SNF buildings to be temporarily certified and non-resident rooms to be used for patients; (5) the requirement for physicians and non-physician practitioners to perform in-person visits for residents is waived to allow telehealth visits, as appropriate; and (6) hospitals are permitted to establish SNF beds, allowing patients that would otherwise be transferred to a post-acute care facility to remain in hospitals.
•On May 8, 2020, CMS published an interim final rule that set forth new COVID-19 reporting requirements for SNFs, among other requirements. SNFs are required to electronically submit weekly reports to the CDC, which must include data on a number of measures, including suspected or confirmed COVID-19 infections among residents and staff, total deaths and COVID-19 deaths among residents and staff, ventilator capacity and supplies, resident beds and census, access to COVID-19 testing and staffing shortages. SNFs are also required to promptly notify residents, family members and representatives of confirmed or suspected COVID-19 cases in the facility. Facilities may face enforcement action, including civil monetary penalties, for failure to comply with these new reporting requirements.
•On May 18, 2020, CMS issued recommendations to state and local officials for the reopening of SNFs, relying on a number of factors, including whether COVID-19 cases are increasing or declining in the geographic area and at SNFs, the adequacy of staffing, supplies and access to COVID-19 testing, as well as local hospital capacity. These guidelines are not binding for states, and some states may be more aggressive in permitting the reopening of SNFs, while others may take a more conservative approach. CMS continued to issue guidance on facilitating outdoor and indoor visitation in June 2020 and September 2020.
•In May 2020, the HHS Office of Inspector General, or OIG, announced its updated work plan featuring several SNF-focused items, including, for example, reviews of on-site surveys during the Pandemic and audits of nursing home infection prevention and control programs, and OIG announced a COVID-19 Response Strategic Plan focused on potential fraud, waste and abuse that may arise out of COVID-19 response and recovery programs. OIG has further updated its work plan to include, among other items, a review of compliance with facility-initiated discharge requirements and audits of nursing home reporting of COVID-19 information and Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, Provider Relief Fund payments.
•On June 1, 2020, CMS announced enhanced enforcement for SNFs with violations of infection control practices. Specifically, CMS has increased enforcement, including civil monetary penalties, for facilities with persistent infection control violations and will be imposing enforcement actions on lower-level deficiencies to ensure they are addressed. Additional on-site surveys of SNFs with previous COVID-19 outbreaks or new COVID-19 suspected and confirmed cases would be performed.
•On August 25, 2020, CMS published an interim final rule that set forth new COVID-19 testing requirements for long-term care facility residents and staff. CMS offered guidance on testing residents and staff in cases where a symptomatic individual is identified, where there is an outbreak and where community COVID-19 activity
dictates routine testing, as well as guidance on documentation to demonstrate compliance with testing requirements. The interim rule also enhanced CMS’s ability to enforce previously issued long-term care facility COVID-19 reporting requirements by imposing civil monetary penalties for failure to report required data to the CDC.
•On October 28, 2020, CMS published an interim final rule that, among other items, clarified its interpretation that the CARES Act provided Medicare Part B coverage and the payment for COVID-19 vaccine and administration.
•In response to a rising number of complaints and lawsuits against senior living communities, certain state Attorneys General have continued efforts to increase scrutiny of long-term care facilities. While these investigations and initiatives have been related to the Pandemic, they have focused on a broad range of alleged misconduct that extends beyond facility responses to the Pandemic, including both civil and criminal theories of liability related to patient abuse and neglect, consumer fraud and false advertising and Medicaid fraud.
In addition, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, provides billions of dollars of relief to certain individuals and businesses suffering from the Pandemic, including as follows:
•It temporarily suspended the 2% Medicare sequestration payment reductions from May 1, 2020 through December 31, 2020. This suspension was extended to March 31, 2021 as part of the Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020.
•It established a Provider Relief Fund for allocation by HHS. On April 10, 2020, HHS began to distribute these funds, or the General Distribution, to healthcare providers who received Medicare fee-for-service reimbursement in 2018 and 2019. On May 22, 2020, HHS announced that Provider Relief Funds would be available to SNFs with six or more certified beds that have been impacted by the Pandemic, or the Targeted SNF Distribution. On June 9, 2020, HHS announced Phase 2 General Distributions, including the Medicaid and Children's Health Insurance Program, or the Medicaid and CHIP Targeted Distribution. On September 3, 2020, HHS announced details of a $2 billion incentive-payment distribution to nursing homes, of which approximately $333 million was distributed in the first round and $523 million in the second round. On October 1, 2020, HHS announced Phase 3 General Distributions, intended to balance payments of 2% of annual revenue from patient care for all applicants plus a possible add-on payment to account for revenue losses and expenses attributable to COVID-19.
•It established an option for companies to elect to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. The first half of the deferred payments will become due on December 31, 2021, with the remainder due December 31, 2022.
In addition, the Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020. Among other things, this Act further supplemented the Provider Relief Fund with an additional $3 billion. Information on future allocations of the Provider Relief Fund are not yet known, though the statute requires that no less than 85% of unobligated balances of the fund and funds recovered from providers after the enactment date be allocated based on financial losses and changes in operating expenses occurring in the third or fourth quarter of calendar year 2020.
We elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020 as provided for under the CARES Act. In addition, we have received funds as part of certain relief programs provided under the CARES Act. The terms and conditions of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the Pandemic and for eligible costs to prevent, prepare for and respond to the Pandemic that are not covered by other sources. In addition, Provider Relief Fund recipients are subject to other terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions must be returned to HHS. Receipt of additional government funds and other benefits from the CARES Act is subject to, in certain circumstances, a detailed application and approval process and it is too soon to accurately predict whether we will meet any eligibility requirements.
We received $1.7 million in Phase 1 General Distribution funds for rehabilitation and wellness services clinics and home health operations that participate in Medicare for the year ended December 31, 2020. We recognized $1.7 million as other operating income for Phase 1 General Distribution funds for which we have met the required terms and conditions for the year ended December 31, 2020. We received $1.6 million in Phase 2 General Distribution funds primarily for our senior living communities for the year ended December 31, 2020. We recognized $1.6 million as other operating income for Phase 2 General Distribution funds for which we have met the required terms and conditions for the year ended December 31, 2020. In addition, we recognized $0.1 million as other operating income from funding we received from various state programs for which we
believe we have met the required terms and conditions, and also recognized $0.1 million as other operating income for the fair market value of rapid point-of-care diagnostic testing devices and COVID-19 test kits that we received and used for testing from the federal government.
For more information about COVID-19 relief funds, see Note 17 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
In addition to federal measures, many states have taken actions to waive or modify healthcare laws or regulations and Medicaid reimbursement rules. Both state and federal waivers and other temporary actions in response to the Pandemic are expected to last throughout the National Emergency, the duration of which is currently unknown. Additional measures may be taken prior to and after the conclusion of the National Emergency to alleviate the economic impact of the Pandemic. Governmental responses to COVID-19 are rapidly evolving, and it is not yet known what the duration or impact of such responses will be.
On December 11 and December 18, 2020, the U.S. Food and Drug Administration, or FDA, issued the emergency use authorizations, or the EUAs, to Pfizer Inc. / BioNTech SE and Moderna, Inc., respectively, for vaccines for the prevention of COVID-19. The CDC’s Advisory Committee on Immunization Practices has placed long-term care facility residents and healthcare personnel in “Phase 1a,” the highest priority group to receive COVID-19 vaccines, which included residents and team members at our SNFs, memory care units and assisted living communities. States have subsequently prioritized all categories of older adults, which include our independent living facilities. In order to protect the health and safety of our residents, team members and clients, we scheduled multiple vaccination clinics as soon as possible after the EUAs for our SNF, memory care and assisted living residents and team members at no cost to those individuals. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine.Despite these efforts and the issuances of these EUAs, and potentially others for additional vaccines in the future, it is expected that throughout the first quarter of 2021 substantially all residents and team members in our senior living communities will have been offered the opportunity to be vaccinated. In addition, we may be subject to claims by residents and team members related to vaccine administration by us or the care provided by us following administration of the vaccine. However, such liability is currently limited by the Public Readiness and Emergency Preparedness Act, which provides immunity protections under federal and state law for individuals and entities, or Covered Persons, against claims of loss relating to certain COVID-19 countermeasures, or Covered Countermeasures, although such protections are currently subject to challenges in certain courts. We and our team members who administer Covered Countermeasures such as the COVID-19 vaccine are classified as Covered Persons immune to claims arising from COVID-19 vaccine administration with the exception of death or serious physical injury caused by willful misconduct.
Independent Living Communities.Communities - Regulation and Reimbursement. Government benefits are not generally available for services at independent living communities, and residents in those communities use private resources to pay for their living units and the services they receive. The rates in these communities are determined by local market conditions and operating costs. However, a number of federal Supplemental Security Income program benefits pay housing costs for elderly or disabled recipients to live in these types of residential communities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a significant number of Supplemental Security Income recipients reside or are likely to reside. Categories of living arrangements that may be subject to these state standards include independent living communities and assisted living communities. Because independent living communities usually offer common dining facilities, in many jurisdictions they are required to obtain licenses applicable to food service establishments in many jurisdictions in addition to complying with land use and life safety requirements. In addition, in some states, state or county health departments, social service agencies and/or offices on aging have jurisdiction over group residential communities for seniorsolder adults and license independent living communities. To the extent that independent living communities include units to which assisted living or nursing services are provided, these units are subject to applicable state licensing regulations. If the communities receive Medicaid or Medicare funds, they are subject to certification standards and requirements that they must meet, or the Conditions of Participation. In some states, insurance or consumer protection agencies regulate independent living communities in which residents pay entrance fees or prepay for services.
Assisted Living Communities.Communities - Regulation and Reimbursement. A majority of states provide or are approved to provide Medicaid payments for personal care and medical services to some residents in licensed assisted living communities under waivers granted by or under Medicaid state plans approved by the Centers for Medicare and Medicaid Services, or CMS, of the U.S. Department of Health and Human Services, or HHS.CMS. State Medicaid programs control costs for assisted living and other home and community basedcommunity-based services by various means such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists.means. Because rates paid to assisted living community operators are generally lower than rates paid to SNF operators, some states use Medicaid funding of assisted living as a means
of lowering the cost of services for residents who may not need the higher level of health services provided in SNFs. States that administer Medicaid programs for services in assisted living communities are responsible for monitoring the services at, and physical conditions of, the participating communities.
As a result of thea large number of states using Medicaid funds to purchase services at assisted living communities and the growth of assisted living in recent years, states have adopted licensing standards applicable to assisted living communities. According to the National Center for Assisted Living and the HHS Office of the Assistant Secretary for Planning and Evaluation, all states regulate assisted living and residential care communities, although states do not use a uniform approach. Most state licensing standards apply to assisted living communities regardless of whether they accept Medicaid funding. Also, according to the National Conference of State Legislatures, a few states require certificates of need, or CONs, from state health planning authorities before new assisted living communities may be developed. Based on our analysis of recent economic and regulatory trends, we believe that assisted living communities that become dependent upon Medicaid or other government payments for a majority of their revenues may decline in value because Medicaid and other public rates may fail to keep up with increasing costs. We also believe that assisted living communities located in states that adopt CON requirements or other limitations on the development of new assisted living communities may increase in value because those limitations may help ensure higher nongovernment rates and reduced competition.
HHS, the Senate Special Committee on Aging and the Government Accountability Office, or the GAO, have studied and reported on the development of assisted living and its role in the continuum of long termlong-term care and as an alternative to SNFs. Since 2003,In addition, CMS has commenced a series of actions to increase its oversight of state quality assurance programs for
assisted living communities and has providedprovides guidance and technical assistance to states to improve their ability to monitor and improve the quality of services paid for through Medicaid waiver programs.
CMS is encouraging state Medicaid programs to expand their use of home and community basedcommunity-based services as alternatives to institutional services, pursuant to provisions of the Deficit Reduction Act of 2005, or the DRA, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, and other authorities, through the use of several programs. One such program, the Community First Choice Option, or the CFC Option, grants states that choose to participate in the program a 6% increase in federal matching payments for related medical assistance expenditures. According to CMS, as of January 2019, eight states had approved CFC Option programs. We are unable to predict the effect of the implementation of the CFC Option and other similar programs, but their impact may be adverse and material to our operations and our future financial results of operations.
Skilled Nursing Facilities—Facilities - Medicare Reimbursement.Currently, we only manage SNFs and we are not the licensed operators of such SNFs. As of December 31, 2020, we managed nine SNFs. A majority of all SNF revenues in the United States comes from publicly funded programs. According to CMS, Medicaid is the largest source of public funding for SNFs, followed by Medicare. In 2016,For example, nationally in 2019 approximately 31%29% of SNF and continuing care retirement community revenues came from Medicaid and 23%approximately 22% from Medicare.
SNFs are highly regulated businesses. The federal and state governments regularly monitor the quality of care provided at SNFs. State health departments conduct surveys of resident care and inspect the physical condition of SNF properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require SNF operators to make significant capital improvements. These mandated capital improvements have usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over the expected useful lives of the improvements.
Under the Medicare SNF prospective payment system, or SNF PPS, capital costs are part of the prospective rate and are not community specific.community-specific. The SNF PPS and other recent legislative and regulatory actions with respect to state Medicaid rates limit the reimbursement levels for some SNF services. At the same time, federal and state enforcement agencies have increased oversight of SNFs, making licensing and certification of these communities more rigorous.
CMS implemented the SNF PPS pursuant to the Balanced Budget Act of 1997.
Under the SNF PPS, SNFs receive a fixed payment for each day of care provided to residents who are Medicare beneficiaries. Medicare SNF PPS payments cover substantially all services provided to Medicare residents in SNFs, including ancillary services such as rehabilitation services. Currently, theThe SNF PPS requireshistorically required SNFs to assign each resident to a care group depending on that resident’s medical characteristics and service needs using a resident assessment instrument called the Minimum Data Set 3.0.needs. These care groups arewere known as Resource Utilization Groups, or RUGs, and CMS establishes a per diem payment rate for each RUG.
On October 1, 2019, CMS updates SNF PPS payments for each year by a market basket update to account for inflation and periodically implements changes toreplaced the RUG categoriesmodel, with a revised case-mix methodology called the Patient-Driven Payment Model, or PDPM. The PDPM focuses on clinically relevant factors, rather than volume-based payment. Therapy
reimbursement under the PDPM is linked to patient diagnoses with higher reimbursements being provided to higher-acuity patients. As a result, initial patient assessments, including obtaining full clinical documentation from hospitals and payment rates. Effective October 2010,accurately applying the International Classification of Diseases, or ICD-10, diagnosis codes to reflect a patient’s full clinical status, have become increasingly important factors in reimbursement. CMS adopted rulesestimates that implemented a new SNF PPS case mix classification system known as RUG-IV. Following the implementation of RUG-IV, Medicare billing increased nationally, partially because of the unexpectedly large proportion of patients grouped in the highest paying RUG therapy categories. CMS did not intend for the implementation of RUG-IVpaperwork simplification related to increase Medicare billing. In 2011, CMS adopted a final rule designed to recalibrate the Medicare SNF PPS, which resulted in a reduction in aggregate Medicare paymentspatient assessments will reduce reporting burdens for SNFs by approximately 11.1%, or $3.87$2.0 billion in federal fiscal year 2012. Since federal fiscal year 2012, the ACA has also reduced SNF PPS payments for each year by a productivity adjustment based on national economic productivity statistics.over ten years.
In subsequent years, CMS slightly increased the Medicare SNF PPS rates and estimated that those rates would increase payments to SNFs by an aggregate of approximately 1.8% for federal fiscal year 2013, 1.3% for federal fiscal year 2014, 2.0% for federal fiscal year 2015, 1.2% for federal fiscal year 2016, 2.4% for federal fiscal year 2017, and 1% for federal fiscal year 2018.
On July 31, 2018,2020, CMS issued the latest SNF prospective payment system final rule for federal fiscal year 2019,2020, which CMS estimates will increase Medicare payments to SNFs by approximately $820$750 million for federal fiscal year 2019,2021, or 2.4%2.2%, compared to federal fiscal year 2018, as mandated by the Bipartisan Budget Act of 2018.2020. It is unclear whether these adjustments in Medicare rates will compensate for the increased costs we may incur for services to our residents whose services are paid for by Medicare.
On July 31, 2018, CMS finalized its proposal The final rule also made changes to replace the RUG-IV model, with a revised case-mix methodology called the Patient-Driven Payment Model, or PDPM, which will become effective October 1, 2019. The PDPM focuses on clinically relevant factors, rather than volume-based payment, by using ICD-10certain clinical diagnosis codes and otherincluded in patient characteristics ascase-mix groups that determine the basis for patient classification.rate paid under the PDPM, will eliminate the need for SNFs to use Minimum Data Set 3.0 to
assign residents to a care group. CMS estimates that paperwork simplificationformalized deadlines related to patient assessments will reducequarterly quality reporting burdensunder Medicare’s SNF Value-Based Payment Program, and established performance periods and performance standards for SNFs by approximately $2.0 billion over 10upcoming program years.
The Middle Class Tax Relief and Job Creation Act of 2012, enacted in February 2012, incrementally reduced the SNF reimbursement rate for Medicare bad debt from 100% to 65% by federal fiscal year 2015 for beneficiaries dually eligible for Medicare and Medicaid. Because a majority of SNF bad debt has historically been related to dual eligible beneficiaries, this rule has a substantial negative effect on SNFs, including some that we operate. The same law also reduced the SNF Medicare bad debt reimbursement rate for Medicare beneficiaries not eligible for Medicaid from 70% to 65% in federal fiscal year 2013 and going forward.
The Budget Control Act of 2011 and the Bipartisan Budget Act of 2013 allow for automatic reductions in federal spending by means of a process called sequestration, which reduces Medicare payment rates by 2.0% through 2023. In 2014 and 2015,subsequent years, Congress approved two additional one year extensions of Medicare sequestration, through 2025.2029. Medicaid is exempt from the automatic reductions, as are certain Medicare benefits. The automatic 2.0% payment cuts took effect in April 2013 and had an adverse effect on our operations and financial results. Subsequent legislation appears to have modified some aspects of the sequestration process, but at this time it is unclear what impact this legislation may have on Medicare payments we receive.2013. Any future reductions in Medicare payment rates could be adverse and material to our operations and financial results.
We are unable to predict the impact of on us of these or other recent legislative or regulatory actions or proposed actions with respect to Medicare rates received by our facilities.
Skilled Nursing Facilities - Medicaid Reimbursement.Although Medicaid is exempt from the sequestration process described above, some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. Some states are expanding their use of managed care, partly to control Medicaid program costs. According to a report by the CMS Office of the Actuary in February 2018, Medicaid enrollment is estimated to have increased 11.9% in 2014, 4.9% in 2015, 3.0% in 2016, and 2.0% in 2017, due primarily to the expansion in Medicaid eligibility under the ACA, which began in 2014. InAccording to a Kaiser Family Foundation report published in October 2020, in 2018 and 2019, Medicaid enrollment declined 2.1% and 1.7%, respectively, and was relatively flat (-.06%) andin 2020, increasing 0.04%. As reported, enrollment is projected to modestly increase 0.9%significantly to 8.2% in 2019,2021, which moderationincrease in growth we believe is due to the taperingeconomic downturn associated with the Pandemic and temporary maintenance of ACA-related Medicaid expansion, a strong economy, and enhanced eligibility verification systems.requirements that incentivize states to allow more residents to remain enrolled in Medicaid.
In January 2018, CMS issued a letter to State Medicaid Directors announcing that CMS would support state efforts to test incentives that make participation in work or other community engagement a requirement for continued Medicaid eligibility for non-elderly, non-pregnant adults. States would be required to have exemptions for individuals who are classified as “disabled” for Medicaid eligibility purposes, as well as those with acute medical conditions or medical frailty that would prevent them from complying with the work requirement. As of January 2019,December 2020, work requirements in Arkansas, Kentucky, Michigan and Indiana have implemented work requirements for adults receiving Medicaid; New Hampshire had been set aside by courts. Arizona, Georgia, Indiana, Nebraska, Ohio, South Carolina, Utah and IndianaWisconsin have received CMS approval and are expected to implement theirbut have not yet implemented or have suspended implementation of work requirements during 2019.requirements. In addition, Arizona, Kansas, Maine,Alabama, Idaho, Mississippi, North Carolina, Ohio, UtahMontana, Oklahoma, South Dakota and WisconsinTennessee have submitted requests forto modify their respective state Medicaid plans to include work requirements. The implementation of work requirements, if it were to occur, may reduce the availability of Medicaid coverage within our patient population. Additionally, the Biden administration has indicated that it will seek to reverse the January 2018 guidance and prohibit states from implementing work requirements. In February 2021, CMS, in response to guidance from the Biden administration, began notifying states that it is determining whether to withdraw the approvals that permitted states to implement work requirements.
Some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce Medicaid rates. Effective June 30, 2011, Congress ended certain temporary increases in federal payments to states for Medicaid programs that had been in effect since 2008. We expect the ending of these temporary federal payments, combined with other state budgetary pressures to result in continued challenging state fiscal conditions, particularly in those states that are not participating in Medicaid expansion. As a result, some state budget deficits may increase, and certain states may continue to reduce Medicaid payments to healthcare providers like us as part of an effort to balance their budgets. These state level cuts have the potential to negatively impact our revenue from Medicaid sources.
We are unable to predict the impact on us of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates, the federal payments to states for Medicaid programs, Medicaid program design and Medicaid eligibility standards.
Skilled Nursing Facilities – Provider Reimbursement. The outpatient therapy revenue received by our providers is tied to the Medicare Physician Fee Schedule, or MPFS, which has historically been subject to limitations on the amount of therapy services that can be provided, as well as limitations on annual cost growth.
In 2006, Medicare payments for outpatient therapies became subject to payment limits. The DRA created an exception process under which beneficiaries could request an exception from the cap and be granted the amount of services deemed medically necessary by Medicare. In April 2014, the Protecting Access to Medicare Act of 2014, or PAMA, extended the Medicare outpatient therapy cap exception process through March 2015, postponing the implementation of firm limits on Medicare payments for outpatient therapies. In April 2015, Congress passed the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which extended the outpatient therapy cap exceptions process from March 2015 through December 2017, further postponing the implementation of strict limits on Medicare payments for outpatient therapies. The Bipartisan Budget Act of 2018 permanently repealed the caps, effective January 1, 2018.
In October 2016, CMS issued a final rule to implement the Merit-Based Incentive Payment System, or MIPS, and Advanced Alternative Payment Models, or APMs, which together CMS calls the Quality Payment Program. These reforms were mandated under MACRA and replace the Sustainable Growth Rate, or SGR, methodology for calculating updates to the MPFS. Starting in 2019, providers may be subject to either MIPS payment adjustments or APM incentive payments. MIPS consolidates the various CMS incentive and quality programs into a single reporting mechanism. Providers will receive either incentive payments or reimbursement cuts based on their compliance with MIPS requirements and their performance against a mean and median threshold of all MIPS eligible providers. APMs are innovative models approved by CMS for paying healthcare providers for services provided to Medicare beneficiaries that draw on existing programs, such as the bundled payment and shared savings models.
In addition, under MACRA, there were and will be MPFS conversion factor updates of 0.0% from January 2015 through June 2015, 0.5% from July 2015 through December 2015, and 0.5% each year from 2016 through 2018. The Bipartisan Budget Act of 2018 reduced the conversion factor for 2019 from 0.5% to 0.25%. For 2020 through 2025, the conversion factor will be further reduced to 0.0%.
Our Medicare Part B outpatient therapy provider revenue rates are tied to the MPFS and may be affected by these modifications; however, we are unable to predict the impact of these modifications on the Medicare rates received by our providers.
Skilled Nursing Facilities — -Quality Improvement, Pay-for-Performance and Value-Based Purchasing Initiatives.In addition to the reimbursement and rate changes discussed above, payments to SNFs will be increasingly determined by the quality of care provided. The federal government has enhanced its focus on developing and imposing quality-related regulations, standards and programs to improve the quality of care provided at SNFs and to better align payment to quality outcomes. As mandated by the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, the Protecting Access to Medicare Act of 2014, or PAMA, and the Improving Medicare Post-Acute Care Transformation Act of 2014, or the IMPACT Act, CMS established the SNF Value-Based Purchasing Program and the SNF Quality Reporting Program to achieve these goals.
The IMPACT Act established the SNF Quality Reporting Program under which SNFs are required to report certain quality measures and resource use measures in a standardized and interoperable format and to report certain patient assessment data in such a format. Beginning in federal fiscal year 2018, SNFs that failedfail to comply with the reporting requirements by the established times are subject to a 2.0%2% reduction in their Medicare payment rates for that fiscal year. Beginning in October 2018, SNF Quality Reporting Program data is publicly available on CMS’ Nursing Home Compare website.
PAMA established the SNF Value-Based Purchasing Program, under which HHS will assess SNFs based on hospital readmissions and make these assessments available to the public. In the SNF PPS final rule for fiscal year 2016, CMS has adopted a 30 day all-cause, all-condition hospital readmission measure for SNFs, which was replaced with an all-condition, risk-adjusted potentially preventable hospital readmission rate measure in the SNF PPS final rule for fiscal year 2017.SNFs. Beginning in federal fiscal year 2019, Medicare payment rates will beare partially based on SNFs’ performance scores on this measure. The 20192020 federal fiscal year update established baseline and performance periods for federal fiscal year 2021, adjustedadopted two new quality measures to assess whether certain health information is provided by the SNF Value-Based Purchasing scoring methodology, and established an extraordinary circumstances exception policy.at the time of transfer or discharge. The update also adopted several standardized patient assessment data elements. To fund the program, CMS will reducereduces Medicare payments to all SNFs by 2.0%2% through a withhold mechanism starting in October 2018 and then redistributeredistributes between 50% andto 70% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure. CMS estimates that the federal fiscal year 20192021 changes to the SNF VBPValue-Based Purchasing program will decrease payments to SNFs by an aggregate of approximately $211$200 million, compared to federal fiscal year 2018.2020.
In August 2015, CMS announced that it would conduct the second phase of another SNF quality improvement program, the Initiative to Reduce Avoidable Hospitalizations Among Nursing Facility Residents, a pilot program first announced in 2012, which will be continued in partnership with selected organizations from October 2016 to October 2020. In this phase of the initiative, participants will test whether a new payment model for SNFs and practitioners, together with clinical and educational interventions that participants are currently implementing, will further reduce avoidable
hospitalizations, lower combined Medicare and Medicaid spending and improve the quality of care received by long stay SNF residents. As of January 2019, six organizations had cooperative agreements with CMS to implement this phase of the initiative, and over 250 long term care facilities were selected to participate.
As these quality improvement initiatives increase in size and scope, the federal government will likely monitor the impact of these programs more closely. We are unable to predict the impact of these quality improvement initiatives on our Medicare reimbursement rates or the cost of our SNFs’ operations.
Other legislative proposals introduced in Congress, proposed by federal or state agencies or under consideration by some state governments include the option of block grants for states rather than federal matching money for certain state Medicaid services, laws authorizing or directing Medicare to negotiate rate reductions for prescription drugs, additional Medicare and Medicaid enforcement procedures and federal and state cost containmentcost-containment measures, such as freezing Medicare or Medicaid SNF payment rates at their current levels and reducing or eliminating annual Medicare or Medicaid inflation allowances or gradually reducing rates for SNFs. We cannot estimate the type or magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be material to and adversely affect our future results of operations.
Skilled Nursing Facilities – Conditions of Participation. CMS maintains and enforces Conditions of Participation that healthcare organizations must meet in order to participate in the Medicare and Medicaid programs. These standards are designed to improve the quality of care and protect the health and safety of beneficiaries. Through the Conditions of Participation, CMS is able to require certain quality standards protocols, including most recently, requiring SNFs to implement a quality assurance and performance improvement program.
In SeptemberNovember 2016, CMS releasedinstituted a final rulecomprehensive update to comprehensively update the Conditions of Participation for long termlong-term care facilities that participate in Medicare and Medicaid, such as our SNFs. The final rule,SNFs, which went into effect beginning in November 2016, institutesincluded a broad range of new requirements, some of which stem from statutory modifications under the ACA and the IMPACT Act.
In particular, theJuly 2019, CMS announced two rules - one final rule requires our SNFs, in a multi-phased approach over the next few years, to: train staff on care for residents with dementia and on abuse prevention; consider residents’ health needs when making decisions about the kinds and levels of staffing; ensureone proposed - to further update requirements that staff have the appropriate skills and competencies to provide individualized, resident centered care; augment care planning activities, including considering residents’ goals and preferences and, on discharge, giving residents necessary follow up information and improving communication with receiving facilities or services; permit dietitians and therapy providers to write orders under certain circumstances; meet heightened food and nutrition services requirements; implement an updated infection prevention and control program, including requiring each of our SNFs to designate an infection prevention and control officer; and strengthen residents’ rights. In addition, the final rule requires our SNFs to: alter their staffing levels and competencies based on the results of mandated facility assessments; develop, implement and maintain a compliance and ethics program and a quality assurance and performance improvement program; and implement new practices surrounding the preparation and implementation of care plans and discharge summaries, among other new requirements. These requirements will increase the cost of operations for long termlong-term care facilities that participate in Medicare and Medicaid including our SNFs.must meet. Specifically, CMS estimated in the final rule repeals the prohibition on the use of pre-dispute, binding arbitration agreements by long-term care facilities. The final rule also imposes certain safeguards intended to increase the transparency of arbitration agreements used by long-term care facilities, as well as the related arbitration process, including mandating that a facility not require any resident or his or her representative to sign an arbitration agreement as a condition of admission to the costfacility. Under the proposed rule, CMS proposes to further reform the requirements for long-term care facilities by eliminating or reducing certain requirements deemed unnecessary, obsolete, or excessively burdensome. Notably, CMS put forward proposals to modify certain requirements related to grievance policies, infection control staffing, and compliance program requirements, among other changes. As of complying with allFebruary 20, 2021, this proposed
rule has not been finalized. We cannot estimate the type or magnitude of the new requirements per facility would be approximately $62,900 in the first year, and approximately $55,000 each year thereafter. However, we believe new requirements often cost considerably more than CMS estimates.
Skilled Nursing Facilities—Survey and Enforcement. Pursuant to the Omnibus Reconciliation Act of 1987, Congress enacted major reforms to federal and state regulatory systems for SNFs that participate in thepotential Medicare and Medicaid programs. Since then, the GAO has reported that, although much progress has been made, substantial problems remain in the effectivenesspolicy changes, but they may be material to and adversely affect our future results of federaloperations.
Skilled Nursing Facilities - Survey and state regulatory activities.Enforcement. The HHS Office of Inspector General, or the OIG has issued several reports concerning quality of care and billing practices in SNFs, and the GAO has issued several reports recommending that CMS and states strengthen their compliance and enforcement practices, including federal oversight of state actions and to ensure that SNFs provide adequate care and states act more consistently. Moreover, in its fiscal year 2017 work plan and subsequent monthly updates, the OIG specificallyhas publicly stated that it will review compliance with various aspects of the SNF PPS, including the documentation requirement in support of claims paid by Medicare, and assess the incidence of serious quality of care issues, such as abuse and neglect. In recent years, the OIG and the GAO have also repeatedly called for increased oversight and payment system reform for SNFs.
In August 2017, the OIG issued an early alert regarding preliminary results of its ongoing review of potential abuse or neglect of Medicare beneficiaries in SNFs. As a result of the review, which is part of the ongoing efforts of the OIG to detect and combat elder abuse, the OIG concluded that CMS has inadequate procedures to ensure that incidents of potential abuse or neglect of beneficiaries residing in SNFs are identified and reported. The OIG provided suggestions for immediate actions that
CMS can take to ensure better protection of beneficiaries. It is unclear what policy changes or oversight efforts CMS will undertake as a result of this early alert.
In addition to scrutiny from the GAO and the OIG, the Senate Special Committee on Aging and other congressional committees have also held hearings on related SNF issues. As a result, CMS has undertaken several initiatives to increase the effectiveness of Medicare and Medicaid SNF survey and enforcement activities. CMS has been taking steps to identify and focus enforcement efforts on SNFs and chains of SNF operators with findings of substandard care or repeat violations of Medicare and Medicaid standards. CMS has also increased its oversight of state survey agencies and has improved the process by which data is captured from these surveys. As an added measure of improving patient care, the ACA provides for the funding of a state background check system for job applicants to long termlong-term care providers who will have direct access to patients. CMS has begun the administration of this program, and, as of January 2018,October 2020, had awarded funding to approximately half of the states.
In addition, CMS adopted regulations expanding federal and state authority to impose civil monetary penalties in instances of noncompliance. When CMS or state agencies identify deficiencies under state licensing and Medicare and Medicaid standards, they may impose sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight, temporary management or receivership and loss of Medicare and Medicaid participation or licensure on SNF operators. Our senior living communities may incur sanctions and penalties from time to time. If we are unable to cure deficiencies that have been identified or that are identified in the future, or if appeals of proposed sanctions or penalties are not successful, decertification or additional sanctions or penalties may be imposed. These consequences may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.
Therapy Services – Provider Reimbursement. Our rehabilitation and wellness segment, including Ageility, provides various therapy services, including physical therapy, occupational therapy and speech therapy. The outpatient therapy revenue received by our providers is tied to the Medicare Physician Fee Schedule, or MPFS, which has historically been subject to limitations on the amount of therapy services that can be provided, as well as limitations on annual cost growth. For example, in 2006, Medicare payments for outpatient therapies became subject to payment limits. The DRA created an exception process under which beneficiaries could request an exception from the cap and be granted the amount of services deemed medically necessary by Medicare, while the Bipartisan Budget Act of 2018 permanently repealed the caps, effective January 1, 2018.
CMS has implemented a Merit-Based Incentive Payment System, or MIPS, and Advanced Alternative Payment Models, or APMs, which together CMS calls the Quality Payment Program. These reforms were mandated under MACRA and replace the Sustainable Growth Rate, or SGR, methodology for calculating updates to the MPFS. Starting in 2019, providers may be subject to either MIPS payment adjustments or APM incentive payments. MIPS consolidates the various CMS incentive and quality programs into a single reporting mechanism. Providers will receive either incentive payments or reimbursement cuts based on their compliance with MIPS requirements and their performance against a mean and median threshold of all MIPS eligible providers. CMS expanded the definition of MIPS-eligible clinicians to include physical and occupational therapists. APMs are innovative models approved by CMS for paying healthcare providers for services provided to Medicare beneficiaries that draw on existing programs, such as the bundled payment and shared savings models.
In addition, under MACRA, there have been and will be MPFS conversion factor updates. The Bipartisan Budget Act of 2018 reduced the conversion factor for 2019 from 0.5% to 0.25%. For 2020 through 2025, the conversion factor will be further reduced to 0.0%.
In November 2019, CMS published a final rule that updates the MPFS for the calendar year 2020 and changed other Medicare Part B policies. In particular, the rule continued to implement a statutory requirement that claim modifiers be used to identify certain therapy services that are furnished in whole or in part by physical therapy assistants, or PTAs, and occupational therapy assistants, or OTAs, beginning January 1, 2020. CMS has adopted a standard that, when more than 10% of the service is furnished by a PTA or OTA, then the service is considered to be furnished “in whole or in part” by a PTA or OTA. CMS proposes to base the 10% calculation on the therapeutic minutes of time spent by the therapist versus a PTA or OTA. Beginning
January 1, 2022, claims that contain a therapy assistant modifier will be paid at 85% of the otherwise applicable payment amount.
In December 2020, CMS published a final rule that updates the MPFS for the calendar year 2021. Amongst other changes, the rule adds certain services to the Medicare Telehealth Services list, either permanently or for the duration of the National Emergency, and reduces the frequency limitations for nursing facility care services delivered through telehealth. The final rule also includes increases to certain visit codes, including evaluation and management services. However, in order to maintain mandatory budget neutrality, these increases are offset by a decrease in the PFS conversion factor. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020 further revised the PFS conversion factor to have a less substantial decrease, with such revision expected to result in a 3% decrease in reimbursement for therapy services.
Our Medicare Part B outpatient therapy provider revenue rates are tied to the MPFS and may be affected by these modifications; however, we are unable to predict the impact of these modifications on the Medicare rates received by our providers.
Furthermore, physical therapy, occupational therapy and speech, hearing and language disorder services are optional benefits under Medicaid and thus states may choose whether or not to provide coverage of such benefits. We expect states will continue to experience budgetary pressures, and certain states may choose these services to be cut to reduce Medicaid spending; however, we are unable to predict whether such cuts will occur and the impact of such cuts on us.
Certificates of Need. As a mechanism to prevent overbuilding and subsequent healthcare price inflation, many states limit the number of SNFs by requiring developers to obtain certificates of need, or CONs, before new facilities may be built or additional beds may be added to existing facilities. As noted above, a few states also limit the number of assisted living facilities by requiring CONs. In addition, some states (such as California and Texas) that have eliminated CON laws have retained other means of limiting new development, including moratoria, licensing laws or limitations upon participation in the state Medicaid program. These government requirements limit expansion, which we believe may make existing SNFs more valuable by limiting competition.
Healthcare Reform. The ACA has resulted in changes to insurance, payment systems and healthcare delivery systems. The ACA was intended to expand access to health insurance coverage, including the expansion of access to Medicaid coverage, and reduce the growth of healthcare expenditures while simultaneously maintaining or improving the quality of healthcare.
The ACA also encouraged the development and testing of bundled payment for services models, the development of Medicare value-based purchasing plans as well as several initiatives to encourage states to develop and expand home and community basedcommunity-based services under Medicaid. Some of the provisions of the ACA took effect immediately, whereas others took effect or will take effect at later dates.
The Recently, the ACA has been subject to judicial,significant reform, repeal and revision efforts by the executive and legislative and executive review over the past several years. In particular, the U.S. Supreme Court issued several decisions related to the scopebranches of the ACA, including upholdingfederal government and subject to changes resulting from lawsuits filed with the Medicaid expansion provision. In 2017, Congress accelerated its attempts to repeal and replace the ACA and in 2018 the Trump Administration has continued to modify the ACA through the regulatory process.
In June 2017, HHS solicited suggestions for changes that could be made within the existing ACA legal framework to improve health insurance markets and meet the Trump Administration’s reform goals. HHS sought comments from interested parties to inform its ongoing efforts to create a more patient-centered healthcare system that adheres to the key principles of affordability, accessibility, quality, innovation and empowerment.
On October 12, 2017, President Trump signed an executive order that modified certain aspectsjudicial branch of the ACA. Specifically,federal government. It is unclear what the result of any of these legislative, executive order directed federal agencies to reduce limits on association health plans and temporary insurance plans, allowing more widespread offerings of plans that do not adhere to all of the ACA’s mandates, and to permit workers to use funds from tax advantaged accounts to pay for their own coverage. On October 2, 2018, the U.S. Department of Labor, the U.S. Internal Revenue Service,regulatory reform efforts may be or the IRS, and CMS issued regulations to permit insurers to sell short-term plans that provide coverage for up to 12 months; previous Obama Administration guidance had limited such plans to 90 days. Short term plans are often less expensive than plans that meet the requirements of the ACA; however, short-term plans are also exempt from the ACA’s essential health benefits and other consumer protection requirements. In addition,effect they may have on October 22, 2018, CMS announced that future Section 1332 of the ACA state health insurance innovation waivers may include short term or association health plans as having coverage comparable to ACA plans. us, if any. For example:
•In 2018, the ACA was also subject to lawsuits that sought to invalidate some or all of its provisions. In Texas,February 2018, a lawsuit brought in federal district court in Texas by 18 attorneys general and two governors in federal district court argued that, following the legislative repeal of the ACA mandate’s tax penalties (by settingby the Tax Cuts and Jobs Act of 2017 (which set the penalty to $0), the entire ACA should be enjoined as invalid. On December 14, 2018, the district court found that the ACA, following the mandate repeal, was unconstitutional. Following the ruling, additional state attorneys general intervened as defendants in the case and on December 30, 2018, the court granted the intervenor defendants’ request for a stay pending appeal.
We cannot estimate
•In January 2019, the typeDepartment of Justice, or magnitudethe DOJ, and the intervenor defendants appealed the district court’s 2018 decision to the Fifth Circuit Court of Appeals. On December 18, 2019, a three-judge panel of the potential Medicare and Medicaid policy changes, rate reductions or other changes andFifth Circuit Court of Appeals held in a 2-1 opinion that the impact on usACA’s individual mandate was unconstitutional, but, rather than determining whether the remainder of the possible failureACA is valid, the Fifth Circuit Court of these programsAppeals remanded the case for additional analysis on severability. In March 2020, the Supreme Court agreed to increase rates to match our increasing expenses, but they may be material toreview the case and adversely affect our future results of operations. Similarly, we are unable to predict the impactoral arguments were held on usNovember 10, 2020.
The effect of the insurance reforms, payment reforms, and healthcare delivery systems reforms contained in and to be developed pursuanttransition from the Trump administration to the ACA. Expanded or decreased insurance availability may impactBiden administration in January 2021 on the number of paying customers for the services we provide.ACA is unknown at this time. If the changes implemented under the ACA result in reduced payments for our servicesis repealed, replaced or the failure of Medicare, Medicaid or insurance payment rates to cover our costs,modified, additional regulatory risks may arise and our future financial results could be adversely and materially affected. IfWe are unable to predict the ACA is repealed, replacedimpact of these or modified, additional risksother recent legislative and regulatory uncertainty may arise. Depending upon what aspectsactions or proposed actions with respect to state Medicaid rates and federal Medicare rates and federal payments to states for Medicaid programs discussed above on us. The changes implemented or to be implemented as a result of
such actions could result in the ACA are repealed, replacedfailure of Medicare, Medicaid or modified, our future financial results could be adversely and materially affected.private payment reimbursement rates to cover increasing costs, in a reduction in payments or other circumstances.
Regulatory Reform. In the fall of 2018,2020, the Trump Administration,administration, including HHS, updated its “Unified Agenda of Regulatory and Deregulatory Actions,” which lists the scope and anticipated timing of pending and future regulations. In releasing the agenda, the Administration highlighted its “ongoing progress toward the goals of more effective and less burdensome regulation,” which appears to be consistent with Executive Order 13771’s mandate to eliminate two economically significant regulations for every one added.regulation." It is unclear how these regulatory reform efforts will impact our operations.operations or whether the Biden administration will continue these efforts. Some of the regulatory updates described above may in the future, be repealed, replaced or modified as a result of these regulatory reform efforts.efforts, if such efforts continue. For instance, in the latest update, HHS notes CMS's efforts to assist healthcare providers and CMS stated their intent to propose changessuppliers in responding to the current ConditionsNational Emergency through its issuance of Participation or Conditions for Coverage that healthcare organizations must meet in order to beginregulatory waivers and continue participating in the Medicare and Medicaid programs. This may include additional changes to the Conditions of Participation for long term care facilities that participate in Medicare and Medicaid, such as our SNFs. We are unable to predict the impact on usother flexibilities. CMS has identified some of these or other regulatory reform efforts. While these efforts could ultimately decrease regulatorywaivers as opportunities to eliminate the burden for our operations in the long term, they may increase regulatory uncertainty in the near term.permanently.
We are unable to predict the impact on us of these or other regulatory reform efforts. While these efforts could ultimately decrease the regulatory burden for our operations in the long term,long-term, they may increase regulatory uncertainty in the near term.
Tax Reform. On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the TCJA, became effective, enacting significant change to the United States Internal Revenue Code of 1986, as amended, or the IRC. The TCJA significantly impacts major aspects of the national economy, including the healthcare industry.
Enforcement. Federal and state efforts to target false claims, fraud and abuse and violations of anti‑kickback, physician referral (including the Ethics in Patient Referrals Act of 1989), privacy and consumer protection laws by providers under Medicare, Medicaid and other public and private programs have increased in recent years, as have civil monetary penalties, treble damages, repayment requirements and criminal sanctions for noncompliance. The FCA, as amended and expanded by the Fraud Enforcement and Recovery Act of 2009, and the ACA, provides significant civil monetary penalties and treble damages for false claims and authorizes individuals to bring claims on behalf of the federal government for false claims.claims and earn a percentage of the government's recovery should the government intervene. These incentives have led to a steady increase in whistleblower actions. The federal Civil Monetary Penalties Law authorizes the Secretary of HHS to impose substantial civil penalties, treble damages and program exclusions administratively for false claims or violations of the federal Anti-Kickback Statute. In addition, the ACA increased penalties under federal sentencing guidelines by between 20% and 50% for healthcare fraud offenses involving more than $1.0 million. State Attorneys General typically enforce consumer protection laws relating to senior living services, clinics and other healthcare facilities.
Government authorities are devoting increasing attention and resources to the prevention, detection and prosecution of healthcare fraud and abuse. The OIG has guidelines for SNFs intended to assist them in developing voluntary compliance programs to prevent fraud and abuse; these guidelines recommend that CMS identify SNFs that are billing for higher paying RUGs and more closely monitor their compliance with patient therapy assessments as methods of fraud prevention.abuse. CMS contractors are also expanding the retroactive audits of Medicare claims submitted by SNFs and other providers, and recouping alleged overpayments for services determined by auditors not to have been medically necessary or not to meet Medicare coverage criteria as billed. State Medicaid programs and other third partythird-party payers are conducting similar medical necessity and compliance audits.
In addition, federal agencies have announced intentions to enhance enforcement efforts to improve the quality and safety of care in nursing homes, which will impact our operations and increase our operating costs. For example, in accordance with the previously announced attention by CMS regarding the overuse of antipsychotics in nursing homes, CMS stated its intention to use civil monetary penalties and denial of Medicare reimbursement to penalize nursing homes that fail to adopt strategies to lower medically-unnecessary use of antipsychotic medications. Further, the DOJ announced a National Nursing Home Initiative to pursue civil and criminal penalties against “nursing homes that provide grossly substandard care to their residents.” The DOJ stated that it would consider a number of factors in identifying problematic nursing homes, including:
(1) consistent failure to provide adequate nursing staff; (2) failure to adhere to basic protocols for hygiene and infection control; (3) failure to provide sufficient food to residents; (4) withholding of pain medication; and (5) use of physical or chemical restraints to restrain or sedate residents.
The ACA facilitates the Department of Justice’s, or the DOJ’s ability to investigate allegations of wrongdoing or fraud at SNFs, in part because of increased cooperation and data sharing among CMS, the OIG, the DOJ and the states. In 2018,On October 20, 2020, the DOJ announced three settlements with SNF facilitiesissued its Annual Report to Congress on its Work to Combat Elder Fraud and their affiliates for $6Abuse, highlighting among its nursing home cases a $15.0 million $10 millionsettlement and $30 million, respectively, relating to allegedlyCorporate Integrity Agreement resolving False Claims Act allegations regarding medically unnecessary rehabilitation therapy services provided to SNF patients.services. The significant nature of the settlementssettlement indicates that the federal government is increasingly focused on the appropriateness of billing practices of, and medical necessity of services provided at, SNFs. The DOJ has also established 10 regional intergovernmental Elder Justice Task Forces across the country to identify and take enforcement action against SNFs that provide substandard care to residents. In September 2019, the DOJ announced that it intends to identify criminal charges, such as wire fraud or healthcare fraud, that can be brought alongside civil actions against SNFs and employees accused of abusing or defrauding elderly patients.
In addition, the ACA requires all states to terminate the Medicaid participation of any provider that has been terminated under Medicare or any other state Medicaid plan. Moreover, state Medicaid fraud control agencies may investigate and prosecute assisted living communities and SNFs, clinics and other healthcare facilities under fraud and patient abuse and neglect laws. We expect that increased enforcement and monitoring by government agencies will cause us to expend considerable amounts on regulatory compliance and likely reduce the profits available from providing healthcare services.
Current state laws and regulations allow enforcement officials to make determinations as to whether the care provided at our senior living communities exceeds the level of care for which a particular community is licensed. A finding that a community is delivering care beyond the scope of its licenselicensed, which could result in the closure of the community and the immediate discharge and transfer of residents. Some states and the federal government allow certain citations of one community to impact other communities operated by the same entityCitations or a related entity, including communities in other states. Revocationrevocation of a license or certification at one of our communitiescommunity could therefore impact our ability to obtain new licenses or certifications or to maintain or renew existing licenses and certifications at other communities, and trigger defaults under our leases, our management agreements with SNHDHC, our leases and our credit facilityagreement or adversely affect our ability to operate or obtain financing in the future. In addition, an adverse finding by state officials could serve as the basis for lawsuits by private plaintiffs and lead to investigations under federal and state laws, which could result in civil and/or criminal penalties against the community as well as a related entity.
Other Matters. Our communities We must comply with laws designed to protect the confidentiality and security of individually identifiable information. Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, our communitieswe must comply with rules adopted by HHS governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information, or PHI, and also with security rules for electronic PHI. There may be both civil monetary penalties and criminal sanctions for noncompliancenon-compliance with these laws. Under the HITECH Act, penalties for violation of certain provisions may be as high as $50,000 per violation for a maximum civil penalty of $1.5 million per calendar year. In January 2013, HHS released the HIPAA Omnibus Rule, or the Omnibus Rule, which went into effect in March 2013 and required compliance with most provisions by September 2013. The Omnibus Rule modified various requirements, including the standard for providing breach notices, which previously required an analysis of the harm of any disclosure, to a more objective analysis relating to whether any PHI was actually acquired or viewed as a result of the breach. On December 10, 2020, HHS issued a proposed rule that would modify certain standards, definitions, and patient rights under the HIPAA Privacy Rule to address barriers to coordinated care and case management. The effect of this proposed rule, if finalized, upon our operations is unknown at this time. In addition to HIPAA, many states have enacted their own security and privacy laws relating to individually identifiable information, including financial information and PHI.health information. For example, the California Consumer Privacy Act became effective in 2020, and we expect additional federal and state legislative and regulatory efforts to regulate consumer privacy in the future. In some states, these laws are more burdensome than HIPAA. In instances in which the state provisions are more stringent than or differ from HIPAA, our communities must comply with both the applicable federal and state standards. If we fail to comply with applicable federal or state standards, we could be subject to civil sanctions and criminal penalties, which could materially and adversely affect our business, financial condition and results of operations. HIPAA enforcement efforts have increased considerably over the past few years, with HHS, through its Office for Civil Rights, entering into several multi-million dollar HIPAA settlements in 20182020 alone. Finally, the Office for Civil Rights and other regulatory bodies have become increasingly focused on cybersecurity risks, including the emerging threat of ransomware and similar cyber attacks.cyber-attacks. The increasing sophistication of cybersecurity threats presents challenges to the entire healthcare industry.
Our communities
We must also comply with the Americans with Disabilities Act, or the ADA, and similar state and local laws to the extent that such communities are “public accommodations” as defined in those laws. The obligation to comply with the ADA and other similar laws is an ongoing obligation, and we continue to assess our communities and make appropriate modifications.
INSURANCE
Insurance
Litigation against senior living and healthcare companies continues to increase, and liability insurance costs continue to increase as a result. In addition, our employee benefit costs, including health insurance and workers’ compensation insurance, generally continue to increase.increase and increased during the year ended December 31, 2020 due to the Pandemic and we expect that these increased costs due to the Pandemic may continue in the future. To partially offset these insurance cost increases, among other things, we have taken have:
•a number of actions, including:
becoming fully self insuredself-insured program for all health relatedhealth-related claims of covered employees;team members;
increasing
•increased the deductible or retention amounts for which we are liable under our liability insurance;
operating
•operated an offshore captive insurance company which participates in our workers’ compensation, professional and general liability and certain of our automobile liability insurance programs, which may allow us to reduce our
net insurance costs by retaining the earnings on our reserves, provided our claims experience does not exceed that projected by various statutory and actuarial formulas;
increasing
•increased the amounts that some of our employeesteam members are required to pay for health insurance coverage and copaymentsco-payments for health services and pharmaceutical prescriptions and decreasing the amount of certain healthcare benefits as well as adding a high deductible health insurance plan as an option for our employees;team members;
utilizing
•utilized insurance and other professional advisors to help us establish programs to reduce our workers’ compensation and professional and general liabilities, including a programprograms to monitor and proactively settleprevent liability claims and to reduce workplace injuries; and
utilizing
•utilized insurance and other professional advisors to help us establish appropriate reserves for our retained liabilities and captive insurance programs; andprograms.
participating with ABP Trust and other companies to which RMR LLC provides management services in a combined property insurance program through Affiliates Insurance Company, or AIC, and with respect to which AIC is an insurer or a reinsurer of certain coverage amounts. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and Note 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10‑K.
We partially self insureself-insure up to certain limits for workers’ compensation, professional and general liability, automobile and property coverage. Claims in excess ofthat exceed these limits are insured up to contractual limits, over which we are self insured.self-insured. Our current insurance arrangements are generally renewable annually. We cannot be sure that our insurance charges and self insuranceself-insurance reserve requirements will not increase, and we cannot predict the amount of any such increase, or to what extent, if at all, we may be able to offset any such increase through higher deductibles, retention amounts, self insuranceself-insurance or other means in the future.
COMPETITION
The senior living services business is highly competitive. We compete with numerous other senior living community operators, as well as companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our existing competitors are larger and have greater financial resources than us and some of our competitors are not for profit entities which have endowment income and may not face the same financial pressures that we do. Also, in recent years a significant number of new senior living communities have been developed, and we expect this increased development activity to continue in the future. This development activity has increased competitive pressures on us, particularly in the geographic markets where we have concentrations of senior living communities. We may enter additional arrangements with SNH for us to operate additional senior living communities that SNH owns, and our relationships with SNH and RMR LLC may provide us with competitive advantages; however, SNH is not obligated to provide us with opportunities to operate additional properties it owns. We cannot be sure that we will be able to compete successfully or operate profitably, and, as noted elsewhere in this Annual Report on Form 10-K, including under the heading “Going Concern” in this Part I, Item 1 of this Annual Report on Form 10-K, we have determined that there is substantial doubt about our ability to continue as a going concern. For more information on the competitive pressures we faceour self-insurance see Note 2 and associated risks, see “Risk Factors”15 to our Consolidated Financial Statements included in Part I,IV, Item 1A15 of this Annual Report on Form 10-K.
ENVIRONMENTAL AND CLIMATE CHANGE MATTERSEnvironmental and Climate Change Matters
Ownership of real estate is subject to risks associated with environmental hazards. Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose us to the possibility that we may become liable to government agencies or third parties for costs and damages theywe incur in connection with hazardous substances. In addition, these laws also impose various requirements regarding the operation and maintenance of properties, and recordkeeping and reporting requirements relating to environmental matters that may require us to incur costs to comply with.comply.
Under our previously existing leases with SNH,DHC, we have agreed to indemnify SNHDHC for any environmental liabilities it incursmay
incur related to our leasedthe senior living communities subject to those leases and the properties on which they are located. We reviewed environmental surveys of certain of our owned and previously leased, but now managed, properties prior to their purchase or the commencement of our leaseleasing of thethose senior living communities. Based upon thoseenvironmental surveys, other studies we may haveobtained and reviewed andfor certain of our operations of these senior living communities, as well as the results of operations at our senior living communities; we do not believe that there are environmental conditions at any of our owned or leasedthe senior living communities we currently operate that have had or will have a material adverse effect on us. However, we cannot be sure that environmental conditions are not present at our owned or previously leased senior living communities, orproperties, that DHC will fund potential costs we incur in the future related to any such conditions if they relate to a senior living community we manage for DHC, or that such potential costs will not have a material adverse effect on our business or financial condition or results of operations.
When major weather or climate-related events, such as hurricanes, floods and wildfires, occur near our senior living communities, we may relocate the residents at our senior living communities to alternative locations for their safety and close or limit the operations of the impacted senior living community until the event has ended and the senior living community is then ready for operation. We may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our senior living communities in anticipation of, during and after a severe weather or climate-related event, and in terms ofsuffer potential lost business due to the interruption in operating our senior living communities. Our insurance may not adequately compensate us for these costs and losses.
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long term,long-term, we believe any such increased costs will be passed through and paid by our residents and other customers in the form of higher charges for our services. However, in the short term,short-term, these increased costs, if material in amount, could materially and adversely affect our financial condition and results of operations. For more information regarding climate change and other environmental matters and their possible adverse impact on us, see “Risk Factors—Risks
Related to Our Business-OurBusiness—Our operations are subject to environmental risks and liabilities,” “Risk Factors—Risks Related to Our Business-OurBusiness—Our operations are subject to climate change andrisks from adverse weather risks”and climate events” and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Climate Change".
We are aware of the impact of our communities on the environment. When we renovate our senior living communities, we generally use energy efficientenergy-efficient products, including lighting, windows and heating ventilation and air conditioning equipment.
