UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|
| | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 20192021
or
|
| | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-16817
FIVE STAR SENIOR LIVINGALERISLIFE INC.
(Exact Name of Registrant as Specified in Its Charter)
|
| | | | |
| Maryland | 04-3516029 |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
400 Centre Street,, Newton,, Massachusetts02458
(Address of Principal Executive Offices) (Zip Code)
617‑617‑796‑8387
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | | | | | | | |
| Title Of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
| Common Stock | | FVEALR | | 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 Nox☒
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 Nox☒
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 Yesx☒ 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 Yesx☒ No ¨☐
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.
|
| | | | | | | | | | |
| Large accelerated filer | ¨☐ | Accelerated filer | ¨☒ |
| Non-accelerated filer | x☐ | Smaller reporting company | ☒ |
| | 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 $12.7$108.0 million based on the $4.60$5.76 closing price per common share on The Nasdaq Stock Market LLC on June 28, 2019.30, 2021. For purposes of this calculation, an aggregate of 100,330345,983 common shares held directly by, or by affiliates of, the directors and officers of the registrant, plus 423,50010,691,658 common shares held by Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust) and 1,799,9991,972,783 common shares held by ABP Acquisition LLC, have been included in the number of common shares held by affiliates.
Number of the registrant’s common shares outstanding as of February 26, 2020: 31,543,711.21, 2022: 32,618,779.
References in this Annual Report on Form 10‑K to the Company, Five Star,AlerisLife, we, us orand our mean AlerisLife Inc., formerly known as Five Star Senior Living Inc., and its consolidated subsidiaries, unless otherwise expressly stated or the context indicates otherwise. All amounts and share information included in this Annual Report on Form 10-K have been retroactively adjusted for the reverse stock split that resulted in the conversion of every ten of our common shares into one of our common shares, effective September 30, 2019, as if such reverse stock split occurred on the first day of the first period presented, unless otherwise expressly stated or the context indicates otherwise. Certain adjusted amounts may not agree with previously reported amounts due to the receipt of cash in lieu of fractional shares.
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 20202022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2019.
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 Annual Report on Form 10-K relate to various aspects of our business, including:including, but are not limited to the following:
•The duration and severity of the novel coronavirus SARS-CoV-2, or COVID-19, pandemic, or the Pandemic, and its impact on public health and safety, particularly older adults, and on our and Diversified Healthcare Trust's, or DHC's, business, results, operations and liquidity,
•The availability, effectiveness, impact and extent of administration of COVID-19 vaccines and therapeutic treatments on public health and safety, economic conditions, the older adult customer we serve and our business,
•The execution of our Strategic Plan, defined below, and our expectations regarding its timing, costs, savings and benefits,
•Our expectations for the operation and performance of the business following implementation of the Strategic Plan,
•Our expectations regarding demand, impacts of information technology and our competitive advantages with respect to providing services to older adults,
•Our ability to attract and retain qualified and skilled employees,
•Our ability to operate our senior living communities and deliver lifestyle services 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,diversify revenues,
•Our expectation to focus our expansion activities on internal growth from our existing senior living communities we operate and the ancillaryother lifestyle services that we may provide,
•Our ability to increase the number of senior living communities we operate and residents we serve, and to grow ourthrough other sources of revenues, including rehabilitation and wellnesslifestyle 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 health and wellness centerslifestyle services,
•Our expectations of the types of services older adults will demand and other healthcare related properties and services,our ability to satisfy those demands,
•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 abilitybelief regarding the adequacy of our existing cash flows from operations and unrestricted cash on hand to access or raise debt or equity capital,support our business,
•Our ability to sell communities we may offer for sale andat our targeted prices,
•Our ability to access or raise debt or equity capital,
•Our expectations for closing, commencing in August 2022, our ten inpatient rehabilitation clinics at senior living communities we do not operate, and
•Other matters.risks described under "Risk Factors" below.
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. Risks,A summary of the risks, uncertainties and other factors that could have a material adverse effect on our forward-lookingforward-
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 and other customers,
•Competition for older adult customers within the senior livingresidential and other health and wellness relatedlifestyle services businesses,
•Older adults delaying or forgoing moving into senior living communities or purchasing health and wellnesslifestyle services from us,
•Increases in our labor costs or in costs we pay for goods and services, delays in supply chain and price inflation,
•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, Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust), or DHC, The RMR Group LLC, or RMR LLC, ABP Trust and others affiliated with them,
•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,
Delays or nonpayment of government payments to us,
•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,
•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,
Continued•Ongoing healthcare reform efforts, including continued efforts by third partythird-party payers to reduce costs, and
•Acts of terrorism, outbreaks of so-called pandemics or other manmadehuman-made or natural disasters beyond our control.control, and
•The effects of the implementation of the Strategic Plan on our business and operations.
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,the Strategic Plan,
•Our ability to operate senior living communitiesdeliver residential management or lifestyle services profitably and increase the revenues generated by uswe generate depends upon many factors, including our ability to integrate new communities and clinics 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 and deliver lifestyle services,
•We expect to enter additionalinto management arrangements with DHC or other owners for additional senior living communities that DHC owns or may acquire in the future.communities. However, we cannot be sure that we will enter into 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 lifestyle 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 our employeeteam member turnover level by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits, as well as our efforts to attract talent, may not be successful and may not result in the benefits we expect to achieve through such investments,
•We may not be able to implement each aspect of the Strategic Plan, including repositioning the 1,532 skilled nursing facility, or SNF, units that have been closed to other uses that are beneficial to us, our customers and DHC,
•The costs of executing the evolve and diversify pillars of the Strategic Plan may be more than we expect,
•We may not realize the benefits we anticipate from the Strategic Plan,
•We may not be able to achieve our objectives following implementation of the Strategic Plan, including partially offsetting the revenue loss from the senior living communities we transitioned with expense reductions to right-size operations, on the anticipated timeline, or at all,
•We cannot be sure that the terms of our new management arrangements with DHC will achieve the anticipated benefit on our operating results,
•Our expectation that our lifestyle services segment will grow may not be realized or any growth it does achieve may not be profitable or produce the benefits we expect,
•Our marketing initiatives may not succeed in increasing our occupancy and revenues, and they may cost more than any increased revenues they may generate,
•Our strategic investments to enhance efficiencies, in, and benefits from,enhance our purchasing of servicesservice offerings or grow our business may not be successful or generate the returns we expect,
•Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, inflation, weakening housing market conditions, higher levels of unemployment among our residentscustomers or potential residents’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 senior living communities,business,
Residents•Customers 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,
•The various federal and state government agencies that pay us for the services we provide to some of our residentscustomers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us,
•Our efforts to mitigate the continued effects of the Pandemic may not be sufficient,
•We expect that the Pandemic may 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 effect on the operating costs of our senior living communities,
•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, 2019, we had $31.7 million of unrestricted cash and cash equivalents. As of December 31, 2019, we had no borrowings under our $65.0 million secured revolving credit facility, or our credit facility, letters of credit issued in an aggregate amount of $3.2 million and $55.9 million available for borrowing under our credit facility.
|
These statements may implyWe believe that we may have sufficient cash liquidity.adequate financial resources to fund our business for at least the next 12 months. However, we have incurred in the most recent period, and in prior periods, and we may continue to incur in future periods, operating losses and we have ana 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. Accordingly,As a result, we may not have sufficient cash liquidity,
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,
•The amount of available borrowings under our credit facilitysecured senior term loan, or the Loan, is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility.Loan. Accordingly, the availability ofavailable borrowings under our credit facilitythe Loan at any time may be less than $65.0 million. $95.0 million as it was as of January 31, 2022.
Also, the availability of borrowings under our credit facilityLoan is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy,
•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 caused and continued by the Pandemic as well as general economic conditions may significantly limit our access to capital,
•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 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,
•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 senior living communities that we own or manage, that we, or DHC may seek to sell, on acceptable terms acceptable to us or otherwise,we may incur losses in connection with any such sales,
The fact that we have regained compliance with Nasdaq’s minimum $1.00 bid price per share requirement may imply that we will continue to satisfy that Nasdaq standard. The number of our common shares included in our nonaffiliated public float is currently at a reduced level, which may result in decreased liquidity and increased trading price volatility for our common shares. If we fail to maintain compliance with Nasdaq’s minimum $1.00 bid price or other standards, Nasdaq may initiate proceedings to delist our common shares,
•We believe that our relationships with our related parties, including DHC, RMR LLC, ABP Trust 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, and
Our senior living communities•Components of our residential management and lifestyle services are subject to extensive government regulation, licensure and oversight. We sometimes have regulatory issues in the operation of our senior living communities and delivery of lifestyle services and, as a result, some of our communitieswe may periodically be prohibited from or limited in admitting new residents or providing services, or our license to continue operations at a community may be suspended or 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.customers.
Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, global climate change, pandemics, epidemics and other widespread illnesses, including the pandemic, changed Medicare or Medicaid rates, new legislation, regulations or rule makingrulemaking affecting our business, or changes in capital markets or the economy generally.
We have based our forward-looking statements on our current expectations about future events that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risk and uncertainties, some of which cannot be predicted or qualified, our forward-looking statements should not be relied on as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected or implied in our forward-looking statements. The matters discussed in this warning should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report on Form 10-K. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
The information contained elsewhere in this Annual Report on Form 10‑K or in our other filings with the Securities and Exchange Commission, or SEC, 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 the SEC are available on the SEC’s website at www.sec.gov.
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.
FIVE STAR SENIOR LIVINGALERISLIFE INC.
20192021 ANNUAL REPORT ON FORM 10‑K
Table of Contents
This Annual Report on Form 10-K includes our registered trademarks, such as “Five Star Senior Living”, “Bridge to Rediscovery” and, “Ageility Physical Therapy Solutions” and “Ageility”, which are our property and are protected under applicable intellectual property laws. Our trademark application for “AlerisLife” is currently pending. 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.
PART I
Item 1. Business
The Company
We operate 268 senior living communities, including one active adult community, located in 32 states and provide services to approximately 26,000 residents. We have achieved J.D. PowerAlerisLife Inc., formerly known as Five Star Senior Living Certification for 32Inc., is a holding company incorporated in Maryland and substantially all of our business is conducted by our two segments: (i) residential (formerly known as senior living communitiesliving) through our brand Five Star Senior Living, or Five Star, and (ii) lifestyle services (formerly known as of December 31, 2019.rehabilitation and wellness Services) primarily through our brands Ageility Physical Therapy Solutions and Ageility Fitness, or collectively Ageility, as well as Windsong Home Health.
WithGuided by our new mission statement, “To honorenrich and enrichinspire the journey of life, one experience at a time,” w we are a leadership team committed to prioritizing the needs of our residents, clients and team members. Withe employ approximately 23,00010,700 team members experienced in supporting older adults and we are focused on establishing ourselves as a premier provider of services to older adults, and their caregivers.which we define as adults who are 75+ years of age.
As of December 31, 2019,2021, through our residents residedresidential segment, we owned and operated or managed, 141senior living communities located in (i) 257 primarily28 states with 20,105 living units, including 10,423 independent andliving apartments, 9,636 assisted living communities and (ii) 11 skilled nursing facilities, or SNFs. Our independent and assisted living communities,suites, which includes 1,872 of our Bridge to Rediscovery memory care units, consists of 30,021 living units. These units include 31and one continuing care retirement communities,community, or CCRCs,CCRC, with 7,070106 living units, and our SNFs consistincluding 46 skilled nursing facility or SNF, units that was closed in February 2022. We managed 121 of 1,264 living units. As of December 31, 2019, we leased and operated 170 of these268 senior living communities (18,840(18,005 living units), for Diversified Healthcare Trust, or DHC, and owned and operated 20 of these senior living communities (2,108(2,100 living units) and managed 78. As of theseDecember 31, 2021, we transitioned the management of 107 senior living communities (10,337with approximately 7,400 living units)units to new operators pursuant to the Strategic Plan described below. On September 30, 2021, our former lease with Healthpeak Properties Inc., including one active adult community (169or PEAK, for four communities (with approximately 200 living units). was terminated. The foregoing numbers exclude living units categorized as out of service.
With the goal of offeringOur lifestyle services segment provides a comprehensive suite of lifestyle services which includes our rehabilitations and wellness division,including Ageility Physical Therapy Solutions, or Ageility, we provide our residents and others with rehabilitation and wellnessfitness, Windsong home health and other home based, concierge services at our senior living communities we own and operate or manage as well as at outpatient clinics located separately from ourunaffiliated senior living communities. As of December 31, 2019, we2021, Ageility operated 41ten inpatient rehabilitation clinics providing rehabilitation services in 34senior living communities owned by DHC, all of our CCRCs and seven of our SNFs.which are in communities that were transitioned to new operators during the year ended December 31, 2021. As of December 31, 2019, we2021, Ageility operated 190205 outpatient rehabilitation clinics, of which 150106 were clinics within ourlocated at Five Star operated senior living communities and 4099 were clinics with otherlocated within senior living companies.communities not operated by Five Star. We provided Ageility rehabilitation services to approximately 10,00017,000 clients in 2019.2021. As of December 31, 2019,2021, we have expanded ourprovided Ageility service line by introducing innovative fitness and personal training offeringsservices in 199 senior living communities. In December 2021, we closed 17 outpatient rehabilitation clinics that were in senior living communities that were transitioned to complement outpatient therapya new operator in nine active adult communities.2021 or closed in February 2022.
According to the Longevity Economy Outlook, AARP with The Economist, aschanging profile of December 31, 2019, the over 50 age populationolder adults in the United States was comprisedshows an 18% increase in the 75+ demographic in the last ten years according to Statista, a leading provider of 117.4consumer and market data, with an even more significant increase projected by 2030 (up to 49%). With 23 million people, or 35% of the population. The fastest growing age population75+ older adults in the United States, we believe that this demographic is the over 85,set to drive significant demand in aging services, and the second fastest is the over 100. We believethat 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 arehave long been focused on (i) creating experiences for older adultsthe delivery of an exceptional experience to our current residents, including quality clinical services, as well as compelling lifestyle offerings such as Ageility rehabilitation and fitness. With the recent repositioning of our senior living portfolio to focus on our operational strengths, and our continued commitment to building our lifestyle services platform, we are committed to provide our customers with financially flexible, choice-based service offerings, no matter their residential location.
We believe that meet their expectations and (ii) offering residences andour company is positioned to become a leading provider of residential as well as lifestyle services that meet the needs and demands ofto older adults. To that end, we collaborate and actively engage with other innovative organizations. We also sponsor and pilot programs to continually evolve our service capabilities to meet the needs of our residents and team members and we adapt our offerings to meet the evolving consumer demands of a growing population of older adults. In 2019,2021, we served approximately 27,00022,000 older adults on a daily basis by providing a variety of living experiences and servicesservices.
Our History
AlerisLife Inc. is a Maryland corporation that was formed in addition2001. Until January 25, 2022, our name was Five Star Senior Living Inc. and, prior to delivering ancillary services, such as through Ageility. Forthat, our residents inname was Five Star Quality Care, Inc. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.
Historically, we were primarily an operator of senior living communities, including independent living, assisted living, memory care and SNF communities, we offer assistance with their daily living activities, including bathing and dressing, eating, toileting and agility and mobility assistance. In certain communities, we also provide licensed skilled nursing facilities. We expanded into rehabilitation services to complement our resident experience. In response to changing market dynamics, in 2019 we converted 166 senior living communities that we had previously leased under a triple net lease from DHC to a management structure, which significantly reduced our senior living operating risk. In 2021, we announced the Strategic Plan, as defined below, to reposition our senior living management services to focus on larger, lower acuity senior living communities and exit the SNF business, including inpatient rehabilitation services, invest in evolving our corporate infrastructure to support operations and growth and our senior living resident experience to better align with our changing customer and diversify our revenue through continued growth of outpatient rehabilitation services as well as other lifestyle services. During the year ended December 31, 2021, 107 senior living communities that we previously managed for DHC were transitioned to new operators and one senior living community was closed in February 2022. In addition, we offer additional services including, but not limited to, on-site entertainment, personal grooming servicesclosed approximately 1,500 SNF units and home health and dining services. Our27 inpatient rehabilitation clinics operated by Ageility. We renewed our focus on our operational strengths within senior living and positioned the Company to grow and diversify revenue streams through lifestyle services. On January 26, 2022, we announced the change in the Company’s name to AlerisLife. We will strive to continue to deliver an exceptional residential experience to senior living and active adult residents, while also offering a broad arraylifestyle services to the younger “choice based” consumer, with the goal of services helps promote a greater sense of communitybuilding an earlier and enable older adults to age-in-place independently.lasting trusted partnership.
Restructuring 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, effectiveEffective as of January 1, 2020, or the Conversion Time:
our fiveand then existing master leases with DHC for 166 of DHC's senior living communities (18,636 living units) that we then leased,again in April 2021 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 10,268,158part of our common shares to DHC and an aggregate of 16,118,849 ofStrategic Plan, we restructured 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 (with DHC's provision of such consideration to us, collectivelybusiness arrangements with the Conversion and the Share Issuances, being included in the definition of Restructuring Transactions in this Annual Report on Form 10-K).
In connection with the Transaction Agreement, we entered into a credit agreement with DHC pursuant to which DHC
extended to us a $25.0 million line of credit, or the DHC credit facility, which was secured by six senior living communities we own. The DHC credit facility matured and was terminated in connection with the completion of the Restructuring Transactions. There were no amounts outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term.
Also in connection with the Restructuring Transactions, we agreed to expand our Board of Directors within six months following the Conversion Time to add an Independent Director (as defined in our bylaws) reasonably satisfactory to DHC. On February 26, 2020, our Board of Directors elected Michael E. Wagner, M.D. as an Independent Director, which satisfied our agreement with DHC to expand our Board of Directors.
For more information regarding the Restructuring Transactions,this restructuring, 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 910 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
On April 9, 2021, we announced a new strategic plan, or the Strategic Plan. For more information on the Strategic Plan and the progress we have made with respect to the Reposition, Evolve and Diversify phases of the Strategic Plan during the year ended December 31, 2021, see Notes 1, 10 and 19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Residential
Our History
We are a corporation formed under the lawsFive Star residential service offerings consist of the Stateoperation of Maryland in 2001. Effective March 3, 2017, we changed our name from Five Star Quality Care, Inc. to Five Star Senior Living Inc. Since then we have grown primarily by leasing or managing communities acquired by DHC. We also offer rehabilitationlarger independent and wellness services both at ourassisted living senior living communities, including memory care, as well as in communities of other senior living companies. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 796-8387.
Our Communities and Our Services
Our present business plan contemplates the operation of owned, managed and leased independent and assisted senior livingactive adult communities. Our communitiesofferings can be classified into different primary service categories; while some communities provide a single service, othersmany provide multiple servicesservice levels in a single building or campus. The majority of the senior living communities we operate are organized in campus-like settings or stand-alone communities containing multiple service levels.a campus setting.
Independent Living Communities. Independent living communities provide residents with high levels of privacy in various types of apartments and are similar to a multi-unit environment and require residents to be relatively 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 housekeeping service or plannedaccess to a variety of activities. Additional non-healthcare services are generally available from staff employees on a fee for service basis. Included in independent living communities are 31 CCRC communities, as well as independent living communities that provide both assisted living and skilled nursing services in separate parts of the community. As of December 31, 2019, our2021, Five Star's operations included 11,36410,423 independent living apartmentsunits in 9786 senior living communities. We also haveIncluded in this total is an active adult community, which we classify as an independent living community.community, that has 167 living units.
Assisted Living Communities. Assisted living communities are typically comprised of one-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 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 Alzheimer’s or memory care services at certain of our assisted living communities through our award winningaward-winning Bridge to Rediscovery program. As of December 31, 2019, our2021, Five Star's operations included 16,4709,636 assisted living suites in 229 communities.
Skilled Nursing Facilities. SNFs generally provide extensive nursing and healthcare services that are similar to services available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose-built SNF 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. As118 senior living communities, of December 31, 2019, our operations included 3,451 SNFwhich 1,872 units in 49 communities.65 senior living communities are dedicated to memory care services.
In addition to Five Star senior living communities, we provide a comprehensive suite of lifestyle services at our senior living communities, as well as at third-party operated communities through our lifestyle services segment.
Lifestyle Services
Our Ageility lifestyle services consist of delivery of rehabilitation services, primarily provided in outpatient rehabilitation clinics, and Wellness Services. fitness services. Our rehabilitation and wellness services are offered by Ageility. Ageility’s services are primarily clinically based rehabilitation services, includinginclude physical therapy, speech therapy and occupational therapy. Ageility also offers other rehabilitation and wellness services with a hospitality approach, includingtherapy, as well as strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, continence management programs, pain management programs, neurological rehabilitation and post-surgical or post-hospitalization services. Our fitness services andinclude general personal fitness and wellness programs. The clinicsBoth rehabilitation and fitness services are staffed withdelivered by licensed therapists or other trained personnel. As of December 31, 2021, Ageility's operations included ten inpatient rehabilitation clinics and 205 outpatient rehabilitation clinics providing rehabilitation services. In addition, Ageility provides fitness and personal training services in 199 senior living communities. We also offer other lifestyle services in certain of our communities, including home health and home care.
Current Industry Trends
The Pandemic has significantly impacted the older adult population we serve causing a negative public perception in the marketplace and increasing the regulatory focus by government agencies. Our roots in clinical excellence have served us well through this time, supported our focus on the safety and well-being of our residents, and compliance with changing regulations, which is all accomplished by our experienced team members. We were among the first in the industry to issue a company-wide vaccine requirement for our community and clinic team members, driving confidence in our ability to keep our customers safe and healthy.
Post-Pandemic recovery continues to remain uncertain, with The National Investment Center, or NIC, forecasting 2.7-7.1 years of recovery for assisted living and 1.8-8.5 years of recovery for independent living. While thesenior housing construction of new senior living communities is startinghas continued to slow, down, itwith annualized inventory growth returning to 2014 rates, the increase in net absorption has experiencedbeen gradual. However, in general, move-in rates rebounded in the past several years significant constructionlatter part of new communities2021 and there is a sense of renewed consumer confidence in senior living. We believe that the 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 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 buildings to servicecompanies in the technology arena, resulting in a steady stream of innovations targeting older adults. We believe this 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 has resulted in reductions or limitations on the growthMany of government funding for senior living and healthcare services, despite the increasing 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,these innovations enable older adults are delaying theto age at which they move to senior living communities, or forgoing such a move entirely.
Inin their homes longer. Just in the last ten years, as the industry evolvedaverage move in age for independent living has increased from 78 to serve831. This investment is causing providers of traditional service offerings to consider new ways of delivering services to older adults. Regardless of the growing numberinflux of technology solutions that change how services are delivered to older adults, it was also facingwe believe that the impactsdelivery of an economic recession.services requires human connection and that high-touch and high-tech environments are not mutually exclusive. Technology can augment, but we believe, will not replace the human connection that differentiates our service. We have searchedare committed, however, to continue thoughtful and impactful investment in technology to enhance the resident experience.
We expect the demand for residential and lifestyle services to increase in future years. We continue to implement innovative ways to overcome the industry's challenges that includecreated by the Pandemic, including workforce shortages and low employee retention, occupancy pressures and challenges related to new technology and the increasing desire for exceptional customer experience including conciergehigher service level services.expectations.
To address workforce and retention challenges, senior living companies like uswe 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 includeinitiatives, including increasing wages, have been implemented, especially in geographic areas where competition for healthcare and senior livingclinical professionals is fierce.intense. Other innovative efforts to attract talent to the senior living industry include connecting to the future workforce through school partnerships and recruitment presentations.
(1) Source: https://seniorhousingnews.com/2019/05/18/senior-living-communities-ceo-oversupply-will-last-longer-than-many-expect/
To address occupancy challenges, we are investingfocused on both customer acquisition and retention. Through investment in business intelligence, website enhancements, targeted content, search engine optimization strategy and technology-enabledtargeted marketing campaigns tailored to understand market demands and adapt its service offeringseach micro-market, we seek to attract families and individualsthose searching for the services they need for their aging loved ones or themselves. In addition, we have increased our use ofare focused on higher quality prospect engagement, beginning with high touch digital interactions supported by extensive sales training that focuses on research-based, prospect-centered sales tactics to more effectively “close”convert move-ins from leads through our digital marketing efforts. We are also focused on improving the prospects generated by technology with a genuine, human touch.
Incustomer experience as part of the technology arena, demographic trends regarding aging adults have captured"Evolve" phase of the attention of a number of entrepreneurs, start-ups and other companies, resultingStrategic Plan. As an example, during 2021, we improved Wi-Fi in a steady stream of innovations entering the75 senior living space. Many of these innovations enable older adultscommunities, with the remaining communities expected to age in their own existing homes longer. Technology is causingbe improved by the industry to look at new ways of delivering care to older adults. Regardlessend of the influxthird quarter of technology solutions that change how2022. We have also entered into collaborative arrangements with Compass Community Living, a division of Compass Group, or Compass, for senior living companies deliver older adultresident dining services and Dispatch Health for urgent care theservices for senior living industry remainsresidents, as well as invested in our understanding of evolving customer trends by hiring 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.Chief Customer Officer, or CCO, in January 2022.
Recent trends suggest older adults are focused on evaluating senior living communities that offer serviceprefer platforms that enable individuals to live a more independent lifestyle. With a broader scope of senior living communities operatingresidential options available in the
United States, combined with technology enablement, consumers have more optionschoices in choosing where to live and how they will be supported as they age. This wider range of options for consumers is causing further pressure on the senior living industry to implement innovative methods and services that provide for an exceptional customer experience. Our continued focus on customer needs and ongoing investment in marketing intelligence is a direct result of our commitment to that experience.
Competition
The market for senior living services business iscontinues to be highly competitive. We compete with numerous otherlocal, regional and national senior living community operators, as well asoperators. Increasingly, we are also competing with other companies that provide senior living services to older adults, such as home healthcare companies and other real estate based service providers.companies. 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. Also, inIn 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.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 concentrationsconcentration of senior living communities. While smaller senior living operators may have struggled to manage the impact of the Pandemic, particularly 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 customers.
We continue to address competition (i) by focusing on operations to ensure an exceptional resident experience, high customer satisfaction and employeeteam member retention, through, among other things, training and development, (ii) by differentiating ourselves with the 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 additional arrangements with DHC forOur recent repositioning has allowed us to operate new or additional senior living communities including active adult communities that DHC owns, andfocus on our relationships with DHC and RMR LLC may provide us with competitive advantages; however, DHC 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.operational strengths. For more information on the competitive pressurespressure 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 management companies in the United States, based on unit count, and we have been in operation for over 18 years currently servicing20 years. In 2021, we provided services to approximately 26,00016,000 older adults in our Five Star senior living communities as well asand approximately 10,000 clients in our17,000 Ageility clinics. As the demographics and psychographics of our prospective customers change, weclients. We are focused on establishing ourselves as a premier provider of services to older adults and their caregivers.
We are focused on continually improving and differentiating our service offerings to retain our current customers and acquire new customers. The Strategic Plan contemplates a three-pronged approach to furthering our Company as a premier provider of services that enrich and inspire the lives of older adults as they age.
Reposition: We signaled our intent to exit the skilled nursing business and reposition our senior living service offering to focus on larger assisted living, independent living, memory care and standalone independent living and active adult communities. The reposition phase of the Strategic Plan has been substantially completed, see Note 1 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Evolve: We are committed to a scalable and sustainable corporate infrastructure to support operations and growth, which includes not only robust shared services and technology platforms, but also a strong and differentiated leadership team. Recently, we changed our company name to AlerisLife Inc. to signal the continued evolution of this foundational infrastructure that serves as our platform for growth and success across several business lines. In addition, we are focused on delivering a differentiated customer focused resident experience consistently executed across the repositioned portfolio of communities.
In November 2021, we entered into a culinary services partnership with Compass to transform the dining experience for residents and we also established a strategic partnership platform to enable collaboration opportunities. In December 2021, we announced a collaboration with DispatchHealth to provide our senior living residents access to ambulatory urgent care services in certain markets. We continue to explore and foster partnerships, at both the local and national level, that will give our customers access to a continuum of services.
Diversify: We continue to focus on revenue diversification opportunities in our lifestyle services segment, leading with Ageility rehabilitation services. In 2019, we also began offering Ageility fitness services as a complement to our Ageility rehabilitation services. Since January 1, 2020, Ageility has opened 32 net new outpatient rehabilitation clinics, exclusive of 17 outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022. As of December 31, 2021, Ageility fitness services are offered in 199 senior living communities of which 109 are operated by Five Star. We also continue to expand our rehabilitation and fitness services to senior living communities outside of Five Star senior living communities. As of December 31, 2021, 99 Ageility outpatient rehabilitation clinics (or 48% of our total outpatient rehabilitation clinics) were located in senior living communities that were outside Five Star senior living communities. This is an increase from 58 Ageility outpatient rehabilitation clinics (or 28% of our total outpatient rehabilitation clinics) as of December 31, 2020. In addition, we continue to seek ways to grow other lifestyle services that complement our existing senior living resident experience and are available to older adults living outside of Five Star communities. During the year ended December 31, 2021, we grew Ageility fitness revenues to $3.3 million or a 38.1% increase over the same period in 2020.
We seek to improve revenues from our existing senior living operationsresidential and lifestyle services offerings by focusing on an exceptional resident experience for those who pay with private resources. We also seek to improve profitability through continuedmaking strategic investments in our communities including capital investments at our senior living communities and investments in the development of our staff, as well as by working with service providers to increase the desirability and competitiveness of ourFive Star senior living communities. In addition to routine renovations and upgrades at our existing senior living communities, since January 1, 2018,2020, we have invested $106.5$16.4 million in capital improvements in our owned senior living communities and DHC has invested $124.1 million in capital improvements at our managed senior living communities.
We also seek to grow our business by entering into additional long-term management agreements for senior living communities and active adult communities where residents’ private resources account for all or a large majority of revenues. In 2018 and 2019, we sold four senior living communities, all of which we previously owned and operated, to DHC and began managing those communities for the account of DHC upon completion of each sale. In 2018 and 2019, we also began managing three DHC owned senior living communities and one active adult community for the account of DHC. For more information about the sale transactions, see “Our Dispositions” included in Part I, Item I of this Annual Report on Form 10-K. For more information about our management and prior leasing arrangements with DHC, see “Properties — Our DHC Leases and Management Agreements with DHC” included 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.
Through our ancillarylifestyle services segment, we provide diversified offerings to older adults within ourwho reside in Five Star senior living communities and outside,or in other locations, including skilled rehabilitation services for short-term inpatient stays, such as after joint replacement surgery; home healthcarehealth care in certain of our independent living and assisted living communities;communities, outpatient rehabilitation services focused on older adults;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’ 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 resideengage with us sooner and remain a customer for a longeran extended period.
Since January 1, 2018, we have opened 101 rehabilitation and wellness outpatient clinics. We also expandedIn summary, our rehabilitation and wellness services to senior living communities outside of our current operations. In addition, we continue to seek ways to grow our other ancillary services that complement our existing senior living operations to residents of the senior living communities we operate as 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, we offer “Lifestyle360”, a wellness program focused on five dimensions of wellness (social, intellectual, spiritual, emotional and physical). We believe that programs 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 expansion efforts are currently focused on internal growth through effective management of our existing residential portfolio, by increasing occupancy and room rates, as well as by increasing revenues from our ancillarylifestyle services, such as outpatient therapy services, and health and wellnessfitness and concierge services, to residents of the Five Star senior living communities we operate as well as older adults living outside of ourFive Star communities. We may also agree to operatemanage additional senior living communities and active adult communities for the account of DHC or other third parties pursuant to management or other arrangements and, from time to time, we may acquire and operate additional senior living communities.
Recent Developments
Strategic Plan. On April 9, 2021, we announced the Strategic Plan. For more information on the Strategic Plan and the progress we have made in regards to the Reposition, Evolve and Diversify phases of the Strategic Plan during the year ended December 31, 2021, see Notes 1, 10 and 19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Portfolio Optimization Through Dispositions. We continually monitor our portfolio of senior living communities and other assets, and wecommunities. We may seek to dispose of, or change our method of operating, certain of our senior living communities if and when we determine it is in our best interest to do so and we are able to reach an agreement regarding the sale or change of our method of operating ofoperations for such communities with our pre-existing contracting parties, including DHC. Since January 1, 2018, we have sold or participated in the saleOn September 30, 2021, our lease with PEAK for four communities (with approximately 200 living units) was terminated.
Portfolio Optimization Through Expansion Activities. We currently expect that our expansion activities will be focused on internal growth from our existingFive Star senior living communities and enteringplus additional offerings through our lifestyle services segment.
Residential Services. Through the successful execution of the Evolve phase of the Strategic Plan, we intend to continue to seek opportunities to enter into additional long-term managementlong term agreements forto manage senior living communities as well as the growth of ancillaryfor DHC and other owners.
Lifestyle Services. We currently expect to continue to grow our lifestyle service offerings includingby opening new Ageility outpatient rehabilitation clinics and wellness servicesexpanding our Ageility fitness and other home-based service offerings.
In June 2018, DHC acquired an additional living unit at a senior living community Since January 1, 2020, we have opened 32 net new Ageility outpatient rehabilitation clinics, 15 of which were opened in 2021, exclusive of 17 Ageility outpatient rehabilitation clinics that we leased from DHC locatedwere closed in Florida which was added to the then existing lease for that senior living community.
We also began managing communities for the account of DHC, pursuant to a management agreement and/or our then existing pooling agreements,as amended and restated,December 2021 in senior living communities owned by DHC as follows:that were transitioned to a new operator in 2021 or closed in February 2022.
|
| | | | |
Month | | State | | Units |
June 2018 | | California | | 98 |
November 2018 | | Colorado | | 238 |
April 2019 | | Oregon | | 318 |
December 2019 | | Texas | | 169 |
Total | | | | 823 |
Name ChangeEffective. On January 1, 2020,25, 2022, we changed our then existing management and pooling agreements with DHC for these communities were terminated and replaced with New Management Agreements in connection with the Restructuring Transactions.name from Five Star Senior Living Inc. to AlerisLife Inc.
For more information about our dispositions, see Note 11 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information about our former leases and our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 and NoteNotes 1 and 10 to our Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Financing Sources
On January 27, 2022, certain of our subsidiaries entered into a credit and security agreement, or the Credit Agreement, with MidCap Funding VIII Trust, as administrative agent and a lender, or MidCap. Under the terms of the Credit Agreement, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. The remaining proceeds include $12.0 million for capital improvements and an opportunity for another $20.0 million that is available to us upon achieving certain financial thresholds. Certain subsidiaries of the Company are borrowers under the Credit Agreement and the Company and one of its subsidiaries provided a payment guarantee of up to $40.0 million of the obligations under the Credit Agreement as well as standard non-recourse carve-outs. The guaranty is evidenced by a Guaranty and Security Agreement, or the Guaranty Agreement, made by the Company and one of its subsidiaries in favor of MidCap. Pursuant to the Guaranty Agreement, the Company's subsidiary granted MidCap a security interest on all of the assets of the subsidiary. The Guaranty Agreement requires the Company and its subsidiary to comply with various covenants, including restricting the Company's ability to make distributions to shareholders. The Loan is secured by real estate mortgages on 14 senior living communities owned by the borrowers, the borrowers' assets and certain related collateral. The maturity date of the Loan is January 27, 2025. Subject to the payment of an extension fee and meeting certain other conditions the Company may elect to extend the stated maturity date of the Loan for two one-year periods. We are required to pay interest on outstanding amounts at a base rate of the Secured Overnight Financing Rate, or SOFR, (subject to a minimum base rate of 50 basis points) plus 450 basis points. The Credit Agreement requires interest only payments for the first two years and requires customary mandatory prepayment of the Loan on account of certain events of default. Voluntary prepayments made within 18 months of the effective date of the Loan will be subject to a prepayment fee, but the Loan may thereafter be voluntarily prepaid without premium or penalty. The Company will be required to pay an exit fee upon any prepayment of the Loan, which would be in addition to any prepayment fees that may be payable. The Loan replaced our $65.0 million secured revolving credit facility, or the Credit Facility, which was scheduled to expire on June 12, 2022. No borrowings were outstanding under the Credit Facility at the time the Company entered into the Credit Agreement. For more information about the Credit Facility and the Loan, see Notes 9 and 20 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 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. The annual interest rates as of December 31, 2019, were 4.20% and 6.25%, respectively. 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. 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.
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, or, together, the Share Issuances. As consideration for the Share Issuances, DHC provided to us $75.0 million of additional consideration by assuming certain of our working capital liabilities.
In addition, in connection with the Transaction Agreement, we entered into a credit agreement with DHC for the DHC credit facility, which was secured by six senior living communities we own. The DHC credit facility matured and was terminated on January 1, 2020, in connection with the completion of the Restructuring Transactions. There were no borrowings outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term.
For more information about our credit facility and the DHC credit facility, see Notes 8 and 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
In the future, we may also assume mortgage debt on properties we may acquire, in the future, or place mortgages on properties we own or seek to obtain other additional sources of financing, 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.
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 $67.0 million, borrowings under our $95.0 million Loan, and, for our managed senior living communities, funding from DHC.
Operating Structure
We have fourtwo operating divisions. Three of these divisionsdivisions: residential (previously known as senior living) and lifestyle services (previously known as rehabilitation and wellness services). Residential is led by a senior vice president at our corporate office and two vice presidents who are each responsible for a division of senior living communities located in specified geographiccommunities. The residential operating division is further divided into regions. Each region’s management is responsible for independent living and assisted living and skilled nursing units within its specified region. A divisional vice president, with extensive experiencelocated in the senior living industry, manages one of our divisions from one of our regional offices.a specific geographic area. Our regional offices are responsible for the senior living communities we operate that are located within a designated geographic region and are led by regional directors of operations that have extensive experience in the senior living industry. Each of our regional offices 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 senior living community operations within their designated geographic region, including:
•resident services;
•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.
Residential operating divisions are supported in a centralized manner by corporate teams in the following areas:
•Lead nurturing, and
•Financial operations, which assists with cash application, managing of accounts receivable and purchase order management.
Our fourthsecond operating division, lifestyle services, is responsible for rehabilitationled by a senior vice president and therapy services and is headed by a vice president at our corporate office who hashave extensive experience in rehabilitation and wellness services and is supported by a network of divisional and regional directors of rehabilitation services that are assigned to specified geographic regions.
Our corporate headquarters staff is responsible for corporate levelcorporate-level systems, policies and procedures to support our residential and lifestyle services divisions, such as:
company-wide policies and procedures;
•human resources and team member engagement;
•marketing and communications;
•resident experience;
•information technology services;
•licensing and certification maintenance;
•legal services and regulatory compliance;
•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 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 tradedpublicly-traded company, including our internal audit function, capital markets and financing activities and investor relations.
Human Capital Resources
We are a service organization and our employees, who we call team members, are the foundation of our operations. 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 Staffing
Equal Opportunity. As a service provider to a diverse group of residents and clients, we are committed to team member diversity and 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 equality and fostering a diverse and inclusive 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, 2021, approximately 8,300 and 5,900 of our approximately 10,700 team members were female and non-white, respectively. As of February 26, 2020,18, 2022, we had approximately 23,600 employees,10,400 team members, including approximately 15,6006,800 full time equivalents.and 3,600 part-time. Approximately 8,800 of our team members work in senior living communities, 1,300 in rehabilitation clinics, and 270 in our corporate office. The average tenure of a team member is approximately 5.1 years.
Board Diversity.As of December 31, 2021, our Board composition was 42.9% female.
Team Member Safety. The safety of our team members, our residents and clients, and our contractors and vendors as well as our visitors is our paramount concern. During the Pandemic, we put in place protocols that comply 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. We also required all team members who work in or visit our communities or clinics as part of their responsibilities to be fully vaccinated against COVID-19 by September 1, 2021. 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 Total Rewards. We aim to provide team members a competitive total rewards program that includes competitive salaries and a broad range of sponsored benefits such as a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, tuition assistance, which we believe are competitive with others in our relationsindustry.
Team Member Engagement, Education and Training. Our team member engagement initiatives align with our employees are good.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 team member 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.
Training and Development, Industry Associations & Credentials: We offer a robust learning management platform to provide training and development opportunities to all team members. 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, License to practice law and Certified Public Accountant accreditations.
Communities and Clinics staffing:Our employeesteam members predominately work collaboratively in our communities thatand clinics which 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 thatwho is responsible for the day-to-day operations of the applicable community, including quality of care, resident services, sales and marketing, financial performance and staff supervision, as applicable.supervision. The executive director is supported by department managers who oversee the care and service of our residents, a wellness director of resident care 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. These communities also typically have a dining services coordinator, an activities coordinator a business office manager and a property maintenance coordinator.
Skilled Nursing FacilityRehabilitation Clinic Staffing. Each of our outpatient rehabilitation clinics is located within an independent living, assisted living or memory care neighborhood within a senior living community as well as in active adult communities. Ageility outpatient rehabilitation clinics are located in select senior living communities operated by Five Star, as well as in senior living communities operated by other senior living companies. Each outpatient rehabilitation clinic has a licensed therapist functioning as a rehabilitation director or therapy 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 rehabilitation clinic has services available from licensed therapists or licensed therapy assistants in the disciplines of physical therapy, occupational therapy and speech pathology. Therapy services are provided pursuant to a physician’s order with verified insurance coverage in place prior to commencing services. In addition, Ageility subcontracts with external home health providers in senior living communities to provide therapy during home health episodes of care.
We also own and operate Windsong, a licensed home health agency in Houston, Texas, which operates within three of our senior living communities.
Ageility fitness is a private pay offering where senior living residents receive individual personal fitness training or participate in community sponsored group fitness programs.
Ageility inpatient rehabilitation clinics provide rehabilitation services to SNFs, which as of December 31, 2021 are not operated by Five Star, under the direction of a licensed therapist acting as a rehabilitation director who is managedresponsible 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 state licensed administrator who is supported by other professional personnel, includingphysician for residents admitted to a director of nursing, an activities director,SNF for short-term rehabilitation as well as for those residents requiring rehabilitation services and residing under a marketing director, a social services director, a business office manager and physical, occupational and speech therapists. Our directors of nursing are state licensed nurses who supervise our registered nurses, licensed practical nurses and nursing assistants. Staff size and composition vary among our SNFs depending onlong-term care arrangement. We plan to close the size and occupancy of, and the type of care provided at, the applicable SNF. Our SNFs also contract with physicians who provide certain administrative, clinical and oversight services.remaining ten inpatient rehabilitation clinics commencing in August 2022.
Government Regulation and Reimbursement
The senior living, rehabilitation 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, has brought increased government regulation, as well as compliance burdens.
We are subject to, and our operations must comply with, these laws and regulations. From time to time, our senior living communities or rehabilitation clinics receive notices from federal, state and local agencies regarding noncompliancenon-compliance with such requirements. Upon receipt of these notices, we review them for accuracy 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 or rehabilitation clinics may have an adverse impact on our licensing and ability to operate and attract residentscustomers to other communities.senior living communities or rehabilitation clinics.
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 (principallycommunities. Out of our SNFs). Wetotal residential and lifestyle services revenues, we derived approximately 21.5%32.2% and 23.3% of our consolidated senior living revenues26.4% from Medicare and Medicaid programs for the years ended December 31, 20192021 and 2018,2020, respectively. Specific to our residential revenues, we derived approximately 1.8% from Medicare and Medicaid programs in each of the years ended December 31, 2021 and 2020. Specific to our lifestyle services revenues, we derived approximately 61.2% and 49.4%, from Medicare and Medicaid programs for the years ended December 31, 2021 and 2020, respectively. Out of the total revenues earned at senior living communities we manage on behalf of DHC, they derived approximately 8.7% and 14.4% from Medicare and Medicaid programs for the years ended December 31, 2021 and 2020, 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. From March 2020 through February 18, 2022, there have been approximately 77.5 million reported cases of COVID-19 in the United States and approximately 0.9 million related deaths, which have disproportionately impacted older adults. Federal and state governments have taken a number of actions in response. For example:
•After the Pandemic was declared a National Emergency at the federal level, individual states declared states of emergency and imposed various lock-downs and executive orders that restricted the operation of businesses, travel, and various aspects of the economy and society at large.
•In 2020, the Secretary of the U.S. Department of Health and Human Services, or HHS, and the Centers for Medicare and Medicaid Services, or CMS, along with various states, issued various legal waivers, emergency and public health orders, and other requirements applicable to healthcare providers. These various orders imposed COVID-19 testing and reporting requirements, as discussed below, as well as social distancing orders, infection control protocol mandates, reductions in visitation rights, mandated masking in congregate settings, increased use of Personal Protective Equipment, or PPE, as well as other measures.
•Throughout 2020 and 2021, Federal and state governments established and enforced COVID-19 testing requirements. Early on in the pandemic the Centers for Disease Control, or CDC, established priority groups for COVID-19 testing, given that testing capacity could not meet demand. On April 27, 2020, the CDC revised its priority groups for testing, adding long term care residents and staff with symptoms of COVID-19 to the highest priority. As the pandemic proceeded, healthcare providers became subject to widespread and mandatory patient and workforce COVID-19 testing and reporting.
•On April 30, 2020, President Trump launched Operation Warp Speed, a public-private initiative established to support the development of a COVID-19 vaccine as quickly as possible.
•In December 2020, the U.S Food and Drug Administration, or FDA, issued theemergency use authorization, or EUAs, for vaccines for the prevention of COVID-19, developed by Pfizer-BioNTech and Moderna. This was followed by the FDA issuing an EUA for the Johnson and Johnson vaccine in February 2021.
•In the fall and winter of 2020, the CDC and states began issuing guidance on prioritizing COVID-19 vaccine distribution. In December 2020, the CDC’s Advisory Committee on Immunization Practices voted to recommend health care workers and long-term care residents receive the first doses of a COVID-19 vaccine when it was available.
•In late 2020 and early 2021, the Federal and state governments coordinated efforts with the private sector to launch a massive COVID-19 vaccination effort. COVID-19 vaccinations were initially made available to priority groups, and then to the general public by April 2021.
•On April 27, 2021, CMS and CDC reduced restrictions on testing, visitations, and activities for fully vaccinated residents in long-term care facilities.
•On June 17, 2021, the Occupational Safety and Health Administration, or OSHA, released Emergency Temporary Standards, or ETS, to address exposure to COVID-19 by workers in health care settings. Providers had to be in compliance with most of the standards by July 6, 2021.
•On September 9, 2021, President Biden announced a comprehensive, six-part strategy to combat COVID-19, aimed largely at vaccinating the approximately 25% of the eligible population who remained unvaccinated. His plan included proposals to mandate vaccination or weekly testing for private sector employers with more than 100 employees (which ultimately was not implemented), and to mandate vaccines in most health care settings that receive Medicare or Medicaid reimbursement. Other parts of the plan addressed (1) protecting the vaccinated by, among other things, preparing for the administration of booster shots; (2) keeping schools safely open through a number of safety measures; (3) increasing the availability of testing, (4) protecting the economy, including by streamlining the Paycheck Protection Program loan forgiveness program; and (5) improving care for those infected by COVID-19.
•Throughout 2021, COVID-19 variants became of increasing concern, including the Delta variant, and later in the year, the Omicron variant. The variants have caused COVID-19 surges in different parts of the country at different times, which has caused the Federal and state governments to re-impose certain restrictions discussed above in certain geographies at different times.
•In response to the variants and scientific findings that the protection from COVID-19 vaccines waned over time, the Federal government began emphasizing the importance of COVID-19 vaccine booster shots. On September 24, 2021, FDA approved the first COVID-19 vaccine booster shot developed by Pfizer, for individuals 65 years or older as well as those with frequent occupational exposure. The CDC specifically recommended the COVID-19 vaccine booster for long-term care residents and staff. On October 20, 2021, FDA and CDC recommended the Pfizer, Moderna or Johnson & Johnson vaccine booster shots for all adults 65 years and older as well as certain groups who work or live in high-risk settings, including long term care residents and workers. On November 19, 2021 the FDA and CDC approved the Pfizer and Moderna COVID-19 vaccine booster shots for all individuals 18 years of age and older six months after completion of primary vaccination with any FDA-authorized or approved COVID-19 vaccine.
•The Federal government, in coordination with the states, has continued its COVID-19 vaccination efforts. According to the CDC’s COVID Data Tracker, as of January 27, 2022, of the U.S. population 65 years or older, approximately 95.0% has received at least one dose of a COVID-19 vaccine, 88.3% is fully vaccinated, and as of February 5, 2022, 64.9% has received a booster shot. Further, as of January 27, 2022, of the U.S. population 18 years or older, approximately 86.7% has received at least one dose of a COVID-19 vaccine, 74.0% is fully vaccinated, and as of February 5, 2022, 45.4% have received a booster shot.
•On November 5, 2021, CMS issued an Interim Final Rule mandating COVID-19 vaccines for all applicable staff of health care providers receiving reimbursement from the Medicare or Medicaid programs. Under the rule, all applicable staff must be fully vaccinated by January 4, 2022 unless they qualify for a medical or religious exemption. Health care providers that do not comply with these new regulations may be subject to civil monetary penalties, loss of government contracts, denial of payment of new admissions for facilities, termination from Medicare and Medicaid participation, and referral to a state enforcement agency for application of its other enforcement remedies. The rule was temporarily stayed in 25 states due to litigation that was raised to the U.S. Supreme Court, however, as of January 13, 2022, the court ordered that the stay be lifted and the rule be enforced in all states other than Texas. Certain states have also imposed their own requirements for healthcare facilities and workers.
•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.
•CMS and the Secretary of HHS have also promulgated a number of waivers, guidance publications, and final rules for SNFs in response to the National Emergency. Among other things, SNFs have been required to submit weekly COVID-19 infection-related data to the CDC, to comply with resident and family notification requirements regarding confirmed or suspected cases of COVID-19, and have been subject to enhanced enforcement and penalties related to violations of infection control practices. As discussed above, as of February 18, 2022 we no longer operate or manage SNFs as a result of the Strategic Plan announced on April 9, 2021, which resulted in the management transition or closure of nine SNFs we managed for DHC and the closure of 27 skilled nursing units in CCRCs we continue to manage for DHC. However, our former SNFs were subject to and impacted by these requirements prior to their transitions and closures.
In addition, the Federal government took several measures to address the financial impact of the Pandemic. First, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act, was signed into law. The CARES Act,
among other things, provided $2 trillion in aid to healthcare providers, small businesses, individuals, and state and local governments suffering from the Pandemic. In addition:
•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. Further, on April 14, 2021, President Biden signed into law legislation that further extended the temporary suspension of the sequestration payment reductions until December 31, 2021.
•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.
•On September 1, 2020, HHS announced that assisted living providers could apply for COVID-19 relief funding as provided by the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act. 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.
•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. The statute required 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.
On March 11, 2021, the American Rescue Plan Act of 2021, or ARPA, was signed into law. In addition to broad-based public and private financial relief, ARPA included a number of measures intended to assist the health care industry, including funding to support COVID-19 research, testing, and vaccination efforts. In addition, ARPA provided $450 million to support SNFs in protecting against COVID-19: $200 million for the development and dissemination of COVID-19 prevention protocols in conjunction with quality improvement organizations; and $250 million to states and territories to deploy strike teams that can assist SNFs experiencing COVID-19 outbreaks. The ARPA temporarily increased the Federal Medical Assistance Percentage specifically for the provision of home and community-based services, or HCBS, which include home health care services and rehabilitative services, by ten points from April 1, 2021 through March 31, 2022, provided states maintain state spending levels as of April 1, 2021. ARPA further specified that states must use the enhanced funds to “implement, or supplement the implementation of, one or more activities to enhance, expand, or strengthen” Medicaid HCBS.
Further, on September 10, 2021, HHS, through the Health Resources and Services Administration, made $25.5 billion in new funding in COVID-19 relief available to healthcare providers. Under this plan, Provider Relief Fund Phase 4 payments were based on lost revenues and expenditures between July 1, 2020, and March 31, 2021.
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.
On September 10, 2021, the Biden Administration announced that the HHS, through the Health Resources and Services Administration, or HRSA, is making $25.5 billion in new funding available for health care providers affected by the COVID-19 pandemic. This funding includes $8.5 billion in American Rescue Plan, or ARP, resources for providers who serve rural Medicaid, Children's Health Insurance Program, or CHIP, or Medicare patients, and an additional $17.0 billion for Provider
Relief Fund Phase 4 for a broad range of providers who can document revenue loss and expenses associated with the Pandemic. We have not received any funds under Phase 4.
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. We received funds from the CARES Act for the years ended December 31, 2021 and 2020, as well as from certain states. We believe we have met the required terms and conditions to recognize the funds received as income, which we have recorded in other operating income in the consolidated statement of operations. The below table provides the funds we received and income we recognized for the years ended December 31, 2021 and 2020 by program (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Received | | Recognized | | Received | | Recognized |
| General Distribution Funds | | | | | | | |
| Phase 1 | $ | — | | | $ | — | | | $ | 1,720 | | | $ | 1,720 | |
| Phase 2 | — | | | — | | | 1,562 | | | 1,562 | |
| Phase 3 | 7,724 | | | 7,724 | | | — | | | — | |
| State Programs | 71 | | | 71 | | | 88 | | | 88 | |
| Testing Equipment/Test kits | — | | | — | | | 65 | | | 65 | |
| Total | $ | 7,795 | | | $ | 7,795 | | | $ | 3,435 | | | $ | 3,435 | |
For more information about COVID-19 relief funds, see Note 18 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.
Vaccinations. In response to the Pandemic, we established rigorous testing and vaccination protocols and efforts. Throughout 2021, we coordinated multiple vaccination clinics for our residents and team members in all service lines of business at no cost to those individuals. Further, we required all team members who work in or visit our communities or clinics as part of their responsibilities to be fully vaccinated against COVID-19 by September 1, 2021. As of September 30, 2021, we were in compliance with this requirement. Consistent with CDC recommended guidelines we coordinated COVID-19 vaccine booster clinics and/or facilitated transportation to sites that administer the booster shot. Effective March 1, 2022 we are mandating identified eligible team members receive the recommended booster shot where legally permissible.
As discussed above, we are subject to federal and state regulations regarding mandatory vaccination and/or COVID-19 testing of employees. These federal and state mandates related to COVID-19 vaccination and testing protocols for employees could have the effect of increasing employee attrition or retirement and adversely impact the Company’s ability to retain and attract employees concerned about the obligations imposed by such standards or mandates. To date, approximately 4.0% of our workforce has left due to vaccine mandates. Depending on the specific provisions of such mandates or standards, we may experience labor shortages or increased operating costs that could impact our revenue, financial condition and results of operations. 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 older 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 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 a 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-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 - Medicare Reimbursement.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. For example, in 2016 approximately 31% of SNF and continuing care retirement community revenues came from Medicaid and 23% from Medicare. In November 2019, CMS proposed new reporting requirements for state supplemental payments to Medicaid providers and limitations on approvals to state plan amendments for payments for services at long-term care facilities, including SNFs. The finalization of the proposal could impact the availability of supplemental Medicaid payments to SNFs.
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. 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. The SNF PPS historically 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. These care groups were known as Resource Utilization Groups, or RUGs, and CMS establishes a per diem payment rate for each RUG.
On July 31, 2018, CMS finalized its proposal to replace the RUG model, with a revised case-mix methodology called the Patient-Driven Payment Model, or PDPM, which became effective October 1, 2019. The PDPM focuses on clinically relevant factors, rather than volume-based payment, by using ICD-10 diagnosis codes and other patient characteristics as the basis for patient classification. PDPM will eliminate the need for SNFs to use Minimum Data Set 3.0 to assign residents to a care group. Therapy reimbursement will be 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 accurately applying ICD-10 coding to reflect a patient’s full clinical status, will become increasingly important factors in reimbursement. CMS estimates that paperwork simplification related to patient assessments will reduce reporting burdens for SNFs by approximately $2.0 billion over 10 years. With regard to Medicaid, in an update to PDPM guidance issued on April 4, 2019, CMS will permit states to continue reimbursement based on the state’s previous Medicaid SNF payment system, rather than requiring conversion to PDPM by October 1, 2020.
On July 30, 2019, CMS issued the latest SNF prospective payment system final rule for federal fiscal year 2020, which CMS estimates will increase Medicare payments to SNFs by approximately $851 million for federal fiscal year 2020, or 2.4%, compared to federal fiscal year 2019. 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.
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 subsequent years, Congress approved additional extensions of Medicare sequestration, through 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. 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 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. In 2019, Medicaid enrollment declined (1.7%) and is projected to modestly increase 0.8% in 2020, which moderation in growth we believe is due to a strong economy, changes in the renewal process and enhanced verification and data matching systems.
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 those with acute medical conditions or medical frailty that would prevent them from complying with the work requirement. As of December 2019, previously approved work requirements implemented in Arkansas, Kentucky and New Hampshire had been suspended by federal courts. Arkansas’s work requirements were later struck down by a federal appeals court panel and Kentucky’s governor rescinded the state’s work requirement waiver. Arizona, Indiana, Michigan, Ohio, South Carolina, Utah and Wisconsin have received CMS approval but have not yet implemented or have suspended implementation of work requirements. In addition, Alabama, Georgia, Idaho, Mississippi, Montana, Nebraska, Oklahoma, South Dakota, Tennessee and Virginia have submitted requests to modify their respective state Medicaid plans to include work requirements. The implementation of work requirements may reduce the availability of Medicaid coverage within our patient population.
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 FacilitiesServices – Provider Reimbursement. Our lifestyle services 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.
In 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. In April 2014,Medicare, while 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 issuedhas implemented 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 the Medicare Access and CHIP Reauthorization Act of 2015, or 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 werehave been 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.updates. The Bipartisan Budget Act of 2018 reduced the conversion factor for 2019 from 0.5% to 0.25%. For 2020 through 2025, the conversionstatutory update factor will be furtheris reduced to 0.0%. The Consolidated Appropriations Act, 2021, further revised the MPFS factor to have a less substantial decrease with such revision expected to result in a 3% decrease in reimbursement for therapy services. Over the next several years, the conversion factor is likely to decrease because of budget neutrality rules and changes in care patterns as the nation’s population ages.
In November 2019, CMS published a final rule that updatesupdated 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.amount, as discussed below.
In December 2020, CMS published a final rule that updated the MPFS for the calendar year 2021. Amongst other changes, the rule added 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 included 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 MPFS conversion factor.
In December 2021, CMS published a final rule that updates the MPFS for calendar year 2022. In the rule, CMS finalized a series of standard technical proposals involving practice expense, including standard rate-setting refinements, the implementation of the fourth year of the market-based supply and equipment pricing update, and changes to the practice expense for many services associated with the update to clinical labor pricing. In addition, the rule modifies paymentfor therapy services furnished in whole or in part by a PTA or OTA. In particular, the rule completes implementation of the statutory requirement that, through the use of new modifiers (CQ and CO), CMS will identify and make payment at 85% of the otherwise applicable Part B payment amount for physical therapy and occupational therapy services furnished “in whole or in part” by PTAs and OTAs ─ when they are appropriately supervised by a physical therapist (PT) or occupational therapist (OT), respectively ─ for dates of service on and after January 1, 2022. CMS defines services furnished “in whole or in part” by PTAs or OTAs as those for which the PTA or OTA time exceeds a de minimis threshold. For calendar year 2022, CMS is revising the policy for the de minimis standard. Specifically, CMS’ revised policy will allow a 15-minute timed service to be billed without the CQ/CO modifier in cases when a PTA/OTA participates in providing care to a patient, independent from the PT/OT, but the PT/OT meets the Medicare billing requirements for the timed service on their own, without the minutes furnished by the PTA/OTA, by providing more than the 15-minute midpoint (that is, 8 minutes or more ─ also known as the 8-minute rule). Under this finalized policy, any minutes that the PTA/OTA furnishes in these scenarios would not matter for purposes of billing Medicare. In addition to cases where one unit of a multi-unit therapy service remains to be billed, CMS revised the de minimis policy that would apply in a limited number of cases where there are two 15-minute units of therapy remaining to be billed. For these limited cases, CMS is allowing one 15-minute unit to be billed with the CQ/CO modifier and one 15-minute unit to be billed without the CQ/CO modifier in billing scenarios where there are two 15-minute units left to bill when the PT/OT and the PTA/OTA each provide between 9 and 14 minutes of the same service when the total time is at least 23 minutes and no more than 28 minutes. Overall, the de minimis standard would continue to be applicable in the following scenarios: (i) when the PTA/OTA independently furnishes a service, or a 15-minute unit of a service “in whole” without the PT/OT furnishing any part of the same service; (ii) in instances where the service is not defined in 15-minute increments including: supervised modalities, evaluations/reevaluations, and group therapy; (iii) when the PTA/OTA furnishes 8 minutes or more of the final 15-minute unit of a billing scenario in which the PT/OT furnishes less than eight minutes of the same service; and (iv) when both the PTA/OTA and the PT/OT each furnish less than 8 minutes for the final 15-minute unit of a billing scenario (the 10% standard applies).
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 MACRA, 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,Furthermore, physical therapy, occupational therapy and speech, hearing and language disorder services are optional benefits under which SNFs are requiredMedicaid and thus states may choose whether or not to reportprovide coverage of such benefits. We expect states will continue to experience budgetary pressures, and certain quality measures and resource use measures in a standardized and interoperable format andstates may choose these services to report certain patient assessment data in such a format. Beginning in federal fiscal year 2018, SNFs that failedbe cut to comply with the reporting requirements by the established times are subject to a 2.0% 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 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. Beginning in federal fiscal year 2019, Medicare payment rates will be partially based on SNFs’ performance scores on this measure. The 2020 federal fiscal year update adopted two new quality measures to assess whether certain health information is provided by the SNF at the time of transfer or discharge. The update also adopted several standardized patient assessment data elements. To
fund the program, CMS will reduce Medicare payments to all SNFs by 2.0% through a withhold mechanism starting in October 2018 and then redistribute approximately 60% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure. CMS estimates that the federal fiscal year 2020 changes to the SNF VBP program will decrease payments to SNFs by an aggregate of approximately $213.6 million, compared to federal fiscal year 2019.
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 December 2019, six organizations had cooperative agreements with CMS to implement this phase of the initiative, and over 247 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. Wespending; however, we are unable to predict whether such cuts will occur and the impact of these quality improvement initiativessuch cuts on us.
Skilled Nursing Facilities.Although, as discussed above, we no longer operate or manage SNFs, we managed nine standalone SNFs and 27 skilled nursing units in CCRCs throughout the first half of 2021.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. For example, nationally in 2020 approximately 53% of SNF and continuing care retirement community revenues came from Medicaid and approximately 22% from Medicare. As such, our Medicare reimbursement rates or the costSNF line 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 Medicarebusiness was subject to negotiate rate reductions for prescription drugs, additional Medicare and Medicaid enforcement procedures and federal and state cost 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 changeslegislative and the impact on usregulatory actions with respect to payment rates, federal determinations of the possible failure of these programsMedicaid payments 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 Medicarestates and Medicaid programs. Theseeligibility 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 September 2016, CMS released a final rule to comprehensively update the Conditions of Participation for long-term care facilities that participate in Medicare and Medicaid, such as our SNFs. The final rule, which went into effect beginning in November 2016, institutes a broad range of new requirements, some of which stem from statutory modifications under the ACA and the IMPACT Act. In particular, the 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; ensure 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 assurancenumber of other potential reimbursement 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-term care facilities that participate in Medicare and Medicaid, including our SNFs. Specifically, CMS estimated in the final rule that the cost of complying with all 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.
In July 2019, CMS announced two rules - one final and one proposed - to further update requirements that long-term care facilities that participate in Medicare and Medicaid must meet. Specifically, 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 requiring that a facility not require any resident or his or her representative to sign an arbitration agreement as a condition of admission to the facility. 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. We cannot estimate the type or magnitude of the potential Medicare and Medicaid policy changes, but they may be material to and adversely affect our future results of operations.
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 the Medicare and Medicaid programs. Since then, the GAO has reported that, although much progress has been made, substantial problems remain in the effectiveness of federal and state regulatory activities. 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 specifically 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 isimpacts throughout part of the ongoing efforts2021. A fulsome discussion of the OIGgovernment regulations and requirements specific 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 residingSNFs is set forth in SNFs are identified and reported. The OIG provided suggestionsour Form 10-K filing 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-term care providers who will have direct access to patients. CMS has begun the administration of this program, and, as of January 2018, 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 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.
Certificates of Need. As a mechanism to prevent overbuilding and subsequent healthcare price inflation, manysome states limit the number of SNFsassisted living facilities by requiring developers to obtain 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, (suchsuch as California and Texas)Texas, that have eliminated CON laws have retained other means of limiting new development, including moratoria and licensing laws or limitations upon participation in the state Medicaid program. These government requirements limit expansion, which we believe may make existing SNFsassisted living facilities 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. Recently, the ACA has been subject to significant reform, repeal and revision efforts by the executive
and legislative branches of the federal government and subject to changes resulting from lawsuits filed with the judicial branch of the federal government. It is unclear what the result of any of these legislative, executive and regulatory reform efforts may be or the effect they may have on us, if any. For example:
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 aspects of the ACA. Specifically, the 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, 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, 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.
On October 12, 2017, the Trump Administration also announced that it would stop paying what are known as cost sharing reduction subsidies to issuers of qualified health plans under the ACA. As a result, in 2018 payors generally increased premiums for plans offered on exchanges in order to make up for termination of federal cost sharing reduction subsidies.
•In 2018, the ACA was also subject to lawsuits that sought to invalidate some or all of its provisions. In 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 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.
•In January 2019, the Department of Justice, or the 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 Fifth Circuit Court of Appeals held in a 2-1 opinion that the ACA’s individual mandate was unconstitutional, but, rather than determining whether the remainder of the ACA is valid, the Fifth Circuit Court of Appeals remanded the case for additional analysis on severability. In March 2020, the United States Supreme Court agreed to review the case and oral arguments were held on November 10, 2020.
•On June 17, 2021, the Supreme Court ruled that the plaintiffs did not have standing to challenge the constitutionality of the ACA’s individual mandate, vacated the lower court rulings and instructed the Texas district court to dismiss the case. The Supreme Court did not reach the questions of whether the individual mandate is unconstitutional and whether the ACA should be struck.
If the ACA is repealed, replaced or modified, additional regulatory risks may arise and our future financial results could be adversely and materially affected. We are unable to predict the impact of these or other recent legislative and regulatory actions 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 failure of Medicare, Medicaid or private payment reimbursement rates to cover increasing costs, in a reduction in payments or other circumstances.
Regulatory Reform. In the fall of 2019, the Trump 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 regulation added. It is unclear how these regulatory reform efforts will impact our operations. Some of the regulatory updates described above may in the future, be repealed, replaced or modified as a result of these regulatory reform efforts. For instance, in the latest update, HHS and CMS stated their intent to propose changes to the current Conditions of Participation or Conditions for Coverage that healthcare organizations must meet in order to begin 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 us of these or other regulatory reform efforts. While these efforts could ultimately decrease the regulatory burden for our operations in the long-term, they may increase regulatory uncertainty in the near term.
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, rehabilitation 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 SNFshealthcare providers 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.
The ACA facilitates 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 2019, the DOJ announced two settlements with SNF facilities and their affiliates for $2 million and $10 million, as well as a $44 million judgment, relating to allegedly unnecessary rehabilitation therapy services provided to SNF patients. The significant nature of the settlements 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 management agreements with DHC, and our credit facilitythe Credit Agreement 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 communitiesWe 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 $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 health information. For example, the California Consumer Privacy Act became effective in 2020, and was further modified by the California Privacy Rights Act. 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 20192020 alone. Finally, theThe Office for Civil Rights, or OCR, also has demonstrated a continuing commitment to enforce the obligation to provide individuals with timely access to their health information upon request. On November 30, 2021, OCR announced the resolution of five investigations in its HIPAA Right of Access Initiative, amounting to 25 total actions since the initiative began in 2019. Finally, the OCR and other regulatory bodies have become increasingly focused on cybersecurity risks, including the emerging threat of ransomware and similar cyber-attacks. The increasing sophistication of cybersecurity threats presents challenges to the entire healthcare industry.