GOING CONCERNInternet Website
We face increased competition across the senior living industry, including in specific markets in which we operate senior living communities. Medical advances and healthcare services also allow some potential residents to defer the time when they require the special services available at our communities. In addition, low unemployment in the United States combined with a competitive labor market within our industry are increasing our employment costs. These challenges are currently negatively impacting our revenues, expenses, cash flows and results from operations, and we expect these challenges to continue at least through 2019. At December 31, 2018, we have an accumulated deficit of $292.6 million and have incurred operating losses in each of the last three years. In addition, our credit facility is scheduled to expire on June 28, 2019, and we currently have $51.5 million of borrowings outstanding under that facility. These conditions raise substantial doubt about our ability to continue as a going concern.
We currently operate 260 senior living communities under lease and management arrangements with SNH, or approximately 91.5% of the total communities we operate. In order to address the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH’s independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with will be agreed to or occur. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH unless we obtain relief. For example, we expect to obtain a temporary deferral from SNH on our obligation to pay rent to SNH under our leases with SNH for the month of February 2019 but we cannot be sure that SNH will grant us this deferral; if we do not receive this deferral or any other relief we may need in the future, we may default in paying some or all of the rent due to SNH. In addition, we cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. Any changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
INTERNET WEBSITE
Our internet website address is www.fivestarseniorliving.com. Copies of our governance guidelines, our code of business conduct and ethics, or our Code of Conduct, and the charters of our audit, quality of care, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, Five Star Senior Living Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 02458.02458-1634. We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that stockholdersshareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct. We make available, free of charge, onthrough the "Investor Relations" section of our website, our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission,SEC. Any material we file with or SEC. Securityholdersfurnish to the SEC is also maintained on the SEC website, www.sec.gov. Security-holders may send communications to our Board of Directors or individual Directors by writing to the party for whom the communication is intended at c/o Secretary, Five Star Senior Living Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 02458 or by email at secretary@5ssl.com. Our website address is included several times in this Annual Report on Form 10-K as a textual referencesreference only and the information in any suchon or accessible through our website is not incorporated by reference into this Annual Report on Form 10‑K.10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investor Relations” section. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Item 1A. Risk Factors
Risks Related to Our business is subjectBusiness
The Pandemic has had, and may continue to have, a number of risks and uncertainties. Investors and prospective investors should carefully consider the risks described below, together with all of the other information in this Annual Reportmaterially adverse effect on Form 10-K.The risks described below may not be the only risks we face but are risks we believe may be material at this time. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business, operations, or financial results. If any ofresults and liquidity and its duration is unknown.
The Pandemic has had a negative impact on the events or circumstances described below occurs,global economy, including certain industries in the U.S. economy that are primarily focused on personal services.
These conditions have had, and will likely continue to have, a material and adverse impact on our business, financial condition or results of operations and liquidity. Occupancy at our senior living communities has continually declined during the valuePandemic and we expect these declines may continue for a sustained period of time, which we expect would have a significant adverse impact on our securitiesfinancial results. Although the rates we charge residents has not changed significantly to date as a result of the Pandemic, that could decline. Investorschange if the Pandemic continues or economic conditions worsen. We earn management fees based on a percentage of revenues generated at the senior living communities that we manage; therefore, declines in occupancy, restrictions on admitting new residents and prospective investors should consider the closure or curtailment of operations of senior living communities we manage, without sufficient offsets from increased rates or other revenues, and vice versa, have and likely will continue to reduce the management fees we earn. In addition, the Pandemic may further adversely impact our business if shortages in the materials we need to operate our senior living communities or staffing shortages result. Additionally, the Pandemic could continue to significantly increase certain operating costs for our senior living communities, including labor costs due to agency usage or overtime pay and our costs to obtain PPE, to incorporate enhanced infection control measures and to implement quarantines for residents. Also, we believe that our insurance costs may continue to rise as a result of claims or litigation associated with the Pandemic. In addition, as a result of the Pandemic, Ageility has been forced to close certain outpatient clinics temporarily and we significantly reduced the number of new clinics we planned to open during 2020. As a result, revenues from our Ageility business have been, and may continue to be, negatively impacted.
Although immunization against COVID-19 is in process, it is expected to continue through the first quarter of 2021, and with considerable effort and expense, for all of the residents and team members in our senior living communities to be vaccinated and even longer for the vaccines to be produced, distributed and administered to a sufficient number of people to
enable the cessation of the Pandemic. In addition, we may be subject to claims by residents and team members related to vaccine administration by us or the care provided by us following risks,administration of the information containedvaccine and we cannot be sure we will be protected from liability as a result of being a "Covered Person" under the heading “Warning Concerning Forward Looking Statements”Public Readiness and Emergency Preparedness Act.
We cannot predict the risks described elsewhere in this Annual Reportextent and duration of the Pandemic or its economic impact, but we expect the adverse consequences will be substantial. Further, the extent and strength of any economic recovery after the Pandemic abates is uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the Pandemic abates and may remain at depressed levels compared to prior to the outbreak of the Pandemic for an extended period.
The high levels of infected COVID-19 patients and deaths at senior living communities and resulting negative publicity may have a long-term significant detrimental impact on Form 10-K before deciding whetherthe senior living industry.
COVID-19 has been particularly harmful to invest inseniors and persons with pre-existing health conditions. If the senior living industry continues to experience high levels of COVID-19 infections among residents and related deaths, and news accounts emphasize these experiences, seniors may delay or forgo moving into senior living communities or using other services provided by senior living operators. As a result, our securities.senior living communities’ business and our results of operations may experience a long-term significant detrimental impact.
RISKS RELATED TO OUR BUSINESS
We may fail to continue asoperate profitably and grow our revenues.
Most of the senior living communities we manage are owned by DHC and we operate those senior living communities pursuant to the New Management Agreements that became effective following the Restructuring Transactions. Pursuant to these New Management Agreements, DHC funds the operations and capital needs of those senior living communities, which alleviates us of those funding commitments. In return, we earn base management fees and construction supervision fees based on a going concern.
fixed percentage of revenues and construction costs for construction projects we manage at those senior living communities. As discussed elsewhere in this Annual Report on Form 10-K, our management has concluded that certain conditions and events that we face raise substantial doubt abouta result, our ability to continue as a going concern. Our continuation as a going concern depends upon many factors, including our ability to increasegrow our revenues reduce our costs and/or pursue other transactions, including seeking to reduce our operating leverage and sell assets, to be able to continue to fund our operating and capital requirements and meet our debt obligations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. If we pursue asset sales, we may be unable to sell at prices as high as we may be able to receive if we were not experiencing our current operating and liquidity challenges. We cannot be sure that we will be able to obtain any such needed additional funds by any of the foregoing or other means, and any such funds we may obtain may not be sufficient. If we are unable to obtain sufficient funds, we may be unable to continue as a going concern.
We currently operate 260from managing those senior living communities under lease and management arrangements with SNH, or approximately 91.5% of the total communities we operate. In order to address the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH’s independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with SNH will be agreedlimited to the applicable fee percentages related to the growth of revenues or occur. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH unless we obtain relief. For example, we expect to obtain a temporary deferralapplicable construction costs from SNH on our obligation to pay rent to SNH under our leases with SNH for the month of February 2019 but we cannot be sure that SNH will grant us this deferral; if we do not receive this deferral or any other relief we may need in the future, we may default in paying some or all of the rent due to SNH. In addition, we cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. Any changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
We may default on our lease obligations.
We lease 184those senior living communities, from SNH. As of December 31, 2018, our total annual rent payablesubject to SNH was $207.8 million. As discussed elsewhere in this Annual Report on Form 10-K, as partany incentive fees we may earn. In addition, some of our attempt to address the operating and liquidity issues wecosts are currently experiencing, our Independent Directors and SNH’s independent trustees are currently evaluating our lease and management arrangements with SNH. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH. For example, we expect to obtain a temporary deferral from SNH for our obligation to pay rent to SNH under our leases with SNH for the month February 2019 but wefixed or cannot be, sure that SNH will grant us this deferral; if we do not receive this deferral or may be delayed in being, proportionally adjusted in response to any decline in fees and other reliefrevenues we may need in the future, we may default in paying some or all of the rent due to SNH. If we default our leases with SNH and do not obtain relief for that default, we would likely experience a material adverse effect and we may fail to continue as a going concern.
We may fail to renew or replace our existing credit facility.
Our credit facility is scheduled to expire on June 28, 2019. As of March 5, 2019, we had $51.5 million of borrowings outstanding under that facility. We are currently evaluating options to refinance our credit facility. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. We may not be able to renew or restructure our credit facility, and any renewed or restructured credit facility that we may obtain may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
We may not be able to fund our operating and capital expenses and debt service obligations and any reductions we make to our operating and capital expenses may harm our business.
Our principal sources of funds to meet operating and capital expenses and debt service obligations are cash flows from operating activities, unrestricted cash balances, borrowings under our credit facility and proceeds from our sales to SNH of qualified capital improvements we may make to communities that we lease from SNH for increased rent pursuant to our leases. At December 31, 2018, we have an accumulated deficit of $292.6 million, we have incurred operating losses in each of the last three years, and we had net negative cash flows from operations of $54.2 million for the year ended December 31, 2018. Further, our existing credit facility is scheduled to expire on June 28, 2019 and we cannot be sure that we will renew or replace that facility. Due to our current operating and liquidity challenges, we may not be able to fund our operating and capital expenses or debt service obligations. In addition, we may reduce our capital and operating expenses, which may harm our competitive position, require us to make larger expenditures in the future for deferred maintenance and other costs and harm our business.
We may fail to comply with the terms of the credit agreement, including repaying the principal at maturity on June
28, 2019.
Our credit agreement includes various conditions, covenants and events of default. We may not be able to satisfy all of these conditions or may default on some of these covenants for various reasons, including for reasons beyond our control. For example, our credit agreement requires us to maintain certain debt service ratios. Our ability to comply with such covenants will depend upon our ability to operate our business profitably. If the recent trends in occupancy, rates and employment and other costs and expenses continue or increase or we do not sufficiently reduce our operating leverage, we may incur additional operating losses. Complying with these covenants may limit our ability to take actions that may be beneficial to us and our securityholders.
If we default under our credit agreement, our lenders may demand immediate payment. Any default under our credit agreement that results in acceleration of our obligations to repay outstanding indebtedness would likely have serious adverse consequences to us, including the possible foreclosure of the real estate mortgages on 10 senior living communities owned by our guarantor subsidiaries, and would likely cause the value of our securities to decline.
In the future, we may obtain additional debt financing, and the covenants and conditions which apply to any such
additional debt may be more restrictive than the covenants and conditions that are contained in our credit agreement.
We have realized losses from operations for the past several years and, prior to that, we had not been consistently profitable, and we have limited resources and substantial lease obligations.
We have realized losses from operations for the past several years and, prior to that, we had not been consistently profitable since we became a public company in 2001. We currently have limited resources and substantial lease obligations. Given our history of losses and the current industry conditions, we cannot be sure that we will be able to achieve and/or maintain profitability in the future or that we will be able to continue as a going concern. If we are unable to effectively manage our operations and cash flows, or achieve profitability in other ways, the value of our securities may be adversely affected.
A small percentage decline in our revenues or increase in our expenses could have a material adverse impact on our operating results.
We have high operating leverage.experience. As a result, a small percentage decline in our revenues or increase in our expenses could have a material adverse impact on our operating results because someresults.
In addition to managing senior living communities for DHC, we own senior living communities outright and lease senior living communities from another owner of senior living communities, as well as providing other services, such as rehabilitation, wellness and home health services. We may grow these businesses or engage in new or additional businesses in the future. If we do not profitably operate our businesses, the losses we may incur from these businesses, together with corporate and general and administrative expenses we may incur, may exceed the fees we earn from managing senior living communities for DHC and we may incur operating losses as a result.
Termination of assisted living resident agreements and resident attrition could adversely affect our revenues and earnings.
Unlike typical apartment leases that typically have a one-year term, state regulations governing assisted living communities typically require that senior living community residents have the right to terminate their assisted living resident agreements for any reason on reasonable (30 to 60 days’) notice. Should a large number of our fixed costs, such asresidents elect to terminate their resident agreements at or around the same time, our base rent, would not decrease during times of lower revenues and earnings could not be reduced to offset other expenses which may be increasing.
Circumstances thatmaterially and adversely affectaffected. In addition, the ability of seniors or their families to pay for our services could cause our occupancy rates, revenues and results of operations to decline.
As further discussed below, government benefits, such as Medicare and Medicaid, are not generally available for services at independent and assisted living communities. Many seniors are not otherwise able to pay our monthly resident fees with private resources. Our residents paid approximately 76.7%advanced ages of our senior living revenues from operations duringresidents may result in high resident turnover rates.
Current and future trends in healthcare and the year ended December 31, 2018 from their private resources,needs and we expect to continue to rely on the abilitypreferences of our residents to pay for our services from their own financial resources. Economic downturns, softness in the U.S. housing market, higher levels of unemployment among resident family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford our resident fees. If we are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our occupancy rates, revenues and results of operations could decline.
The current trend for seniors to delay moving to senior living communities until they require greater care or to forgo moving to senior living communities altogetherolder adults could have a material adverse effect on our business, financial condition and results of operations.
Seniors
The healthcare industry is dynamic. The needs and preferences of older adults have been increasingly delayinggenerally changed over the past several years, including preferences for older adults to reside in their homes permanently or to delay moving to senior living communities, including to our senior living communities until they require greater care, and increasingly forgoing moving to senior living communities altogether.care. Further, rehabilitation services and other services are increasingly available and being provided to seniorsolder adults on an outpatient basis or in seniors’older adults’ personal residences, in response to market demand and government regulation, which may increase the trend for seniorscause older adults to delay moving to senior living communities. Such delays may causeresult in decreases in our occupancy rates and increases in our resident turnover rates. Moreover, older adults who do eventually move to senior living communities may have greater care needs and require higher acuity, services, which may increase our cost of doing business, expose us to additional liability or result in lost business and shorter stays at our senior living communities if we are not able to provide the requisite care services or fail to adequately provide those services.communities. These trends may negatively impact our occupancy rates, revenues, cash flows and results of operations.
Additionally, if we fail to identify and successfully act upon future changes and trends in our labor costs may have a material adverse effect on us.
Wageshealthcare and employee benefits associated with our operations were approximately 42%the needs and preferences of our 2018 total operating expenses. The U.S. labor market has been experiencing an extended period of low unemployment. Further, there has been recent legislation enacted and proposed legislation to increase the minimum wage in certain jurisdictions. This, in turn, has put upward pressure on wages. We compete with other senior living community operators, among others, to attract and retain qualified personnel responsible for the day to day operations of our senior living communities. The market for qualified nurses, therapists and other healthcare professionals is highly competitive, and periodic or geographic area shortages of such healthcare professionals may require us to increase the wages and benefits we offer to our employees in order to attract and retain such personnel or to utilize temporary personnel at an increased cost. In addition, employee benefit costs, including health insurance and workers’ compensation insurance costs, have materially increased in recent years and, as noted above, we cannot predict the future impact of the ACA, the repeal or replacement of the ACA or any other future healthcare legislation, on the cost of employee health insurance. Moreover, the low level of unemployment in the United States currently may result in our being unable to fully staff our senior living communities and clinics or having to pay overtime to adequately staff our senior living communities and clinics. Although we determine our employee health insurance and workers’ compensation self insurance reserves with guidance from third party professionals, our reserves may nonetheless be inadequate. Increasing employee health
insurance and workers’ compensation insurance costs and increasing self insurance reserves for labor related insurance may materially and adversely affect our earnings.
We have been experiencing increases in labor costs. We cannot be sure that our labor costs will not continue to increase or that any increases will be recovered by corresponding increases in the rates we charge to our residents or otherwise. Any significant failure by us to control labor costs or to pass any increases on to residents through rate increases could have a material adverse effect onolder adults, our business, financial condition, results of operations and prospects will be adversely impacted.
Circumstances that adversely affect the ability of older adults or their families to pay for our services could cause our revenues and results of operations. Further, increased costs chargedoperations to decline.
Because government benefits, such as Medicare and Medicaid, are not generally available for services at independent and assisted living communities, our residents paid from their private resources approximately 86.3% of the total resident fees in connection with the senior living communities we operated during the year ended December 31, 2020, and we expect to continue to rely on our residents’ ability to pay for our services from their private resources. Economic downturns, lower levels of consumer confidence, stock market volatility and/or changes in demographics could adversely affect the ability of older adults to afford our resident fees. Our prospective residents frequently use the proceeds from their home sales to pay our entrance and resident fees. Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability of older adults to afford these fees. Also, recent high unemployment as a result of the Pandemic may reduce the ability of family members to assist their older relatives in paying these fees. If we are unable to retain and/or attract older adults with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our occupancyrevenues and growth.results of operations could decline.
We face significant competition.
We compete with numerous other senior living community operators, as well as companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our existing competitors are larger and have greater financial resources than us and some of our competitors are not for profit entities whichthat have endowment income and may not face the same financial pressures that we do. We cannot be sure that we will be able to attract a sufficient number of residents to our senior living communities at rates that will generate acceptable returns or that we will be able to attract employeesteam members and keep wages and other employee benefits, insurance costs and other operating expenses at levels whichthat will allow us to compete successfully and operate profitably.
In recent years, a significant number of new senior living communities have been developed and continue to be developed. Although there are indications that the rate of newly started developments has recently declined and further slowed due to the Pandemic, new inventory is expected to still hit the market in the near term due to the increased development of senior living communities in the past several years, and this increased supply of senior living communities that has resulted from recent development activity has increased and will continue to increase competitive pressures on us, particularly in certain geographic markets where we operate senior living communities, and we expect these competitive challenges to continue at least through 2019.for the foreseeable future. These competitive challenges may prevent us from maintaining or improving occupancy and rates at our senior living communities, which may adversely affect their profitability and, therefore, negatively impact our revenues, cash flows and results from operations.
The failure
Changes in the reimbursement rates, methods, or timing of payment from government programs, including Medicare and Medicaid, ratesor other reductions in reimbursement for senior living and healthcare services could adversely impact our revenues.
Our revenues rely in part on reimbursement from government programs and third party payers for the senior living and rehabilitation services we provide. The healthcare industry in the United States is subject to match our costs willcontinuous reform efforts and pressures to reduce our income or create losses.
costs. Some of our current operations, especially the SNFs we manage on behalf of DHC and our SNFs,Ageility business, receive significant revenues from Medicare and Medicaid. We derived approximately 23.3% and 22.9% of our senior living revenues from continuing operations from these programs for the years ended December 31, 2018 and 2017, respectively. Payments under Medicare and Medicaid are set by government policy, laws and regulations. The rates and amounts of payments under these paymentsprograms are subject to periodic adjustment. Currentadjustment and projected federal budget deficits, federal spending priorities and challenging state fiscal conditionsthere have resulted inbeen numerous recent legislative and regulatory actions or proposed actions with respect to Medicare and Medicaid payments, insurance and healthcare delivery. Examples of these, and other information regarding such matters and developments, are provided under the caption “Business—Government Regulation and Reimbursement” in Part I, Item 1 of this Annual Report on Form 10-K. We cannot estimate the type or magnitude of these matters. However, these matters could result in the failure of Medicare or Medicaid payment rates to cover our costs of providing required services to residents, or in reductions inAdditionally, we receive significant payments to us or other circumstances that could have a material adverse effect on our business, results of operations and financial condition.
Privatefrom third party payers continue to try to reduce healthcare costs.
Privatefor certain of our rehabilitation and wellness services, including approximately 50.6% and 44.1% of our total revenues for the years ended December 31, 2020 and 2019, respectively. These private third party payers such as insurance companies continue their efforts to control healthcare costs and decrease payments for our services through direct contracts with healthcare providers, increased utilization review practices and greater enrollment in managed care programs and preferred provider organizations. TheseAny reduction in the payments we receive from Medicare, Medicaid and third party payers increasingly demand discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. These efforts to limit the amount of payments we receive for healthcare services could adversely affect us. Reimbursement payments under third party payer programs may not remain at levels comparable to present levels or be sufficient to cover the costs allocable to patients participating in such programs. Future changes in, or renegotiations of, the reimbursement rates or methods of third party payers, or the implementation of other measures to reduce payments for our services could result in a substantial reduction in our net operating revenues. At the same time, as a result of competitive pressures, our ability to maintain operating margins through price increases to private pay residents may be limited.
Provisions of the ACA and efforts to repeal, replace or modify the ACA could reduce our income and increase our costs.
The ACA contains insurance changes, payment changes and healthcare delivery systems changes that have affected, and will continue to affect, subject to possible future repeal, replacement or modification of the ACA. The ACA provides for multiple reductions to the annual market updates for inflation that may result in reductions in SNF Medicare payment rates. In
addition, certain provisions of the ACA that affect employers generally, including the employer shared responsibility provisions that went into effect on January 1, 2015, may have an impact on the design and cost of the health coverage that we offer to our employees. We are unable to predict the impact of the ACA on our future financial results of operations, but it may be adverse and material. In addition, maintaining compliance with the ACA will require us to expend management time and financial resources.
The ACA includes other changes that may affect us, such as enforcement reforms and Medicare and Medicaid program integrity control initiatives, new compliance, ethics and public disclosure requirements, initiatives to encourage the development of home and community based long term care services rather than institutional services under Medicaid, value based purchasing plans and a Medicare post acute care pilot program to develop and evaluate making a bundled payment for services, including physician and SNF services, provided during an episode of care. We are unable to predict the impact on us of the insurance, payment, and healthcare delivery systems reforms contained in and to be developed pursuant to the ACA. If the changes implemented under the ACA result in reduced payments for our services or the failure of Medicare, Medicaid or insurance payment ratesthose reimbursements to cover our increasing costs our future financial results could be adversely and materially affected.
Depressed U.S. housing market conditions may reduce the willingness or ability of seniors to relocateproviding required services to our senior living communities.
Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability, of seniors to afford our entrance feesresidents and resident fees, as prospective residents frequently use the proceeds from the sale of their homes to cover the cost of such fees. If seniors have a difficult time selling their homes, their ability to relocate to our senior living communities or finance their stays at our senior living communities with private resources could be adversely affected. If U.S. housing market conditions reduce seniors’ willingness or ability to relocate to our senior living communities, the occupancy rates, revenuesclients and cash flows at our senior living communities and our results of operations could be negatively impacted.
Federal, state and local employment related laws and regulations could increase our cost of doing business, and our failure to comply with such laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
Increases in our labor costs and staffing turnover may have a material adverse effect on us.
The success of our senior living communities depends on our ability to attract and retain team members for the day-to-day operations of those communities. We continue to face upward pressure on wages and benefits due to high competition for qualified personnel in our industry, low unemployment prior to the onset of the Pandemic and recent proposed and enacted legislation to increase the minimum wage in certain jurisdictions. The market for regional and executive directors at our
communities, and qualified nurses, therapists and other healthcare professionals is highly competitive, and periodic or geographic area shortages of such healthcare professionals, as well as the added pressure of the Pandemic, may require us to increase the wages and benefits we offer to our team members in order to attract and retain them or to utilize temporary personnel at an increased cost. In addition, employee benefit costs, including health insurance and workers’ compensation insurance costs, have materially increased in recent years.
Our labor costs have increased because of the Pandemic, including because of increased staffing needs and team member exposure to COVID-19. Staffing turnover at our senior living communities is common and has increased as a result of the Pandemic, the current competitive labor market conditions and the competitive environment in the senior living industry. We have had to rely on more expensive agency help or pay overtime to adequately staff our communities and clinics. Labor unions also attempt to organize our team members from time to time; if our team members were to unionize, it could result in business interruptions, work stoppages, the degradation of service levels due to work rules, or increased operating expenses that may adversely affect our results of operations.
Additionally, our operations are subject to a variety of federal, state and localvarious employment related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governsgovern matters such as minimum wages, the Family and Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, and a variety of similar laws that govern these and other employment related matters. We are currently subject to employment related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. Because labor represents a significant portion of our operating expenses, compliance with these evolving laws and regulations could substantially increase our cost of doing business, while failure to do so could subject us to significant back pay awards, fines and lawsuits. We are currently subject to employment related claims in connection with our operations. These claims, lawsuits and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. Our failure to comply with federal, state and local employment related laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
Any significant failure by us to control labor costs or to pass any increases on to residents through rate increases could have a material adverse effect on our business, financial condition and results of operations. Further, increased costs charged to our residents may reduce our occupancy and growth.
Our business is subject to extensive regulation, which requires us to incur significant costs and may result in losses.
Licensing and Medicare and Medicaid laws require operators of senior living communities and rehabilitation and wellness clinics to comply with extensive standards governing operations and physical environments. Federal and state laws also prohibit fraud and abuse by senior living healthcare providers and rehabilitation and wellness clinic operators, including civil and criminal laws that prohibit false claims and regulate patient referrals in Medicare, Medicaid and other payer programs. In recent years, federal and state governments have devoted increased resources to monitoring the quality of care at senior living communities and to anti‑fraud investigations in healthcare generally. CMS contractors, are expanding the retroactive audits of Medicare claims submitted by SNFs and other providers, and recouping alleged overpayments for services determined by auditors not to have been medically necessary or not to meet Medicare coverage criteria as billed. Statestate Medicaid programs and other third partythird-party payers are conducting similarcontinue to conduct medical necessity and compliance audits. When federal or state agencies identify violations of anti‑fraud, false claims, anti‑kickback and physician referral laws, they may impose or seek civil or criminal penalties, treble damages and other government sanctions, and may revoke a community’s license or make conditional or exclude the community from Medicare or Medicaid participation. The ACA amended the federal Anti‑Kickback Statute and the FCA, making it easier for government agencies and private plaintiffs to prevail in lawsuits brought against healthcare providers and for severe fines and penalties to be imposed on healthcare providers that violate applicable laws and regulations.imposed. In addition, when these agencies determine that there has been quality of care deficiencies or improper billing, they may impose or seek various remedies or sanctions, including denial of new admissions, exclusion from Medicare or Medicaid program participation, monetary penalties, restitution of overpayments, government oversight, temporary management, loss of licensure and criminal penalties.
Current state laws and regulations allow enforcement officials to make determinations as to whether the care provided at our senior living communities exceeds the level of care for which a particular community is licensed. A finding that a community is delivering care beyond the scope of its licenselicensed, which could result in holds on accepting new residents, or the closure of the facility and the immediate discharge and transfer of residents. Certain states and the federal government may determine that citations relating to one community affect other communities operated by the same entityCitations or related entities, which may negatively impact an operator’s ability to maintain or renew other licenses or Medicare or Medicaid certifications or to secure new licenses or certifications. In addition, revocation of a license or certification at one community could impact our ability to obtain new licenses or certifications or to maintain or renew existing licenses and certifications at other communities, and trigger defaults under our leases, our management agreements with SNHDHC, our leases with PEAK and our credit facility, oragreement, adversely affect our ability to operate our senior living communities or our Ageility clinics or obtain financing in the future.
Our senior living communities incur sanctions and penalties from time to time. As a result of the healthcare industry’s extensive regulatory system and increasing enforcement initiatives, we have experienced increased costs for monitoring quality of care compliance, billing procedures and compliance with referral laws and other laws that apply to us, and we expect these costs may continue to increase. For example, as disclosed elsewhere in this Annual Report on Form 10-K, as a result
Provisions of the ACA could reduce our compliance program initiativeincome and increase our costs.
The ACA regulates insurance, payment and healthcare delivery systems that have affected, and will continue to review records related toaffect our Medicare billing practices, in September 2017, we made a disclosurerevenues and costs. The ACA provides for multiple reductions to the OIG regarding potential inadequate documentationannual market updates for inflation that may result in reductions in SNF Medicare payment rates. The ACA includes other provisions that may affect us, such as enforcement reforms and other potential issues at oneMedicare and Medicaid program integrity control initiatives, new compliance, ethics and public disclosure requirements, initiatives to encourage the development of our leased SNFs.home and community based long-term care services rather than institutional services under Medicaid, value based purchasing plans and a Medicare post-acute care pilot program to develop and evaluate making a bundled payment for services, including physician and SNF services, provided during an episode of care. We submitted supplemental disclosures relatedare unable to this matterpredict the impact on us of the insurance, payment, and healthcare delivery systems provisions contained in and to be developed pursuant to the OIGACA. In addition, maintaining compliance with the ACA requires us to expend management time and financial resources.
Our business requires us to make significant capital expenditures to maintain and improve our senior living communities and to retain our competitive position in December 2017 and March 2018. At December 31, 2018, we had accrued an estimated revenue reservethe senior living industry.
Our senior living communities sometimes require significant expenditures to address required ongoing maintenance or to make them more attractive to residents. Various government authorities mandate certain physical characteristics of $0.8 million for historical Medicare payments we received and expectsenior living communities; changes in these regulations may require us to repay as a result of these deficiencies.make significant expenditures. In addition, we have recorded expenses for additional costsare often required to make significant capital expenditures when we incurredacquire or expect to incur, including estimated OIG imposed penalties, as a result of this matter, totaling $0.7 million for the year ended December 31, 2018, of which $0.6 million remains accrued and not paid at December 31, 2018. The compliance review we undertook, which resulted in this OIG voluntary disclosure, was not initiated in response to any specific complaint or allegation, but a review of the type that we periodically undertake to test our own compliance with applicable Medicare billing rules pursuant to our compliance program.
The revenues we receive from Medicare and Medicaidnewly lease senior living communities. Our available financial resources may be subjectinsufficient to statutoryfund these expenditures. We incur capital costs for senior living communities we own or lease and regulatory changes, retroactive rate adjustments, recovery of program overpaymentsfor our other businesses and corporate level activities. Further, increases in capital costs at our managed senior living communities may negatively impact the financial metrics at our senior living communities and our potential to earn incentive fees for these senior living communities or set offs, administrative rulingseven give DHC a right to terminate the applicable management agreements. DHC’s failure to make certain capital expenditures may result in our senior living communities being less competitive and policy interpretations, and payment delays. If we become subject to additional regulatory sanctions or repayment obligations at any ofin our existing communities (or at any of our newly acquired communities with prior deficiencies that we are unable to correct or resolve), our business may be adversely affected, and we might experience financial losses. Any adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or any penalties, repayments, or sanctions, and the increasing costs of required compliance with applicable federal and state laws, may adversely affect our ability to meet our financial obligations and negatively affect our financial condition and results of operations.earning less management fees.
The nature of our business exposes us to litigation and regulatory and government proceedings.
We have been, are currently, and expect in the future to be, involved in claims, lawsuits and regulatory and government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. For example, we were defendants in a lawsuit filed by the estate of a former resident of a senior living community operated by us in which a verdict was rendered against us awarding damages of approximately $19.2 million, which consisted of $2.5 million for pain and suffering and the remainder in punitive damages. In March 2016, pursuant to a settlement agreement we entered with the plaintiff, approximately $7.3 million was paid to the plaintiff by us and our former liability insurer. The defense and resolution of such claims, lawsuits and other proceedings may require us to incur significant expenses.
In several well publicized instances, private litigation by residents of senior living communities for alleged abuses has resulted in large damage awards against other senior living companies. Some lawyers and law firms specialize in bringing litigation against senior living community operators. As a result, of this litigation and potential litigation, the cost of our liability insurance continues to increase. Medical liability insurance reform has at times been a topic of political debate, and some states have enacted legislation to limit future liability awards. However, such reforms have not generally been adopted, and we expect our insurance costs may continue to increase. Further, although we determine our self insurance reserves with guidance from third party professionals, our reserves may nonetheless be inadequate. Increasing liability insurance costs and increasing self insurance reserves could have a material adverse effect on our business, financial condition and results of operations.
In addition, we are currently defendants in two employee litigation matters and may be subject to future employee litigation. For more information regarding the two pending employee litigation matters, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.
Litigation may subject us to adverse rulings and judgments that may materially impact our business, operating results and liquidity. In addition, defending litigation distracts the attention of our management and may be expensive. For more
information regarding certain of the settled employee litigation matters, our legal contingencies and past legal and compliance matters,see Note 12 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
If we do not achieve and maintain a high quality of care, payments through pay-for-performance and value-based purchasing programs may be reduced, and the overall attractiveness of our senior living communities to potential residents could decrease as more quality data becomes publicly available.
CMS is moving towardstoward pay-for-performance programs, such as value-based payment, as an alternative to fee-for-service reimbursement. In October 2016, CMS issued a final rule to implement the Quality Payment Program. StartingBeginning in 2019, providers may bewere subject to either MIPS payment adjustments or APM incentive payments. Under PAMA, beginning in federal fiscal year 2019,since October 2018, Medicare payment rates will beare now partially based on SNFs’ performance scores on a hospital readmissionsreadmission measure as part of CMS’s new SNF Value-Based Purchasing Program. Moreover, underUnder the IMPACT Act, SNFs are required to report certain quality measures, resource use measures and certain patient assessment data in a standardized and interoperable format. SNFs that fail to comply with the reporting requirements are subject to a 2.0%2% reduction in their Medicare payment rates. Beginning inSince October 2018, HHS has made SNF-reported data publicly available on its Nursing Home Compare website. We cannot predict the impact of these quality-driven payment reforms, but they may be material to and adversely affect our future results of operations. In addition, we cannot predict the impact of more quality data becoming publicly available, but if we do not achieve and maintain a high quality of care, the overall attractiveness of our communities to potential residents could decrease.
Increasing
We may fail to comply with the terms of our credit agreement.
Our credit agreement includes various conditions, covenants and events of default. We may not be able to satisfy all of these conditions or may default on some of these covenants for various reasons, including for reasons beyond our control. For example, our credit agreement requires us to comply with certain financial and other covenants. Our ability to comply with such covenants will depend upon our ability to operate our business profitably. If the recent trends in occupancy, rates and employment and other costs and expenses continue or increase, we may incur operating losses. Complying with these covenants may limit our ability to take actions that may be beneficial to us and our security holders.
If we default under our credit agreement, our lenders may demand immediate payment. Any default under our credit agreement that results in acceleration of our obligations to repay outstanding indebtedness would likely have serious adverse consequences to us, including the possible foreclosure of the real estate mortgages on 11 senior living communities owned by us, and would likely cause the value of our securities to decline.
In the future, we may obtain additional debt financing, and the covenants and conditions that apply to any such additional debt may be more restrictive than the covenants and conditions that are contained in our credit agreement.
Changes in market interest rates may adversely affect us.
Since the most recent U.S. recession, the Board of Governors of
Interest rates are at relatively low levels on a historical basis, and the U.S. Federal Reserve System orhas indicated that it does not expect to raise interest rates in response to the Pandemic and current market conditions until at least the end of 2023. There can be no assurance, however, that the U.S. Federal Reserve has taken actions which have resultedSystem will not raise rates prior to that time.Any increases in lowmarket interest rates prevailing in the marketplace for a historically long period of time. Recently, there have been some modest signs of inflationary price movements, and the U.S. Federal Reserve has been raising the federal funds rate since December 2016. Previously, the U.S. Federal Reserve had indicated that it expected to raise the federal funds rate further in 2019, although it recently indicated that it may delay making those increases. Market interest rates may continue to increase, and those increases may materially and negatively affect us in several ways, including:
Increases
•increases in interest rates could adversely impact the housing market and reduce demand for our services and occupancy at our senior living communities, could increase our rent expense at our leased senior living communities due to the landlord setting rent based on a required return on its investment, andwhich could reduce the likelihood that we will earn incentive fees at our managed senior living communities due toif the owner requiring a minimum return on its investment prior toEBITDA we realize at our being eligible to receive an incentive fee or subject our management agreements to termination by the owner of ourmanaged senior living communities if it does not realize its return on invested capital under our management agreements.declines as a result;
Amounts•amounts outstanding under our credit facility require interest to be paid at variable interest rates. When interest rates increase, our interest costs will increase, which could adversely affect our cash flows, our ability to pay principal and interest on our debt, and our cost of refinancing our debt when it becomes due and our ability to fund our operations and working capital.capital; and
An•an increase in interest rates could decrease the amount buyers may be willing to pay for our senior living communities, thereby reducingnegatively impact the market value of our owned senior living communities and limitinglimit our ability to sell any owned senior living communities. Further, increasedIncreased interest rates would increase our costs for, and may limit our ability to obtain, mortgage financing secured byfinancing.
Conversely, low market interest rates, particularly if they remain over a sustained period, may increase our senior livinguse of debt capital to fund property acquisitions, lower capitalization rates for property purchases and increase competition for property purchases, which may reduce opportunities for us to operate additional communities.
Our growth strategy may not succeed.
We intend to continue to grow our business by entering into additional long term operatinglong-term management arrangements for senior living communities and growing the healthcareancillary services we provide wherein which residents’ private resources account for all or a large majority of revenues. Our business plans include seeking to take advantage of expected long termlong-term increases in demand for senior living communities and healthcarehealth and wellness services. Our growth strategy is subject to risks, including, but not limited to, the following:
•we may not be an attractive business partner given our operating history and the liquidity challenges we are currently experiencing;have experienced;
•we may be unable to identify and operateacquire or newly manage or lease additional senior living communities and rehabilitation and wellness services clinics on acceptable terms;
•we may be unable to access the capital required to operatemanage additional senior living communities and clinics;operate rehabilitation and wellness services clinics or grow ancillary services;
we may be unable to identify and operate additional senior living communities and clinics where residents’ private resources account for all or a large majority
•we may not achieve the operating results we expect from newly managed or leased senior living communities we operate or any healthcarerehabilitation and wellness or other services we may provide;
the operations of newly managed or leased senior living communities and clinics and provision of other healthcare services may subject us to unanticipated contingent liabilities or regulatory matters;
we may be required to make significant capital expenditures to improve newly managed or leased senior living communities, including capital expenditures that were unanticipated at the time of entry into the management or lease arrangements;
we may have difficulty hiring and retaining key employees and other personnel at newly managed or leased senior living communities and clinics;
to the extent we incur additional lease obligations associated with new leased senior living communities or clinics, our operating leverage and resulting risks of debt defaults may increase;
the occupancy at newly managed or leased senior living communities may decline and •it may take a period of time to stabilize the operations of newly managed or leased senior living communities;communities after we acquire, or commence managing or leasing, them;
•integrating the operations of newly managed or leased senior living communities and rehabilitation and wellness services clinics we commence operating, or other healthrehabilitation and wellness services we may provide, may disrupt our existing operations, or may cost more than anticipated;
•we may fail to realize any expected operating or cost efficiencies from any future additional senior living communities or rehabilitation and wellness services clinics we agree to manage or lease;operate;
•we may agree to manage or leasecommence operating senior living communities that are subject to unknown liabilities and without any recourse, or with limited recourse, such as liability for the cleanup of undisclosed environmental contamination or for claims by residents, vendors or other persons related to actions taken by former owners or operators of the communities;
•any failure to comply with licensing requirements at our senior living communities, rehabilitation and wellness services clinics or elsewhere may prevent our obtaining or renewing licenses needed to conduct and grow our businesses; and
newly managed or leased •senior living communities and rehabilitation and wellness services clinics that we commence operating, and otherany new or expanded healthcarerehabilitation and wellness services we may seek to provide might require significant management attention that would otherwise be devoted to our other business activities.
For these reasons, among others, we might not realize the anticipated benefits of our additional long term operating arrangements, and our growth strategy may not succeed or may cause us to experience losses.
Our business requires us to make significant capital expenditures to maintain and improve our senior living communities.
Our senior living communities sometimes require significant expenditures to address required ongoing maintenance or to make them more attractive to residents. Physical characteristicsThe substantial majority of senior living communities are mandated by various government authorities; changes in these regulations may require us to make significant expenditures. In addition, we are often required to make significant capital expenditures when we lease or manage new senior living communities. Our available financial resources may be insufficient to fund these expenditures. SNH has historically provided most of the capital required to improve the senior living communities that we lease from them or manage for their account but SNHoperate are owned by DHC and our business is not required to fund capital expenditures atsubstantially dependent on our senior living communities. However, when SNH funds capital expenditures at our leasedrelationship with DHC.
Of the 252 senior living communities our rent increases,we operate, 228 are owned by DHC, and when SNH funds capital expenditureswe manage all of those senior living communities pursuant to the New Management Agreements.
DHC may terminate the New Management Agreements in certain circumstances, including if the EBITDA we generate at our managed senior living communities the invested capitaldoes not exceed target levels or for our uncured material breach. Our business is substantially dependent upon which SNH’s returns are based increases. We may be unable to pay increased rent at our leased senior living communities without experiencing losses and increases in SNH’s invested capital at our managed communities may
reduce or prevent our receipt of incentive fees or subject the applicable management agreements to termination by SNH if it is unable to realize its return on invested capital under such agreements. Further, in light of our current operating and liquidity challenges, we may be limited in making capital expenditures, which may harm our competitive position, require us to make larger expenditures in the future for deferred maintenance and other costs and harm our business.
Current government policies regarding interest rates and trade as well as any prolonged government shutdown may cause a recession.
continued relationship with DHC.The U.S. Federal Reserve policy regarding the timing and amount of future increases in interest rates, changing U.S. and other countries’ trade policies and a prolonged U.S. government shutdown may hinder the growthloss of the U.S. economy. It is unclear whether the U.S. economy will be able to withstand these challenges and continue sustained growth. Economic weakness in the U.S. economy generallyNew Management Agreements with DHC, or a new U.S. recession would likely adversely affectmaterial change to their terms less favorable to us, could have a material adverse effect on our business, financial condition including by limiting our ability to pay rent and causing the valuesor results of our owned and operated senior living communities and of our securities to decline. Further, general economic conditions, such as inflation, commodity costs, fuel and other energy costs, costs of labor, insurance and healthcare, interest rates, and tax rates, affect our operating and general and administrative expenses, and we have no control or limited ability to control such factors. Such economic uncertainties and conditions may adversely affect us and others, including our landlords, the owner of our managed senior living communities and our residents and prospective residents, such as by reducing access to funding or credit, increasing the cost of credit, limiting the ability to manage interest rate risk and increasing the risk that obligations will not be fulfilled, as well as other impacts which we are unable to fully anticipate.operations.
We rely on information technology and systems in our operations, and any material failure, inadequacy, interruption or security failure of that technology or those systems could materially and adversely affect us.
We rely on information technology and systems, including the Internet and cloud-based infrastructures, commercially available software and our internally developed applications, to process, transmit, store and safeguard information and to manage or support a variety of our business processes, (includingincluding managing our building systems), includingsystems, financial transactions and maintenance of records, which may include personally identifiable information or protected health information of employees, residentsteam members and tenants and lease data.residents. If we or our third party vendors experience material security or other failures, inadequacies or interruptions, of our information technology, we could incur material costs and losses and our operations could be disrupted as a result. Further, third party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to us. We rely on commercially available systems, software, tools and monitoring, as well as our internally developed applications and internal procedures and personnel, to provide security for processing, transmitting, storing and safeguarding confidential resident, tenant, customer and vendor information, such as personally identifiable information related to our employees and others, including our residents, and information regarding their and our financial accounts.disrupted. We take various actions, and incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, it is possible that these measures willmay not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of personally identifiable information.security.
Security breaches, computer viruses, attacks by hackers, and online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The cybersecurity risks to us and our third partythird-party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the field of cryptography and new and increasingly sophisticated methods used to perpetrate illegal or fraudulent activities against us, including cyberattacks, email or wire fraud and other attacks exploiting security vulnerabilities in our or third parties’parties' information technology networks and systems or operations. Any failure by us or
our third party vendors to maintain the security, proper function and availability of our information technology and systems or certain third party vendors’ failure to similarly protect their information technology and systems that are relevant to us or our operations, or to safeguard our business processes, assets and information could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect our business and the value of our securities.
We may fail to comply with laws governing the privacy and security of personal information, including relating to health.
We are required to comply with federal and state laws governing the privacy, security, use and disclosure of personally identifiable information and protected health information. Underinformation, including HIPAA and the HITECH Act, as updated by the Omnibus Rule, we are required to comply with the HIPAA privacy rule, security standards and standards for electronic healthcare transactions. State laws also govern protected health information, and rules regarding state privacy rights may be more stringent than HIPAA. Other federal and state laws govern the privacy of other personally identifiable information.Rule. If we fail to comply
with applicable federal or state standards, we could be subject to civil sanctions and criminal penalties, which could materially and adversely affect our business, financial condition and results of operations. HIPAA enforcement efforts have steadily increased, with HHS, through its Office for Civil Rights, entering into many HIPAA settlements with providers.
Operating leverage
Insurance may harmnot adequately cover our financial conditionlosses, and resultsthe cost of operations and prevent us from continuing as a going concern.
We have substantial lease and other obligations. Our total annual minimum rent payable by us under our leases was $210.6 million as of December 31, 2018. In addition, our total consolidated long term debt as of December 31, 2018 was approximately $7.5 million. We also had approximately $51.5 million of borrowings outstanding under our credit facility and $0.3 million of short term mortgage debt as of December 31, 2018.
Our substantial lease and other obligations, including our indebtedness, could impact our business in the following ways, among others:
our ability to continue as a going concernobtaining such insurance may continue to be a substantial risk;increase.
our ability to satisfy our lease and debt obligations could be affected;
the funds required to make rent, interest and principal payments will not be availableWe purchase certain third party insurance coverage for operations, working capital, capital expenditures, expansion or general corporate or other purposes;
our ability to obtain additional financing may be impaired;
our flexibility in planning for, or reacting to, changes in our business and industryproperties, including for casualty, liability, malpractice, fire, extended coverage and rental or business interruption loss insurance. Pursuant to our management agreements with DHC, we are obligated to maintain certain insurance coverage for our DHC managed senior living communities. Recently, the costs of insurance have increased significantly, and these increased costs have had an adverse effect on us and the operating results for our senior living communities. Although DHC funds the insurance premiums for our DHC managed senior living communities, the increased costs of insurance may negatively impact the financial results at those managed senior living communities or give rise to a DHC right of termination of the applicable management agreements if the EBITDA at those managed senior living communities does not meet certain targets. In addition, we are responsible for paying for insurance for other properties that we operate, including senior living communities that we own or lease, and increased insurance costs will adversely impact us as a result. Losses of a catastrophic nature, such as those caused by hurricanes, flooding, volcanic eruptions and earthquakes, or losses from terrorism, may be limited; and
covered by insurance policies with limitations such as large deductibles or co-payments that we or the owner may not be able to pay. Insurance proceeds may not be adequate to restore an affected property to its condition prior to loss or to compensate us for our losses, including lost revenues or other costs. Certain losses, such as losses we may be more vulnerableincur as a result of known or unknown environmental conditions, are not covered by our insurance. Market conditions or our loss history may limit the scope of insurance or coverage available to downturnsus on economic terms. If an uninsured loss or a loss in our business and industryexcess of insured limits occurs, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the economy generally.capital invested in a property, as well as the anticipated future revenue from the property.
We may incur significant costs from our self insuranceself-insurance arrangements.
We partially self insureself-insure up to certain limits for workers’ compensation, professional and general liability and automobile coverage. Claims in excess of these limits are insured up to contractual limits, over which we are self insured.self-insured. We fully self insureself-insure all health relatedhealth-related claims for our covered employees. We may incur significant costs for claims and related matters under our self insuranceself-insurance arrangements. We cannot be sure that our insurance charges and self insuranceself-insurance reserve requirements will not increase, and we cannot predict the amount of any such increase, or to what extent, if at all, we may be able to offset any such increase through higher retention amounts, self insuranceself-insurance or other means in the future. Although we determine our employee health insurance, workers’ compensation and professional and general liability self insuranceself-insurance reserves with guidance from third party professionals, our reserves may nonetheless be inadequate. Determining reserves for the casualty, liability, workers’ compensation and healthcare losses and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected settlements for pending claims, known incidents that we expect may result in claims, estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved and could result in our recognizing a significant amount of expenses in excess of our reserves. Our costs under our self insuranceself-insurance arrangements may materially and adversely affect our business, results of operations and liquidity.
Successful union organization of our employees may adversely affect our business, financial condition and results of operations.
From time to time labor unions attempt to organize our employees. If federal legislation modifies the labor laws to make it easier for employee groups to unionize, additional groups of employees may seek union representation. If our employees were to unionize, it could result in business interruptions, work stoppages, the degradation of service levels due to work rules, or increased operating expenses that may adversely affect our results of operations.
Termination of assisted living resident agreements and resident attrition could adversely affect our revenues and earnings.
State regulations governing assisted living communities typically require a written resident agreement with each resident. Most of these regulations also require that each resident have the right to terminate these assisted living resident agreements for any reason on reasonable notice. Consistent with these regulations, most of our resident agreements allow residents to terminate their agreements on 30 days’ notice. Thus, we may be unable to contract with assisted living residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with terms of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, our revenues and earnings could be materially and adversely affected. In addition, the advanced ages of our senior living residents may result in high resident turnover rates.
Changes in tax laws or other actions could have a negative effect on us.
At any time, the federal or state income tax laws, or the administrative interpretations of those laws, may be amended. Federal and state tax lawsWe are constantly under review by persons involved in the legislative process, the IRS, the U.S. Department of the Treasury and state taxing authorities. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us.
In particular, December 2017 legislation made substantial changes to the IRC, especially as it relates to the taxation of corporate income. Among those changes are a significant permanent reduction in the generally applicable corporate income tax rate, changes in the taxation of individuals and other noncorporate taxpayers that generally reduce their taxes on a temporary basis subject to “sunset” provisions, and the elimination or modification of various deductions. The new provisions generally limit business interest expense deductions to 30% of a taxpayer’s adjusted taxable income for a taxable year, and beginning after 2021, this limitation will become more stringent as it will be determined after application of any deduction for depreciation, amortization, or depletion. Additionally, the legislation also imposes additional limitations on the usage of net operating losses. Many of the provisions of the new law will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also possible that there will be technical corrections legislation proposed with respect to the new law, the effect of which cannot be predicted and may be adverse to us.
We may be unable to use our net operating loss or tax credit carryforwards before they expire, or our ability to use our net operating loss orand tax credit carryforwards.
Our ability to deduct pre-2020 net operating loss carryforwards may be limited.
Net operating losses and other tax credit carryforwards are subject to limitations in accordance with federal and state regulations, such as limitations imposed under Section 382a significant annual limitation on account of the IRC following an “ownership change” (as defined in applicable Treasury regulations) and a limitation stemmingownership changes resulting from the December 2017 amendmentsRestructuring Transactions, as described in Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Losses and credits that arise after January 1, 2020, the IRC providing that carryforwards of net operating losses arising in taxable years beginning after 2017 generally cannot offset more than 80%effective date of the current year’s taxable income. Moreover, pursuant to the December 2017 amendments to the IRC, net operating losses arising in taxable years beginning after 2017 may not be carried back, but may be carried forward indefinitely.
In addition, if we experience an ownership change, our net operating loss and tax credit carryforwards,Restructuring Transactions, which currently are expected to be utilized to offset future taxable income, maywill not be subject to the limitations resulting from the Restructuring Transactions, but futurechanges in ownership may result in limitations on usage or elimination.elimination of those future losses and credits. Our bylaws contain certain provisions to facilitate the preservation of the tax treatment of our net operating losses and tax credit carryforwards, including provisions generally prohibiting a person or group from becoming a “5-percent shareholder” (as defined in the applicable Treasury regulations) without the consent of our BoardBoard. However, we cannot be sure that these restrictions will be effective or
that our Board will not determine to waive such restrictions in the future. Moreover, net operating losses and other carryforwards are subject to other limitations under the United States Internal Revenue Code of Directors, ABP Acquisition LLC and certain related parties acquired approximately 36%1986, as amended, or the IRC, including provisions generally restricting carryforwards of our common shares. Although this acquisition did not limitnet operating losses arising in taxable years beginning after 2017 from offsetting more than 80% of the current year’s taxable income, which could affect our ability to use our net operating loss or tax credit carryforwards, it limits the extent to which potential future acquisitionsutilize all of our common shares by “5-percent shareholders” may be made without limiting our ability to use ourexisting net operating loss and tax credit carryforwards.carryforwards in a given year.
As of December 31, 2018, our federal net operating loss carryforwards, which are scheduled to begin expiring in 2026 if unused, were approximately $167.0 million, and our federal tax credit carryforwards, which begin expiring in 2022 if unused, were approximately $18.9 million. If in the future we use our net operating loss or tax credit carryforwards to reduce our tax liabilities, the existence and amounts of these net operating loss or tax credit carryforwards may be subject to audit by the relevant tax authorities and the amounts of these net operating loss or tax credit carryforwards may be reduced.
Our operations are subject to environmental risks and liabilities.
Our operationsWe are required to comply with various environmental laws governing the use, management and disposal of, and human exposure to, hazardous and toxic substances. If we fail to comply with such laws, or if the properties we own, operate or use for disposal are contaminated by such substances, we may be subject to risks associated with environmental hazards. Under various laws, owners as well as tenantspenalties or other corrective action requirements and operators of real estate may be requiredliabilities, including the costs to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances.remediate such contamination. These laws also expose us to the possibility that we may become liable to government agencies orclaims by third parties for costs and damages they may incur in connection with hazardous substances. Under our leases with SNH, we have agreed to indemnify SNH for any environmental liabilities it incurssubstances related to the properties on which our senior living communities thatactivities and properties. If we lease from SNH are located. The costs and damages that may arise fromexperience these environmental hazards are difficult to assess and estimate for numerous reasons, including uncertainty about the extent of contamination, alternative treatment methods that may be applied, the location of the property which subjects it to differing local laws and regulations and their interpretations, as well as the time it may take to remediate contamination. In addition, these laws also impose various requirements regarding the operation and maintenance of properties and record keeping and reporting requirements relating to environmental matters that require us to incur costs to comply with.
We may incur substantial liabilities and costs, for environmental matters.they could have a material impact on our operating results and financial condition.
Our operations are subject to risks from adverse weather and climate events.
Severe weather may have an adverse effect on certain senior living communities we operate. Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires have had and may have in the future an adverse effect on senior living communities we operate and result in significant losses to us and interruption of our business. When major weather or climate-related events such as hurricanes, floods and wildfires, occur near our senior living communities, we may relocate the residents at ourof those senior living communities to alternative locations for their safety and close or limit the operations of the impacted senior living communitycommunities until the event has ended and the senior living community is then ready for operation. We may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our senior living communities in anticipation of, during, and after a severe weather or climate-related event and in terms of potential lost business due to the interruption in operating our senior living communities. Our insurance may not adequately compensate us for these costs and losses.
Further, concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long term,long-term, we believe any such increased operating costs will be passed through and paid by our residents and other customers in the form of higher charges for our services. However, in the short term,short-term, these increased costs, if material in amount, could materially and adversely affect our financial condition and results of operations and cause the value of our securities to decline.
Our former rehabilitation hospitals may be subject to retroactive Medicare reclassifications or repayments.
During the period we operated our rehabilitation hospitals, which were sold in the fourth quarter of 2013, Medicare payments accounted for a significant amount of the rehabilitation hospitals’ revenues. CMS has established a standard known as the “60% Rule”, which provides that at least 60% of an inpatient rehabilitation facility’s, or IRF’s, total inpatient population must require intensive rehabilitation services associated with treatment of at least one of thirteen designated medical conditions in order for the facility to be classified as an IRF by the Medicare program. Although we believe that our IRFs were operated in compliance with the 60% Rule during the period in which we operated them, CMS could determine that we were non‑compliant in a prior year. Such an event would result in these rehabilitation hospitals being subject to Medicare reclassification to a different type of provider and our receiving lower Medicare payment rates retroactively. Also, retroactive audits of Medicare claims submitted by IRFs and other providers are expanding, and CMS is recouping amounts paid for services determined by auditors not to have been medically necessary or not to meet Medicare criteria for coverage as billed. If our IRFs were required to make substantial retroactive repayments to Medicare, our financial condition and results of operations could be adversely affected.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or our internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and our internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we cannot be surethat our disclosure controls and procedures and internal control over financial reporting will be effective in accomplishing all
control objectives all of the time. Deficiencies, including any material weaknesses, in our disclosure controls and procedures or internal control over financial reporting could result in misstatements of our results of operations or our financial statements or could otherwise materially and adversely affect our business, reputation, results of operations, financial condition or liquidity.
Changes in lease accounting standards may materially and adversely affect us.
The Financial Accounting Standards Board, or FASB, adopted new accounting rules that are effective for reporting periods beginning after December 2018, which require companies to capitalize long term leases on their balance sheets by recognizing lessees’ rights and obligations. Since January 1, 2019, we are now required to account for the leases forgeographic concentration of our senior living communities exposes us to changes in market conditions in those areas.