Our communitiesWe 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
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, 2021 due to the Pandemic, and we expect that these increased costs may continue in the future. To partially offset these insurance cost increases, among other things, we have:
become•a fully self-insured program for all health-related claims of covered employees;team members;
•increased the deductible or retention amounts for which we are liable under our liability insurance;
•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;
•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;
for our managed senior living communities, our residents either buy insurance directly and are required to list us as an insured party, or we purchase the insurance ourselves and are reimbursed;
•utilized insurance and other professional advisors to help us establish programs to reduce our workers’ compensation and professional and general liabilities, including programs to prevent liability claims and to reduce workplace injuries; and
•utilized insurance and other professional advisors to help us establish appropriate reserves for our retained liabilities and captive insurance programs.
We partially self-insure up to certain limits for workers’ compensation, professional and general liability, automobile and property coverage. Claims that exceed these limits are insured up to contractual limits, over which we are self-insured. Our current insurance arrangements are generally renewable annually. We cannot be sure that our insurance charges and self-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-insurance or other means in the future.
Environmental 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 we 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.
Under our previously existing leases with DHC, we agreed to indemnify DHC for any environmental liabilities it may
incur related to the 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 leasing of those senior living communities. Based upon environmental surveys, we obtained and reviewed for certain of our senior living communities, as well as the results of operations at our senior living communities,communities; we do not believe that there are environmental conditions at any of the 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 properties, that DHC will fund potential costs we incur in the future related to any such
conditions will be funded by DHC 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 suffer 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, 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, 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—Our operations are subject to environmental risks and liabilities,” “Risk Factors—Risks Related to Our Business—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-efficient products, including lighting, windows and heating ventilation and air conditioning equipment.
Internet Website
Our internet website address is www.fivestarseniorliving.com.www.alerislife.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 LivingAlerisLife Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 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, through 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 SEC. Any material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov. SecurityholdersSecurity-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 LivingAlerisLife Inc., Two Newton Place, 255 Washington Street, Newton, Massachusetts 02458 or by email at secretary@5ssl.com.secretary@alerislife.com. Our website address is included several times in this Annual Report on Form 10-K as a textual reference 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 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
Our business is subject to 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 Report 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 of the events or circumstances described below occurs, our business, financial condition or results of operations and the value of our securities could decline. Investors and prospective investors should consider the following risks, the information contained under the heading “Warning Concerning Forward-Looking Statements” and the risks described elsewhere in this Annual Report on Form 10-K before deciding whether to invest in our securities.
Risks Related to Our Business
WeThe Pandemic has had, and DHC restructuredmay continue to have, a material adverse effect on our business, arrangements to addressoperations, financial results and operating challenges weliquidity and its duration and ultimate lasting impact is unknown.
The Pandemic has had been experiencing, but those arrangements may not resulta negative impact on certain industries in the benefits we expect.
On January 1, 2020, we and DHC completed the Restructuring Transactions to address financial and operating challenges we had been experiencing under the challenging conditions in theU.S. economy that are primarily focused on senior living industry thatand other lifestyle services.
These conditions have had, been existing and may continue to exist. In connection withhave, a material adverse impact on our business, results of operations and liquidity. Occupancy at our senior living communities and caseload at our rehabilitation clinics declined during the Restructuring Transactions, among other things, all
Pandemic. Although occupancy and caseload have improved from the low point experienced during the Pandemic, it remains below pre-Pandemic levels and may continue to be indefinitely. We may experience future declines as a result of resurgence of the Pandemic from time-to-time or otherwise. Although the rates we charge residents has not changed significantly to date as a result of the Pandemic, that could change if the Pandemic continues or intensifies or economic conditions worsen. We earn residential management fees based on a percentage of revenues generated at the senior living communities that DHC ownswe manage; therefore, declines in occupancy, restrictions on admitting new residents and that we previously leased and operated are now operated by us pursuant to long-term management agreements.
As a resultthe closure or curtailment of this change, our operating leverage has been reduced significantly because we are no longer paying rent to DHC for the senior living communities we previously leased but now manage for the accountoperations of DHC as of January 1, 2020. We believe these changes will enable us to be profitable in the future. However, our business remains subject to various risks, including, among others, the highly competitive nature of the senior living industry; medical advances and health and wellness services that allow some potential residents to defer the time when they require the special services available at our senior living communities; low unemployment in the United States combined with a competitive labor market within our industry that are increasing our employment costs, including labor costs that we incur and which DHC is not obligated to fund or reimburse to us; significant regulatory requirements imposed on our business; and other factors. Many of these factors are beyond our control. As a result, we may not achieve and maintain profitability in future periods, despite having completed the Restructuring Transactions.
We may fail to operate profitably, despite having completed the Restructuring Transactions.
Most of the senior living communities we operate are owned by DHC and we operate those senior living communities pursuant to long-term management agreements. Pursuant to those management agreements, DHC funds the operations and capital needs of those senior living communities, which alleviates us of those funding commitments. In return, we receive management fees based on revenues, and construction costs for construction projects we manage, at those senior living communities. In addition, we may earn incentive fees if the combined earnings before interest, taxes, depreciation and amortization, or EBITDA, at those senior living communities exceed certain targets. We engage in other businesses besides managing senior living communities for DHC, including owning and leasing from other third parties senior living communities, as well as providing other services, such as rehabilitation, wellness and home health services. Further, we may grow these businesses or engage in new or additional businesses in the future. If we do not profitably operate our businesses, we may incur losses if the fees we earn from the senior living communities we manage for DHC do not exceed those losses.as a result of the Pandemic, without sufficient offsets from increased rates or other revenues, have and may in the future reduce the residential management fees we earn. In addition, we incur other expenses that are not incurred at thehave experienced shortages in staffing and materials we need to operate our senior living communities we manageduring the Pandemic. Staffing shortages continue to exist and are resulting in increased labor costs. These conditions may continue for DHC,an extended period and could intensify, including corporateas a result of the Pandemic or government and general and administrative expenses, that we are responsiblemarket actions. Additionally, the Pandemic could continue to significantly increase certain other operating costs for funding. If those expenses exceed the fees we earn from theour senior living communities, including costs to obtain PPE, to incorporate enhanced infection control measures and to implement quarantines for residents. Also, we manage for DHCbelieve 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, we have been forced to close certain outpatient rehabilitation clinics temporarily and any profits we have reduced the number of new clinics we planned to open. As a result, revenues from our rehabilitation services have been, and may realize at our other businesses, we may incur operating losses.
continue to be, negatively impacted.
COVID-19 immunization efforts, including administration of booster shots, continue to be in process, along with observance of various infection control procedures and social distancing practices, with considerable effort and expense to the business. Further, the emergence of new COVID-19 variants continues to lengthen the Pandemic and has resulted in numerous surges over time.
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 and we cannot be sure we will be protected from liability as a result of being a "Covered Person" under the Public Readiness and Emergency Preparedness Act.
The duration and ultimate impact of the Pandemic is not known. Our business, operations and financial position may continue to be negatively impacted as a result of the Pandemic and may remain at depressed levels compared to prior to the outbreak of the Pandemic for an extended period.
Our ability to grow our revenues may be limited, and a small percentage decline inlimited.
The Five Star senior living communities we operate are the largest part of our revenues or increase in our expenses could have a material adverse impact on our operating results.
Mostbusiness. We manage most of the senior living communities we operate currently are pursuant to long-termfor DHC. We earn base residential management agreements. The base managementfees and construction supervision fees we earn under those management agreements are based on a fixed percentage of revenues and construction costs for construction projects we manage at those senior living communities, which are currently 5% and 3%, respectively.communities. As a result, our ability to grow our revenues from managing those senior living communities will be limited to the applicable fee percentages related to the growth of revenues or applicable construction costs from those senior living communities, subject to any incentive fees we may earn,earn. Although we also operate senior living communities we own, and we provide other services, such as rehabilitation, wellness and home health services, these businesses are currently a minority of our overall business. Further, we may not succeed in growing revenues from these other businesses. In addition, any growth in our revenues that we may realize may not exceed any increase in expenses.
The Strategic Plan may not result in the benefits we expect.
In 2021, we repositioned our residential management business to focus on larger independent living, assisted living and memory care communities, as well as stand-alone independent living and active adult communities. Pursuant to the Strategic Plan, we transitioned the management of 107 senior living communities with approximately 7,400 living units to new operators in 2021, and we closed one community with approximately 100 living units that we manage for DHC in February 2022, exiting the SNF business with the February 2022 community closure, closed the 27 Ageility inpatient rehabilitation clinics we operated in certain of the transitioned communities and eliminated certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.
We intend to grow our business by entering into additional long-term management arrangements for senior living communities and growing the lifestyle services we provide in which residents' private resources account for all or a large majority of revenues. Our business plans include seeking to take advantage of expected long-term increases in demand for senior living communities and lifestyle services. We believe the Strategic Plan will enable us to build on our operational strengths at larger senior living communities and stand-alone independent living and active adult communities while continuing to evolve our choice-based, financially flexible lifestyle services. However, our business remains subject to various risks, including, among others:
•the highly competitive nature of the senior living industry;
•we may not be perceived to be an attractive business provider given our operating history and the liquidity challenges we have experienced;
•we may be unable to identify and acquire or newly manage or lease additional senior living communities and rehabilitation services clinics on acceptable terms;
•we may be unable to access the capital required to acquire, manage or lease additional senior living communities and operate rehabilitation clinics or grow lifestyle services;
•we may not realize the operating results, or operating cost synergies, we expect from senior living communities we operate or any rehabilitation or other lifestyle services we may provide;
•integrating the operations of senior living communities and rehabilitation clinics we commence operating, or other lifestyle services we may provide, may require significant management attention that would otherwise be devoted to our other business activities, may disrupt our existing operations, or may cost more than anticipated;
•we may commence operating senior living communities that are cappedsubject 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 1.5%our senior living communities, rehabilitation clinics or elsewhere may prevent our obtaining, renewing or maintaining licenses needed to conduct and grow our businesses; and
•medical advances and health and wellness services that allow some potential residents to defer the time when they require the services available at our senior living communities.
Certain of gross revenues realizedthese factors are beyond our control. In addition, the costs of implementing the Strategic Plan may be greater than we expect and we may be unable to offset such costs, as well as the revenue loss from the communities transitioned, through expense reductions to right-size operations. As a result, we may not achieve the benefits we expect from the Strategic Plan.
Reliance on outsourcing arrangements could adversely affect our business.
We have outsourced, or are in the process of outsourcing, certain functions, including the dining services operations at allour senior living communities, on a combined basisto third-party service providers to leverage leading specialized capabilities and achieve cost efficiencies. Outsourcing these functions involves the risk that third-party service providers may not perform to our standards or legal requirements, may not produce reliable results, may not perform in a calendar year. In addition, sometimely manner, may not maintain the confidentiality of our proprietary information, or may fail to perform at all. Additionally, any disruption, such as a government shutdown, war, natural disaster or global pandemic (including the Pandemic), could affect the ability of our third-party service providers to meet their contractual obligations to us. Failure of these third parties to meet their contractual, regulatory, confidentiality or other obligations to us could result in material financial loss, higher costs, are fixedregulatory actions, and reputational harm.
In connection with the Strategic Plan, we eliminated positions in our corporate, regional and divisional teams and impacted units and clinics, which may have an adverse impact on our business and financial results.
In connection with the Strategic Plan, we eliminated approximately 120, or 27.3% of the positions in our corporate, regional and divisional teams and approximately 6,200, or 34.3%, of the positions in our Five Star senior living communities and Ageility rehabilitation clinics. This reduction in force resulted in the loss of institutional knowledge and expertise and required the reallocation and combination of certain roles and responsibilities across the organization, which could adversely affect our operations and increase the risk that we may not comply with accounting, legal and regulatory requirements and may not be able to or may be delayed in being, proportionally adjusted in response to any decline in fees and other revenuespursue certain business opportunities. In addition, we may experience. As a result, a small percentage declinenot achieve anticipated benefits from the reduction in force, including the expected cost savings and operational efficiencies.
Termination of assisted living resident agreements and resident attrition could adversely affect our revenues and earnings.
Unlike 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 residents elect to terminate their resident agreements at or increasearound 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 our expenseshigh resident turnover rates.
Current and future trends in healthcare and the needs and preferences of older adults could have a material adverse impacteffect on our operating results.
Our ability
The healthcare industry is dynamic. The needs and preferences of older adults have generally changed over the past several years, including preferences for older adults to earn incentive fees and avoid triggering DHC termination rights will depend,reside in part, on our abilitytheir homes permanently or to grow EBITDA at our managed senior living communities.
We may earn incentive fees under the New Management Agreements with DHC if EBITDA from the manageddelay moving to senior living communities exceeds target levels. The EBITDA target levelsuntil they require greater care. Further, rehabilitation services and other services are increased annually basedincreasingly available and being provided to older adults on the greater of the yearly increasean outpatient basis or in the Consumer Price Indexolder adults’ personal residences, which may cause older adults to delay moving to senior living communities. Such delays may result in decreases in our occupancy rates and 2%, plus a percentage of any capital costs we fund atincreases in our managedresident turnover rates. Moreover, older adults who do eventually move to senior living communities may have greater care needs and acuity, which may increase our cost of doing business, expose us to additional liability or result in excess of target amounts. If the revenues from our managed senior living communities do not grow in excess of those increases, or if the expenses fromlost business and shorter stays at our senior living communities grow in excesscommunities. These trends may negatively impact our occupancy rates, revenues, cash flows and results of those increases, we may not earn incentive fees, or any incentive fees we may earn may decrease. Further, DHC has certain termination rights if EBITDA from our managed senior living communities do not exceed target levels. As a result,operations.
Additionally, if we fail to increase EBITDA atidentify and successfully act upon changes and trends in healthcare and the needs and preferences of older adults, our managed senior living communities by the amount of the annual increases to the target levels, our business, financial condition, results of operations and cash flows mayprospects will be adversely affected.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 to decline.
As further discussed below,
Because government benefits, such as Medicare and Medicaid, are not generally available for services at independent and assisted living communities. Many older adults are not otherwise able to paycommunities, our monthly resident fees with private resources. Our residents paid from their private resources approximately 78.5%92.0% of the total resident fees in connection with the senior living communities we operated during the year ended December 31, 2019, from their private resources,2021, and we expect our business to continue to relydepend more on theour residents’ ability of our residents to pay for our services from their own financial resources.private resources following our exit from the skilled nursing business. 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 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, during periods of high unemployment, the ability of family members to assist their older relatives in paying these fees may be reduced. 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 revenues and results of operations could decline.
The current trend for older adults to delay moving to senior living communities until they require greater care or to forgo moving to senior living communities altogether could have a material adverse effect on our business, financial condition and results of operations.
Older adults have been increasingly delaying moving to senior living communities, including to our senior living communities, until they require greater care, and they have been increasingly forgoing moving to senior living communities altogether. Further, rehabilitation services and other services are increasingly being provided to older adults on an outpatient basis or in older adults’ personal residences in response to market demand and government regulation, which may increase the trend for older adults to delay moving to senior living communities. Such delays may cause decreases in our occupancy rates and increases in our resident turnover rates. Moreover, older adults 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. These trends may negatively impact our occupancy rates, revenues, cash flows and results of operations.
Increases in our labor costs and staffing turnover may have a material adverse effect on us.
Wages and employee benefits associated with our operations were approximately 43% of our 2019 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. Increasing employee health insurance and workers’ compensation insurance costs and other employee benefits costs may materially and adversely affect our earnings.
We have been experiencing increases in labor costs. 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, following completion of the Restructuring Transactions, we manage most of the senior living communities we operate and are not responsible for funding labor costs at those senior living communities, labor cost pressures impact the other senior living communities we own and lease, as well as our other businesses and corporate level activities. Further, increases in labor costs at our managed senior living communities may negatively impact our financial results at those managed senior living communities and hence reduce or prevent our earning incentive fees for our management of those 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. 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 on our business, financial condition and results of operations. Further, increased costs charged to our residents may reduce our occupancy and growth.
We often experience staffing turnover, which has recently increased in light of the current competitive labor market conditions and the competitive environment in the senior living industry. Heightened levels of staffing turnover, particularly for key and skilled positions, such as management, our regional and executive directors for our senior living communities and other skilled and qualified personnel, may disrupt our operations, limit or slow our ability to execute our business strategies, decrease our revenues and increase our costs, any of which may have a material adverse effect our business, financial condition, results of operations and prospects.
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 uswe do 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 atwho will pay 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, theThis 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 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.
IfIncreases in our labor costs, staffing turnover and labor shortages 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, modest unemployment, recent proposed and enacted legislation to increase the minimum wage in certain jurisdictions and other factors that have limited our available labor pool. 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 failoffer to identifyour team members in order to attract and successfully act upon changesretain them or to utilize temporary personnel at an increased cost. In addition, employee benefit costs, including health insurance and trendsworkers’ compensation insurance costs, have materially increased in healthcarerecent years.
Our labor costs have increased significantly because of the Pandemic, including because of increased staffing needs, team member exposure to COVID-19 and our requirement that all our team members be vaccinated against COVID-19. Staffing turnover at our senior living communities is common and has significantly increased as a result of the Pandemic, the current competitive labor market conditions and the needscompetitive environment in the senior living industry. We have more
frequently had to rely on more expensive agency help or pay overtime to adequately staff our communities and preferencesclinics. 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 older adults,service levels due to work rules, or increased operating expenses that may adversely affect our results of operations.
Additionally, our operations are subject to various employment related laws and regulations, which govern 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 and could have a material adverse effect on our business, financial condition and results of operationsoperations. Labor costs at the senior living communities that we manage for DHC are reimbursable by DHC. However, those costs decrease the operating results at those communities, which may negatively impact the financial metrics at our senior living communities and prospects will be adversely impacted.our potential to earn incentive fees for these senior living communities or even give DHC a right to terminate the applicable management agreements. Further, if DHC believes we are not successfully managing labor costs, it may not select us as its manager in the future for additional senior living communities
The healthcare industry isAny significant failure by us to control labor costs or to pass any increases on to residents through rate increases could have a dynamic industry. The needs and preferences of older adults have generally changed over the past several years, including preferences to reside in their homes longer or permanently, as well as changes in services and offerings, including delivery of home healthcare services, utilization of outpatient rehabilitation services and services that address their increasing desire to maintain active lifestyles. If we fail to identify and successfully act upon and address changes
and trends in healthcare and needs and preferences of older adults,material adverse effect on our business, financial condition and results of operations. Further, increased costs charged to our residents may reduce the occupancy and growth at the senior living communities we operate.
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 clinics to comply with extensive standards governing operations and prospectsphysical environments. Federal and state laws also prohibit fraud and abuse by senior living providers and rehabilitation 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, state Medicaid programs and other third-party payers continue 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 provider's license or make conditional or exclude the provider 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. 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, which could result in holds on accepting new residents, or the closure of the community and the immediate discharge and transfer of residents. Citations or 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 management agreements with DHC and the Credit Agreement, adversely affect our ability to operate our senior living communities or our rehabilitation clinics or obtain financing in the future.
Our senior living communities and rehabilitation clinics 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.
Provisions of the ACA could reduce our income and increase our costs.
The ACA regulates insurance, payment and healthcare delivery systems that have affected, and will continue to affect our revenues and costs. The ACA includes provisions 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, and value based purchasing plans. We are unable to predict the impact on us of the insurance, payment, and healthcare delivery systems provisions contained in and to be adversely impacted.developed pursuant to the ACA. 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 rehabilitation clinics to retain our competitive position.
Our senior living communities and rehabilitation clinics 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 senior living communities and rehabilitation clinics; changes in these regulations may require us to make significant expenditures. In addition, we are often required to make significant capital expenditures when we acquire senior living communities. Our available financial resources may be insufficient to fund these expenditures. We incur capital costs for senior living communities we own and for our other businesses and corporate level activities. DHC funds the capital costs for the managed senior living communities and those costs and related budgets are subject to DHC's approval. It is possible that DHC may not approve capital investment we believe should be made. 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 even 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 in our earning less residential 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. 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. As a result, the cost of our liability insurance continues to increase. Medical liability insurance reforms have not generally been adopted, and we expect our insurance costs may continue to increase.
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 13 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We may fail to comply with the terms of our credit agreement.the Credit Agreement.
Our credit agreementThe 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 agreementthe 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 securityholders.security holders.
If we default under our credit agreement,the Credit Agreement, our lenders may demand immediate payment. Any default under our credit agreementthe 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 1114 senior living communities owned by our guarantor subsidiaries,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 whichthat apply to any such additional debt may be more restrictive than the covenants and conditions that are contained in our credit agreement.the Credit Agreement.
The failure of Medicare and Medicaid rates to match our costs will reduce our income or create losses.
Some of our current operations, especially our SNFs, receive significant revenues from Medicare and Medicaid. We derived approximately 21.5% and 23.3% of our total resident fees at the senior living communities we operated from these programs for the years ended December 31, 2019 and 2018, respectively. Payments under Medicare and Medicaid are set by government policy, laws and regulations. The rates and amounts of these payments are subject to periodic adjustment. Current and projected federal budget deficits, federal spending priorities and challenging state fiscal conditions have resulted in 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. 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 in payments to us or other circumstances that could have a material adverse effect on our business, financial condition and results of operations.
Private third party payers continue to try to reduce healthcare costs.
Private third party payers such as insurance companies continue their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review practices and greater enrollment in managed care programs and preferred provider organizations. These 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 health and wellness 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 our revenues and costs, 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 rates 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 older adults to relocate to our senior living communities.
Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability, of older adults to afford our entrance fees and resident fees, as prospective residents frequently use the proceeds from the sale of their homes to cover the cost of such fees. If older adults 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 older adults’ willingness or ability to relocate to our senior living communities, the occupancy rates, revenues 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.
Our operations are subject to a variety of federal, state and local employment related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs 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. 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. Although following completion of the Restructuring Transactions, we manage most of the senior living communities we operate and are not responsible for funding labor costs at those senior living communities, labor cost pressures impact the other senior living communities we own and lease, as well as our other businesses and corporate level activities. Further, increases in labor costs at our managed senior living communities may negatively impact the financial results at those managed senior living communities and as a result, reduce or prevent our earning incentive fees for our management of those 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. 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.
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 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. State Medicaid programs and other third party payers are conducting similar 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. 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 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 license could result in 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 entity 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 management agreements with DHC, our leases and our credit agreement, or adversely affect our ability to operate or obtain financing in the future.
Our 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 of our compliance program initiative to review records related to our Medicare billing practices, in September 2017, we made a disclosure to the OIG regarding potential inadequate documentation and other potential issues at one of our leased SNFs. In June 2019, we settled this matter with the OIG without admitting any liability and agreed to pay approximately $1.1 million in exchange for a customary release. 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 Medicaid may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set offs, administrative rulings and policy interpretations, and payment delays. If we become subject to additional regulatory sanctions or repayment obligations at any of 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.
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. 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 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 towards 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. Beginning in 2019, providers were subject to either MIPS payment adjustments or APM incentive payments. Under PAMA, since October 2018, Medicare payment rates are now partially based on SNFs’ performance scores on a hospital readmission measure as part of CMS’s new SNF Value-Based Purchasing Program. Moreover, under 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% reduction in their Medicare payment rates. Since 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.
Changes in market interest rates including changes that may result from the expected phase out of LIBOR, may adversely affect us.
Since the most recent U.S. recession, the Board of Governors of the U.S. Federal Reserve System, or the U.S. Federal Reserve, has taken actions which have resulted inInterest rates are at relatively low interest rates prevailing in the marketplace forlevels on a historically long period of time.historical basis. The U.S. Federal Reserve steadily increasedrecently indicated that in light of the targeted federal funds rate over the last several years, but recently took actioneconomic recovery and higher than anticipated inflation, it expects to decrease the federal funds rate and may continue to make adjustments in the near future. In addition, LIBOR is expected to be phased out in 2021. Theraise interest rates under our revolving credit facility is based on LIBORas early as March 2022 and future debt we may incur may also be based on LIBOR. We currently expect that the determination of interest under our revolving credit facility would be based on the alternative rates provided under our credit agreement or would be revisedmultiple times in 2022 in response to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our credit agreement would approximate the current calculation in accordance with LIBOR. An alternative interest rate index that may replace LIBOR may result in our paying increased interest. Increasesrising inflation rates. Any increases in market interest rates may materially and negatively affect us in several ways, including:
•increases in interest rates could adversely impact the housing market and reduce demand for our services and occupancy at our senior living communities, which could reduce the likelihood that we will earn incentive fees at our managed senior living communities if the EBITDA we realize at our managed senior living communities declines as a result; and 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;
•amounts outstanding under our credit facilityLoan 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; and
•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 by our senior living communities.financing.
LowConversely, low market interest rates, particularly if they remain over a sustained period, may increase our use of debt capital to fund property acquisitions, lower capitalization rates for property purchases and increasedincrease competition for property purchases, which may reduce our and, with respect to opportunities for us to operate additional communities owned by DHC, DHC’s ability to acquire new properties.
Our growth strategy may not succeed.
We intend to continue to grow our business by entering into additional long-term operating arrangements for senior living communities and growing the ancillary services we provide where residents’ private resources account for all or a large majority of revenues. Our business plans include seeking to take advantage of expected long-term increases in demand for
senior living communities and health 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 have experienced;
we may be unable to identify and operate additional senior living communities and clinics on acceptable terms;
we may be unable to access the capital required to operate additional senior living communities and 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 of revenues;
we may not achieve the operating results we expect from newly managed senior living communities or any health and wellness or other services we may provide;
the operations of newly managed senior living communities and clinics and provision of other health and wellness services may subject us to unanticipated contingent liabilities or regulatory matters;
we may be required to make significant capital expenditures to improve newly managed senior living communities, including capital expenditures that were unanticipated at the time of entry into the management arrangements;
we may have difficulty hiring and retaining key employees and other personnel at newly managed senior living communities and clinics;
it may take a period of time to stabilize the operations of newly managed senior living communities;
integrating the operations of newly managed senior living communities, clinics or other health 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 senior living communities or clinics we agree to manage;
we may agree to manage senior living communities 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, clinics or elsewhere may prevent our obtaining or renewing licenses needed to conduct and grow our businesses; and
newly managed senior living communities, clinics and other new or expanded health 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 characteristics 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 acquire or lease or manage new senior living communities. Our available financial resources may be insufficient to fund these expenditures. Although, following completion of the Restructuring Transactions, we manage mostThe substantial majority of the senior living communities that we operate are owned by DHC and we are not responsible for funding capital costs at thoseour business is substantially dependent on our relationship with DHC.
Our business is substantially dependent upon our continued relationship with DHC. Of the 141 senior living communities we still will incur capital costsoperated at December 31, 2021, 121 were owned by DHC. In connection with the Strategic Plan, we and DHC amended our management agreements to facilitate the transition or closure of 108 senior living communities that we managed for DHC to new operators and we closed approximately 1,500 SNF units in 27 CCRCs that we continue to manage for DHC. The reduction of the number of senior living communities we ownmanage for DHC could harm our financial condition and lease,ability to achieve our long-term growth initiatives, and may decrease the likelihood that DHC chooses us as well asits manager for our other businesses and corporate level activities. Further, increases in capital costs at our
managedadditional senior living communities may negatively impactin the financial results at those managed senior living communities and, if future.
DHC funds capital costs above target amounts, the target EBITDA for the applicable senior living communities would be increased by an amount equal to six percent of the excess. Our earning incentive fees, and certain DHC rights tomay terminate our management agreements are based on EBITDA generatedin certain circumstances, including if the financial metrics at our managed senior living communities compared to EBITDA targets. Hence, increased capital costs at our managed senior living communities may reducedo not exceed target levels or prevent our earning incentive fees for our managementuncured material breach. The loss of those senior living communities or give rise to a DHC right of termination of the applicableour management agreements if the EBITDA at those managed senior living communities does not meet certain targets.with DHC, or a material change to their terms, could have a material adverse effect on our business, financial condition or results of 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 employee, 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 cyber attackcyberattack or the improper disclosure of confidential or protectedpersonally identifiable information.
Security breaches, computer viruses, attacks by hackers, online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The risk of a security breach or disruption, particularly through cyberattacks or cyber intrusions, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the intensity and sophistication of attempted attacks and intrusions from around the world have increased. 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’ 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.
Supply chain constraints and commodity pricing and other inflation, including inflation impacting wages and employee benefits, may negatively impact our business and results of operations.
The global economy has been experiencing supply chain constraints and commodity pricing and other inflation, including inflation impacting wages and employee benefits. These conditions have increased the costs for materials, other goods and labor. These pricing increases as well as increases in labor costs have increased our operating costs. If these inflationary pressures continue, we may realize decreased earnings.
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.
Insurance may not adequately cover our losses, and the cost of obtaining such insurance may continue to increase.
We purchase certain third party insurance coverage for our business and properties, 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 financial metrics at our managed senior living communities do 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, and increased insurance costs will adversely impact us as a result. Losses of a catastrophic nature, such as those caused by hurricanes, flooding, and earthquakes, or losses from terrorism, may be covered by insurance policies with limitations such as large deductibles or co-payments that we or the owner may not be able to pay. For instance, in April 2021, a fire at a community we leased caused extensive damage and the community was out of service until we terminated the lease in the third quarter of 2021. A portion of the losses incurred as a result of the fire were not covered by insurance. 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 incur 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 us on economic terms. If an uninsured loss or a loss in excess of insured limits occurs, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property.
We may incur significant costs from our self-insurance arrangements.
We partially self-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. We fully self-insure all health relatedhealth-related claims for our covered employees. Although, following completion of the Restructuring Transactions, we manage most of the senior living communities we operate and are not responsible for funding insurance costs at those senior living communities, including health insurance for our employees who work at those senior living communities, these insurance cost pressures impact senior living communities we own and lease, as well as our other businesses and corporate level activities. Further, increases in insurance costs at our managed senior living communities may negatively impact the financial results at those managed senior living communities and, as a result, reduce or prevent our earning incentive
fees for our management of those 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. We may incur significant costs for claims and related matters under our self-insurance arrangements. We cannot be sure that our insurance charges and self-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-insurance or other means in the future. Although we determine our employee health insurance, workers’ compensation and professional and general liability self-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. OurInsurance costs allocated to senior living communities that we manage for DHC are reimbursable by DHC. However, these costs decrease the operating results at those communities, which may negatively impact the financial metrics at our senior living communities and our potential to earn incentive fees for these senior living communities.In addition, our costs under our self-insurance arrangements that are not reimbursable may materially and adversely affect our business, results of operations and liquidity.
Insurance may not adequately cover our losses, and the cost of obtaining such insurance may continue to increase.
We maintain insurance coverage for our properties and the operations conducted on them, including for casualty, liability, malpractice at managed properties, fire, extended coverage and rental or business interruption loss insurance. Pursuant to our management agreements with DHC, we are obligated to maintain insurance for the senior living communities that we manage for DHC’s account. 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 the managed senior living communities, the increased costs of insurance may negatively impact the financial results at those managed senior living communities and hence reduce or prevent our earning incentive fees for our management of those 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, among other things, or losses from terrorism, may be covered by insurance policies with limitations such as large deductibles or co-payments that we or, with respect to the properties that DHC owns and we manage, DHC may not be able to pay. Insurance proceeds may not be adequate to restore an affected property to its condition prior to a loss or to compensate us for our losses, including the loss of future revenues from an affected property. Similarly, our other insurance, including our general liability insurance, may not provide adequate insurance to cover our losses. In addition, we do not have any insurance to limit losses that we may incur as a result of known or unknown environmental conditions. Further, we cannot be sure that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis, and, in the future, we may discontinue certain insurance coverage on some or all of our properties that we own or are otherwise not obligated to maintain pursuant to agreements with third parties if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the loss. If an uninsured loss or a loss in excess of insured limits occurs, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property. We might also remain obligated for any financial obligations related to the property, even if the property is irreparably damaged. In addition, future changes in the insurance industry’s risk assessment approach and pricing structure could further increase the cost of insuring our properties or decrease the scope of insurance coverage, either of which could have an adverse effect on our financial condition, results of operations or 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.
Our geographic concentration of our senior living communities exposes us to changes in market conditions in those areas.
We have a high concentration of our senior living communities in various geographic areas, including
in Florida, North Carolina, South Carolina, Georgia, Texas and California. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations, particularly with respect to senior living communities, acts of nature and other factors that may result in a decrease in demand for our services in these states could have
an adverse effect on our revenues, 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.
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.
We are subject to limitations on our ability to use our net operating loss and tax credit carryforwards.
We expect that our ability to deduct pre-2020 net operating loss carryforwards and tax credit carryforwards will be subject to a significant annual limitation on account of the ownership changes resulting from the Restructuring Transactions. The impact of the ownership change on our net operating losses and other tax credit carryforwards as a result of the completion of the Restructuring Transactions is described in Note 5 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 the Conversion Time, which currently are expected to be utilized to offset future taxable income, will not be subject to the limitations resulting from the Restructuring Transactions, but futurechanges in ownership may result in limitations on usage or elimination of those future losses and credits. Our bylaws contain 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 Board of Directors. However, we cannot be sure that these restrictions will be effective or that our Board of Directors 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 1986, as amended, or the IRC, including provisions generally restricting carryforwards of net 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 utilize all of our existing net operating loss and tax credit carryforwards in a given year.
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 penalties or other corrective action requirements and liabilities, including the costs to investigate or remediate such contamination. These laws also expose us to claims by third parties for costs and damages they may incur in connection with hazardous substances related to our activities and properties. If we experience these environmental liabilities and costs, they could have a material impact on our operating results and financial condition.
Our operations are subject to risks from adverse weather events and climate change and 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 have incurred and may in the future 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, 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, these increased costs, if material in amount, could adversely affect our financial condition and results of operations and cause the value of our securitiesoperations.
Widespread illnesses due to decline.
Aa severe cold andor flu season epidemics or any other widespread illnessesa 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 there were to occur a severe cold andor flu season, an epidemic or any other widespread illnesses, including the Coronavirus,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 quarantine 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 relief measures pursuant to the CARES Act and other 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 Pandemic-related cash flow disruptions. Additionally, retaining these funds 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 be sufficient to mitigate the impact of the Pandemic.
Changes in the reimbursement rates, methods, or timing of payment from government programs, including Medicare and Medicaid, or 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 continuous reform efforts and pressures to reduce costs. Some of our operations, especially our rehabilitation services, receive significant revenues from Medicare and Medicaid. The rates and amounts of payments under these programs are subject to periodic adjustment and there have been numerous recent legislative and regulatory actions or proposed actions with respect to Medicare and Medicaid payments, insurance and healthcare delivery. Additionally, we receive significant payments from third party payers for certain of our lifestyle services, including approximately 38.8% and 50.6% of our total revenues for the years ended December 31, 2021 and 2020, respectively. These private third party payers 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. Any reduction in the payments we receive from Medicare, Medicaid and third party payers could result in the failure of those reimbursements to cover our costs of providing required services to our residents and clients and could have a material adverse effect on our business, financial condition and results of operations.
Third party expectations relating to Environmental, Social and Governance, or ESG, factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors and certain of our customers, team members, and other stakeholders concerning corporate responsibility, specifically related to ESG factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us, or otherwise do business with us, if they believe our policies relating to corporate responsibility are inadequate. Third party providers of corporate responsibility ratings and reports on companies have increased in number, resulting in varied and in some cases inconsistent standards. In addition, the criteria by which companies’ corporate responsibility practices are assessed are evolving, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. Alternatively, if we elect not to or are unable to satisfy such new criteria or do not meet the criteria of a specific third party provider, some investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. If we fail to satisfy the expectations of investors and our customers, employees and other stakeholders or our initiatives are not executed as planned, our reputation and financial results 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 proceduresaffected 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 ourrevenues, results of operations or our financial statements or could otherwise materially and adversely affectability to grow our business reputation, results of operations, financial condition or liquidity.may be negatively impacted.
Risks Arising From Certain of Our Relationships and Our Organization and Structure
Our agreements and relationships with 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 DHC, the Chair of our Board of Directors andwho is also one of our Managing Directors, Adam D. Portnoy, RMR LLC and others related to them, including:
•the substantial majority of the senior living communities that we operate are owned by DHC and our business is substantially dependent upon our relationship with DHC;
following the completion of the Restructuring Transactions, •DHC owned 33.9%32.7% of our outstanding common shares as of January 1, 2020;December 31, 2021;
•RMR LLC provides management services to us and DHC 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 DHC 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 DHC’s or such other entity’s behalf rather than on our behalf;
•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;
•Adam D. Portnoy beneficially owned, following the completion of the Restructuring Transactions, in aggregate, approximately 6.3%6.2% of our outstanding common shares and 1.1% of DHC'sDHC’s outstanding common shares, in each case as of January 1, 2020;December 31, 2021;
•our President and Chief Executive Officer, Katherine E. Potter, and our Executive Vice President, Chief Financial Officer and Treasurer, Jeffrey C. Leer, are also officers and employees of RMR LLC, as are DHC’s president and chief operating officer and chief financial officer and treasurer;LLC;
•our other Managing Director and Secretary, Jennifer B. Clark, is secretary and a former managing trustee and secretary of DHC and a managing director and officer of RMR Inc. and an officer and employee of RMR LLC;
prior to December 31, 2001, we were a wholly owned subsidiary of DHC. On that date, DHC distributed substantially all of •our then outstanding common shares it owned to its shareholders. In connection with that distribution, we entered agreements with DHC 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 DHC as a real estate investment trust and limit our ability to acquire real estate of types which are owned by DHC or other businesses managed by RMR LLC; and
•we lease our officecorporate headquarters building from a subsidiary of ABP Trust.Trust, the controlling shareholder of RMR Inc.
These multiple responsibilities, relationships and cross ownerships could create competition for the time and efforts of RMR LLC, our 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, the New Management Agreements,our management agreements with DHC, business management agreement with RMR LLC and other transactions with DHC, our Managing Director, RMR LLC and others related to them were not negotiated on an arm’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 disinterestedindependent 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-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 DHC and our business is substantially dependent on our relationship with DHC.
Of the 268 senior living communities we operate, 244 are owned by DHC, and, as of January 1, 2020, we 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 does not exceed target levels or for our uncured material breach. Our business is substantially dependent upon our continued relationship with DHC.The loss of the New Management Agreements with DHC, or a material change to their terms, could have a material adverse effect on our business, financial condition or results of operations.
DHC owns 33.9%32.7% of our outstanding common shares. As a result, investors in our securities may have less influence over our business than shareholders of other publicly traded companies.companies and trading in our shares may be difficult.
As of the date of this Annual Report on Form 10-K, DHC owns 33.9%32.7% of our outstanding common shares.
For so long as DHC continues to retainretains a significant ownership stake in us, it maywill 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, DHC 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 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 large ownership position of DHC, trading in our common shares may be more difficult.
As of the date of this Annual Report on Form 10-K, DHC owns 33.9% of our outstanding common shares. ThisDHC’s large shareholding 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 DHC not to not take actions that may conflict with DHC’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 any net operating losses and other tax 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.
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 Board of Directors;Board;
•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 beare “Independent Directors” and other Directors beare “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.
As changes occur in the marketplace for corporate governance policies, the above provisions may change or be removed, or new provisions may be added.
Our management agreements with DHC provide that our rights under those agreements may be cancelled by DHC 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 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 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
stockholder shareholder 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 DHC 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 shares of stock of ours or by stockholdersshareholders against us or any Director, officer, agent, or employee of 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.
Risks Related to Our Securities
If we fail to operate profitably, the value of our securities may decline and could become worthless.
We have incurred operating losses in each of our past four fiscal years and we had an accumulated deficit of $245.2 million as of December 31, 2019, and we had net negative cash flows from operations in recent prior years. Since December 31, 2018, we have taken various actions to improve our business, financial condition, results of operations and prospects, including completing the Restructuring Transactions on January 1, 2020. Although we believe these actions will allow us to operate profitably in the future, our business remains subject to various risks, including those noted in this Annual Report on Form 10-K, some of which are beyond our control. As a result, we may fail to operate profitably in the future, despite the actions we have taken. If we fail to operate profitably, the value of our securities may decline and could become worthless.
The number of common shares we issued in connection with the Restructuring Transactions may significantly impact our share price and volatility.
In connection with the Restructuring Transactions, on January 1, 2020, we issued an aggregate of 26,387,007 of our common shares to DHC and to DHC shareholders of record as of December 13, 2019, which resulted in DHC owning 33.9% and those DHC shareholders owning 51.1% of our then outstanding common shares as of that date. The number of our common shares issued in the Share Issuances represents a significant percentage of our currently outstanding common shares. The trading, the lack of trading, or any market expectations of the trading or lack of trading of those shares may significantly impact the trading price and liquidity of our common shares.
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, adjusting for the one-for-ten reverse stock split that we completed on September 30, 2019. If we issue additional common shares at or near current trading price levels, certain of our pre-existing stockholders, especially our long-term stockholders, may experience significant dilution of their equity interests.
If we fail to maintain compliance with the minimum bid price requirements of the Nasdaq 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 letter from Nasdaq informing us that we were not in compliance with the minimum bid price Nasdaq standard for continued listing on Nasdaq. On September 30, 2019, we completed a one-for-ten reverse stock split of our outstanding common shares, which resulted in the closing bid price of our common shares exceeding the $1.00 per share minimum bid price requirement for the applicable period. Consequently, on October 15, 2019, we received a letter from Nasdaq informing us that we had regained compliance with the minimum bid price standard for continued listing on Nasdaq. We cannot be sure that we will be able to maintain compliance with this listing standard or that we will otherwise be in compliance with other Nasdaq listing standards. If we fail to 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 Communities
We classify a senior living community based on the predominant type of services offered at that community. As of December 31, 2019, prior to the completion of the Restructuring Transactions, we owned, leased or managed 268Five Star operates 20 senior living communities which we have categorized into five groupsown and 121 senior living communities we manage for DHC, as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Type of Units | | | | Average
Occupancy | | Revenues (2) (3) | | Percent of Revenues from Private Resources |
| Type of Community | | No. of Communities | | Indep. Living | | Assisted Living | | Skilled Nursing | | Total Units | | | |
| IL/AL Communities: | |
|
| |
|
| |
|
| |
|
| |
|
| | | |
|
| | |
Leased (DHC) (1) | | 155 |
| | 6,176 |
| | 9,383 |
| | 1,813 |
| | 17,372 |
| | 83.9% | | $ | 817,254 |
| | 88.1 | % |
| Leased (PEAK) | | 4 |
| | — |
| | 204 |
| | — |
| | 204 |
| | 81.9% | | 9,220 |
| | 100.0 | % |
| Owned | | 20 |
| | 564 |
| | 1,544 |
| | — |
| | 2,108 |
| | 81.4% | | 73,271 |
| | 98.4 | % |
Managed (1) | | 78 |
| | 4,571 |
| | 5,339 |
| | 427 |
| | 10,337 |
| | 85.0% | | 433,458 |
| | 93.2 | % |
| Total: AL/IL Communities | | 257 |
| | 11,311 |
| | 16,470 |
| | 2,240 |
| | 30,021 |
| | 84.1% | | 1,333,203 |
| | 90.4 | % |
SNFs - Leased (DHC) (1) | | 11 |
| | 53 |
| | — |
| | 1,211 |
| | 1,264 |
| | 76.6% | | 138,169 |
| | 23.2 | % |
| Totals: | | 268 |
| | 11,364 |
| | 16,470 |
| | 3,451 |
| | 31,285 |
| | 83.6% | | $ | 1,471,372 |
| | 84.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | No. of Communities | | Type of Units | | | | Average Occupancy (3) | | Month End Occupancy (3) | | Revenues (3)(4)(5)(7) | | Percent of Revenues from Private Resources |
| Operation Type | | | Indep.
Living | | Assisted Living (2) | | Memory Care (1)(2) | | Skilled Nursing (2) | | Total
Units | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Owned | | 20 | | | 566 | | | 1,264 | | | 270 | | | — | | | 2,100 | | | 69.9% | | 72.7% | | $ | 59,707 | | | 98.2% |
Managed (6) | | 121 | | | 9,857 | | | 6,500 | | | 1,602 | | | 46 | | | 18,005 | | | 71.0% | | 74.8% | | 875,980 | | | 91.3% |
| Total | | 141 | | | 10,423 | | | 7,764 | | | 1,872 | | | 46 | | | 20,105 | | | 70.9% | | 74.5% | | $ | 935,687 | | | 91.7% |
(1) Memory Care units are shown above separately; however, they typically are part of an assisted living community and not a stand alone building or community.
(1)(2) Includes one CCRC that we managed for DHC, which includes assisted living units (49 units), SNF units (46 units) and memory care units (11 units), that was closed in February 2022.
(3)Effective Month end occupancy is as of January 1, 2020, followingDecember 31, 2021 and average occupancy and revenues are for the completionyear ended December 31, 2021.
(4) Data excludes $68,014 of revenue from lifestyle services and $4,931 from previously leased communities, as well as $7,795 of income received under the Provider Relief Fund of the Restructuring Transactions,CARES Act, of which $6,960 related to our then existing leasesowned independent and management agreements with DHC wereassisted living communities, $815 related to previously leased communities, and $19 related to lifestyle services. Additionally, managed community level revenues exclude CARES Act income of $19,570. On September 30, 2021, Five Star and PEAK terminated and we began managing thesetheir lease for all four communities under the New Management Agreements.(with approximately 200 living units) Five Star previously leased from PEAK.
(2)(5) Data includes $4.2 millionRepresents the revenues of deferred resident fees and deposits, or Deferred Resident Fees and Deposits, related tothe senior living communities we previously leased from DHC that were recognizedown as revenue in December 2019,well as a resultthose we manage for DHC. Managed senior living communities' revenues does not represent our revenues and is included to provide supplemental information regarding the operating results of the completion of the Restructuring Transactions.communities from which we earn residential management fees.
(3)(6) Data excludes $47.3 millionIncludes one active adult community with 167 independent living units.
(7) We transitioned 107 senior living communities managed for DHC with approximately 7,400 units to new operators during the year ended December 31, 2021 and we closed one senior living community that we manage for DHC with approximately 100 units in February 2022 and (ii) we closed 1,532 SNF units in 27 CCRCs during the year ended December 31, 2021 and are in the process of revenue from Ageility physical therapy clinics.repositioning these units that we will continue to manage for DHC. The revenues earned at these communities and units for the year ended December 31, 2021 were $244,875 and are included above.
As of December 31, 2019, we operated, owned, leased and managed 2682021, all 141 senior living communities located in 32 states. We28 states are operated by Five Star.
Ageility Clinics
As of December 31, 2021, Ageility operated 215 rehabilitation clinics as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Clinic | | No. of Clinics (1) | | No. of States | | Average Square Footage of Clinics (2) | | Revenues (3)(4) | | Percentage of Revenues from Medicare and Medicaid (3) |
| Outpatient | | 205 | | 28 | | 492 | | $ | 55,684 | | | 71.1% |
| Inpatient | | 10 | | 5 | | n/a | | 11,233 | | | 17.7% |
| | | | | | | | | | |
| Total | | 215 | | 28 | | 492 | | $ | 66,917 | | | 62.2% |
(1) As of December 31, 2021, Ageility inpatient rehabilitation clinics provide rehabilitation services in ten senior living communities not operated by Five Star. As of December 31, 2021, 106 of our outpatient rehabilitation clinics were clinics within our owned and managed senior living communities and 99 were clinics within senior living communities operated by other providers.
(2) Inpatient rehabilitation clinics operate under a service agreement with the senior living community and do not have dedicated clinic space.
(3) Data excludes $1,096 of revenue from home healthcare services as well as $19 of income received under the Provider Relief Fund of the CARES Act, related to lifestyle services.
(4) Includes revenue of $5,006 for the year ended December 31, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed throughout the year ended December 31, 2021 and $1,717 for 17 Ageility outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022. Also includes $269 of revenues for closed outpatient rehabilitation clinics not related to the Strategic Plan.
Ageility leases space from DHC at certain of the senior living communities that we manage for DHC to operate Ageility's outpatient rehabilitation clinics. The leased 166 of these communitiesclinics from DHC and fourthose located within other senior living companies are typically leased for an initial period of these communities from Healthpeak Properties, Inc. (formerly known as HCP, Inc.), or PEAK, owned 20 communitiesone year and managed 78 on behalfautomatically renew for successive one year periods. The leases are generally terminable with 30 to 90 days' notice. The average Ageility clinic is approximately 500 square feet. As of DHC. December 31, 2021, Ageility leased approximately 100,000 square feet in 28 states.
Geographic Breakdown of Our Senior Living Communities and Rehabilitation Clinics
The following table sets forth certain information about our owned, leased and managed communities as of December 31, 2019 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Communities | | | | | | |
| State | | Total Living Units (1) | | Average
Occupancy (1) | | Owned | | Leased (2) | | Managed | | No. of Communities (1) | | Revenues (1)(3)(4) | | Percent of Revenues from Private Resources (1) (3) |
| 1. Alabama | | 695 |
| | 86.3% | | 2 |
| | 5 |
| | 3 |
| | 10 |
| | $ | 26,819 |
| | 100.0% |
| 2. Arizona | | 1,150 |
| | 84.2% | | — |
| | 3 |
| | 3 |
| | 6 |
| | 54,163 |
| | 85.0% |
| 3. Arkansas | | 187 |
| | 92.6% | | — |
| | — |
| | 3 |
| | 3 |
| | 7,866 |
| | 100.0% |
| 4. California | | 1,498 |
| | 82.3% | | — |
| | 9 |
| | 3 |
| | 12 |
| | 82,919 |
| | 81.4% |
| 5. Colorado | | 1,005 |
| | 78.3% | | — |
| | 7 |
| | 1 |
| | 8 |
| | 68,099 |
| | 31.5% |
| 6. Delaware | | 988 |
| | 73.7% | | — |
| | 6 |
| | — |
| | 6 |
| | 57,592 |
| | 73.3% |
| 7. Florida | | 4,617 |
| | 92.1% | | 1 |
| | 8 |
| | 11 |
| | 20 |
| | 204,461 |
| | 86.1% |
| 8. Georgia | | 1,681 |
| | 81.6% | | — |
| | 11 |
| | 11 |
| | 22 |
| | 62,051 |
| | 97.4% |
| 9. Illinois | | 1,025 |
| | 88.3% | | — |
| | 4 |
| | 7 |
| | 11 |
| | 39,761 |
| | 92.7% |
| 10. Indiana | | 1,672 |
| | 81.1% | | 5 |
| | 10 |
| | 1 |
| | 16 |
| | 62,593 |
| | 92.0% |
| 11. Kansas | | 557 |
| | 86.9% | | — |
| | 3 |
| | — |
| | 3 |
| | 31,088 |
| | 70.9% |
| 12. Kentucky | | 934 |
| | 85.2% | | — |
| | 9 |
| | — |
| | 9 |
| | 43,431 |
| | 86.1% |
| 13. Maryland | | 1,281 |
| | 78.3% | | — |
| | 10 |
| | 1 |
| | 11 |
| | 74,349 |
| | 100.0% |
| 14. Massachusetts | | 123 |
| | 93.8% | | — |
| | 1 |
| | — |
| | 1 |
| | 9,291 |
| | 100.0% |
| 15. Minnesota | | 188 |
| | 69.2% | | — |
| | 1 |
| | — |
| | 1 |
| | 9,176 |
| | 90.8% |
| 16. Mississippi | | 116 |
| | 80.5% | | — |
| | 2 |
| | — |
| | 2 |
| | 3,621 |
| | 100.0% |
| 17. Missouri | | 434 |
| | 91.2% | | 1 |
| | — |
| | 5 |
| | 6 |
| | 14,067 |
| | 99.9% |
| 18. Nebraska | | 200 |
| | 79.4% | | — |
| | 2 |
| | — |
| | 2 |
| | 33,504 |
| | 33.1% |
| 19. Nevada | | 287 |
| | 97.3% | | — |
| | — |
| | 2 |
| | 2 |
| | 14,245 |
| | 100.0% |
| 20. New Jersey | | 1,037 |
| | 79.3% | | 2 |
| | 3 |
| | 1 |
| | 6 |
| | 50,600 |
| | 86.6% |
| 21. New Mexico | | 204 |
| | 83.5% | | — |
| | 1 |
| | — |
| | 1 |
| | 12,381 |
| | 86.2% |
| 22. New York | | 310 |
| | 92.5% | | — |
| | — |
| | 1 |
| | 1 |
| | 20,153 |
| | 100.0% |
| 23. North Carolina | | 1,921 |
| | 83.9% | | 5 |
| | 10 |
| | 6 |
| | 21 |
| | 94,416 |
| | 99.8% |
| 24. Ohio | | 282 |
| | 87.2% | | — |
| | 1 |
| | — |
| | 1 |
| | 18,014 |
| | 82.1% |
| 25. Oregon | | 318 |
| | 77.8% | | — |
| | — |
| | 1 |
| | 1 |
| | 7,253 |
| | 100.0% |
| 26. Pennsylvania | | 991 |
| | 77.4% | | 1 |
| | 9 |
| | — |
| | 10 |
| | 37,660 |
| | 100.0% |
| 27. South Carolina | | 1,638 |
| | 73.3% | | 1 |
| | 17 |
| | 5 |
| | 23 |
| | 64,874 |
| | 91.3% |
| 28. Tennessee | | 1,111 |
| | 88.8% | | 1 |
| | 9 |
| | 5 |
| | 15 |
| | 37,495 |
| | 100.0% |
| 29. Texas | | 2,266 |
| | 83.0% | | — |
| | 9 |
| | 4 |
| | 13 |
| | 103,759 |
| | 86.4% |
| 30. Virginia | | 1,092 |
| | 87.0% | | — |
| | 11 |
| | 1 |
| | 12 |
| | 42,912 |
| | 99.4% |
| 31. Wisconsin | | 1,288 |
| | 80.7% | | 1 |
| | 7 |
| | 3 |
| | 11 |
| | 57,271 |
| | 62.1% |
| 32. Wyoming | | 189 |
| | 75.6% | | — |
| | 2 |
| | — |
| | 2 |
| | 13,284 |
| | 27.2% |
| Totals: | | 31,285 |
| | 83.6% | | 20 |
| | 170 |
| | 78 |
| | 268 |
| | $ | 1,459,168 |
| | 84.6% |
(1) Includes owned, leased and managed communities.
(2) Effective as of January 1, 2020, following the completion of the Restructuring Transactions, our then existing leases for 166 of these leased senior living communities were terminated andthat we began managing these communities and the pre-existingown or manage for DHC, managed communities under the New Management Agreements.
(3) Data does not include revenue earned in the state of Iowa of $12,204,that are operated by Five Star, as well as the Iowa communities were disposedinpatient and outpatient rehabilitation clinics that Ageility operates, by state as of duringand for the year ended December 31, 2019. The percentage2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Senior Living Communities | | Ageility Clinics | | |
| State | | Total Living Units | | Average Occupancy | | Owned | | Managed | | Total | | Inpatient | | Outpatient | | Total | | Revenues (1)(2)(3) |
| Alabama | | 461 | | | 71.3% | | 2 | | | 3 | | | 5 | | | — | | — | | — | | $ | 18,732 | |
| Arizona | | 881 | | | 71.5% | | — | | | 5 | | | 5 | | | — | | 12 | | 12 | | 37,725 | |
| Arkansas | | — | | | 65.2% | | — | | | — | | | — | | | — | | — | | — | | 4,067 | |
| California | | 504 | | | 74.9% | | — | | | 3 | | | 3 | | | — | | 1 | | 1 | | 36,945 | |
| Colorado | | 239 | | | 61.1% | | — | | | 1 | | | 1 | | | 5 | | 1 | | 6 | | 40,374 | |
| Delaware | | 395 | | | 58.7% | | — | | | 3 | | | 3 | | | 2 | | 5 | | 7 | | 42,539 | |
| Florida | | 4,196 | | | 77.8% | | 1 | | | 18 | | | 19 | | | — | | 30 | | 30 | | 166,469 | |
| Georgia | | 601 | | | 64.8% | | — | | | 4 | | | 4 | | | — | | 11 | | 11 | | 34,947 | |
| Illinois | | 483 | | | 73.2% | | — | | | 3 | | | 3 | | | — | | 6 | | 6 | | 28,987 | |
| Indiana | | 1,534 | | | 67.4% | | 5 | | | 11 | | | 16 | | | — | | 6 | | 6 | | 46,807 | |
| Kansas | | 399 | | | 73.0% | | — | | | 3 | | | 3 | | | — | | 3 | | 3 | | 18,284 | |
| Kentucky | | 364 | | | 77.6% | | — | | | 2 | | | 2 | | | 1 | | 3 | | 4 | | 30,829 | |
| Maryland | | 1,097 | | | 65.2% | | — | | | 8 | | | 8 | | | — | | 9 | | 9 | | 58,643 | |
| Massachusetts | | 123 | | | 77.6% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 8,451 | |
| Minnesota | | 188 | | | 43.1% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 6,082 | |
| | | | | | | | | | | | | | | | | | |
| Missouri | | 199 | | | 77.6% | | 1 | | | 1 | | | 2 | | | — | | 3 | | 3 | | 10,413 | |
| Nebraska | | — | | | 44.5% | | — | | | — | | | — | | | — | | — | | — | | 1,184 | |
| Nevada | | 287 | | | 89.6% | | — | | | 2 | | | 2 | | | — | | 2 | | 2 | | 14,060 | |
| New Jersey | | 870 | | | 66.1% | | 2 | | | 3 | | | 5 | | | — | | 7 | | 7 | | 37,363 | |
| New Mexico | | 147 | | | 79.4% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 7,838 | |
| New York | | 310 | | | 68.4% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 16,097 | |
| North Carolina | | 1,730 | | | 67.2% | | 5 | | | 13 | | | 18 | | | — | | 33 | | 33 | | 78,370 | |
| Ohio | | 258 | | | 62.2% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 10,780 | |
| Oregon | | 318 | | | 55.9% | | — | | | 1 | | | 1 | | | — | | 1 | | 1 | | 7,459 | |
| Pennsylvania | | 623 | | | 57.1% | | 1 | | | 5 | | | 6 | | | — | | 7 | | 7 | | 23,272 | |
| South Carolina | | 339 | | | 68.0% | | 1 | | | 2 | | | 3 | | | 1 | | 8 | | 9 | | 38,049 | |
| Tennessee | | 592 | | | 77.2% | | 1 | | | 5 | | | 6 | | | — | | 8 | | 8 | | 29,419 | |
| Texas | | 1,821 | | | 74.6% | | — | | | 12 | | | 12 | | | 1 | | 22 | | 23 | | 84,245 | |
| Virginia | | 695 | | | 80.2% | | — | | | 6 | | | 6 | | | — | | 12 | | 12 | | 37,126 | |
| Wyoming | | — | | | 59.0% | | — | | | — | | | — | | | — | | — | | — | | 7,585 | |
| Washington | | — | | | —% | | — | | | — | | | — | | | — | | 7 | | 7 | | 955 | |
| Wisconsin | | 451 | | | 75.3% | | 1 | | | 2 | | | 3 | | | — | | 3 | | 3 | | 24,535 | |
| Totals | | 20,105 | | | 70.9% | | 20 | | | 121 | | | 141 | | | 10 | | | 205 | | | 215 | | | $ | 1,008,631 | |
(1) Represents financial data of revenues from private resources for the state of Iowa was 28.3%.
(4) Data includes $4.2 million of Deferred Resident Feesrehabilitation clinics we operate and Deposits related to senior living communities we previously leased from DHC that were recognizedown as revenue in December 2019,well as a resultmanage for DHC. Managed senior living communities' data does not represent our financial results, but rather the operating results of the completioncommunities, and is included to provide supplemental information regarding the operating results and financial condition of the Restructuring Transactions,senior living communities from which we earn residential management fees.
(2) Includes home health revenue of $1,096 for the year ended December 31, 2021.
(3) Data excludes $7,795 of income received under the Provider Relief Fund of the CARES Act and excludes $47.3 million of revenue earned from Ageility physical therapyother government grants, related to our independent and assisted living communities and rehabilitation clinics.
Our Leases and Management Agreements with DHC
As of December 31, 2019, we had five master leases with DHC, and managed senior living communities for the account of DHC pursuant to long-term management and pooling agreements. Effective January 1, 2020, we and DHC completed the Restructuring Transactionscertain 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 with DHC for the senior living communities that we managed for DHC, were terminated and replaced with the New Management Agreements.new management agreements.
Pursuant to the New Management Agreements,management agreements, we will receivereceived 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 received a fee equal to 3% of construction costs for construction projects we managed at the senior living communities as well aswe managed for DHC. Commencing with the 2021 calendar year, we may receive an annual incentive fee equal to either 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or 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 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 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 Agreementsmanagement agreements were to expire in 2034, subject to our right to extend them for two consecutive five-year terms if we achieveachieved certain performance targets for the combined managed senior living communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements also provide that DHC has, and in some cases we have, the option to terminate themanagement agreements 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 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.
The New Management Agreements also provideprovided DHC with the right to terminate the New Management Agreementany management agreement for any 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 DHC’s applicable subsidiaries, we have guaranteed the payment and performance of each of our applicable subsidiary’s obligations under the applicable Newmanagement agreements.
2021 Amendments to our Management Agreements.Arrangements with DHC. As part of the implementation of the Strategic Plan, on June 9, 2021, we and DHC amended our management arrangements. See our "Business—Our History" in Part I, Item 1 of this Annual Report on Form 10-K and Notes 1, 10 and19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information on the Strategic Plan. The principal changes to the management arrangements include:
•We agreed to cooperate with DHC to transition the operations for 107 senior living communities owned by DHC with approximately 7,400 living units that we then managed to other third party managers and to close one senior living community with approximately 100 living units, without payment of any termination fee to us;
•DHC will no longer have the right to sell up to an additional $682 million of senior living communities managed by us and terminate our management of those communities without payment of a termination fee to us upon sale;
•DHC's ability to terminate the management agreement was revised: (i) to not commence until 2025; (ii) the maximum number of communities that may be terminated was reduced to 10% (from 20%) of the total managed portfolio by revenue per year; and (iii) to provide that achieving less than 80% (rather than 90%) of budgeted EBITDA will be required to qualify as a “Non-Performing Asset.” DHC will not be obligated to pay any termination fee to us if it exercises these termination rights;
•We will continue to manage for DHC 120 senior living communities we then managed for it;
•We closed the 27 skilled nursing units in CCRC communities that we will continue to manage with approximately 1,500 living units and are in the process of repositioning those units;
•the incentive fee that we may earn in any calendar year for the senior living communities that we will continue to manage for DHC will no longer be subject to a cap and that any senior living community that is undergoing a major renovation or repositioning will be excluded from the calculation of the incentive fee and the incentive fee calculation will be reset pursuant to the terms of the management agreements as a result of expected capital projects DHC is planning in the next five years;
•RMR LLC assumed oversight of major community renovation or repositioning activities at the senior living communities that we continue to manage for DHC; and
•the term of our existing management agreements with DHC was extended by two years to December 31, 2036.
We and DHC entered into an amended and restated master management agreement, or the Master Management Agreement, for thesenior living communities that we manage for DHC and interim management agreements for the senior living communities that we and DHC agreed to transition to new operators. These agreements replaced our prior management and omnibus agreements with DHC. In addition, we delivered to DHC a related amended and restated guaranty agreement pursuant to which we will continue to guarantee the payment and performance of each of our applicable subsidiary's obligations under the applicable management agreements.
During the year ended December 31, 2021, we transitioned the management of 107 senior living communities that we managed for DHC with approximately 7,400 living units to new operators. We closed one senior living community with approximately 100 living units that we manage for DHC in February 2022. During the year ended December 31, 2021, we closed all 1,532 SNF units within the 27 CCRC communities that we will reposition and continue to manage for DHC. For the years ended December 31, 2021 and 2020, we recognized $12.7 million and $23.4 million of residential management fees related to the management of these communities and units, respectively.
For more information regarding our historical leases and management arrangements with DHC, see Note 9Notes 1 and 10 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 DHC, see Note 1415 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Rehabilitation and Wellness
Our Ageility clinics operate within our senior living communities and lease approximately 40 clinics totaling 19,000 square feet located in 12 states.
Corporate Headquarters
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 extended the lease through December 31, 2031. On January 10, 2022, we further amended the lease to reduce the amount of space we lease to approximately 30,000 square feet and have adjusted the rent. A copy of the Third 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 14Notes 2 and 15 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 13 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., our wholly owned subsidiary, 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. For the years ended December 31, 2019 and 2018, we incurred costs related to this litigation of $0.5 million and $0.6 million, respectively.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 Matters and Issuer Purchases of Equity Securities
Our common shares are traded on Nasdaq (symbol: ALR, formerly FVE).
As of February 26, 2020,21, 2022, there were approximately 1,200 stockholders885 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, 2019:2021:
| | | 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 | 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 2019 | | 5,724 |
| | $ | 4.50 |
| | — |
| | $ | — |
| |
| December 2021 | | December 2021 | | 70,255 | | | $ | 3.01 | | | — | | | $ | — | |
| Total | | 5,724 |
| | $ | 4.50 |
| | — |
| | $ | — |
| Total | | 70,255 | | | $ | 3.01 | | | — | | | $ | — | |
| |
(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. |
Item 6. Selected Financial DataReserved
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following informationdiscussion should be read in conjunction with our Consolidated Financial Statementsthe consolidated financial statements and accompanying notes to the financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Strategic Plan
On April 9, 2021, we announced a new strategic plan, or the Strategic Plan. For more information on the Strategic Plan and the progress we have made in regards to the Reposition, Evolve and Diversify phases of the Strategic Plan during the year ended December 31, 2021, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 1, 10 and 19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Following the completion of the Reposition phase of the Strategic Plan, we continue to manage 120 senior living communities for DHC, representing 17,899 living units and approximately 73.2% of our residential management fees for the year ended December 31, 2021, and we continue to own 20 senior living communities with 2,100 living units.
Presented below is a summary of the units owned and managed by us as of December 31, 2021 following the completion of the Reposition phase of the Strategic Plan:
| | | | | | | | | | |
| | Total Units (1) | | |
| Independent living | | 10,423 | | |
| Assisted living | | 7,715 | | |
| Memory care | | 1,861 | | |
| | | | |
| Total | | 19,999 | | |
(1) The units operated as of December 31, 2021 include 20 Five Star senior living communities that are owned by us and 120 Five Star senior living communities managed by us for DHC and excludes 107 Five Star senior living communities with approximately 7,400 living units that we previously managed for DHC that were transitioned to new operators during the year ended December 31, 2021 and one senior living community with approximately 100 living units that was closed in February 2022.
Presented below is a summary of the communities, units, average occupancy, month end occupancy, revenues and residential management fees for the Five Star senior living communities we manage for DHC, as of and for the year ended December 31, 2021 after the completion of the Reposition phase of the Strategic Plan (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Year Ended December 31, 2021 |
| | Communities | | Units | | Average Occupancy | | Month End Occupancy | | Community Revenues (1) | | Management Fees (2)(3) |
Independent and assisted living communities(4) | | 120 | | 17,899 | | 73.3% | | 75.2% | | $ | 630,951 | | | $ | 34,778 | |
| Total | | 120 | | 17,899 | | 73.3% | | 75.2% | | $ | 630,951 | | | $ | 34,778 | |
| | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Represents the revenues of the Five Star senior living communities we managed for DHC. Managed senior living communities' revenues do not represent our revenues, and are included to provide supplemental information regarding the operating results of the Five Star senior living communities from which we earn residential management fees.
(2) Excludes residential management fees of $1,865, for the year ended December 31, 2021, for the 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 2021 and are to be repositioned.
(3) Excludes residential management fees of $10,828, for the year ended December 31, 2021, for the 107 senior living communities with approximately 7,400 living units that were transitioned to new operators during the year ended December 31, 2021, and one senior living community with approximately 100 living units that was closed in February 2022.
(4) Excludes one CCRC with approximately 100 living units that we closed in February 2022.