We have a high concentration of senior living communities in certain geographic areas, including those with SNH, in the assetsFlorida, North Carolina, South Carolina, Georgia, Texas and liabilities on our balance sheet, where previously we accounted for such leases on an “off balance sheet” basis. Indiana. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations, acts of nature and other factors that may result in a significant amount of lease related assets and liabilities are recordeddecrease in demand for our services in these states could have an adverse effect on our balance sheetrevenues, results of operations and cash flow. In addition, we are particularly susceptible to revenue loss, cost increases or damage caused by severe weather conditions or natural disasters such as hurricanes, wildfires, earthquakes or tornadoes in those areas.
Widespread illnesses due to a severe cold or flu season or a pandemic (like COVID-19) could adversely affect the occupancy of our senior living communities.
Our revenues are dependent on occupancy at our senior living communities. If a severe cold or flu season, an epidemic or any other widespread illnesses, like COVID-19, were to occur in locations where our senior living communities are located, our revenues from those communities would likely be significantly adversely impacted. During such occasions, we may experience a decline in occupancy due to residents leaving our communities and, we may be required, or we may otherwise determine that it would be prudent, to makequarantine some or all of the senior living community and not permit new residents during that time. Further, depending on the severity of the occurrence, we may be required to incur costs to identify, contain and remedy the impacts of those occurrences at those senior living communities. As a result, these occurrences could significantly adversely affect our results of operations.
The benefits we have realized and may continue to realize from participating in relief programs provided under the CARES Act may not be sufficient to enable us to withstand the current economic conditions and any extended economic downturn or recession which may result from the Pandemic.
We have received funds under the CARES Act, and have benefited from other changesrelief measures pursuant to the recordingCARES Act and classificationother government stimulus, including the deferral of employer payroll taxes. Receipt of additional government funds and other benefits from the CARES Act is subject to, in certain circumstances, a detailed application and approval process and it is unclear whether we will meet any eligibility requirements, receive any funds and the extent to which these funds may offset our lease related expenses. ThoughPandemic-related cash flow disruptions. Additionally, retaining these changes dofunds subjects us to various terms and conditions. While we have taken steps to ensure compliance with these terms and conditions, any violation may trigger repayment of some or all of the funds received. Further, funds we have received or may receive, either directly through participation in government programs, or indirectly through increased revenues attributable to a possible economic recovery generated in whole or in part by the CARES Act, may not have any directbe sufficient to mitigate the impact on our overall financial condition, these changes could cause investors or others to believe that we are highly leveraged and could changeof the calculationsPandemic.
Risks Arising From Certain of financial metrics and covenants, as well as third party financial models regarding our financial condition.Our Relationships
RISKS ARISING FROM CERTAIN OF OUR RELATIONSHIPS AND OUR ORGANIZATION AND STRUCTURE
Our agreements and relationships with SNH,DHC, one of our Managing Directors, RMR LLC and others related to them may create conflicts of interest or the perception of such conflicts of interest.
We have significant commercial and other relationships with SNH,DHC, the Chair of our Board who is also one of our Managing Directors, Adam D. Portnoy, RMR LLC and others related to them, including:
The
•the substantial majority of the senior living communities that we operate are owned by SNHDHC and our business is substantially dependent upon our relationship with SNH;DHC;
SNH•DHC owned 8.3%33.7% of our outstanding common shares as of December 31, 2018;2020;
•RMR LLC a subsidiary of RMR Inc., provides management services to us and SNHDHC and we pay RMR LLC fees for those services based on a percentage of revenues, as defined under our business management agreement with RMR LLC. In the event of a conflict between us and SNHDHC or us and RMR LLC, any of its affiliates or any public entity RMR LLC or its subsidiaries provide management services to, RMR LLC may not act on its own and SNH’s or such other entity’s behalf rather than on our behalf;
One of our Managing Directors, •Adam D. Portnoy, is also the chair of the board of trustees and a managing trustee of DHC, is a managing director, an officer and employee and, as the sole trustee of ABP Trust, the controlling shareholder of RMR Inc., and is an officer of, and through ABP Trust owns equity interests in, RMR LLC. RMR Inc. is the managing member of RMR LLC;
One of our Managing Directors, •Adam D. Portnoy is our largest stockholder and beneficially owned, in aggregate, approximately 35.7%6.2% of our outstanding common shares and 1.1% of SNH'sDHC's outstanding common shares, in each case as of December 31, 2018;2020;
Our•our President and Chief Executive Officer, Katherine E. Potter, and our Executive Vice President, Chief Financial Officer and Treasurer, Richard A. Doyle,Jeffrey C. Leer, are also officers and employees of RMR LLC, as are SNH’s presidentLLC;
•our other Managing Director and chief operatingSecretary, Jennifer B. Clark, is a managing trustee and secretary of DHC and a managing director and officer of RMR Inc. and an officer and chief financial officer and treasurer;employee of RMR LLC;
Prior to December 31, 2001, we were a wholly owned subsidiary of SNH. On that date, SNH distributed substantially all of •our then outstanding common shares it owned to its shareholders. In connection with that distribution, we entered agreements with SNHDHC and RMR LLC which, among other things, limit (subject to certain exceptions) ownership of more than 9.8% of our voting shares, restrict our ability to take any action that could jeopardize the tax status of SNHDHC as a real estate investment trust and limit our ability to acquire real estate of types which are owned by SNHDHC or other businesses managed by RMR LLC; and
We•we lease our officecorporate headquarters building from a subsidiary of ABP Trust;Trust, the controlling shareholder of RMR Inc.
We, SNH, ABP Trust and four other companies to which RMR LLC provides management services currently own AIC, are parties to a shareholders agreement regarding AIC and participate in AIC’s property insurance program.
These multiple responsibilities, relationships and cross ownerships could create competition for the time and efforts of RMR LLC, Adam Portnoyour Managing Directors and other RMR LLC personnel, including our executive officers, and give rise to conflicts of interest, or the perception of such conflicts of interest with respect to matters involving us, RMR Inc., RMR LLC, our Managing Directors, the other companies to which RMR LLC or its subsidiaries provide management services and their related parties. Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our reputation,
business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.
As a result of these relationships, our leases and management and pooling agreements with SNH,the New Management Agreements, business management agreement with RMR LLC and other transactions with SNH,DHC, our Managing Director, RMR LLC and others related to them were not negotiated on an arm’s lengtharm’s-length basis between unrelated third parties, and therefore, while certain of these agreements were negotiated with the use of a special committee and approved by our disinterested directors after receipt of a fairness opinion, the terms thereof may not be as favorable to us as they would have been if they weredifferent from those negotiated on an arm’s lengtharm’s-length basis between unrelated third parties. In the past, in particular, following periods of volatility in the overall market or declines in the market price of a company’s securities, stockholdershareholder litigation, dissident stockholdershareholder director nominations and dissident stockholdershareholder proposals have often been instituted against companies alleging conflicts of interest, in business dealings with affiliated and related persons and entities. These activities, if instituted against us, and the existence of conflicts of interest or the perception of conflicts of interest could result in substantial costs and diversion of our management’s attention and could have a material adverse impact on our reputation, business and the market price of our common shares.
The substantial majority of the senior living communities that we operate are owned by SNH and our business is substantially dependent on our relationship with SNH.
Of the 284 senior living communities we operate, 260 are owned by SNH. We lease 184 of these properties pursuant to five long term leases with SNH and we manage 76 of these senior living communities pursuant to long term management agreements and pooling agreements with SNH. For the year ended December 31, 2018, $983 million, or 90%, of our senior living revenue and all of our management fee revenue and reimbursed costs incurred on behalf of managed communities revenue were recognized in respect of SNH owned properties that we operate.
SNH may terminate our leases, management agreements and pooling agreements in certain circumstances, including if SNH does not receive certain annual minimum returns on the subject properties or for our uncured material breach. Our business is substantially dependent upon our continued relationship with SNH.The loss of our leases, management agreements or pooling agreements with SNH, or a material change to their terms, could have a material adverse effect on our business, financial condition or results of operations. See also “—Risk Factors—We may default our lease obligations” in this Annual Report on Form 10-K.
Adam Portnoy, the sole trustee of ABP Trust, beneficiallyDHC owns in aggregate, 35.7%33.7% of our outstanding common shares. As a result, investors in our securities may have less influence over our business than shareholders of other publicly owned companies.traded companies and trading in our shares may be difficult.
As of the date of this Annual Report on Form 10-K, Adam Portnoy beneficiallyDHC owns in aggregate, 35.7%33.7% of our outstanding common shares.
For so long as Adam Portnoy and the entities he controls continue to retainDHC retains a significant ownership stake in us, he mayit will have a significant influence in the election of the members of our Board, of Directors, including our Independent Directors, and the outcome of stockholdershareholder actions. As a result, theyDHC may have the ability to significantly impact all matters affecting us, including:
•the composition of our Board of Directors;Board;
through our Board of Directors, determinations with respect to our management, business and investments generally, including with respect to our acquisition and disposition of assets, financing activities and plans, capital structure, distributions on our common shares, corporate policies and the appointment and removal of our officers, among others;
•determinations with respect to mergers and other business combinations; and
•the number of common shares available for issuance under our equity compensation plan.
In addition, the significant ownership of our common shares by DHC and Adam D. Portnoy and the entities controlled by him and SNH in us may discourage transactions involving a change of control of us, including transactions in which our stockholdersshareholders might otherwise receive a premium for their common shares over the then current market price.
As a result of the
DHC's large ownership positions of Adam Portnoy and SNH, trading in our common shares may be more difficult.
As of the date of this Annual Report on Form 10-K, Adam Portnoy beneficially owned, in aggregate, 35.7% of our outstanding common shares and SNH owned 8.3% of our outstanding common shares. These large shareholdings, some of which are subject to lock-up restrictions, reduceshareholding also reduces the number of our common shares that might otherwise be available to trade publicly, which could adversely affect the liquidity and market price of our common shares.
Risks Related to Ownership of Our Securities
Ownership limitations and certain provisions in our charter, bylaws and certain material agreements, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals.
Our charter and bylaws contain separate provisions whichthat prohibit any stockholdershareholder from owning more than 9.8% and 5% of the number or value of any class or series of our outstanding shares of stock. Thestock, respectively. Our charter's 9.8% ownership limitation in our charter is consistent with our contractual obligation with SNHDHC not to not take actions that may conflict with SNH’sDHC’s status as a real estate investment trust under the IRC. The 5% ownership limitation in our bylaws or our NOL bylaw, is intended to help us preserve the tax treatment of ourany net operating losses and other tax benefits.benefits we may have from time to time. We also believe these provisions promote good orderly governance. These provisions inhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a stockholdershareholder may consider favorable.
In October 2016, our Board of Directors granted a conditional exception from certain ownership limitations under our organizational documents that allowed ABP Acquisition LLC, a wholly owned subsidiary of ABP Trust, to acquire 17,999,999 common shares in November 2016. Based on our Board of Directors’ desire to continue to preserve the tax treatment of our net operating losses and other tax benefits, the acquisition by ABP Acquisition LLC will reduce the size of any future acquisition that our Board of Directors may be prepared to approve for purposes of our NOL bylaw.
Other provisions contained in our charter and bylaws or under Maryland law may also inhibit acquisitions of a significant stake in us and deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a stockholdershareholder may consider favorable, including, for example, provisions relating to:
•the division of our Directors into three classes, with the term of one class expiring each year, which could delay a change of control of us;year;
stockholder•shareholder voting rights and standards for the election of Directors and other provisions which require larger majorities for approval of actions which are not approved by our Board of Directors than for actions which are approved by our BoardBoard;
•the authority of our Board, of Directors, and not our stockholders,shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Directors;Board;
•required qualifications for an individual to serve as a Director and a requirement that certain of our Directors be “Independent Directors” and other Directors be “Managing Directors”, as defined in our bylaws;
•limitations on the ability of our stockholdersshareholders to propose nominees for election as Directors and propose other business to be considered at a meeting of stockholders;shareholders;
•certain procedural and informational requirements applicable to stockholdersshareholders requesting that a special meeting be called;
•limitations on the ability of our stockholdersshareholders to remove our Directors;
•the authority of our Board of Directors to create and issue new classes or series of stockshares (including stockshares with voting rights and other rights and privileges that may deter a change in control) and issue additional common shares;
•restrictions on business combinations between us and an interested stockholdershareholder that have not first been approved by our Board of Directors (including a majority of Directors not related to the interested stockholder)shareholder); and
•the authority of our Board, of Directors, without stockholdershareholder approval, to implement certain takeover defenses.
In addition, our shareholders agreement with respect to AIC provides that AIC and the other shareholders of AIC may have rights to acquire our interests in AICAs changes occur in the event that anyone acquires more than 9.8% of our sharesmarketplace for corporate governance policies, the above provisions may change or we experience some other change in control. The terms of our leases andbe removed, or new provisions may be added.
Our management agreements with SNHDHC provide that our rights under thesethose agreements may be cancelled by SNHDHC upon the acquisition by any person or group of more than 9.8% of our voting stock,shares, and upon other change in control events, as defined in those documents, including in certain of the leases and management agreements, the adoption of any proposal (other than a precatory proposal) or the election to our Board of Directors of any individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a majority of our Directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual. In addition, a change in control event of us, including upon the acquisition by any person or group of more than 35% of our voting stock,shares, is a default under our credit agreement, unless approved by our lenders.
Our ownership interest in AIC may prevent stockholders from accumulating a large stake in us, from nominating or serving as our Directors, or from taking actions to otherwise control our business.
As an owner of AIC, we are licensed and approved as an insurance holding company, and any stockholder who owns or controls 10% or more of our securities or anyone who wishes to solicit proxies for election of, or to serve as, one of our Directors or for another proposal of business not approved by our Board of Directors may be required to receive pre-clearance from the concerned insurance regulators. These pre-approval procedures may discourage or prevent investors from purchasing our securities, from nominating persons to serve as our Directors or from taking other actions.
Our rights and the rights of our stockholdersshareholders to take action against our Directors and officers are limited.
Our charter limits the liability of our Directors and officers to us and our stockholdersshareholders for moneymonetary damages to the maximum extent permitted under Maryland law. Under current Maryland law, our Directors and officers will not have any liability to us and our stockholdersshareholders for money damages other than liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•active and deliberate dishonesty by such Director or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our charter and contractual obligations authorize and may require us to indemnify, to the maximum extent permitted by Maryland law, any present or former Director or officer for actions taken by them in those and other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our stockholdersshareholders may have more limited rights against our present and former Directors and officers than might otherwise exist absent the provisions in our charter and contracts or that might exist with other companies, which could limit our stockholdersshareholders’ recourse in the event of actions not in their best interest.
StockholderShareholder litigation against us or our Directors, officers, manager, other agents or employees may be referred to mandatory arbitration proceedings, which follow different procedures than in-court litigation and may be more restrictive to stockholdersshareholders asserting claims than in-court litigation.
Our stockholdersshareholders agree, by virtue of becoming stockholders,shareholders, that they are bound by our governing documents, including the arbitration provisions of our bylaws, as they may be amended from time to time. Our bylaws provide that certain actions by one or more of our stockholdersshareholders against us or any of our Directors, officers, manager, other agents or employees, other than disputes, or any portion thereof, regarding the meaning, interpretation or validity of any provision of our charter or
bylaws, will be referred to mandatory, binding and final arbitration proceedings if we, or any other party to such dispute, including any of our Directors, officers, manager, other agents or employees, unilaterally so demands. As a result, we and our stockholdersshareholders would not be able to pursue litigation in state or federal court against us or our Directors, officers, manager, other agents or employees, including, for example, claims alleging violations of federal securities laws or breach of fiduciary duties or similar director or officer duties under Maryland law, if we or any of our Directors, officers, manager, other parties or employees, against whom the claim is made unilaterally demands the matter be resolved by arbitration. Instead, our stockholdersshareholders would be required to pursue such claims through binding and final arbitration.
Our bylaws provide that such arbitration proceedings would be conducted in accordance with the procedures of the Commercial Arbitration Rules of the American Arbitration Association, as modified by our bylaws. These procedures may provide materially more limited rights to our stockholdersshareholders than litigation in a federal or state court. For example, arbitration in accordance with these procedures does not include the opportunity for a jury trial, document discovery is limited, arbitration hearings generally are not open to the public, there are no witness depositions in advance of arbitration hearings and arbitrators may have different qualifications or experiences than judges. In addition, although our bylaws’ arbitration provisions contemplate that arbitration may be brought in a representative capacity or on behalf of a class of our stockholders,shareholders, the rules governing such representation or class arbitration may be different from, and less favorable to, stockholdersshareholders than the rules governing representative or class action litigation in courts. Our bylaws also generally provide that each party to such an arbitration is required to bear their own costs in the arbitration, including attorneys’ fees, and that the arbitrators may not render an award that includes shifting of such costs or, in a derivative or class proceeding, award any portion of our award to any stockholdershareholder or such stockholder’sshareholder’s attorneys. The arbitration provisions of our bylaws may discourage our stockholdersshareholders from bringing, and attorneys from agreeing to represent our stockholdersshareholders wishing to bring, litigation against us or our Directors, officers, manager, other agents or employees. Our agreements with RMR LLC and SNHDHC have similar arbitration provisions to those in our bylaws.
We believe that the arbitration provisions in our bylaws are enforceable under both state and federal law, including with respect to federal securities laws claims. We are a Maryland corporation and Maryland courts have upheld the enforceability of arbitration bylaws. In addition, the United StatesU.S. Supreme Court has repeatedly upheld agreements to arbitrate other federal statutory claims, including those that implicate important federal policies. However, some academics, legal practitioners and others are of the view that charter or bylaw provisions mandating arbitration are not enforceable with respect to federal securities laws claims. It is possible that the arbitration provisions of our bylaws may ultimately be determined to be unenforceable.
By agreeing to the arbitration provisions of our bylaws, stockholdersshareholders will not be deemed to have waived compliance by us with federal securities laws and the rules and regulations thereunder.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders,shareholders, which could limit our stockholders’shareholders’ ability to obtain a favorable judicial forum they deem favorable for disputes with us or our Directors, officers, manager, agents or employees.
Our bylaws currently provide that, unless the dispute has been referred to binding arbitration, the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim for breach of a fiduciary duty owed by any Director, officer, manager, agent or employee of ours to us or our stockholders;shareholders; (3) any action asserting a claim against us or any Director, officer, manager, agent or employee of ours arising pursuant to Maryland law, our charter or bylaws brought by or on behalf of a stockholder,shareholder, either on his, her or its own behalf, on our behalf or on behalf of any series or class of our shares of stock of ours or by stockholdersshareholders against us or any Director, officer, agent, or employee of our Directors, officers, agents, employees,ours, or our manager, including any disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of the charter or bylaws; or (4) any action asserting a claim against us or any Director, officer, agent, employee, or manager of ours that is governed by the internal affairs doctrine. Our bylaws currently also provide that the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for any dispute, or portion thereof, regarding the meaning, interpretation or validity of any provision of our charter or bylaws. The exclusive forum provision of our bylaws does not apply to any action for which the Circuit Court for Baltimore City, Maryland does not have jurisdiction or to a dispute that has been referred to binding arbitration in accordance with our bylaws. The exclusive forum provision of our bylaws does not establish exclusive jurisdiction in the Circuit Court for Baltimore City, Maryland for claims that arise under the Securities Act of 1933, as amended, the Exchange Act or other federal securities laws if there is exclusive or concurrent jurisdiction in the federal courts. Any person or entity purchasing or otherwise acquiring or holding any interest in our common shares shall be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. The arbitration and exclusive forum provisions of our bylaws may limit a stockholder’sshareholder’s ability to bring a claim in a judicial forum that the stockholdershareholder believes is favorable for disputes with us or our Directors, officers, agents, employees, or our manager, which may discourage lawsuits against us and our Directors, officers, agents, employees or our manager.
We may experience losses from our business dealings with AIC.
expanding our relationship with AIC to other types of insurance. Our principal reason for investing in AIC and for purchasing insurance in these programs is to seek to improve our financial results by obtaining improved insurance coverage at lower costs than may be otherwise available to us or by participating in any profits which we may realize as an owner of AIC. While we believe we have in the past benefitted from these arrangements, these beneficial financial results may not occur in the future, and we may need to invest additional capital in order to continue to pursue these results. AIC’s business involves the risks typical of an insurance business, including the risk that it may not operate profitably. Accordingly, financial benefits from our business dealings with AIC may not be achieved in the future, and we may experience losses from these dealings.
RISKS RELATED TO OUR SECURITIES
If we become insolvent or fail to continue as a going concern, our securities may become worthless.
As noted elsewhere in this Annual Report on Form 10-K, we have incurred operating losses in each of our past three fiscal years, we had an accumulated deficit of $292.6 million as of December 31, 2018 and we had net negative cash flows from operations of $54.2 million for the year ended December 31, 2018. In addition, we have determined that there is a substantial doubt about our ability to continue as a going concern. If we become insolvent or fail to continue as a going concern, our securities may become worthless.
Any future equity issuances we may make may significantly dilute our stockholders’ equity interests.
The trading price of our common shares is currently well below the historical trading prices for our common shares. If we issue additional common shares at or near current trading price levels, our pre-existing stockholders, especially our long term stockholders, may experience significant dilution of their equity interests. As noted elsewhere in this Annual Report on Form 10-K, we have determined that there is a substantial doubt about our ability to continue as a going concern. We are considering possible alternatives to improve our current operating and financial condition, including possible options to reduce operating leverage. To the extent we issue additional common shares as part of a transaction or other arrangement in an attempt to improve our current operating and financial condition, our existing shareholders’ equity interests may be significantly diluted.
We are not currently in compliance with the minimum bid price continued listing standard of The Nasdaq Stock Market LLC, or Nasdaq. If our common shares continue to trade below $1.00 per share for a sustained period, or we fail to meet other Nasdaq continued listing standards, Nasdaq may determine to delist our common shares, which could negatively impact the market price and liquidity of our common shares and reduce our ability to raise additional capital.
On October 22, 2018, we received a notification letter from Nasdaq informing us that, for the prior 30 consecutive business days, the bid price of our common shares had closed below $1.00 per common share, which is the minimum required closing bid price for continued listing on Nasdaq pursuant to Listing Rule 5550(a)(2). Under Nasdaq Listing Rule 5810(c)(3)(A), we have a 180 calendar day grace period, or until April 22, 2019, to regain compliance with the minimum bid price continued listing standard. To regain compliance, the closing bid price of our common shares must meet or exceed $1.00 per common share for a minimum of 10 consecutive business days during the 180 calendar day grace period. If we are not in compliance by April 22, 2019, we may be afforded a second 180 calendar day grace period. To qualify for this additional grace period, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq with the exception of the minimum bid price requirement. If we do not regain compliance within the allotted period(s), including any extensions that we may receive, Nasdaq will provide notice that our common shares will be subject to delisting.
We are monitoring the bid price of our common shares and are considering options available to us to achieve compliance with the minimum bid price continued listing standard; however, we cannot be sure that we will be able to regain and/or maintain compliance with this listing standard or that we will otherwise be in compliance with other Nasdaq listing standards. If we fail to regain and/or maintain compliance with the minimum bid price requirement or to meet other applicable continued listing standards of Nasdaq in the future, and Nasdaq determines to delist our common shares, the market price and liquidity of our common shares could be negatively impacted and our ability to raise additional capital could be reduced.
We do not intend to pay cash dividends on our common shares in the foreseeable future.
We have never declared or paid any cash dividends on our common shares, and we currently do not anticipate paying any cash dividends in the foreseeable future.
Changes in market conditions could adversely affect the value of our securities.
As with other publicly traded securities, the value of our securities depends on various market conditions and other factors that are subject to change from time to time, including:
the extent of investor interest in our securities;
the liquidity of the market for our securities;
investor confidence in the stock markets, generally;
changes in our operating results;
changes in analysts’ expectations;
market interest rates;
national economic conditions; and
general market conditions.
In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuations may also cause the value of our securities to decline. Stockholders may be unable to resell our common shares at or above the price at which they purchased our common shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
OUR SENIOR LIVING COMMUNITIESOur Senior Living Communities
We classify a senior living community based on the predominant type of services offered at that community. As of December 31, 2018,2020, we owned, leased or leased and operated 208managed 252 senior living communities which we have categorized into two groups as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Type of units | | | | Average
occupancy for
the year ended
Dec. 31, 2018 | | Revenues for
the year ended
Dec. 31, 2018 | | Percent of revenues from private resources |
| Type of community | | No. of communities | | Indep. living apts. | | Assist. living suites | | Skilled nursing beds | | Total living units | | | |
| Independent and assisted living communities | | 179 |
| | 6,742 |
| | 11,127 |
| | 1,876 |
| | 19,745 |
| | 82.7 | % | | $ | 892,412 |
| | 88.1 | % |
| SNFs | | 29 |
| | 76 |
| | — |
| | 2,429 |
| | 2,505 |
| | 76.3 | % | | 164,234 |
| | 21.0 | % |
| Totals: | | 208 |
| | 6,818 |
| | 11,127 |
| | 4,305 |
| | 22,250 |
| | 82.0 | % | | $ | 1,056,646 |
| | 77.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | No. of
Communities | | Type of Units | | | | Average
Occupancy | | Spot Occupancy(4) | | Revenues (5)(6) | | Percent of
Revenues
from Private
Resources |
| Operation Type | | | Indep. Living (2)(3) | | Assisted Living (2) | | Memory Care (1)(2) | | | | Skilled Nursing (2) | | Total
Units | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Owned | | 20 | | | 564 | | | 1,264 | | | 270 | | | | | — | | | 2,098 | | | 76.7% | | 70.2% | | $ | 67,637 | | | 98.9% |
| Leased | | 4 | | | — | | | 177 | | | 27 | | | | | — | | | 204 | | | 74.0% | | 64.2% | | 9,378 | | | 93.1% |
Managed (7) | | 228 | | | 10,418 | | | 10,671 | | | 2,923 | | | | | 2,957 | | | 26,969 | | | 77.2% | | 70.8% | | 1,204,811 | | | 85.6% |
| Total | | 252 | | | 10,982 | | | 12,112 | | | 3,220 | | | | | 2,957 | | | 29,271 | | | 77.2% | | 70.7% | | $ | 1,281,826 | | | 86.3% |
(1) Memory Care units are shown above separately; however, they typically are part of an assisted living community or CCRC and not a stand alone building or community.
(2) Includes 37 CCRCs that we manage on behalf of DHC, which includes independent living units (4,309 units), assisted living units (1,868 units), SNF units (2,055 units) and in certain instances memory care units (342 units).
Excluded(3) Included in the managed units are 53 independent living units that are located in SNF's.
(4) As of December 31, 2020.
(5) Data excludes $82.0 million of revenue from the preceding dataAgeility rehabilitation and the data belowwellness services clinics as well as $21.8 million of income received under the above heading "Our Senior Living Communities" are 76Provider Relief Fund of the CARES Act, related to our independent and assisted living communities with 4,077 independentand rehabilitation and wellness services clinics.
(6) Represents the revenues of the senior living apartments, 5,262 assisted living suitescommunities we own and 427 SNF units thatlease as well as those we manage for the account of SNH. DHC. Managed senior living communities' revenues does not represent our revenues and is included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.
Independent and Assisted Living Communities(7) Includes one active adult community with 167 independent living units.
As of December 31, 2018,2020, we operated, owned, or leased and operated 179 independent and assistedmanaged 252 senior living communities.communities located in 31 states. We owned 20 communities, leased 155 of thesefour communities from SNH and four of these communities from HCP,Healthpeak Properties, Inc., or HCP,PEAK, and owned the remaining 20 communities. These 179managed 228 communities have a combined 19,745 living unitson behalf of DHC.
Rehabilitation and are located in 26 states. The following table provides additional information about these communities and their operations as of December 31, 2018 (dollars in thousands):Wellness Services Clinics
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Type of units | | | | Average
occupancy for
the year ended
Dec. 31, 2018 | | Revenues for
the year ended
Dec. 31, 2018 | | Percent of revenues from private resources |
| Location | | No. of communities | | Indep. living apts. | | Assist. living suites | | Skilled nursing beds | | Total living units | | | |
| 1. Alabama | | 7 |
| | — |
| | 325 |
| | — |
| | 325 |
| | 85.7 | % | | $ | 12,011 |
| | 100.0 | % |
| 2. Arizona | | 3 |
| | 460 |
| | 220 |
| | 199 |
| | 879 |
| | 77.1 | % | | 37,188 |
| | 82.6 | % |
| 3. California | | 9 |
| | 490 |
| | 424 |
| | 59 |
| | 973 |
| | 86.0 | % | | 49,285 |
| | 90.2 | % |
| 4. Delaware | | 6 |
| | 337 |
| | 295 |
| | 356 |
| | 988 |
| | 74.8 | % | | 59,027 |
| | 72.0 | % |
| 5. Florida | | 9 |
| | 1,173 |
| | 723 |
| | 155 |
| | 2,051 |
| | 93.2 | % | | 88,088 |
| | 83.1 | % |
| 6. Georgia | | 11 |
| | 111 |
| | 527 |
| | 40 |
| | 678 |
| | 81.8 | % | | 25,943 |
| | 94.2 | % |
| 7. Illinois | | 4 |
| | 112 |
| | 199 |
| | — |
| | 311 |
| | 91.9 | % | | 10,076 |
| | 100.0 | % |
| 8. Indiana | | 15 |
| | 933 |
| | 485 |
| | 140 |
| | 1,558 |
| | 78.4 | % | | 56,259 |
| | 91.2 | % |
| 9. Kansas | | 3 |
| | 332 |
| | 67 |
| | 158 |
| | 557 |
| | 83.1 | % | | 28,853 |
| | 73.1 | % |
| 10. Kentucky | | 9 |
| | 477 |
| | 291 |
| | 166 |
| | 934 |
| | 84.0 | % | | 44,108 |
| | 84.4 | % |
| 11. Maryland | | 10 |
| | 238 |
| | 708 |
| | — |
| | 946 |
| | 81.4 | % | | 56,021 |
| | 100.0 | % |
| 12. Massachusetts | | 1 |
| | — |
| | 123 |
| | — |
| | 123 |
| | 93.1 | % | | 8,917 |
| | 100.0 | % |
| 13. Minnesota | | 1 |
| | — |
| | 202 |
| | — |
| | 202 |
| | 76.1 | % | | 10,571 |
| | 90.1 | % |
| 14. Mississippi | | 2 |
| | — |
| | 116 |
| | — |
| | 116 |
| | 82.2 | % | | 3,628 |
| | 100.0 | % |
| 15. Missouri | | 1 |
| | 110 |
| | — |
| | — |
| | 110 |
| | 91.9 | % | | 2,676 |
| | 100.0 | % |
| 16. Nebraska | | 2 |
| | 27 |
| | 111 |
| | 62 |
| | 200 |
| | 84.6 | % | | 9,673 |
| | 59.4 | % |
| 17. New Jersey | | 5 |
| | 215 |
| | 544 |
| | 60 |
| | 819 |
| | 77.4 | % | | 38,373 |
| | 81.8 | % |
| 18. New Mexico | | 1 |
| | 112 |
| | 35 |
| | 57 |
| | 204 |
| | 79.9 | % | | 11,795 |
| | 87.3 | % |
| 19. North Carolina | | 15 |
| | 143 |
| | 1,296 |
| | — |
| | 1,439 |
| | 83.3 | % | | 69,546 |
| | 99.8 | % |
| 20. Ohio | | 1 |
| | 143 |
| | 115 |
| | 24 |
| | 282 |
| | 82.4 | % | | 16,213 |
| | 84.8 | % |
| 21. Pennsylvania | | 10 |
| | — |
| | 991 |
| | — |
| | 991 |
| | 80.6 | % | | 37,793 |
| | 100.0 | % |
| 22. South Carolina | | 18 |
| | 101 |
| | 887 |
| | 58 |
| | 1,046 |
| | 77.7 | % | | 42,666 |
| | 93.1 | % |
| 23. Tennessee | | 10 |
| | 7 |
| | 619 |
| | — |
| | 626 |
| | 88.2 | % | | 26,163 |
| | 100.0 | % |
| 24. Texas | | 9 |
| | 837 |
| | 610 |
| | 273 |
| | 1,720 |
| | 79.7 | % | | 82,826 |
| | 82.8 | % |
| 25. Virginia | | 11 |
| | 285 |
| | 696 |
| | — |
| | 981 |
| | 84.3 | % | | 36,467 |
| | 99.8 | % |
| 26. Wisconsin | | 6 |
| | 99 |
| | 518 |
| | 69 |
| | 686 |
| | 85.4 | % | | 28,246 |
| | 68.6 | % |
| Totals: | | 179 |
| | 6,742 |
| | 11,127 |
| | 1,876 |
| | 19,745 |
| | 82.7 | % | | $ | 892,412 |
| | 88.1 | % |
Skilled Nursing Facilities
As of December 31, 2018,2020, we operated 244 rehabilitation and wellness services clinics as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Clinic | | No. of Clinics (1) | | No. of
States | | Average Square Footage of Clinics (2) | | Revenues (3) | | Percentage of Revenues from Medicare and Medicaid (3) |
| Inpatient | | 37 | | 16 | | n/a | | $ | 25,724 | | | 16.1% |
| Outpatient | | 207 | | 28 | | 487 | | 54,969 | | | 66.2% |
| Total | | 244 | | 28 | | 487 | | $ | 80,693 | | | 50.2% |
(1) As of December 31, 2020, inpatient clinics provide rehabilitation and wellness services in 32 of our CCRCs and in 5 of our SNFs. As of December 31, 2020, 149 of our outpatient clinics were clinics within our senior living communities and 58 were clinics within senior living communities operated by other providers.
(2) Inpatient clinics operate under a service agreement with the senior living community and do not have dedicated clinic space.
(3) Data excludes $1.3 million of revenue from home healthcare services as well as income received under the Provider Relief Fund of the CARES Act, related to our rehabilitation and wellness services clinics.
We lease space from DHC at certain of the senior living communities that we manage for DHC to operate our outpatient Ageility clinics. The leased clinics from SNHDHC and operated 29 SNFsthose located within other senior living companies are typically leased for an initial period of one year and automatically renew for successive one year periods. The leases are generally terminable with a combined 2,505 living units that are located30 to 90 days' notice. The average rehabilitation and wellness services clinic is approximately 500 square feet. As of December 31, 2020, Ageility leased approximately 100,000 square feet in seven28 states.
Geographic Breakdown of Our Senior Living Communities and Rehabilitation and Wellness Services Clinics
The following table provides additionalsets forth certain information about these SNFsour owned, leased and their operationsmanaged senior living communities, as well as our inpatient and outpatient Ageility clinics, by state as of December 31, 20182020 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Type of units | | | | Average
occupancy for
the year ended
Dec. 31, 2018 | | Revenues for
the year ended
Dec. 31, 2018 | | Percent of revenues from private resources |
| Location | | No. of communities | | Indep. living apts. | | Assist living suites | | Skilled nursing beds | | Total living units | | | |
| 1. California | | 3 |
| | — |
| | — |
| | 278 |
| | 278 |
| | 77.7 | % | | $ | 26,226 |
| | 6.4 | % |
| 2. Colorado | | 7 |
| | 46 |
| | — |
| | 719 |
| | 765 |
| | 80.7 | % | | 57,156 |
| | 22.3 | % |
| 3. Iowa | | 4 |
| | 19 |
| | — |
| | 283 |
| | 302 |
| | 78.9 | % | | 17,224 |
| | 29.9 | % |
| 4. Kansas | | 1 |
| | 4 |
| | — |
| | 56 |
| | 60 |
| | 85.5 | % | | 3,824 |
| | 28.3 | % |
| 5. Nebraska | | 10 |
| | — |
| | — |
| | 602 |
| | 602 |
| | 76.6 | % | | 31,430 |
| | 22.5 | % |
| 6. Wisconsin | | 2 |
| | — |
| | — |
| | 309 |
| | 309 |
| | 59.2 | % | | 14,884 |
| | 23.0 | % |
| 7. Wyoming | | 2 |
| | 7 |
| | — |
| | 182 |
| | 189 |
| | 76.2 | % | | 13,490 |
| | 24.8 | % |
| Totals: | | 29 |
| | 76 |
| | — |
| | 2,429 |
| | 2,505 |
| | 76.3 | % | | $ | 164,234 |
| | 21.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Senior Living Communities | | Ageility Clinics | | |
| State | | Total Living Units (1) | | Average
Occupancy (1) | | Owned | | Leased | | Managed | | Total (1) | | Inpatient | | Outpatient | | Total | | Revenues (1)(2)(3)(4) |
| 1. Alabama | | 695 | | | 80.5% | | 2 | | | — | | | 8 | | | 10 | | | — | | — | | — | | $ | 25,014 | |
| 2. Arizona | | 1,146 | | | 78.2% | | — | | | — | | | 6 | | | 6 | | | 3 | | 9 | | 12 | | 53,055 | |
| 3. Arkansas | | 187 | | | 75.3% | | — | | | — | | | 3 | | | 3 | | | — | | — | | — | | 6,505 | |
| 4. California | | 908 | | | 81.9% | | — | | | — | | | 9 | | | 9 | | | 1 | | 1 | | 2 | | 55,097 | |
| 5. Colorado | | 1,005 | | | 68.8% | | — | | | — | | | 8 | | | 8 | | | 5 | | 1 | | 6 | | 66,028 | |
| 6. Delaware | | 988 | | | 68.0% | | — | | | — | | | 6 | | | 6 | | | 3 | | 6 | | 9 | | 55,761 | |
| 7. Florida | | 4,620 | | | 85.0% | | 1 | | | — | | | 19 | | | 20 | | | 7 | | 27 | | 34 | | 202,053 | |
| 8. Georgia | | 1,629 | | | 72.7% | | — | | | — | | | 22 | | | 22 | | | 1 | | 22 | | 23 | | 58,068 | |
| 9. Illinois | | 1,025 | | | 80.9% | | — | | | — | | | 11 | | | 11 | | | 1 | | 6 | | 7 | | 38,259 | |
| 10. Indiana | | 1,672 | | | 75.7% | | 5 | | | — | | | 11 | | | 16 | | | 2 | | 6 | | 8 | | 60,132 | |
| 11. Kansas | | 557 | | | 83.2% | | — | | | — | | | 3 | | | 3 | | | 2 | | 3 | | 5 | | 28,071 | |
| 12. Kentucky | | 934 | | | 82.6% | | — | | | — | | | 9 | | | 9 | | | 1 | | 3 | | 4 | | 43,517 | |
| 13. Maryland | | 1,281 | | | 71.7% | | — | | | ��� | | | 11 | | | 11 | | | — | | 9 | | 9 | | 71,605 | |
| 14. Massachusetts | | 123 | | | 87.2% | | — | | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 9,159 | |
| 15. Minnesota | | 188 | | | 53.9% | | — | | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 6,567 | |
| 16. Missouri | | 434 | | | 85.2% | | 1 | | | — | | | 5 | | | 6 | | | — | | 3 | | 3 | | 13,685 | |
| 17. Nebraska | | 69 | | | 73.0% | | — | | | — | | | 1 | | | 1 | | | — | | — | | — | | 8,333 | |
| 18. Nevada | | 287 | | | 91.9% | | — | | | — | | | 2 | | | 2 | | | — | | 2 | | 2 | | 14,468 | |
| 19. New Jersey | | 930 | | | 71.6% | | 2 | | | — | | | 3 | | | 5 | | | 1 | | 7 | | 8 | | 46,651 | |
| 20. New Mexico | | 204 | | | 77.1% | | — | | | — | | | 1 | | | 1 | | | 1 | | 1 | | 2 | | 11,129 | |
| 21. New York | | 310 | | | 80.3% | | — | | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 18,476 | |
| 22. North Carolina | | 1,905 | | | 78.1% | | 5 | | | — | | | 16 | | | 21 | | | — | | 27 | | 27 | | 93,769 | |
| 23. Ohio | | 282 | | | 77.7% | | — | | | — | | | 1 | | | 1 | | | 1 | | 1 | | 2 | | 16,292 | |
| 24. Oregon | | 318 | | | 65.1% | | — | | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 8,431 | |
| 25. Pennsylvania | | 808 | | | 64.3% | | 1 | | | — | | | 7 | | | 8 | | | — | | 7 | | 7 | | 32,111 | |
| 26. South Carolina | | 1,500 | | | 68.8% | | 1 | | | 4 | | | 16 | | | 21 | | | 2 | | 11 | | 13 | | 62,344 | |
| 27. Tennessee | | 1,015 | | | 81.9% | | 1 | | | — | | | 13 | | | 14 | | | — | | 8 | | 8 | | 38,684 | |
| 28. Texas | | 2,262 | | | 77.6% | | — | | | — | | | 13 | | | 13 | | | 5 | | 21 | | 26 | | 103,846 | |
| 29. Virginia | | 1,049 | | | 81.8% | | — | | | — | | | 11 | | | 11 | | | — | | 12 | | 12 | | 43,147 | |
| 30. Washington | | — | | | —% | | — | | | — | | | — | | | — | | | — | | 7 | | 7 | | 1,376 | |
| 31. Wisconsin | | 751 | | | 74.9% | | 1 | | | — | | | 7 | | | 8 | | | 1 | | 3 | | 4 | | 56,042 | |
| 32. Wyoming | | 189 | | | 69.0% | | — | | | — | | | 2 | | | 2 | | | — | | — | | — | | 14,101 | |
| Totals | | 29,271 | | | 77.2% | | 20 | | | 4 | | | 228 | | | 252 | | | 37 | | | 207 | | | 244 | | $ | 1,361,776 | |
(1) Includes owned, leased and managed senior living communities.
OUR LEASES AND MANAGEMENT AGREEMENTS WITH SNH(2) Data does not include revenue earned in the state of Mississippi of $2,056 and in the state of Iowa of $26, as the Mississippi and Iowa senior living communities were disposed of.
The following(3) Represents financial data of rehabilitation and wellness services clinics we operate and senior living communities we own, lease, and manage for the account of DHC. Managed senior living communities' data does not represent our financial results and is a summaryincluded to provide supplemental information regarding the operating results and financial condition of the material termssenior living communities from which we earn management fees.
(4) Data excludes $21.8 million of our leasesincome received under the Provider Relief Fund of the CARES Act and management agreements with SNH. For more information about the terms of our leases and management agreements with SNH andother governmental grants, related amounts, see Note 9 to our Consolidated Financial Statements included in Part IV, Item 15independent and assisted living communities and rehabilitation and wellness services clinics.
Our Leases and Management Agreements with DHC
Leases with SNH
As of December 31, 2018,2019, we had five master leases with SNH as follows:
|
| | | | | | | | | | |
| | Number of Properties | | Annual Rent as of December 31, 2018 | | Current Expiration Date | | Remaining Renewal Options |
| 1. Lease No. 1 for SNFs and independent and assisted living communities | 82 |
| | $ | 59.3 | million | | December 31, 2024 | | Two 15-year renewal options. |
| 2. Lease No. 2 for SNFs, independent and assisted living communities | 47 |
| | 67.0 | million | | June 30, 2026 | | Two 10-year renewal options. |
| 3. Lease No. 3 for independent and assisted living communities | 17 |
| | 36.0 | million | | December 31, 2028 | | Two 15-year renewal options. |
| 4. Lease No. 4 for SNFs and independent and assisted living communities | 29 |
| | 35.6 | million | | April 30, 2032 | | Two 15-year renewal options. |
| 5. Lease No. 5 for independent and assisted living communities | 9 |
| | 9.9 | million | | December 31, 2028 | | Two 15-year renewal options. |
| Totals | 184 |
| | $ | 207.8 | million | | | | |
Percentage Rent. Our leases with SNH require us to pay percentage rent at the senior living communities we lease from SNH equal to 4% of the amount by which gross revenues, as defined in our leases, of each property exceeds gross revenues for a specific base year, as defined in our leases. These amounts are in addition to the annual rent amounts payable by us to SNH. We incurred total percentage rent of $5.5 million in 2018. Different base years apply to those communities that pay percentage rent. The base year is usually the first full calendar year after each community is initially leased.
Operating Costs. Each lease is a “triple net” lease which requires us to pay all costs incurred in the operation of the properties, including the costs of maintenance, personnel, services to residents, insuranceDHC, and real estate and personal property taxes.
Rent During Renewal Term. For all of the properties we lease from SNH, rent during each applicable renewal term is determined in the same manner as the annual rent and percentage rent payable during the initial term.
Licenses. Our leases require us to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased properties.
Maintenance and Alterations. We are required to operate continuously and maintain, at our expense, the leased properties in good order and repair, including structural and non-structural components. We may request that SNH fund amounts needed for qualifying improvements to the leased communities in return for rent increases according to formulas in the leases; however, SNH is not obligated to fund such requests, and we are not required to sell them to SNH. At the end of each lease term, we are required to surrender the leased properties in substantially the same condition as existed on the commencement date of the lease, subject to any permitted alterations and ordinary wear and tear.
Assignment and Subletting. SNH’s consent is generally required for any direct or indirect assignment or sublease of any of the properties. Also, in the event of any assignment or subletting, we remain liable under the terms of the applicable lease.
Indemnification and Insurance. With limited exceptions, we are required to indemnify SNH from all liabilities which may arise from the ownership or operation of the leased properties. We generally are required to maintain insurance against such risks and in such amounts as SNH shall reasonably require and may be commercially reasonable. Each lease requires that SNH be named as an additional insured under these insurance policies.
Damage, Destruction, Condemnation and Environmental Matters. In the event of any damage or immaterial condemnation of a leased property, we are generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by SNH, if any, but if other amounts are made available by SNH, our rent will be increased accordingly. In the event of any material or total condemnation of a leased property, the lease shall terminate with respect to such leased property, in which event SNH shall be entitled to the condemnation proceeds and our rent will be reduced accordingly. In the event of any material or total destruction of a leased property, we may terminate the lease with respect to such leased property, in which event we are required to pay to SNH any shortfall in the amount of proceeds SNH receives from insurance compared to the replacement cost of such leased property and our rent will be reduced accordingly. We are also required to remove and dispose of any hazardous substance at the leased properties in compliance with all applicable environmental laws and regulations.
Events of Default. Events of default under each lease generally include the following:
our failure to pay rent or any money due under the lease when it is due, which failure continues for five business days;
our failure to maintain the insurance required under such lease;
any person or group acquiring ownership of 9.8% or more of our outstanding voting stock or any change in our control, the adoption of any stockholder proposal (other than a precatory proposal) or the election to our Board of Directors of any individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a majority of our Directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual;
the occurrence of certain events with respect to our insolvency or dissolution;
our default under indebtedness which gives the holder the right to accelerate our repayment of the indebtedness;
our being declared ineligible to receive reimbursement under Medicare or Medicaid programs for any of the leased properties which participate in such programs or the revocation of any material license required for our operations; and
our failure to perform any terms, covenants or agreements of such lease and the continuance thereof for a specified period of time after written notice.
Remedies. Upon the occurrence of any event of default, each lease provides that, among other things, SNH may, to the extent legally permitted:
accelerate the rent;
terminate the lease in whole or in part;
enter the property and take possession of any and all our personal property and retain or sell the same at a public or private sale;
make any payment or perform any act required to be performed by us under the lease; and
rent the property and recover from us any deficiency between the amount of rent which would have been due under the lease and the rent received from the re‑letting.
We are obligated to reimburse SNH for all costs and expenses incurred in connection with any exercise of the foregoing remedies.
Management. We may not enter any new management agreement affecting any leased property without the prior written consent of SNH.
Lease Subordination. Our leases may be subordinated to any mortgages on properties leased from SNH. As of December 31, 2018, none of our leases were subordinated to any mortgage notes.
Financing Limitations; Security. Our leases subject to mortgage financings of SNH require SNH’s consent before we incur debt secured by our investments in our tenant subsidiaries that lease or operate the properties subject to these leases. Further, our leases subject to mortgage financings prohibit our tenant subsidiaries from incurring liabilities, other than operating liabilities incurred in the ordinary course of business, secured by our accounts receivable or purchase money debt. We may pledge interests in our leases only if the pledge is approved by SNH.
Non‑Economic Circumstances. If we determine that continued operations of one or more properties is not economical, we may negotiate with SNH to close or sell that community, including SNH’s ownership in the property. In the event of such a sale, SNH receives the net proceeds and our rent for the remaining properties in the applicable lease is reduced according to formulas contained in the applicable lease.
Management Agreements with SNH
As of December 31, 2018, we managed 76 senior living communities for the account of SNH,DHC pursuant to long termlong-term management and pooling agreements. Effective January 1, 2020, we and DHC completed the Restructuring Transactions pursuant to which our five then existing master leases with DHC for all the senior living communities that we leased from DHC, as well as our then existing management and pooling agreements that combine various calculations of revenues and expenses from the operations of the communities covered by the applicable pooling agreement. Our management agreements with SNHDHC for the part of the senior living community owned by SNH and located in Yonkers, New York that is not subject to the requirements of New York healthcare licensing laws, and for the assisted living communities owned by SNH and located in Villa Valencia, California and Aurora, Colorado are not currently included in any of our pooling agreements with SNH. Pursuant to our management agreements with SNH for senior living communities that include assisted living unitswe managed for DHC, were terminated and replaced with the pooling agreements,New Management Agreements.
Pursuant to the New Management Agreements, we receive from SNH:
a management fee equal to either 3% or 5% of the gross revenues realized at the applicable senior living communities
plus reimbursement for our direct costs and expenses related to such communities. We also receive 3% of construction costs for construction projects we manage at the senior living communities
we manage. Commencing with the 2021 calendar year, we may receive an annual incentive fee equal to either 35% or 20%15% of the amount by which the annual EBITDA of all senior living communities on a combined basis exceeds the target EBITDA for all senior living communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all senior living communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual net operating income of such communities remaining after SNH realizes an annual minimum return equal to either 8% or 7% of its invested capital, or, in the case of certainincrease of the Consumer Price Index, or CPI, or 2%, plus 6% of any capital investments funded at the managed communities on a specified amount plus 7%combined basis in excess of its investedthe target capital since December 31, 2015, andinvestment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.
a feeThe New Management Agreements expire in 2034, subject to our right to extend them for our management of capital expenditure projects equal to 3% of amounts funded by SNH.
We also have a pooling agreement with SNH that combines our management agreements with SNHtwo consecutive five-year terms if we achieve certain performance targets for the combined managed senior living communities consisting only of independent living units.
Our management agreements with SNH generally expire between 2030 and 2042, and are subject to automatic renewal for two consecutive 15 year terms,portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. These management agreements alsoThe New Management Agreements provide that SNH has, and in some cases we have,DHC with the optionright to terminate any New Management Agreement for any community that does not earn 90% of the agreements upontarget EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the acquisition by a person or groupmeasurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided DHC may not in any calendar year terminate communities representing more than 9.8%20% of the other’s voting stock and upon certain change in control events affecting the other party, as defined in the applicable agreements, including the adoption of any stockholder proposal (other than a precatory proposal) with respect to the other party, or the election to the board of directors or trustees, as applicable, of the other party of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of the other party’s board of directors or board of trustees, as applicable, in office immediately prior to the making of such proposal or the nomination or appointment of such individual.
In November 2017, we entered a transaction agreement with SNH pursuant to which we agreed to sell six senior living communities to SNH. In December 2017, January 2018, February 2018 and June 2018, we sold to SNH these six senior living communities and, concurrently with those sales, we and SNH entered management agreementscombined revenues for each of these senior living communities and two new pooling agreements with terms substantially similar to our other management and pooling agreements with SNH, and we began managing theseall communities for the accountcalendar year prior to such termination. Pursuant to a guaranty agreement dated as of SNH.
AlsoJanuary 1, 2020, made by us in November 2017,favor of DHC’s applicable subsidiaries, we amended our preexisting pooling agreements with SNH, among other things, to provide that, with respect to SNH’s right to terminate allhave guaranteed the payment and performance of the management agreements covered by a preexisting pooling agreement if it does not receive its annual minimum return under such agreement in each of three consecutive years, the commencement year for the measurement period for determining whether the specified annual minimum returnour applicable subsidiary’s obligations under the applicable pooling agreement has been achieved will be 2017.New Management Agreements.
In June 2018, we began managing for the account of SNH, pursuant to a management agreement and our existing Pooling Agreement No. 12 with SNH, as amended and restated, a senior living community SNH owns located in California.
In November 2018, we began managing for the account of SNH pursuant to a management agreement with SNH, a senior living community SNH owns located in Colorado.
We currently operate 260 senior living communities under lease and management arrangements with SNH, or approximately 91.5% of the total communities we operate. In order to address the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH's independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with SNH will be agreed to or occur. In addition, we cannot
be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. Any changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
For more information regarding our historical leases and management arrangements with SNH,DHC, see Note 910 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information regarding our relationship with SNH,DHC, see Note 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Our corporate headquarters is located in Newton, Massachusetts, where we lease approximately 41,000 square feet of administrative office space from a subsidiary of ABP Trust. On February 24, 2021, we entered into an amendment to the lease which extends the lease through December 31, 2031, see Note 18 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. In addition, a copy of the Second Amendment to the Lease is included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information regarding our relationship with ABP Trust, see Note 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Item 3. Legal Proceedings
We are defendantsFor information regarding our legal proceedings, see Note 12 to our Consolidated Financial Statements included in two lawsuits filed by former employees in California. The first lawsuit, Lefevre v. Five Star Quality Care, Inc. was filed in San Bernardino County Superior Court in May 2015 and the second lawsuit, Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. was filed in Orange County Superior Court in July 2015. The claims asserted against us in the similar, though not identical, complaints include: (i) failure to pay all wages due, (ii) failure to pay overtime, (iii) failure to provide meal and rest breaks, (iv) failure to provide itemized, printed wage statements, (v) failure to keep accurate payroll records and (vi) failure to reimburse business expenses. Both plaintiffs assert causesPart IV, Item 15 of actionthis Annual Report on behalf of themselves and on behalf of other similarly situated employees, including causes of action pursuant to the California Labor Code Private Attorney General Act. We believe that the claims against us are without merit and intend to vigorously defend against them. The results of litigation are uncertain and entail risk of adverse outcomes, and litigation is usually expensive and can be distracting to management. We can provide no assurance as to the outcome of these lawsuits. Our costs related to this litigation were $0.4 million in 2017. We incurred an additional $0.6 million of costs related to this litigation in 2018.Form 10-K.
Procedurally, both matters were removed to the U.S. District Court for the Central District of California, or the District Court, where we filed motions to compel arbitration in each matter. In December 2015, our motions to compel arbitration in both cases were denied and we appealed each to the U.S. Court of Appeals for the Ninth Circuit, or the Ninth Circuit. In Lefevre, the Ninth Circuit affirmed the District Court’s decision. In Mandviwala, the Ninth Circuit affirmed the District Court’s decision in part and reversed the District Court’s decision in part. We filed petitions for writ of certiorari seeking review by the U.S. Supreme Court in both cases. The U.S. Supreme Court denied our petition for writ of certiorari in both cases and, as a result, the merits of both cases will be decided in litigation in the District Court.
In addition, from time to time, we become involved in litigation matters incidental to the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, we do not believe any of our currently pending litigation is likely to have a material adverse effect on our business.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related StockholderShareholder Mattersand Issuer Purchases of EquitySecurities
Our common shares are traded on Nasdaq (symbol: FVE).
As of February 27, 2019,20, 2021, there were approximately 2,000 stockholders930 shareholders of record of our common shares.
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Calendar Month | | Number of Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
| December 2020 | | 6,542 | | | $ | 8.15 | | | — | | | $ | — | |
| Total | | 6,542 | | | $ | 8.15 | | | — | | | $ | — | |
(1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of current and former employees and officers of us and of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.
|
| | | | | | | | | | | | | |
| Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 2018 | | — |
| | — |
| | — |
| | $ | — |
|
| November 2018 | | — |
| | — |
| | — |
| | $ | — |
|
| December 2018 | | 30,492 |
| | 0.38 |
| | — |
| | $ | — |
|
| |
(1) | In December 2018, all common share purchases were made to satisfy tax withholding and payment obligations of employees and officers of us and of RMR LLC in connection with the vesting of awards of our common shares. We purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date. |
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL INDUSTRY TRENDS
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.
General Industry Trends
We believe that, in the United States, the primary market for senior living services is focused towards individuals age 80 and older, and, according to U.S. Census data, that group is projected to be among the fastest growing age cohort in the United States over the next 20 years. Also, asolder. As a result of medical advances, seniorsadults are living longer.longer and expanding their options as to where they choose to reside as they age. Due to these demographic trends, in the last ten years the senior living industry evolved to serve the growing number of older adults and we expect the demand for senior living services to increase in future years. We have searched for innovative ways to overcome the industry's challenges, including workforce shortages and low employee retention, occupancy pressures, challenges related to new technology and higher service level expectations. More recently, the senior living industry has been materially adversely impacted by the Pandemic and resulting economic recession.