Presented below is a summary of the Ageility rehabilitation clinics we operated as of and for the year ended December 31, 2021 and the number of clinics to be operated after the implementation of the Reposition phase of the Strategic Plan (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the
Year Ended December 31, 2021 | | Retained |
| | Number of Clinics | | Total Revenue (3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin | | Number of Clinics | | Total Revenue (1)(3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin |
| Inpatient Clinics in Transitioned Communities | | 10 | | $ | 11,233 | | | $ | n/m | | 23.0% | | — | | $ | — | | | $ | — | | | —% |
| Outpatient Clinics in DHC Communities | | 91 | | 32,058 | | | 352 | | | 12.6% | | 91 | | 32,058 | | | 352 | | | 12.6% |
Outpatient Clinics in Transitioned Communities (2) | | 28 | | 7,213 | | | 258 | | | 15.4% | | 28 | | 5,497 | | | 196 | | | 18.9% |
| Total Clinics at DHC Communities | | 129 | | 50,504 | | | 392 | | | 15.3% | | 119 | | 37,555 | | | 316 | | | 13.5% |
| Outpatient Clinics at AlerisLife Owned Communities | | 15 | | 3,687 | | | 246 | | | 13.2% | | 15 | | 3,687 | | | 246 | | | 13.2% |
Outpatient Clinics at Other Communities (4) | | 71 | | 12,726 | | | 179 | | | 5.3% | | 71 | | 12,457 | | | 175 | | | 6.4% |
| Total Clinics | | 215 | | $ | 66,917 | | | $ | 311 | | | 13.3% | | 205 | | $ | 53,699 | | | $ | 262 | | | 11.8% |
n/m - not meaningful because the revenues include revenue earned from 37 inpatient clinics, but, at December 31, 2021, there were only ten inpatient clinics.
(1) Excludes revenue of $11,233 for the year ended December 31, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed throughout the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics which are expected to be closed commencing in August 2022 as part of the Strategic Plan. Excludes revenue of $1,717 for the year ended December 31, 2021 for 17 Ageility outpatient rehabilitation clinics that were closed in December 2021 in Five Star senior living communities that were transitioned in 2021 or closed in February 2022.
(2) As part of the Strategic Plan, 107 Five Star senior living communities managed for DHC were transitioned to new operators in 2021 and one senior living community was closed in February 2022. These transitioned communities had 45 Ageility outpatient rehabilitation clinics. As of December 31, 2021 we continue to operate 28 of these clinics. The remaining 17 clinics were closed in December 2021 in senior living communities that were transitioned to new operators in 2021 or closed in February 2022.
(3) Total Ageility revenue excludes home healthcare services, which are part of the lifestyle services segment.
(4) Other communities includes outpatient rehabilitation clinics at senior living communities not owned or managed by us.
We currently expect to continue to diversify revenue through growth of our lifestyle service offerings, including opening new outpatient rehabilitation clinics and expanding our fitness and other home-based service offerings within and outside of Five Star senior living communities. Fitness offerings started as an extension of Ageility's outpatient rehabilitation services and, while representing only 4.9% of segment revenues for the year ended December 31, 2021, fitness revenues increased to $3.3 million, or by 38.1% when compared to the same period in 2020 when it represented 2.9% of segment revenue. Since January 1, 2020, Ageility has opened 32 net new outpatient rehabilitation clinics, 17 of which were opened in 2020, and 15 of which were opened during the year ended December 31, 2021 (exclusive of the 17 outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were transitioned to new operators in 2021 or closed in February 2022).
General Industry Trends
We believe that, in the United States, the current primary market for senior living services to older adults is focused towardson individuals age 8075 and older, and that the fastest-growing age population is the over 85. Also, asolder. As a result of medical advances, older adults are living longer. longer and expanding their options as to where they choose to reside as they age. The aging of the Baby Boomers and their increasing life expectancy are leading to a fundamental demographic shift. The U.S. age profile shows a 17.8% rise in the 75+ demographic in the last ten years. This is expected to rise even more significantly by 2030 (as evidenced by the aging boomers in the 65-74 age category)(2).
Due to these demographic trends, we expect the demand for senior living services to increase in future years. However, in the last ten years, as the senior living industry evolvedservice providers are evolving to serve the growing number of older adults and we expect the demand for these services to increase in future years regardless of where the older adults may reside. Recently, the senior living industry has been materially adversely impacted by the novel coronavirus SARS-CoV-2, or COVID-19, and the resulting pandemic, or the Pandemic, and its economic impact. As we continuously evaluate market opportunities related to older adults, we are cognizant of the demographic trends and projections that indicate that the age 65 and older demographic will represent the largest growth population in the United States over the next decade and beyond. We believe that increased longevity, coupled with evolving consumer preferences, will heighten demand for physical and recreational activities, as well as lifestyle-enhancing services, as older adults seek quality of life, ongoing engagement and sustained independence.
COVID-19 Pandemic
The Pandemic has significantly disrupted and may continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. The World Health Organization declared COVID-19 a pandemic in March 2020. From March 2020 through February 18, 2022, there have been approximately 77.5 million reported cases of COVID-19 in the United States and approximately 0.9 million related deaths, which have disproportionately impacted older adults.
The U.S. economy has been growing as the Pandemic conditions have significantly improved in the United States from their low points. Commercial activities have been increasingly returning to pre-Pandemic practices and operations as a result and because of recent and expected future government spending on relief from the Pandemic, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the Pandemic on commercial activities, including risks that may arise from (i) mutations or related strains of the virus, that may develop from time to time, (ii) the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and (iii) the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens' ability to otherwise achieve immunity to the virus. For further information and risks relating to the Pandemic on us and our business, see Part I, Item 1, "Business—COVID Pandemic" and Part I, Item 1A, "Risk Factors", of this Annual Report on Form 10-K.
On September 10, 2021, the Biden Administration announced that the U.S. Department of Health and Human Services, or HHS, through the Health Resources and Services Administration, or HRSA, is making $25.5 billion in new funding available for health care providers affected by the COVID-19 pandemic. This funding includes $8.5 billion in American Rescue Plan, or ARP, resources for providers who serve rural Medicaid, Children's Health Insurance Program, or CHIP, or Medicare patients, and an additional $17.0 billion for Provider Relief Fund, or PRF, Phase 4 for a broad range of providers who can document revenue loss and expenses associated with the Pandemic.
Vaccinations. On December 11, 2020 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 subsequently prioritized all categories of older adults, which included our independent living facilities. In order to protect the health and safety of our residents, team members and clients, we coordinated multiple vaccination clinics throughout 2021 for our residents and team members in all service lines of business at no cost to those individuals. 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 and decrease our costs for PPE and COVID-19 testing.
(2) Source: Bureau of labor statistics, 2021.
The Centers for Medicare & Medicaid Services, or CMS, is taking action to require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action builds on the vaccination requirement for nursing facilities previously announced by CMS on September 9, 2021, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care. These requirements will apply to approximately 50,000 providers and cover a majority of health care workers across the country. Some facilities and states have begun to adopt hospital staff or health care sector vaccination mandates. This action will create a consistent standard across the country, while giving patients assurance of the vaccination status of those delivering care.
As previously announced, all team members who work in or visit our communities or Ageility clinics as part of their responsibilities were required to be fully vaccinated against COVID-19 by September 1, 2021. As of September 30, 2021, we were in compliance with this requirement.
Protective Measures for Residents and Team Members. Our customers are part of a population that has been disproportionately affected by the Pandemic. Our team members who work in our communities and/or clinics 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, including boosters, 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 also facing challenges fromdetermined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and our internal criteria;
•reopened our rehabilitation 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, 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 recovery from an economic recession, suchcross-functional team to implement proactive protection for residents in our senior living communities and clients in our rehabilitation clinics as workforce shortageswell as team members;
•provided additional and low retention, occupancy pressures, challengesenhanced 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 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;
•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 technologyvirtual 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 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.
Occupancy. As a result of the Pandemic, we experienced declines in average occupancy at our owned and leased senior living communities from 76.4% for the year ended December 31, 2020 to 69.5% for the year ended December 31, 2021. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities we manage on behalf of DHC also experienced average occupancy declines from 77.2% for the year ended December 31, 2020 to 71.0% for the year ended December 31, 2021. At February 18, 2022, all of our senior living communities were accepting new residents in all service lines of business (independent living, assisted living or memory care). We expect that the impact of the widespread administration of vaccinations for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and, as of February 18, 2022 there were less than 75 confirmed cases among our over 15,700 residents. With the reduction of confirmed cases, we have been able to significantly reduce and in some cases eliminate restrictions at our senior living communities, which has enabled us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing effects of the Pandemic, there is a possibility of continued or increased occupancy declines in the near term, due to possible surge of COVID variant viruses, current residents leaving our senior living communities, restrictions on new residents moving into and/or touring our senior living communities and the increasing desire for exceptional customer experience.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.
FutureExpenses. We have also incurred and may 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. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic and by team members pursuing elective procedures they deferred or were not able to obtain during 2020 during the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, we expect the increased costs associated with the Pandemic to continue for the reasonably foreseeable future. We incur these costs for our owned 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 operating results and on the operating results for those communities we manage for DHC as a result of the Pandemic and we expect those negative impacts to continue for the reasonably foreseeable future. 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 of the Pandemic on our operating results and the operating results for those communities we manage for DHC. Despite the approval and increasing availability of several 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 consumer confidence and the demand for our communities and services.
Additionally, we expect that 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 older 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. However, any appreciation in U.S. housing values may not result in increased demand for our services. Although many of the services that we provide to residents are needs driven, economic circumstances, among other reasons, are key factors when making decisions as to whether to relocate to a senior living community.
Senior Living Development. For the past few years prior to the Pandemic, increased access to capital and continued low interestlow-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 increase in new senior living community inventory entering the market in recent years, despite a slowdown of construction of new communities the senior living industry is starting to see. The new senior living community inventory 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 may further impact new development, we expect these challengesthat new inventory will enter the market in the near term due to the increased development of senior living communities in the past several years. That increase will continue to have a competitive effect on our business for at least the next few years. We expect to have continuingyears; these challenges to maintain or increase occupanciesmay be intensified as a result of the Pandemic and charges at ourits impact on the senior living communities at least throughcommunity industry.
Labor Market. In connection with the end of 2020.
In addition, low unemployment in the United States combined with a competitive labor market and, in certain jurisdictions, legislation and regulations that increase the minimum wage, are increasing our employment costs, including salaries, wages and benefits, such as health care benefit coverage, for our employees, which will increase our operating expenses and may negatively impact our financial results. We havePandemic, 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 rehabilitation clinics, increased use of temporary staffing and increased health insurance and workers' compensation costs. In addition, we increased the rates paid to community based team members during 2021 in order to be competitive with the increasing rates in the market for these front line team members. We also increased staffing needs at the communities we operated, for which we continue to use temporary staffing through our arrangements with staffing agencies to accommodate staffing shortages due to a tight labor market conditions.in addition to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19. The market for skilled front line workers within and outside of the senior living industry continues to be very competitive, and the current demand for those workers remains strong.
2021 Operations
We primarily earn revenue by providing housing and services to residents of Five Star's senior living communities that we own or lease, in addition to managing senior living communities for DHC, and by providing our residents, clients and others, with lifestyle services inclusive of rehabilitation clinics at our senior living communities, as well as at outpatient rehabilitation clinics located separately from our senior living communities. Effective January 1, 2020, pursuant to the restructuring of our business arrangements with DHC, 166 of our formerly leased senior living communities from DHC were converted to managed communities. In response,2021, as part of the Strategic Plan, we have increased our investments in our workforcetransitioned 107 senior living communities that we previously managed for DHC to new operators and we are continuing to focus on reducing our employee turnover by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits.
Theclosed one senior living community in February 2022. For further information on the Strategic Plan, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K and healthNotes 1, 10 and wellness industries are subject to extensive and 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, 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 1219 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" included in Part I, Item 1, and "—Concentration of Risk - Revenues" included in Part II, Item 7, of this Annual Report on Form 10-K.
Recent trends would suggest that consumer preferences of older adults are focused on evaluating senior living communities that offer service platforms to their residents 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. The impact of this wider range of options for consumers is causing further demand on the industry to provide innovative methods on services that provide for an exceptional customer experience.
2019 Operations
We primarily earn our senior living revenues by providing housing and services to residents of our senior living communities. During 2019, approximately 21.5% of our senior living revenues came from the Medicare and Medicaid programs and approximately 78.5% of our senior living revenues came from residents’ private resources. We bill all private pay residents in advance for the housing and services to be provided in the following month.
Our expenses primarily were:
senior living•residential wages and benefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for our employeesteam members working at our owned senior living communities;
•other senior livingresidential operating expenses, including utilities, housekeeping, dietary, maintenance, insurance and community levelcommunity-level administrative costs at our owned senior living communities;
•lifestyle services expenses, including wages and wage-related expenses, such as health insurance and other benefits for our team members working at our rehabilitation clinics, as well as other operating expenses such as insurance, supplies and other administrative costs;
•costs incurred on behalf of managed senior 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 DHC, which are reimbursed to us by DHC, including from revenues we receive from the applicable managed communities, pursuant to our management agreements with DHC;
rent expense attributable to the 166 senior living communities we leased from DHC and four senior living communities from PEAK. Effective January 1, 2020, all our then existing leases with DHC were terminated and we entered into the New Management Agreements.DHC. 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 910 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
•general and administrative expenses, principally comprised of wages and wage-related expenses for headquarters and divisional and regional staff as well as investments in technology used in supporting our residential and lifestyle services business lines and professional service fees and other administrative costs;
•rent expense attributable to the four senior living community operationscommunities we leased from PEAK through September 30, 2021. For more information about our lease arrangements with PEAK, see “Properties—Our Leases and ancillary business lines;Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 11 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
•depreciation and amortization 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. As a result of theour finance lease right-of-use assets; and
completion of the Restructuring Transactions, we do not expect that depreciation and amortization expense will continue to be a material expense for us in at least the near-to-intermediate term; and
•interest and other expense, primarily including interest on outstanding debt and amortization of deferred financing costs.
As
ExpansionActivities
During 2021 and 2020, we opened 15 and 17 net new outpatient rehabilitation clinics, respectively, exclusive of the closure of 17 outpatient rehabilitation clinics in December 31, 2019, we had two operating segments:2021 in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022.
We currently expect that our expansion activities will be focused on entering into additional long-term management agreements for senior living communities and rehabilitation and wellness. Ingrowing lifestyle services, 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
During 2021 and 2020, we received gross proceeds of $4.9 million and $10.4 million, respectively, in connection with the sale of equity and debt investments through our offshore captive insurance company, and recorded net realized gains of $0.2 million and $0.4 million, respectively.
During 2021 and 2020, we purchased certain debt and equity investments through our offshore captive insurance company for $3.2 million and $5.8 million, respectively.
2020 Restructuring of our Business Arrangements with DHC
Effective as of January 1, 2020 we restructured our business arrangements with DHC.
For more information regarding the restructuring transactions, our management agreements and other transactions with DHC, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K, Notes 1, 10 and 15 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Credit Facilities
We had a $65.0 million Credit Facility with a syndicate of lenders that was available for us to use for general business purposes, of which $10.8 million was available for borrowing as of December 31, 2021.
On January 27, 2022, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. Upon entering into the Loan, our Credit Facility was terminated. For more information about the Loan, see “Business—Financing Sources” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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 2021, as part of the Strategic Plan, we transitioned the management of 107 senior living communities that we previously managed for DHC to new operators. In addition, we closed one senior living community in February 2022. For the years ended December 31, 2021 and 2020, we recognized $10.8 million and $17.4 million, respectively, of residential management fees for these transitioned or closed communities.
In connection with the Strategic Plan, we closed 27 of the 37 inpatient rehabilitation clinics. An additional ten inpatient rehabilitation clinics are expected to be closed commencing in August 2022 as part of the transition.
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. For the year ended December 31, 2020, we recognized $2.7 million of residential management fees related to the sold and closed communities.
During 2021 and 2020, we closed 22 and six outpatient rehabilitation clinics, respectively, primarily as a result of being located in senior living communities that we managed on behalf of DHC that were transitioned to a new operator, sold or closed.
Results of Operations
We operate in two reportable segments: (1) residential (formerly known as senior living) and (2) lifestyle services (formerly known as rehabilitation and wellness services). In the residential segment, we operate for our own account or manage for the account of others and operate, respectively, primarily independent living communities and assisted living communities CCRCs and SNFsan active adult community that are subject to centralized oversight and provide housing and services to older adults through centralized oversight.adults. Included in the results of the assisted living communities are memory care living units. In the rehabilitation and wellness operatinglifestyle services segment, we provide therapya comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in the inpatient settingand outpatient clinics as well as through outpatient clinics. We determinedhome health and fitness services.
For the year ended December 31, 2021, we recognized $12.7 million of residential management fees related to the senior living communities and units that our two operating segments meetwe previously managed for DHC, which have been transitioned to other operators or were closed pursuant to the aggregation criteria as prescribed underStrategic Plan. For the Financial Accounting Standards Board Accounting Standards CodificationTM Topic 280, Segment Reporting,year ended December 31, 2021, we recognized lifestyle services revenue of $11.2 million related to the inpatient rehabilitation clinics that have been or will be closed pursuant to the Strategic Plan. The information in the Key Statistical Data table below includes those communities, units and we have therefore determined that our business is comprised of one reportable segment, senior living. clinics in the results reported.
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, DHC acquired an additional living unit at a senior living community located in Florida that we then leased from DHC, which was added to the lease for that senior living community, our annual rent payable to DHC increased by $14,000.
Also in June 2018, we began managing for the account of DHC a senior living community DHC owns located in California with 98 living units.
In November 2018, we began managing for the account of DHC a senior living community DHC owns located in Colorado with 238 living units.
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 169 units.
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 senior living communities, although we may from time to time acquire additional senior living communities.
Investment Activities
Historically, when we made capital improvements to the senior living communities that we leased from DHC we 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. In the following month, adjustments were made based on the actual amounts incurred in the prior month. Similar arrangements will continue following December 31, 2019, in accordance with the New Management Agreements. As of December 31, 2019, due to related persons on our consolidated balance sheets included $1.8 million due to DHC. On January 1, 2020, in accordance with the Transaction Agreement, we 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.
During 2019 and 2018, we received gross proceeds of $5.2 million and $9.4 million, respectively, in connection with the sale of equity and debt investments, and recorded net realized gains of $0.2 million and $0.1 million, respectively.
During 2019 and 2018, we purchased certain debt and equity investments for $3.0 million and $5.3 million, respectively.
Transaction Agreement with DHC and Credit Facilities
As previously discussed, 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 the Conversion Time:
our five then existing master leases with DHC for all of DHC's senior living communities that we then leased, as well as our then existing management and pooling agreements with DHC for DHC’s senior living communities that were then managed by us, 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 of additional consideration by assuming certain of our working capital liabilities.
In connection with the Transaction Agreement, we entered into the DHC credit facility, which was secured by six senior living communities we own. The DHC credit facility matured and was terminated in connection with the completion of the Restructuring Transactions. There were no amounts outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term.
On June 12, 2019, we entered into a second amended and restated credit agreement with Citibank, N.A., as administrative agent and lender, and a syndicate of other lenders, pursuant to which we obtained a $65.0 million secured revolving credit facility that is available for general business purposes. Our credit facility replaced our prior credit facility, which was scheduled to expire on June 28, 2019. In June 2019, we repaid, in aggregate, approximately $51.5 million of outstanding borrowings under our credit facility.
For more information regarding our credit agreement, our credit facility, our prior credit facility and the DHC credit facility, see Note 8 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For more information regarding our leases and management arrangements with DHC, see Notes 9 and 11 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
DispositionActivities
During the first quarter of 2018, we sold to DHC two senior living communities pursuant to a transaction agreement we entered with DHC in November 2017, or the 2017 transaction agreement. In June 2018, we sold to DHC the remaining two senior living communities that we agreed to sell pursuant to the 2017 transaction agreement. Concurrent with our sales of the senior living communities to DHC pursuant to the 2017 transaction agreement, we began managing those senior living communities for DHC’s account.
In June 2018, we and DHC sold to a third party a SNF, that DHC owned and leased to us, located in California with 97 living units, for a sales price of approximately $6.5 million, excluding closing costs. Pursuant to the terms of our then existing lease with DHC, and as a result of this sale, our annual rent payable to DHC decreased by 10.0% of the net proceeds that DHC received from this sale.
In May and September of 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.
Results of Operations
Key Statistical Data For the Years Ended December 31, 20192021 and 2018.
For
The following tables present a summary of our operations for the years ended December 31, 2021 and 2020(dollars and visits in thousands, except RevPAR and RevPOR): | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Increase/(Decrease) | |
| | 2021 (1) | | 2020 (1) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Lifestyle services | | $ | 68,014 | | | $ | 82,032 | | | $ | (14,018) | | | (17.1) | % | |
| Residential | | 64,638 | | | 77,015 | | | (12,377) | | | (16.1) | % | |
| Residential management fees | | 47,479 | | | 62,880 | | | (15,401) | | | (24.5) | % | |
| Total management and operating revenues | | 180,131 | | | 221,927 | | | (41,796) | | | (18.8) | % | |
| Reimbursed community-level costs incurred on behalf of managed communities | | 722,857 | | | 916,167 | | | (193,310) | | | (21.1) | % | |
| Other reimbursed expenses | | 31,605 | | | 25,648 | | | 5,957 | | | 23.2 | % | |
| Total revenues | | 934,593 | | | 1,163,742 | | | (229,149) | | | (19.7) | % | |
| | | | | | | | | |
| Other operating income | | 7,795 | | | 3,435 | | | 4,360 | | | n/m | |
| | | | | | | | | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Lifestyle services expenses | | 59,322 | | | 66,853 | | | (7,531) | | | (11.3) | % | |
| Residential wages and benefits | | 38,970 | | | 41,819 | | | (2,849) | | | (6.8) | % | |
| Other residential operating expenses | | 30,311 | | | 28,116 | | | 2,195 | | | 7.8 | % | |
| Community-level costs incurred on behalf of managed communities | | 722,857 | | | 916,167 | | | (193,310) | | | (21.1) | % | |
| General and administrative | | 85,718 | | | 85,835 | | | (117) | | | (0.1) | % | |
| Restructuring expenses | | 19,196 | | | 1,448 | | | 17,748 | | | n/m | |
| Depreciation and amortization | | 11,873 | | | 10,997 | | | 876 | | | 8.0 | % | |
| Total operating expenses | | 968,247 | | | 1,151,235 | | | (182,988) | | | (15.9) | % | |
| | | | | | | | | |
| Operating (loss) income | | (25,859) | | | 15,942 | | | (41,801) | | | n/m | |
| | | | | | | | | |
| Interest, dividend and other income | | 358 | | | 757 | | | (399) | | | (52.7) | % | |
| Interest and other expense | | (1,683) | | | (1,631) | | | (52) | | | 3.2 | % | |
| Unrealized gain on equity investments | | 730 | | | 480 | | | 250 | | | 52.1 | % | |
| Realized gain on sale of debt and equity investments | | 218 | | | 425 | | | (207) | | | (48.7) | % | |
| Loss on termination of leases | | (3,278) | | | (22,899) | | | 19,621 | | | (85.7) | % | |
| Loss before income taxes and equity in losses of an investee | | (29,514) | | | (6,926) | | | (22,588) | | | n/m | |
| Provision for income taxes | | (234) | | | (663) | | | 429 | | | (64.7) | % | |
| Equity in losses of an investee | | (177) | | | — | | | (177) | | | 100.0 | % | |
| Net loss | | $ | (29,925) | | | $ | (7,589) | | | $ | (22,336) | | | n/m | |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
| Number of communities (end of period) | | 20 | | | 24 | | | (4) | | | (16.7) | % | |
| Number of living units (end of period) | | 2,100 | | | 2,302 | | | (202) | | | (8.8) | % | |
| Month end occupancy at December 31, | | 72.7 | % | | 69.7 | % | | 300 bps | | 4.3 | % | |
| Average occupancy | | 69.5 | % | | 76.4 | % | | (690) bps | | (9.0) | % | |
RevPAR (2) | | $ | 2,440 | | | $ | 2,751 | | | $ | (311) | | | (11.3) | % | |
RevPOR (3) | | $ | 3,433 | | | $ | 3,541 | | | $ | (108) | | | (3.0) | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 121 | | | 228 | | | (107) | | | (46.9) | % | |
| Number of living units (end of period) | | 18,005 | | | 26,969 | | | (8,964) | | | (33.2) | % | |
| Month end occupancy at December 31, | | 74.8 | % | | 70.8 | % | | 400 bps | | 5.6 | % | |
| Average occupancy | | 71.0 | % | | 77.2 | % | | (620) bps | | (8.0) | % | |
RevPAR (2) | | $ | 3,108 | | | $ | 3,546 | | | $ | (438) | | | (12.4) | % | |
RevPOR (3) | | $ | 4,283 | | | $ | 4,515 | | | $ | (232) | | | (5.1) | % | |
| | | | | | | | | |
| Lifestyle services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 272 | | | $ | 266 | | | $ | 6 | | | 2.3 | % | |
| Number of visits at outpatient clinics | | 600 | | | 582 | | | 18 | | | 3.1 | % | |
| Number of inpatient clinics (end of period) | | 10 | | | 37 | | | (27) | | | (73.0) | % | |
| Number of outpatient clinics (end of period) | | 205 | | | 207 | | | (2) | | | (1.0) | % | |
| Total clinics | | 215 | | | 244 | | | (29) | | | (11.9) | % | |
n/m - not meaningful
(1) The summary of operations includes (i) 107 senior living communities managed for DHC with approximately 7,400 units that were transitioned to new operators during the year ended December 31, 2019, compared to2021 and one senior living community with approximately 100 units that we manage for DHC that was closed in February 2022, (ii) 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 20182021 and are in the process of being repositioned that we will continue to manage for DHC, (iii) 27 Ageility inpatient rehabilitation clinics that were closed during the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed commencing in August 2022 as part of the Strategic Plan and (iv) 17 Ageility outpatient rehabilitation clinics, that were closed in December 2021 in senior livings communities that were transitioned to a new operator in 2021 or closed in February 2022. In addition, the summary of operations includes four leased communities with approximately 200 living units where the lease was terminated on September 30, 2021.
(2) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) (dollarsRevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
Comparable Communities and Clinics
Comparable communities and clinics (senior living communities and rehabilitation clinics that we have continually operated or managed since January 1, 2020, excluding those communities, units and clinics that have been transitioned to new operators or have been closed per the Strategic Plan as well as all four former leased communities, the lease for which was terminated on September 30, 2021) (dollars in thousands, except average monthly rate)RevPOR and RevPAR):
:
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) |
| | | 2019 | | 2018 | | Amount | | Percent |
| Revenues: | | | | | | | | |
| Senior living | | $ | 1,085,183 |
| | $ | 1,094,404 |
| | $ | (9,221 | ) | | (0.8 | )% |
| Management fees | | 16,169 |
| | 15,145 |
| | 1,024 |
| | 6.8 | % |
| Reimbursed costs incurred on behalf of managed communities | | 313,792 |
| | 280,845 |
| | 32,947 |
| | 11.7 | % |
| Total revenue | | 1,415,144 |
| | 1,390,394 |
| | 24,750 |
| | 1.8 | % |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Senior living wages and benefits | | 573,593 |
| | 563,263 |
| | 10,330 |
| | 1.8 | % |
| Other senior living operating expenses | | 297,885 |
| | 301,239 |
| | (3,354 | ) | | (1.1 | )% |
| Costs incurred on behalf of managed communities | | 313,792 |
| | 280,845 |
| | 32,947 |
| | 11.7 | % |
| Rent expense | | 141,486 |
| | 209,150 |
| | (67,664 | ) | | (32.4 | )% |
| General and administrative expenses | | 87,884 |
| | 78,189 |
| | 9,695 |
| | 12.4 | % |
| Depreciation and amortization expense | | 16,640 |
| | 35,939 |
| | (19,299 | ) | | (53.7 | )% |
| Loss (gain) on sale of senior living communities | | 856 |
| | (7,131 | ) | | 7,987 |
| | (112.0 | )% |
| Long-lived asset impairment | | 3,282 |
| | 461 |
| | 2,821 |
| | 611.9 | % |
| Total operating expenses | | 1,435,418 |
| | 1,461,955 |
| | (26,537 | ) | | (1.8 | )% |
| | | | | | | | | |
| Operating loss | | (20,274 | ) | | (71,561 | ) | | 51,287 |
| | (71.7 | )% |
| | | | | | | | | |
| Interest, dividend and other income | | 1,364 |
| | 818 |
| | 546 |
| | 66.7 | % |
| Interest and other expense | | (2,615 | ) | | (3,018 | ) | | 403 |
| | (13.4 | )% |
| Unrealized gain (loss) on equity investments | | 782 |
| | (690 | ) | | 1,472 |
| | (213.3 | )% |
| Realized gain on sale of debt and equity investments, net of tax | | 229 |
| | 99 |
| | 130 |
| | 131.3 | % |
| | | | | | | | | |
| Loss before income taxes and equity in earnings of an investee | | (20,514 | ) | | (74,352 | ) | | 53,838 |
| | (72.4 | )% |
| Provision for income taxes | | (56 | ) | | (247 | ) | | 191 |
| | (77.3 | )% |
| Equity in earnings of an investee | | 575 |
| | 516 |
| | 59 |
| | 11.4 | % |
| Net loss | | $ | (19,995 | ) | | $ | (74,083 | ) | | $ | 54,088 |
| | (73.0 | )% |
| | | | | | | | | |
| Total number of communities (end of period): | | | | | | | | |
Owned and leased communities (1) | | 190 |
| | 208 |
| | (18 | ) | | (8.7 | )% |
| Managed communities | | 78 |
| | 76 |
| | 2 |
| | 2.6 | % |
| Number of total communities | | 268 |
| | 284 |
| | (16 | ) | | (5.6 | )% |
| | | | | | | | | |
| Total number of living units (end of period): | | | | | | | | |
Owned and leased living units (1) (2) | | 20,948 |
| | 22,250 |
| | (1,302 | ) | | (5.9 | )% |
| Managed living units | | 10,337 |
| | 9,766 |
| | 571 |
| | 5.8 | % |
| Number of total living units | | 31,285 |
| | 32,016 |
| | (731 | ) | | (2.3 | )% |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | |
Occupancy % (1) (2) (3) | | 82.9 | % | | 82.0 | % | | 90 | bps | | n/a |
|
Average monthly rate (2) (3) | | $ | 4,708 |
| | $ | 4,729 |
| | $ | (21 | ) | | (0.4 | )% |
| Percent of senior living revenue from Medicaid | | 11.3 | % | | 12.4 | % | | (110 | ) bps | | n/a |
|
| Percent of senior living revenue from Medicare | | 10.2 | % | | 10.9 | % | | (70 | ) bps | | n/a |
|
| Percent of senior living revenue from private and other sources | | 78.5 | % | | 76.7 | % | | 180 | bps | | n/a |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) | |
| | 2021 (4) | | 2020 (4) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Lifestyle services | | $ | 49,485 | | | $ | 50,001 | | | $ | (516) | | | (1.0) | % | |
| Residential | | 59,720 | | | 67,656 | | | (7,936) | | | (11.7) | % | |
| Residential management fees | | 34,778 | | | 36,815 | | | (2,037) | | | (5.5) | % | |
| Other operating income | | 6,980 | | | 2,348 | | | 4,632 | | | n/m | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Lifestyle services expenses | | 43,566 | | | 43,965 | | | (399) | | | (0.9) | % | |
| Residential wages and benefits | | 36,293 | | | 38,258 | | | (1,965) | | | (5.1) | % | |
| Other residential operating expenses | | 25,064 | | | 22,621 | | | 2,443 | | | 10.8 | % | |
| | | | | | | | | |
| Owned communities: | | | | | | | | | |
| Number of communities (end of period) | | 20 | | | 20 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 2,100 | | | 2,098 | | | 2 | | | 0.1 | % | |
| Month end occupancy at December 31, | | 72.7 | % | | 70.2 | % | | 250 bps | | 3.6 | % | |
| Average occupancy | | 69.9 | % | | 76.7 | % | | (680) bps | | (8.9) | % | |
RevPAR (2) | | $ | 2,390 | | | $ | 2,676 | | | $ | (286) | | | (10.7) | % | |
RevPOR (3) | | $ | 3,344 | | | $ | 3,434 | | | $ | (90) | | | (2.6) | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 120 | | | 120 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 17,899 | | | 17,910 | | | (11) | | | (0.1) | % | |
| Month end occupancy at December 31, | | 75.2 | % | | 74.2 | % | | 100 bps | | 1.3 | % | |
| Average occupancy | | 73.3 | % | | 80.7 | % | | (740) bps | | (9.2) | % | |
RevPAR (2) | | $ | 2,961 | | | $ | 3,248 | | | $ | (287) | | | (8.8) | % | |
RevPOR (3) | | $ | 3,954 | | | $ | 3,961 | | | $ | (7) | | | (0.2) | % | |
| | | | | | | | | |
| Lifestyle services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 293 | | | $ | 295 | | | $ | (2) | | | (0.7) | % | |
| Number of visits at outpatient clinics | | 525 | | | 517 | | | 8 | | | 1.5 | % | |
| Number of inpatient clinics (end of period) | | — | | | — | | | — | | | — | % | |
| Number of outpatient clinics (end of period) | | 165 | | | 165 | | | — | | | — | % | |
| Total clinics | | 165 | | | 165 | | | — | | | — | % | |
(1) Effective as of January 1, 2020, following the completion of the Restructuring Transactions, our then existing leases for 166 of these leased senior living communities (18,636 living units) were terminated and we began managing these communities under the New Management Agreements.n/m - not meaningful
(2)(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) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) Occupancy RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and average monthly rate2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(4) The years ended December 31, 2021 and 2020 include data for 20 owned senior living communities, 120 managed senior living communities and 165 outpatient rehabilitation clinics that we have continuously owned or managed since January 1, 2020. Per the Strategic Plan the summary of operations for comparable communities and clinics excludes (i) 107 senior living communities managed for DHC with approximately 7,400 units that were transitioned to new operators in the year ended December 31, 2018, include data2021 and one senior living community managed for DHC with approximately 100 units that was closed during February of 2022, (ii) 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 2021 and are in the process of being repositioned that we will continue to manage for DHC, (iii) 27 Ageility inpatient rehabilitation clinics that were closed during the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed commencing in August 2022 as part of the Strategic Plan and (iv) 17 Ageility outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were soldtransitioned to DHC during such period as owned untila new operator in 2021 or closed in February 2022. In addition, the time of sale and as managed from the time of sale through the end of such period. Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues for senior living services divided by occupied units during the period, and multiplying it by 30 days. The calculation of the December 31, 2019, average monthly ratescomparable communities also excludes $4.2 million of Deferred Resident Fees and Deposits, related to senior livingall four leased communities we previously leased from DHC that were recognized as revenue in December 2019, as a result of the completion of the Restructuring Transactions.