COVID-19 Pandemic
The Pandemic has significantly disrupted and likely will continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. The WHO declared COVID-19 a pandemic in March of 2020. From March 2020 through February 20, 2021, there have been approximately 28.7 million reported cases of COVID-19 in the United States and 510,000 related deaths, which have disproportionately impacted older adults like our customers. In response to the Pandemic, most states and municipalities closed non-essential businesses and implemented restrictions on others to prevent the spread of COVID-19 in March and April of 2020. Although states and municipalities have partially reopened their economies and eased certain restrictions in recent months and economic data has indicated that the United States economy has improved since the lowest periods experienced in March and April 2020, the United States gross domestic product remains below pre-Pandemic levels. Recently, following the holiday season, the reopening of economies and the easing of restrictions, the United States has experienced peak numbers of COVID-19 infections and deaths. In some cases, certain states have again required the closure of certain business activities and imposed certain other restrictions.
Vaccinations. On December 11 and December 18, 2020, the FDA issued EUAs to Pfizer Inc. / BioNTech SE and Moderna, Inc., respectively, for vaccines for the prevention of COVID-19. The CDC's Advisory Committee on Immunization Practices placed long-term care facility residents and healthcare personnel in "Phase 1a," the highest priority group to receive COVID-19 vaccines, which included residents and team members at our SNFs, memory care units and assisted living communities. States have subsequently prioritized all categories of older adults, which include our independent living facilities. In order to protect the health and safety of our residents, team members and clients, we scheduled multiple vaccination clinics as soon as possible after the EUAs for our SNF, memory care and assisted living residents and team members at no cost to those individuals. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine. We expect that widespread vaccination for COVID-19 amongst our residents and team members will decrease the incidence of COVID-19 in our senior living communities, eventually end restrictions on the admission of more new residents in our senior living communities and decrease our costs for PPE and COVID-19 testing.
Protective Measures for Residents and Team Members. Our residents and clients are part of a population that has been disproportionately affected by the Pandemic. Older adults also tend to have more chronic medical conditions than the general population. Those with pre-existing medical conditions are at a higher risk of serious illness or death, or both, if they contract COVID-19. In addition, our team members who work in our communities may be at a higher risk of contracting or spreading COVID-19 due to the nature of their work environment when caring for our residents and clients. Our highest priority is maintaining the health and well-being of our residents, clients and team members. As a result, we continue to monitor, evaluate and adjust our plans to address the impact to our business. We have, among other steps:
•facilitated multiple COVID-19 vaccination clinics for residents and team members at our senior living communities and Ageility clinics, and encouraged our residents and team members at our senior living communities and Ageility clinics to receive a COVID-19 vaccination as soon as it became available at their community;
•restricted access to our senior living communities to essential visitors and team members, and only reopened communities when it was determined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and our internal criteria;
•reopened our rehabilitation and wellness services clinics for in-person services when it was determined safe to do so and in accordance with federal, state and local regulations and guidelines;
•reopened our corporate office, when it was safe to do so, at a reduced capacity in accordance with federal, state and local regulations and guidelines;
•enhanced infectious disease prevention and control policies, procedures and protocols at all properties;
•created a cross-functional team to implement proactive protection for residents in our senior living communities and clients in our rehabilitation and wellness services clinics as well as team members;
•provided additional and enhanced training to team members at all levels of the organization;
•worked with vendors to provide adequate supplies and PPE to our senior living communities and rehabilitation and wellness services clinics;
•identified residents needs for higher level of care and worked with them and their family members to ensure their safety during the Pandemic; and
•effectively transitioned to virtual sales and marketing activities and thoughtfully proceeded with resident move-ins, when appropriate.
In addition, we have taken actions to safeguard and support our team members, residents, clients and senior living communities including:
•provided meals to team members to limit their outside exposure during shifts;
•provided COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to, or tested positive for, COVID-19 and offered flexible work schedules;
•as of February 20, 2021, conducted over 290,000 resident and team member tests, and also performed health screenings for visitors to our senior living communities;
•recognized and rewarded team members with bonuses in addition to our total rewards package;
•provided corporate team members with appropriate information technology, including laptop computers, smart phones, computer applications, information technology security applications and technical support, to work remotely during mandatory work-from-home orders directed by local and state governments;
•promoted access to mental health services and other benefits to support residents' and team members' mental and physical well-being as well as complementary counseling and support services for residents;
•hosted virtual all-hands meetings to communicate our policies, procedures and guidelines related to COVID-19 response, vaccination safety and availability and re-opening efforts and to ensure team members are supported with assistance and guidance;
•implemented new virtual group activities for residents that allow for engagement while maintaining social distancing;
•expanded effective communication channels to residents, their families and team members;
•provided devices and connectivity options for residents' interactions with family members, virtual programming opportunities and distance learning; and
•focused on learning and development opportunities for team members.
We have also been impacted by mandatory work from home orders directed by local and state governments in the jurisdictions in which we operate. However, essential work exemptions permit certain of our team members to work on site to meet the needs of our residents and clients at our senior living communities and rehabilitation and wellness services clinics. Effective as of July 13, 2020, our corporate office was re-opened in compliance with state and local guidelines and restrictions and most corporate team members returned to the corporate office at a reduced capacity.We continue to monitor regulations and guidance from federal, state and local governments and agencies and will adapt and update our policies and procedures to continue to prioritize the health and safety of our residents, clients and team members. Our team members at our corporate office have been able to support the needs of the business while working remotely or in the corporate office. At our corporate office, we continue to provide enhanced cleaning protocols and abide by social distancing guidelines to reduce the possibility of our team members gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for the spread of COVID-19 infections. Included among these protocols and measures are focusing on sanitizing high touch points in common areas and restrooms, shutting down certain building amenities, limiting staff interactions and reducing non-essential building services.
Occupancy. As a result of the Pandemic, we experienced declines in occupancy at our owned and leased senior living communities from 82.9% for the year ended December 31, 2019 to 76.4% for the year ended December 31, 2020. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities we manage on behalf of DHC also experienced occupancy declines from 85.0% for the year ended December 31, 2019 to 77.2% for the year ended December 31, 2020. Additionally, in accordance with certain federal, state and local regulatory requirements, in conjunction with our own policies and procedures, we ceased or limited admissions to and tours of certain of our senior living communities as a precautionary measure and only have reopened communities to resident admissions and in-person tours when it was determined safe to do so. During the three months ended December 31, 2020, the number of new residents moving into our senior living communities was slightly higher compared to the three months ended September 30, 2020, reducing the rate of decline in occupancy rates compared to the preceding quarter. At December 31, 2020, 89% of our senior living communities were accepting new residents in at least one service line of business (independent living, assisted living, skilled nursing or memory care). Following the EUA, our residents and team members began receiving COVID-19 vaccines in December of 2020. As of February 20, 2021, 87.2% of our residents and 42.5% of our team members at our senior living communities had received their initial dose of a COVID-19 vaccine, and 52.7% of our residents and 26.9% of our team members had received their second dose of a COVID-19 vaccine. As of February 20, 2021, 249 senior living communities have held a vaccination
clinic for the initial dose of a COVID-19 vaccine, and 183 senior living communities have also held a vaccination clinic for the second dose of a COVID-19 vaccine. We expect that widespread vaccination for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and eventually ease restrictions at our senior living communities, which impact new admissions and resident programming. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing effects of the Pandemic, we expect continued occupancy declines in the near term, due to current residents leaving our senior living communities, restrictions on new residents moving into and/or touring our senior living communities and the possibility that older adults will forego or delay moving into senior living communities because of perceived safety issues associated with the Pandemic. Our revenues are largely dependent on occupancy at our senior living communities and any decline in occupancy adversely impacts our revenues, unless we are able to offset those lost revenues with increased rates we charge our residents and clients or other sources of increased revenues.
Expenses. We have also incurred and will continue to incur significant costs to address the Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 testing to our residents and team members that were not otherwise covered by government payer or third-party insurance sources and disposable food supplies as well as increased sanitation and janitorial supplies and increased labor costs. We have, for example, entered into temporary staffing agreements with staffing agencies in order to supply additional workers in the event that our team members contract COVID-19. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, and we expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19, we expect the increased costs associated with the Pandemic to continue throughout the first half of 2021 and for the reasonably foreseeable future thereafter. We incur these costs for our owned and leased senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the senior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our management arrangements. The Pandemic has also disrupted the global supply chain, including many of our medical and technological suppliers, due to factory closures and reduced manufacturing output. We believe that our current supplies and supplies we currently have on order should be sufficient to support our needs for the reasonably foreseeable future. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of critical materials to meet our expected increased needs for the reasonably foreseeable future and by identifying and engaging alternative suppliers. We continue to be alert to the potential for disruptions that could arise from the Pandemic and remain in close contact with our suppliers.
Results of Operations. We have experienced negative impacts on our results of operations, cash flows and financial condition as a result of the Pandemic and we expect those negative impacts to continue at least through the first half of 2021. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 at those communities and will eventually decrease our costs and the negative impacts on our results of operations that are associated with the Pandemic. Despite this trend, futurethe approval and increasing availability of COVID-19 vaccines, going forward, the amounts and type of revenue, expense and cash flow impacts resulting from the Pandemic will be dependent on a number of additional factors, including: the speed, depth, geographic reach and duration of the spread of the disease; the distribution, availability and effectiveness of therapeutic treatments and testing for COVID-19 to our residents, clients and team members; the legal, regulatory and administrative developments that occur, including the availability of governmental financial and regulatory relief to businesses; our infectious disease control and prevention efforts; the duration and severity of the economic downturns,downturn in response to the Pandemic; and the demand for our communities and services.
Additionally, we expect that the continuation or deepening of the current economic downturn, other direct and indirect impacts of the Pandemic, softness in the U.S. housing market, higher levels of unemployment, among our residents’ and potential residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics couldwill adversely affect the ability of seniorsolder adults and their families to afford our resident charges. Prospective residents who plan to use the proceeds from the sale of their homes to cover the cost of senior living services seem to be especially affected by cyclical factors affecting the housing market. In recent years, economic indicators reflect an improving housing market; however, it is unclear how sustainable the improvements will be and whether any such improvements will result in any increased demand for our services. Although many of the services that we provide to residents are needs driven, some prospective residents may be deferring decisions to relocate to senior living communities in light of economic circumstances, among other reasons.
Senior Living Development. For the past few years lowprior to the Pandemic, increased access to capital costsand continued low-interest rates appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancies.occupancy. This has resulted in a significant number ofincrease in new senior living communities being developedcommunity inventory entering the market in recent years, although there are indications that the rate of newly started development has recently declined. The development activity has increasedincreasing competitive pressures on us, particularly in certain of our geographic markets,markets. Although new development had been slowing prior to the onset of the Pandemic, and the impact of the Pandemic and the economic slowdown may further impact new development, we expect these challengesthat new inventory will hit the market in the near term due to the increased development of senior living communities in the past several years, and that increase will continue to have a competitive effect on our business for at least the next few years. As recently developed senior living communities begin operations, we expect to have continuing challenges to maintain or increase occupanciesyears, and charges at our senior living communities. These challenges are currently negatively impacting our revenues, cash flows and results from operations and we expect these challenges to continue at least through 2019.
Another factor which appears to be negatively affecting us and our industry is that the same medical advances and healthcare services that are extending lives and periods of occupancy at senior living communities are also allowing some potential residents to defer the time when they require the special services available at our communities or forgo moving to senior living communities altogether. We do not currently believe that the increased stays that may result from medical advances and healthcare services will be completely offset by deferred entry, but we think this factorrelated challenges may be contributingintensified as a result of the Pandemic and the associated economic downturn.
Labor Market. Prior to occupancy declines at this time.
In addition,the onset of the Pandemic, low unemployment, in the United States combined with a competitive labor market and, in certain jurisdictions, legislation and regulations that increaseincreased minimum wages, is increasing ourcaused employment costs to increase, including for salaries, wages and benefits, such as health care benefit coverage, for our employees,team members, which will increaseincreased our operating expenses and may negatively impactimpacted our financial results.
The U.S. labor market may return to such levels as the impact of the Pandemic subsides. As noted above, in connection with the Pandemic, we incurred increased labor costs as a result of increased overtime pay for team members, increased costs associated with team member engagement and retention programs, such as meals for certain of our team members and bonuses to team members at our senior living communities and healthcare industries are subjectrehabilitation and wellness clinics, and increased health insurance and workers' compensation costs. We also increased staffing needs, for which we have entered into temporary staffing agreements with staffing agencies to extensiveaccommodate staffing shortages due to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19, and frequently changing federal, statewe experienced increased costs associated with PPE and local laws and regulations. These laws and regulations vary by jurisdiction but may address, among other things, licensure, personnel training, staffing ratios, types and quality of medical care, physical facilitytesting requirements government healthcare program participation,due to the definition of "fraud and abuse", payment rates for resident services and confidentiality of patient records. We incur significant costs to comply with these laws and regulations and these laws and regulations may result in our having to repay payments we received for services we provided and to pay penalties, fines and interest, which amounts can be significant. See Note 12 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For further information regarding government regulations and reimbursements, including possible changes and related legislative and other reform efforts, see "Business—Government Regulation and Reimbursement" in Part I, Item 1, and "—Our Revenues" in Part II, Item 7, of this Annual Report on Form 10-K.Pandemic.
OPERATIONS2020 Operations
We primarily earn our senior living revenuesrevenue by providing housing and services to residents of our senior living communities. During 2018, approximately 23.3%communities that we own or lease, in addition to managing senior living communities for the account of DHC, and by providing our residents, clients and others with rehabilitation and wellness services at our senior living revenues camecommunities, as well as at outpatient clinics located separately from the Medicare and Medicaid programs and approximately 76.7% of our senior living communities. Effective January 1, 2020, due to the Transaction Agreement, 166 of our formerly leased senior living communities from DHC were converted to managed communities. This resulted in a significant decrease in senior living revenues came from residents’ private resources.and corresponding expenses, an increase in management fees and an increase in costs incurred for managed communities and the reimbursement of those costs in our financial statements. We bill all private pay residents in advance for the housing and services to be provided in the following month.
Our material expenses are:primarily were:
Wages and benefits—includes
•senior living wages and wage relatedbenefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for our employeesteam members working at our owned and leased senior living communities.communities;
Other•other senior living operating expenses—includesexpenses, including utilities, housekeeping, dietary, maintenance, insurance and community levelcommunity-level administrative costs at our owned and leased senior living communities.communities;
Rent expense—as of December 31, 2018, we lease 184 senior living communities from SNH•rehabilitation and four senior living communities from HCP.
General and administrative expenses—principallywellness services expenses, including wages and wage relatedwage-related expenses, such as health insurance and other benefits for headquartersour team members working at our rehabilitation and regional staff supporting our communities.wellness services clinics, as well as other operating expenses such as insurance, supplies and other administrative costs;
Costs•costs incurred on behalf of managed communities—includessenior living communities, including wages and benefits for staff and other operating expenses related to the senior living communities that we manage for the account of SNH,DHC, which are reimbursed to us by SNH,DHC, including from revenues we receive from the applicable managed communities, pursuant to our New Management Agreements with DHC. For more information about our management agreementsarrangements with SNH.DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
Depreciation•general and administrative expenses, principally comprised of wages and wage-related expenses for headquarters and regional staff as well as investments in technology used in supporting our senior living community operations and ancillary business lines and professional service fees and other administrative costs;
•rent expense attributable to the 4 senior living communities we leased from PEAK. Effective January 1, 2020, all of our then existing leases with DHC were terminated and we entered into the New Management Agreements. For more information about our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
•depreciation and amortization expense—expense as we incur depreciation expense on buildings and furniture and equipment that we own and we incur amortization expense on certain identifiable intangible assets.our finance lease right-of-use assets; and
Interest•interest and other expenses—expense, primarily includesincluding interest on outstanding debt and amortization of deferred financing costs.
ExpansionActivities
In April 2019, we began managing for the account of DHC a senior living community DHC owns located in Oregon with 318 living units.
In December 2019, we began managing for the account of DHC an active adult community DHC owns located in Texas with 167 units.
During 2020 and 2019, we opened 23 and 65 new rehabilitation and wellness services outpatient clinics, respectively.
We currently expect that our expansion activities will be focused on entering into additional long-term management agreements for senior living communities and growing the ancillary services that we provide, including through our Ageility clinics, rather than from the acquisition or leasing of additional senior living communities, although we may from time to time acquire or lease additional senior living communities.
Investment Activities
Historically, when we made capital improvements to the senior living communities that we leased from DHC, we generally would sell such improvements to DHC and our annual rent payments would increase pursuant to the terms of our then existing leases with DHC. On April 1, 2019, DHC purchased from us approximately $50.0 million of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to DHC’s senior living communities leased and operated by us, which was subsequently reduced to $49.2 million due to the exclusion of certain fixed assets in accordance with the Transaction Agreement. In addition, subsequent to entering into and in accordance with the Transaction Agreement, DHC pre-funded estimated capital expenditures for the DHC senior living communities that we operated on a monthly basis during the remainder of 2019. In the following month, adjustments were made based on the actual amounts incurred in the prior month. As of December 31, 2018,2019, $1.8 million due to DHC related to this prefunding was included in due to related persons on our consolidated balance sheets. On January 1, 2020, in accordance with the Transaction Agreement, we had two operating segments:sold to DHC $2.7 million of the remaining qualified capital improvements at the senior living communities we previously leased from DHC at net book value. DHC funds capital improvements at the senior living communities we manage for the account of DHC pursuant to the New Management Agreements.
During 2020 and 2019, we received gross proceeds of $10.4 million and $5.2 million, respectively, in connection with the sale of equity and debt investments through our offshore captive insurance company, and recorded net realized gains of $0.4 million and $0.2 million, respectively.
During 2020 and 2019, we purchased certain debt and equity investments through our offshore captive insurance company for $5.8 million and $3.0 million, respectively.
Restructuring Transactions with DHC
On April 1, 2019, we entered into the Transaction Agreement with DHC to restructure our business arrangements with DHC, pursuant to which, effective as of January 1, 2020:
•our five then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with the New Management Agreements;
•we effected the Share Issuances pursuant to which we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019; and
•as consideration for the Share Issuances, DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments.
For more information regarding the Transaction Agreement, our leases and management agreements and other transactions with DHC, see Notes 1, 10 and 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Credit Facilities
We have a $65.0 million secured revolving credit facility with a syndicate of lenders that is available for us to use for general business purposes, of which $42.1 million is available for borrowing as of December 31, 2020.
For more information regarding our credit facility and our irrevocable standby letters of credit, see Note 9 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
DispositionActivities
In 2019, we and DHC sold to third parties 18 SNFs located in California, Kansas, Iowa and Nebraska that DHC owned and leased to us for an aggregate sales price of approximately $29.5 million, excluding closing costs. As a result of these sales, the annual minimum rent payable to DHC by us under our then existing master leases with DHC was reduced in accordance with the Transaction Agreement.
In 2020, DHC sold nine senior living communities that we previously managed located in California, Mississippi, Nebraska and Wisconsin. Upon completion of these sales, our management agreements with DHC for these communities were terminated. In addition, DHC in November 2020 closed seven senior living communities and one building in one senior living community that we previously managed. While these closed communities are no longer being used as senior living communities, we continue to manage their back-office operations and monitor the empty facilities. For the year ended December 31, 2020, we recognized $2.7 million of management fees related to the sold and closed communities.
During 2020 and 2019, we permanently closed six and four rehabilitation and wellness.wellness services outpatient clinics, respectively, primarily as a result of being located in senior living communities that were operated in communities we managed on behalf of DHC that were sold or closed.
Results of Operations
We operate in two reportable segments: (1) senior living and (2) rehabilitation and wellness services. In the senior living communities segment, we operate for our own account or manage for the account of others and operate for our own account, respectively, independent living communities, assisted living communities, CCRCs, SNFs and SNFsan active adult community that are subject to centralized oversight and provide housing and services to elderly residents.older adults. Included in the results of the assisted living communities and CCRCs are memory care living units specializing in the care of those with Alzheimer's. In the rehabilitation and wellness operatingservices reporting segment, we provide therapya comprehensive suite of rehabilitation and wellness services, including
physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics. We determined that our two operating segments meet the aggregation criteriaclinics as prescribed under the FASB Accounting Standards Codification™ Topic 280, Segment Reporting, and we have therefore determined that our business is comprised of one reportable segment, senior living. well as home health services.
All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.
EXPANSIONACTIVITIES
In June 2018, SNH acquired an additional living unit at a senior living community we lease from SNH located in Florida which was added to the lease for that senior living community, and our annual rent payable to SNH increased by $14,000 as a result.
Also in June 2018, we began managing for the account of SNH, pursuant to a management agreement and our existing Pooling Agreement No. 12 with SNH, as amended and restated, a senior living community SNH owns located in California with 98 living units.
In November 2018, we began managing for the account of SNH, pursuant to a new management agreement we entered with SNH, a senior living community SNH owns located in Colorado with 238 living units. We and SNH both have the option to terminate the management agreement with respect to this community as of December 31, 2019.
We currently expect that our expansion activities will be focused on internal growth from our existing senior living communities and the healthcare services that we may provide and not from our acquisition of senior living communities, although we may from time to time acquire additional senior living communities.
For more information regarding our leases and management arrangements with SNH, see Note 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
INVESTMENT ACTIVITIES
During 2018 and 2017, we made capital expenditures for property, plant and equipment related to our operations, on a net basis after considering the proceeds from sales to SNH of improvements we made to senior living communities we lease from SNH, of $31.0 million and $31.3 million, respectively.
During 2018 and 2017, we received gross proceeds of $9.4 million and $22.4 million, respectively, in connection with the sale of equity and debt investments, and recorded net realized gains of $0.1 million and $0.4 million, respectively.
During 2018 and 2017, we purchased certain debt and equity investments for $5.3 million and $14.4 million, respectively.
DISPOSITIONACTIVITIES
In August 2017, we sold to SNH a land parcel adjacent to a senior living community located in Delaware that we lease from SNH for $0.8 million, excluding closing costs. This land parcel was added to the applicable lease and our annual minimum rent payable to SNH increased by $33,000 in accordance with the terms of that lease.
In November 2017, we entered a transaction agreement with SNH pursuant to which we agreed to sell six senior living communities to SNH for $104.4 million, including SNH’s assumption of approximately $33.5 million of mortgage debt principal secured by certain of these senior living communities and excluding closing costs. In December 2017, January 2018, February 2018 and June 2018, we sold to SNH two of these senior living communities located in Alabama and Indiana, one of these senior living communities located in Tennessee, one of these senior living communities located in Arizona and two of these senior living communities located in Tennessee, respectively, and in connection with those sales, we entered management agreements for each of these senior living communities and two new pooling agreements with SNH and we began managing these communities for the account of SNH.
In June 2018, we and SNH sold a SNF, which had been previously leased to us, located in California with 97 living units to a third party for a sales price of approximately $6.5 million, excluding closing costs. Pursuant to the terms of our lease with SNH, as a result of this sale, our annual rent payable to SNH decreased by 10.0% of the net proceeds that SNH received from this sale.
GOING CONCERN
We face increased competition across the senior living industry, including in specific markets in which we operate senior living communities. Medical advances and healthcare services also allow some potential residents to defer the time when they require the special services available at our communities. In addition, low unemployment in the United States combined with a competitive labor market within our industry are increasing our employment costs. These challenges are currently negatively impacting our revenues, expenses, cash flows and results from operations, and we expect these challenges to continue at least through 2019. At December 31, 2018, we have an accumulated deficit of $292.6 million and have incurred operating losses in each of the last three years. In addition, our credit facility is scheduled to expire on June 28, 2019, and we currently have $51.5 million of borrowings outstanding under that facility. These conditions raise substantial doubt about our ability to continue as a going concern. Further, due to our current operating and liquidity challenges, we may not be able to fund our operating and capital expenses or debt service obligations. In addition, we may reduce our capital and operating expenses, which may harm our competitive position, require us to make larger expenditures in the future for deferred maintenance and other costs and harm our business.
We currently operate 260 senior living communities under lease and management arrangements with SNH, or approximately 91.5% of the total communities we operate. In order to address the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH's independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with SNH will be agreed to or occur. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH unless we obtain relief. For example, we expect to obtain a temporary deferral from SNH on our obligation to pay rent to SNH under our leases with SNH for the month of February 2019 but we cannot be sure that SNH will grant us this deferral; if we do not receive this deferral or any other relief we may need in the future, we may default in paying some or all of the rent due to SNH. In addition, we cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. Any changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
For more information regarding our leases and management agreements with SNH, see Note 9 and 11 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Key Statistical Data For the Years EndedDecember 31, 20182020 and 20172019.
The following tables present a summary of our operations for the years ended December 31, 20182020 and 2017:2019(dollars in thousands, except RevPAR):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (dollars in thousands, except average monthly rate) | | 2018 | | 2017 | | Change | | %/ bps
Change | |
| Senior living revenue | | $ | 1,094,404 |
| | $ | 1,122,176 |
| | $ | (27,772 | ) | | (2.5 | )% | |
| Management fee revenue | | 15,145 |
| | 14,080 |
| | 1,065 |
| | 7.6 | % | |
| Reimbursed costs incurred on behalf of managed communities | | 280,845 |
| | 259,850 |
| | 20,995 |
| | 8.1 | % | |
| Total revenues | | 1,390,394 |
| | 1,396,106 |
| | (5,712 | ) | | (0.4 | )% | |
| Senior living wages and benefits | | (563,263 | ) | | (551,096 | ) | | (12,167 | ) | | 2.2 | % | |
| Other senior living operating expenses | | (301,239 | ) | | (293,425 | ) | | (7,814 | ) | | 2.7 | % | |
| Costs incurred on behalf of managed communities | | (280,845 | ) | | (259,850 | ) | | (20,995 | ) | | 8.1 | % | |
| Rent expense | | (209,150 | ) | | (206,531 | ) | | (2,619 | ) | | 1.3 | % | |
| General and administrative expenses | | (78,189 | ) | | (75,212 | ) | | (2,977 | ) | | 4.0 | % | |
| Depreciation and amortization expense | | (35,939 | ) | | (38,192 | ) | | 2,253 |
| | (5.9 | )% | |
| Gain on sale of senior living communities | | 7,131 |
| | 7,258 |
| | (127 | ) | | (1.7 | )% | |
| Long lived asset impairment | | (461 | ) | | (2,112 | ) | | 1,651 |
| | (78.2 | )% | |
| Interest, dividend and other income | | 818 |
| | 765 |
| | 53 |
| | 6.9 | % | |
| Interest and other expense | | (3,018 | ) | | (4,308 | ) | | 1,290 |
| | (29.9 | )% | |
| Gain on early extinguishment of debt | | — |
| | 143 |
| | (143 | ) | | (100.0 | )% | |
| Unrealized loss on equity investments | | (690 | ) | | — |
| | (690 | ) | | 100.0 | % | |
| Realized gain on sale of debt and equity investments, net of tax | | 99 |
| | 408 |
| | (309 | ) | | (75.7 | )% | |
| (Provision) benefit for income taxes | | (247 | ) | | 4,536 |
| | (4,783 | ) | | (105.4 | )% | |
| Equity in earnings of an investee | | 516 |
| | 608 |
| | (92 | ) | | (15.1 | )% | |
| Loss from continuing operations | | $ | (74,083 | ) | | $ | (20,902 | ) | | $ | (53,181 | ) | | 254.4 | % | |
| | | | | | | | | | |
| Total number of communities (end of period): | | | | | | | | | |
| Owned and leased communities | | 208 |
| | 213 |
| | (5 | ) | | (2.3 | )% | |
| Managed communities | | 76 |
| | 70 |
| | 6 |
| | 8.6 | % | |
| Number of total communities | | 284 |
| | 283 |
| | 1 |
| | 0.4 | % | |
| | | | | | | | | | |
| Total number of living units (end of period): | | | | | | | | | |
Owned and leased living units(1) | | 22,250 |
| | 22,742 |
| | (492 | ) | | (2.2 | )% | |
Managed living units (1) | | 9,766 |
| | 9,043 |
| | 723 |
| | 8.0 | % | |
Number of total living units (1) | | 32,016 |
| | 31,785 |
| | (45 | ) | | (0.1 | )% | |
| | | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
Occupancy % (1)(2) | | 82.0 | % | | 83.1 | % | | n/a |
| | (110 | ) | bps |
Average monthly rate (2)(3) | | $ | 4,729 |
| | $ | 4,693 |
| | $ | 36 |
| | 0.8 | % | |
| Percent of senior living revenue from Medicaid | | 12.4 | % | | 11.9 | % | | n/a |
| | — |
| bps |
| Percent of senior living revenue from Medicare | | 10.9 | % | | 11.1 | % | | n/a |
| | (20 | ) | bps |
| Percent of senior living revenue from private and other sources | | 76.7 | % | | 77.1 | % | | n/a |
| | (40 | ) | bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) |
| | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 77,015 | | | $ | 1,036,498 | | | $ | (959,483) | | | (92.6) | % |
| Management fees | | 62,880 | | | 16,169 | | | 46,711 | | | 288.9 | % |
| Rehabilitation and wellness services | | 82,032 | | | 48,685 | | | 33,347 | | | 68.5 | % |
| Total management and operating revenues | | 221,927 | | | 1,101,352 | | | (879,425) | | | (79.8) | % |
| Reimbursed community-level costs incurred on behalf of managed communities | | 916,167 | | | 313,792 | | | 602,375 | | | 192.0 | % |
| Other reimbursed expenses | | 25,648 | | | — | | | 25,648 | | | n/m |
| Total revenues | | 1,163,742 | | | 1,415,144 | | | (251,402) | | | (17.8) | % |
| | | | | | | | |
| Other operating income | | 3,435 | | | — | | | 3,435 | | | n/m |
| | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 41,819 | | | 538,931 | | | (497,112) | | | (92.2) | % |
| Other senior living operating expenses | | 25,470 | | | 292,644 | | | (267,174) | | | (91.3) | % |
| Rehabilitation and wellness services expenses | | 64,496 | | | 39,903 | | | 24,593 | | | 61.6 | % |
| Community-level costs incurred on behalf of managed communities | | 916,167 | | | 313,792 | | | 602,375 | | | 192.0 | % |
| General and administrative | | 87,168 | | | 87,884 | | | (716) | | | (0.8) | % |
| Rent | | 5,118 | | | 141,486 | | | (136,368) | | | (96.4) | % |
| Depreciation and amortization | | 10,997 | | | 16,640 | | | (5,643) | | | (33.9) | % |
| | | | | | | | |
| Loss on sale of senior living communities | | — | | | 856 | | | (856) | | | (100.0) | % |
| Long-lived asset impairment | | — | | | 3,282 | | | (3,282) | | | (100.0) | % |
| Total operating expenses | | 1,151,235 | | | 1,435,418 | | | (284,183) | | | (19.8) | % |
| | | | | | | | |
| Operating income (loss) | | 15,942 | | | (20,274) | | | 36,216 | | | (178.6) | % |
| | | | | | | | |
| Interest, dividend and other income | | 757 | | | 1,364 | | | (607) | | | (44.5) | % |
| Interest and other expense | | (1,631) | | | (2,615) | | | 984 | | | (37.6) | % |
| Unrealized gain on equity investments | | 480 | | | 782 | | | (302) | | | (38.6) | % |
| Realized gain on sale of debt and equity investments | | 425 | | | 229 | | | 196 | | | 85.6 | % |
| | | | | | | | |
| Loss on termination of leases | | (22,899) | | | — | | | (22,899) | | | n/m |
| | | | | | | | |
| Loss before income taxes and equity in earnings of an investee | | (6,926) | | | (20,514) | | | 13,588 | | | (66.2) | % |
| Provision for income taxes | | (663) | | | (56) | | | (607) | | | 1083.9 | % |
| Equity in earnings of an investee | | — | | | 575 | | | (575) | | | (100.0) | % |
| Net loss | | $ | (7,589) | | | $ | (19,995) | | | $ | 12,406 | | | (62.0) | % |
| | | | | | | | |
| Owned and leased communities: | | | | | | | | |
| Number of communities (end of period) | | 24 | | | 190 | | | (166) | | | (87.4) | % |
Number of living units (end of period) (1) | | 2,302 | | | 20,948 | | | (18,646) | | | (89.0) | % |
| Spot occupancy at December 31, | | 69.7 | % | | 82.7 | % | | (13.0) | % | | n/m |
| Average occupancy | | 76.4 | % | | 82.9 | % | | (6.5) | % | | n/m |
RevPAR (2) | | $ | 2,751 | | | $ | 3,975 | | | $ | (1,224) | | | (30.8) | % |
| | | | | | | | |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 228 | | | 78 | | | 150 | | | 192.3 | % |
Number of living units (end of period) (1) | | 26,969 | | | 10,337 | | | 16,632 | | | 160.9 | % |
| Spot occupancy at December 31, | | 70.8 | % | | 83.5 | % | | (12.7) | % | | n/m |
| Average occupancy | | 77.2 | % | | 85.0 | % | | (7.8) | % | | n/m |
RevPAR (2) | | $ | 3,546 | | | $ | 3,602 | | | $ | (56) | | | (1.6) | % |
| | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | |
| Number of inpatient clinics (end of period) | | 37 | | | 41 | | | (4) | | | (9.8) | % |
| Number of outpatient clinics (end of period) | | 207 | | | 190 | | | 17 | | | 8.9 | % |
| Total clinics | | 244 | | | 231 | | | 13 | | | 5.6 | % |
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2) Occupancy andRevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average monthly ratenumber of available units for the period, divided by the number of months in the period. Amounts for the year ended December 31, 2018 include data2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act and other governmental grants.
Comparable Communities and Clinics
Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2019) results, for the year ended December 31, 2020, compared to the year ended December 31, 2019, are listed below. The number of comparable communities represent a minority of the senior living communities that were soldwe operated since January 1, 2019 as a result of the changes to SNH during such period as owned untilour business arrangements with DHC pursuant to the time of sale and as managed from the time of sale through the end of such period.
(3) Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenuesRestructuring Transaction for senior living services divided by occupied units during the period, and multiplying it by 30 days.
Comparable communities (senior living communities that we owned, leased or managed and operated continuously since January 1, 2017)manage on behalf of DHC (dollars in thousands, except RevPAR):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| (dollars in thousands, except average monthly rate) | | 2018 | | 2017 | | Change | | %/bps
Change | |
| Senior living revenue | | $ | 1,081,462 |
| | $ | 1,091,886 |
| | $ | (10,424 | ) | | (1.0 | )% | |
| Management fee revenue | | 13,323 |
| | 13,230 |
| | 93 |
| | 0.7 | % | |
| Senior living wages and benefits | | 555,297 |
| | 537,793 |
| | 17,504 |
| | 3.3 | % | |
| Other senior living operating expenses | | 298,621 |
| | 285,218 |
| | 13,403 |
| | 4.7 | % | |
| | | | | | | | | | |
| Total number of communities (end of period): | | | | | | | | | |
| Owned and leased communities | | 208 |
| | 208 |
| | — |
| | — |
| |
| Managed communities | | 68 |
| | 68 |
| | — |
| | — |
| |
| Number of total communities | | 276 |
| | 276 |
| | — |
| | — |
| |
| | | | | | | | | | |
| Total number of living units (end of period): | | | | | | | | | |
Owned and leased living units (1) | | 22,250 |
| | 22,279 |
| | (29 | ) | | (0.1 | )% | |
Managed living units (1) | | 8,830 |
| | 8,814 |
| | 16 |
| | 0.2 | % | |
Number of total living units (1) | | 31,080 |
| | 31,093 |
| | (13 | ) | | — | % | |
| | | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
Occupancy % (1) | | 82.0 | % | | 82.9 | % | | n/a |
| | (90 | ) | bps |
Average monthly rate (2) | | $ | 4,732 |
| | $ | 4,721 |
| | $ | 11 |
| | 0.2 | % | |
| Percent of senior living revenue from Medicaid | | 12.4 | % | | 11.5 | % | | n/a |
| | 90 |
| bps |
| Percent of senior living revenue from Medicare | | 10.5 | % | | 10.7 | % | | n/a |
| | (20 | ) | bps |
| Percent of senior living revenue from private and other sources | | 77.1 | % | | 77.8 | % | | n/a |
| | (70 | ) | bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) |
| | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 76,293 | | | $ | 82,154 | | | $ | (5,861) | | | (7.1) | % |
| Management fees | | 19,536 | | | 15,091 | | | 4,445 | | | 29.5 | % |
| Rehabilitation and wellness services | | 60,048 | | | 41,064 | | | 18,984 | | | 46.2 | % |
| Reimbursed community-level costs incurred on behalf of managed communities | | 279,162 | | | 284,179 | | | (5,017) | | | (1.8) | % |
| Other operating income | | 3,047 | | | — | | | 3,047 | | | n/m |
| | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 42,546 | | | 38,980 | | | 3,566 | | | 9.1 | % |
| Other senior living operating expenses | | 19,597 | | | 15,166 | | | 4,431 | | | 29.2 | % |
| Rehabilitation and wellness services expenses | | 48,295 | | | 33,152 | | | 15,143 | | | 45.7 | % |
| Community-level costs incurred on behalf of managed communities | | 279,162 | | | 284,179 | | | (5,017) | | | (1.8) | % |
| Rent | | 4,119 | | | 3,815 | | | 304 | | | 8.0 | % |
| | | | | | | | |
| Owned and leased communities: | | | | | | | | |
| Number of communities (end of period) | | 24 | | | 24 | | | — | | | — | % |
Number of living units (end of period) (1) | | 2,302 | | | 2,312 | | | (10) | | | (0.4) | % |
| Average occupancy | | 76.4 | % | | 81.4 | % | | (5.0) | % | | n/m |
RevPAR (2) | | $ | 2,751 | | | $ | 2,961 | | | $ | (210) | | | (7.1) | % |
| | | | | | | | |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 74 | | | 74 | | | — | | | — | % |
Number of living units (end of period) (1) | | 9,302 | | | 9,382 | | | (80) | | | (0.9) | % |
| Average occupancy | | 79.1 | % | | 86.0 | % | | (6.9) | % | | n/m |
RevPAR (2) | | $ | 3,311 | | | $ | 3,626 | | | $ | (315) | | | (8.7) | % |
| | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | |
| Number of inpatient clinics (end of period) | | 37 | | | 37 | | | — | | | — | % |
| Number of outpatient clinics (end of period) | | 121 | | | 121 | | | — | | | — | % |
| Total clinics | | 158 | | | 158 | | | — | | | — | % |
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2) Average monthly rate RevPAR is calculateddefined by takingus as resident fee revenues for the corresponding portfolio for the period divided by the average daily rate, which is defined as total operating revenuesnumber of available units for the period, divided by the number of months in the period. Amounts for the year ended December 31, 2020 exclude income received by senior living services divided by occupied units duringcommunities under the period,Provider Relief Fund of the CARES Act and multiplying it by 30 days.other governmental grants.
Year Ended December 31, 2018,2020, Compared to Year Ended December 31, 20172019
The following is a discussion of our operating results for our senior living communities during the year ended December 31, 20182020, compared to the year ended December 31, 2017.2019.
Senior living revenue. Seniorrevenues. The decrease in senior living revenuerevenues is primarily due to the conversion of 166 senior living communities formerly leased from DHC to managed communities pursuant to the Transaction Agreement, effective January 1, 2020. The decrease in senior living revenues at our comparable senior living communities was primarily due to the decrease in average occupancy from 81.4% to 76.4% caused by the Pandemic as move-out rates exceeded move-in rates, resulting from the impact of state and company-wide policies that restricted admissions at those communities with a confirmed case of COVID-19, the decline in demand due to the increased scrutiny of COVID-19 spread amongst residents and staff within senior living communities, and marketplace reluctance to relocate to other senior living communities during the Pandemic. The decrease in senior living revenues was partially offset by the receipt and recognition of $1.7 million under the Provider Relief Fund of the CARES Act and other governmental grants more fully described under Other Operating Income below.
Management fees. The increase in management fees is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Management fees and construction management fees increased $40.8 million and $1.6 million, respectively, due to the increase in senior living communities we manage for the account of DHC from 78 to 228. The remaining increase is primarily due to the terms of the New Management Agreements, under which we receive a management fee equal to 5% of the gross revenues realized at senior living communities managed and 3% of the costs of construction projects we manage for the account of DHC. Prior to the Transaction Agreement, our management fee for 46 of the 78 previously managed senior living communities was equal to 3% of the gross revenues realized at those senior living communities and 3% of the costs of construction projects we managed for the account of DHC. These increases were partially offset by declines in gross revenues at the senior living communities we managed primarily caused by the impact of the Pandemic. The increase in management fees at our comparable senior living communities was primarily due to the impact of the standardization of our management fee rate across all DHC communities in conjunction with the execution of the New Management Agreements and the construction management fee that we began earning on construction projects we manage effective January 1, 2020, partially offset by a decline in gross revenues at the senior living communities we manage caused by the Pandemic.
Rehabilitation and wellness services.The increase in rehabilitation and wellness services revenues is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business, including opening new outpatient clinics. Rehabilitation and wellness services revenues for the year ended December 31, 2018 decreased by 2.5% compared2019 excluded $24.0 million related to inpatient clinics at senior living communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, this revenue was eliminated in consolidation pursuant to U.S. generally accepted accounting principles, or GAAP. The remaining increase was primarily due to 17 net new outpatient clinics opened during the year ended December 31, 2017 primarily due to2020 as well as the salefull year impact of two senior living communities61 net new outpatient clinics opened during the fourth quarter of 2017 and five senior living communities during the first half of 2018 and a decrease in occupancy, partially offset by an increase in average monthly rates to residents who pay privately for services, an increase in revenues from ancillary services, such as rehabilitation and wellness services, and an estimated $0.9 million revenue reserve we recorded in 2017 in connection with our voluntary Medicare compliance assessment in 2017 at one of our SNFs, or the 2017 Compliance Assessment. The 1.0% decrease in senior living revenue at the senior living communities that we have operated continuously since January 1, 2017 was primarily due to a decrease in occupancy, partially offset by an increase in average monthly rates to residents who pay privately for services and an estimated $0.9 million revenue reserve we recorded in 2017 in connection with the 2017 Compliance Assessment.
Management fee revenue. Management fee revenue increased by 7.6% for the year ended December 31, 2018 compared2019. These increases were partially offset by temporary closures of outpatient clinics during the second quarter of 2020 as a result of the Pandemic as clinics suspended certain outpatient services and limited services were provided to the year ended December 31, 2017 primarily due to an increase inresidents, which significantly reduced the number of clients we treated on a daily basis. In addition, as we reopened, we saw a reduction of visits at certain of our clinics, however most of our clinics by the third quarter of 2020 were open and operating at or near pre-Pandemic levels. The decrease which occurred during the period in which the outpatient clinics were closed was partially covered by the receipt of $1.7 million under the Provider Relief Fund of the CARES Act more fully described under Other Operating Income below. The increase in rehabilitation and wellness services revenues at our comparable clinics was due to the conversion of our formerly leased senior living communities to managed communities from 70pursuant to 76.the Transaction Agreement and the change in how those revenues are accounted for as a result, partially offset by a decline in gross revenues caused by the Pandemic.
Reimbursed community-level costs incurred on behalf of managed communities.Reimbursed The increase in reimbursed community-level costs incurred on behalf of managed communities increased by 8.1% for the year ended December 31, 2018 compared to the year ended December 31, 2017was primarily due to anthe conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, resulting in the increase in senior living communities managed for the numberaccount of DHC. This was partially offset by a decline in costs incurred at the senior living communities we manage resulting from continued occupancy declines as a result of the effects of the Pandemic. The decrease in reimbursed community-level costs incurred on behalf of managed communities at our comparable communities was due to lower community-level costs, including other operating expenses such as marketing expenses, travel and entertainment, professional service fees and other costs that were impacted by occupancy declines due to the Pandemic, including wages, dietary costs and repairs and maintenance.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from 70certain centralized services we provide pursuant to 76.the New Management Agreements.
Other operating income.Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution as well as certain other governmental grants.
Senior living wages and benefits. The decrease in senior living wages and benefits is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Senior living wages and benefits increased by 2.2% for the year ended December 31, 2018 comparedrelated to the year ended December 31, 2017 primarily due to increases in overtime expenses, annual wage increases and employee health insurance expenses, partially offset by the sale of two senior living communities duringpreviously leased from DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the fourth quarter of 2017 and five senior living communities during the first half of 2018.New Management Agreements. The 3.3% increase in senior living wages and benefits at the senior livingour comparable communities that we have operated continuously since January 1, 2017 wasis primarily due to increases in overtime expenses, annual wage increasesincreased medical insurance costs related to the Pandemic and employee health insurance expenses.certain rewards programs to front line team members directly supporting our residents during the Pandemic.
Other senior living operating expenses. Other senior living operating expenses which includeare comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and community level administrative costs, increased by 2.7% for the year ended December 31, 2018 compared to the year ended December 31, 2017other community-level costs. The decrease in other senior living operating expenses is primarily due to an increase in repairs and maintenance and certain consulting and other purchased services expenses,the conversion of our formerly leased senior living communities to managed communities effective January 1, 2020 pursuant to the Transaction Agreement, partially offset by increased legal costs related to a settlement of a lawsuit, increased self-insurance obligations and increased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the sale of two senior living communities during the fourth quarter of 2017 and five senior living communities during the first half of 2018, a decrease in professional and general liability insurance expenses and $0.7 million of estimated penalties and fees recorded in 2017 in connection with the 2017 Compliance Assessment.Pandemic. The 4.7% increase in other senior living operating expenses at our comparable communities is primarily due to costs associated with our self-insurance obligations, increased legal costs related to the settlement of a lawsuit as well as increases in costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the Pandemic, partially offset by lower repairs and maintenance, reduction in consulting and other purchased service expenses associated with our 2019 strategic sourcing investment program
Rehabilitation and wellness services expenses.The increase in rehabilitation and wellness services expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities, effective January 1, 2020, pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services expenses for the year ended December 31, 2019 excluded $24.0 million related to inpatient clinics at senior living communities we previously leased from DHC. Prior to the effective date of the Restructuring Transactions, these expenses were eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 17 net new outpatient clinics opened during the year ended December 31, 2020 as well as the full year impact of 61 net new outpatient clinics opened during the year ended December 31, 2019. These increases were partially offset by a reduction of labor costs due to reduced visits and temporary closures of outpatient clinics as a result of the Pandemic. The increase in rehabilitation and wellness services expenses at our comparable communities was due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and the change for how those revenues are accounted for as a result, partially offset by a reduction of labor costs due to reduced visits and temporary closures of outpatient clinics as a result of the Pandemic.
General and administrative.The slight decrease in general and administrative expenses is primarily due to a decrease of $10.4 million in transaction costs incurred in connection with the Restructuring Transactions, mostly offset by increased salaries and benefits, which include costs for certain centralized services we provide pursuant to the New Management Agreements.
Rent. The decrease in rent expense is due to the termination of our master leases for the senior living communities that we have operated continuously since January 1, 2017 waspreviously leased from DHC, which were replaced with the New Management Agreements, pursuant to the Transaction Agreement. Rent for comparable communities increased primarily due to an increaseincreases in repairsrent at certain of our rehabilitation and maintenancewellness services clinics.
Depreciation and certain consulting and other purchased services expenses, partially offset by aamortization. The decrease in professional and general liability insurance expenses and $0.7 million of estimated penalties and fees recorded in 2017 in connection with the 2017 Compliance Assessment.
Rent expense. Rent expense increased by 1.3% for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to additional rent related to senior living community capital improvements we sold to SNH since January 1, 2017 pursuant to our leases with SNH.
General and administrative expenses. General and administrative expenses increased by 4.0% for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to an increase in expenses for certain consulting and other purchased services and increases in corporate wages and benefits expenses.
Depreciationdepreciation and amortization expense. Depreciation and amortization expense decreased by 5.9% for the year ended December 31, 2018 compared to the year ended December 31, 2017is primarily due to the sale of two senior living communities during the fourth quarterapproximately $110.0 million of 2017fixed assets and five senior living communities during the first half of 2018, partially offset by capital expenditures we incurred at our owned and leased senior living communities (net of our sales of capital improvements to SNH at our leased communities) since January 1, 2017. DHC during 2019.
GainLoss on sale of senior living communities. For the years ended December 31, 2018 and 2017, we recorded a gainA loss on sale of senior living communities of $7.1$0.9 million and $7.3 million, respectively, primarilywas recognized during the year ended December 31, 2019 in connection with our salethe disposition of four senior living communities in January, February18 SNFs to third parties during 2019 by DHC and June 2018 and two senior living communities in December 2017 to SNH pursuant to the transaction agreement discussed above.us.
Long livedLong-lived asset impairment.For the yearsyear ended December 31, 2018 and 2017,2019, we recorded non-cash charges for long livedrecognized a long-lived asset impairment of $0.5$3.3 million and $2.1 million, respectively, to reduce the carrying value of certain of our long livedlong-lived assets related to our senior living segment to their estimated fair values.
Interest, dividend and other income. Interest,The decrease in interest, dividend and other income increased by 6.9% for the year ended December 31, 2018is primarily due to decreased amounts of interest earned on our cash and cash equivalents and dividends received from our investments in equity securities due to declines in interest rates and dividends paid during 2020.
Interest and other expense. The decrease in interest and other expense is primarily due to decreased amounts of interest incurred on borrowings under our credit facility compared to the year ended December 31, 2017 primarily due to higher investable cash and cash equivalents balances.
Interest and other expense. Interest and other expense decreased by 29.9% for2019. We did not borrow any funds under our credit facility during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to the repayment of one mortgage note in September 2017 and another mortgage note in December 2017 and SNH’s assumption of one mortgage note in February 2018 and another mortgage note in June 2018 in connection with our sale of three senior living communities to SNH pursuant to the transaction agreement discussed above.2020; however we did incur unused line fees recorded as other expense.
Gain on early extinguishment of debt. In September 2017, we prepaid a mortgage note and recorded aUnrealized gain of $0.1 million, net of unamortized premiums and a prepayment penalty equal to 1% of the principal prepaid.
Unrealized loss on equity investments. Unrealized lossgain on equity investments represents adjustments made to our unrealized loss on ourinvestments in equity investments heldsecurities to record amounts at December 31, 2018 in accordance with new U.S. generally accepted accounting principles. fair value.
Realized gain on sale of debt and equity investments, net of tax. investments.Realized gain on sale of debt and equity investments represents our realized gain on investments generally held related to our salecaptive insurance company.
Loss on termination of investments, netleases. Loss on termination of applicable taxes.leases represents the excess of the fair value of the Share Issuances of $97.9 million compared to the consideration of $75.0 million paid by DHC.
(Provision) benefitProvision for income taxes. For the yearsyear ended December 31, 20182020 and 2017,2019, we recognized a provision for income taxes of $0.2$0.7 million and a benefit for income taxes of $4.5$0.1 million, respectively. The provision for income taxes for the year ended December 31, 2018 was due to2020 represents state taxes.income taxes, including current period expenses and the addition of a state valuation allowance, partially offset by a federal benefit for alternative minimum tax, or AMT, credits. The benefitprovision for income taxes for the year ended December 31, 2017 is primarily due to our monetization2019 represents state income taxes, including current period expenses, net of alternative minimumintra-period tax credits.allocation, partially offset by a federal benefit for AMT credits and intra-period tax allocation. For additional information regarding our taxes, see Note 56 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Equity in earnings of an investee.Equity in earnings of an investee net of tax. Equity in earnings of an investee, net of tax, represents our proportionate share of earnings from AIC.our former investment in Affiliates Insurance Company, or AIC, which was dissolved on February 13, 2020.
LIQUIDITY AND CAPITAL RESOURCESConcentration of Risk - Revenues
For the year ended December 31, 2020, 28.3% of our management and operating revenues was management fee revenue from our senior living communities managed for the account of DHC. DHC is the sole source of our management fee revenue. Effective as of January 1, 2020, all of our then existing leases and management and pooling agreements with DHC were terminated and replaced with the New Management Agreements, but prior to such date a substantial majority of our senior living revenue was derived from senior living communities leased from DHC. We expect to continue to be dependent on revenues from the management of senior living communities owned by DHC for the foreseeable future. Failure of DHC to continue to own these senior living communities in the future, or DHC's termination of a significant number of the New Management Agreements, could significantly impact our business. For additional information about our management arrangements with DHC, see "Restructuring Transactions with DHC“ included in Part I, Item I, Properties—Our Leases and Management Agreements with DHC” included in Part I, Item 2, and “—Liquidity and Capital Resources—Related Person Transactions” included in Part II, Item 7, of this Annual Report on Form 10-K and Notes 1 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Medicare and Medicaid programs provide operating revenues at some of our senior living communities (principally our SNFs) and for our rehabilitation and wellness services clinics. As a result of the completion of the Restructuring Transactions, our revenues from Medicare and Medicaid have declined; however, we earn management fees on Medicare and Medicaid revenue generated at the senior living communities we manage and for rehabilitation and wellness services we provide. From time to time, in the senior living communities we own or lease and operate, we may receive Medicaid revenue.
We cannot currently predict the type or magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us or our customer, DHC, of the possible failure of these programs to increase rates to match increasing expenses, but they may be adverse and material to our operations and to our future financial results of operations as well as those of DHC. Similarly, we are unable to predict the impact on us of the insurance changes, payment changes and healthcare delivery systems changes contained in and to be developed pursuant to the ACA. If the changes implemented under the ACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs or the costs borne by our client, DHC, of providing required services to residents, our future financial results could be materially and adversely affected. Finally, to the extent the ACA is repealed, replaced or modified,
additional regulatory risks may arise. Depending upon what aspects of the ACA are repealed, replaced or modified, our future financial results could be adversely and materially affected.
For more information regarding government regulation and its possible impact on us and our business, revenues and operations, see “Business—Government Regulation and Reimbursement” in Part I, Item 1 of this Annual Report on Form 10-K.
Liquidity and Capital Resources
We require cash to fund our operating expenses, to make capital expenditure and to service our debt obligations. As of December 31, 2018,2020, we had $29.5$84.4 million of unrestricted cash and cash equivalents and no availability for further borrowing under our credit facility.
Our principal sourcesequivalents. As of funds to meet operating and capital expenses and debt service obligations are cash flows from operating activities, unrestricted cash balances and proceeds from our sales to SNH of qualified capital improvements we may make to communities that we lease from SNH for increased rent pursuant to our leases with SNH. As noted elsewhere in this Annual Report of Form 10-K, we are currently experiencing substantial operating and liquidity challenges and we have determined that there is a substantial doubt about our ability to continue as a going concern.
Based on our cash balance at December 31, 2018 and projected cash needs for the next 12 months,2020, our management believes that we will need to increase our revenues, reduce our costs and/or pursue other transactions to be able to continue to fund our operating and capital requirements. We will need to raise the additional funds by: (i) increasing occupancy and/or rates we charge at our senior living communities, (ii) reducing our costs, (iii) increasing our revenues from other services we provide, such as rehabilitation, home health or other services, (iv) engaging in additional sale and leaseback or manageback or other transactions or otherwise expanding the scope of our business, (v) selling assets, including senior living communities we own, (vi) obtaining mortgage financing on our owned senior living communities, (vii) obtaining additional debt financing, such as term debt and/or a new credit facility, and/or (viii) issuing other debt or equity securities. We cannot be sure that we will be able to obtain any such additional funds by any of the foregoing or other means, and any such funds we may obtain may not be sufficient. If we are unable to obtain sufficient funds, we may be unable to continue as a going concern.
Assets and Liabilities
At December 31, 2018, we had $29.5 million of unrestrictedrestricted cash and cash equivalents compared to $26.3included $21.6 million atof bank term deposits in our captive insurance company.
As of December 31, 2017. Our total2020 and 2019, we had current and long term assets were $138.1of $262.3 million and $267.6$143.4 million, respectively, at December 31, 2018, compared to $197.2and current liabilities of $177.9 million and $278.7$164.3 million, respectively, at December 31, 2017. Our total current and long term liabilities were $229.7 million and $104.8 million, respectively, at December 31, 2018, compared to $218.6 million and $112.3 million, respectively, at December 31, 2017. The decrease in total current assets primarily relates to a decrease in assets held for sale as a result of the sale of four senior living communities to SNH during the first half of 2018, partially offset by an increase in due from related persons because of timing differences in when payments were received. The increase in our total current liabilities primarily relates to borrowings under our credit facility, partially offset by decreases in our accounts payable and accrued expenses due to timing differences in when payments were made and a decrease in liabilities held for sale as a result of SNH’s assumption of mortgage debtrespectively.