Comparable Communities
The following table presents a summary of senior living communities that we owned, leased or managed continuously since January 1, 2018, for the year ended December 31, 2019, compared to the year ended December 31, 2018 (dollars in thousands, except average monthly rate):
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase/(Decrease) |
| | | 2019 | | 2018 | | Amount | | Percent |
| Revenues: | | | | | | | | |
| Senior living | | $ | 1,026,365 |
| | $ | 1,011,026 |
| | $ | 15,339 |
| | 1.5 | % |
| Management fees | | 13,687 |
| | 13,735 |
| | (48 | ) | | (0.3 | )% |
| Senior living wages and benefits | | 531,849 |
| | 506,739 |
| | 25,110 |
| | 5.0 | % |
| Other senior living operating expenses | | 281,441 |
| | 276,781 |
| | 4,660 |
| | 1.7 | % |
| | | | | | | | | |
| Total number of communities (end of period): | | | | | | | | |
Owned and leased communities (1) | | 190 |
| | 190 |
| | — |
| | — | % |
| Managed communities | | 70 |
| | 70 |
| | — |
| | — | % |
| Number of total communities | | 260 |
| | 260 |
| | — |
| | — | % |
| | | | | | | | | |
| Total number of living units (end of period): | | | | | | | | |
Owned and leased living units (1) (2) | | 20,948 |
| | 21,008 |
| | (60 | ) | | (0.3 | )% |
| Managed living units | | 9,059 |
| | 9,059 |
| | — |
| | — | % |
| Number of total living units | | 30,007 |
| | 30,067 |
| | (60 | ) | | (0.2 | )% |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | |
Occupancy % (2) | | 83.2 | % | | 82.2 | % | | 100 | bps | | n/a |
|
Average monthly rate (3) | | $ | 4,648 |
| | $ | 4,637 |
| | $ | 11 |
| | 0.2 | % |
| Percent of senior living revenue from Medicaid | | 9.3 | % | | 8.9 | % | | 40 | bps | | n/a |
|
| Percent of senior living revenue from Medicare | | 8.9 | % | | 9.8 | % | | (90 | ) bps | | n/a |
|
| Percent of senior living revenue from private and other sources | | 81.8 | % | | 81.3 | % | | 50 | bps | | n/a |
|
(1) Effective as of January 1, 2020, following the completion of the Restructuring Transactions, our then existing leases for 166 of these leased senior living communities (18,636 living units) were terminated and we began managing these communities under the New Management Agreements.
(2) Includes onlywith approximately 200 living units categorized as in service. As a result,where the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(3) Average monthly rate is calculated by taking the average daily rate, which is defined as total operating revenues for senior living services divided by occupied units during the period, and multiplying it bylease was terminated on September 30, days. The calculation of the December 31, 2019 average monthly rates excludes $4.2 million of Deferred Resident Fees and Deposits.
Year Ended December 31, 2019,2021, Compared to Year Ended December 31, 20182020
The following is a discussion of our operating results for our senior living communities during the year ended December 31, 2019,2021, compared to the year ended December 31, 2018.
Senior living
Lifestyle services revenue. Senior livingThe decrease in lifestyle services revenues is primarily due to a decrease in inpatient rehabilitation clinic revenues of $14.5 million and outpatient rehabilitation clinic revenues of $0.2 million. The reduction of inpatient rehabilitation clinic revenue is primarily associated with the closure of 27 inpatient rehabilitation clinics during the year ended December 31, 2021 in accordance with the Strategic Plan. Our fitness services continued to expand during the year and partially offset the declines from our inpatient rehabilitation clinic closures with an increase in revenue of $0.9 million, a 38.1% increase over the prior year. Fitness services revenue in the year ended December 31, 2021 represented 4.9% of total lifestyle services revenue, an increase from 2.9% in the prior year. We also realized the full year impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021, and five net new outpatient rehabilitation clinics opened during the three months ended September 30, 2021. There was a decrease in lifestyle services revenues at our comparable clinics due to decreased approximately 0.8%, or $9.2 million,revenue per visit in 2021.
Residential revenues. The decrease in residential revenues are primarily due to the sales duringdecline in average occupancy from 76.4% for the first half of 2018 of fouryear ended December 31, 2020 to 69.5% for the year ended December 31, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the marketplace reluctance to relocate to senior living communities during the Pandemic. In addition, the decrease in residential revenue is due to DHC,the termination of a lease for four communities on September 30, 2021, the discontinuation of these four communities resulted in a decrease in revenue of $1.9 million. In addition, one of our leased communities was out of service due to a fire on April 4, 2021, which resulted in a decline in revenue attributable to that community of $0.8 million. The decrease in residential revenues at our comparable communities are primarily due to the decline in average occupancy from 76.7% for the year ended December 31, 2020 to 69.9% for the year ended December 31, 2021 caused by the Pandemic.
Residential management fees. The decrease in residential management fees is due to declines in gross revenues at the senior living communities we now manage, for DHC's account, as well asprimarily caused by a decrease in occupancy rates caused by the impactongoing impacts of the salesPandemic and the transitioning of 18 SNFsthe management of approximately 7,400 living units to third parties duringnew operators and the second and third quartersclosure of 2019.approximately 1,500 SNF units in the year ended December 31, 2021. The impactongoing impacts of these salesthe Pandemic resulted in a decline in average occupancy at our managed communities from 77.2% for the year ended December 31, 2020 to 71.0% for the year ended December 31, 2021. The transitioning of the management of approximately 7,400 living units to new operators resulted in a decrease in residential management fees of $5.3 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The closure of approximately 1,500 SNF units resulted in a decrease in residential management fees of $3.6 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. In addition, revenue declines were partially offsetimpacted by increases in occupancy as well as increased revenues from our ancillary services, such as rehabilitation and wellness services, in conjunction with the recognition of $4.2 million of Deferred Resident Fees and Deposits. The 1.5% increase innine senior living revenue at the communities sold and seven senior living communities closed by DHC in 2020 that we have operated continuously since January 1, 2018previously managed, which reduced residential management fees by $2.7 million from the year ended December 31, 2020. The decrease in residential management fees at our comparable senior living communities was primarily due to the decline in gross revenues at the senior living communities we manage caused by Pandemic related declines in average occupancy in the 2021 period, partially offset by an increase in occupancy as well as $4.2 million of Deferred Resident Fees and Deposits.residential construction management fees we earn on construction projects we manage.
Management fee revenue. Management fee revenue increased by 6.8%, or $1.0 million, due to an increase in the number of managed communities to 78 from 76, partially offset by decreases in occupancy and average monthly rates for rooms to residents who pay privately for services at the communities that we have operated continuously since January 1, 2018.
Reimbursed community-level costs incurred on behalf of managed communities.Reimbursed The decrease in reimbursed community-level costs incurred on behalf of managed communities increased by 11.7%, or $32.9 million,was primarily due to the transitioning of the management of approximately 7,400 living units to new operators in the year ended December 31, 2021 and the closure of approximately 1,500 SNF units in the year ended December 31, 2021 as well as nine senior living communities sold and seven senior living communities closed in 2020. Additionally, there was an overall reduction in community-level costs incurred at the senior living communities we continue to manage as other operating expenses such as wages and dietary costs were impacted by continued
occupancy declines due to the Pandemic. These reductions were offset, in part, by increases in repairs and maintenance, marketing, resident activities and health insurance.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The increase in other reimbursed expenses was due to reimbursements related to restructuring expenses in the numberyear ended December 31, 2021 of managed communities$13.3 million which was partially offset by a decrease in expenses that are reimbursable.
Other operating income.Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution. The increase in other operating income for the year ended December 31, 2021 was due to 78 from 76,the increase in Cares Act funds received.
Lifestyle services expenses.The decrease in lifestyle services expenses is primarily due to the closure of 27 inpatient rehabilitation clinics throughout the year ended December 31, 2021 in accordance with the Strategic Plan. This was partially offset by the growth of fitness services, home health visits and other expanded outpatient services as well as an increase in wages in outpatient rehabilitation clinics due to current market conditions. We also realized the full year impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021, and five net outpatient rehabilitation clinics opened during the three months ended September 30, 2021. The decrease in lifestyle services expenses at our salaries and wages atcomparable clinics was consistent with the communities we have operated continuously since January 1, 2018, primarily attributable todecrease in lifestyle services revenue for comparable clinics during the competitive labor market. In addition, as part of our evaluation of our operations in 2019, we identified certain corporate personnel that were providing full time dedicated direct support to communities and therefore, costs associated with that personnel would be reimbursed by those communities in accordance with our then existing management agreements with DHC.year ended December 31, 2021.
Senior livingResidential wages and benefits. Senior livingThe decrease in residential wages and benefits increased by 1.8%, or $10.3 million,is primarily due to an increasedecreased costs in our salariesthe current year for medical insurance and wagesworkers compensation costs as well as the termination of $18.7 million at thea lease for four communities that we have operated continuously since January 1, 2018 attributable to the competitive labor market and,on September 30, 2021, which resulted in certain jurisdictions, legislation and regulations that increased the minimum wage. In addition, outside labor costs increased $5.3 million at the communities that we have operated continuously since January 1, 2018, primarily due to the transition plan of the operations of the SNFs that DHC owns and leases to us, which we and DHC have since agreed to sell. These increases were partially offset by a decrease in employee health insurance expense, and the impact of sales of four senior living communities to DHC, which we now manage for DHC's account, and the sale of one SNF to a third party during the first half of 2018, coupled with the sales of 18 SNFs to third parties during the second and third quarters of 2019. The 5.0% increase in senior living wages and benefits at the communities that we have operated continuously since January 1, 2018 is due toof $1.1 million. This was partially offset by an increase in salaries and wages attributable to our continued investment in our employees, including our focus on reducing employee turnover through market competitive cash compensation and other benefits. In addition, we also experienced increased outside labor costs due to the transition of the operations of the SNFs that DHC owns and leases to us, which we and DHC have agreed to sell, partially offset by amarket conditions. The decrease in employee healthresidential living wages and benefits at our comparable communities is primarily due to decreased costs in 2021 for medical insurance expense.and workers compensation costs.
Other senior livingresidential operating expenses. Other senior livingresidential operating expenses which includeare comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and community level administrative costs, decreased by 1.1%, or $3.4 million,other community-level costs. The increase in other residential operating expenses is primarily due to 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 sales duringon-going response to the first half of 2018 of four senior livingCOVID-19 pandemic. In addition, in 2021, we recognized a $0.9 million long lived asset impairment related to a community that was damaged by a fire. The increase in other residential operating expenses at our comparable communities is primarily due to DHC, which communities we now manage for DHC's account,costs associated with our self-insurance obligations as well as one SNFincreases in repairs and maintenance costs to reinvest in our communities and marketing efforts to meet lead volume demand.
General and administrative.The slight decrease in general and administrative expenses was primarily attributable to lower corporate wages and benefits due to reduced corporate headcount of approximately 30% in connection with the Strategic Plan and lower expenses for services performed by RMR LLC due to a third party, and the sales of 18 SNFsdecrease in revenues to third parties during the second and third quarters of 2019. The 1.7%which those fees are related to. This was partially offset by an increase in other senior living operatingmarketing expenses atand professional fees as we focused on growth of our core business to rebound from the communities that we have operated continuously since January 1, 2018Pandemic as well as investments in shared services infrastructure as part of the Evolve phase of our Strategic Plan.
Restructuring expenses. The increase was primarily due to repairsseverance and maintenance and certain insuranceretention costs as a result of increased rates attributablerelated to the propertyStrategic Plan to align our organization following completion of our Reposition phase of our Strategic Plan, of which $13.3 million was reimbursed by DHC and casualty insurance marketincluded in other reimbursed expenses.
Depreciation and certain consultingamortization. The increase in depreciation and other purchased services expenses incurred in connection with costs associated with our strategic investments to enhance efficiencies in and benefits from our purchasing of services.
Rent expense. Rent expense decreased by 32.4%, or $67.7 million, due to the reduction in our aggregate minimum monthly rent payable to DHC commencing February 1, 2019, pursuant to the Transaction Agreement, which includes the recognition of a lease inducement in 2019 totaling $13.8 million.
General and administrative expenses. General and administrative expenses increased by 12.4%, or $9.7 million,amortization is primarily due to $12.0 million of transaction costs incurred in connection with the Restructuring Transactions, partially offset by a decrease in wages due to our evaluation of our operations in 2019, in which we identified certain corporate personnel that were providing full time dedicated direct support to communities as a result of which, costs associated with that personnel would be reimbursed by those communities in accordance with our then existing management agreements with DHC.
Depreciation and amortization expense. Depreciation and amortization expense decreased by 53.7%, or $19.3 million, primarily attributable to the sale of approximately $110.0 million of fixed assets and improvements to DHCincurred on our equipment finance lease, which was entered into during the year ended December 31, 2019, as well as the sales during the first halffourth quarter of 2018 of four senior living communities to DHC, which communities we now manage for DHC's account, as well as one SNF to a third party and the sales of 18 SNFs to third parties during the second and third quarters of 2019.2020.
Loss(gain) on sale of senior living communities. A loss on sale of senior living communities of $0.9 million was recorded during the year ended December 31, 2019, primarily in connection with the sales of 18 SNFs to third parties during the second and third quarters of 2019. A gain on sale of senior living communities of $7.1 million was recognized during the year ended December 31, 2018, primarily in connection with our sale of four senior living communities to DHC during the first half of 2018.
Long-lived asset impairment. For the years ended December 31, 2019 and 2018, we recorded non-cash charges for long-lived asset impairments of $3.3 million and $0.5 million, respectively, to reduce the carrying value of certain of our long-lived assets to their estimated fair values.
Interest, dividend and other income. Interest,The decrease in interest, dividend and other income increased by 66.7%, or $0.5 million,is primarily due to the combinationdecreased amounts of higher statedinterest earned primarily on our debt and equity investments due to declines in interest rates and increased cash balances invested during the period.2021.
Interest and other expense. Interest and other expense decreased by 13.4%, or $0.4 million,consists primarily attributableof deferred financing fees and commitment fees related to decreased borrowings under our credit facilitiesCredit Facility, interest on our finance leases and DHC’s assumption of twoour mortgage notes in connection with our sale of four senior living communities to DHC during the first half of 2018.note.
Unrealized gain (loss) on equity investments. Unrealized gain (loss) on equity investments represents adjustments made to our investments in equity securities to record amounts toat 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 gaingains and losses on investments,investments.
Loss on termination of leases. Loss on termination of leases for the year ended December 31, 2021 represents a $3.3 million loss on the lease termination for four communities. These costs include a $3.1 million lease termination fee, the write off of the remaining net assets at the communities including property and equipment and the remaining right of applicable taxes.use assets, less the remaining recorded lease liability and the remaining obligations under the insurance deductible for a fire that occurred at one of the four leased communities. Loss on termination of leases in the year ended December 31, 2020 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 for income taxes. For the years ended December 31, 20192021 and 2018,2020, we recognized a provision for income taxes of $0.1$0.2 million and $0.2$0.7 million, respectively. The provision for income taxes for the year ended December 31, 2019, is related to our federal and2021 represents state income taxes, including current period expenses and utilization of a deferred tax obligations.credit. The provision for income taxes for the year ended December 31, 2018, is due to our2020 represents state income taxes.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. 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.
Concentration of Risk - Revenues
We have primarily derived the majority of our revenues from the communities we operate that are owned by DHC. For the year ended December 31, 2019, 88.9% of our senior living revenue was derived from properties leased from DHC and primarily all2021, 26.4% of our management fee revenueand operating revenues was comprised of residential management fees from propertiessenior living communities we managed for DHC. DHC is the accountsole source of DHC.our residential management fees. We expect to continue to be dependent on revenues from the management of senior living communities owned by DHC for the foreseeable futurefuture. In the year ended December 31, 2021, as part of the Strategic Plan, we transitioned 107 senior living communities we managed for DHC to new operators and effective aswe closed one senior living community that we manage on behalf of January 1, 2020, all of our then existing leasesDHC in February 2022. After the transitions and management and pooling agreements with DHC were terminated and replaced with the New Management Agreements.closure, we will continue to manage 120 senior living communities for DHC. 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,management agreements, could significantly impact our business. For additional information about our management arrangements with DHC, see “Properties—"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 Note 9Notes 1 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 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 nursingcertain of our former SNF units and rehabilitation and wellnessour lifestyle services. We derived approximately 21.5%4.6% and 23.3%3.6% of our consolidated revenues from these government fundedgovernment-funded programs forduring the years ended December 31, 20192021 and 2018,2020, respectively. ForRevenues from Medicare programs totaled $41.5 million and $40.5 million during the years ended December 31, 20192021 and 2018, our net Medicare revenues2020, respectively. Revenues from Medicaid programs totaled $110.3$1.2 million and $119.1$1.4 million respectively. Forduring the years ended December 31, 20192021 and 2018,2020, respectively. Following the repositioning of our net Medicaidresidential services, the concentration of revenues totaled $122.8 million and $135.9 million, respectively. As a result of the completion of the Restructuring Transactions, our revenuesderived from Medicare and Medicaid will decline; however, we will earn management fees on Medicare and Medicaid revenue generated at the senior living communities we manage and we expect to continue to receive Medicare and Medicaid revenues at the senior living communities we own and lease, as well as for certain ancillary services we provide.principally be earned in connection with our lifestyle services.
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 DHC 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.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 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 RESOURCES48
Liquidity and Capital Resources
We require cash to fund our operating expenses, to make capital expenditures and to service our debt obligations. As of December 31, 2019,2021, we had $31.7$67.0 million of unrestricted cash and cash equivalents. As of December 31, 20192021, our restricted cash and 2018,cash equivalents included $22.9 million of bank term deposits in our captive insurance company. On January 27, 2022, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. For more information about the Loan, see “Business—Financing Sources” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
As of December 31, 2021 and December 31, 2020, we had current assets of $143.4$186.8 million and $138.1$262.3 million, respectively, and current liabilities of $164.3$140.9 million and $229.7$177.9 million, respectively.
In addition, onOn January 1, 2020, in connection with the Restructuring Transactions,restructuring of our business arrangements with DHC, 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 certain of our working capital liabilities.liabilities and through cash payments as consideration for the share issuances.
The following is a summary of cash flowstable presents selected data on our continuing operations from operating, investing and financing activities, as reflected in our consolidated statement of cash flows:flows for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Net cash provided by (used in): | | 2021 | | 2020 | | $ Change | | % Change |
| Operating Activities | | $ | (7,573) | | | $ | 51,381 | | | $ | (58,954) | | | n/m |
| Investing Activities | | (7,650) | | | 2,243 | | | (9,893) | | | n/m |
| Financing Activities | | (1,435) | | | (1,006) | | | (429) | | | 42.6 | % |
| (Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents | | (16,658) | | | 52,618 | | | (69,276) | | | n/m |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 109,597 | | | 56,979 | | | 52,618 | | | 92.3 | % |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 92,939 | | | $ | 109,597 | | | $ | (16,658) | | | (15.2) | % |
_______________________________________ |
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2019 | | 2018 | | $ Change | | % Change |
| Net cash used in operating activities | | $ | (4,109 | ) | | $ | (54,223 | ) | | $ | 50,114 |
| | 92.4 | % |
| Net cash provided by investing activities | | 62,981 |
| | 4,936 |
| | 58,045 |
| | 1,176.0 | % |
| Net cash (used in) provided by financing activities | | (53,146 | ) | | 50,964 |
| | (104,110 | ) | | (204.3 | )% |
| Net increase in cash, cash equivalents and restricted cash | | 5,726 |
| | 1,677 |
| | 4,049 |
| | 241.4 | % |
| Restricted cash transferred to held for sale assets | | (5 | ) | | — |
| | (5 | ) | | — | % |
| Cash, cash equivalents and restricted cash at beginning of period | | 51,258 |
| | 49,581 |
| | 1,677 |
| | 3.4 | % |
| Cash, cash equivalents and restricted cash at end of period | | $ | 56,979 |
| | $ | 51,258 |
| | $ | 5,721 |
| | 11.2 | % |
We had
Operating Activities
The decrease in cash flows used inprovided by operating activities of $4.1 million for the year ended December 31, 2019,2021 compared to cashthe same period in 2020 is primarily due to payment of $27.6 million of deferred employer payroll taxes and an increase in net loss of $22.3 million, partially offset by $22.2 million of deferred employer payroll taxes reimbursed by DHC.
Investing Activities
Cash flows used in operatinginvesting activities of $54.2 million for the year ended December 31, 2018. The2021, increased as compared to the same period in 2020 primarily due to increased investments of property and equipment of $4.0 million for owned communities and shared services infrastructure as part of the Evolve phase of the Strategic Plan and a decrease in cash flows used in operating activities was mainly attributable to improved operating income before non-cash items as a result of the reduction in minimum monthly rent payments to DHC pursuant to the Transaction Agreement, coupled with a one-time recognition of $4.2 million in Deferred Resident Fees and Deposits as well as $12.4 million of lease inducement, and an improvement in the working capital, including a $2.9 million current liability at December 31, 2019 resultingproceeds from the impact of the adoption of the Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases.
We had cash flows provided by investing activities of $63.0 million and $4.9 million for the years ended December 31, 2019 and 2018, respectively. The increase in cash flows provided by investing activities was primarily attributable to a year-over-year increase of $92.1 million for the sale of property and equipment and the $9.0 million initial liquidating distribution received from Affiliates Insurance Company, or AIC. This was partially offset by a decreaseto DHC of $2.7 million.
Financing Activities
The increase in the proceeds received from the sale of senior living communities of $32.6 million and an increase for the acquisition of property and equipment of $8.5 million. Historically, we acquired property and equipment and then subsequently sold these assets to DHC.
We hadnet cash flows used in financing activities of $53.1 million for the year ended December 31, 2019,2021, compared to cash flows providedthe same period in 2020 is primarily due to repayments of finance lease principal in the current period partially offset by financing activitiescosts incurred in 2020 related to the issuance of $51.0 million forcommon stock in the prior year.
Capital Expenditures
During the year ended December 31, 2018. The decrease was2021, we invested $13.2 million primarily attributable to a $71.5in our owned senior living communities and rehabilitation services clinics as well as shared services infrastructure as part of the Evolve phase of the Strategic Plan. During the year ended December 31, 2020, we invested $4.5 million reduction of borrowings onprimarily in our credit facilitiesowned and a net increase in repayments of $31.5 million relatedleased senior living communities and rehabilitation services clinics. DHC funds the capital expenditures at the senior living communities we manage for DHC pursuant to our repaymentmanagement agreements with DHC.
We believe we have adequate financial resources from our existing cash flows from operations, together with cash on hand, amounts available under our credit facility and DHC's assumption of $75.0 million in liabilities in connection with the Share Issuances on January 1, 2020 pursuant to the Transaction Agreement, as further detailed in Notes 9 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, to support our business for at least the next twelve months, assuming relatively stable general economic conditions.
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 our management agreements with DHC, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute on our strategy or to maintain appropriate 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 Loan, to support our business for at least the next twelve months.
We are closely monitoring the effect of the Pandemic on our liquidity. We currently expect to use cash balanceson hand and cash flows from operations as well as our Loan to fund our future operations and capital expenditures, to the extent not funded or reimbursed by DHC pursuant to our management agreements with DHC, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue streams.sources. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. We intend to conduct our business in a manner 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 decline in economic conditions or adverse market conditions in the senior living industry may borrow funds fromcause a decline in financing availability and increased costs for financings.
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 our management agreements with DHC. Further, our health insurance and workers compensation costs have increased as a result of the Pandemic, as well as team members now pursuing elective procedures that had been deferred or they were not able to obtain during the Pandemic. These increased costs may continue in the future. We also have purchased property insurance coverage under DHC's policy with unrelated third party insurance providers. On April 4, 2021, one of the communities that we leased had a fire which caused extensive damage and the residents of the community to be relocated. We had insurance on this community with a deductible of $1.0 million. Insurance proceeds received for property damages to the previously leased community caused by the fire were subsequently transferred to PEAK.
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 16 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 15 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, 2021, we had two irrevocable standby letters of credit outstanding, totaling $26.9 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 $22.9 million of cash equivalents and $4.6 million of debt and equity investments. This letter of credit expires in June 2022 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, 2021, 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 one irrevocable standby letters of credit outstanding at December 31, 2021, totaling $0.1 million, which was issued under the Credit Facility, secure certain of our other obligations. This letter of credit was terminated when we replaced the Credit Facility with the Loan.
Debt Financings and Covenants
We had a $65.0 million Credit Facility that was available for general business purposes. The Loan that we obtained on January 27, 2022 replaced the Credit Facility which was scheduled to expire on June 12, 2022. No borrowings were outstanding under the Credit Facility at the time we entered into the Credit Agreement. We were 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, 2021 were 2.60% and
4.75%, respectively. We were 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 was due until maturity.
Our Credit Facility was secured by 11 senior living communities we own with a combined 1,237 living units owned by certain of our subsidiaries that guarantee our obligations under our Credit Facility. Our Credit Facility was also secured by these senior living communities' accounts receivable and related collateral. The amount of available borrowings under our Credit Facility was subject to our having qualified collateral, which was primarily based on the value and operating performance of the communities securing our obligations under our Credit Facility. Our Credit Facility provided 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 facility from timeagreement. Our credit agreement contained financial and other covenants, including those that restrict our ability to timepay dividends or make other distributions to our shareholders in certain circumstances.
At December 31, 2021, we had two irrevocable standby letters of credit outstanding, totaling $26.9 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 $22.9 million of cash equivalents and $4.6 million of debt and equity investments. This letter of credit expires in June 2022 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, 2021, the cash equivalents collateralizing this letter of credit areclassified 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 one irrevocable standby letters of credit outstanding at December 31, 2021, totaling $0.1 million, which were issued under the Credit Facility, secured certain of our other obligations. This letter of credit was terminated when we replaced the Credit Facility with the Loan.
On January 27, 2022, certain of our subsidiaries entered into the Credit Agreement with MidCap. Under the terms of the Credit Agreement, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. The remaining proceeds include $12.0 million for capital improvements and an opportunity for another $20.0 million that is available to us upon achieving certain financial thresholds. Certain subsidiaries of the Company are borrowers under the Credit Agreement and the Company and one of its subsidiaries provided a payment guarantee of up to $40.0 million of the obligations under the Credit Agreement as well as standard non-recourse carve-outs. The guaranty is evidenced by the Guaranty Agreement, made by the Company and one of its subsidiaries in favor of MidCap. Pursuant to the Guaranty Agreement, the Company's subsidiary granted MidCap a security interest on all of the assets of the subsidiary. The Guaranty Agreement requires the Company and its subsidiary to comply with various covenants, including restricting the Company's ability to make distributions to shareholders. The Loan is secured by real estate mortgages on 14 senior living communities owned by the borrowers, the borrowers' assets and certain related collateral. The maturity date of the Loan is January 27, 2025. Subject to the payment of an extension fee and meeting certain other conditions the Company may elect to extend the stated maturity date of the Loan for two one-year periods. We are required to pay interest on outstanding amounts at base rate of SOFR (subject to a minimum base rate of 50 basis points) plus 450 basis points. The Credit Agreement requires interest only payments for the first two years and requires customary mandatory prepayment of the Loan on account of certain events of default. Voluntary prepayments made within 18 months of the effective date of the Loan will be subject to a prepayment fee, but the Loan may thereafter be voluntarily prepaid without premium or penalty. The Company will be required to pay an exit fee upon any prepayment of the Loan, which would be in addition to any prepayment fee that may be payable. The Loan provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of the Company, as defined in the Credit Agreement. The Credit Agreement also contains a number of financial and other covenants including covenants that restrict the borrowers' ability to incur indebtedness or to pay or make distributions under certain circumstances and requires the Company to maintain certain financial ratios. The Credit Agreement also contains certain customary representations and warranties and reporting obligations. For more information about the Term Loan, see Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We also have a mortgage note as of December 31, 2021, 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, 2021.
As of December 31, 2021, we had no borrowings outstanding under our Credit Facility, $0.1 million in letters of credit issued under our Credit Facility, $10.8 million available for borrowing under our Credit Facility, and $6.8 million outstanding on the mortgage note. As of December 31, 2021, we believe we were in compliance with all applicable covenants under our debt agreements.
For more information regarding our debt financings and covenants, see Notes 9 and 20 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 strategic investments. We also may seekand other such relationships and related person transactions, see Notes 10, 14 and 15 to participateour Consolidated Financial Statements included in a joint venturePart 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 2022 Annual Meeting of Stockholders, or other arrangementour definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2021. 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 additional sourcesmanagement services.
Seasonality
Revenues derived from our senior living and managed communities are subject to modest effects of financing. Althoughseasonality, which we cannot be sure weexperience 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, successful in consummating any particular type of financing, we believe that weincluding whether it will have access to financings, such as debtweaken, transform or otherwise become a common seasonal virus, which may change or amplify seasonal aspects and equity offerings, to fund future business ventures and to payeffects on our current obligations.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’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’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, 20192021 or 20182020 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 managed 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 Office of the Inspector General, or OIG, pursuant to the OIG’s Provider Self-Disclosure Protocol. We submitted supplemental disclosures related to this matter to the OIG in December 2017 and March 2018. In June 2019, we settled this matterDHC entered into a settlement agreement with the OIG without admittingeffective January 5, 2021 and the settlement was paid by DHC. We and DHC did not admit any liability and paid $1.1pursuant to this settlement. We recognized $0.1 million to the OIG in exchange for a customary release. The expense associated with this matter was recorded primarily in 2017, with the exception of an adjustment of $0.2 million that was made during the year ended December 31, 2018,2020 as a reduction in residential management fees from DHC for the residential management fees that were previously paid to reduceus with respect to the balancehistorical Medicare payments DHC received that it repaid pursuant to the settlement.
In July 2021, we became aware of a potential issue with respect to completion of a form at one of the liabilitySNFs we previously recorded.managed for DHC. As a result of this discovery, we have made a voluntary self-disclosure to HHS, the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We did not recognize anysubmitted our initial disclosure to the OIG in January 2022 and we
have recorded expenses relatedfor costs we incurred or expect to this matter in 2019.
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, and also require residents in our managed senior living communities to buy insurance directly or reimburse us for insurance that we purchase, our costs have increasedincur, including estimated OIG imposed penalties, as a result of this matter totaling $0.2 million to general and administrative expenses in our consolidated statements of operations for 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 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 we and the other AIC shareholders elected not to renew the AIC property insurance program; we instead have purchased standalone property insurance coverage 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.
Off-Balance Sheet Arrangements
Atyear ended December 31, 2019, we had seven irrevocable standby letters2021, all of credit outstanding, totaling $28.6 million. In 2019, we increased, from $22.7 million to $25.4 million, one of these letters of credit which secures our workers’ compensation insurance program,is accrued and this letter of credit is currently collateralized by approximately $21.7 million of cash equivalents and $7.3 million of debt and equity investments. This letter of credit currently expires in June 2020 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 2020. The remaining six irrevocable standby letters of credit outstandingnot paid at December 31, 2019, totaling $3.2 million, secure certain of our2021.
For information regarding other obligations. These letters of credit are scheduled to mature between June 2020 and October 2020 and are required to be renewed annually.
Debt Financings and Covenants
In December 2018, we amended the credit agreement governing our prior credit facility. As a result of the amendment to such credit agreement, the aggregate amount of the commitments under our prior credit facility was reduced to $54.0 million from $100.0 million, and the stated maturity date of our prior 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 prior credit facility for two, one-year periods, as well as to request an increase in the aggregate amount of the commitments under our prior credit facility. In June 2019, we entered into a new credit agreement to replace our prior credit facility with our $65.0 million secured revolving credit facility, which is available for general business purposes. Our credit facility matures in June 2021, and, subjectlitigation matters, see Note 13 to our payment of an extension feeconsolidated financial statements, entitled "Commitments and meeting other conditions, we have the option to extend the stated maturity date of our credit facility for a one-year period. Other terms of our credit facility are substantially similar to those of our prior credit facility. 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 our credit agreement, plus 150 basis points per annum, on borrowings under our credit facility; the annual interest rates as of December 31, 2019 were 4.20% and 6.25%, respectively. 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 11 senior living communities with a combined 1,245 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 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 stockholders in certain circumstances.
At December 31, 2019, we had seven irrevocable standby letters of credit outstanding, totaling $28.6 million. In 2019, we increased, from $22.7 million to $25.4 million, one of these letters of credit which secures our workers’ compensation insurance program, and this letter of credit is currently collateralized by approximately $21.7 million of cash equivalents and $7.3 million of debt and equity investments. This letter of credit currently expires in June 2020 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 2020. The remaining six irrevocable standby letters of credit outstanding at December 31, 2019, totaling $3.2 million, secure certain of our other obligations. These letters of credit are scheduled to mature between June 2020 and October 2020 and are required to be renewed annually.
We also have mortgage debt of $7.5 million as of December 31, 2019 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, 2019.
As of December 31, 2019, we had no borrowings outstanding under our credit facility and $3.2 millionin letters of credit issued under our credit facility, and $55.9 million of availability for further borrowing under our credit facility, and we had $7.5 million in outstanding mortgage debt. As of December 31, 2019, we believe we were in compliance with all applicable covenants under our debt agreements.
As of December 31, 2019, we had a $25.0 million available to us under the DHC credit facility we obtained from DHC on April 1, 2019. The DHC credit facility matured and was terminated on January 1, 2020, in connection with the
completion of the Restructuring Transactions. There were no borrowings outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term. See Note 8 and 9Contingencies," to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10‑K.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 example: DHC is our former parent company, our former largest landlord, the owner of the senior living communities that we manage and our largest stockholder, owning as of January 1, 2020, 33.9% of our outstanding common shares, and with which we restructured our business arrangements as of January 1, 2020 pursuant to the Transaction Agreement; Adam D. Portnoy, the Chair of our Board of Directors and one of our Managing Directors, is the sole trustee, an officer and the controlling shareholder of ABP Trust and he is also a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR LLC and the chair of the board of trustees and a managing trustee of DHC; Jennifer Clark, our other Managing Director and Secretary, is a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer of ABP Trust, an officer and employee of RMR LLC and a managing trustee and secretary of DHC; 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 DHC; RMR LLC employs our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer; Adam Portnoy, directly and indirectly through ABP Trust and its subsidiaries, is a significant stockholder of us, beneficially owning approximately 6.3% of our outstanding common shares as of January 1, 2020; a subsidiary of ABP Trust is also the landlord for our headquarters; and Adam Portnoy, through ABP Trust, 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, DHC, RMR LLC or RMR Inc.
For further information about these and other such relationships and related person transactions, see Notes 9, 11, 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 2020 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, 2019. 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 prior leases, forms of management agreements and related pooling and omnibus agreements with DHC, 2019 and 2017 transaction agreements with DHC, our business management agreement with RMR LLC, and our headquarters lease with a subsidiary of ABP Trust, 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.
Critical Accounting Policies
OurAn understanding of our critical accounting policies concernis necessary for a complete analysis of our results, financial position, liquidity and trends. The preparation of our financial statements requires our management to make certain critical accounting estimates and judgments that impact (1) revenue recognition, including contractual allowances, the allowance for doubtful accounts,(2) long lived asset recoverability, (3) self-insurance reserves leases, long-lived assets and (4) our judgments and estimates concerning our provisionsprovision for income taxes.taxes or valuation allowance related to deferred tax assets. We consider them to be critical because of their significance to our financial statements and the possibility that future events may cause differences from current judgment or because the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to test their reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.
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,lifestyle services revenue, residential management fees, residential revenues and reimbursed costs incurred pursuant to our management 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.allowances.
Our policiesLong-Lived Asset Recoverability. We regularly evaluate our properties for valuing accounts receivable, includingindicators of impairment. Impairment indicators may include declining resident occupancy, weak or declining profitability from the allowance for doubtful accounts, involve significant judgments based uponproperty, decreasing cash flows, our experience, including considerationdecision to dispose of a property before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the agerelated property by comparing it to the expected future cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the receivables,property to its estimated fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate incorrectly or if future operations, market or industry factors differ from our expectations we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, or the termsamount 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 revisionsany such charges may be material.inaccurate.
Self-Insurance Reserves.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
Taxes. use our judgment in determining the incremental borrowing rate used to discount lease payments based on the applicable reference rate, coupled with a credit spread and lease specific adjustments.
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.
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 realization 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. 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 realization 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, 20192021 and 2018.2020.
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.
For further information on our critical accounting estimates and policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements, see Note 2, "Summary of Significant Accounting Policies", to the Consolidated Financial Statements in Item 15 of Part IV of this Annual Report on Form 10-K, which is incorporated herein by reference.
10-K.
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 impacts on our business. Rising price levels might allow us to increase our charges 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.
Deflation would likely have a negative impact upon us. A large component of our expenses consists of our fixed minimum rental obligations. Accordingly, we believe that a general decline in price levels which could cause our charges to residents to decline would likely not be fully offset by a decline in our expenses.
Seasonality
Our senior living business is 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.
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, 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, 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, 2019,2021, 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, 2019.2021. 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 believes that, as of December 31, 2019,2021, our internal control over financial reporting is effective.
Item 9B. Other Information
On February 26, 2020, our BoardNone.
Table of Directors pursuant to a recommendation of the Nominating and Governance Committee of our Board of Directors, increased its size from five to seven members, with each new Director to be in Class III of our Board of Directors with a term expiring at our 2022 annual meeting of stockholders, and in order to fill the vacancies created by such increase, elected Jennifer B. Clark and Michael E. Wagner, M.D., a Managing Director and an Independent Director, respectively, each in Class III of our Board of Directors. Dr. Wagner was also elected as a member of the Audit Committee, Compensation Committee, the Nominating and Governance Committee and Quality of Care Committee of our Board of Directors. Also, on February 26, 2020, our Board, pursuant to a recommendation of the Nominating and Governance Committee of our Board of Directors, changed the designation of its Director, Gerard M. Martin, from a Managing Director to an Independent Director, in part because Mr. Martin is not an employee or officer of the Company or RMR LLC or involved in the day to day activities of the Company. Mr. Martin continues to be a Director in Class II of our Board of Directors with a term expiring at our 2021 annual meeting of stockholders. Mr. Martin was also elected as a member of the Audit Committee and the Nominating and Governance Committee, and will continue to serve on the Quality of Care Committee, of our Board of Directors.
Ms. Clark, age 58, has been executive vice president, general counsel and secretary of RMR Inc. since shortly after its formation in 2015, and a managing director of RMR Inc. since 2018. Ms. Clark joined RMR LLC in 1999 as a vice president; she became a senior vice president in 2006, an executive vice president and general counsel in 2008 and secretary in 2015. Ms. Clark has also served as a managing trustee of DHC since 2018. Ms. Clark also serves as a director and secretary of Sonesta International Hotels Corporation, a director, executive vice president, general counsel and secretary of Tremont Realty Advisors LLC, and a managing trustee, secretary and chief legal officer of RMR Real Estate Income Fund. Ms. Clark serves as the secretary of each of the companies to which RMR LLC or its subsidiaries provide management services, including the Company and DHC. Ms. Clark has also served as secretary of RMR Office Property Fund LP since 2018 and as a director of RMR Advisors LLC since 2016, as its president and chief executive officer since 2019, and prior to that as its executive vice president and general counsel from October 2017 through December 2018 and as its secretary since 2004, and as vice president and chief legal officer from 2007 through September 2017. Prior to joining RMR LLC, Ms. Clark was a partner at the law firm of Sullivan & Worcester LLP.
Dr. Wagner, age 60, has been chief physician executive since 2018 of Wellforce, a Massachusetts health care system, and served as interim president and chief executive officer during 2019. He is also an associate professor of clinical medicine at Tufts University School of Medicine. Prior to joining Wellforce, Dr. Wagner held a number of positions with one of its founding members, Tufts Medical Center, or Tufts, including president and chief executive officer from 2013 to 2018, president and chief executive officer of Tufts Medical Center Physicians Organization from 2012 to 2014, chief medical officer from 2011 to 2013, and chief, internal medicine and adult primary care from 2008 to 2012. While at Tufts, Dr. Wagner also served on its board of trustees and was a member of many of its committees, including the compensation, governance and nominating, finance, audit, investment and real estate and quality of care committees at various time from 2011 to 2018. Prior to joining Tufts, Dr. Wagner held various positions in health care organizations and hospitals.
There is no arrangement or understanding between Ms. Clark or Dr. Wagner and any other person pursuant to which Ms. Clark or Dr. Wagner, respectively, was selected as a Director. There are no transactions, relationships or agreements
between Dr. Wagner and us that would require disclosure pursuant to Item 404(a) of Regulation S-K promulgated under the Exchange Act. As noted above, Ms. Clark has relationships with DHC and RMR LLC. Please see Notes 9, 13 and 14 to our consolidated financial statements included in this Annual Report for further information regarding our relationships with DHC and RMR LLC.Contents
Our Board of Directors concluded that each of Dr. Wagner and Mr. Martin is qualified to serve as an Independent Director in accordance with the requirements of The Nasdaq Stock Market LLC, the Securities and Exchange Commission and our bylaws, and Ms. Clark is qualified to serve as a Managing Director in accordance with the requirements of our bylaws. For their service as Directors, Mr. Martin and Dr. Wagner will be entitled to the compensation we generally provide to our Independent Directors, with the annual cash fees prorated, and Ms. Clark will be entitled to the compensation we generally provide to our Managing Directors, which is limited to awards of our common shares. A summary of our currently effective Director compensation is filed as Exhibit 10.6 to this Annual Report on Form 10-K and is incorporated herein by reference. Consistent with those compensation arrangements, on February 26, 2020, we awarded to each of Dr. Wagner and Ms. Clark 2,000 of our common shares in connection with their election, all of which vested on the award date.
In connection with Dr. Wagner’s election, we entered into an indemnification agreement with Dr. Wagner, effective as of February 26, 2020, on substantially the same terms as the agreements previously entered into between us and each of our other Directors. We previously entered into indemnification agreements with Ms. Clark and Mr. Martin will continue to apply. The form of indemnification agreement entered into between us and our Directors is filed as Exhibit 10.5 to this Annual Report on Form 10-K and is incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have a Codecode of Conductbusiness conduct and ethics that applies to our officers and Directors, and RMR Inc. and RMR LLC, their senior level officers and certain other officers and employees and RMR, its officers and employees and its parent's and subsidiaries directors, officers and employees. Our code of RMR LLC. Our Code of Conductbusiness conduct and ethics is posted on our website, www.fivestarseniorliving.com.www.alerislife.com. A printed copy of our Codecode of Conductbusiness conduct and ethics is also available, free of charge, to any person who requests a copy by writing to our Secretary, Five Star Senior LivingAlerisLife Inc., Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458.Massachusetts 02458-1634. We intend to disclose any amendments to or waivers toof our Codecode of Conductbusiness conduct and ethics applicable to our principal executive officer, principal financial officer and principal accounting officer or controller (or any person performing similar functions) on our website.
The remainder of the information required by 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 award 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, 2019:2021:
| | | | 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)) | | | 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) | | | (a) | | (b) | | (c) | |
| Equity compensation plans approved by securityholders—2014 Plan | None | | None | | 176,460 | (1) | Equity compensation plans approved by securityholders—2014 Plan | None | | None | | 1,392,470 | (1) |
| Equity compensation plans not approved by securityholders | None | | None | | None | | Equity compensation plans not approved by securityholders | None | | None | | None | |
| Total | None | | None | | 176,460 | (1) | Total | None | | None | | 1,392,470 | (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 employees are described in Notes 1012 and 1415 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
| | | | | |
(a) | Index to Financial Statements |
| Page |
| |
| Page |
Consolidated Financial Statements of Five Star Senior LivingAlerisLife Inc. | |
| |
| F-5 |
| |
| |
| |
| |
| |
| |
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | |
| 3.3 | | | | 8-K | | 3.1 | | 001-16817 | | 1/31/2022 | | |
| 3.4 | | | | 8-K | | 3.4 | | 001-16817 | | 1/31/2022 | | |
| 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 | | | | 10-K | | 10.4 | | 001-16817 | | 2/25/2021 | | |
| 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 | | |
|
| | | |
Exhibit
Number
| | Description |
| | |
3.1 |
| | |
3.2 |
| | |
4.1 |
| | |
4.2 |
| | |
4.3 |
| | |
10.1 |
| | |
10.2 |
| | |
10.3 |
| | |
10.4 |
| | |
10.5 |
| | |
10.6 |
| | |
10.7 |
| | |
10.8 |
| | 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). (Incorporated by reference to Diversified Healthcare Trust’s Current Report on Form 8-K dated December 13, 2001.) |
10.9 |
| | |
10.10 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | |
| 10.15 | | | | 8-K | | 10.1 | | 001-16817 | | 1/31/2022 | | |
| 10.16 | | | | 8-K | | 10.2 | | 001-16817 | | 1/31/2022 | | |
| 21.1 | | | | | | | | | | | | X |
| 23.1 | | | | | | | | | | | | X |
| 23.2 | | | | | | | | | | | | 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 | | | | 10-K | | 99.4 | | 001-16817 | | 2/25/2021 | | |
| 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 | | |
|
| | | |
10.11 |
| | |
10.12 |
| | |
10.13 |
| | |
21.1 |
| | |
23.1 |
| | |
31.1 |
| | |
31.2 |
| | |
32.1 |
| | |
99.1 |
| | |
99.2 |
| | |
99.3 |
| | |
99.4 |
| | |
99.5 |
| | |
99.6 |
| | |
99.7 |
| | Amended and Restated Shareholders Agreement, dated May 21, 2012, among Affiliates Insurance Company, the Company, Service Properties Trust, Diversified Healthcare Trust, TravelCenters of America Inc. (f/k/a TravelCenters 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.) |
99.8 |
| | |
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. |
101.SCH |
| | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
101.LAB |
| | Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
101.PRE |
| | Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
104 |
| | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 99.8 | | | | 10-Q | | 10.1 | | 001-16817 | | 8/1/2012 | | |
| 99.9 | | | | 10-Q | | 99.1 | | 001-16817 | | 8/10/2015 | | |
| 99.10 | | | | | | | | | | | | X |
| 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 |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | | | X |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | X |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | X |
| 101.LAB | | Taxonomy Extension Label Linkbase Document. | | | | | | | | | | X |
| 101.PRE | | Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | | | X |
________________________
(+) Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
To the Shareholders and Board of Directors and Shareholders
Five Star Senior Livingof AlerisLife Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of AlerisLife Inc. (the "Company") (formerly known as Five Star Senior Living Inc. (the Company)) as of December 31, 2019 and 2018,2021, the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows, for the years thenyear ended December 31, 2021, and the related notes (collectively referred to as the consolidated financial statements (collectively, 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, 2019 and 2018,2021 and the results of its operations and its cash flows for the yearsyear ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated, February 23 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
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 audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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. Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Self-Insurance Reserves - Refer to Notes 2 and 16 to the consolidated financial statements
Critical Audit Matter Description
The Company is partially self-insured up to certain limits for workers’ compensation, professional and general liability, and automobile claims. The Company fully self-insures all health-related claims for covered employees. The Company’s recorded self-insurance reserves represent the projected settlement value of reported and unreported claims. The Company’s determination of reserves for casualty, liability, workers’ compensation and healthcare losses and costs that have been incurred involves significant judgment based on the Company’s past experience, expectations of future events, 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, and are established using actuarial methods followed in the insurance industry. The Company’s recorded self-insurance reserves were $73.1 million as of December 31, 2021 and are included in accrued compensation and benefits and accrued self-insurance obligations in the accompanying consolidated balance sheet.
We identified self-insurance reserves as a critical audit matter because estimating the reserves for claims is complex and involves significant estimation by management. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether self-insurance reserves were appropriately recorded as of December 31, 2021.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to self-insurance reserves included the following, among others:
•We tested the effectiveness of controls related to self-insurance reserves, including those related to management’s review of the completeness and accuracy of data inputs used in the actuarial methods and analysis and management’s review of the of the actuarial assumptions and reserve calculations over the projected settlement value of reported and unreported claims.
•We evaluated the methods and assumptions used by management to estimate the self-insurance reserves by:
◦Reading the Company’s insurance policies and comparing the coverage and terms to the assumptions used by management,
◦Testing the underlying workers’ compensation, professional and general liability claims data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were accurate and complete, and
◦Evaluating whether changes to the reserves for known claims were being recognized timely based on the underlying available data and current estimates.
•With the assistance of our actuarial specialists, we:
◦Evaluated the methodologies used and the significant actuarial assumptions discussed above, and
◦Developed a range of independent estimates of the self-insurance reserves, including loss data and industry claim development factors, and compared the range of independent estimates to management’s estimates.
Long-Lived Asset Recoverability — Refer to Notes 2 and 5 to the consolidated financial statements
The Company’s investments in property assets are evaluated for impairment periodically or when events or changes in circumstances indicate that the carrying amount of a property asset may not be recoverable. Impairment indicators may include declining resident occupancy, weak or declining profitability from the property, decreasing cash flows or liquidity, the Company’s decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are identified for any property asset, the Company evaluates the recoverability of that asset by comparing undiscounted future cash flows expected to be generated by the asset over the Company’s expected remaining hold period to the respective carrying amount. The Company’s undiscounted future cash flows analysis requires management to make significant estimates and assumptions related to expected remaining hold periods, market rents, and terminal capitalization rates.
We identified the impairment of property assets as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of property assets. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of the significant estimates and assumptions related to expected remaining hold periods, market rents, and terminal capitalization rates within management’s undiscounted future cash flows analysis which are sensitive to future market or industry considerations.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the undiscounted cash flows analysis for each property asset or group of assets with possible impairment indicators included the following among others:
•We tested the effectiveness of controls over management’s evaluation of the recoverability of its property assets, including the key assumptions utilized in estimating the undiscounted future cash flows.
•We evaluated the undiscounted cash flow analysis including estimates of expected remaining hold period, market rents, and terminal capitalization rates for each property asset or group of assets with possible impairment indicators by (1) evaluating the source information and assumptions used by management and (2) comparing management’s projections to external market sources and evidence obtained in other areas of our audit.
•We evaluated the reasonableness of management’s undiscounted future cash flows analysis by developing an independent expectation of future undiscounted cash flows based on third party market data and compared that independent estimate to the carrying amount of the property asset or group of assets with possible indicators of
impairment. We compared our analysis of the recoverability of the property asset or group of assets to the Company's analysis.
•We made inquiries of management about the current status of potential transactions and about management’s judgments to understand the probability of future events that could affect the expected remaining hold period and other cash flow assumptions for the properties.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2022
We have served as the Company's auditor since 2021.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of AlerisLife Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of AlerisLife Inc. (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 23, 2022 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of AlerisLife Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of AlerisLife (formerly known as Five Star Senior Living Inc.) (the "Company") as of December 31, 2020, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
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.audit. 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 auditsaudit 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 auditsaudit 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 auditsaudit 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 auditsaudit 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 provideaudit provides 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 16 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.from 2014 to 2020.
Boston, Massachusetts
March 2, 2020February 25, 2021
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
F-6
AlerisLife Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)amounts)
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 31,740 |
| | $ | 29,512 |
|
| Accounts receivable, net of allowance of $4,664 and $3,422 at December 31, 2019 and 2018, respectively | 34,190 |
| | 37,758 |
|
| Due from related persons | 5,533 |
| | 7,855 |
|
| Prepaid expenses | 3,809 |
| | 8,567 |
|
| Investments in available for sale securities, of which $12,622 and $11,285 are restricted as of December 31, 2019 and 2018, respectively | 21,070 |
| | 20,179 |
|
| Restricted cash | 23,995 |
| | 20,823 |
|
| Other current assets | 13,477 |
| | 13,359 |
|
| Assets held for sale | 9,554 |
| | — |
|
| Total current assets | 143,368 |
| | 138,053 |
|
| | | | |
| Property and equipment, net | 167,247 |
| | 243,873 |
|
| Equity investment of an investee | 298 |
| | 8,633 |
|
| Restricted cash | 1,244 |
| | 923 |
|
| Restricted investments in available for sale securities | 7,105 |
| | 8,073 |
|
| Right of use assets | 20,855 |
| | — |
|
| Other long-term assets | 5,676 |
| | 6,069 |
|
| Total assets | $ | 345,793 |
| | $ | 405,624 |
|
| | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Revolving credit facilities | $ | — |
| | $ | 51,484 |
|
| Accounts payable and accrued expenses | 82,447 |
| | 69,667 |
|
| Current portion of lease liabilities | 2,872 |
| | — |
|
| Accrued compensation and benefits | 35,629 |
| | 35,421 |
|
| Due to related persons | 2,247 |
| | 18,883 |
|
| Mortgage notes payable | 362 |
| | 339 |
|
| Accrued real estate taxes | 1,676 |
| | 12,959 |
|
| Security deposits and current portion of continuing care contracts | 434 |
| | 3,468 |
|
| Other current liabilities | 26,089 |
| | 37,472 |
|
| Liabilities held for sale | 12,544 |
| | — |
|
| Total current liabilities | 164,300 |
| | 229,693 |
|
| | | | |
| Long-term liabilities: | | | |
| Mortgage notes payable | 7,171 |
| | 7,533 |
|
| Long-term portion of lease liabilities | 19,671 |
| | — |
|
| Accrued self-insurance obligations | 33,872 |
| | 33,030 |
|
| Deferred gain on sale and leaseback transaction | — |
| | 59,478 |
|
| Other long-term liabilities | 798 |
| | 4,721 |
|
| Total long-term liabilities | 61,512 |
| | 104,762 |
|
| | | | |
| Commitments and contingencies |
| |
|
| | | | |
| Shareholders’ equity: | | | |
| Common stock, par value $.01: 75,000,000 shares authorized, 5,154,892 and 5,085,345 shares issued and outstanding at December 31, 2019 and 2018, respectively | 52 |
| | 51 |
|
| Additional paid in capital | 362,450 |
| | 362,012 |
|
| Accumulated deficit | (245,184 | ) | | (292,636 | ) |
| Accumulated other comprehensive income | 2,663 |
| | 1,742 |
|
| Total shareholders’ equity | 119,981 |
| | 71,169 |
|
| Total liabilities and shareholders’ equity | $ | 345,793 |
| | $ | 405,624 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 66,987 | | | $ | 84,351 | |
| Restricted cash and cash equivalents | 24,970 | | | 23,877 | |
| Accounts receivable, net | 9,244 | | | 9,104 | |
| Due from related person | 41,664 | | | 96,357 | |
| Debt and equity investments, of which $7,609 and $11,125 are restricted, respectively | 19,535 | | | 19,961 | |
| Prepaid expenses and other current assets | 24,433 | | | 28,658 | |
| Total current assets | 186,833 | | | 262,308 | |
| | | |
| Property and equipment, net | 159,843 | | | 159,251 | |
| Operating lease right-of-use assets | 9,197 | | | 18,030 | |
| Finance lease right-of-use assets | 3,467 | | | 4,493 | |
| Restricted cash and cash equivalents | 982 | | | 1,369 | |
| Restricted debt and equity investments | 3,873 | | | 4,788 | |
| Other long-term assets | 12,082 | | | 3,967 | |
| Total assets | $ | 376,277 | | | $ | 454,206 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| Accounts payable | $ | 37,516 | | | $ | 23,454 | |
| Accrued expenses and other current liabilities | 31,488 | | | 42,208 | |
| Accrued compensation and benefits | 34,295 | | | 70,543 | |
| Accrued self-insurance obligations | 31,739 | | | 31,355 | |
| Operating lease liabilities | 699 | | | 2,567 | |
| Finance lease liabilities | 872 | | | 808 | |
| Due to related persons | 3,879 | | | 6,585 | |
| Mortgage note payable | 419 | | | 388 | |
| Total current liabilities | 140,907 | | | 177,908 | |
| | | |
| Long-term liabilities: | | | |
| Accrued self-insurance obligations | 34,744 | | | 37,420 | |
| Operating lease liabilities | 9,366 | | | 17,104 | |
| Finance lease liabilities | 3,050 | | | 3,921 | |
| Mortgage note payable | 6,364 | | | 6,783 | |
| Other long-term liabilities | 256 | | | 538 | |
| Total long-term liabilities | 53,780 | | | 65,766 | |
| | | |
| Commitments and contingencies | 0 | | 0 |
| | | |
| Shareholders’ equity: | | | |
| Common stock, par value $0.01: 75,000,000 shares authorized, 32,662,649 and 31,679,207 shares issued and outstanding, respectively | 327 | | | 317 | |
| Additional paid-in-capital | 461,298 | | | 460,038 | |
| Accumulated deficit | (281,064) | | | (251,139) | |
| Accumulated other comprehensive income | 1,029 | | | 1,316 | |
| Total shareholders’ equity | 181,590 | | | 210,532 | |
| Total liabilities and shareholders' equity | $ | 376,277 | | | $ | 454,206 | |
The accompanying notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
F-7
AlerisLife Inc.
Consolidated Statements of Operations
(amountsin thousands, exceptpershare data)amounts)
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2021 | | 2020 |
| REVENUES | | | |
| Lifestyle services | $ | 68,014 | | | $ | 82,032 | |
| Residential | 64,638 | | | 77,015 | |
| Residential management fees | 47,479 | | | 62,880 | |
| Total management and operating revenues | 180,131 | | | 221,927 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 722,857 | | | 916,167 | |
| Other reimbursed expenses | 31,605 | | | 25,648 | |
| Total revenues | 934,593 | | | 1,163,742 | |
| | | |
| Other operating income | 7,795 | | | 3,435 | |
| | | |
| | | |
| OPERATING EXPENSES | | | |
| Lifestyle services expenses | 59,322 | | | 66,853 | |
| Residential wages and benefits | 38,970 | | | 41,819 | |
| Other residential operating expenses | 30,311 | | | 28,116 | |
| Community-level costs incurred on behalf of managed communities | 722,857 | | | 916,167 | |
| General and administrative | 85,718 | | | 85,835 | |
| Restructuring expenses | 19,196 | | | 1,448 | |
| Depreciation and amortization | 11,873 | | | 10,997 | |
| Total operating expenses | 968,247 | | | 1,151,235 | |
| | | |
| Operating (loss) income | (25,859) | | | 15,942 | |
| | | |
| Interest, dividend and other income | 358 | | 757 |
| Interest and other expense | (1,683) | | | (1,631) | |
| Unrealized gain on equity investments | 730 | | | 480 | |
| Realized gain on sale of debt and equity investments | 218 | | | 425 | |
| Loss on termination of leases | (3,278) | | | (22,899) | |
| Loss before income taxes and equity in losses of an investee | (29,514) | | | (6,926) | |
| Provision for income taxes | (234) | | | (663) | |
| Equity in losses of an investee | (177) | | | — | |
| Net loss | $ | (29,925) | | | $ | (7,589) | |
| | | |
| Weighted average shares outstanding—basic and diluted | 31,591 | | | 31,471 | |
| | | |
| Net loss per share—basic and diluted | $ | (0.95) | | | $ | (0.24) | |
|
| | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| REVENUES | | | |
| Senior living | $ | 1,085,183 |
| | $ | 1,094,404 |
|
| Management fee | 16,169 |
| | 15,145 |
|
| Reimbursed costs incurred on behalf of managed communities | 313,792 |
| | 280,845 |
|
| Total revenues | 1,415,144 |
| | 1,390,394 |
|
| | | | |
| OPERATING EXPENSES | | | |
| Senior living wages and benefits | 573,593 |
| | 563,263 |
|
| Other senior living operating expenses | 297,885 |
| | 301,239 |
|
| Costs incurred on behalf of managed communities | 313,792 |
| | 280,845 |
|
| Rent expense | 141,486 |
| | 209,150 |
|
| General and administrative expenses | 87,884 |
| | 78,189 |
|
| Depreciation and amortization expense | 16,640 |
| | 35,939 |
|
| Loss (gain) on sale of senior living communities | 856 |
| | (7,131 | ) |
| Long-lived asset impairment | 3,282 |
| | 461 |
|
| Total operating expenses | 1,435,418 |
| | 1,461,955 |
|
| | | | |
| Operating loss | (20,274 | ) | | (71,561 | ) |
| | | | |
| Interest, dividend and other income | 1,364 |
| | 818 |
|
| Interest and other expense | (2,615 | ) | | (3,018 | ) |
| Unrealized gain (loss) on equity investments | 782 |
| | (690 | ) |
| Realized gain on sale of debt and equity investments, net of tax | 229 |
| | 99 |
|
| | | | |
| Loss before income taxes and equity in earnings of an investee | (20,514 | ) | | (74,352 | ) |
| Provision for income taxes | (56 | ) | | (247 | ) |
| Equity in earnings of an investee, net of tax | 575 |
| | 516 |
|
| Net loss | $ | (19,995 | ) | | $ | (74,083 | ) |
| | | | |
| Weighted average shares outstanding (basic and diluted) | 5,006 |
| | 4,969 |
|
| | | | |
| Net loss per share (basic and diluted) | $ | (3.99 | ) | | $ | (14.91 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
F-8
AlerisLife Inc.
Consolidated Statements of Comprehensive Loss
(dollars in thousands)
|
| | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| Net loss | $ | (19,995 | ) | | $ | (74,083 | ) |
| Other comprehensive income (loss): | | | |
| Unrealized gain (loss) on investments, net of tax of $294 and $0, respectively | 831 |
| | (385 | ) |
| Equity in unrealized gain (loss) of an investee, net of tax | 90 |
| | (68 | ) |
| Realized gain on investments reclassified and included in net loss, net of tax of $0 and $0, respectively | — |
| | 106 |
|
| Other comprehensive income (loss) | 921 |
| | (347 | ) |
| Comprehensive loss | $ | (19,074 | ) | | $ | (74,430 | ) |
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2021 | | 2020 |
| Net loss | $ | (29,925) | | | $ | (7,589) | |
| Other comprehensive (loss) income: | | | |
| Unrealized (loss) gain on debt investments, net of tax of $0 and $0, respectively | (420) | | | 649 | |
| Realized loss in equity of an investee, net of tax of $0 and $0, respectively | 177 | | | — | |
| Realized gain on debt investments reclassified and included in net (loss), net of tax of $0 and $0, respectively | (44) | | | (302) | |
| Other comprehensive (loss) income | (287) | | | 347 | |
| Comprehensive loss | $ | (30,212) | | | $ | (7,242) | |
The accompanying notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
F-9
AlerisLife Inc.
Consolidated Statements of Shareholders’ EQUITYEquity
(dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Common Stock | | Additional Paid In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total |
| Balance at December 31, 2017 | 5,052,442 |
| | $ | 51 |
| | $ | 361,396 |
| | $ | (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 gain 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 | 47,100 |
| | — |
| | 616 |
| | — |
| | — |
| | 616 |
|
| Repurchases under share award plan | (14,197 | ) | | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| 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 income (loss) | — |
| | — |
| | — |
| | (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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Total Shareholders' Equity |
| Balance at December 31, 2019 | 5,154,892 | | | $ | 52 | | | $ | 362,450 | | | $ | (245,184) | | | $ | 2,663 | | | $ | 119,981 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (7,589) | | | — | | | (7,589) | |
| 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) | | | — | |
| 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) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 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 and forfeitures 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 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (29,925) | | | — | | | (29,925) | |
| | | | | | | | | | | |
| Unrealized loss on debt investments, net of tax | — | | | — | | | — | | | — | | | (420) | | | (420) | |
| Realized gain on debt investments reclassified and included in net loss, net of tax | — | | | — | | | — | | | — | | | (44) | | | (44) | |
| Equity in realized loss of an investee | — | | | — | | | — | | | — | | | 177 | | | 177 | |
| | | | | | | | | | | |
| Grants under share award plan and share-based compensation | 1,084,600 | | | 11 | | | 1,503 | | | — | | | — | | | 1,514 | |
| Repurchases and forfeitures under share award plan | (101,158) | | | (1) | | | (243) | | | — | | | — | | | (244) | |
| Balance at December 31, 2021 | 32,662,649 | | | $ | 327 | | | $ | 461,298 | | | $ | (281,064) | | | $ | 1,029 | | | $ | 181,590 | |
The accompanying notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-10
AlerisLife Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
|
| | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 |
| CASH FLOW FROM OPERATING ACTIVITIES: | | | |
| Net loss | $ | (19,995 | ) | | $ | (74,083 | ) |
| Adjustments to reconcile net loss to cash used in operating activities: | | | |
| Depreciation and amortization expense | 16,640 |
| | 35,939 |
|
| Loss (gain) on sale of senior living communities | 856 |
| | (7,131 | ) |
| Unrealized (gain) loss on equity securities | (782 | ) | | 690 |
|
| Realized gain on sale of debt and equity securities | (229 | ) | | (99 | ) |
| Loss on disposal of property and equipment | 86 |
| | 16 |
|
| Long-lived asset impairment | 3,282 |
| | 461 |
|
| Equity in earnings of an investee, net of tax | (575 | ) | | (516 | ) |
| Stock based compensation | 439 |
| | 616 |
|
| Provision for losses on receivables | 4,891 |
| | 4,904 |
|
| Amortization of non-cash rent adjustments | (13,840 | ) | | (6,609 | ) |
| Other non-cash expense (income) adjustments, net | 346 |
| | 1,192 |
|
| Changes in assets and liabilities: | | | |
| Accounts receivable | (1,323 | ) | | (3,989 | ) |
| Prepaid expenses and other assets | 914 |
| | 1,535 |
|
| Accounts payable and accrued expenses | 12,850 |
| | (4,211 | ) |
| Accrued compensation and benefits | 208 |
| | (2,472 | ) |
| Due (to) from related persons, net | (1,619 | ) | | (1,683 | ) |
| Other current and long-term liabilities | (6,258 | ) | | 1,217 |
|
| Net cash used in operating activities | (4,109 | ) | | (54,223 | ) |
| | | | |
| CASH FLOW FROM INVESTING ACTIVITIES: | | | |
| Acquisition of property and equipment | (57,494 | ) | | (48,980 | ) |
| Purchases of investments | (2,991 | ) | | (5,297 | ) |
| Proceeds from sale of property and equipment | 110,027 |
| | 17,956 |
|
| Distributions in excess from Affiliates Insurance Company | 9,000 |
| | — |
|
| (Settlement of liabilities) proceeds from sale of communities | (754 | ) | | 31,819 |
|
| Proceeds from sale of investments | 5,193 |
| | 9,438 |
|
| Net cash provided by investing activities | 62,981 |
| | 4,936 |
|
| | | | |
| CASH FLOW FROM FINANCING ACTIVITIES: | | | |
| Proceeds from borrowings on revolving credit facilities | 5,000 |
| | 76,484 |
|
| Repayments of borrowings on revolving credit facilities | (56,484 | ) | | (25,000 | ) |
| Repayments of mortgage notes payable | (365 | ) | | (509 | ) |
| Payment of deferred financing fees | (1,271 | ) | | — |
|
| Payment of employee tax obligations on withheld shares | (26 | ) | | (11 | ) |
| Net cash (used in) provided by financing activities | (53,146 | ) | | 50,964 |
|
| | | | |
| Change in cash, cash equivalents and restricted cash | 5,726 |
| | 1,677 |
|
| Restricted cash transferred to held for sale assets | (5 | ) | | — |
|
| Cash, cash equivalents and restricted cash at beginning of period | 51,258 |
| | 49,581 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 56,979 |
| | $ | 51,258 |
|
| Reconciliation of cash, cash equivalents and restricted cash | | | |
| Cash and cash equivalents | $ | 31,740 |
| | $ | 29,512 |
|
| Restricted cash | 25,239 |
| | 21,746 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 56,979 |
| | $ | 51,258 |
|
| | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Interest paid | $ | 1,819 |
| | $ | 1,577 |
|
| Income taxes (received) paid, net | $ | (1,947 | ) | | $ | 311 |
|
| | | | |
| NON-CASH ACTIVITIES: | | | |
| Initial recognition of right of use asset | $ | 1,478,958 |
| | $ | — |
|
| Initial recognition of lease liability | $ | 1,478,958 |
| | $ | — |
|
| Real estate sales | $ | — |
| | $ | 33,364 |
|
| Mortgage notes assumed by purchaser in real estate sales | $ | — |
| | $ | 33,364 |
|
| | | | | | | | | | | | | | |
| | | For the year ended December 31, |
| | | 2021 | | 2020 |
| CASH FLOW FROM OPERATING ACTIVITIES: | | | | |
| Net loss | | $ | (29,925) | | | $ | (7,589) | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | |
| Depreciation and amortization | | 11,873 | | | 10,997 | |
| Unrealized gain on equity investments | | (730) | | | (480) | |
| Realized gain on sale of debt and equity investments | | (218) | | | (425) | |
| Lease terminations | | (408) | | | 22,899 | |
| Long-lived asset impairment | | 890 | | | — | |
| Equity in loss of an investee | | 177 | | | — | |
| Share-based compensation | | 1,484 | | | 513 | |
| Provision for losses on accounts receivables | | 2,089 | | | 1,450 | |
| Other non-cash expense adjustments, net | | 992 | | | 633 | |
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | (2,229) | | | 23,636 | |
| Due from related person | | 54,693 | | | (70,799) | |
| Prepaid expenses and other current and long term assets | | (4,248) | | | (10,324) | |
| Accounts payable | | 10,351 | | | (6,986) | |
| Accrued expenses and other current liabilities | | (10,894) | | | 37,813 | |
| Accrued compensation and benefits | | (36,248) | | | 34,914 | |
| Due to related persons | | (2,706) | | | 4,338 | |
| Other current and long term liabilities | | (2,516) | | | 10,791 | |
| Net cash (used in) provided by operating activities | | (7,573) | | | 51,381 | |
| | | | |
| CASH FLOW FROM INVESTING ACTIVITIES: | | | | |
| Acquisition of property and equipment | | (9,439) | | | (5,427) | |
| Purchases of debt and equity investments | | (3,156) | | | (5,750) | |
| Proceeds from sale of debt and equity investments | | 4,934 | | | 10,408 | |
| Proceeds from sale of property and equipment | | — | | | 2,725 | |
| Distributions in excess of earnings from an investee | | 11 | | | 287 | |
| Net cash (used in) provided by investing activities | | (7,650) | | | 2,243 | |
| | | | |
| CASH FLOW FROM FINANCING ACTIVITIES: | | | | |
| Costs related to issuance of common stock | | — | | | (559) | |
| Repayments of mortgage notes payable | | (414) | | | (387) | |
| Repayments of finance lease principal | | (807) | | | — | |
| Payment of employee tax obligations on withheld shares | | (214) | | | (60) | |
| Net cash used in financing activities | | (1,435) | | | (1,006) | |
| | | | |
| (Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents | | (16,658) | | | 52,618 | |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 109,597 | | | 56,979 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 92,939 | | | $ | 109,597 | |
| | | | |
| Reconciliation of cash and cash equivalents and restricted cash and cash equivalents: | | | | |
| Cash and cash equivalents | | $ | 66,987 | | | $ | 84,351 | |
| Current restricted cash and cash equivalents | | 24,970 | | | 23,877 | |
| Other restricted cash and cash equivalents | | 982 | | | 1,369 | |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 92,939 | | | $ | 109,597 | |
| | | | |
| Supplemental cash flow information: | | | | |
| Interest paid | | $ | 453 | | | $ | 480 | |
| Income taxes paid, net | | 449 | | | (40) | |
| Operating lease payments, including lease termination payment | | 7,952 | | | 4,643 | |
| Financing lease interest payments | | 332 | | | 92 | |
| | | | |
| Non-cash investing and financing activities: | | | | |
| Liabilities assumed related to issuance of our common stock | | $ | — | | | $ | 51,547 | |
| Change in accrued capital | | 267 | | | 2,656 | |
| Right-of-use assets obtained in exchange for finance lease liabilities | | — | | | 4,724 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | 9,746 | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
FIVE STAR SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-11
AlerisLife Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
1. OrganizationBasis of Presentation and Description of BusinessOrganization
GeneralGeneral.. AlerisLife Inc., formerly known as Five Star Senior Living Inc., collectively with its consolidated subsidiaries, the Company, we, us or our, is a corporation formedholding company incorporated in 2001 under the lawsMaryland and substantially all of the State of Maryland. our business is conducted by our 2 segments: (i) residential (formerly known as senior living) through our brand Five Star Senior Living, or Five Star, and (ii) lifestyle services (formerly known as rehabilitation and wellness services) primarily through our brands Ageility Physical Therapy Solutions and Ageility Fitness, or collectively Ageility, as well as Windsong Home Health.