On January 1, 2020, in connection with the saleRestructuring Transactions, we issued 10,268,158 of three senior living communitiesour common shares to SNH duringDHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. As consideration for the first halfShare Issuances, DHC provided to us $75.0 million by assuming certain of 2018.our working capital liabilities and through cash payments.
We had
The following table presents selected data on our continuing operations from our condensed consolidated statement of cash flows used in operating activities of $54.2 million for the year ended December 31, 2018 compared to cash flowsperiods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | $ Change | | % Change |
| Net cash provided by (used in) | | | | | | | | |
| Operating activities | | $ | 51,381 | | | $ | (4,109) | | | $ | 55,490 | | | n/m |
| Investing activities | | 2,243 | | | 62,981 | | | (60,738) | | | (96.4) | % |
| Financing activities | | (1,006) | | | (53,146) | | | 52,140 | | | (98.1) | % |
| Increase in cash and cash equivalents and restricted cash and cash equivalents | | 52,618 | | | 5,726 | | | 46,892 | | | 818.9 | % |
| Restricted cash included in held for sale assets | | — | | | (5) | | | 5 | | | (100.0) | % |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 56,979 | | | 51,258 | | | 5,721 | | | 11.2 | % |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 109,597 | | | $ | 56,979 | | | $ | 52,618 | | | 92.3 | % |
n/m - not meaningful
Operating Activities
Cash provided by operating activities of $16.2 millionis net income adjusted for the year ended December 31, 2017.certain non-cash items and changes in assets and liabilities. The increase in cash flows used inprovided by operating activities for the year ended December 31, 20182020, compared to the year ended December 31, 2017 relatessame period in 2019 is primarily due to the timingRestructuring Transactions, including the receipt of payments made$23.5 million of cash from DHC, and the deferral of payroll taxes of $27.6 million as permitted by usthe CARES Act, of which $22.2 million will be reimbursed from DHC, as well as a decrease in net loss for payables and other accrued expenses, amounts received by us from related persons, a $0.8 million payment we received from our former liability insurer related to the settlement of our previously disclosed Arizona litigation matter during the year ended December 31, 2017,which included $3.4 million received and lowerrecognized under the CARES Act as other operating income, before non-cash items during the year ended December 31, 2018 compared to the year ended December 31, 2017.offset by changes in working capital.
We had cash flows provided by investing activities of $4.9 million and $16.5 million for the years ended December 31, 2018 and 2017, respectively.
Investing Activities
The decrease in cash flows provided by investing activities was primarily due to the $31.8 million of net proceeds received from the sale of four senior living communities to SNH during the first half of 2018
compared to the $39.1 million of net proceeds received from the sale of two senior living communities to SNH during the fourth quarter of 2017. Acquisitions of property and equipment, net of sales of such assets to SNH, were $31.0 million and $31.3 million for the years ended December 31, 2018 and 2017, respectively.
We had cash flows provided by financing activities of $51.0 million for the year ended December 31, 20182020, compared to the same period in 2019 is primarily due to a decrease in proceeds from the sale of property and equipment to DHC of $107.3 million and the decrease in the distributions in excess of earnings of AIC of $8.7 million, partially offset by a decrease in the acquisition of property and equipment of $52.1 million.
Financing Activities
Financing cash flows consist primarily of issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common share grants through our equity compensation plan. The decrease in net cash used in financing activities of $18.9 million for the year ended December 31, 2017.2020, compared to the same period in 2019 is primarily due to the net repayment of our outstanding borrowings on the revolving credit facility during the year ended December 31, 2019.
Capital Expenditures
During 2019, we completed an intensive review of our community-level capital expenditure needs with a focus on ensuring that our senior living communities are in appropriate physical condition to support our long-term strategy. During this review, we determined what additional investments are needed to protect the value of our senior living community portfolio and began in 2020 with implementing this long-term strategy. During the year ended December 31, 2019, we invested $5.2 million in our 20 owned and four communities leased from PEAK as well as our rehabilitation and wellness services clinics, and we invested and sold at cost $50.7 million in the communities we then leased and subsequently manage on behalf of DHC. During the year ended December 31, 2020, we invested $4.5 million in our 24 owned and leased senior living communities and rehabilitation and wellness services clinics. DHC funds the capital expenditures at the senior living communities we manage for the account of DHC pursuant to the New Management Agreements.
During 2020, we entered into an equipment finance lease and, as of December 31, 2020, we had a finance right-of-use asset of $4.5 million and a related finance lease liability of $4.7 million. The increasemajority of the equipment leased is for the use of DHC, and we expect to receive reimbursement for a majority of the finance lease liability from DHC over the lease term.
Pandemic Liquidity Impact
Our liquidity and capital funding requirements depend on numerous factors, including our operating results, our capital expenditures to the extent not funded by DHC pursuant to the New Management Agreements, general economic conditions and the cost of capital. Shortfalls in cash flows provided by financing activities was duefrom operating results or other principal sources of liquidity may have an adverse impact on our ability to net borrowings of $51.5 millionexecute on our strategy or to maintain capital spending levels. We believe we have adequate financial resources from our existing cash flows from operations, together with unrestricted cash on hand and amounts available under our credit facility to support our business for at least the prepaymentnext twelve months.
We are closely monitoring the effect of the Pandemic on our liquidity. We currently expect to use cash on hand and cash flows from operations as well as our revolving credit facility to fund our future operations and capital expenditures, to the extent not funded or reimbursed by DHC pursuant to the New Management Agreements, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue streams. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. We intend to conduct our business in a $13.1manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be certain that we will be able to successfully carry out this intention, particularly because of the uncertainty surrounding the duration and severity of the current economic impact resulting from the Pandemic. A long, protracted and extensive economic recession may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.
Insurance
Increases over time in the cost of insurance, especially professional and general liability insurance, workers’ compensation and employee health insurance, have had an adverse impact upon our results of operations. We self-insure a large portion of these costs. We also self-insure for auto insurance. Our costs have increased as a result of the higher costs that we incur to settle claims and to purchase insurance for claims in excess of the self-insured amounts, some of which related to the senior living communities we manage on behalf of DHC and are reimbursed to us by DHC pursuant to the New Management Agreements. Further, our health insurance and workers compensation costs have increased as a result of the Pandemic. These increased costs may continue in the future. We previously participated with other companies to which RMR LLC provides management services in a combined property insurance program through AIC. The policies under that program expired on June 30, 2019, and the other AIC shareholders and we elected not to renew the AIC property insurance program; we instead have purchased property insurance coverage under DHC's policy with unrelated third party insurance providers.
For more information about our existing insurance see “Business—Insurance” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 2 and 15 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information about our purchased property insurance coverage under DHC's policy, see Note 14 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
At December 31, 2020, we had seven irrevocable standby letters of credit outstanding, totaling $29.3 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $21.6 million of cash equivalents and $7.5 million of debt and equity investments. This letter of credit expires in June 2021 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At December 31, 2020, the cash equivalents collateralizing this letter of credit wereclassified as short-term restricted cash and cash equivalents in our consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term restricted debt and equity investments in our consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at December 31, 2020, totaling $2.4 million, which are issued under the credit facility, secure certain of our other obligations. As of February 25, 2021, these letters of credit are scheduled to mature between June 2021 and October 2021 and are required to be renewed annually.
Debt Financings and Covenants
We have a $65.0 million secured revolving credit facility that is available for general business purposes. Our credit facility matures in June 2021, and, subject to our payment of an extension fee and other conditions, we have the option to extend the stated maturity date of our credit facility for a one-year period. We are required to pay interest on borrowings under our credit facility at a rate of LIBOR plus a premium of 250 basis points per annum; or at a base rate, as defined in the credit agreement, plus 150 basis points per annum. The annual interest rate options as of December 31, 2020 were 2.64% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available capacity under our credit facility. No principal repayment is due until maturity.
Our credit facility is secured by 11 senior living communities with a combined 1,235 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility. Our credit facility is also secured by these senior living communities’ accounts receivable and related collateral. The amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our credit facility. Our credit facility provides for acceleration of payment of all amounts outstanding under our credit facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our credit agreement. Our credit agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.
At December 31, 2020, we had seven irrevocable standby letters of credit outstanding, totaling $29.3 million, as more fully described above under the heading “—Off-Balance Sheet Arrangements.”
We also have a mortgage note in September 2017 and fees paid in 2017as of December 31, 2020, that we assumed in connection with the replacementa previous acquisition of a senior living community. Payments of principal and interest are due monthly under this mortgage debt until maturity in September 2032. The annual interest rate on this mortgage debt was 6.20% as of December 31, 2020.
As of December 31, 2020, we had no borrowings outstanding under our credit facility.facility and $2.4 million in letters of credit issued under our credit facility, and $42.1 million available for borrowing under our credit facility, and $7.4 million outstanding on the mortgage note. As of December 31, 2020, we believe we were in compliance with all applicable covenants under our debt agreements.
For more information regarding our debt financings and covenants, see Note 9 to our Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Related Person Transactions
We have relationships and historical and continuing transactions with DHC, RMR LLC, ABP Trust and others related to them. For further information about these and other such relationships and related person transactions, see Notes 10, 13 and 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference and our other filings with the SEC, including our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2020. For further information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements”, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Seasonality
Revenues derived from our senior living and managed communities are subject to modest effects of seasonality, which we experience in certain regions more than others, due to weather patterns, geography and higher incidence and severity of flu and other illnesses during winter months. We do not expect these seasonal differences to cause material fluctuations in our revenues or operating cash flows. It is uncertain what the long-term survival, recurrence and resurgence of COVID-19 will be, including whether it will weaken, transform or otherwise become a common seasonal virus, which may change or amplify seasonal aspects and effects on our business.
Debt Investments
We routinely evaluate our available for sale debt investments to determine if they have been impaired. If the fair value of a debt investment is less than its book or carrying value, and we expect that situation to continue for more than a temporary period, we will record an “other than temporary impairment” loss in our consolidated statements of operations. We evaluate the fair value of our available for sale debt investments by reviewing each debt investment'sinvestment’s current market price, the ratings of the investment, the financial condition of the issuer, and our intent and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the investment is below the investment'sinvestment’s cost basis for an extended period.period, which we typically define as greater than twelve months. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the investment is historically volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not meet the criteria described above, such as if we plan to sell the investment in the near term and the fair value is below our cost basis. When we believe that a change in fair value of a debt investment is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses. When we determine that impairment in the fair value of a debt investment is an “other than temporary impairment”, we record a charge to earnings. We did not record an impairment charge for the years ended December 31, 20182020 or 20172019 for our debt investments.
Compliance and Litigation Matters
As previously disclosed, in July 2017, as a result of our routine monitoring protocols that are a part of our compliance program to review records related to our Medicare billing practices, we became aware of certain potentialdiscovered potentially inadequate documentation and other issues at onea SNF that we manage on behalf of our leased SNFs.DHC. This compliance reviewmonitoring was not initiated in response to any specific complaint or allegation, but was a reviewmonitoring of the type that we periodically undertake to test our compliance with applicable Medicare billing rules. As a result of these discoveries,this discovery, we, along with DHC, made a voluntary disclosure of deficiencies to the OIG pursuant to the OIG'sOIG’s Provider Self-Disclosure Protocol. We submitted supplemental disclosures related to this matter to the OIG in December 2017 and March 2018. At December 31, 2017, we accrued an estimated revenue reserve of $0.9 million for historical Medicare payments we received and expect to repay as a result of these deficiencies, which amount we reduced to $0.8 million in March 2018. The entire $0.8 million reserve remained accrued and unpaid at December 31, 2018. In addition, at December 31, 2017, we recorded an aggregate $0.7 million expense for additional costs we incurred as a result of this matter, including estimated OIG imposed penalties. Our total costs incurred related to this matter at December 31, 2018, excluding revenue reserves, was $0.7 million, $0.6 million of which remained accrued and unpaid at December 31, 2018.
We were defendants in a lawsuit filed in the Superior Court of Maricopa County, Arizona by the estate of a former resident of a senior living community operated by us, or the Arizona litigation matter. The complaint asserted claims against us for pain and suffering as a result of improper treatment constituting violations of the Arizona Adult Protective Services Act and wrongful death. In May 2015, the jury rendered a decision in our favor on the wrongful death claim, and against us on the remaining claims, returning verdicts awarding damages of approximately $19.2 million, which consisted of $2.5 million for pain and suffering and the remainder in punitive damages. In March 2016, pursuant toDHC entered into a settlement agreement we entered with the plaintiff, $7.3 million was paid toOIG effective January 5, 2021 and the plaintiff, of which $3.0 millionsettlement was paid by our thenDHC. We and DHC did not admit any liability insurer and the balance by us.pursuant to this settlement. We recorded a $4.2recognized $0.1 million charge forduring the year ended December 31, 2015 for the net settlement amount we paid. In September 2017,pursuant to an agreement we entered with our former liability insurer to settle litigation we had commenced against it, our former liability insurer paid us an additional $0.8 million related to our settlement of the Arizona litigation matter and we recorded2020 as a decrease to other senior living operating expensesreduction in our consolidated statements of operations consistent with the classification of the original charge.
Our Leases and Management Agreements with SNH
As of December 31, 2018, we leased 184 senior living communities from SNH under five leases. Our total annual rent payable to SNH as of December 31, 2018 was $207.8 million, excluding percentage rent based on increases in gross revenues at certain communities. Our total rent expense under all of our leases with SNH, net of lease inducement amortization and the amortization of the deferred gain associated with the June 2016 sale and leaseback transaction, was $206.2 million and $203.6 million for the years ended December 31, 2018 and 2017, respectively, which included approximately $5.5 million in estimated percentage rent due to SNH for each of the years ended December 31, 2018 and 2017.
Upon our request, SNH may purchase capital improvements made at the communities we lease from SNH and increase our rent pursuant to contractual formulas; however, we are not required to offer these improvements for sale to SNH and SNH is not obligated to purchase these improvements from us. During the year ended December 31, 2018, we sold to SNH $18.0 million of capital improvements made at the communities we lease from SNH. As a result, our annual rent payable to SNH increased by approximately $1.4 million.
We managed 76 senior living communities for the account of SNH and its related entities as of December 31, 2018, pursuant to long term management and pooling agreements that combine various calculations of revenues and expenses from the operations of the communities covered by the applicable pooling agreements. We earned management fees from SNH of $15.1 million and $14.1 millionDHC for the years ended December 31, 2018 and 2017, respectively, frommanagement fees that were previously paid to us with respect to the senior living communities we manage for the account of SNH and its related entities. Included in these amounts were fees we earned for our management of capital expenditure projects at the communities we manage for the account of SNH of $0.7 million and $0.8 million for the years ended December 31, 2018 and 2017, respectively. In addition, we earned incentive fees of $36,000 for the year ended December 31, 2018.
In November 2017, we entered a transaction agreement with SNH pursuant to which we agreed to sell six senior living communities to SNH and, as we sold these communities, to enter new management agreements with SNH for us to manage the sold communities for SNH, with the new management agreements being combined pursuant to two new pooling agreements between us and SNH. In December 2017, January 2018, February 2018 and June 2018, we sold to SNH these six senior living communities and concurrently with those sales, we and SNH entered management agreements for each of these senior living communities and two new pooling agreements and we began managing these communities for the account of SNH.
Our Independent Directors and SNH’s independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNH in the future. We cannot be surehistorical Medicare payments DHC received that any changes to our arrangements with SNH will be agreed to or occur. For more information regarding our leases and management arrangements and other transactions with SNH, see Notes 9, 11 and 14 to our Consolidated Financial Statements included in Part IV, Item 15 in this Annual Report on Form 10-K.
Our Revenues
Our revenues from services to residents at our senior living communities are our primary source of cash to fund our operating expenses, including rent, capital expenditures (net of capital improvements that we sell to SNH for increased rent pursuant to our leases with SNH) and principal and interest payments on our debt. The general trends impacting our industry are affecting our business and revenues. For further information about those trends see "General Industry Trends" appearing earlier in this Part II, Item 7 of this Annual Report on Form 10-K.
At some of our senior living communities (principally our SNFs) and our rehabilitation and wellness clinics, Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation and wellness services. We derived approximately 23.3% and 22.9% of our consolidated revenues from these government funded programs for the years ended December 31, 2018 and 2017, respectively. Our net Medicare revenues totaled $119.1 million and $124.3 million for the years ended December 31, 2018 and 2017, respectively. Our net Medicaid revenues totaled $135.9 million and $133.0 million for the years ended December 31, 2018 and 2017, respectively.
We cannot currently predict the type or magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be adverse and material to our operations and to our future financial results of operations. Similarly, we are unable to predict the impact on us of the insurance changes, payment changes and healthcare delivery systems changes contained in and to be developedit repaid pursuant to the ACA. If the changes implemented under the ACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs of providing required services to residents, our future financial results could be materially and adversely affected. Finally, to the extent thesettlement.
ACA is repealed, replaced or modified, additional regulatory risks may arise. Depending upon what aspects of the ACA are repealed, replaced or modified, our future financial results could be adversely and materially affected.
For more information regarding government regulation and its possible impact on us and our business, revenues and operations,other litigation matters, see “Business—Government Regulation and Reimbursement” in Part I, Item 1 of this Annual Report on Form 10-K.
Insurance
Increases over time in the costs of insurance, especially professional and general liability insurance, workers’ compensation and employee health insurance, have had an adverse impact upon our results of operations. Although we self insure a large portion of these costs, our costs have increased as a result of the higher costs that we incur to settle claims and to purchase insurance for claims in excess of the self insurance amounts. These increased costs may continue in the future. We, ABP Trust and other companies to which RMR LLC provides management services are the shareholders of an insurance company which has designed and reinsured in part a combined property insurance program in which we and the other shareholders participate. For more information about our existing insurance see “Business—Insurance” in Part I, Item 1 of this Annual Report on Form 10-K.
Debt Financings and Covenants
In February 2017, we replaced our prior credit facility, which was scheduled to mature in April 2017, with a $100.0 million secured revolving credit facility, with terms substantially similar to those of our prior credit facility. We paid fees of $1.9 million in 2017 in connection with the replacement of our credit facility, which fees were deferred and are being amortized over the term of our credit facility. On December 18, 2018, we amended our credit agreement. As a result of the amendmentNote 12 to our credit agreement, the aggregate amount of the commitments under our credit facility was reduced to $54.0 million from $100.0 million,consolidated financial statements, entitled "Commitments and the stated maturity date of our credit facility was changed to June 28, 2019 from February 24, 2020. In addition, the amendment eliminated our options to extend the maturity date of our credit facility for two, one year periods, as well as to request an increase in the aggregate amount of the commitments under our credit facility. The amendment also removed certain financial covenants we were previously required to comply with, including the leverage and fixed charge coverage ratios and the tangible net worth covenant. Certain other covenants and related definitions, among other provisions, included in our credit agreement were also modified pursuant to the amendment. Our credit facility is available for general business purposes, including acquisitions. We are required to pay interest at a rate based on, at our option, LIBOR or a base rate, plus a premium, or 4.85% and 7.00%, respectively, per annum as of December 31, 2018, on outstanding borrowings under our credit facility. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of the available borrowings under our credit facility. No principal repayment is due until maturity.
Our credit facility is secured by real estate mortgages on 10 senior living communities with a combined 1,219 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility. Our credit facility is also secured by these subsidiaries’ accounts receivable and related collateral. The amount of available borrowings under our credit facility is subject to our having qualified collateral, which is primarily based on the value of the communities securing our obligations under our credit facility. Our credit facility provides for acceleration of payment of all amounts outstanding under our credit facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined. Our credit agreement, contains a number of financial and other covenants, including covenants that restrict our ability to pay dividends or make other distributions to our stockholders in certain circumstances.
At December 31, 2018, we had seven irrevocable standby letters of credit outstanding, totaling $25.2 million. In June 2018, we increased, from $17.8 million to $22.7 million, one of these letters of credit which secures our workers' compensation insurance program, and this letter of credit is currently collateralized by approximately $17.9 million of cash equivalents and $5.4 million of debt and equity investments. This letter of credit currently expires in June 2019 and is automatically extended for one year terms unless notice of nonrenewal is provided by the issuing bank prior to the end of the applicable term. We expect that our workers' compensation insurance program will require an increase in the value of this letter of credit in June 2019. The remaining six irrevocable standby letters of credit outstanding at December 31, 2018 totaling $2.5 million, secure certain of our other obligations. These letters of credit are scheduled to mature between May 2019 and October 2019 and are required to be renewed annually.
We also have mortgage debt of $7.9 million as of December 31, 2018 that we assumed in connection with a previous acquisition of a senior living community. Payments of principal and interest are due monthly under this mortgage debt until maturity in September 2032. The annual interest rate on this mortgage debt was 6.20% as of December 31, 2018.
In September 2017, we prepaid a mortgage note for one of our senior living communities that had a principal balance of $13.1 million and required interest at the contracted rate of 6.47% per annum.
In November 2017, we entered a transaction agreement with SNH pursuant to which in December 2017, January 2018, February 2018 and June 2018 we sold to SNH a total of six senior living communities and, concurrently with those sales, we and SNH entered management agreements for each of these senior living communities and two new pooling agreements with terms substantially similar to our other management and pooling agreements with SNH, and we began managing these communities for the account of SNH. In December 2017, we sold two of these senior living communities for approximately $39.2 million, including $2.3 million of mortgage debt, net of a mortgage discount, which was prepaid with proceeds from the sale, excluding closing costs. In January and February 2018 we sold two senior living communities for an aggregate sales price of approximately $41.9 million, including $17.4 million of mortgage debt, net of a mortgage premium, which SNH assumed upon completion of the sale, excluding closing costs. In June 2018, we sold two senior living communities for an aggregate sales price of approximately $23.3 million, including $17.2 million of mortgage debt, net of a mortgage premium, which SNH assumed upon completion of the sale, excluding closing costs.
As of December 31, 2018, we had $51.5 million in outstanding borrowings under our credit facility and $2.5 millionin letters of credit issued under our credit facility, and no availability for further borrowing under our credit facility, and we had $7.9 million in outstanding mortgage debt. As of December 31, 2018, we believe we were in compliance with all applicable covenants under our debt agreements. We are evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.
Related Person Transactions
We have relationships and historical and continuing transactions with SNH, RMR LLC, ABP Trust, AIC and others related to them. For example: SNH is our former parent company, our largest landlord, the owner of the senior living communities that we manage and a significant stockholder of us, owning as of December 31, 2018, 8.3% of our outstanding common stock; various services we require to operate our business are provided to us by RMR LLC pursuant to our business management agreement with RMR LLC and RMR LLC also provides management services to SNH; RMR LLC employs our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer; Adam D. Portnoy, one of our Managing Directors, directly and indirectly through ABP Trust and its subsidiaries, is our largest stockholder, beneficially owning approximately 35.7% of our outstanding common stock as of December 31, 2018; a subsidiary of ABP Trust is also the landlord for our headquarters; and Adam Portnoy, through ABP Trust and its subsidiaries, is also the controlling shareholder of RMR Inc., which is the managing member of RMR LLC. We have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and some of which have directors, trustees or officers who are also directors, trustees or officers of us, SNH, RMR LLC or RMR Inc., including: AIC, of which we, ABP Trust, SNH and four other companies to which RMR LLC provides management services each own 14.3% and which arranges and insures or reinsures in part a combined property insurance program for us and its six other shareholders.
For further information about these and other such relationships and related person transactions, see Notes 9, 11, 13 and 14Contingencies," to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference and our other filings with the SEC, including our definitive Proxy Statement for our 2019 Annual Meeting of Stockholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2018. For further information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward Looking Statements”, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” Our filings with the SEC and copies of certain of our agreements with these related persons, including our leases, forms of management agreements and related pooling agreements with SNH, the 2017 transaction agreement we entered with SNH, our business management agreement with RMR LLC, our headquarters lease with a subsidiary of ABP Trust, and our shareholders agreement with AIC and its six other shareholders, are available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.10-K.
Critical Accounting Policies
Our critical accounting policies concern revenue recognition, including contractual allowances, the allowance for doubtful accounts, self insuranceself-insurance reserves long lived assets and our judgments and estimates concerning our provisionsprovision for income taxes.taxes or valuation allowance related to deferred tax assets.
Revenue Recognition. Our revenue recognition policies involve judgments about Medicare and Medicaid rate calculations. These judgments are based principally upon our experience with these programs and our knowledge of current rules and regulations applicable to these programs. Our principal sources of revenue are senior living revenues, management fees, rehabilitation and management feewellness services revenue and reimbursed costs incurred pursuant to our management agreements and pooling agreements.
We recognize revenues when services are provided, and these amounts are reported at their estimated net realizable amounts. Some Medicare and Medicaid revenues are subject to audit and retroactive adjustment and sometimes retroactive legislative changes. See “Revenue Recognition” in Note 2 to our Consolidated Financial Statements included in Part IV, Item
15 of this Annual Report on Form 10-K for a detailed discussion of our revenue recognition policies and our contractual arrangements.
Allowance for Doubtful Accounts. Our policies for valuing accounts receivable, including the allowance for doubtful accounts, involve significant judgments based upon our experience, including consideration of the age of the receivables, the terms of the agreements with our residents, their third party payers or other obligors, the residents’ or payers’ stated intent to pay, the residents’ or payers’ financial capacity and other factors which may include litigation or rate and payment appeal proceedings. We periodically review and revise these estimates based on new information and these revisions may be material.
Determining reserves for Medicare repayment obligations and related costs, including penalties, and the casualty, liability, workers’ compensation and healthcare losses and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved. We regularly adjust these estimates to reflect changes in the foregoing factors, our actual claims experience, recommendations from our professional consultants, changes in market conditions and other factors; it is possible that such adjustments may be material.
We regularly evaluate whether events or changes in circumstances have occurred that could indicate impairment in the value of our long lived assets. If there is an indication that the carrying value of an asset is not recoverable, we determine the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. We determine estimated fair value through an evaluation of recent financial performance, recent transactions for similar assets, market conditions and projected cash flows using standard industry valuation techniques. This process requires that estimates be made, and, if we misjudge or estimate incorrectly, this could have a material effect on our financial statements.
Taxes.Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits, if any, reflect our assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States. Significant judgments and estimates are required in determining our income tax expense and the realizabilityrealization of our deferred tax assets and liabilities.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state and federal pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income or loss.
We established a valuation allowance against our deferred tax assets that we have determined to be not realizable. The decision to establish the valuation allowance includes our assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. An important aspect of objective negative evidence evaluated includes the significant losses incurred by us in recent years, excluding the gain
recognized for tax purposes from the June 2016 sale and leaseback transaction.years. This objective negative evidence is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realizabilityrealization of our deferred tax assets. For these reasons, we have recorded a valuation allowance against the majority of our net deferred tax assets and liabilities as of December 31, 20182020 and 2017.2019.
Judgments and Estimates. Some of our judgments and estimates are based upon published industry statistics and, in some cases, third partythird-party professionals. Any misjudgments or incorrect estimates affecting our critical accounting policies could have a material effect on our financial statements.
In the future, we may need to revise the judgments, estimates and assessments we use to formulate our critical accounting policies to incorporate information which is not now known. We cannot predict the effect changes to the premises underlying our critical accounting policies may have on our future results of operations, although such changes could be material and adverse.
Impact ofInflation and Deflation
Inflation in the past several years in the United States has been modest, but recently there have been indications of inflation in the U.S. economy and some market forecasts indicate an expectation of increased inflation in the near to intermediate term. Future inflation might have both positive and negative impactsFor further information on our business. Rising price levels might allow uscritical accounting estimates and policies and a summary of recent accounting pronouncements applicable to increase our chargesConsolidated Financial Statements, see Note 2, "Summary of Significant Accounting Policies", to residents, but might cause our operating costs, including our percentage rent, to increase. Also, our ability to realize rate increases paid by Medicare and Medicaid programs might be limited despite inflation.the Consolidated Financial Statements in Item 15 of Part IV of this Annual Report on Form 10-K.
Deflation would likely have a negative impact upon us. A large component
Seasonality
Our senior living business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods, residents at such facilities are sometimes discharged to spend time with family and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among residents which can result in increased costs or discharges to hospitals. As a result of these and other factors, these operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the fourth and first calendar quarters. We do not expect these seasonal differences to cause material fluctuations in our revenues or operating cash flows.
Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws, and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long term,long-term, we believe any such increased costs will be passed through and paid by our residents and other customers in higher charges for our services. However, in the short term,short-term, these increased costs, if material in amount, could materially and adversely affect our financial condition and results of operations.
Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather has had and may continue to have an adverse effect on certain senior living communities we operate. Flooding caused by rising seassea levels and severe weather events, including hurricanes, tornadoes and widespread fires may have an adverse effect on the senior living communities we operate. We mitigate these risks by procuring insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results. For more information on the impact of climate change, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Part IV, Item 15 of this Annual Report on Form 10‑K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a‑15 and 15d‑15 under the Exchange Act. Based upon that evaluation, our management, including our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 20182020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial Reporting
We areOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018.2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 framework). Based on this assessment, we believeour management concluded that, as of December 31, 2018,2020, our internal control over financial reporting is effective.
Item 9B. Other Information
None.Effective February 23, 2021, Ellen Snow ceased serving as Vice President and Chief Accounting Officer of Five Star Senior Living Inc. (the “Company”).
On February 24, 2021, Jeffrey C. Leer, the Company’s Executive Vice President, Chief Financial Officer and Treasurer, assumed the responsibilities of principal accounting officer, in addition to continuing in his role as principal financial officer.
Mr. Leer, 41, has served as the Company’s Executive Vice President, Chief Financial Officer and Treasurer since June 2019.
There is no other arrangement or understanding between Mr. Leer and any other person pursuant to which Mr. Leer was selected as an officer of the Company, and Mr. Leer has no family relationships with any director or other executive officer. Additionally, there are no related party transactions involving Mr. Leer or any member of his immediate family required to be disclosed pursuant to Item 404(a) of Regulation S-K. Biographical information about Mr. Leer is contained in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on April 15, 2020.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have a Code of Conduct that applies to our officers and Directors, RMR Inc. and RMR LLC, senior level officers of RMR LLC, senior level officers of RMR Inc. and certain other officers and employees of RMR LLC. Our Code of Conduct is posted on our website, www.fivestarseniorliving.com. A printed copy of our Code of Conduct is also available free of charge to any person who requests a copy by writing to our Secretary, Five Star Senior Living Inc., Two Newton Place, 255 Washington Street, Newton, MA 02458. We intend to disclose any amendments or waivers to our Code of Conduct applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any person performing similar functions) on our website.
The remainder of the information required by this Item 10 of Form 10-K is incorporated by reference to our definitive Proxy Statement.
Item 11. Executive Compensation
The information required by this Item 11 of Form 10-K is incorporated by reference to our definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
We may grantaward common shares to our officers and employees and to employees of RMR LLC under our 2014 Equity Compensation Plan, or the 2014 Plan. In addition, each of our Directors receives common shares as part of his or her annual compensation for serving as a Director and such shares are awarded under the 2014 Plan. The terms of awards made under the 2014 Plan are determined by the Compensation Committee of our Board of Directors at the time of the awards. The following table is as of December 31, 2018:2020:
|
| | | | | |
| Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
| Weighted‑average
exercise price of
outstanding options,
warrants and rights
| Number of securities
remaining available for future
issuance under equity
compensation plans (excluding
securities reflected in
column (a))
| |
| (a) | (b) | (c) | |
Equity compensation plans approved by securityholders—2014 Plan | None | None | 2,528,500 |
| (1)
|
Equity compensation plans not approved by securityholders | None | None | None |
| |
Total | None | None | 2,528,500 |
| (1)
|
| | | | | | | | | | | | | | | | | | | | |
| | Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights | | Weighted‑Average
Exercise Price of
Outstanding Options,
Warrants and Rights | | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a)) | |
| | (a) | | (b) | | (c) | |
| Equity compensation plans approved by securityholders—2014 Plan | None | | None | | 2,446,730 | (1) |
| Equity compensation plans not approved by securityholders | None | | None | | None | |
| Total | None | | None | | 2,446,730 | (1) |
(1) Consists of common shares available for issuance pursuant to the terms of the 2014 Plan. Share awards that are forfeited will be added to the common shares available for issuance under the 2014 Plan.
Payments by us to RMR LLC and RMR LLC employees are described in Notes 1311 and 14 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. The remainder of the information required by Item 12 of Form 10-K is incorporated by reference to our definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 of Form 10-K is incorporated by reference to our definitive Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 of Form 10-K is incorporated by reference to our definitive Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements
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(a) | Index to Financial Statements |
| Page |
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| Page |
| Consolidated Financial Statements of Five Star Senior Living Inc. | |
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All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(b) Exhibits
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| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit Number | | File Number | | Filing Date | | Filed Herewith |
| | | | | | | | | | | | |
| 3.1 | | | | 10-Q | | 3.1 | | 001-16817 | | 11/6/2019 | | |
| 3.2 | | | | 10-K | | 3.6 | | 001-16817 | | 3/3/2017 | | |
| 4.1 | | | | 10-Q | | 4.1 | | 001-16817 | | 11/6/2019 | | |
| 4.2 | | | | 8-K | | 10.1 | | 001-16817 | | 10/6/2016 | | |
| 4.3 | | | | 10-K | | 4.3 | | 001-16817 | | 3/2/2020 | | |
| 10.1 | | | | 8-K | | 10.1 | | 001-16817 | | 6/9/2020 | | |
| 10.2 | | | | 10-Q | | 10.5 | | 001-16817 | | 4/16/2014 | | |
| 10.3 | | | | 10-K | | 10.5 | | 001-16817 | | 3/3/2017 | | |
| 10.4 | | | | | | | | | | | | X |
| 10.5 | | | | 8-K | | 10.1 | | 001-16817 | | 5/21/2018 | | |
| 10.6 | | | | 10-K | | 10.5 | | 001-16817 | | 3/2/2020 | | |
| 10.7 | | | | 8-K | | 10.2 | | 001-16817 | | 6/9/2020 | | |
| 10.8 | | | | 8-K | | 10.1 | | 001-16817 | | 6/13/2019 | | |
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| 10.9 | | Transaction Agreement, dated December 7, 2001, among Diversified Healthcare Trust (f/k/a Senior Housing Properties Trust), certain subsidiaries of Diversified Healthcare Trust, the Company, certain subsidiaries of the Company, FSQ, Inc., Service Properties Trust (f/k/a Hospitality Properties Trust), Equity Commonwealth (f/k/a HRPT Properties Trust) and The RMR Group LLC (f/k/a Reit Management & Research LLC). | | 8-K | | 10.1 | | 001-16817 | | 12/13/2001 | | |
| 10.10 | | | | 8-K | | 10.1 | | 001-16817 | | 4/5/2019 | | |
| 10.11 | | | | 10-K | | 10.10 | | 001-16817 | | 3/2/2020 | | |
| 10.12 | | | | 10-K | | 10.11 | | 001-16817 | | 3/2/2020 | | |
| 10.13 | | | | 10-Q | | 10.3 | | 001-16817 | | 8/10/2009 | | |
| 10.14 | | | | 10-K | | 10.52 | | 001-16817 | | 3/16/2015 | | |
| 21.1 | | | | | | | | | | | | X |
| 23.1 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
| 32.1 (#) | | | | | | | | | | | | X |
| 99.1 | | | | 10-K | | 99.1 | | 001-16817 | | 3/2/2020 | | |
| 99.2 | | | | 8-K | | 99.1 | | 001-16817 | | 5/13/2011 | | |
| 99.3 | | | | 10-K | | 99.14 | | 001-16817 | | 3/16/2015 | | |
| 99.4 | | | | | | | | | | | | X |
| 99.5 | | | | 10-Q | | 99.1 | | 001-16817 | | 8/1/2012 | | |
| 99.6 | | | | 10-Q | | 99.2 | | 001-16817 | | 10/30/2012 | | |
| 99.7 | | | | 10-K | | 99.25 | | 001-16817 | | 3/16/2015 | | |
| 99.8 | | | | 10-Q | | 10.1 | | 001-16817 | | 8/1/2012 | | |
| 99.9 | | | | 10-Q | | 99.1 | | 001-16817 | | 8/10/2015 | | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
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Exhibit
Number
101.SCH | | DescriptionXBRL Taxonomy Extension Schema Document. |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1 |
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4.2 |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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10.11 |
| | Transaction Agreement, dated December 7, 2001, among Senior Housing Properties Trust, certain subsidiaries of Senior Housing Properties Trust, the Company, certain subsidiaries of the Company, FSQ, Inc., Hospitality Properties Trust, Equity Commonwealth (f/k/a HRPT Properties Trust) and The RMR Group LLC (f/k/a Reit Management & Research LLC). (Incorporated by reference to Senior Housing Properties Trust’s Current Report on Form 8-K dated December 13, 2001, File No. 001-15319.) |
10.12 |
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10.13 |
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10.14 |
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10.15 |
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10.16 |
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10.17 |
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10.18 |
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10.19 |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
| | X |
10.26101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document. | |
10.27 |
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10.28 |
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10.29 |
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10.30 |
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10.31 |
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10.32 |
| | Amended and Restated Guaranty Agreement (Lease No. 1), dated as of August 4, 2009, made by the Company, as Guarantor, for the benefit of certain subsidiaries of Senior Housing Properties Trust, relating to the Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
10.33 |
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10.34 |
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10.35 |
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10.36 |
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10.37 |
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10.38 |
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10.39 |
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10.40 |
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10.41 |
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10.42 |
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10.43 |
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10.44 |
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11.45 |
| | Amended and Restated Guaranty Agreement (Lease No. 2), dated as of August 4, 2009, made by the Company, as Guarantor, for the benefit of certain subsidiaries of Senior Housing Properties Trust, relating to the Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
10.46 |
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10.47 |
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10.48 |
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10.49 |
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10.50 |
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10.51 |
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10.52 |
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10.53 |
| | Amended and Restated Guaranty Agreement (Lease No. 4), dated as of August 4, 2009, made by the Company, as Guarantor, for the benefit of certain subsidiaries of Senior Housing Properties Trust, relating to the Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
10.54 |
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10.55 |
| | X |
10.56101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document. | Guaranty Agreement (Lease No. 5), dated as of June 29, 2016, made by the Company, as Guarantor, for the benefit of SNH/LTA Properties Trust, relating to Master Lease Agreement (Lease No. 5), dated as of June 29, 2016, between SNH/LTA Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
10.57 |
| | Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No.001-16817.) |
10.58 |
| | Amendment No. 1 to Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
10.59 |
| | Partial Termination of and Amendment No. 2 to Amended and Restated Master Lease Agreement, dated as of August 31, 2012, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended September 30, 2012, File No. 001-16817.) |
10.60 |
| | Amended and Restated Guaranty Agreement, dated as of August 4, 2009, made by the Company, as Guarantor, for the benefit of SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, relating to the Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
10.61 |
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10.63 |
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10.64 |
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10.65 |
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10.66 |
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10.67 |
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21.1 |
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23.1 |
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31.1 |
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31.2 |
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32.1 |
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99.1 |
| | Amended and Restated Security Agreement (Lease No. 1), dated as of August 4, 2009, among Five Star Quality Care Trust, as Tenant, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.2 |
| | Amended and Restated Subtenant Guaranty Agreement (Lease No. 1), dated as of August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
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99.3 |
| | Amended and Restated Subtenant Security Agreement (Lease No. 1), dated as of August 4, 2009, made by certain subsidiaries of the Company, as Subtenants, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.4 |
| | Amended and Restated Security Agreement (Lease No. 2), dated as of August 4, 2009, made by certain subsidiaries of the Company, as Tenant, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.5 |
| | Amended and Restated Subtenant Guaranty Agreement (Lease No. 2), dated as of August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.6 |
| | Amended and Restated Subtenant Security Agreement (Lease No. 2), dated as of August 4, 2009, made by certain subsidiaries of the Company, as Subtenants, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.7 |
| | Amended and Restated Security Agreement (Lease No. 4), dated as of August 4, 2009, made by certain subsidiaries of the Company, as Tenant, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.8 |
| | Amended and Restated Subtenant Guaranty Agreement (Lease No. 4), dated as of August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.9 |
| | Amended and Restated Subtenant Security Agreement (Lease No. 4), dated as of August 4, 2009, made by certain subsidiaries of the Company, as Subtenants, and the Landlord under the Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10‑Q for the quarter ended June 30, 2009, File No. 001-16817.) |
99.10 |
| | |
99.11 |
| | |
99.12 |
| | |
99.13 |
| | |
99.14 |
| | |
99.15 |
| | |
99.16 |
| | |
99.17 |
| | |
|
| | | |
99.18 |
| | X |
99.19101.LAB |
| Taxonomy Extension Label Linkbase Document. | |
99.20 |
| | |
99.21 |
| | |
99.22 |
| | |
99.23 |
| | |
99.24 |
| | |
99.25 |
| | |
99.26 |
| | |
99.27 |
| | |
99.28 |
| | |
99.29 |
| | |
99.30 |
| | |
99.31 |
| | |
99.32 |
| | |
99.33 |
| | |
99.34 |
| | |
99.35 |
| | |
99.36 |
| | |
99.37 |
| | |
99.38 |
| | |
|
| | | |
99.39 |
| | | | X |
99.40101.PRE |
| Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
99.41104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
99.42 |
| | |
99.43 |
| | |
99.44 |
| | |
99.45 |
| | Amended and Restated Shareholders Agreement, dated May 21, 2012, among Affiliates Insurance Company, the Company, Hospitality Properties Trust, Senior Housing Properties Trust, Travel Centers of America LLC, ABP Trust (as successor to The RMR Group LLC), Office Properties Income Trust (f/k/a Government Properties Income Trust) and Industrial Logistics Properties Trust (as successor to Select Income REIT). (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, File No. 001-16817.) |
99.46 |
| | |
99.47 |
| | |
99.48 |
| | |
99.49 |
| | |
101.1 |
| | The following materials from the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements, tagged as blocks of text and in detail. (Filed herewith.)X |
________________________
(+) Management contract or compensatory plan or arrangement.
(#) This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
Item 16. Form 10-K Summary
None.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Shareholders
of Five Star Senior Living Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Five Star Senior Living Inc. (the Company)"Company") as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive loss, shareholders'shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the financial statements)"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit of $292.6 million. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of Self-Insurance Reserves
As described in Note 2 and Note 15 of the consolidated financial statements, the Company partially self-insures up to certain limits for workers’ compensation, professional and general liability and automobile coverage. Claims in excess of these limits are insured up to contractual limits, over which the Company self-insures. The Company fully self-insures all health-related claims for covered employees. The Company’s self-insurance reserves were $79.0 million as of December 31, 2020 and are included in accrued compensation and benefits and accrued self-insurance obligations in the accompanying consolidated balance sheet. The reserves for the casualty, liability, workers’ compensation and healthcare losses and costs are estimated utilizing a third-party actuary and are based on past experience, expectations of future events, including projected settlements for pending claims, known incidents that may result in claims, estimates of incurred but not reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors.
We identified the Company’s self-insurance reserves as a critical audit matter because of the significant judgments made by management in determining the estimates, as well as the sensitivity of the actuarial assumptions. Auditing management’s judgments regarding the self-insurance reserves involved a high degree of auditor judgment and increased effort was required, including the involvement of actuarial specialists to evaluate the reasonableness of the significant estimates and assumptions utilized in the reserve calculations.
Our audit procedures related to the determination of the self-insurance reserves included the following, among others:
•With the assistance of our actuarial specialists, we evaluated the reasonableness of the actuarial methodologies and assumptions. Our specialists also assessed the appropriateness of management’s estimates by comparing management’s estimates to our independently developed estimate.
•We tested the accuracy and completeness of the underlying data utilized in the actuarial valuation including the actual claims paid during the year.
•We assessed the qualifications and objectivity of management’s third-party actuarial specialists.
•We evaluated the Company’s ability to estimate self-insurance reserves by comparing its historical estimates with actual claims paid.
/s/ RSM US LLP
We have served as the Company's auditor since 2014.
Boston, Massachusetts
March 6, 2019February 25, 2021
FIVE STAR SENIOR LIVING INC.
Five Star Senior Living Inc.
Consolidated Balance Sheets
(in thousands, except share data)
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 29,512 |
| | $ | 26,255 |
|
| Accounts receivable, net of allowance of $3,422 and $3,572 at December 31, 2018 and 2017, respectively | 37,758 |
| | 38,673 |
|
| Due from related persons | 7,855 |
| | 4,774 |
|
| Prepaid expenses | 9,670 |
| | 11,484 |
|
| Investments in available for sale securities, of which $11,285 and $7,310 are restricted as of December 31, 2018 and 2017, respectively | 20,179 |
| | 22,524 |
|
| Restricted cash | 19,720 |
| | 20,747 |
|
| Other current assets | 13,359 |
| | 13,648 |
|
| Assets held for sale | — |
| | 59,080 |
|
| Total current assets | 138,053 |
| | 197,185 |
|
| | | | |
| Property and equipment, net | 243,873 |
| | 251,504 |
|
| Equity investment of an investee | 8,633 |
| | 8,185 |
|
| Restricted cash | 923 |
| | 1,476 |
|
| Restricted investments in available for sale securities | 8,073 |
| | 10,758 |
|
| Other long term assets | 6,069 |
| | 6,800 |
|
| Total assets | $ | 405,624 |
| | $ | 475,908 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Revolving credit facilities | $ | 51,484 |
| | $ | — |
|
| Accounts payable and accrued expenses | 69,667 |
| | 74,734 |
|
| Accrued compensation and benefits | 35,421 |
| | 37,893 |
|
| Due to related persons | 18,883 |
| | 18,683 |
|
| Mortgage notes payable | 339 |
| | 316 |
|
| Accrued real estate taxes | 12,959 |
| | 11,801 |
|
| Security deposits and current portion of continuing care contracts | 3,468 |
| | 4,073 |
|
| Other current liabilities | 37,472 |
| | 36,361 |
|
| Liabilities held for sale | — |
| | 34,781 |
|
| Total current liabilities | 229,693 |
| | 218,642 |
|
| | | | |
| Long term liabilities: | | | |
| Mortgage notes payable | 7,533 |
| | 7,872 |
|
| Accrued self insurance obligations | 33,030 |
| | 33,082 |
|
| Deferred gain on sale and leaseback transaction | 59,478 |
| | 66,087 |
|
| Other long term liabilities | 4,721 |
| | 5,231 |
|
| Total long term liabilities | 104,762 |
| | 112,272 |
|
| | | | |
| Commitments and contingencies |
| |
|
| | | | |
| Shareholders’ equity: | | | |
| Common stock, par value $.01: 75,000,000 shares authorized, 50,852,052 and 50,524,424 shares issued and outstanding at December 31, 2018 and 2017, respectively | 508 |
| | 505 |
|
| Additional paid in capital | 361,555 |
| | 360,942 |
|
| Accumulated deficit | (292,636 | ) | | (220,489 | ) |
| Accumulated other comprehensive income | 1,742 |
| | 4,036 |
|
| Total shareholders’ equity | 71,169 |
| | 144,994 |
|
| Total liabilities and shareholders' equity | $ | 405,624 |
| | $ | 475,908 |
|
See accompanying notes.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)amounts)
|
| | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 |
| Revenues: | | | |
| Senior living revenue | $ | 1,094,404 |
| | $ | 1,122,176 |
|
| Management fee revenue | 15,145 |
| | 14,080 |
|
| Reimbursed costs incurred on behalf of managed communities | 280,845 |
| | 259,850 |
|
| Total revenues | 1,390,394 |
| | 1,396,106 |
|
| | | | |
| Operating expenses: | | | |
| Senior living wages and benefits | 563,263 |
| | 551,096 |
|
| Other senior living operating expenses | 301,239 |
| | 293,425 |
|
| Costs incurred on behalf of managed communities | 280,845 |
| | 259,850 |
|
| Rent expense | 209,150 |
| | 206,531 |
|
| General and administrative expenses | 78,189 |
| | 75,212 |
|
| Depreciation and amortization expense | 35,939 |
| | 38,192 |
|
| Gain on sale of senior living communities | (7,131 | ) | | (7,258 | ) |
| Long lived asset impairment | 461 |
| | 2,112 |
|
| Total operating expenses | 1,461,955 |
| | 1,419,160 |
|
| | | | |
| Operating loss | (71,561 | ) | | (23,054 | ) |
| | | | |
| Interest, dividend and other income | 818 |
| | 765 |
|
| Interest and other expense | (3,018 | ) | | (4,308 | ) |
| Gain on early extinguishment of debt | — |
| | 143 |
|
| Unrealized loss on equity investments | (690 | ) | | — |
|
| Realized gain on sale of debt and equity investments, net of tax | 99 |
| | 408 |
|
| | | | |
| Loss before income taxes and equity in earnings of an investee | (74,352 | ) | | (26,046 | ) |
| (Provision) benefit for income taxes | (247 | ) | | 4,536 |
|
| Equity in earnings of an investee, net of tax | 516 |
| | 608 |
|
| Net loss | $ | (74,083 | ) | | $ | (20,902 | ) |
| | | | |
| | | | |
| Weighted average shares outstanding—basic and diluted | 49,687 |
| | 49,204 |
|
| | | | |
| Net loss per share—basic and diluted | $ | (1.49 | ) | | $ | (0.42 | ) |
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 84,351 | | | $ | 31,740 | |
| Restricted cash and cash equivalents | 23,877 | | | 23,995 | |
| Accounts receivable, net of allowance of $3,149 and $4,664, respectively | 9,104 | | | 34,190 | |
| Due from related person | 96,357 | | | 5,533 | |
| | | |
| Debt and equity investments, of which $11,125 and $12,622 are restricted, respectively | 19,961 | | | 21,070 | |
| Prepaid expenses and other current assets | 28,658 | | | 17,286 | |
| Assets held for sale | 0 | | | 9,554 | |
| Total current assets | 262,308 | | | 143,368 | |
| | | |
| Property and equipment, net | 159,251 | | | 167,247 | |
| Operating lease right-of-use assets | 18,030 | | | 20,855 | |
| Finance lease right-of-use assets | 4,493 | | | 0 | |
| Restricted cash and cash equivalents | 1,369 | | | 1,244 | |
| Restricted debt and equity investments | 4,788 | | | 7,105 | |
| Equity investment of an investee, net | 11 | | | 298 | |
| Other long-term assets | 3,956 | | | 5,676 | |
| Total assets | $ | 454,206 | | | $ | 345,793 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| Accounts payable | $ | 23,454 | | | $ | 30,440 | |
| Accrued expenses and other current liabilities | 41,843 | | | 55,981 | |
| Accrued compensation and benefits | 70,543 | | | 35,629 | |
| Accrued self-insurance obligations | 31,355 | | | 23,791 | |
| Operating lease liabilities | 2,567 | | | 2,872 | |
| Finance lease liabilities | 808 | | | 0 | |
| Due to related persons | 6,585 | | | 2,247 | |
| Mortgage note payable | 388 | | | 362 | |
| | | |
| Security deposits and current portion of continuing care contracts | 365 | | | 434 | |
| Liabilities held for sale | 0 | | | 12,544 | |
| Total current liabilities | 177,908 | | | 164,300 | |
| | | |
| Long-term liabilities: | | | |
| Accrued self-insurance obligations | 37,420 | | | 33,872 | |
| Operating lease liabilities | 17,104 | | | 19,671 | |
| Finance lease liabilities | 3,921 | | | 0 | |
| Mortgage note payable | 6,783 | | | 7,171 | |
| Other long-term liabilities | 538 | | | 798 | |
| | | |
| Total long-term liabilities | 65,766 | | | 61,512 | |
| | | |
| Commitments and contingencies | 0 | | 0 |
| | | |
| Shareholders’ equity: | | | |
| Common stock, par value $0.01: 75,000,000 shares authorized, 31,679,207 and 5,154,892 shares issued and outstanding, respectively | 317 | | | 52 | |
| Additional paid-in-capital | 460,038 | | | 362,450 | |
| Accumulated deficit | (251,139) | | | (245,184) | |
| Accumulated other comprehensive income | 1,316 | | | 2,663 | |
| Total shareholders’ equity | 210,532 | | | 119,981 | |
| Total liabilities and shareholders’ equity | $ | 454,206 | | | $ | 345,793 | |
SeeThe accompanying notes.notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSFive Star Senior Living Inc.
Consolidated Statements of Operations
(in thousands)
|
| | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 |
| Net loss | $ | (74,083 | ) | | $ | (20,902 | ) |
| Other comprehensive income: | | | |
| Unrealized (loss) gain on investments, net of tax of $0 and $249, respectively | (385 | ) | | 388 |
|
| Equity in unrealized (loss) gain of an investee, net of tax | (68 | ) | | 461 |
|
| Realized loss (gain) on investments reclassified and included in net loss, net of tax of $0 and $161, respectively | 106 |
| | (247 | ) |
| Other comprehensive (loss) income | (347 | ) | | 602 |
|
| Comprehensive loss | $ | (74,430 | ) | | $ | (20,300 | ) |
See accompanying notes.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY
(amounts in thousands, except per share data)amounts)
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2020 | | 2019 |
| REVENUES | | | |
| Senior living | $ | 77,015 | | | $ | 1,036,498 | |
| Management fees | 62,880 | | | 16,169 | |
| Rehabilitation and wellness services | 82,032 | | | 48,685 | |
| Total management and operating revenues | 221,927 | | | 1,101,352 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 916,167 | | | 313,792 | |
| Other reimbursed expenses | 25,648 | | | 0 | |
| Total revenues | 1,163,742 | | | 1,415,144 | |
| | | |
| Other operating income | 3,435 | | | 0 | |
| | | |
| OPERATING EXPENSES | | | |
| Senior living wages and benefits | 41,819 | | | 538,931 | |
| Other senior living operating expenses | 25,470 | | | 292,644 | |
| Rehabilitation and wellness services expenses | 64,496 | | | 39,903 | |
| Community-level costs incurred on behalf of managed communities | 916,167 | | | 313,792 | |
| General and administrative | 87,168 | | | 87,884 | |
| Rent | 5,118 | | | 141,486 | |
| Depreciation and amortization | 10,997 | | | 16,640 | |
| | | |
| Loss on sale of senior living communities | 0 | | | 856 | |
| Long-lived asset impairment | 0 | | | 3,282 | |
| Total operating expenses | 1,151,235 | | | 1,435,418 | |
| | | |
| Operating income (loss) | 15,942 | | | (20,274) | |
| | | |
| Interest, dividend and other income | 757 | | | 1,364 | |
| Interest and other expense | (1,631) | | | (2,615) | |
| Unrealized gain on equity investments | 480 | | | 782 | |
| Realized gain on sale of debt and equity investments | 425 | | | 229 | |
| Loss on termination of leases | (22,899) | | | 0 | |
| | | |
| Loss before income taxes and equity in earnings of an investee | (6,926) | | | (20,514) | |
| Provision for income taxes | (663) | | | (56) | |
| Equity in earnings of an investee | 0 | | | 575 | |
| Net loss | $ | (7,589) | | | $ | (19,995) | |
| | | |
| Weighted average shares outstanding (basic and diluted) | 31,471 | | | 5,006 | |
| | | |
| Net loss per share (basic and diluted) | $ | (0.24) | | | $ | (3.99) | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Common Stock | | Additional Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total |
| Balance at December 31, 2016 | 49,995,932 |
| | $ | 500 |
| | $ | 359,853 |
| | $ | (199,521 | ) | | $ | 3,434 |
| | $ | 164,266 |
|
| Comprehensive loss: | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (20,902 | ) | | — |
| | (20,902 | ) |
| Unrealized gain on investments, net of tax | — |
| | — |
| | — |
| | — |
| | 388 |
| | 388 |
|
| Realized gain on investments reclassified and included in net loss, net of tax | — |
| | — |
| | — |
| | — |
| | (247 | ) | | (247 | ) |
| Equity in unrealized gain of an investee, net of tax | — |
| | — |
| | — |
| | — |
| | 461 |
| | 461 |
|
| Total comprehensive loss | — |
| | — |
| | — |
| | (20,902 | ) | | 602 |
| | (20,300 | ) |
| Grants under share award plan and share based compensation | 590,600 |
| | 5 |
| | 1,089 |
| | — |
| | — |
| | 1,094 |
|
| Repurchases under share award plan | (62,108 | ) | | — |
| | — |
| | (66 | ) | | — |
| | (66 | ) |
| Balance at December 31, 2017 | 50,524,424 |
| | $ | 505 |
| | $ | 360,942 |
| | $ | (220,489 | ) | | $ | 4,036 |
| | $ | 144,994 |
|
| Comprehensive loss: | | | | | | | | | | | |
| Cumulative effect of reclassification of unrealized gain on equity investments in connection with the adoption of FASB ASU No. 2016-01 | — |
| | — |
| | — |
| | 1,947 |
| | (1,947 | ) | | — |
|
| Net loss | — |
| | — |
| | — |
| | (74,083 | ) | | — |
| | (74,083 | ) |
| Unrealized loss on investments, net of tax | — |
| | — |
| | — |
| | — |
| | (385 | ) | | (385 | ) |
| Realized loss on investments reclassified and included in net loss, net of tax | — |
| | — |
| | — |
| | — |
| | 106 |
| | 106 |
|
| Equity in unrealized loss of an investee, net of tax | — |
| | — |
| | — |
| | — |
| | (68 | ) | | (68 | ) |
| Total comprehensive loss | — |
| | — |
| | — |
| | (72,136 | ) | | (2,294 | ) | | (74,430 | ) |
| Grants under share award plan and share based compensation | 471,000 |
| | 5 |
| | 613 |
| | — |
| | — |
| | 618 |
|
| Repurchases under share award plan | (143,372 | ) | | (2 | ) | | — |
| | (11 | ) | | — |
| | (13 | ) |
| Balance at December 31, 2018 | 50,852,052 |
| | $ | 508 |
| | $ | 361,555 |
| | $ | (292,636 | ) | | $ | 1,742 |
| | $ | 71,169 |
|
Five Star Senior Living Inc.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Comprehensive Loss
(dollars in thousands)
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2020 | | 2019 |
| Net loss | $ | (7,589) | | | $ | (19,995) | |
| Other comprehensive income: | | | |
| Unrealized gain on debt investments, net of tax of $0 and $294, respectively | 649 | | | 831 | |
| Equity in unrealized gain of an investee, net of tax of $0 and $0, respectively | 0 | | | 90 | |
| Realized gain on debt investments reclassified and included in net loss, net of tax of $0 and $0, respectively | (302) | | | 0 | |
| Other comprehensive income | 347 | | | 921 | |
| Comprehensive loss | $ | (7,242) | | | $ | (19,074) | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | |
| | For the year ended December 31, |
| | 2018 | | 2017 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (74,083 | ) | | $ | (20,902 | ) |
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | | | |
| Depreciation and amortization expense | 35,939 |
| | 38,192 |
|
| Gain on sale of senior living communities | (7,131 | ) | | (7,258 | ) |
| Gain on early extinguishment of debt | — |
| | (166 | ) |
| Unrealized loss on equity securities | 690 |
| | — |
|
| Realized gain on sale of debt and equity securities | (99 | ) | | (408 | ) |
| Loss on disposal of property and equipment | 16 |
| | 277 |
|
| Long lived asset impairment | 461 |
| | 2,112 |
|
| Equity in earnings of an investee, net of tax | (516 | ) | | (608 | ) |
| Stock based compensation | 616 |
| | 1,094 |
|
| Provision for losses on receivables | 4,904 |
| | 4,697 |
|
| Amortization of deferred gain on sale and leaseback transaction | (6,609 | ) | | (6,608 | ) |
| Other non-cash expense (income) adjustments, net | 1,192 |
| | 703 |
|
| Changes in assets and liabilities: | | | |
| Accounts receivable | (3,989 | ) | | (5,046 | ) |
| Prepaid expenses and other assets | 1,535 |
| | (10,650 | ) |
| Accounts payable and accrued expenses | (4,211 | ) | | 6,306 |
|
| Accrued compensation and benefits | (2,472 | ) | | 1,954 |
|
| Due (to) from related persons, net | (1,683 | ) | | 11,439 |
|
| Other current and long term liabilities | 1,217 |
| | 1,120 |
|
| Cash (used in) provided by operating activities | (54,223 | ) | | 16,248 |
|
| | | | |
| Cash flows from investing activities: | | | |
| Acquisition of property and equipment | (48,980 | ) | | (71,095 | ) |
| Purchases of investments | (5,297 | ) | | (14,409 | ) |
| Proceeds from sale of property and equipment | 17,956 |
| | 39,800 |
|
| Proceeds from sale of land | — |
| | 750 |
|
| Proceeds from sale of communities | 31,819 |
| | 39,076 |
|
| Proceeds from sale of investments | 9,438 |
| | 22,382 |
|
| Cash provided by investing activities | 4,936 |
| | 16,504 |
|
| | | | |
| Cash flows from financing activities: | | | |
| Proceeds from borrowings on credit facilities | 76,484 |
| | 65,000 |
|
| Repayments of borrowings on credit facilities | (25,000 | ) | | (65,000 | ) |
| Repayments of mortgage notes payable | (509 | ) | | (16,766 | ) |
| Prepayment fees on early extinguishment of debt | — |
| | (132 | ) |
| Payment of deferred financing fees | — |
| | (1,889 | ) |
| Payment of employee tax obligations on withheld shares | (11 | ) | | (66 | ) |
| Cash provided by (used in) financing activities | 50,964 |
| | (18,853 | ) |
| | | | |
| Cash flows from discontinued operations: | | | |
| Net cash provided by operating activities | — |
| | 1,003 |
|
| Net cash used in investing activities | — |
| | — |
|
| Net cash flows provided by discontinued operations | — |
| | 1,003 |
|
| | | | |
| Change in cash and cash equivalents and restricted cash | 1,677 |
| | 14,902 |
|
| Cash and cash equivalents and restricted cash at beginning of period | 48,478 |
| | 33,576 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 50,155 |
| | $ | 48,478 |
|
| Reconciliation of cash and cash equivalents and restricted cash | | | |
| Cash and cash equivalents | $ | 29,512 |
| | $ | 26,255 |
|
| Restricted cash | 20,643 |
| | 22,223 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 50,155 |
| | $ | 48,478 |
|
| | | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 1,577 |
| | $ | 3,932 |
|
| Cash paid (received) for income taxes, net | $ | 311 |
| | $ | (1,399 | ) |
| | | | |
| Non-cash activities: | | | |
| Real estate sales | $ | 33,364 |
| | $ | — |
|
| Mortgage notes assumed by purchaser in real estate sales | $ | 33,364 |
| | $ | — |
|
SeeFive Star Senior Living Inc.
Consolidated Statements of Shareholders’Equity
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Total Shareholders' Equity |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at December 31, 2018 | 5,085,345 | | | $ | 51 | | | $ | 362,012 | | | $ | (292,636) | | | $ | 1,742 | | | $ | 71,169 | |
| Comprehensive income (loss): | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (19,995) | | | — | | | (19,995) | |
| Unrealized gain on investments, net of tax | — | | | — | | | — | | | — | | | 831 | | | 831 | |
| | | | | | | | | | | |
| Equity in unrealized gain of an investee, net of tax | — | | | — | | | — | | | — | | | 90 | | | 90 | |
| Total comprehensive (loss) income | — | | | — | | | — | | | (19,995) | | | 921 | | | (19,074) | |
| Cumulative effect adjustment to beginning retained earnings in connection with the adoption of FASB ASU No. 2016-02 | — | | | — | | | — | | | 67,473 | | | — | | | 67,473 | |
| Grants under share award plan and share-based compensation | 85,800 | | | 1 | | | 438 | | | — | | | — | | | 439 | |
| Repurchases under share award plan | (16,253) | | | — | | | — | | | (26) | | | — | | | (26) | |
| Balance at December 31, 2019 | 5,154,892 | | | 52 | | | 362,450 | | | (245,184) | | | 2,663 | | | 119,981 | |
| Comprehensive income (loss): | | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (7,589) | | | — | | | (7,589) | |
| Unrealized gain on debt investments, net of tax | — | | | — | | | — | | | — | | | 649 | | | 649 | |
| Realized gain on debt investments reclassified and included in net loss, net of tax | — | | | — | | | — | | | — | | | (302) | | | (302) | |
| | | | | | | | | | | |
| Total comprehensive (loss) income | — | | | — | | | — | | | (7,589) | | | 347 | | | (7,242) | |
| Cumulative effect adjustment to beginning accumulated deficit and accumulated other comprehensive income in connection with a reclassification of equity investments previously classified as debt investments | — | | | — | | | — | | | 1,694 | | | (1,694) | | | 0 | |
| Issuance of common shares | 26,387,007 | | | 264 | | | 97,076 | | | — | | | — | | | 97,340 | |
| Grants under share award plan and share-based compensation | 155,150 | | | 1 | | | 524 | | | — | | | — | | | 525 | |
| Repurchases under share award plan | (17,842) | | | — | | | (12) | | | (60) | | | — | | | (72) | |
| Balance at December 31, 2020 | 31,679,207 | | | $ | 317 | | | $ | 460,038 | | | $ | (251,139) | | | $ | 1,316 | | | $ | 210,532 | |
The accompanying notes.notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Five Star Senior Living Inc.
Consolidated Statements of Cash Flows
(dollar amountsdollars in thousands)
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2020 | | 2019 |
| CASH FLOW FROM OPERATING ACTIVITIES: | | | |
| Net loss | $ | (7,589) | | | $ | (19,995) | |
| Adjustments to reconcile net loss to net cash provided (used in) by operating activities: | | | |
| Depreciation and amortization | 10,997 | | | 16,640 | |
| Loss on sale of senior living communities | 0 | | | 856 | |
| | | |
| Unrealized gain on equity securities | (480) | | | (782) | |
| Realized gain on sale of debt and equity securities | (425) | | | (229) | |
| Loss on termination of leases | 22,899 | | | 0 | |
| Long-lived asset impairment | 0 | | | 3,282 | |
| Equity in earnings of an investee | 0 | | | (575) | |
| Share-based compensation | 513 | | | 439 | |
| Provision for losses on accounts receivables | 1,450 | | | 4,891 | |
| Amortization of non-cash rent adjustments | 0 | | | (13,840) | |
| Other non-cash expense (income) adjustments, net | 633 | | | 432 | |
| Changes in assets and liabilities: | | | |
| Accounts receivable | 23,636 | | | (1,323) | |
| Due from related person | (70,799) | | | 15,017 | |
| Prepaid expenses and other current assets | (10,324) | | | 914 | |
| Accounts payable | (6,986) | | | 10,271 | |
| Accrued expenses and other current liabilities | 37,813 | | | (6,770) | |
| Accrued compensation and benefits | 34,914 | | | 208 | |
| Due to related persons | 4,338 | | | (16,636) | |
| Other current and long term liabilities | 10,791 | | | 3,091 | |
| Net cash provided by (used in) operating activities | 51,381 | | | (4,109) | |
| | | |
| CASH FLOW FROM INVESTING ACTIVITIES: | | | |
| Acquisition of property and equipment | (5,427) | | | (57,494) | |
| Purchases of debt and equity investments | (5,750) | | | (2,991) | |
| Proceeds from sale of property and equipment | 2,725 | | | 110,027 | |
| | | |
| Settlement of liabilities from sale of communities | 0 | | | (754) | |
| Distributions in excess of earnings from Affiliates Insurance Company | 287 | | | 9,000 | |
| Proceeds from sale of debt and equity investments | 10,408 | | | 5,193 | |
| Net cash provided by investing activities | 2,243 | | | 62,981 | |
| | | |
| CASH FLOW FROM FINANCING ACTIVITIES: | | | |
| Proceeds from borrowings on revolving credit facility | 0 | | | 5,000 | |
| Repayments of borrowings on revolving credit facility | 0 | | | (56,484) | |
| Costs related to issuance of common stock | (559) | | | 0 | |
| Repayments of mortgage notes payable | (387) | | | (365) | |
| | | |
| Payment of deferred financing fees | 0 | | | (1,271) | |
| Payment of employee tax obligations on withheld shares | (60) | | | (26) | |
| Net cash used in financing activities | (1,006) | | | (53,146) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Increase in cash and cash equivalents and restricted cash and cash equivalents | 52,618 | | | 5,726 | |
| Restricted cash included in held for sale assets | 0 | | | (5) | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | 56,979 | | | 51,258 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 109,597 | | | $ | 56,979 | |
| | | |
| Reconciliation of cash and cash equivalents and restricted cash and cash equivalents: | | | |
| Cash and cash equivalents | $ | 84,351 | | | $ | 31,740 | |
| Current restricted cash and cash equivalents | 23,877 | | | 23,995 | |
| Other restricted cash and cash equivalents | 1,369 | | | 1,244 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | $ | 109,597 | | | $ | 56,979 | |
| | | |
| Supplemental cash flow information: | | | |
| Interest paid | $ | 572 | | | $ | 1,819 | |
| Income taxes received, net | (40) | | | (1,947) | |
| | | |
| Non-cash investing and financing activities: | | | |
| Liabilities assumed related to issuance of our common stock | $ | 51,547 | | | $ | 0 | |
| Right-of-use assets obtained in exchange for finance lease liabilities | 4,724 | | | 0 | |
| Change in accrued capital | 2,656 | | | (785) | |
| | | |
| | | |
| | | |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements
(dollarsin thousands, exceptpershareamounts)
1. OrganizationBasis of Presentation and BusinessOrganization
General. We areGeneral. Five Star Senior Living Inc., collectively with its consolidated subsidiaries, the Company, we, us or our, is a corporation that was formed in 2001 under the laws of the State of Maryland in 2001.Maryland. As of December 31, 2018,2020, we managed or operated 284252 senior living communities located in 3231 states with 32,01629,271 living units, including 255243 primarily independent and assisted living communities with 29,51128,316 living units, which include 37 continuing care retirement communities, or CCRCs, with 8,574 living units, and 299 primarily skilled nursing facilities, or SNFs,SNF's with 2,505955 living units. As of December 31, 2018,2020, we managed 228 of these senior livingcommunities (26,969 living units), we owned and operated 20 of these senior livingcommunities (2,108(2,098 living units), and we leased and operated 1884 of these senior livingcommunities (20,142 living units) and we managed 76 of these senior livingcommunities (9,766(204 living units). Our 284252 senior living communities, as of December 31, 2020, included 10,89510,982 independent living apartments, 16,38915,332 assisted living suites (which includes 3,220 of our Bridge to Rediscovery memory care units) and 4,7322,957 SNF units. The foregoing numbers exclude living units categorized as out of service.
Going Concern. On January 1, 2016, we adopted Financial Accounting Standards Board,
Ageility Physical Therapy Solutions, or FASB, Accounting Standards Update, or ASU, No. 2014-15, PresentationAgeility, a division of Financial Statements-Going Concern: Disclosureour rehabilitation and wellness services segment, provides a comprehensive suite of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires us to evaluate, as of each reporting period, whether there are conditions or events that raise substantial doubt aboutrehabilitation and wellness services at our ability to continue as a going concern within one year after the date that our financial statements are issued and to provide related disclosures in certain circumstances.
The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which accordingly assumes, among other things, the realization of assets and the satisfaction of liabilities in the ordinary course of business. We face increased competition across the senior living industry, including in specific markets in which we operatecommunities as well as at outpatient clinics located separately from our senior living communities. Medical advancesAs of December 31, 2020, we operated 37 inpatient rehabilitation and healthcarewellness services also allow some potential residents to defer the time when they require the specialclinics in senior living communities owned by Diversified Healthcare Trust, or DHC, which are managed by us. As of December 31, 2020, we operated 207 outpatient rehabilitation and wellness services availableclinics, of which 149 were located at our communities. In addition, low unemployment inmanaged, leased and owned senior living communities and 58 were located within senior living communities not owned or leased by us or managed on behalf of DHC.
Restructuring of Business Arrangements with DHC. On April 1, 2019, we entered into a transaction agreement, or the United States combinedTransaction Agreement, with DHC, to restructure our business arrangements with DHC, pursuant to which, effective as of January 1, 2020, or the Conversion Time:
•our 5 then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all of these senior living communities, together with a competitive labor market withinrelated omnibus agreement, or collectively, the New Management Agreements;
•we issued 10,268,158 of our industrycommon shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019, or, together, the Share Issuances; and
•as consideration for the Share Issuances, DHC provided to us $75,000 by assuming certain of our working capital liabilities and through cash payments. Such consideration, the Conversion and the Share Issuances are increasingcollectively referred to as the Restructuring Transactions.
As of January 1, 2020, we reorganized our employment costs. These challenges are currently negatively impactingbusiness to better align with the different services we offer older adults. In connection with our revenues, expenses, cash flowsreorganization, we changed our reporting structure and resultsthe composition of our reporting units. We have reclassified certain prior year amounts to conform to the current year’s presentation. See Notes 2 and 4 for more information regarding our segment reporting.
As of January 1, 2020, we reclassified certain of our investments from operations, anddebt investments to equity investments to reflect the nature of the investment rather than the nature of the securities held by the investment. As a result, we expect these challengesreclassified the related unrealized gain of $1,694 from accumulated other comprehensive income to continue at least through 2019. At December 31, 2018, we have an accumulated deficit of $292,636 and have incurred operating losses in each of the last three years. In addition, our credit facility is scheduled to expire on June 28, 2019, and we currently have $51,484 of borrowings outstanding under that facility. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Based on our cash balance at December 31, 2018 and projected cash needs for the next 12 months, our management believes that we will need to increase our revenues, reduce our costs and/or pursue other transactions to be able to continue to fund our operating and capital requirements.January 1, 2020. See Note 8 for more information regarding our indebtedness and covenants. We will need to raise the additional funds by: (i) increasing occupancy and/or ratesthese investments.
Reverse Share Split. On September 30, 2019, we charge at our senior living communities, (ii) reducing our costs, (iii) increasing our revenues from other services we provide, such as rehabilitation, home health or other services, (iv) engaging in additional sale and leaseback or manageback transactions or otherwise expanding the scopecompleted a one-for-ten reverse share split of our business, (v) selling assets, including senior living communities we own, (vi) obtaining mortgage financing foroutstanding common shares, or the Reverse Share Split, pursuant to which every ten of our owned senior living communities, (vii) obtaining additional debt financing, suchcommon shares issued and outstanding as term debt and/or a new credit facility, and/or (viii) issuing other debt or equity securities. We cannot be sure that we will be able to obtain any such additional funds by any of the foregoing or other means, and any such funds we may obtain may not be sufficient. If we are unable to obtain sufficient funds, we may be unable to continue as a going concern.
We currently operate 260 senior living communities under lease and management arrangements with SNH, or approximately 91.5%effective time of the total communities we operate. In orderReverse Share Split were converted into one share of our common stock, par value $0.10 per share, subject to address the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH's independent trustees are currently evaluating our lease and management arrangements with SNH. As a result, there may be agreed changes to our arrangements with SNHreceipt of cash in lieu of fractional shares. Following the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with SNH will be agreed to or occur. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH unless we obtain relief. For example, we expect to obtain a temporary deferral from SNH on our obligation to pay rent to SNH under our leases with SNH for the month of February 2019 but we cannot be sure that SNH will grant us this deferral; if we do not receive this deferral or any other relief we may need in the future, we may default in paying some or alleffective time of the rent dueReverse Share Split on September 30, 2019, we changed the par value of our common stock from $0.10 per share back to SNH. In addition, we cannot be sure that we will obtain$0.01 per share. The Reverse Share Split affected all record holders of our common shares uniformly and did not affect any renewed or restructured credit facility,record shareholder's percentage of ownership interest in us. The Reverse Share Split reduced the number of our then issued and our abilityoutstanding common shares from 50,823,340 to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us5,082,334.
Five Star Senior Living Inc.
Notes to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. AnyConsolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
2. Summary of Significant Accounting Policies
BasisPrinciples of Presentation.Consolidation. The accompanying consolidated financial statements include ourthe accounts of Five Star Senior Living Inc. and those of all of our consolidatedits wholly-owned subsidiaries. All significant intercompany transactionsbalances and balances with or among our consolidated subsidiariestransactions have been eliminated.eliminated in consolidation.
Use of Estimates. Preparation
Estimates and Assumptions. The preparation of these financial statements in conformity with U.S. generally accepted accounting principles, generally accepted in the United Statesor GAAP, requires us to make estimates and assumptions that may affect the amounts reported in these consolidated financial statements and related notes. Some significantSignificant estimates are included in our consolidated financial statements relate to revenue recognition, including contractual allowances, the allowance for doubtful accounts, self insuranceself-insurance reserves long lived assets, and estimates concerning our provisionsprovision for income taxes.taxes or valuation allowance related to deferred tax assets.
Our actual results could differ from our estimates. We periodically review estimates and assumptions and we reflect the effects of changes, if any, in the consolidated financial statements in the period that they are determined.
Earnings
Fair Value of Financial Instruments. Our financial instruments are limited to cash and cash equivalents, accounts receivable, debt and equity investments, accounts payable and a mortgage note payable. Except for our mortgage note payable, the fair value of these financial instruments was not materially different from their carrying values at December 31, 2020 and 2019. We estimate the fair values of our mortgage note payable using market quotes when available, discounted cash flow analyses and current prevailing interest rates.
Our assets recorded at fair value have been categorized based on a fair value hierarchy. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.
Level 1 - Inputs are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 - Inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments and quoted prices in inactive markets.
Level 3 - Inputs are generated from model-based techniques that use significant assumptions that are not observable in the market.
Segment Information. Operating segments are components of an enterprise that engages in business activities and for which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in determining the allocation of resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer.
Effective as of January 1, 2020, we reorganized our business to better align with the different services we offer to older adults. As a result of the reorganization, our chief operating decision maker changed the manner in which our performance is assessed and, therefore, we changed our reporting structure and the composition of our operating segments.
Since the reorganization of our business on January 1, 2020, we operate in 2 reportable segments: (1) senior living and (2) rehabilitation and wellness services. In the senior living reportable segment, we manage for the account of others and operate for our own account, independent living communities, assisted living communities, CCRCs and SNFs that are subject to centralized oversight. In the rehabilitation and wellness services segment, we primarily provide a comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in inpatient and outpatient clinics through our Ageility division. Corporate and other amounts excluded from our reportable segments' performance are separately stated and include amounts related to functional areas such as finance, information technology, legal, human resources and our captive insurance company subsidiary, which participates in our workers' compensation, professional and general liability and certain automobile insurance programs. We allocate corporate and other amounts to our senior living and rehabilitation and wellness services segments to assist in determining the allocation of resources and assessing the performance of our segments. Corporate and other allocation amounts are determined by applying an estimated cost rate to the revenues of each division within the reportable segments. Estimated cost rates used to allocate corporate and other amounts vary by division. All of our operations and assets are located in the United States, except for the operations of our captive insurance company subsidiary, which is organized in the Cayman Islands. We do not allocate assets to operating segments and, therefore, no asset information is provided for reportable segments. See Note 4 for more information.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Net Income (Loss) Per Share. We calculate basic earningsnet income (loss) per common share, or EPS, by dividing net income (loss) by the weighted average number of common shares outstanding during the year. We calculate diluted EPS using the more dilutive of the two-class method or the treasury stock method. See Note 7 for more information.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents. Cash and cash equivalents as of December 31, 2020 and 2019, consisting of short term,short-term, highly liquid investments and money market funds with original maturities of three months or less at the date of purchase, are carried at cost, plus accrued interest, which approximates market. Certain cash account balances exceed Federal Deposit Insurance Corporation insurance limits of $250 per account and, as a result, there is a concentration of credit risk related to amounts in excess of the insurance limits. We regularly monitor the financial stability of the financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.
Equity Method Investments.
Restricted cash and cash equivalents as of December 31, 2020 and 2019 include cash we deposited as security for obligations arising from our self-insurance programs and other amounts for which we are required to establish escrows, including real estate taxes and capital expenditures, as required by our mortgage and certain resident security deposits. Our restricted cash and cash equivalents consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| | 2020 | | 2019 |
| | Current | | Long-Term | | Current | | Long-Term |
| Workers’ compensation letter of credit collateral | $ | 21,561 | | | $ | 0 | | | $ | 21,655 | | | $ | 0 | |
| Insurance reserves and other restricted amounts | 644 | | | 1,369 | | | 679 | | | 1,244 | |
| Health deposit-imprest cash | 1,103 | | | 0 | | | 1,103 | | | 0 | |
| Real estate taxes and certain capital expenditures as required by our mortgage | 569 | | | 0 | | | 526 | | | 0 | |
| Resident security deposits | 0 | | | 0 | | | 32 | | | 0 | |
| Total | $ | 23,877 | | | $ | 1,369 | | | $ | 23,995 | | | $ | 1,244 | |
Concentrations of Credit Risk. Our financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. We have investment policies that, among other things, limit investments to investment-grade securities. We hold our cash and cash equivalents and investments with high-quality financial institutions and we monitor the credit ratings of those institutions.
We perform ongoing credit evaluations of our customers, and the risk with respect to accounts receivable is further mitigated by the diversity, both by geography and by industry, of the customer base. As of December 31, 2018, we2020, payments due from Medicare and six other shareholders each owned approximately 14.3% of the outstanding equity of Affiliates Insurance Company, or AIC. Although we owned less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC, as allMedicaid represented 32.0% and 1.2%, respectively, of our Directors are also directors of AIC. Under the equity method, we recorded our percentage share of net earnings from AIC in ourgross consolidated statements of operations. If we determine there is an “other than temporary impairment” in the fair value of this investment, we would record a charge to earnings. In evaluating the fair value of this investment, we have considered, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally.accounts receivable balance. As of December 31, 2018, we have invested $6,034 in AIC.
Equity2019, payments due from Medicare and Debt Investment. On January 1, 2018, we adopted FASB ASU, No. 2016-01, RecognitionMedicaid represented 26.5% and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. Prior to our adoption of this ASU, we recorded changes in the fair value25.0%, respectively, of our equity investments through other comprehensive income. Pursuantconsolidated accounts receivable.
We derive primarily all of our management fee revenue from DHC. As of December 31, 2020 and 2019, we had net $89,911 and $3,363 due from DHC, respectively, which are included in due from related persons and due to this ASU, these changes will now be recorded through earnings. We adopted this ASU using the cumulative effect adjustment method and recorded an adjustment of $1,107related persons on January 1, 2018 to accumulated other comprehensive income and accumulated deficit in our consolidated balance sheets. See Note 14 for more information. The balance due at December 31, 2020 includes deferred payroll taxes of $22,194 under the CARES Act described more fully in Note 17, as well as liabilities incurred on behalf of DHC of $30,090, which is also included in accrued expenses and other current liabilities on our consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts. We record accounts receivable at their estimated net realizable value. Included in accounts receivable as of December 31, 2020 and 2019, are amounts due from Medicare of $3,915 and $9,056, respectively, and amounts due from various state Medicaid programs of $152 and $8,532, respectively. The Company does not believe there are significant credit risks associated with the receivables from these governmental programs.
We estimate allowances for uncollectible amounts and contractual allowances based upon factors which include, but are not limited to, historical payment trends, write-off experience, analyses of accounts receivable portfolios by payor source and the age of the receivable as well as a review of specific accounts, the terms of the agreements, the residents’ or third party payers’ stated intent to pay, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation.
Billings for services under third-party payer programs are recorded net of estimated retroactive adjustments, if any. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
when assessed (without regard to when the assessment is paid or withheld). Subsequent adjustments to these accrued amounts are recorded in net revenues when known.
The allowance for doubtful accounts reflects estimates that we periodically review and revise based on new information, to which revisions may be material. Our allowance for doubtful accounts consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | Balance at Beginning of Period | | Provision for Doubtful Accounts | | Recoveries | | Write-offs | | Balance at End of Period |
| December 31, 2019 | | $ | 3,422 | | | $ | 4,891 | | | $ | 1,459 | | | $ | (5,108) | | | $ | 4,664 | |
| December 31, 2020 | | $ | 4,664 | | | $ | 1,450 | | | $ | 156 | | | $ | (3,121) | | | $ | 3,149 | |
Equity and Debt Investments.Equity investments are carried at fair value with changes in fair value recorded in earnings. At December 31, 2018,2020, these equity investments had a fair value of $5,466$12,439 and a net unrealized holding gain of $419.$3,376. At December 31, 2017,2019, these equity investments had a fair value of $6,438$6,409 and a net unrealized holding gain of $1,107.$1,201.
Debt investments, which are classified as available for sale, are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity within accumulated other comprehensive income and “other than temporary impairment” losses recorded through earnings. Realized gains and losses on debt investments are recognized based on specific identification. Restricted debt investments are kept as security for obligations arising from our self insuranceself-insurance programs. At December 31, 2018,2020, these debt investments had a fair value of $22,785$12,310 and a net unrealized holding gain of $979.$756. At December 31, 2017,2019, these debt investments had a fair value of $26,844$21,766 and a net unrealized holding gain of $1,255.$2,104.
In 20182020 and 2017,2019, our debt and equity investments generated interest and dividend income of $818$757 and $762,$1,364, respectively, which is included in interest, dividend and other income in our consolidated statements of operations.
The following table summarizes the fair value and gross unrealized losses related to our debt investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the years ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Debt Investments |
| Less than 12 months | | Greater than 12 months | | Total |
| Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| December 31, 2020 | $ | 291 | | | $ | 4 | | | $ | 0 | | | $ | 0 | | | $ | 291 | | | $ | 4 | |
| December 31, 2019 | $ | 292 | | | $ | 10 | | | $ | 0 | | | $ | 0 | | | $ | 292 | | | $ | 10 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 months | | Greater than 12 months | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| Debt investments | $ | 1,688 |
| | $ | 31 |
| | $ | 12,234 |
| | $ | 265 |
| | $ | 13,922 |
| | $ | 296 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | | Greater than 12 months | | Total |
| | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| Debt investments | $ | 12,562 |
| | $ | 113 |
| | $ | 2,253 |
| | $ | 33 |
| | $ | 14,815 |
| | $ | 146 |
|
We routinely evaluate our debt investments to determine if they have been impaired. If the fair value of a debt investment is less than its book or carrying value and we expect that situation to continue for a more than temporary period, we will record an “other than temporary impairment” loss in our consolidated statements of operations. We evaluate the fair value of our debt investments by reviewing each investment'sinvestment’s current market price, the ratings of the investment, the financial condition of the issuer and our intent and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the investment is below the investment'sinvestment’s cost basis for an extended period.period, which we typically define as greater than twelve months. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the investment is historically volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not meet the criteria described above, such as if we plan to sell the investment in the near term and the fair value is below our cost basis. When we believe that a change in fair value of a debt investment is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized gains and losses. When we determine that impairment in the fair value of a debt investment is an “other than temporary impairment”, we record a charge to earnings. We did not record such an impairment charge for the years ended December 31, 20182020 and 2017.
Restricted Cash. Restricted cash as of December 31, 2018 and 2017 includes cash that we deposited as security for obligations arising from our self insurance programs and other amounts for which we are required to establish escrows including real estate taxes and capital expenditures as required by our mortgages and certain resident security deposits.
|
| | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Current | | Long term | | Current | | Long term |
| Insurance reserves | $ | 691 |
| | $ | 923 |
| | $ | 1,095 |
| | $ | 1,476 |
|
| Real estate taxes and capital expenditures as required by our mortgages | 483 |
| | — |
| | 1,161 |
| | — |
|
| Resident security deposits | 612 |
| | — |
| | 655 |
| | — |
|
| Workers' compensation letter of credit collateral | 17,934 |
| | — |
| | 17,836 |
| | — |
|
| Total | $ | 19,720 |
| | $ | 923 |
| | $ | 20,747 |
| | $ | 1,476 |
|
Accounts Receivable and Allowance for Doubtful Accounts. We record accounts receivable at their estimated net realizable value. Included in accounts receivable as of December 31, 2018 and 2017 are amounts due from the Medicare program of $8,821 and $9,558, respectively, and amounts due from various state Medicaid programs of $12,757 and $13,059, respectively.
We estimate allowances for uncollectible amounts and contractual allowances based upon factors which include, but are not limited to, the age of the receivable and the terms of the agreements, the residents’ or third party payers’ stated intent to pay, the payers’ financial capacity to pay and other factors which may include likelihood and cost of litigation. Accounts receivable allowances are estimates. We periodically review and revise these estimates based on new information and these revisions may be material. Our allowance for doubtful accounts consists of the following:
|
| | | |
| Balance January 1, 2017 | $ | 3,191 |
|
| Provision for doubtful accounts | 4,697 |
|
| Write-offs | (4,316 | ) |
| Balance December 31, 2017 | 3,572 |
|
| Provision for doubtful accounts | 4,904 |
|
| Write-offs | (5,054 | ) |
| Balance December 31, 2018 | $ | 3,422 |
|
Deferred FinanceFinancing Costs. We capitalize issuance costs related to our secured revolving credit facility, or our credit facility, and amortize the deferred costs over the term of the agreements.agreement governing our credit facility, or our credit agreement. In June 2019, we entered into a new credit agreement to replace our prior credit facility with our $65,000 secured revolving credit facility. See Note 9 for more information on our credit facility. Our unamortized balance of deferred finance costs was $187$288 and $1,377$980 at December 31, 20182020 and 2017,2019, respectively, of which $187$288 and $635$692 was included in prepaid expenses and other current assets on our consolidated balance sheets as of December 31, 20182020 and 2017,2019, respectively, and $0 and $742$288 was included in
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
other long termlong-term assets on our consolidated balance sheets as of December 31, 20182020 and 2017,2019, respectively. In connection with an amendment to the agreement governing our credit facility, or our credit agreement, in December 2018, we wrote off $554 in deferred financing fees in the fourth quarter of 2018 and recorded such amount to interest and other expense in our consolidated statements of operations. See Note 8 for more information on our credit facility. At December 31, 2018,2020, the weighted average amortization period remaining, related to our finance costs, is less than 1 year.
Assets and Liabilities Held for Sale. We designate communities as held for sale when it is probable that the communities will be sold within one year. We record these assets on the consolidated balance sheets at the lesser of the carrying value and fair value less estimated selling costs. If the carrying value is greater than the fair value less the estimated selling costs, we record an impairment charge. We evaluate the fair value of the assets held for sale each period to determine if it has changed. At December 31, 2019, we designated all communities under our then master leases with DHC as held for sale, because, pursuant to the Transaction Agreement, effective January 1, 2020, those leases were terminated and we and DHC entered into the New Management Agreements. As of December 31, 2020, we did not have assets or liabilities classified as held for sale.
Property and Equipment. Property and equipment is statedare recorded at cost less accumulated depreciation. We record depreciation on property and equipment on a straight linedepreciated using the straight-line basis over their estimated useful lives, which are typically as follows:
| | | | | | | | |
| Asset Class | | Estimated Useful Life
(in years) |
| Buildings | | 40 |
| Building and land improvements | | 3-15 |
| Equipment | | 7 |
| Computer equipment and software | | 5 |
| Furniture and fixtures | | 7 |
We routinely perform an assessment of uplong-lived assets to 40 years for buildings, updetermine if indicators of impairment are present. An indicator that the carrying amount of a long-lived asset, or asset group, is not recoverable exists if it exceeds the sum of the undiscounted cash flows expected to 15 years for building improvementsresult from the use and up to seven years for personal property. We regularly evaluate whethereventual disposition of the asset (asset group), or if other events or changes in circumstances have occurred that could indicate impairment in the value of our long lived assets. If there is an indication that the carrying valueamount of an asset isor group of assets may not recoverable,be recoverable. If we conclude that an impairment exists, we determine the amount of impairment loss if any, by comparing the historical carrying value of the asset, or group of assets, to itstheir estimated fair value. We determine estimated fair value through an evaluation of recent financial performance, recent transactions forbased on input from market participants, our experience selling similar assets, market conditions and projectedinternally developed cash flows using standardflow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement.
Equity Method Investments. Until its dissolution on February 13, 2020, 6 other shareholders and we each owned approximately 14.3% of Affiliates Insurance Company's, or AIC's, outstanding equity. Although we owned less than 20% of AIC, we used the equity method to account for this investment because we believed that we had significant influence over AIC, as all of our then Directors were also directors of AIC. Under the equity method, we recorded our percentage share of net earnings from AIC in our consolidated statements of operations. If we determined there was an “other than temporary impairment” in the fair value of this investment, we would have recorded a charge to earnings. In evaluating the fair value of this investment, we considered, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry valuation techniques. generally. At the time of its dissolution, we had invested $6,034 in AIC.
Legal ProceedingsAs of December 31, 2020 and Claims.2019, our investment in AIC had a carrying value of $11 and $298, respectively. These amounts are presented as equity investment of an investee in our consolidated balance sheets. In June 2020, we received $287 in connection with AIC's dissolution. We did not recognize any income related to our investment in AIC for the year ended December 31, 2020, and recognized income of $575 for the year ended December 31, 2019, which amount is presented as equity in earnings of an investee in our consolidated statements of operations. Our other comprehensive income includes our proportionate share of unrealized gains (losses) on securities that are owned by AIC related to our investment in AIC of $90 for the year ended December 31, 2019.
As discussed further in Note 14, AIC was dissolved on February 13, 2020, and in connection with this dissolution, we and each other AIC shareholder received an initial liquidating distribution of $9,000 in December 2019 and a subsequent distribution of $287 in June 2020.
Commitments and Contingencies. We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, theThe defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with FASB, Accounting Standards Codification™, or ASC, Topic 450, Contingencies. Under FASB ASC Topic 450, lossLoss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made,
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment, and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore, the estimated minimum loss amount, which could be zero,0, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. Occasionally, a minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Self Insurance.Self-Insurance. We self insurepartially self-insure up to certain limits for workers’ compensation, professional and general liability, claims, automobile claims and property losses.coverage. Claims in excess ofthat exceed these limits are insured up to contractual limits, over which we are self insured.self-insured. We fully self insureself-insure all health relatedhealth-related claims for our covered employees. We have established an offshore captive insurance company subsidiary whichthat participates in our workers’ compensation, and professional and general liability and automobile insurance programs. Determining reserves for the casualty, liability, workers’ compensation and healthcare losses and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected settlements for pending claims, known incidents that we expect may result in claims, estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved. We regularly adjust these estimates to reflect changes in the foregoing factors, our actual claims experience, recommendations from our professional consultants, changes in market conditions and other factors; it is possible that such adjustments may be material. Our total self insurance reserves were $67,534
Lease Accounting. At the inception of a contract, we, as lessee, evaluate and $66,945 asdetermine whether such a contract is or contains a lease based on whether such contract conveys the right to control the use of the year ended December 31, 2018 and 2017, respectively, and are included in accrued compensation and benefits, other current liabilities and accrued self insurance obligations in our consolidated balance sheets.
Continuing Care Contracts. Residents at oneidentified asset. We apply a dual approach, classifying leases as either finance or operating leases based on the principle of our communities may enter continuing care contracts with us. We offer one form of continuing care contract to new residents at this community. This form of contract provides that 10%whether or not the lease is effectively a financed purchase of the resident admission fee becomes non‑refundable upon occupancy, and the remaining 90% becomes non-refundable at the rate of
1.5% per month of the original amount over the subsequent 60 months. Four other forms of continuing care contracts are in effect for existing residents but are not offered to new residents. One historical form of contract provides that the resident admission fee is 10% non-refundable upon occupancy and 90% refundable. The second historical form of contract provides that the resident admission fee is 100% refundable. The third historical form of contract provides that the resident admission fee is 1% refundable and 99% non-refundable upon admission. The fourth historical form of contract provides that 30% of the resident admission fee is non-refundable upon occupancy and 70% is refundable. In each case, we amortize the non-refundable part of these fees into revenue over the actuarially determined remaining life of the resident, which is the expected period of occupancyleased asset by the resident.lessee. We pay refunds of these admission feeshave elected to apply the extent refundable under the contract when residents relocate from our communities. We report the refundable amount of these admission fees as current liabilities and the non‑refundable amount as deferred revenue, a portion of which is classified as a current liability. The balance of our refundable admission fees as of December 31, 2018 and 2017 were $755 and $1,142, respectively, and were includedportfolio approach where possible in security deposits and current portion of continuing care contracts on our consolidated balance sheets. The balance of non-refundable admission fees as of December 31, 2018 and 2017 were $1,119 and $1,154, respectively, of which $863 and $898, respectively, were included in other long term liabilities on our consolidated balance sheets.
Leases. On the inception date of a lease and upon any relevant amendments to such lease, we test the classification of such lease as either a capital lease or an operating lease. None ofassessing our leases and performed an assessment of all our leases. In addition, we have elected the practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. As lessee, we lease senior living communities and our headquarters, and enter into contracts for the use and maintenance of various equipment that contain a lease. We have determined that an equipment lease has met any of the criteria to be classified as a capitalfinance lease. The remaining leases are operating leases.
We have determined that our leases for the use and maintenance of equipment are short-term leases, except for the lease under FASB ASC Topic 840, Leases, or ASC Topic 840,that is classified as a finance lease. We have made an accounting policy election for our leases, which are determined to be short-term leases, whereby we recognize the lease payments on a straight-line basis over the lease term and therefore,variable lease payments in the period in which the obligations for those payments are incurred. Expenses related to these leases are recognized in the consolidated statement of operations in other senior living operating expenses and general and administrative expenses and are not material to our consolidated financial statements.
We have determined that our leases for senior living communities, our headquarters and the equipment finance lease are long-term leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Accordingly, we have accountedrecorded a right-of-use asset and lease liability for all of our long-term leases. We determined that the discount rate implicit in the leases as operating leases. Other aspectswas not readily available, and therefore, we determined our incremental borrowing rate, or IBR, to calculate the right-of-use assets and lease liabilities, except for the equipment finance lease where we used the discount rate implicit in the lease. For purposes of determining the lease term, we concluded that it is not reasonably certain that our lease accounting policies relateextensions will be exercised and, therefore, we included payments required to be made under the committed lease term in calculating the right-of-use assets and lease liabilities. In the consolidated statement of operations, expenses related to the accountingleases for sale leaseback transactions, including the appropriate amortization ofsenior living communities are recognized in rent expense, expenses related deferred liabilities and any deferred gains or losses, and the accounting for lease incentives.
Taxes. FASB ASC Topic 740, Income Taxes, prescribes how we should recognize, measure and present into our consolidated financial statements uncertain tax positions that have been taken orheadquarters are expected to be taken in a tax return. We can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized.
We pay franchise taxes in certain states in which we have operations. We have included franchise taxesrecorded in general and administrative and expenses related to our equipment finance lease are recognized in depreciation and amortization and interest and other seniorexpense. In 2019, we recognized variable lease payments primarily relating to percentage rent paid under our then leases with DHC and operating costs such as insurance and real estate taxes, in the statement of operations in the period in which the obligations for those payments are incurred. There were no variable lease payments in 2020.
We have capitalized initial direct costs related to our finance lease, which are not material to our consolidated financial statements.
Our leases have remaining lease terms of up to eight years. Our lease terms may include options to extend or terminate the lease. The options are included in the lease term when it is determined that it is reasonably certain the option will be exercised. The Company recorded right-of-use assets and lease liabilities, which are presented on the Consolidated Balance
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Sheet. At December 31, 2020 the weighted average remaining lease term was approximately seven years with a weighted average discount rate of 5.2%.
The following table presents supplemental information related to operating and finance leases:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lease No.
(Expiration Date) | Number of Properties | Remaining Renewal Options | Right-of-Use Asset | Future Minimum Rents
for the Year Ended December 31, | IBR (2) | Lease Liability |
| 2021 | 2022 | 2023 | 2024 | 2025 | There after | Total |
Healthpeak lease (1) (April 30, 2028) | 4 | NaN 10-year renewal option | $ | 17,578 | | $ | 2,910 | | $ | 2,959 | | $ | 3,023 | | $ | 3,088 | | $ | 3,150 | | $ | 7,590 | | $ | 22,720 | | 4.60% | $ | 19,175 | |
Headquarters lease (June 30, 2021) (3) | 1 | N/A | 452 | | 503 | | 0 | | 0 | | 0 | | 0 | | 0 | | 503 | | 4.60% | 496 | |
| Equipment lease (December 31, 2025) | N/A | 5 year renewal option | 4,493 | | 1,140 | | 1,140 | | 1,140 | | 1,140 | | 1,140 | | 0 | | 5,700 | | 7.60% | 4,729 | |
| Total | | | $ | 22,523 | | $ | 4,553 | | $ | 4,099 | | $ | 4,163 | | $ | 4,228 | | $ | 4,290 | | $ | 7,590 | | $ | 28,923 | | 5.20% | $ | 24,400 | |
(1) Lease includes assisted living operatingcommunities.
(2) For the equipment lease, this represents the discount rate.
(3) On February 24, 2021, we entered into a second amendment to extend our headquarters lease through December 31, 2031. See Note 18 for more information regarding the lease extension.
Operating lease expenses consist of monthly rent costs, certain utilities and real estate taxes. For the year ended December 31, 2020, we recognized $5,118 in rent expense and $1,760 in general and administrative expenses within our consolidated statements of operations. For the year ended December 31, 2020, we recognized finance lease expenses of $323, consisting of amortization of the right-of-use asset of $230 and interest expense on the lease liability of $93, which are recorded in our consolidated statements of operations.operations in depreciation and amortization and interest and other expenses, respectively.
ASC Topic 842 provides lessors with a practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. In addition, ASC Topic 842 clarifies which ASC Topic (Topic 842 or FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606) applies for the combined component. Specifically, if the non-lease components associated with the lease component are the predominant component of the combined components, the lessor should account for the combined component in accordance with ASC Topic 606. Otherwise, the lessor should account for the combined component as an operating lease. We have elected this practical expedient and recognized revenue under our resident agreements at our independent living and assisted living communities based upon the predominant component rather than allocating the consideration and separately accounting for it under ASC Topic 842 and ASC Topic 606. We have concluded that the non-lease components of the agreements with respect to our independent and assisted living communities are the predominant component of the leases and, therefore, we recognize revenue for these agreements under ASC Topic 606.
Stock-Based Compensation. We have a stock-based compensation plan under which we grant equity-based awards. We measure the compensation cost of award recipients’ services received in exchange for an award of equity instruments based on the grant date fair value of the underlying award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. The impact of forfeitures are recognized as they occur.
Income Taxes. Our income tax expense includes U.S. income taxes. Certain items of income and expense are not reported in tax returns and financial statements in the same year. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences to be included in our financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, while the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized.
Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent, we believe that we are more likely
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
than not that all or a portion of deferred tax assets will not be realized, we establish a valuation allowance to reduce the deferred tax assets to the appropriate valuation. To the extent we establish a valuation allowance or increase or decrease this allowance in a given period, we include the related tax expense or tax benefit within the tax provision in the consolidated statement of operations in that we believe these assets are more likely than not to be realized.period. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. In the future, if we determine that we would be able to realize our deferred tax assets in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance and record an income tax benefit.benefit within the tax provision in the consolidated statement of operations in that period.
Fair ValueWe pay franchise taxes in certain states in which we have operations. We have included franchise taxes in general and administrative and other senior living operating expenses in our consolidated statements of Financial Instruments. Our financial instruments are limited to cash and cash equivalents, accounts receivable, debt and equity investments, accounts payable and mortgage notes payable. Except for our mortgage debt, the fair value of these financial instruments was not materially different from their carrying values at December 31, 2018 and 2017. We estimate the fair values of our mortgage debt using market quotes when available, discounted cash flow analyses and current prevailing interest rates.operations.
Revenue Recognition. On January 1, 2018, we adopted FASBWe recognize revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606, under the modified retrospective approach applied to certain contracts which were not completed as of December 31, 2017 using the practical expedient in paragraph 606-10-10-4 that allows for the use of a portfolio approach, because we have determined that the effect of applying the guidance to our portfolios of contracts within the scope of ASC Topic 606 on our consolidated financial statements would not differ materially from applying the guidance to each individual contract within the respective portfolio or our performance obligations within thatsuch portfolio. This approach will also be used for future contract modifications, if any. The five stepfive-step model defined by ASC Topic 606 requires us to: (1)(i) identify our contracts with customers, (2)customers; (ii) identify our performance obligations under those contracts, (3)contracts; (iii) determine the transaction prices of those contracts, (4)contracts; (iv) allocate the transaction prices to our performance obligations in those contractscontracts; and (5)(v) recognize revenue when each performance obligation under those contracts is satisfied. Revenue is recognizedrecognition occurs when promised goods or
services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. Our adoption of ASC Topic 606 did not result in an adjustment to our retained earnings
Senior Living and did not have a material impact on the amountRehabilitation and timing of our revenue recognition for the year ended December 31, 2018.
Wellness Services Revenues.A substantial portion of our revenue from our independent living and assisted living communities relates to contracts with residents for housing services that are generally short term in nature and fallinitially are subject to ASC Topic 842, Leases, or ASC Topic 842. As noted earlier, we have concluded that the non-lease components of these agreements are the predominant components of the contracts; therefore, we recognize revenue for these agreements under ASC Topic 840, which are specifically excluded606. We also provide our residents and others with rehabilitation and wellness services at our senior living communities as well as at outpatient clinics located separately from the scope of ASC Topic 606.our senior living communities. Our contracts with residents and other customers that are within the scope of ASC Topic 606 are also generally short term in nature. We have determined that services performed under those contracts are considered one performance obligation in accordance with ASC Topic 606 as such services are regarded as a series of distinct events with the same timing and pattern of transfer to the resident or customer. Revenue is recognized for those contracts when our performance obligation is satisfied by transferring control of the service provided to the resident or customer, which isare generally when the services are provided over time.
Senior Living Revenue. Resident fees at our independent living and assisted living communities consist of regular monthly charges for basic housing and support services and fees for additional requested services, such as assisted living services, personalized health services and ancillary services. Fees are specified in our agreements with residents, which are generally short term (30 days to one year), with regular monthly charges billed in advance. Funds received from residents in advance of services being provided are not material to our consolidated financial statements. Some of our senior living communities require payment of an upfront entrance fee in advance of a resident moving into the community; substantially all of these community fees are non-refundable and are initially recorded as deferred revenue and included in accrued expenses and other current liabilities in our consolidated balance sheets. These deferred amounts are then are amortized on a straight linestraight-line basis into revenue over the term of the resident's agreement. When the resident agreement.no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. Revenue recorded and deferred in connection with community fees is not material to our consolidated financial statements. A substantial portion of our senior living revenue related toRevenue for basic housing and support services falls under ASC Topic 840, and is recorded on a straight line basis over the term of the resident agreement. Revenue for additional requested services is recognized in accordance with ASC Topic 606 and measured based on the consideration specified in the resident agreement and is recorded when the services are provided.
In our SNFs and certain of our independent and assisted living communities where we provide SNF services, we are paid fixed daily rates from governmental and contracted third party payers, and we charge a predetermined fixed daily rate for private pay residents. These fixed daily rates and certain other fees are billed monthly in arrears. Although there are complex regulatory compliance rules governing fixed daily rates, we have no episodic payments or capitation arrangements. We currently use the “most likely amount” technique to estimate revenue, in accordance with ASC Topic 606, although rates are generally known and considered fixed prior to services being performed, whether included in the resident agreement or contracted with governmental or third party payers. Rate adjustments from Medicare or Medicaid are recorded when known (without regard to when the assessment is paid or withheld), and subsequent adjustments to these amounts are recorded in revenues when known. Billings under certain of these programs are subject to audit and possible retroactive adjustment, and related revenue is recorded at the amount we ultimately
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
expect to receive, which is inclusive of the estimated retroactive adjustments or refunds, if any, under reimbursement programs. Retroactive adjustments are recorded on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Revenue is recognized when performance obligations are satisfied by transferring control of the service provided to the resident, which is generally when services are provided over the duration of care. We derived approximately 23.3%
Rehabilitation and 22.9%wellness services revenues at our Ageility clinics consist of our senior living revenuescharges for clinically-based rehabilitation services, including physical therapy, speech therapy and occupational therapy, as well as other service-based programs and therapies. Revenue for these services is recognized in accordance with ASC Topic 606 and is recorded when the years ended December 31, 2018 and 2017, respectively, from payments under Medicare and Medicaid programs.services are provided.
Management Fee RevenueRevenues and Reimbursed Community-Level Costs Incurred on Behalf of Managed Communities.We manage senior living communities for the account of Senior Housing Properties Trust, or, together with its subsidiaries, SNH,DHC pursuant to long termlong-term management agreements which provide for periodic management fee payments to us and reimbursement for our direct costs and expenses related to support such communities. Although there are various management and operational activities performed by us under the New Management Agreements, we have determined that all community operations and management activities constitute a single performance obligation, which is satisfied over time as the services are rendered. We earn management fees are determined by an agreed upon percentageequal to 5% of gross revenues (as defined)realized and recognized in accordance with ASC Topic 6063% of construction costs for construction projects we manage at the senior living communities we manage. We recognize management fee revenues in the same period that we provide the management services to SNH, generally monthly. FASB DHC. Our estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred.
Commencing with the 2021 calendar year, we may also earn incentive fees from DHC under the New Management Agreements, which are payable in cash and are contingent, performance-based fees recognized only when earned at the end of each respective measurement period. Incentive management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized. The incentive fee is equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all the managed communities on a combined basis exceeds target EBITDA for those communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all the managed communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the Consumer Price Index, or CPI, or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of target amounts. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.
ASU No. 2016-08, Revenue from Contracts with Customers(Topic (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which we adopted effective January 1, 2018, clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. Where we are the primary obligor and, therefore, control the transfer of the goods and services with respect to any such operating expenses incurred in connection with the management of these communities, we recognize revenue when the goods have been delivered or the service has been rendered and we are due to be reimbursed from SNH.DHC pursuant to the New Management Agreements. Such revenue is included in reimbursed community-level costs incurred on behalf of managed communities in our consolidated statements of operations. The related costs are included in community-level costs incurred on behalf of managed communities in our consolidated statements of operations. Amounts due from SNHDHC related to management fees and reimbursed community-level costs incurred on behalf of managed communities are included in due from related personsperson in our consolidated balance sheets.
The following table presents revenue disaggregated by type of contract and payer:
|
| | | |
| | Year Ended
December 31, 2018
|
Leasing revenue (1)
| | 649,493 |
|
Revenue from contracts with customers: | | |
Medicare and Medicaid programs (1)
| | 255,032 |
|
Additional requestedOther reimbursed expenses. Other reimbursed expenses include reimbursements that arise from certain centralized services and private pay and other third party payer SNF services (1)
| | 189,879 |
|
Management fee revenue | | 15,145 |
|
Reimbursed costs incurred on behalf of managed communities | | 280,845 |
|
| | 740,901 |
|
Total revenues | | 1,390,394 |
|
(1)Included in senior living revenue in our consolidated statements of operations.
One-time Employee Termination Benefits. FASB ASC Topic 420, Exit or Disposal Cost Obligations, or ASC Topic 420, specifies the criteria for recognizing a one-time employee termination arrangement. In connection with the resignation of Bruce J. Mackey Jr. as our president and chief executive officer, we and The RMR Group LLC, or RMR LLC, entered into a separation agreement with Bruce Mackey on December 11, 2018. Pursuant to this separation agreement, Bruce Mackey will remain an employee of us and RMR LLC until December 31, 2019, or such earlier date as he may elect, he received a cash payment from us in January 2019 in the amount of $600 and will receive release payments in the aggregate amount of $550, paid in four equal quarterly installments starting in March 2019 and ending in December 2019, transition payments at the rate of $10 per month from January 1, 2019 until December 31, 2019, and certain other employee benefits, subject to him signing a customary release. RMR LLC has agreed to pay 20.0% and we have agreed to pay 80.0% of the transition payments and release payments payable to Bruce Mackeyprovide pursuant to this separation agreement. Our arrangement with Bruce Mackey meetsour management agreements, a significant portion of which are charged or passed through to and are paid by our customers. We have determined that we control the criteria in ASC Topic 420,services provided by third parties for our customers and, as a result,therefore, we recordedaccount for the full severance cost of $1,160 inthese services and the related reimbursement revenue on a gross basis. We recognized revenue from other reimbursed expenses of $25,648 for the year ended December 31, 2018, which is included in general and administrative2020. We did 0t recognize revenue from other reimbursed expenses in our consolidated statements of operations. In addition, all of our unvested common stock previously awarded to Bruce Mackey will vest in full upon the date of his separation from us, subject to conditions.
In connection with the termination, effective December 12, 2018, of the employment of our former senior vice president of senior living operations with us, we entered into a letter agreement with him on December 27, 2018. Pursuant to the letter agreement, we made a cash payment to him in the amount of $510 on January 11, 2019. Our arrangement with our former senior vice president, senior living operations meets the criteria in ASC Topic 420, and, as a result, we recorded the full severance cost of $510 infor the year ended December 31, 2018, which are included in general and administrative expenses in our consolidated statements of operations.2019.
Reclassifications. We have made reclassifications to the prior years’ financial statements to conform to the current year’s presentation. These reclassifications had no effect on net loss or shareholders’ equity.
RecentRecently Adopted Accounting Pronouncements.Pronouncements. On January 1, 2018,2020, we adopted FASB ASU No. 2016-01, Recognition2018-13, Fair Value Measurement (Topic 820) issued by the Financial Accounting Standards Board, or FASB, which modified certain disclosure
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
requirements in Topic 820, such as the removal of the need to disclose the amount of and Measurementreason for transfers between Level 1 and Level 2 of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under thehierarchy, and several changes related to Level 3 fair value option that are attributable to their own credit. AIC, a private company in which we have an equity investment, chose to early adopt this ASU during the second quarter of 2018, and therefore we recorded a cumulative effect adjustment of $840 to accumulated other comprehensive income and accumulated deficit in our consolidated balance sheets to reflect our share of AIC's adjustment to its equity investments. See the discussion above under “Equity and Debt Investments” for more information regarding the impact of these ASUs on our consolidated financial statements. See Note 14 for more information regarding our arrangements with AIC.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. Additionally, real estate sales are within the scope of ASU No. 2014-09, as amended by ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. Under these ASUs, income recognition for real estate sales is primarily based on the transfer of control of the real estate rather than the continuing involvement in the real estate under the current guidance. As a result, more of our transactions may qualify as real estate sales and we may be required
to recognize gains or losses sooner. We adopted these ASUs on January 1, 2018 using the modified retrospective approach. The adoption of these ASUs did not result in any adjustment to our initial retained earnings and did not result in any significant change to the amount and timing of our revenue recognition. The adoption of these ASUs did result in expanded disclosures related to the nature, amount, timing and uncertainty of our revenue and cash flows arising from our contracts with customers that are included within the scope of these ASUs. See also the discussion above under “Revenue Recognition” for more information regarding the impact of these ASUs on our consolidated financial statements.
On January 1, 2018, we adopted FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how entities present and classify certain cash receipts and cash payments in the statement of cash flows.measurements. The adoption of this ASU did not have a material impact on our consolidated financial statements.
On January 1, 2018,2020, we adopted FASB ASU No. 2016-18, Statement2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40) issued by the FASB, using the prospective transition method, which aligned the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. The adoption of Cash Flows (Topic 230): Restricted Cash, which requires that the reconciliation of the beginning-of-period and end-of-period amounts presented in the statement of cash flows include restricted cash and restricted cash equivalents. We adopted this ASU retrospectively to all periods presented in our consolidated statement of cash flows. Pursuant to this ASU, in the event restricted cash is presented separately from cash and cash equivalents in the balance sheets, entities are required to reconcile the amounts presented in the statement of cash flows to the amounts presented in the balance sheet and to disclose information about the nature of the restrictions. Wedid not have presented our consolidated statement of cash flows to reconcile both cash and cash equivalents and restricted cash and restricted cash equivalents and have provided a reconciliation to the amounts presented in our consolidated statements of cash flows to the amounts presented in our consolidated balance sheets.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). This ASU requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. This ASU also changes the accounting for sale and leaseback transactions, such as our sale and leaseback transaction with SNH in June 2016, and any associated deferred gain. Additionally, this ASU requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. This ASU is effective for reporting periods beginning after December 15, 2018. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which works to improve on certain aspects of ASU No. 2016-02 identified by stakeholders as problematic or difficult to implement, including the adoption method. ASU No. 2018-11 provides for a transition method option, allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, rather than restating comparative periods being presented. ASU No. 2018-11 also provides lessors with a practical expedient, by class of underlying asset, not to separate non-lease components from the associated lease component if certain conditions are met. In addition, ASU No. 2018-11 clarifies which ASC Topic (Topic 842 or Topic 606) applies for the combined component. Specifically, if the non-lease components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC Topic 606. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC Topic 842. We will elect this practical expedient provided to lessors and will recognize revenue under our resident agreements based upon the predominant component. We will adopt these ASUs as required effective January 1, 2019 utilizing the modified retrospective transition method with no adjustments to comparative periods presented in accordance with ASU No. 2018-11. Additionally, we will elect the practical expedients within ASU No. 2016-02 that allow an entity to not reassess as of January 1, 2019 its prior conclusions on whether an existing contract contains a lease, lease classification for existing leases, and whether costs incurred for existing leases qualify as initial direct costs. While we continue to assess certain effects of adoption, including the recognition of the related deferred income tax impact and anymaterial impact on our valuation allowance, we have concluded that the most significant effects relate to the recognition of lease liabilities and right of use assets for operating leases on the balance sheet and additional disclosures about our leases.
We expect that the adoption of ASU No. 2016-02 will result in the recognition of lease liabilities and right of use assets of approximately $1.5 billion as of January 1, 2019. Such amount of right of use assets will be recognized based upon the amount of the recognized lease liabilities, adjusted for accrued lease payments, which are not material to the consolidated financial statements as of December 31, 2018. We have also concluded that any previously unrecognized right of use assets will need to be reviewed for impairment effective January 1, 2019, which could result in a reduction to the initially recognized right of use assets with a cumulative effect adjustment to beginning retained earnings as of January 1, 2019. We are still in the process of evaluating the initial right of use assets for impairment. While the adoption of these ASUs will not affect the rent westatements.
pay, we expect the rent expense amounts presented in our consolidated statements of operations and comprehensive loss to increase by $6,778 primarily due to changes in how we will account for our deferred gain on our sale and leaseback transaction described above. On January 1, 2019,2020, we also expectadopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (Topic 740) issued by the FASB, which simplifies certain requirements under Topic 740, including eliminating the exception to record through retained earnings our total deferred gainintraperiod tax allocation when there is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. The adoption of $67,472this ASU did not have a material impact on our consolidated balance sheets as of December 31, 2018, $55 of which was in accounts payable and accrued expenses, $6,723 of which was in other current liabilities, $1,216 of which was in other long term liabilities and the remaining $59,478 was separately stated on our consolidated balance sheets.financial statements.
For the year ended December 31, 2018, a substantial portion of our senior living revenue at our independent living and assisted living communities relates to housing services and falls under ASC Topic 840, and revenue for additional requested services is recognized in accordance with ASC Topic 606. Upon adoption of ASU No. 2016-02 and ASU No. 2018-11, we will elect the lessor practical expedient within ASU No. 2018-11 and will recognize revenue under these resident agreements based upon the predominant component, either the lease or non-lease component, of the contracts rather than allocating the consideration and separately accounting for it under ASC Topic 842 and ASC Topic 606. We have concluded that the non-lease components of the agreements with respect to our assisted living communities are the predominant component of the contract, therefore, we currently expect that we will recognize revenue for the agreements with respect to our assisted living communities under ASC Topic 606. We are still determining the predominant component of the agreement with respect to our independent living communities. After the adoption of ASU No. 2016-02 and ASU No. 2018-11, we expect the timing and pattern of revenue recognition will be substantially the same as that prior to adoption.
Recently Issued Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic(Topic 326), which requires a financial asset or a group of financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This ASU eliminates the probable initial recognition threshold and instead requires reflection of an entity’s current estimate of all expected credit losses. In addition, this ASU amends the current available for sale security other-than-temporary impairment model for available for sale debt securities. The length of time that the fair value of an available for sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists and credit losses will now be limited to the difference between a security’s amortized cost basis and its fair value. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amends the transition and effective date for nonpublic entities and smaller reporting companies, such as the Company, and clarifies that receivables arising from operating leases are not in the scope of this ASU. These ASUs areIn November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies guidance around how to report expected recoveries. Entities will apply the provisions of the ASU as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for smaller reporting companies for reporting periods beginning after December 15, 2019. We are assessing the potential impact that the adoption of these ASUs will have on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, this ASU requires the premium to be amortized to the earliest call date. This ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We expect the impact of this ASU will not be material our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220), which permits an entity to reclassify the tax effects that remain recorded within other comprehensive income to retained earnings as a result of the tax reform legislation that became effective in December 2017. This ASU is effective for reporting periods beginning after December 15, 2018. We expect that the impact of this ASU will not be material to our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from non-employees. This ASU is effective for reporting periods beginning after December 15, 2018. We expect the impact of this ASU will not be material to our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning after December 15, 2019.2022. We are assessing the potential impact that the adoption of this ASU (and the related clarifying guidance issued by the FASB) will have on our consolidated financial statements.
In August 2018,March 2020, the FASB also issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40)2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which alignsprovides temporary optional expedients and exceptions on contract modifications meeting certain criteria to ease the requirementsfinancial reporting burdens of the expected market transition from the London Inter-bank Offered Rate, or LIBOR, and other interbank offered rates to the alternative reference rates. For a contract that meets the criteria, this ASU generally allows an entity to account for capitalizing implementation costs incurred inand present modifications as an event that does not require remeasurement at the modification date or reassessment of a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal use software.previous accounting determination. This ASU iswas effective for reporting periods beginning afterupon issuance and can be applied through December 15, 2019.31, 2022. We are assessing the potential impact that the adoption ofexpect this ASU will not have a material impact on our consolidated financial statements.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
3. Revenue and Other Operating Income
The following tables present revenue from contracts by segment with customers disaggregated by type of payer, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Senior
Living | | Rehabilitation and Wellness Services | | Total |
| Private payer | $ | 75,625 | | | $ | 4,520 | | | $ | 80,145 | |
| Medicare and Medicaid programs | 1,390 | | | 40,519 | | | 41,909 | |
| Other third-party payer programs | 0 | | | 36,993 | | | 36,993 | |
| Management fees | 62,880 | | (1) | 0 | | | 62,880 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 916,167 | | (1) | 0 | | | 916,167 | |
| Other reimbursed expenses | 25,648 | | (1) | 0 | | | 25,648 | |
| Total revenues | $ | 1,081,710 | | | $ | 82,032 | | | $ | 1,163,742 | |
(1) Represents separate revenue streams earned from DHC as part of the New Management Agreements.
| | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Senior
Living | | Rehabilitation and Wellness Services | | Total |
| Private payer | $ | 802,071 | | | $ | 2,709 | | | $ | 804,780 | |
| Medicare and Medicaid programs | 204,272 | | | 27,222 | | | 231,494 | |
| Other third-party payer programs | 30,155 | | | 18,754 | | | 48,909 | |
| Management fees | 16,169 | | (1) | 0 | | | 16,169 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 313,792 | | (1) | 0 | | | 313,792 | |
| | | | | |
| Total revenues | $ | 1,366,459 | | | $ | 48,685 | | | $ | 1,415,144 | |
(1) Represents separate revenue streams earned from DHC as part of the then pooling and management agreements in effect through December 31, 2018, we have two2019.
Other operating segments: senior living communitiesincome. On March 27, 2020, the Coronavirus Aid, Relief, and rehabilitationEconomic Security Act, or CARES Act, was signed into law. Under the CARES Act, the U.S. Department of Health and wellness. InHuman Services, or HHS, established the senior living community segment, we operate for our own account or manage forProvider Relief Fund. Retention and use of the account of others independent living communities, assisted living communities and SNFs thatfunds received under the CARES Act are subject to centralized oversightcertain terms and provide housing and servicesconditions, including certain reporting requirements. Other operating income includes income recognized for funds we have received pursuant to elderly residents. In the rehabilitation and wellness operating segmentProvider Relief Fund of the CARES Act that we provide therapy services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics. We have determined that our twoare in compliance with the terms and conditions of the Provider Relief Fund of the CARES Act. We recognize other operating segments meetincome to the aggregation criteria as prescribed under FASB ASC Topic 280, Segment Reporting, andextent we estimate we have therefore determinedincurred losses or COVID-19 related costs that the CARES Act is intended to compensate. The amount of income we recognize for these estimated losses is limited to the amount of funds we received during the period in which the estimated losses have been recognized or, if funds were received subsequently, the period in which the funds were received. We recognized other operating income of $3,435 for the year ended December 31, 2020. See Note 17 for more information.
4. Segment Information
Segment Information. Effective as of January 1, 2020, we changed our business is comprisedreporting segments, see Note 2 for more information. Results of oneoperations and selected financial information by reportable segment senior living. All of our operations and assetsthe reconciliation to the consolidated financial statements are located as follows:
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin the United States,thousands, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.pershareamounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| Senior
Living | | Rehabilitation and Wellness Services | | Corporate and Other | | Total |
| Revenues | $ | 1,081,710 | | | $ | 82,032 | | | $ | 0 | | | $ | 1,163,742 | |
| Other operating income | 1,715 | | | 1,720 | | | 0 | | | 3,435 | |
| Operating expenses | 1,018,348 | | | 67,321 | | | 65,566 | | | 1,151,235 | |
| Operating income (loss) | 65,077 | | | 16,431 | | | (65,566) | | | 15,942 | |
| Allocated corporate and other costs | (57,023) | | | (4,109) | | | 61,132 | | | 0 | |
| Other loss, net | (288) | | | 0 | | | (22,580) | | | (22,868) | |
| Income (loss) before income taxes and equity in earnings of an investee | 7,766 | | | 12,322 | | | (27,014) | | | (6,926) | |
| Provision for income taxes | 0 | | | 0 | | | (663) | | | (663) | |
| Net income (loss) | $ | 7,766 | | | $ | 12,322 | | | $ | (27,677) | | | $ | (7,589) | |
3. | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 |
| Senior
Living | | Rehabilitation and Wellness Services | | Corporate and Other | | Total |
| Revenues | $ | 1,366,459 | | | $ | 48,685 | | | $ | 0 | | | $ | 1,415,144 | |
| Operating expenses | 1,307,068 | | | 41,603 | | | 86,747 | | | 1,435,418 | |
| Operating income (loss) | 59,391 | | | 7,082 | | | (86,747) | | | (20,274) | |
| Allocated corporate and other costs | (74,291) | | | (4,361) | | | 78,652 | | | 0 | |
| Other income (loss), net | 66 | | | 0 | | | (306) | | | (240) | |
| (Loss) income before income taxes and equity in earnings of an investee | (14,834) | | | 2,721 | | | (8,401) | | | (20,514) | |
| Provision for income taxes | 0 | | | 0 | | | (56) | | | (56) | |
| Equity in earnings of an investee | 0 | | | 0 | | | 575 | | | 575 | |
| Net (loss) income | $ | (14,834) | | | $ | 2,721 | | | $ | (7,882) | | | $ | (19,995) | |
5. Property and Equipment, net
Property and equipment, consistsnet consist of the following:
| | | | December 31, | | December 31, | | As of December 31, |
| | 2018 | | 2017 | | 2020 | | 2019 |
| Land | $ | 16,383 |
| | $ | 16,383 |
| Land | $ | 12,155 | | | $ | 12,155 | |
| Buildings and improvements | 208,375 |
| | 211,812 |
| |
| Buildings, construction in process and improvements | | Buildings, construction in process and improvements | 202,679 | | | 201,447 | |
| Furniture, fixtures and equipment | 239,240 |
| | 208,262 |
| Furniture, fixtures and equipment | 60,713 | | | 59,174 | |
| Property and equipment, at cost | 463,998 |
| | 436,457 |
| Property and equipment, at cost | 275,547 | | | 272,776 | |
| Accumulated depreciation | (220,125 | ) | | (184,953 | ) | |
| Less: accumulated depreciation | | Less: accumulated depreciation | (116,296) | | | (105,529) | |
| Property and equipment, net | $ | 243,873 |
| | $ | 251,504 |
| Property and equipment, net | $ | 159,251 | | | $ | 167,247 | |
We recorded depreciation expense relating to our property and equipment of $35,859$10,767 and $37,996$16,640 for the years ended December 31, 20182020 and 2017,2019, respectively.
We review the carrying value of long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying value of an asset is not recoverable, we determine the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate, and we consider these estimates to be a Level 3 fair value measurement.
As a result of our long livedlong-lived assets impairment review, we recorded $387 and $528$3,148 of impairment charges to certain of our long livedlong-lived assets for the years ended December 31, 2018 and 2017, respectively. The fair values of the impaired assets were $362 and $341 as of December 31, 2018 and 2017, respectively. We recorded long lived asset impairment charges of $74 for the year ended December 31, 20182019. The fair value of the impaired assets were $4,520 as of December 31, 2019. We also recorded long-lived asset impairment charges of $134 for the year ended December 31, 2019, to reduce the carrying value of one senior living communitycommunities that we and SNHDHC sold to its estimated fair value less costs to sell. We also recorded long lived asset impairment charges of $1,584 for the year ended December 31, 2017 to reduce the carrying value of one senior living community we classified as held for sale as of December 31, 2017 to itstheir estimated fair value less costs to sell. See Notes 9 and 11Note 10 for further information regarding the salesales of this community.these communities. NaN impairment charges were recorded for the year ended December 31, 2020.
As of December 31, 2018 and 2017,2019, we had $0 and $59,080, respectively,$4,813 of net property and equipment, net classified as held for sale and presented separately on our consolidated balance sheets. See Notes 9sheets that we transferred to DHC as of January 1, 2020 pursuant to the Transaction Agreement. As of December 31, 2020, we did 0t have any property and 11 for more information regarding our communitiesequipment classified as held for sale.
As of December 31, 2017, we had $1,702 of assets related to our leased senior living communities included in our property and equipment that we subsequently sold during the year ended December 31, 2018 to SNH for increased rent pursuant to the terms of our leases with SNH. As of December 31, 2018, we had $1,863 of assets related to our leased senior living communities included in our property and equipment that we expect to request that SNH purchase from us for an increase in future rent; however, SNH is not obligated to purchase such amounts. See Note 9 for more information regarding our leases and other arrangements with SNH.
4. Other Intangible Assets
The other intangible assets balance is made up of management agreements, trademarks, resident agreements, liquor licenses and other intangible assets that we primarily acquired in connection with our acquisitions of senior living communities. The changes in the carrying amount of our other intangible assets for the years ended December 31, 2018 and 2017 are as follows:
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Indefinite lived intangible assets | 191 |
| | — |
| | 191 |
| | 191 |
| | — |
| | 191 |
|
| Definite lived intangible assets | 3,767 |
| | (3,767 | ) | | — |
| | 5,676 |
| | (5,596 | ) | | 80 |
|
| | 3,958 |
| | (3,767 | ) | | 191 |
| | 5,867 |
| | (5,596 | ) | | 271 |
|
F-19
In December 2017, we disposed of $2,337 of fully amortized indefinite lived intangible assets
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin connection with the sale of two senior living communities. See Notes 9 and 11 for further information regarding the sale of these communities.thousands, exceptpershareamounts)
We amortize definite lived intangible assets using the straight line method over the useful lives of the assets which have identifiable useful lives commencing on the date of acquisition. Total amortization expense for definite lived intangible assets for the years ended December 31, 2018 and 2017 was $80 and $196, respectively.
5.6. Income Taxes
Significant components of our deferred tax assets and liabilities at December 31, 20182020 and 2017,2019, which are included in other long termlong-term assets on our consolidated balance sheets, were as follows:
| | | | | | | | As of December 31, |
| | 2018 | | 2017 | | 2020 | | 2019 |
| Non-current deferred tax assets: | | | | Non-current deferred tax assets: | | | |
| Allowance for doubtful accounts | 894 |
| | 933 |
| |
| Deferred gains on sale and leaseback transactions | 18,789 |
| | 20,548 |
| |
| | Insurance reserves | 2,558 |
| | 2,369 |
| Insurance reserves | $ | 2,661 | | | $ | 2,500 | |
| Tax credits | 19,636 |
| | 20,286 |
| Tax credits | 1,060 | | | 19,394 | |
| Tax loss carryforwards | 57,914 |
| | 35,999 |
| Tax loss carryforwards | 36,838 | | | 62,098 | |
| Interest expense | 801 |
| | — |
| |
| | Depreciable assets | 4,831 |
| | 4,114 |
| Depreciable assets | 7,469 | | | 5,778 | |
| Goodwill | 2,992 |
| | 3,865 |
| Goodwill | 2,536 | | | 2,536 | |
| Right-of-use lease obligation | | Right-of-use lease obligation | 6,242 | | | 5,886 | |
| Other assets | 1,050 |
| | 1,301 |
| Other assets | 1,469 | | | 3,047 | |
| Total non-current deferred tax assets before valuation allowance | 109,465 |
| | 89,415 |
| Total non-current deferred tax assets before valuation allowance | 58,275 | | | 101,239 | |
| Valuation allowance: | (101,300 | ) | | (80,154 | ) | Valuation allowance: | (46,485) | | | (87,665) | |
| Total non-current deferred tax assets | 8,165 |
| | 9,261 |
| Total non-current deferred tax assets | 11,790 | | | 13,574 | |
| | | | | | | | |
| | | | | |
| Non-current deferred tax liabilities: | | | | Non-current deferred tax liabilities: | | | |
| Lease expense | (5,434 | ) | | (5,941 | ) | Lease expense | (4,381) | | | (4,914) | |
| Employee stock grants | (35 | ) | | (36 | ) | |
| | Right-of-use lease asset | | Right-of-use lease asset | (6,180) | | | (5,886) | |
| Other liabilities | (1,374 | ) | | (1,312 | ) | Other liabilities | (1,085) | | | (1,825) | |
| Total non-current deferred tax liabilities | (6,843 | ) | | (7,289 | ) | Total non-current deferred tax liabilities | (11,646) | | | (12,625) | |
| Net deferred tax assets | $ | 1,322 |
| | $ | 1,972 |
| Net deferred tax assets | $ | 144 | | | $ | 949 | |
On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act of 2017, or the TCJA, became effective, enacting significant change to the United States Internal Revenue Code of 1986, as amended, or the IRC. Among other things, the TCJA reduces the corporate income tax rate from 35% to 21%, repeals the corporate alternative minimum tax, or AMT, limits various business deductions, modifies the maximum usage of net operating losses and significantly modifies various international tax provisions. The changes effected by the TCJA are generally effective for tax years ending after December 31, 2017.
While the corporate income tax rate reduction took effect on January 1, 2018, the carrying value of deferred tax assets and liabilities is determined by the enacted federal corporate income tax rate. As a result, our deferred tax assets and liabilities and resulting valuation allowance as of December 31, 2017 have decreased by $24,200 and $24,000, respectively. In connection with the elimination of the AMT, the TCJA permits the monetization of AMT credits. We previously recorded a valuation allowance against our AMT credit generated in 2016. The TCJA has made this credit refundable, and we therefore recorded a benefit of $1,108 related to the reversal of the valuation allowance.
In addition, the TCJA will have other impacts on us in the future. Our federal net operating losses incurred prior to December 31, 2017 will continue to have a 20-year carryforward limitation applied to them and will need to be evaluated for recoverability in the future. Federal net operating losses incurred after December 31, 2017, if any, will have an indefinite life, but their usage will be limited to 80% of taxable income in any given year. The deduction of business interest is limited for any tax year beginning after 2017 to the sum of the taxpayer’s business interest income floor plan financing, and 30 percent50% of adjusted taxable income. Any disallowed interest generally may be carried forward indefinitely.
While we have significant net operating losses, due to a “change of ownership” under IRC Sections 382, Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change, and 383, Special Limitations on Certain Excess Credits, as a result of the Share Issuances on January 1, 2020, we have an annual limitation of $445 on the amount of pre-2020 combined federal net operating losses and federal tax credit net operating loss equivalents. As a result, a portion of our federal net operating losses and federal tax credits, $88,601 and $18,498, respectively, will lapse before they can be utilized, for which we reduced our deferred tax assets ($18,606 and $18,498, respectively) and corresponding valuation allowance ($37,104). As of December 31, 2018,2020, our federal net operating loss carryforwards, which are scheduled to begin expiring in 20262027 if unused, were approximately $167,010, and our$87,160, after a reduction of $88,601 for net operating losses that will lapse before they can be utilized, due to the change of ownership discussed above. Our federal tax credit carryforwards, which begin expiring in 20222026 if unused, were approximately $18,869. At December 31, 2018, our$332, after a reduction of $18,498 for federal tax returns filed forcredits that will lapse before they can be utilized, also due to the 2015, 2016, and 2017 tax yearschange of ownership. We are subject to examinationU.S. federal income tax, as well as income tax in multiple state and our netlocal jurisdictions.As of December 31, 2020, all material state and local income tax matters have been concluded through 2017 and all material federal income tax matters have been concluded through 2014. However, in some jurisdictions (U.S. federal and state), operating loss carryforwardslosses and tax credit carryforwards arecredits may be subject to adjustment byuntil such time as they are utilized and the Internal Revenue Service.year of utilization is closed to adjustment.
Management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. An important piece of objective negative evidence evaluated waswere the significant losses we incurred over the three yearthree-year period ending December 31, 2018.2020. That objective negative evidence is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence beyond projections of future income to support the realizabilityrealization of our deferred tax assets. Accordingly, on the basis of that assessment, we have recorded a valuation allowance against the majority of our net deferred tax assets and liabilities as of December 31, 20182020 and 2017.2019. In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit, which may affect our results of operations.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
The changes in our valuation allowance for deferred tax assets were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Amounts Charged To Expense | | Amounts Charged Off, Net of Recoveries | | Amounts Charged (Credited) to Equity | | Balance at End of Period |
| Year Ended December 31, 2017 | $ | 100,524 |
| | $ | — |
| | $ | (20,280 | ) | | $ | (90 | ) | | $ | 80,154 |
|
| Year Ended December 31, 2018 | $ | 80,154 |
| | $ | — |
| | $ | 21,074 |
| | $ | 72 |
| | $ | 101,300 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at
Beginning of
Period | | Amounts
Charged to
Expense | | Amounts
Charged Off,
Net of Recoveries | | Amounts (Credited) Charged to Equity | | Balance at
End of Period |
| Year Ended December 31, 2019 | $ | 101,300 | | | $ | 0 | | | $ | (13,341) | | | $ | (294) | | | $ | 87,665 | |
| Year Ended December 31, 2020 | $ | 87,665 | | | $ | 584 | | | $ | (41,834) | | | $ | 70 | | | $ | 46,485 | |
For the year ended December 31, 2018,2020, we recognized a provision for income taxes from operations of $247,$663, attributable to a federal benefit of $229, plus state income taxes.taxes of $892 that includes a charge to the state valuation allowance of $527.
The provision for income taxes from operations is as follows:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| Current tax provision (benefit): | | | |
| Federal | $ | (554 | ) | | $ | (3,167 | ) |
| State | 151 |
| | 603 |
|
| Total current tax provision (benefit) | (403 | ) | | (2,564 | ) |
| Deferred tax provision (benefit): | | | |
| Federal | 554 |
| | (1,109 | ) |
| State | 96 |
| | (863 | ) |
| Total deferred tax provision (benefit) | 650 |
| | (1,972 | ) |
| Total tax provision (benefit) | $ | 247 |
| | $ | (4,536 | ) |
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | |
| Current tax provision: | | | | | |
| Federal | $ | (506) | | | $ | (561) | | | |
| State | 365 | | | 244 | | | |
| Total current tax benefit | (141) | | | (317) | | | |
| Deferred tax provision: | | | | | |
| Federal | 277 | | | 277 | | | |
| State | 527 | | | 96 | | | |
| Total deferred tax provision | 804 | | | 373 | | | |
| Total tax provision | $ | 663 | | | $ | 56 | | | |
The principal reasons for the difference between our effective tax rate on operations and the U.S. federal statutory income tax rate are as follows:
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | |
| Taxes at statutory U.S. federal income tax rate | (21.0) | % | | (21.0) | % | | |
| State and local income taxes, net of federal tax benefit | 4.5 | % | | 17.2 | % | | |
| Tax credits | 259.3 | % | | (0.6) | % | | |
| Change in valuation allowance | (581.2) | % | | (67.4) | % | | |
| Deferred taxes | 0 | % | | 72.4 | % | | |
| Federal net operating losses | 268.6 | % | | 0 | % | | |
| State net operating losses | 50.2 | % | | 0 | % | | |
| Return to provision | 36.4 | % | | 0.2 | % | | |
| Investments | (7.8) | % | | 0 | % | | |
| Other differences, net | 0.6 | % | | (0.5) | % | | |
| Effective tax rate | 9.6 | % | | 0.3 | % | | |
|
| | | | | |
| | For the years ended December 31, |
| | 2018 | | 2017 |
| Taxes at statutory U.S. federal income tax rate | (21.0 | )% | | (35.0 | )% |
| State and local income taxes, net of federal tax benefit | (5.8 | )% | | (17.0 | )% |
| Tax credits | — | % | | (2.6 | )% |
| Change in valuation allowance | 26.8 | % | | (72.0 | )% |
| Tax rate change | — | % | | 107.2 | % |
| Other differences, net | 0.3 | % | | 1.5 | % |
| Effective tax rate | 0.3 | % | | (17.9 | )% |
Presentation of the tax rate reconciliation for the year ended December 31, 2017 has been modified to conform to that for the year ended December 31, 2018. The modification has no impact on the provision for income taxes.
We utilize a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken on a tax return. The first step is a determination of whether the tax position should be recognized in the financial statements. The second step determines the measurement of the tax position.
As of December 31, 20182020 and 2017,2019, there were no unrecognized0 uncertain tax benefits.positions.
We recognize interest and penalties related to income taxes in income tax expense, and such amounts were not material for the years ended December 31, 20182020 and 2017.2019.
In accordance with the CARES Act, we applied an alternative minimum tax, or AMT, of $554 for the tax year 2019 to our 2020 tax return. See Note 17 for more information. 6. Earnings
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
7. Net Loss Per Share
WeBasic net loss per share is calculated EPS forby dividing net loss by the years ended December 31, 2018, and 2017weighted average number of outstanding common shares during the period. When applicable, net loss per share — diluted reflects the more dilutive earnings per share using the weighted average number of our common shares calculated using the two-class method, or the treasury stock method.
The following table provides a reconciliation of the weighted average number of common shares outstanding duringused in the periods. When applicable,calculation of basic and diluted EPS reflectsnet loss per share (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
| Weighted average shares outstanding—basic | 31,471 | | | 5,006 | |
| Effect of dilutive securities: unvested share awards | 0 | | | 0 | |
Weighted average shares outstanding—diluted(1) | 31,471 | | | 5,006 | |
(1) For the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. The years ended December 31, 20182020 and 2017 had 1,417,6292019, 110 and 1,056,923,121, respectively, of potentially dilutive restrictedour unvested common shares that were not included in the calculation of net loss per share—diluted EPS because to do so would have been antidilutive.anti-dilutive.
7.8. Fair Values of Assets and Liabilities
Our assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.
Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
Recurring Fair Value Measures
The tables below present thecertain of our assets measured at fair value at December 31, 20182020 and 20172019, categorized by the level of inputsinput used in the valuation of each asset.
| | | | | As of December 31, 2018 | | | As of December 31, 2020 |
| Description | | Total | | Quoted Prices in Active Markets for Identical (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Description | | Total | | Quoted Prices in
Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
Cash equivalents(1) | | $ | 23,390 |
| | $ | 23,390 |
| | $ | — |
| | $ | — |
| Cash equivalents (1) | | $ | 26,291 | | | $ | 26,291 | | | $ | 0 | | | $ | 0 | |
| Available for sale securities: | | | | | | | | | |
Equity securities(2) | | | | | | | | | |
| Investments: | | Investments: | | | | | | | | |
Equity investments (2) | | Equity investments (2) | | | | | | | | |
High yield fund (3) | | High yield fund (3) | | 3,156 | | | 0 | | | 3,156 | | | 0 | |
International bond fund (4) | | International bond fund (4) | | 2,818 | | | 0 | | | 2,818 | | | 0 | |
| Financial services industry | | 1,686 |
| | 1,686 |
| | — |
| | — |
| Financial services industry | | 1,348 | | | 1,348 | | | 0 | | | 0 | |
| REIT industry | | 105 |
| | 105 |
| | — |
| | — |
| |
| Other | | 3,675 |
| | 3,675 |
| | — |
| | — |
| |
| Total equity securities | | 5,466 |
| | 5,466 |
| | — |
| | — |
| |
Debt securities(3) | | | | | | | | | |
International bond fund(4) | | 2,537 |
| | — |
| | 2,537 |
| | — |
| |
High yield fund(5) | | 2,669 |
| | — |
| | 2,669 |
| | — |
| |
| Healthcare | | Healthcare | | 477 | | | 477 | | | 0 | | | 0 | |
| Technology | | Technology | | 765 | | | 765 | | | 0 | | | 0 | |
Other (5) | | Other (5) | | 3,875 | | | 3,875 | | | 0 | | | 0 | |
| Total equity investments | | Total equity investments | | 12,439 | | | 6,465 | | | 5,974 | | | 0 | |
Debt investments (6) | | Debt investments (6) | | | | | | | | |
| Industrial bonds | | 1,692 |
| | — |
| | 1,692 |
| | — |
| Industrial bonds | | 540 | | | 0 | | | 540 | | | 0 | |
| Technology bonds | | 2,375 |
| | — |
| | 2,375 |
| | — |
| Technology bonds | | 1,471 | | | 0 | | | 1,471 | | | 0 | |
| Government bonds | | 9,791 |
| | 9,791 |
| | — |
| | — |
| Government bonds | | 7,301 | | | 7,301 | | | 0 | | | 0 | |
| Energy bonds | | 595 |
| | — |
| | 595 |
| | — |
| Energy bonds | | 484 | | | 0 | | | 484 | | | 0 | |
| Financial bonds | | 1,858 |
| | — |
| | 1,858 |
| | — |
| Financial bonds | | 1,359 | | | 0 | | | 1,359 | | | 0 | |
| Other | | 1,268 |
| | — |
| | 1,268 |
| | — |
| Other | | 1,155 | | | 0 | | | 1,155 | | | 0 | |
| Total debt securities | | 22,785 |
| | 9,791 |
| | 12,994 |
| | — |
| |
| Total available for sale securities | | 28,251 |
| | 15,257 |
| | 12,994 |
| | — |
| |
| Total debt investments | | Total debt investments | | 12,310 | | | 7,301 | | | 5,009 | | | 0 | |
| Total investments | | Total investments | | 24,749 | | | 13,766 | | | 10,983 | | | 0 | |
| Total | | $ | 51,641 |
| | $ | 38,647 |
| | $ | 12,994 |
| | $ | — |
| Total | | $ | 51,040 | | | $ | 40,057 | | | $ | 10,983 | | | $ | 0 | |
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
| | | | | As of December 31, 2017 | | | As of December 31, 2019 |
| Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Description | | Total | | Quoted Prices in
Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
Cash equivalents(1) | | $ | 23,578 |
| | $ | 23,578 |
| | $ | — |
| | $ | — |
| Cash equivalents (1) | | $ | 26,143 | | | $ | 26,143 | | | $ | 0 | | | $ | 0 | |
| Available for sale securities: | | | | | | | | | |
Equity securities(2) | | | | | | | | | |
| Investments: | | Investments: | | | |
Equity investments (2) | | Equity investments (2) | | | |
| Financial services industry | | 2,199 |
| | 2,199 |
| | — |
| | — |
| Financial services industry | | 1,233 | | | 1,233 | | | 0 | | | 0 | |
| REIT industry | | 145 |
| | 145 |
| | — |
| | — |
| |
| Healthcare | | Healthcare | | 395 | | | 395 | | | 0 | | | 0 | |
| Technology | | Technology | | 281 | | | 281 | | | 0 | | | 0 | |
| Other | | 4,094 |
| | 4,094 |
| | — |
| | — |
| Other | | 4,500 | | | 4,500 | | | 0 | | | 0 | |
| Total equity securities | | 6,438 |
| | 6,438 |
| | — |
| | — |
| |
Debt securities(3) | | | | | | | | | |
| Total equity investments | | Total equity investments | | 6,409 | | | 6,409 | | | 0 | | | 0 | |
Debt investments (6) | | Debt investments (6) | | | | | | | | |
High yield fund (3) | | High yield fund (3) | | 2,977 | | | 0 | | | 2,977 | | | 0 | |
International bond fund(4) | | 2,511 |
| | — |
| | 2,511 |
| | — |
| International bond fund (4) | | 2,680 | | | 0 | | | 2,680 | | | 0 | |
High yield fund(5) | | 2,744 |
| | — |
| | 2,744 |
| | — |
| |
| Industrial bonds | | 2,017 |
| | — |
| | 2,017 |
| | — |
| Industrial bonds | | 1,180 | | | 0 | | | 1,180 | | | 0 | |
| Technology bonds | | 2,972 |
| | — |
| | 2,972 |
| | — |
| Technology bonds | | 2,189 | | | 0 | | | 2,189 | | | 0 | |
| Government bonds | | 10,707 |
| | 10,610 |
| | 97 |
| | — |
| Government bonds | | 9,537 | | | 9,537 | | | 0 | | | 0 | |
| Energy bonds | | 1,216 |
| | — |
| | 1,216 |
| | — |
| Energy bonds | | 625 | | | 0 | | | 625 | | | 0 | |
Financial bonds | | 1,423 |
| | — |
| | 1,423 |
| | — |
| | 1,853 | | | 0 | | | 1,853 | | | 0 | |
| Other | | 3,254 |
| | — |
| | 3,254 |
| | — |
| Other | | 725 | | | 0 | | | 725 | | | 0 | |
| Total debt securities | | 26,844 |
| | 10,610 |
| | 16,234 |
| | — |
| |
| Total available for sale securities | | 33,282 |
| | 17,048 |
| | 16,234 |
| | — |
| |
| Total debt investments | | Total debt investments | | 21,766 | | | 9,537 | | | 12,229 | | | 0 | |
| Total investments | | Total investments | | 28,175 | | | 15,946 | | | 12,229 | | | 0 | |
| Total | | $ | 56,860 |
| | $ | 40,626 |
| | $ | 16,234 |
| | $ | — |
| Total | | $ | 54,318 | | | $ | 42,089 | | | $ | 12,229 | | | $ | 0 | |
(1) Cash equivalents consist of short term,short-term, highly liquid investments and money market funds held principallyprimarily for obligations arising from our self insuranceself-insurance programs. Cash equivalents are reported in our consolidated balance sheets as cash and cash equivalents and current and long termlong-term restricted cash.cash and cash equivalents. Cash equivalents include $19,529$22,837 and $20,316$23,014 of balances that are restricted at December 31, 20182020 and 2017,2019, respectively.
(2) The fair value of our equity investments is readily determinable. During the years ended December 31, 20182020 and 2017,2019, we received gross proceeds of $2,407$3,845 and $3,200,$1,963, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $280$368 and $388,$289, respectively, and gross realized losses totaling $72$245 and $147,$60, respectively.
| |
(3) | As of December 31, 2018, our debt investments, which are classified as available for sale, had a fair value of $22,785 with an amortized cost of $21,806; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $1,276, net of unrealized losses of $296. As of December 31, 2017, our debt investments had a fair value of $26,844 with an amortized cost of $25,589; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $1,401, net of unrealized losses of $146. Debt investments include $13,943 and $18,068 of balances that are restricted as of December 31, 2018 and 2017, respectively. At December 31, 2018, eight of the debt investments we hold, with a fair value of $1,688, have been in a loss position for less than 12 months and 44 of the debt investments we hold, with a fair value of $12,234, have been in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these investments remain strong with solid fundamentals, or we intend to hold these investments until recovery, and other factors that support our conclusion that the loss is temporary. During the years ended December 31, 2018 and 2017, we received gross proceeds of $7,031 and $19,182, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $10 and $251, respectively, and gross realized losses totaling $119 and $84, respectively. We record gains and losses on the sales of these investments using the specific identification method. |
| |
(4) | The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly. |
| |
(5) | The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly. |
(3) The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment.
(4) The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment.
(5) As of January 1, 2020, we reclassified an investment with a fair value of $286 from a debt investment to an equity investment.
(6) As of December 31, 2020, our debt investments, which are classified as available for sale, had a fair value of $12,310 with an amortized cost of $11,554; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $756, net of unrealized losses of $4. As of December 31, 2019, our debt investments had a fair value of $21,766 with an amortized cost of $19,662; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $2,114, net of unrealized losses of $10. Debt investments include $8,395 and $12,477 of balances that are restricted as of December 31, 2020 and 2019, respectively. At December 31, 2020, 1 of the debt investments we hold, with a fair value of $291, has been in a loss position for less than 12 months and we did not hold any debt investment with a fair value in a loss position for greater than 12 months. We do not believe this investment is impaired primarily because it has not been in a loss position for an extended period of time, the financial conditions of the issuer of this investment remain strong with solid fundamentals, or we intend to hold the investment until recovery, and other factors that support our conclusion that the loss is temporary. During the years ended December 31, 2020 and 2019, we received gross proceeds of $6,563 and $3,230, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $302 and $7, respectively, and gross realized losses totaling $0 and $7, respectively. We record gains and losses on the sales of these investments using the specific identification method.
The amortized cost basis and fair value of available for sale debt securities at December 31, 2020, by contractual maturity, are shown below.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
| | | | | | | | | | | | | | |
| | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 474 | | | $ | 480 | |
| Due after one year through five years | | 6,746 | | | 7,076 | |
| Due after five years through ten years | | 4,334 | | | 4,754 | |
| Total | | $ | 11,554 | | | $ | 12,310 | |
Our financial assets (which include cash equivalents and investments) have been valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. During the year ended December 31, 2018,2020, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value. Accordingly, there were no transfers of assets or liabilities between levels of the fair value hierarchy during the year ended December 31, 2018.
The carrying valuesvalue of accounts receivable and accounts payable approximateapproximates fair value as of December 31, 20182020 and 2017.2019. The carrying value and fair value of our mortgage notes payable were $7,872$7,171 and $8,986,$8,177, respectively, as of December 31, 20182020 and $8,188$7,533 and $9,617,$8,861, respectively, as of December 31, 2017,2019, and are categorized in Level 3 of the fair value hierarchy in their entirety.hierarchy. We estimate the fair valuesvalue of our mortgage notesnote payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date. The carrying value and fair value of our mortgage notes payable as of December 31, 2017, exclude $34,781 of mortgage notes payable categorized as held for sale and presented separately on our consolidated balance sheets. See Note 11 for more information regarding our communities classified as held for sale.
NonrecurringNon-Recurring Fair Value Measures
We review the carrying value of our long livedlong-lived assets, including our right-of-use assets, property and equipment and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. See Note 35 for more information regarding fair value measurements related to impairments of our long lived assetslong-lived assets.
9. Indebtedness
In June 2019, we recorded.
8. Indebtedness
On December 18, 2018, weentered into a second amended our credit agreement. As a result of the amendment to ourand restated credit agreement the aggregate amountwith Citibank, N.A., as administrative agent and lender, and a syndicate of the commitments under ourother lenders, pursuant to which we obtained a $65,000 secured revolving credit facility, was reducedor Credit Facility, scheduled to $54,000 from $100,000, and the stated maturity date ofmature on June 12, 2021. At our credit facility was changed to June 28, 2019 from February 24, 2020. In addition, the amendment eliminated our options tooption, we may extend the maturity date for a one-year period, which is subject to payment of our credit facility for two, one year periods, as well as to request an increase in the aggregate amount of the commitments under our credit facility. The amendment also removed certain financial covenants we were previously required to comply with, including the leverageextension fee and fixed charge coverage ratios and the tangible net worth covenant. Certain other covenants and related definitions, among other provisions, included in our credit agreement were also modified pursuant to the amendment. conditions.
We paid fees of $1,889$1,271 in 20172019 in connection with the replacementJune 2019 closing of our credit facility, which fees were deferred and will beare being amortized over the initial term of our credit facility. In connection withCredit Facility. Our Credit Facility is available for general business purposes, including acquisitions, and provides for the amendment, we wrote off $554 in deferred financing fees in the fourth quarterissuance of 2018 and recorded these to interest and other expense in our consolidated statementsletters of operations. Our credit agreement requires uscredit. We are required to pay interest at a rate based on,of LIBOR plus a premium of 250 basis points per annum, or at our option, LIBOR or a base rate, as defined in our credit agreement, plus a premium, or 4.85% and 7.00%, respectively,150 basis points per annum, on borrowings under our Credit Facility; the effective annual interest rate options, as of December 31, 2018, on outstanding borrowings under our credit facility.2020, were 2.64% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused partportion of the available borrowingscapacity under our credit facility.Credit Facility. The weighted average annual interest rate for borrowings under our credit facilityCredit Facility was 6.3% and 5.4%, respectively,5.00% for the yearsyear ended December 31, 20182019. As of and 2017.for the year ended December 31, 2020, we had 0 borrowings outstanding under our Credit Facility. As of December 31, 2018,2020, we had letters of credit issued under ourthe credit facility in an aggregate amount of $2,516$2,442 and no availabilitywe had $42,053 available for further
borrowingborrowings under our credit facility.Credit Facility. We incurred aggregate interest expense and other associated costs related to our credit facilitiesCredit Facilities of $1,965$1,036 and $1,296$2,089 for the years ended December 31, 20182020 and 2017,2019, respectively.
Our credit facilityCredit Facility is secured by real estate mortgages on 1011 senior living communities we own with a combined 1,2191,235 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility. Our credit facilityCredit Facility is also secured by these subsidiaries’senior living communities' accounts receivable and related collateral. The amount of available borrowings under our credit facilityCredit Facility is subject to our having qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility provides for acceleration of payment of all amounts outstanding under our credit facilityCredit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined.defined in our credit agreement. Our credit agreement contains a number of financial and other covenants, including covenantsthose that restrict our ability to pay dividends or make other distributions to our stockholdersshareholders in certain circumstances.
We are currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations.
At December 31, 2018,2020, we had seven7 irrevocable standby letters of credit outstanding, totaling $25,216. In June 2018, we increased, from $17,800 to $22,700, one$29,292. One of these letters of credit in the amount of $26,850, which secures our workers' compensation insurance program, and this letter of credit is currently collateralized by approximately $17,934$21,561 of cash equivalents and $5,415$7,517 of debt and equity investments. This letter of credit currently expires in June 2019 2021
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
and is automatically extended for one yearone-year terms unless notice of nonrenewal is provided by the issuing bank prior to the end of the applicable term. We expect that our workers' compensation insurance program will require an increase in the value of this letter of credit in June 2019. At December 31, 2018,2020, the cash equivalents collateralizing this letter of credit including accumulated interest, wereclassified as short termshort-term restricted cash and cash equivalents in our consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short termshort-term restricted debt and equity investments in our consolidated balance sheets. The remaining six6 irrevocable standby letters of credit outstanding at December 31, 20182020, totaling $2,516,$2,442, which are issued under the Credit Facility, secure certain of our other obligations. TheseAs of February 25, 2021, these letters of credit are scheduled to mature between May 2019June 2021 and October 20192021 and are required to be renewed annually. As of December 31, 2018, our obligations under these six letters of credit, totaling $2,516, were issued and outstanding under our credit facility and there was no availability for further borrowing under our credit facility.
At December 31, 2018, one2020, 1 of our senior living communities was encumbered by a mortgage.mortgage that secured a note. This mortgage note contains standard mortgage covenants. We recorded a mortgage discount in connection with the assumption of this mortgage note as part of our acquisition of the community secured by this mortgage note in order to record this mortgage note at its estimated fair value. We amortize this mortgage discount as an increase in interest expense until the maturity of this mortgage.mortgage note. This mortgage note requires payments of principal and interest monthly until maturity. The following table is a summary of this mortgage note as of December 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of
December 31, 2020 | | Contractual Stated Interest Rate | | Effective Interest Rate | | Maturity Date | | Monthly Payment | | Lender Type |
| $ | 7,399 | | (1) | | 6.20% | | 6.70% | | September 2032 | | $ | 72 | | | Federal Home Loan Mortgage Corporation |
_______________________________________ |
| | | | | | | | | | | | | | | | |
| Balance as of | | Contractual Stated | | Effective | | | | Monthly | | |
| December 31, 2018 | | Interest Rate | | Interest Rate | | Maturity Date | | Payment | | Lender Type |
| | | | | | | | | | | |
| $ | 8,151 |
| (1) | 6.20 | % | | 6.70 | % | | September 2032 | | $ | 72 |
| | Federal Home Loan Mortgage Corporation |
_______________________________________
(1) Contractual principal paymentpayments excluding unamortized discount and debt issuance costs of $279.$228.
We incurred mortgage interest expense, net of discount or premium amortization, of $1,053$502 and $3,012$526 with respect to the mortgage note for the years ended December 31, 20182020 and 2017,2019, respectively. Our mortgage debt requires monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows require Federal Home Loan Mortgage Corporation, or FMCC, approval.
In September 2017, we prepaid one
As of our Federal National Mortgage Association, or FNMA, mortgage notes that had aDecember 31, 2020, the required principal balance of $13,105 and required interest at the contracted rate of 6.47% per annum. In connection with this prepayment, we recorded a gain of $143 on early extinguishment of debt, net of unamortized premiums and a prepayment penalty equal to 1% of the principal prepaid.
In December 2017, in connection with the sale of one of our senior living communities to SNH, we prepaid one of our FMCC mortgage notes that had a principal balance of $2,375 and required interest at the contracted rate of 6.36% per annum. In connection with this prepayment, we recorded a loss of $145 on early extinguishment of debt, net of unamortized discounts
and a prepayment penalty equal to approximately 3% of the principal prepaid, which amount is included in the gain on sale of senior living communities in our consolidated statements of operations.
In February 2018, in connection with the sale of one of our senior living communities to SNH, SNH assumed a FNMA mortgage note that had a principal balance of $16,776 and required interest at the contracted rate of 6.64% per annum. In connection with SNH's assumption of this debt, we recorded a gain of $543, which amount is included in gain on sale of senior living communities in our consolidated statements of operations.
In June 2018, in connection with the sale of two of our senior living communities to SNH, SNH assumed a commercial lender mortgage note that had a principal balance of $16,588 and required interest at the contracted rate of 5.75% per annum. In connection with SNH's assumption of this debt, we recorded a gain of $638, which amount is included in gain on sale of senior living communities in our consolidated statements of operations.
Principal payments due during the next five years and thereafter under the terms of our mortgage note are as follows:
| | | | | | | | |
| Year | | Principal Payment |
| 2021 | | $ | 413 | |
| 2022 | | 440 | |
| 2023 | | 469 | |
| 2024 | | 498 | |
| 2025 | | 531 | |
| Thereafter | | 5,048 | |
| Total | | 7,399 | |
| | |
| Less: Unamortized net discount | | (228) | |
| Total mortgage note payable | | 7,171 | |
| | |
| Less: Short-term portion of mortgage note payable | | (388) | |
| Long-term portion of mortgage note payable | | $ | 6,783 | |
|
| | | |
| 2019 | $ | 365 |
|
| 2020 | 387 |
|
| 2021 | 413 |
|
| 2022 | 440 |
|
| 2023 | 469 |
|
| Thereafter | 6,077 |
|
| | $ | 8,151 |
|
| | |
| Less: Unamortized net discount and debt issuance costs | $ | (279 | ) |
| Total mortgage note payable | $ | 7,872 |
|
| | |
| Less: Short term portion of mortgage note payable | $ | (339 | ) |
| | |
| Long term portion of mortgage note payable | $ | 7,533 |
|
As of December 31, 2018, weWe believe we were in compliance with all applicable covenants under our credit facility and mortgage debts.note as of December 31, 2020.
9.10. Leases with SNHDHC and HCPHealthpeak Properties, Inc and Management Agreements with SNHDHC
As of December 31, 2019, we leased 166 senior living communities from DHC pursuant to 5 master leases and we managed for DHC's account 78 senior living communities pursuant to management and pooling agreements. Effective as of January 1, 2020, we restructured our business arrangements with DHC as further described below, and after giving effect to the Restructuring Transactions, all 244 of the senior living communities owned by DHC that we then operated are pursuant to the New Management Agreements. As of December 31, 2020, all 228 of the senior living communities owned by DHC that we then operated were pursuant to the New Management Agreements.
Restructuring our Business Arrangements with DHC. Pursuant to the Transaction Agreement as of the Conversion Time:
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
•our 5 then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with the New Management Agreements;
•we completed the Share Issuances pursuant to which we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019; and
•as consideration for the Share Issuances, DHC provided to us $75,000 by assuming certain of our working capital liabilities and through cash payments; we recognized $22,899 in loss on termination of leases, representing the excess of the fair value of the Share Issuances of $97,899 compared to the consideration of $75,000 paid by DHC. As of December 31, 2020, DHC assumed $51,547 of our working capital liabilities as part of the $75,000 it provided to us for the Share Issuances. We currently operate 260received cash of $23,453 from DHC during the year ended December 31, 2020.
The senior living communities under lease and management arrangementsthe 5 then existing master leases with SNH, or approximately 91.5% ofDHC that terminated, as described above, met the total communities we operate. In orderconditions to addressbe classified as held for sale in reporting periods subsequent to our entry into the operating and liquidity issues we are currently experiencing, our Independent Directors and SNH's independent trustees are currently evaluating our lease and management arrangements with SNH.Transaction Agreement. As a result, there may be agreed changes to our arrangements with SNH in the future. In addition, we are also currently evaluating options to refinance our existing credit facility, which is scheduled to expire on June 28, 2019. We cannot be sure that any changes to our arrangements with SNH will be agreed to or occur. If we are not able to reach agreement to change our arrangements with SNH, we will likely default on our rent obligations owed to SNH unless we obtain relief. For example, we expect to obtain a temporary deferral from SNH on our obligation to pay rent to SNH under our leases with SNH for the month of February 2019 but we cannot be sure that SNH will grant us this deferral; if we do not receive this deferral or any other relief we may need in the future, we may default in paying some or all of the rent due to SNH. In addition, we cannot be sure that we will obtain any renewed or restructured credit facility, and our ability to do so will likely depend on the lenders’ belief that our prospects, operating leverage and expected future operating results will permit us to continue as a going concern and to fund our operations, capital investments and debt service and other obligations. Any changes to our lease or management arrangements with SNH or renewed or restructured credit facility may not result in our realizing improved operating results or liquidity and may not be sufficient to enable us to continue as a going concern.
Senior Living Communities Leased from SNH. We are SNH’s largest tenant and SNH is our largest landlord. We leased 184 and 185 senior living communities from SNH as of December 31, 2018 and 2017, respectively. We lease2019, we classified these senior living communities as held for sale. The carrying value of these senior living communities was $(2,990), and consisted of restricted cash of $5, prepaid and other current assets of $4,545, net property and equipment of $4,813, other intangible assets of $191, accrued real estate taxes of $10,615, and security deposits and current portion of continuing care contracts of $1,929, all of which were presented on our consolidated balance sheets as assets or liabilities held for sale. These communities, while leased by us, generated income from SNHoperations before income taxes of $46,316 for the year ended December 31, 2019.
Also pursuant to fivethe Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to DHC by us under our master leases with SNH.DHC was reduced to $11,000 and subsequently reduced in accordance with the Transaction Agreement as a result of DHC’s subsequent sales of certain of the leased senior living communities, and no additional rent was payable to DHC by us from such date through the Conversion Time; and (2) on April 1, 2019, DHC purchased from us $49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to DHC’s senior living communities then leased and operated by us.
The reduction in the monthly minimum rent payable to DHC under our then-existing master leases with DHC pursuant to the Transaction Agreement was determined to be a modification of these master leases, and we reassessed the classification of these master leases based on the modified terms and determined that these master leases continued to be classified as long-term operating leases until certain contingent events were achieved. On April 1, 2019, we recorded a lease inducement of $13,840. During the period from April 1, 2019 through December 31, 2019, we amortized $1,416 of the lease inducements based on the remaining term of the master lease agreements as a reduction of rent expense. As of December 31, 2019, the remaining contingent events were achieved and accordingly, we remeasured the lease liability and right-of-use asset recorded in our consolidated balance sheets to zero and recognized $12,423 of a lease inducement as a reduction of rent expenses.
Pursuant to the New Management Agreements, we receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities. We also receive 3% of construction costs for construction projects we manage at the senior living communities we manage. Beginning on January 1, 2021 calendar year, we may receive an annual incentive fee equal to 15% of the amount by which the annual EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year. The target EBITDA for those communities on a combined basis is increased annually based on the greater of the annual increase of the CPI or 2%, plus 6% of any capital investments funded at the managed communities on a combined basis in excess of the target capital investment. Unless otherwise agreed, the target capital investment increases annually based on the greater of the annual increase of CPI or 2%.
The New Management Agreements expire in 2034, subject to our right to extend them for 2 consecutive five-year terms if we achieve certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements provide DHC with the right to terminate any New Management Agreement for a community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided DHC may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as of January 1, 2020, made by us in favor of
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
DHC’s applicable subsidiaries, we have guaranteed the payment and performance of each of our applicable subsidiary’s obligations under the applicable New Management Agreements.
We recognized transaction costs of $1,448 and $11,952 related to the Transaction Agreement for the years ended December 31, 2020 and 2019, respectively, which is included in general and administrative expenses in our consolidated statements of operations.
Senior Living Communities Formerly Leased from DHC. Prior to the Conversion Time, we were DHC's largest tenant and DHC was our largest landlord. Under our prior master leases with SNH,DHC, we pay SNHpaid DHC annual rent plus percentage rent equal to 4.0% of the increase in gross revenues at SNH’sthe applicable senior living communities over base year gross revenues as specified in the applicable lease. Our obligationPursuant to the Transaction Agreement, we were no longer required to pay any additional percentage rent under Lease No. 5 commenced in 2018. to DHC beginning February 1, 2019.
Our total annual rent payable to SNHDHC was $207,760 and $207,026$129,785 as of December 31, 2018 and 2017, respectively,2019, excluding percentage rent. Our total rent expense under all of our
leases with SNH, net of lease inducement amortization and the amortization of the deferred gain associated with the sale and leaseback transaction with SNH in June 2016,DHC was $206,190 and $203,639$138,310 for the yearsyear ended December 31, 20182019, which amount included percentage rent of $1,547. The 2019 percentage rent occurred prior to, and 2017, respectively,was adjusted by, the Transaction Agreement. Pursuant to the Transaction Agreement, our rent payable to DHC was reduced by a total of $13,840 in aggregate for February and March 2019 and we did not pay such amount to DHC. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019 was not adjusted for the rent reduction for February and March 2019. Instead, the rent reduction for February and March 2019 was determined to be a lease inducement, for which amounts included $5,542a liability of $13,840 was recorded as a reduction of the right-of-use asset on our consolidated balance sheets as of March 31, 2019, and $5,533, respectively,was amortized as a reduction of percentage rent. rent expense over the remaining terms of our master leases.
As of December 31, 2018 and 2017,2019, we had no outstanding rent due and payableobligation to SNH of $18,781 and $18,555, respectively, which are presented in due to related persons in our consolidated balance sheets. Under ourDHC.
Our previously existing leases with SNH, we have the option to extend the lease term for two consecutive 10 or 15 year terms. SNH has the right, in connection with a financing or other capital raising transaction, to reassign one or more of the communities covered by Lease No. 3 or Lease No. 5 to another of our long term lease agreements with SNH.
Our leases with SNH areDHC were “triple net” leases, which generally requirerequired us to pay rent and all property operating expenses, to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased communities, to indemnify SNHDHC from liability which may arise by reason of its ownership of the properties,communities, to maintain the propertiescommunities at our expense, to remove and dispose of hazardous substances onat the propertiescommunities in compliance with applicable lawlaws and to maintain insurance on the propertiescommunities for SNH’sDHC’s and our benefit. In the event of any damage, or immaterial condemnation, of a leased property, we are generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by SNH, if any, but if other amounts are made available by SNH, our rent will be increased accordingly. In the event of any material or total condemnation of a leased property, the lease will terminate with respect to that leased property, in which event SNH will be entitled
Prior to the condemnation proceeds andTransaction Agreement, under our rent will be reduced accordingly. In the event of any material or total destruction of a leased property, we may terminate the lease with respect to that leased property, in which event we are required to pay to SNH any shortfall in the amount of proceeds SNH receives from insurance compared to the replacement cost of that leased property and our rent will be reduced accordingly.
Under ourpreviously existing leases with SNH,DHC, we maycould request that SNHDHC purchase certain improvements to the leased communities in return for increases in annual rent in accordance with a formula specified in the applicable lease; however, SNH is not obligatedlease. Pursuant to purchase suchthe Transaction Agreement, the $110,027 of capital improvements andto the leased communities that we are not obligatedsold to sell them to SNH. DuringDHC during the yearsyear ended December 31, 20182019, did not result in increased rent.
The sale and 2017,leaseback transaction we completed in June 2016 with DHC qualified for sale-leaseback accounting and we classified the related lease as an operating lease. Accordingly, the gain generated from the sale of $82,644 was deferred and was being amortized as a reduction of rent expense over the initial term of the related lease. Upon our adoption of ASC Topic 842 on January 1, 2019, we recorded a cumulative effect adjustment through retained earnings of $67,473, eliminating our remaining deferred gain.
During the year ended December 31, 2019, we and DHC sold $17,956to third parties 18 SNFs located in California, Kansas, Iowa and $39,800, respectively,Nebraska that DHC owned and leased to us for an aggregate sales price to DHC of such improvements and ourapproximately $29,500, excluding closing costs. As a result of these sales, the annual minimum rent payable to SNH increasedDHC by approximately $1,433 and $3,193, respectively,us under our master leases with DHC was reduced in accordance with the terms of the applicable leases. At December 31, 2018, our property and equipment balance included $1,863Transaction Agreement. We recorded a loss on sale of improvements of the type we typically request that SNH purchase for an increase in rent; however SNH is not obligated to purchase these improvements.
Since January 1, 2017, we and SNH added senior living communities toin our leases with SNH and engaged in other transactions impacting our leases with SNH, as follows:
Duringconsolidated statements of operations of $856for the quarteryear ended June 30, 2017, we and SNH agreed to amend the applicable lease for certain construction, expansion and development projects at two senior living communities we lease from SNH. If and when we request that SNH purchase improvements related to these specific projects from us, our annual rent payable to SNH will increase by an amount equal to the interest rate then applicable to SNH’s borrowings under its revolving credit facility plus 2.0% per annum of the amount SNH purchased. This amount of increased rent will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, our annual rent payable to SNH will be revised to equal the amount otherwise determined pursuant to the capital improvement formula specified in the applicable lease.
In August 2017, we sold to SNH a land parcel adjacent to a senior living community located in Delaware that we lease from SNH for $750, excluding closing costs. This land parcel was added to the applicable lease and our annual minimum rent payable to SNH increased by $33 in accordance with the terms of that lease.
In June 2018, we and SNH sold one SNF to a third party, which had been previously leased to us, located in California with 97 living units for a sales price of approximately $6,500, excluding closing costs. Pursuant to the terms of our lease with SNH,December 31, 2019, primarily as a result of this sale, our annual rent payable to SNH decreased by 10.0% of the net proceeds that SNH received from this sale, in accordancesettling certain liabilities associated with the termssale of 15 of these 18 SNFs in the applicable lease.amount of $749. We did not receive any proceeds from this sale.
Also in June 2018, SNH acquired from a third party an additional living unit at athese sales. These senior living community we leasecommunities, while leased to us, incurred losses from SNH located in Florida which was added tooperations before income taxes of $(3,443) for the lease for that senior living community, and, as a resultyear ended December 31, 2019, excluding the loss on sale of this acquisition, our annual rent payable to SNH increased by $14 in accordance with the terms of such lease.communities.
Senior Living Communities Leased from HCPHealthpeak Properties, Inc. As of December 31, 2018,2020, we leased four4 senior living communities under one1 lease with Healthpeak Properties, Inc., (formerly known as HCP, Inc.), or HCP.PEAK. This lease is also a “triple net” lease which requires that we pay all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintaining the communities, and indemnifying the landlord for any liability which may arise from the operations during the lease term. OurWe recognized rent expense for this lease with HCPfor actual rent paid plus or minus a straight-line adjustment for scheduled minimum rent increases, which were not material to our consolidated financial
Five Star Senior Living Inc.
contains a minimum annual escalatorNotes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
statements. The right-of-use asset balance has been decreased for the amount of 2.0%, butaccrued lease payments, which amounts are not greater than 4.0%, depending on increases in certain cost of living indexes and expires on April 30, 2028 and includes one 10 year renewal option.material to our consolidated financial statements.
The following table is a summary ofSee Note 2 for more information regarding our leases with SNH and with HCP as of December 31, 2018:PEAK.
|
| | | | | | | | | | |
| | Number of Properties | | Annual Minimum Rent as of December 31, 2018 | | Current Expiration Date | | Remaining Renewal Options |
| 1. Lease No. 1 for SNFs and independent and assisted living communities | 82 |
| | $ | 59,276 |
| | December 31, 2024 | | Two 15-year renewal options. |
| 2. Lease No. 2 for SNFs and independent and assisted living communities | 47 |
| | 67,032 |
| | June 30, 2026 | | Two 10-year renewal options. |
| 3. Lease No. 3 for independent and assisted living communities | 17 |
| | 35,988 |
| | December 31, 2028 | | Two 15-year renewal options. |
| 4. Lease No. 4 for SNFs and independent and assisted living communities | 29 |
| | 35,604 |
| | April 30, 2032 | | Two 15-year renewal options. |
| 5. Lease No. 5 for independent and assisted living communities | 9 |
| | 9,860 |
| | December 31, 2028 | | Two 15-year renewal options. |
| 6. One HCP lease | 4 |
| | 2,797 |
| | April 30, 2028 | | One 10-year renewal option. |
| Totals | 188 |
| | $ | 210,557 |
| | | | |
We entered a sale and leaseback transaction with SNH in 2016. This transaction was completed in 2017. In accordance with ASC Topic 840, this sale and leaseback transaction qualified for sale-leaseback accounting and we classified the related lease, Lease No. 5, as an operating lease. As a result, the carrying value of the senior living communities we sold to SNH of $29,706 was removed from our consolidated balance sheets, and the gain generated from the sale of $82,644 was deferred and is being amortized as a reduction of rent expense over the initial term of Lease No. 5. As of December 31, 2018, the short term portion of the deferred gain in the amount of $6,609 is presented in other current liabilities in our consolidated balance sheets, and the long term portion of $59,478 is presented separately in our consolidated balance sheets.
The future minimum rents required by our leases as of December 31, 2018, are as follows:
|
| | | |
| | |
| 2019 | 210,557 |
|
| 2020 | 210,613 |
|
| 2021 | 210,670 |
|
| 2022 | 210,728 |
|
| 2023 | 210,787 |
|
| Thereafter | 766,623 |
|
| | $ | 1,819,978 |
|
Senior Living Communities Managed for the Account of SNHDHC and its Related Entities. As of December 31, 20182020 and 2017,2019, we managed 76228 and 7078 senior living communities, respectively, for the account of SNH, pursuant to long term management agreements.DHC. We earned base management fees of $59,928 and $15,045 from SNHthe senior living communities we managed for the account of $14,146 and $12,970DHC for the years ended December 31, 20182020 and 2017,2019, respectively. In addition, we earned incentive fees of $36 and $0 and fees for our management of capital expenditure projects at the communities we managed for the account of SNHDHC of $684$2,467 and $845$842 for the years ended December 31, 20182020 and 2017, respectively, which2019, respectively. These amounts are included in management fee revenue in our consolidated statements of operations.
We have
For the year ended December 31, 2019, we had pooling agreements with SNHDHC that combinecombined most of our management agreements with SNHDHC that includeincluded assisted living units, or our AL Management Agreements. The pooling agreements combinecombined various calculations of revenues and expenses from the operations of the applicable communities covered by such agreements. Our AL Management Agreements and the pooling agreements generally provideprovided that we receivereceived from SNH:DHC:
•a management fee equal to either 3.0% or 5.0% of the gross revenues realized at the applicable communities,
•reimbursement for our direct costs and expenses related to such communities,
•an annual incentive fee equal to either 35.0% or 20.0% of the annual net operating income of such communities remaining after SNHDHC realizes an annual minimum return equal to either 8.0% or 7.0% of its invested capital, or, in the case of certain of the communities, a specified amount plus 7.0% of its invested capital since December 31, 2015, and
•a fee for our management of capital expenditure projects equal to 3.0% of amounts funded by SNH.DHC.
For AL Management Agreements that became effective from and after May 2015, our pooling agreements provideprovided that our management fee iswas 5.0% of the gross revenues realized at the applicable community, and our annual incentive fee iswas 20.0% of the annual net operating income of the applicable community remaining after SNH realizesDHC realized its requisite annual minimum return.
Our management agreements
In connection with SNH for the partcompletion of the senior living community owned by SNHRestructuring Transactions, effective as of January 1, 2020, we and located in Yonkers, New York that is not subject to the requirements of New York healthcare licensing laws, as described elsewhere herein,DHC terminated these long-term management and for the assisted living communities owned by SNH and located in Villa Valencia, California and Aurora, Colorado are not currently included in any of our pooling agreements and replaced them with SNH. We also have a pooling agreement with SNH that combines our management agreements with SNH for senior living communities consisting only of independent living units.
Our management agreements with SNH generally expire between 2030 and 2042, and are subject to automatic renewal for two consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. Each management agreement also generally provides that we, in some cases, and SNH each have the option to terminate the agreement upon the acquisition by a person or group of more than 9.8% of the other’s voting stock and upon certain change in control events affecting the other party, as defined in the agreement, including the adoption of any stockholder proposal (other than a precatory proposal) with respect to the other party, or the election to the board of directors or trustees, as applicable, of the other party of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of the other party’s board of directors or board of trustees, as applicable, in office immediately prior to the making of such proposal or the nomination or appointment of such individual.
Since January 1, 2017, we began managing additional senior living communities of SNH,New Management Agreements, the terms of which are described below, and engaged in other transactions relevant to our management and pooling arrangements with SNH, as follows:discussed above.
During the quarter ended June 2017, we and SNH agreed to amend the applicable management and pooling agreements for a construction, expansion and development project at a senior living community that SNH owns and that is managed by us. SNH’s minimum return on invested capital for this specific project will increase by an amount equal to the interest rate then applicable to its borrowings under its revolving credit facility plus 2.0% per annum. This amount of increased minimum return will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, the amount of annual minimum return on invested capital will be revised to equal the amount otherwise determined pursuant to the applicable management and pooling agreements. We and SNH also agreed that the commencement of the measurement period for determining whether the specified annual minimum return under the applicable management and pooling agreements has been achieved will be deferred until 12 months after a certificate of occupancy is issued with respect to the project.
In November 2017, we entered a transaction agreement with SNH pursuant to which we sold to SNH six senior living communities, which sales were completed in four closings, and concurrently with these sales, we and SNH entered a management agreement for each of these senior living communities and two new pooling agreements and we began managing these communities for the account of SNH, as further described below in Note 11.
Also in November 2017, we amended our then existing pooling agreements with SNH to provide, among other things, that if SNH does not receive its annual minimum return under a management agreement covered by such a pooling agreement in each of three consecutive years, for purposes of SNH’s right to terminate such management agreement, the commencement year for the measurement period for determining whether the specified annual minimum return under the applicable pooling agreement has been achieved will be 2017. The commencement year for these purposes for communities that we began managing for the account of SNH since November 2017 is generally the year or the second year following the year the applicable management agreement was entered.
In June 2018, we began managing for the account of SNH, pursuant to a management agreement and our existing Pooling Agreement No. 12 with SNH, a senior living community SNH owns located in California with 98 living units.
In November 2018, we began managing for the account of SNH, pursuant to a management agreement we entered with SNH, a senior living community SNH owns located in Colorado with 238 living units. We and SNH both have the option to terminate the management agreement with respect to this community as of December 31, 2019.
We also provide certain other services to residents at some of the senior living communities we manage for SNH,the account of DHC, such as rehabilitation and wellness services. At senior living communities we manage for the account of SNHDHC where we provide rehabilitation and wellness services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation and wellness services. At senior living communities we manage for the account of SNHDHC where we provide both inpatient rehabilitation and outpatient rehabilitationwellness services, SNHDHC generally pays us for these services and charges for such services are included in amounts charged to residents, third party payers or government programs. We earned revenues of $6,442$25,687 and $7,525$5,920 for the years ended December 31, 20182020 and 2017,2019, respectively, for rehabilitation and wellness services we provided at senior living communities we manage for the account of SNHDHC and that are payable by SNH.DHC. These amounts are included in senior living revenuerehabilitation and wellness services in our consolidated statements of operationsoperations. Consistent with our historical accounting for those periods.
D&R Yonkers LLC. In order to accommodate certain requirements of New York healthcare licensing laws, a partthese services at our managed communities, the revenues earned at these clinics that were previously located at senior living communities that we leased from DHC but as of the senior living community SNH ownsConversion Time, we now manage, no longer constitute intercompany revenues and we manage locatedthus will not be eliminated in Yonkers, New York is subleased by a subsidiaryconsolidation and will be recognized and reported as rehabilitation and wellness services in our consolidated statements of SNH to D&R Yonkers LLC. D&R Yonkers LLC is owned by our Executive Vice President, Chief Financial Officer and Treasurer and SNH’s former president and chief operating officer. operations.
We manage this part of the community pursuant to a long term management agreement with D&R Yonkers LLC under which we earn a management fee equal to 3.0% of the gross revenues realized at that part of the community and no incentive fee is payable to us. Our management agreement with D&R Yonkers LLC expires on August 31, 2022, and is subject to renewal for eight consecutive five year terms, unless earlier terminated or timely notice of nonrenewal is delivered. Pursuant to our management agreement with D&R Yonkers LLC, we earned management fees of $279$485 and $265$282 for the years ended December 31, 20182020 and 2017,2019, respectively, for management services at a part of a senior living community DHC subleases to an affiliate, which amounts are included in management fee revenuerevenues in our consolidated statements of operations.
During the year ended December 31, 2020, DHC sold 9 senior living communities that we previously managed. Upon completion of these sales, our management agreements with DHC were terminated. In addition, DHC also closed 7 senior
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
living communities and 1 building in 1 community during the year ended December 31, 2020. While these closed communities are no longer being used as senior living communities, we continue to manage their back-office operations and monitor the empty facilities. For the year ended December 31, 2020, we recognized $2,685 of management fees related to these sold and closed communities.
Ageility Clinics Leased from DHC.We lease space from DHC at certain of the senior living communities that we manage for DHC. We use this leased space for outpatient rehabilitation and wellness services clinics. We recognized rent expense of $1,561 and $414 for the years ended December 31, 2020 and 2019, respectively, with respect to these leases.
11. Shareholders’ Equity
We have common shares available for issuance under the terms of our equity compensation plan adopted in 2014, or the 2014 Plan. We awarded 471,000155,150 and 590,60085,800 of our common shares in 20182020 and 2017,2019, respectively, to our Directors, officers and others who provide services to us. We valued these shares based upon the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq,, on the dates the awards were made, or $227$1,073 in 2018,2020, based on a $0.48$6.92 weighted average share price and $920$376 in 2017,2019, based on a $1.56$4.57 weighted average share price. Shares awarded to Directors vest immediately; one fifthone-fifth of the shares awarded to our officers and others (other than our Directors) vest on the award date of grant and on the four succeeding anniversaries of the date of grant.award date. Our unvested common shares totaled 816,900149,638 and 931,92096,482 as of December 31, 20182020 and 2017,2019, respectively. Share based compensation expense is recognized ratably over the vesting period and is included in general and administrative expenses in our consolidated statements of operations. We recorded share based compensation expense of $615$513 and $1,094$438 for the years ended December 31, 20182020 and 2017,2019, respectively. As of December 31, 2018,2020, the estimated future stock compensation expense for unvested shares was $991$1,007 based on the grantaward date closing share price for awards granted to our officers and others and based on the closing share price of $0.48 on December 31, 2018.non-employees. The weighted average period over which stock compensation expense will be recorded is approximatelygreater than 2 years. As of December 31, 2018, 2,527,6002020, 2,446,730 of our common shares remain available for issuance under the 2014 Plan.
In 20182020 and 2017,2019, employees and officers of us or RMR LLC who were recipients of our share awards were permitted to elect to have us withhold the number of their then vesting common shares with a fair market value sufficient to fund the minimum required tax withholding obligations with respect to their vesting share awards in satisfaction of those tax withholding obligations. During 20182020 and 2017,2019, we acquired through this share withholding process 30,4927,912 and 44,708,5,724, respectively, common shares with an aggregate value of approximately $11$60 and $66,$26, respectively, which is reflected as an increase to accumulated deficit in our consolidated balance sheets.
11. Dispositions
In November 2017,On January 1, 2020, in connection with the Restructuring Transactions, we entered a transaction agreement with SNHeffected the Share Issuances pursuant to which in December 2017, January 2018, February 2018we issued 10,268,158 of our common shares to DHC and June 2018 we sold to SNH a total of six senior living communities and, concurrently with those sales, we and SNH entered management agreements for each of these senior living communities and two new pooling agreements with terms substantially similar to our other management and pooling agreements with SNH, and we began managing these communities for the account of SNH. These sales were completed as follows:
In December 2017, we sold two senior living communities for an aggregate sales price of $39,150, excluding closing costs. At the time of sale, these senior living communities had mortgage debt in the aggregate principal amount of $2,375, which was assumed by SNH.
In January 2018, we sold one senior living community for a sales price of $19,667, excluding closing costs.
In February 2018, we sold one senior living community for a sales price of $22,250, excluding closing costs. At the time of sale, this senior living community had mortgage debt in the principal amount of $16,776, which was assumed by SNH.
In June 2018, we sold the remaining two senior living communities for an aggregate sales price of $23,300, excluding closing costs. At the time of sale, these senior living communities had mortgage debt in the principal amount of $16,588, which was assumed by SNH.
In accordance with FASB ASC Topic 360, Property, Plant and Equipment these six senior living communities met the conditions to be classified as held for sale in November 2017. The carrying value at that time for these six senior living communities was $53,743 and consisted primarily of property, plant and equipment, net of mortgage debt and related discounts or premiums, of $37,084. The two senior living communities sold in December 2017 qualified as real estate sales and the gains on these transactions were recognized immediately in accordance with the full accrual method as a result16,118,849 of our lackcommon shares to DHC’s shareholders of continuing involvement in the ownership of the senior living communities after completing these sales. The carrying value of these two senior living communities was not included in our consolidated balance sheetrecord as of December 31, 2017. The senior living communities sold in 2018 were accounted for in accordance with ASU No. 2014-09, in particular ASC Topic 610 and related ASUs, effective with our adoption of these new ASUs on January 1, 2018. Under these new ASUs, the income recognition for real estate sales is largely based on the transfer of control rather than continuing involvement in the ownership of the real estate. We recorded a gain of$7,23113, 2019. As consideration for the year ended December 31, 2018 as a result of the sale of the four senior living communities sold to SNH in 2018, which gain is included in gain on sale of senior living communities in our consolidated statements of operations. These six senior living communities, while owned by us, generated income from operations before income taxes of $178 and $1,684 for the years ended December 31, 2018 and 2017, respectively, excluding the gain on sale of the communities. These amounts are included in our consolidated statements of operations.
In June 2018, we and SNH sold to a third party a SNF, which was previously leasedShare Issuances, DHC provided to us located in California with 97 living units for a sales price$75,000 of approximately $6,500, excluding closing costs. We recorded a loss of $102 for the year ended December 31, 2018 as a result of this sale, which loss is included in gain on sale of senior living communities in our consolidated statements of operations. This community, while leasedadditional consideration by us, generated a loss from operations before income taxes of $320 and $498 for the years ended December 31, 2018 and 2017, respectively, excluding the loss on sale of the community. Pursuant to the termsassuming certain of our lease with SNH, as a result of this sale, our annual rent payable to SNH decreased by 10.0% of the net proceeds that SNH received from this sale. We did not receive any proceeds from this sale.working capital liabilities and through cash payments.
In August 2017, we sold to SNH for $750, excluding closing costs, and simultaneously leased back from, SNH a land parcel adjacent to a senior living community we lease from SNH. This land parcel was added to the applicable lease and our annual minimum rent payable to SNH increased by $33 in accordance with the terms of that lease.
See Notes 9 and 14 for more information regarding these and other transactions with SNH.
12. Legal ProceedingsCommitments and ClaimsContingencies
We have been, are currently, and expect in the future to be involved in claims, lawsuits, and regulatory and other government audits, investigations and proceedings arising in the ordinary course of our business, some of which may involve material amounts. Also, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with FASB ASC Topic 450, Contingencies. Under FASB ASC Topic 450, lossLoss contingency provisions are recorded for probable and estimable losses at our best estimate of a loss or, when a best estimate cannot be made, at our estimate of the minimum loss. These estimates are often developed prior to knowing the amount of the ultimate loss, require the application of considerable judgment and are refined as additional information becomes known. Accordingly, we are often initially unable to develop a best estimate of loss and therefore the estimated minimum loss amount, which could be zero,0, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. A minimum or best estimate amount may be increased or decreased when events result
We are defendants in 2 lawsuits filed by former employees in California. The first lawsuit, Lefevre v. Five Star Quality Care, Inc. was filed in San Bernardino County Superior Court in May 2015 and the second lawsuit, Mandviwala v. Five Star Quality Care, Inc. d/b/a changed expectation.
As previously disclosed,Five Star Quality Care - CA, Inc. and FVE Managers, Inc., our wholly owned subsidiary, was filed in Orange County Superior Court in July 2017, as2015. The claims asserted against us in the similar, though not identical, complaints include: (i) failure to pay all wages due, (ii) failure to pay overtime, (iii) failure to provide meal and rest breaks, (iv) failure to provide itemized, printed wage statements, (v) failure to keep accurate payroll records and (vi) failure to reimburse business
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
expenses. Both plaintiffs asserted causes of action on behalf of themselves and on behalf of other similarly situated employees, including causes of action pursuant to the California Labor Code Private Attorney General Act, or PAGA.
On July 10, 2020, the parties of Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault, to settle their individual and PAGA claims. The settlement was approved by the court, and we are awaiting the court's entry of a final judgment on record. Payment on the claims is expected to be made in the first half of 2021. The settlement effectively extinguished the Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. We recognized $2,473 in other senior living operating expenses on our consolidated statements of operations related to the settlement of these claims during the year ended December 31, 2020.
As a result of routine monitoring protocols that are a part of our compliance program to review recordsactivities related to our Medicare billing, practices, we became aware of certain potentialdiscovered potentially inadequate documentation and other issues at onea SNF that we manage on behalf of our leased SNFs.DHC. This compliance reviewmonitoring was not initiated in response to any specific complaint or allegation, but was a reviewmonitoring of the type that we periodically undertake to test our compliance with applicable Medicare billing rules. As a result of these discoveries,this discovery, we, along with DHC made a voluntary disclosure of deficiencies to the U.S. Department of Health and Human ServicesHHS, Office of the Inspector General, or the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We submitted supplemental disclosures related to this matter toand DHC entered into a settlement agreement with the OIG in December 2017effective January 5, 2021 and March 2018. At December 31, 2017, we accrued an estimated revenue reserve of $888 for historical Medicare payments we received and expect to repay as a result of these deficiencies, whichthe settlement amount we reduced to $759 in March 2018. The entire $759 reserve remained accrued and unpaid at December 31, 2018. In addition, at December 31, 2017, we recorded an aggregate $658 expense for additional costs we incurred as a result of this matter, including estimated OIG imposed penalties, which amount we reduced to $594 in March 2018, and thereafter recorded an additional expense of $88 for further costs related to this matter forwas paid by DHC. We recognized $115 during the year ended December 31, 2018. Our total costs incurred related to this matter at December 31, 2018, excluding revenue reserves, was $682, $559 of which remained accrued and unpaid at December 31, 2018.
We were defendants in a lawsuit filed in the Superior Court of Maricopa County, Arizona by the estate of a former resident of a senior living community operated by us, or the Arizona litigation matter. The complaint asserted claims against us for pain and suffering2020 as a result of improper treatment constituting violations ofreduction in management fees from DHC for the Arizona Adult Protective Services Act and wrongful death. In May 2015, the jury rendered a decision in our favor on the wrongful death claim, and against us on the remaining claims, returning verdicts awarding damages of approximately $19,200, which consisted of $2,500 for pain and suffering and the remainder in punitive damages. In March 2016, pursuant to a settlement agreement we entered with the plaintiff, $7,250 wasmanagement fees that were previously paid to us with respect to the plaintiff, ofhistorical Medicare payments DHC received and which $3,021 was paid by our then liability insurer and the balance by us. We recorded a $4,229 charge for the year ended December 31, 2015 for the net settlement amount we paid. In September 2017, pursuant to an agreement we entered with our former liability insurer to settle litigation we had commenced against it, our former liability insurer paid us an additional $800 related to our settlement of the Arizona litigation matter and we recorded a decrease to other senior living operating expenses in our consolidated statements of operations consistent with the classification of the original charge.repaid DHC.
13. Business Management Agreement with RMR LLC
RMR LLC provides business management services to us pursuant to our business management and shared services agreement. These business management services may include, but are not limited to, services related to compliance with various laws and rules applicable to our status as a publicly ownedtraded company, maintenance of our senior living communities, evaluation of business opportunities, accounting and financial reporting, capital markets and financing activities, investor relations and general oversight of our daily business activities, including legal matters, human resources, insurance programs and the like.
Fees. We pay RMR LLC an annual business management fee equal to 0.6% of our revenues. Revenues are defined as our total revenues from all sources reportable under U.S. generally accepted accounting principles, or GAAP, less any revenues reportable by us with respect to communities for which we provide management services plus the gross revenues at those communities determined in accordance with GAAP. Pursuant to our business management agreement with RMR LLC, we recognized business management fees of $9,059$8,230 and $9,316$9,090 for the years ended December 31, 20182020 and 2017,2019, respectively. These amounts are included in general and administrative expenses in our consolidated statements of operations for these periods.
Term and Termination.The current term of our business management agreement ends on December 31, 20192021 and automatically renews for successive one yearone-year terms unless we or RMR LLC givesgive notice of nonrenewal before the end of an applicable term. RMR LLC may terminate our business management agreement upon 120 days’ written notice, and we may terminate upon 60 days’ written notice, subject to approval by a majority vote of our Independent Directors. If we terminate or elect not to renew our business management agreement other than for cause, as defined, we are obligated to pay RMR LLC a termination fee equal to 2.875 times the sum of the annual base management fee and the annual internal audit services expense, which amounts are based on averages during the 24 consecutive calendar months prior to the date of notice of nonrenewal or termination.
Expense Reimbursement. We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. Under our business management agreement, we reimburse RMR LLC for our allocable costs for our internal audit function. Our Audit Committee appoints our Director of Internal Audit and our Compensation Committee approves the costs of our internal audit function. The amounts recognized as expense for internal audit costs were $236$281 and $276$284 for the years ended December 31, 20182020 and 2017,2019, respectively. These amounts are included in general and administrative expenses in our consolidated statements of operations for these periods.
Transition Services.RMR LLC has agreed to provide certain transition services to us for 120 days following an applicable termination by us or notice of termination by RMR LLC.
Vendors. Pursuant to our management agreement with RMR LLC, RMR LLC may from time to time negotiate on our behalf with certain third partythird-party vendors and suppliers for the procurement of goods and services to us. As part of this
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
arrangement, we may enter agreements with RMR LLC and other companies to which RMR LLC provides management services for the purpose of obtaining more favorable terms from such vendors and suppliers.
14. Related Person Transactions
We have relationships and historical and continuing transactions with SNH,DHC, RMR LLC ABP Trust, Adam Portnoy, AIC and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors trustees orand officers who are also our Directors or officers.
SNH. We were formerly 100% owned subsidiary The RMR Group Inc., or RMR Inc., is the managing member of SNH until SNH distributedRMR LLC. The Chair of our common shares it then owned
to its shareholders in 2001. SNH is currentlyBoard and one of our Managing Directors, Adam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc. and is a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Jennifer B. Clark, our other Managing Director and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR LLC and an officer of ABP Trust. Certain of our officers, and DHC's officers, are also officers and employees of RMR LLC. Some of our Independent Directors also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these companies. Other officers of RMR LLC, including Ms. Clark, serve as managing trustees or managing directors of certain of these companies.
DHC. DHC is currently our largest stockholders,shareholder, owning, as of December 31, 2018, 4,235,0002020, 10,691,658 of our common shares, or 8.3%33.7% of our outstanding common shares. SNH is our largest landlord and weWe manage certainfor the account of DHC a substantial majority of the senior living communities for SNH.
One of our former Managing Directors, Barry M. Portnoy, was a managing trustee of SNH until his death on February 25, 2018. One of our Managing Directors, Adam Portnoy, Barry Portnoy’s son, also serves as a managing trustee of SNH. Our Executive Vice President, Chief Financial Officer and Treasurer was formerly SNH’s chief financial officer and treasurer from 2007 through 2015.we operate. RMR LLC provides management services to both us and SNH. The RMR Group Inc., or RMR Inc., the managing member of RMR LLC, is controlled byDHC and Adam Portnoy asis the solechair of the board of trustees and a managing trustee of ABP Trust. SNH’s executive officersDHC. Jennifer Clark is a managing trustee and the secretary of DHC. Effective as of January 1, 2020, we completed the Restructuring Transactions, pursuant to which we restructured our existing business arrangements with DHC. We participate in a DHC property insurance program for the senior living communities we own and lease. The premiums we pay for this coverage are officersallocated pursuant to a formula based on the profiles of RMR LLC.the properties included in the program. Our Presidentprogram cost for the policy year ended June 30, 2021 is $500. Included in Accrued expenses and Chief Executive Officer,other current liabilities at December 31, 2020 and Executive Vice President, Chief Financial Officer2019 are $30,090 and Treasurer$10,771, respectively, that will be reimbursed by DHC and are officers of RMR LLC.included in Due from related person. See Notes 91 and 1110 for more information regarding our relationships, agreements and transactions with SNHDHC and certain parties related to it and us.
In order to effect SNH’saffect DHC’s distribution of our common shares to its shareholders in 2001 and to govern our relationship with SNHDHC thereafter, we entered into agreements with SNHDHC and others, including RMR LLC. Since then, we have entered into various leases, management agreements and other agreements with SNHDHC that include provisions that confirm and modify these undertakings. Among other things, these agreements provide that:
•so long as SNHDHC remains a real estate investment trust, or a REIT, we may not waive the share ownership restrictions in our charter that prohibit any person or group from acquiring more than 9.8% (in value or number of shares, whichever is more restrictive) of the outstanding shares of any class of our stock without SNH’sDHC’s consent;
•so long as we are a tenant of, or manager for, SNH,DHC, we will not permit nor take any action that, in the reasonable judgment of SNH,DHC, might jeopardize SNH’sDHC’s qualification for taxation as a REIT;
SNH•DHC has the right to terminate our leases and management agreements upon the acquisition by a person or group of more than 9.8% of our voting stock or other change in control events affecting us, as defined therein, including the adoption of any stockholdershareholder proposal (other than a precatory proposal) or the election to our Board of Directors of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of our Directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual; and
•so long as we are a tenant of, or manager for, SNHDHC or so long as we have a business management agreement with RMR LLC, we will not acquire or finance any real estate of a type then owned or financed by SNHDHC or any other company managed by RMR LLC without first giving SNHDHC or such company managed by RMR LLC, as applicable, the opportunity to acquire or finance that real estate.
Senior Living Communities Leased from or Managed for SNH. As of December 31, 2018 and 2017, we leased 184, and 185 senior living communities from SNH, respectively, pursuant to five leases, and we managed 76 and 70 senior living communities for the account of SNH, respectively. See Note 9 for more information regarding our leases and management arrangements with SNH.
D&R Yonkers LLC. We manage a part of a senior living community that SNH owns and subleases to D&R Yonkers LLC, which is owned by our Executive Vice President, Chief Financial Officer and Treasurer and SNH’s former president and chief operating officer. See Note 9 for more information regarding this arrangement.
Our Manager, RMR LLC.We have an agreement with RMR LLC providesto provide business management services to us pursuant to our business management agreement. RMR LLC is a majority owned subsidiary of RMR Inc. One of our Managing Directors, Adam Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc. and is a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Barry Portnoy was one of our Managing Directors and a managing director and an officer of RMR Inc. and an officer and employee of RMR LLC until his death on February 25, 2018. Katherine E. Potter, our President and Chief Executive Officer, Richard A. Doyle, our Executive Vice President, Chief Financial Officer and Treasurer and Bruce J. Mackey Jr., our former President and Chief Executive Officer, are or were officers and employees of RMR LLC. Our Independent Directors also serve as independent directors or independent trustees of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves, and, until his death, Barry Portnoy served, as a managing director or managing trustee of these companies and other officers of RMR LLC serve as managing trustees or managing directors of certain of these companies. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its subsidiaries provide management services.
us. See Note 13 for more information regarding our relationshipmanagement agreement with RMR LLC.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Share Awards to RMR LLC Employees. We have historically made share awards to certain RMR LLC employees who are not also Directors, officers or employees of us under our equity compensation plans. During the years ended December 31, 20182020 and 2017,2019, we awarded to such persons annual share awards of 70,90021,150 and 92,80017,150 common shares, respectively, valued at $25$166 and $139,$77, in aggregate, respectively, based upon the closing price of our common shares on Nasdaq on the dates the awards were made under our equity compensation plans.made. Generally, one fifthone-fifth of these awards vest on the grantaward date and one fifthone-fifth vests on each of the next four anniversaries of the grantaward date. In certain instances, we may accelerate the vesting of an award, such as in connection with the award holder’s retirement as an officer of us or an officer or employee of RMR LLC. These awards to RMR LLC employees are in addition to the share awards granted to our current and former Managing Directors, as Director compensation, and the fees we paid to RMR LLC. In 2018,During the years ended December 31, 2020 and 2019, we purchased 30,4927,912 and 5,724 common shares, at the closing price of the common shares on Nasdaq on the date of purchase, from certain of our officers and other employees of ours and RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. See Note 1011 for further information regarding these purchases.
Other. Retirement and Separation Arrangements.In connection with the resignation oftheir respective retirements or separations, we entered into retirement or separation agreements in 2018 and 2019 with our former officers, Bruce J. Mackey Jr. as our President, Richard A. Doyle and Chief Executive Officer and as an executive vice president of RMR LLC effective December 31, 2018, we and RMR LLC entered into a separation agreement with Bruce Mackey on December 11, 2018.R. Scott Herzig. Pursuant to this separation agreement, Brucethese agreements, we made cash payments of $600 and $510 to Mr. Mackey will remain an employee of us and RMR LLC until December 31, 2019, or such earlier date as he may elect, he received a cash payment from usMr. Herzig, respectively, in January 2019 and made cash payments of $260 to Mr. Doyle in the amounteach of $600 and will receive release payments in the aggregate amount of $550, paid in four equal quarterly installments starting in MarchJune 2019 and ending in December 2019,January 2020. In addition, we made release and transition payments atto Mr. Mackey, in cash, totaling $110 and $426 for the rate of $10 per month from January 1, 2019 untilyears ended December 31, 2020 and 2019, respectively, and transition payments to Mr. Doyle, in cash, totaling $56 for the year ended December 31, 2019. The full severance costs for Messrs. Mackey and Herzig were recorded during 2018. The full severance cost for Mr. Doyle of $581 was recorded during 2019 and certain other employee benefits, subject to him signing a customary release. RMR LLC has agreed to pay 20.0%was included in general and we have agreed to pay 80.0%administrative expenses in our consolidated statements of the transition payments and release payments payable to Bruce Mackey pursuant to this separation agreement. In addition, all of our unvested common stock previously awarded to Bruce Mackey will vest in full upon the date of his separation from us, subject to conditions. Pursuant to the recommendation of RMR LLC, the board of trustees or board of directors, as applicable, of each of RMR Inc. and the other companies managed by RMR LLC that all of the unvested shares he owns of such company will vest in full upon his resignation as an employee of RMR LLC, subject to conditions. Pursuant to his separation agreement, Bruce Mackey agreed that, as long as he owns shares in us, he will vote those shares at shareholders’ meetings in favor of nominees for director and proposals recommended by our Board of Directors and Bruce Mackey made similar agreements, for the benefit of those companies, regarding voting of his shares of those companies. Bruce Mackey’s separation agreement contains other terms and conditions, including cooperation, confidentiality, non-solicitation, non-competition and other covenants, and a waiver and release.operations.
In connection with the termination, effective December 12, 2018, of R. Scott Herzig’s employment with us, we entered into a letter agreement with him on December 27, 2018. Scott Herzig was our Senior Vice President of Senior Living Operations. Pursuant to the letter agreement we made a cash payment to him in the amount of $510 on January 11, 2019. The letter agreement also contains standard restrictive covenants relating to non-competition, confidentiality and non-solicitation of employees.
Adam Portnoy and ABP Trust. Adam Portnoy, one of our Managing Directors, directly and indirectly through ABP Trust and its subsidiaries isowned approximately 1,972,783 of our largest stockholder, beneficially owning 35.7%common shares, representing 6.2% of our outstanding common shares as of
December 31, 2018. As explained above, Adam Portnoy, directly and indirectly through ABP Trust and its subsidiaries, is also the controlling shareholder of RMR Inc., which is the managing member of RMR LLC.2020.
We are party to a Consent, Standstill, Registration Rights and Lock-Up Agreement, dated October 2, 2016, with Adam Portnoy, ABP Trust and certain other related persons, or the ABP Parties, under which, among other things, the ABP Parties have each agreed not to transfer, except for certain permitted transfers as provided for therein, any of our shares of common stock acquired after October 2, 2016, but not including shares issued under our equity compensation plans, for a lock-up period that ends on the earlier of (i) the 10 year anniversary of such agreement, (ii) January 1st of the fourth calendar year after our first taxable year to which no then existing net operating loss or certain other tax benefits may be carried forward by us, but no earlier than January 1, 2022, (iii) the date that we enter into a definitive binding agreement for a transaction that, if consummated, would result in a change of control of us, (iv) the date that our Board otherwise approves and recommends that our stockholdersshareholders accept a transaction that, if consummated, would result in a change of control of us and (v) the consummation of a change of control of us.
Under the Consent, Standstill, Registration Rights and Lock-Up Agreement, the ABP Parties also each agreed, for a period of 10 years, not to engage in certain activities involving us without the approval of our Board, including not to effect or seek to effect any tender or exchange offer, merger, business combination, recapitalization, restructuring, liquidation or other extraordinary transaction involving us, other than the acquisition by the ABP Parties, in aggregate, of up to 18,000,000 of our common shares prior to March 31, 2017, or solicit any proxies to vote any of our voting securities. These provisions do not restrict activities taken by an individual in her or his capacity as a Director, officer or employee of us.
We lease our headquarters from a subsidiary of ABP Trust, pursuant to a lease that currently requires us to pay annual rentthe controlling shareholder of $964, which amount is subject to fixed increases.RMR Inc. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, $1,715was $1,760 and $1,633$1,874 for the years ended December 31, 20182020 and 2017,2019, respectively. We recognize a lease liability and right-of-use asset, which amounts were $496 and $1,446 for the lease liability and $452 and $1,325 for the right-of-use asset as of December 31, 2020 and 2019, respectively, with respect to our headquarters lease, using an IBR of 4.6%. The right-of-use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our consolidated financial statements. On February 24, 2021, we entered into a Second Amendment to extend our headquarters lease through December 31, 2031. See Note 18 for more information regarding the lease extension.
AIC. We, Until its dissolution on February 13, 2020, we, ABP Trust, SNHDHC and four4 other companies to which RMR LLC provides management services currently ownowned AIC an Indiana insurance company, in equal amounts, and are parties to a shareholders agreement regarding AIC.
All our Directors and all the independent trustees and independent directors of theportions. The other AIC shareholders currently serve on the board of directors of AIC. RMR LLC provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Pursuant to this agreement, AIC pays RMR LLC a service fee equal to 3.0% of the total annual net earned premiums payable under then active policies issued or underwritten by AIC or by a vendor or an agent of AIC on its behalf or in furtherance of AIC’s business.
We and the other AIC shareholders participatewe historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. AIC until June 30, 2019.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
We paid aggregate annual premiums, including taxes and fees, of $3,144 and $4,329 in connection with this insurance program for the policy years ending June 30, 2019 and 2018, respectively, which amount for the policy year ending June 30, 2019.
On February 13, 2020, AIC was dissolved and in connection with this dissolution, each other AIC shareholder and we received an initial liquidating distribution of $9,000 from AIC in December 2019 may be adjusted from time to time as we acquire or disposeand a subsequent distribution of properties that are included$287 in this insurance program.June 2020.
As of December 31, 2018 and 2017, our investment in AIC had a carrying value of $8,633 and $8,185, respectively. These amounts are presented as an equity investmentSee Note 2 for further information regarding AIC.
15. Self-Insurance Reserves
The following table represents activity in our consolidated balance sheets. We recognized incomeself-insurance reserves as of $516 and $608 related to our investment in AIC for the years ended December 31, 20182020 and 2017, respectively. These amounts2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | General and Professional Liability and Auto | | Workers' Compensation | | Health
Related | | Total |
| Balance January 1, 2019 | | $ | 31,899 | | | $ | 27,302 | | | $ | 8,333 | | | $ | 67,534 | |
| Current year provisions | | 29,263 | | | 40,711 | | | 6,125 | | | 76,099 | |
| Claims paid and direct expenses | | (31,303) | | | (41,051) | | | (6,213) | | | (78,567) | |
| Change in long-term insurance losses recoverable | | 1,674 | | | (832) | | | 0 | | | 842 | |
| Balance December 31, 2019 | | 31,533 | | | 26,130 | | | 8,245 | | | 65,908 | |
| Current year provisions | | 33,835 | | | 43,726 | | | 6,820 | | | 84,381 | |
| Claims paid and direct expenses | | (28,997) | | | (41,000) | | | (4,848) | | | (74,845) | |
| Change in long-term insurance losses recoverable | | 2,240 | | | 1,308 | | | 0 | | | 3,548 | |
| Balance December 31, 2020 | | $ | 38,611 | | | $ | 30,164 | | | $ | 10,217 | | | $ | 78,992 | |
Our total self-insurance reserves of $78,992 and $65,908 as of December 31, 2020 and 2019, respectively, are presented as equityincluded in earnings of an investeeaccrued compensation and benefits and accrued self-insurance obligations in our consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized (losses) gains on securities which are owned and held for sale by AIC of $(68) and $461 related to our investment in AIC for the years ended December 31, 2018 and 2017, respectively.balance sheets.
Directors’ and Officers’ Liability Insurance. We, RMR Inc., RMR LLC and certain other companies to which RMR LLC or its subsidiaries provide management services, including SNH, participate in a combined directors’ and officers’ liability insurance policy. The current combined policy expires in September 2020. We paid aggregate premiums of $152 and $151 in 2018 and 2017, respectively, for these policies.
15.16. Employee Benefit Plans
Employee 401(k) Plan. We have an employee savings plan, or our 401(k) Plan, under the provisions of Section 401(k) of the IRC. All of our employees are eligible to participate in our 401(k) Plan and are entitled upon termination or retirement to receive their vested portion of our 401(k) Plan assets. We match a certain amount of employee contributions. We also pay certain expenses related to our 401(k) Plan. Our contributions and related expenses for our 401(k) Plan were $1,332$257 and $1,211$1,155 for the years ended December 31, 20182020 and 2017,2019, respectively, of which $1,155$61 and $1,041,$1,016, respectively, was recorded to
senior living wages and benefits in our consolidated statements of operations and $177$196 and $170,$139, respectively, was recorded to general and administrative expenses in our consolidated statements of operations.
Non-Qualified Deferred Compensation Plan.In May 2018, our Board of Directors adopted a non-qualified deferred compensation plan, or our Deferred Compensation Plan, which we began offering to certain of our employees, including our executive officers, in August 2018. Participation in our Deferred Compensation Plan is limited to a group of highly compensated employees holding the position of administrator or director or a position above such levels, which group includes our named executive officers. Our Deferred Compensation Plan is an unfunded and unsecured deferred compensation arrangement. A participant may, on a pre-tax basis, elect to defer base salary and bonus up to the maximum percentages for such deferrals as described in our Deferred Compensation Plan. We may also, at our discretion, match deferrals made under our Deferred Compensation Plan, subject to a vesting schedule. Compensation deferred under our Deferred Compensation Plan was recorded in accounts payableaccrued compensation and accrued expensesbenefits in our consolidated balance sheets as of December 31, 2018.2020 and 2019. Expenses related to such deferred compensation were recorded in senior living wages and benefits and general and administrative expenses in our consolidated statements of operations. Compensation deferred under our Deferred Compensation Plan was not material to our consolidated balance sheets and consolidated statements of operations as of and for the years ended December 31, 2020 and 2019.
Five Star Senior Living Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
17. COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the disease caused by the novel coronavirus SARS-CoV-2, or COVID-19, pandemic, or the Pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption worldwide. Governments in affected regions have implemented and may continue to implement, safety precautions, including quarantines, travel restrictions, business closures and other public safety measures. On March 13, 2020, the Pandemic was declared a national emergency by the President of the United States effective as of March 1, 2020, or the National Emergency, and it has significantly disrupted, and likely will continue to significantly disrupt, the United States economy, our business and the senior living industry as a whole.
In response to the Pandemic, the CARES Act was enacted on March 27, 2020. The CARES Act, among other things, provides billions of dollars of relief to certain individuals and businesses suffering from the impact of the Pandemic.
Under the CARES Act, a Provider Relief Fund was established for allocation by HHS. On April 10, 2020, HHS began to distribute these funds, or the Phase 1 General Distribution, to healthcare providers who received Medicare fee-for-service reimbursement in 2018 and 2019. Each healthcare provider's allocation of the Phase 1 General Distribution was determined based on 2% of a provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix. We received $1,720 in Phase 1 General Distribution funds primarily for our rehabilitation clinics and home health operations that participate in Medicare as of December 31, 2018 or our consolidated statements of operations2020. We recognized $1,720 as other operating income for the year ended December 31, 2018.2020 for Phase 1 General Distribution funds for which we believe we met the required terms and conditions. On September 19, 2020, HHS released reporting requirements that differed materially from the original terms and conditions of the Provider Relief Fund. On October 22, 2020, HHS provided clarification and updated guidance related to the original terms and conditions and the reporting requirements provided on September 19, 2020. As of December 31, 2020, we believe we met the required terms and conditions to retain the funds recognized as other operating income and will continue to assess our compliance with the terms and conditions as necessary.
16. Selected Quarterly Financial Data (Unaudited)
The followingOn June 9, 2020, HHS announced additional distributions from the Provider Relief Fund, or Phase 2 General Distributions, including the Medicaid and Children's Health Insurance Program, or the Medicaid and CHIP Targeted Distribution. HHS stated that it would disburse a payment that, at a minimum, is equal to 2% of reported total revenue from patient care to eligible providers serving Medicaid and CHIP beneficiaries. Providers who had not yet received a summary of unaudited quarterly results of operationsdisbursement from the Phase 1 General Distribution are eligible for the yearsMedicaid and CHIP Targeted Distribution. We received $1,562 in Phase 2 General Distribution funds for which we believe we met the required terms and conditions. We recognized $1,562 as other operating income for the year ended December 31, 20182020 for Phase 2 General Distribution funds for which we believe we met the required terms and 2017:conditions. As of December 31, 2020, we believe we met the required terms and conditions to retain the funds recognized as other operating income and will continue to assess our compliance with the terms and conditions as necessary.
In July 2020, HHS distributed rapid point-of-care diagnostic testing devices and COVID-19 test kits. These devices have been recorded at fair market value and we recognized $65 as other operating income for the year ended December 31, 2020. The offsetting expense of $65 is included in other senior living operating expenses for the year ended December 31, 2020. In addition to the federal funds, we have also been eligible for funding from various other government and state programs. We recognized $88 as other operating income for the year ended December 31, 2020 related to state and other government funding for which we believe we have met the required terms and conditions.
In addition, the Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020. Among other things, this Act further supplemented the Provider Relief Fund with billions of additional funds. Information on future allocations of the Provider Relief Fund are not yet known, though the statute requires that no less than 85% of unobligated balances of the fund and funds recovered from providers after the enactment date be allocated based on financial losses and changes in operating expenses occurring in the third or fourth quarter of calendar year 2020.
The terms and conditions of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the Pandemic and for eligible costs to prevent, prepare for and respond to the Pandemic that are not covered by other sources. In addition, Provider Relief Funds recipients are subject to other terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions, must be returned to HHS.
The CARES Act also delays the payment of required federal tax deposits for certain payroll taxes, including the employer's share of Old-Age, Survivors, and Disability Insurance Tax, or Social Security, employment taxes, incurred between
|
| | | | | | | | | | | | | | | |
| | 2018 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenues | $ | 345,517 |
| | $ | 343,098 |
| | $ | 348,910 |
| | $ | 352,869 |
|
| Operating loss | (7,183 | ) | | (20,241 | ) | | (22,532 | ) | | (21,605 | ) |
| Net loss | (7,949 | ) | | (20,894 | ) | | (21,582 | ) | | (23,658 | ) |
| Net loss per common share—Basic and diluted | $ | (0.16 | ) | | $ | (0.42 | ) | | $ | (0.43 | ) | | $ | (0.47 | ) |
F-34
Five Star Senior Living Inc.
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Revenues | $ | 350,689 |
| | $ | 350,025 |
| | $ | 347,101 |
| | $ | 348,291 |
|
| Operating loss | (6,069 | ) | | (7,613 | ) | | (5,930 | ) | | (3,442 | ) |
| Net loss | (6,787 | ) | | (6,506 | ) | | (6,603 | ) | | (1,006 | ) |
| Net loss per common share—Basic and diluted | $ | (0.14 | ) | | $ | (0.13 | ) | | $ | (0.13 | ) | | $ | (0.02 | ) |
(dollarsin thousands, exceptpershareamounts)
March 27, 2020 and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022. As of December 31, 2020, we have deferred $27,593 of employer payroll taxes (which are included in accrued compensation and benefits in our consolidated balance sheets) of which $22,194 are required to be funded by us and will be reimbursed by DHC pursuant to the New Management Agreements (which are included in due from related person in our consolidated balance sheets).
The Sequestration Transparency Act of 2012 subjected all Medicare fee-for-service payments to a 2% sequestration reduction, or the 2% Medicare Sequestration. The CARES Act temporarily suspends the 2% Medicare Sequestration for the period from May 1, 2020 to December 31, 2020, which may benefit our rehabilitation and wellness services segment and the senior living communities we manage in the form of increased rates for services provided and the management fees we earn from these communities as a result. Increases in rates are recognized in revenue in the period services are provided.
The Tax Cuts and Jobs Act of 2017 repealed the AMT and allowed corporations to fully offset regular tax liability with AMT credits. Any remaining AMT credit amount became refundable incrementally from tax years 2018 through 2021. The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim the refund in full in either tax year 2018 or 2019. We have applied an AMT credit refund of $554 for tax year 2019 to our 2020 tax return.
In connection with the Pandemic, we have experienced occupancy declines, increased labor costs and increased costs related to COVID-19 testing, medical and sanitation supplies and certain other costs. Additionally, we have purchased personal protective equipment, or PPE, to be used at our senior living communities and rehabilitation and wellness clinics. At December 31, 2020, $9,701 of PPE for future use was included in prepaid expenses and other current assets in the consolidated balance sheets. PPE that is deployed to senior living communities that we manage on behalf of DHC is reimbursable to us by DHC.
We cannot predict the extent and duration of the Pandemic or the severity and duration of its economic impact, but we expect it will be substantial. We also cannot predict the extent the relief provided by the CARES Act will offset the financial losses caused by the Pandemic, or if we receive additional funds under the other Provider Relief Fund or other programs, but we expect it will not make us whole.
18. Subsequent Events
On February 24, 2021, we and ABP Trust agreed to renew the lease for our corporate headquarters building through December 31, 2031. The annual lease payment will range from $1,026 to $1,395 over the period of the lease. The lease also provides us with improvements from ABP Trust not to exceed $2,667 on the leased property.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | |
| FIVE STAR SENIOR LIVING INC.
|
| By: | /s/ Katherine E. Potter |
| | Katherine E. Potter
President and Chief Executive Officer
|
Dated: March 6, 2019February 25, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | | |
| Signature | | Title | | Date |
/s/ Katherine E. Potter | | President and Chief Executive Officer
(Principal Executive Officer)
| | March 6, 2019February 25, 2021 |
Katherine E. Potter
| |
/s/ Richard A. Doyle
Jeffrey C. Leer | | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | | March 6, 2019February 25, 2021 |
Richard A. Doyle
Jeffrey C. Leer
| |
/s/ Adam D. Portnoy
Jennifer B. Clark | | Managing Director | | March 6, 2019February 25, 2021 |
Adam D. Portnoy
Jennifer B. Clark
| |
/s/ Gerard M. Martin
Donna D. Fraiche | | ManagingIndependent Director | | March 6, 2019February 25, 2021 |
Gerard M. Martin
Donna D. Fraiche
| |
/s/ Bruce M. Gans
| | Independent Director | | March 6, 2019February 25, 2021 |
Bruce M. Gans
| |
/s/ Barbara D. Gilmore
| | Independent Director | | March 6, 2019February 25, 2021 |
Barbara D. Gilmore
| |
/s/ Donna D. Fraiche
Gerard M. Martin | | Independent Director | | March 6, 2019February 25, 2021 |
DonnaGerard M. Martin
| |
/s/ Adam D. Fraiche
Portnoy | | Managing Director | | February 25, 2021 |
Adam D. Portnoy
| | |
| /s/ Michael E. Wagner, M.D. | | Independent Director | | February 25, 2021 |
| Michael E. Wagner, M.D. | |