As of December 31, 2019,2021, through our residential segment, we owned and operated 268 or managed, 141senior living communities located in 3228 states with 31,28520,105 living units, including 257 primarily10,423 independent andliving apartments, 9,636 assisted living communitiessuites, which includes 1,872 of our Bridge to Rediscovery memory care units, and 1 continuing care retirement community, or CCRC, with 30,021106 living units, and 11including 46 skilled nursing facilities,facility, or SNFs, with 1,264SNF, units that was closed in February 2022. We managed 121 of these senior living units.communities (18,005 living units) for Diversified Healthcare Trust, or DHC, and owned 20 of these senior living communities (2,100 living units). As of December 31, 2019,2021, we owned and operated 20transitioned the management of these senior livingcommunities (2,108 living units), we leased and operated 170 of these senior livingcommunities (18,840 living units) and we managed 78 of these senior livingcommunities (10,337 living units). Our 268107 senior living communities as of December 31, 2019, included 11,364 independentwith approximately 7,400 living apartments, 16,470 assistedunits to new operators pursuant to the Strategic Plan described below. On September 30, 2021, our former lease with Healthpeak Properties, Inc, or PEAK, for 4 communities (with approximately 200 living suites and 3,451 SNF units.units) was terminated. The foregoing numbers exclude living units categorized as out of service.
Our lifestyle services segment provides a comprehensive suite of lifestyle services including Ageility rehabilitation and fitness, Windsong home health and other home based, concierge services at senior living communities we own and operate or manage as well as at unaffiliated senior living communities. As of December 31, 2021, Ageility operated 10 inpatient rehabilitation clinics in senior living communities owned by DHC, all of which are in communities that were transitioned to new operators during the year ended December 31, 2021. As of December 31, 2021, Ageility operated 205 outpatient rehabilitation clinics, of which 106 were located at Five Star operated senior living communities and 99 were located within senior living communities not operated by Five Star. In December 2021, we closed 17 outpatient rehabilitation clinics that were in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022.
2020 Restructuring of our Business Arrangements with DHC. On AprilEffective as of January 1, 2019,2020 we entered into a transaction agreement, or the Transaction Agreement, with Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust), or DHC, to restructurerestructured our business arrangements with DHC, and after giving effect to the restructuring transactions, all 244 of the senior living communities owned by DHC that we then operated were pursuant to which, effectivemanagement agreements. In June 2021, we and DHC replaced our management agreements that were then in effect with the Master Management Agreement, as of January 1, 2020, or the Conversion Time:described below:
We recognized transaction costs of $1,448 related to the 2020 restructuring of our 5 then existing master leasesbusiness arrangements with DHC for allthe year ended December 31, 2020.
For more information regarding the 2020 Restructuring see Note 10.
Strategic Plan. On April 9, 2021, we announced a new strategic plan, or the Strategic Plan, including to:
•Reposition AlerisLife's senior living management service offering to focus on larger independent living and assisted living as well as active adult communities and exit skilled nursing by transitioning 108 communities to new operators and closing approximately 1,500 SNF living units in retained CCRCs;
•Evolve through investment in an enhanced scalable corporate shared services center to support operations and growth and to deliver differentiated, customer focused senior living resident experiences across a segmented portfolio of DHC’scommunities, as well as through home health and concierge offerings. We are expanding our Ageility service line by introducing innovative fitness and personal training offerings to complement outpatient therapy, and home health services, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, and general personal fitness and wellness programs; and
•Diversify with a focus on revenue diversification opportunities, including growing Ageility rehabilitation services and expanding lifestyle services to provide choice based, financially flexible senior living resident experience and reach customers outside of senior living communities.
During and subsequent to the year ended December 31, 2021, we made the following progress with respect to the Reposition phase of the Strategic Plan:
AlerisLife Inc.
Notes to Consolidated Financial Statements
(dollarsin thousands, exceptpershareamounts)
•We and DHC amended our management arrangements on June 9, 2021; see Note 10 for additional information on the amendments to the management arrangements with DHC,
•Transitioned the management of 107 senior living communities thatwith approximately 7,400 living units to new operators,
•Closed 1 senior living community with approximately 100 living units in February 2022,
•Closed all 1,532 SNF living units in 27 managed CCRCs, and began collaborating with DHC to reposition these SNF units,
•Closed 27 of the 37 Ageility inpatient rehabilitation clinics we then leased, as well as our then existing managementplanned to close, and pooling
•For the remaining 10 Ageility inpatient rehabilitation clinics, entered into agreements with DHC for DHC’sthe new operators to continue to provide these services through August 2022.
During and subsequent to the year ended December 31, 2021, we made the following progress with respect to the Evolve phase of the Strategic Plan:
•Completed enhancements to our corporate technology infrastructure,
•Invested in critical areas of residential experience at Five Star senior living communities, including community wireless connectivity, resident transportation services and re-designed senior living community common areas and resident units, deploying $11,684 and $103,378 of capital in our owned and managed communities, respectively,
•Invested in digital marketing infrastructure to effectively reduce cost per digital lead by approximately 70.0%,
•Entered into a culinary services partnership with Compass Group to transform the senior living resident dining experience,
•Entered into a collaboration with Dispatch Health to enable senior living resident access to ambulatory care services in their community,
•Standardized certain administrative functions through centralization efforts to enhance operating efficiency, and
•Subsequent to year end, we hired a Chief People Officer and a Chief Customer Officer.
During the year end December 31, 2021, we made the following progress with respect to the Diversify phase of the Strategic Plan:
•Opened 15 net new Ageility outpatient rehabilitation clinics, exclusive of the closure of 17 Ageility outpatient rehabilitation clinics in December 2021 in Five Star senior living communities that were then managed by us, were terminated and replaced,transitioned to new operators in 2021 or closed in February 2022, bringing 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 sharesAgeility outpatient rehabilitation clinic total to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record205, as of December 13, 2019,31, 2021, and
•Grew Ageility fitness revenues to $3,303 or together,a 38.1% increase over the Share Issuances; andsame period in 2020.
as consideration for the Share Issuances, DHC provided to us $75,000 of additional consideration by assuming certain of our working capital liabilities. Such consideration, the Conversion and the Share Issuances are collectively referred to as the Restructuring Transactions.
In connection with the Transaction Agreement, we entered into a credit agreement with DHC pursuant to which DHC extended to us a $25,000 line of credit, or the DHC credit facility, which was secured by 6 senior living communities we own. The DHC credit facility matured and was terminated in connection with the completion of the Restructuring Transactions. There were 0 amounts outstanding under the DHC credit facility at the time of such termination and we did not make any borrowings under the DHC credit facility during its term.
Reverse Stock Split. On September 30, 2019, we completed a one-for-ten reverse stock splitrepositioning of our outstanding common shares, orresidential management services, we incurred restructuring expenses of $19,196, approximately $13,311 of which were reimbursed by DHC. These expenses included $7,100 of retention bonus payments, $9,091 of severance, benefits and transition expenses, and $3,005 of transaction expenses. See Note 19 for summary of restructuring expenses and the Reverse Stock Split, pursuant to which every ten of our common shares issuedcorresponding liability.
See Notes 10 and outstanding as of the effective time of the Reverse Stock Split were converted into one share of our common stock, par value $.10 per share, subject to the receipt of cash in lieu of fractional shares. Following the effective time of the Reverse Stock Split on September 30, 2019, we changed the par value of our common stock from $.10 per share back to $.01 per share. The Reverse Stock Split affected all record holders of our common shares uniformly and did not affect any record shareholder’s percentage ownership interest in us. The Reverse Stock Split reduced the number of our then issued and outstanding common shares from 50,823,340 to 5,082,334.
All impacted amounts and share19 for more information included in the consolidated financial statements and notes hereto have been retroactively adjusted for the Reverse Stock Split, effective September 30, 2019, as if the Reverse Stock Split occurred on the first date ofStrategic Plan, the first period presented. Certain adjusted amounts amendments to our management arrangements and our business arrangements with DHC.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin the notes to these consolidated financial statements may not agree with the previously reported amounts due to the receipt of cash in lieu of fractional shares.thousands, exceptpershareamounts)
2. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of AlerisLife Inc, formerly known as Five Star Senior Living Inc., and its wholly ownedwholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
UseEstimates and Assumptions. The preparation of Estimates. Preparation of these consolidated 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-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.
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 notesnote payable. Except for our mortgage debt,note payable, the fair value of these financial instruments was not materially different from their carrying values at December 31, 20192021 and 2018.2020. We estimate the fair values of our mortgage debtnote 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 aboutthat engage 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. As of
We operate in 2 reportable segments: (1) residential (formerly known as senior living) and (2) lifestyle services (formerly known as rehabilitation and wellness services). At December 31, 2019,2021, we have 2 operating segments: senior livingchanged the name of our segments to better describe the business and rehabilitation and wellness.operations of those segments. There were no changes in the composition of the segments. In the senior livingresidential reportable segment, we operate for our own account or manage for the account of others and operate for our own account, primarily independent living communities and assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to older adults.through our Five Star division. In the lifestyle services segment, we primarily provide a comprehensive suite of rehabilitation and wellness operating segment, we provide therapy 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 and human resources. We allocate corporate and other amounts to our residential and lifestyle services segments to assist in determining the inpatient settingallocation of resources and in outpatient clinics. We haveassessing the performance of our segments. Corporate and other allocation amounts are determined that our 2 operating segments meetby applying an estimated cost rate to the aggregation criteria as prescribed underrevenues of each division within the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 280, Segment Reporting,reportable segments. Estimated cost rates used to allocate corporate and we have therefore determined that our business is comprised of 1 reportable segment, senior living.other amounts vary by division. 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 participatesis organized in our workers’ compensation, professionalthe Cayman Islands. We do not allocate assets to operating segments and, general liability and certain automobile insurance programs.therefore, no asset information is provided for reportable segments. See Note 4 for more information.
EarningsNet 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.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Cash and Cash Equivalents and Restricted Cash.Cash and Cash Equivalents. Cash and cash equivalents as of December 31, 2021 and 2020, consisting of 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.
Restricted cash and cash equivalents as of December 31, 20192021 and 2018, includes2020 include 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 mortgagesmortgage and certain resident security deposits. Our restricted cash and cash equivalents consist of the following:
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | Current | | Long-Term | | Current | | Long-Term |
| Insurance reserves and other restricted amounts | $ | 679 |
| | $ | 1,244 |
| | $ | 691 |
| | $ | 923 |
|
| Real estate taxes and capital expenditures as required by our mortgages | 526 |
| | — |
| | 483 |
| | — |
|
| Resident security deposits | 32 |
| | — |
| | 612 |
| | — |
|
| Workers’ compensation letter of credit collateral | 21,655 |
| | — |
| | 17,934 |
| | — |
|
| Health deposit-imprest cash | 1,103 |
| | — |
| | 1,103 |
| | — |
|
| Total | $ | 23,995 |
| | $ | 1,244 |
| | $ | 20,823 |
| | $ | 923 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| | Current | | Long-Term | | Current | | Long-Term |
| Workers’ compensation letter of credit collateral | $ | 22,899 | | | $ | — | | | $ | 21,561 | | | $ | — | |
| Insurance reserves and other restricted amounts | 356 | | | 982 | | | 644 | | | 1,369 | |
| Health deposit-imprest cash | 1,103 | | | — | | | 1,103 | | | — | |
| Real estate taxes and certain capital expenditures as required by our mortgage | 612 | | | — | | | 569 | | | — | |
| | | | | | | |
| Total | $ | 24,970 | | | $ | 982 | | | $ | 23,877 | | | $ | 1,369 | |
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 trade receivables.accounts receivable. We have cash 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 trade receivablesaccounts receivable is further mitigated by the diversity, both by geography and by industry, of the customer base. As of December 31, 2019,2021, payments due from Medicare and Medicaid represented 26.5%32.1% and 25.0%1.8%, respectively, of our gross consolidated accounts receivable balance. As
of December 31, 2018,2020, payments due from Medicare and Medicaid represented 23.4%32.0% and 33.8%1.2%, respectively, of our gross consolidated accounts receivable.receivable balance. The Company does not believe there are significant credit risks associated with the receivables from these governmental programs.
We derive primarily all of our residential management fee revenuefees from DHC. As of December 31, 20192021 and 2018,2020, we had $3,363net $37,866 and $89,911 due from DHC and $10,900 due to DHC, respectively, which are included in due from related persons and due to related persons respectively,on our consolidated balance sheets. See Note 15 for more information. The balance due at December 31, 2020 included deferred payroll taxes of $22,194 under the CARES Act which was paid in September 2021, described more fully in Note 18, 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 inof an allowance for doubtful accounts receivable asto represent the Company's estimate of December 31, 2019 and 2018, are amounts due fromexpected losses. The adequacy of the Medicare program of $9,056 and $8,821, respectively, and amounts due from various state Medicaid programs of $8,532 and $12,757, respectively.
We estimate allowancesallowance for uncollectible amounts and contractual allowances based upon factors which include, but are not limited to,doubtful accounts is reviewed on an ongoing basis using 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.factors.
Billings for services under third partythird-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 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, 2018 | | $ | 3,572 |
| | $ | 4,904 |
| | $ | 1,461 |
| | $ | (6,515 | ) | | $ | 3,422 |
|
| December 31, 2019 | | $ | 3,422 |
| | $ | 4,891 |
| | $ | 1,459 |
| | $ | (5,108 | ) | | $ | 4,664 |
|
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | Balance at Beginning of Period | | Provision for Doubtful Accounts | | Recoveries | | Write-offs | | Balance at End of Period |
| December 31, 2020 | | $ | 4,664 | | | $ | 1,450 | | | $ | 156 | | | $ | (3,121) | | | $ | 3,149 | |
| December 31, 2021 | | $ | 3,149 | | | $ | 2,089 | | | $ | 323 | | | $ | (2,711) | | | $ | 2,850 | |
Equity and Debt Investments. On January 1, 2018, we adopted FASB Accounting Standards Update, or ASU, No. 2016-01, Recognition 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 value of our equity investments through other comprehensive income. Pursuant 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 $1,947 on January 1, 2018, to accumulated other comprehensive income and accumulated deficit in our consolidated balance sheets.
Equity investments are carried at fair value with changes in fair value recorded in earnings. At December 31, 2019,2021, these equity investments had a fair value of $6,409$13,033 and a net unrealized holding gain of $1,201.$4,105. 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.
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-insurance programs. At December 31, 2019,2021, these debt investments had a fair value of $21,766$10,375 and a net unrealized holding gain of $2,104.$296. 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.
In 20192021 and 2018,2020, our debt and equity investments generated interest and dividend income of $1,364$358 and $818,$757, 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, 2021 | $ | 2,474 | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 2,474 | | | $ | 10 | |
| December 31, 2020 | $ | 291 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | 291 | | | $ | 4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2019 | $ | 292 |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 292 |
| | $ | 10 |
|
| December 31, 2018 | $ | 1,688 |
| | $ | 31 |
| | $ | 12,234 |
| | $ | 265 |
| | $ | 13,922 |
| | $ | 296 |
|
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’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’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, 20192021 and 2018.2020.
Deferred Financing 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 agreement governing our credit facility, or our credit agreement. Our unamortized balance of deferred finance costs was $980 and $187 at December 31, 2019 and 2018, respectively, of which $692 and $187 was included in other current assets on our consolidated balance sheets as of December 31, 2019 and 2018, respectively, and $288 and $0 was included in other long-term assets on our consolidated balance sheets as of December 31, 2019 and 2018, respectively. In connection with an amendment to the agreement governing our prior credit facility, 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. No such write-offs occurred during the year ended December 31, 2019. In June 2019, we entered into a new credit agreement to replace our prior credit facility with our $65,000 secured revolving credit facility.facility, or the Credit Facility. See Note 89 for more information on our credit facility. AtCredit Facility. Our unamortized balance of deferred finance costs was $75 and $288 at December 31, 2019, the weighted average amortization period remaining, related to our finance costs, is less than two years.
Assets2021 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 these2020, respectively, which was included in prepaid expenses and other current assets on theour 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 periodsheets. The Credit Facility was terminated on January 27, 2022.
AlerisLife Inc.
Notes 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.Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Property and Equipment. Property and equipment are recorded at cost and depreciated 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 - 153-15 |
| Equipment | | 7 |
| Computer equipment and software | | 5 |
| Furniture and fixtures | | 7 |
| Network Development | | 10 |
| Vehicles | | 5 |
We regularly evaluate whetherroutinely perform an assessment of long-lived assets to determine 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 result from the use and eventual 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, with any amount in excess of fair value recognized as an expense in the current period.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 projected cash flows using standard industry valuation techniques. Undiscountedinternally developed cash flow projectionsmodels that our assets or asset groups are expected to generate, and we consider these estimates ofto be a Level 3 fair value amounts are based on a number of assumptions such as revenuemeasurement.
Commitments and expense growth rates, estimated holding periods and estimated capitalization rates (Level 3).
Equity Method Investments. As of December 31, 2019, and until its dissolution on February 13, 2020, we and 6 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 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 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. As of December 31, 2019, we had invested $6,034 in AIC. 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.
Legal Proceedings and Claims.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, 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 0,zero, 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. We partially self-insure up to certain limits for workers’ compensation, professional and general liability and automobile and property coverage.insurance programs. Claims that exceed these limits are insured up to contractual limits, over which we are self-insured. We fully self-insure all health-related claims for our covered employees. We have established an offshore captive insurance company subsidiary that participates in our workers’ compensation, 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 $65,908 and $67,534 as of the year ended December 31, 2019 and 2018, respectively, and are included in accrued compensation and benefits, other current liabilities and accrued self-insurance obligations in our consolidated balance sheets.
Lease Accounting. On January 1, 2019, we adopted FASB ASC Topic 842, Leases, or ASC Topic 842, utilizing the modified retrospective transition method with no adjustments to comparative periods presented. Additionally, we elected the practical expedients within FASB ASU No. 2016-02, Leases (Topic 842), or 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.
In accordance with ASC Topic 842, atAt the inception of a contract, we, as lessee, evaluate and determine whether such a contract is or contains a lease based on whether such contract conveys the right to control the use of the identified asset. We 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. We have elected to apply the portfolio approach where possible in assessing 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 pieces of equipment that contain a lease. We have determined that none of these leases havean equipment lease has met any of the criteria to be classified as a finance lease and, therefore, we have accounted for all of theselease. The remaining leases asare operating leases.
We have determined that our leases for the use and maintenance of equipment and for our Ageility outpatient rehabilitation clinics are short-term leases. In accordance with ASC Topic 842, weleases, except for the equipment lease that is classified as a finance lease. We have made an
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
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 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 livingresidential operating expenses, lifestyle services 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, and our headquarters and the equipment finance lease are long-term leases. In accordance with ASC Topic 842, aA lessee is required to record a right of useright-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Accordingly, we have recorded a right of useright-of-use asset and lease liability for all of our leased communities and our headquarters.long-term leases. We determined that the discount rate implicit in the leases was not readily available, and therefore, in accordance with ASC Topic 842, we determined our incremental borrowing rate, or IBR, to calculate the right of useright-of-use assets and lease liabilities.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 extensions will be exercised and, therefore, we included payments required to be made under the committed lease term in calculating the right of useright-of-use assets and lease liabilities. ExpensesIn the consolidated statement of operations, expenses related to thesethe leases for senior living communities are recognized in the statement of operations in rent expense, except for the expenseother senior living operating expenses, expenses related to our headquarters which isare recorded in general and administrative expenses. Weexpenses and expenses related to our equipment finance lease are recognized in depreciation and amortization and interest and other expense. There were no variable lease payments primarily relatingin 2021 and 2020.
Our leases have remaining lease terms of up to percentageten 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 Sheet. At December 31, 2021, the weighted average remaining lease term was approximately eight years with a weighted average discount rate of 4.9%.
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 (1) | | Lease Liability |
| | 2022 | | 2023 | | 2024 | | 2025 | | There after | | Total | | |
Headquarters lease (December 31, 2031) (2) | 1 | N/A | $ | 9,197 | | | | $ | 1,046 | | | $ | 1,087 | | | $ | 1,128 | | | $ | 1,169 | | | $ | 7,858 | | | $ | 12,288 | | | 3.88% | | $ | 10,065 | |
Equipment lease
(December 31, 2025) | N/A | 5 year renewal option | 3,467 | | | | 1,140 | | | 1,140 | | | 1,140 | | | 1,140 | | | — | | | 4,560 | | | 7.60% | | 3,922 | |
| Total | | | $ | 12,664 | | | | $ | 2,186 | | | $ | 2,227 | | | $ | 2,268 | | | $ | 2,309 | | | $ | 7,858 | | | $ | 16,848 | | | 4.90% | | $ | 13,987 | |
(1) For the equipment lease, this represents the discount rate.
(2) On January 10, 2022, we entered into a third amendment which reduced our headquarters leased space from approximately 41,000 square feet to approximately 30,000 square feet.
Operating lease expenses consist of monthly rent paid undercosts, certain utilities and real estate taxes. For the years ended December 31, 2021 and 2020, we recognized $2,041 and $2,762 of operating lease expenses in other residential operating expenses, $2,431 and $2,356 in lifestyle services expenses and $2,082 and $1,760 in general and administrative expenses within our leasesconsolidated statements of operations, respectively. For the years ended December 31, 2021 and 2020, we recognized finance lease expenses of $1,256 and $323, consisting of amortization of the right-of-use asset of $924 and $230 and interest expense on the lease liability of $332 and $93, respectively, which are recorded in our consolidated statements of operations in depreciation and amortization and interest and other expenses, respectively.
We lease our headquarters from a subsidiary of ABP Trust. On February 24, 2021, we and the ABP Trust subsidiary renewed the lease 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 DHC and operating costs such as insurancean improvements allowance from ABP Trust not to exceed $2,667. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was $2,082 and $1,760 for the year ended December 31, 2021 and 2020, which amounts are included in general and administrative expenses. As a result of renewing this lease, we increased each of our right-of-use asset and lease liability noted below on our consolidated balance sheets by $9,746 to reflect the statementterms of operations in the period inamendment. We recognized a right-of-use asset and lease liability, which amounts were $10,065 and $496 for the obligationslease liability and $9,197 and $452 for those payments are incurred.
We have not capitalized any initial direct costs relatedthe right-of-use asset as of December 31, 2021 and December 31, 2020, respectively, with respect to our leases as these costsheadquarters lease, using an incremental borrowing rate of 3.9%. 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 January 10, 2022, we entered into the third amendment to the lease for our Corporate
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
headquarters which reduced the leased space from approximately 41,000 square feet to approximately 30,000 square feet. Commencing on July 1, 2022, the annual lease payment will range from $770 to $1,007 over the period of the lease. As a result of amending the lease we will decrease the right of use asset and lease liability by $2,629 and $2,658, respectively.
ASC Topic 842, Leases, or 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(ASC 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 in accordance with ASC Topic 842.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 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 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 within the tax provision in the consolidated statement of operations in that period.
We 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 operations.
Revenue Recognition.We recognize revenue from contracts with customers in accordance with ASC Topic 606 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 such portfolio. The five-step model defined by ASC Topic 606 requires us to: (i) identify our contracts with customers,customers; (ii) identify our performance obligations under those contracts,contracts; (iii) determine the transaction prices of those contracts,contracts; (iv) allocate the transaction prices to our performance obligations in those contractscontracts; and (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.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Residential and Lifestyle Services Revenues.A substantial portion of our revenue atfrom our independent living and assisted living communities relates to contracts with residents for housing services that are generally short-termshort term in nature and initially isare subject to ASC Topic 842. As previously discussed,noted earlier, we have concluded that the non-lease components of these contractsagreements are the predominant components of the contracts; therefore, we recognize revenue for these contractsagreements under ASC Topic 606. We also provide our residents and others with lifestyle services at our senior living communities as well as at outpatient rehabilitation clinics located separately from our senior living communities. Our contracts with residents and other customers that are within the scope of ASC Topic 606 are generally short-termshort 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-termshort 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 amortized on a straight linestraight-line basis into revenue over the term of the resident's agreement. When the resident 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. Revenue for basic housing and support services and 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 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.
Continuing Care Contracts. Residents at one of our senior living communities may enter continuing care contracts with us, which require the resident to pay an upfront entrance fee prior to moving into the community, which is partially refundable in certain circumstances up to 90% of the total entrance fee. NaN other forms of continuing care contracts were in effect for existing residents but are not offered to new residents. The non-refundable portion of a resident’s entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation. When the resident no longer resides within our community, the remaining deferred non-refundable fees are recognized in revenue. The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or upon the resale of the unit, or in some agreements, upon the resale of a comparable unit, or 12 months after the resident vacates the unit. The refundable portion of the entrance fee is not amortized and is included in security deposits and the current portion of continuing care contracts on the consolidated balance sheet. All refundable amounts due to residents at any time in the future are classified as current liabilities.
We pay refundsLifestyle services revenues at our Ageility rehabilitation clinics consist of charges 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 admission fees to 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 whichservices is classified as a current liability. The balance of our refundable admission fees as of December 31, 2019 and 2018 were $552 and $755, respectively, and were included in liabilities held for sale and security deposits and current portion of continuing care contracts, respectively, on our consolidated balance sheets. The balance of non-refundable admission fees as of December 31, 2019 and 2018 were $0 and $1,119, respectively, of which $0 and $863, respectively, were included in other long-term liabilities on our consolidated balance sheets.
SNFs. 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 revenuerecognized 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 areis 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 adjustments, and related revenue is recorded at the amount we ultimately 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 renderedprovided.
Residential Management Fees 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 21.5% and 23.3% of our senior living revenues for the years ended December 31, 2019 and 2018, respectively, from payments under Medicare and Medicaid programs.
Management Fee Revenue and Reimbursed Community-Level Costs Incurred on Behalf of Managed Communities.We manage senior living communities for the account of DHC pursuant to long-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 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.
Management We earn residential 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 residential management fees in the same period that we provide the management services to DHC, generally monthly.
We estimate the amount of incentive fee revenue expected to be earned, on an annual basis and revenue is recognized as services are provided.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.
FASB
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Commencing with the 2021 calendar year, we may also earn incentive fees from DHC under the 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%.
As part of the Strategic Plan, we amended our management arrangement with DHC. The incentive fee that we may earn in any calendar year for the senior living communities that we will continue to manage for DHC will no longer be subject to a cap and any senior living communities that are undergoing a major renovation or repositioning will be excluded from the calculation of the incentive fee and the incentive fee will be reset pursuant to the terms of the management agreements as a result of expected capital projects DHC is planning in the next five years.
For more information regarding the 2021 amendments to our management agreements with DHC, see "Properties" included 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.
ASU No. 2016-08, Revenue from Contracts with Customers(Topic (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), 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 DHC.DHC pursuant to the 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 DHC related to residential 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, |
| | | 2019 | | 2018 |
Leasing revenue (1) | | $ | 654,563 |
| | $ | 649,493 |
|
| Revenue from contracts with customers: | | | | |
Medicare and Medicaid programs (1) | | 237,455 |
| | 255,032 |
|
Additional requested services, and private pay and other third party payer SNF services (1) | | 193,165 |
| | 189,879 |
|
| Management fee revenue | | 16,169 |
| | 15,145 |
|
| Reimbursed costs incurred on behalf of managed communities | | 313,792 |
| | 280,845 |
|
| Total revenue from contracts with customers | | 760,581 |
| | 740,901 |
|
| Total revenues | | $ | 1,415,144 |
| | $ | 1,390,394 |
|
(1)Other reimbursed expenses. IncludedOther reimbursed expenses include reimbursements that arise from certain centralized services we provide pursuant to our 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 services provided by third parties for our customers and, therefore, we account for the cost of these services and the related reimbursement revenue on a gross basis. We recognized revenue from other reimbursed expenses of $31,605 and $25,648 for the years ended December 31, 2021 and December 31, 2020, respectively.
Government grants. We recognize income from government grants on a systematic and rational basis over the period in senior living revenuewhich we recognize the related expenses or loss of revenues for which the grants are intended to compensate when there is reasonable assurance that we will comply with the applicable terms and conditions of the grant and there is reasonable assurance that the grant will be received.
Accounting for Costs Associated with Exit or Disposal Activities. A liability for costs associated with exit or disposal activities other than in our consolidated statements of operations.
One-time Employee Termination Benefits.a business combination, is recognized when the liability is incurred. The liability, recognized under Accounting Standards Codification, or ASC, 420, FASB ASC Topic 420, Exit or Disposal Cost Obligations and ASC 712, Compensation — Nonretirement Postemployment - special termination benefits, or ASC Topic 420, specifies the criteriais measured at fair value, with adjustments for recognizing a one-time employee termination arrangement. In connection with their respective retirement, we and The RMR Group LLC, or RMR LLC, entered into retirement agreements with our former officers, Bruce J. Mackey Jr. and Richard A. Doyle. Additionally, we entered into a separation agreement with our former Senior Vice President, Senior Living Operations, R. Scott Herzig. Pursuant to these agreements, we madechanges in estimated cash payments of $600 and $510 to Mr. Mackey and Mr. Herzig, respectively,flows recognized in January 2019, and made cash payments of $260 to Mr. Doyle in each of June 2019 and January 2020. In addition, we made release payments to Mr. Mackey in cash, in an aggregate amount of $330, duringearnings. During the year ended December 31, 20192021, costs were incurred related to the Strategic Plan. See Note 19 for summary of restructuring expenses and $110 in January 2020, and made transition payments to Mr. Mackey and Mr. Doyle in cash, in an aggregate amount of $96 and $56, respectively, during the year ended December 31, 2019. Our arrangements with Messrs. Mackey, Herzig and Doyle meet the criteria in ASC Topic 420, and, as a result, we recorded the full severance cost of $1,160 for Mr. Mackey and $510 for Mr. Herzig in the year ended December 31, 2018, and we recorded the full severance cost of $581 for Mr. Doyle in the year ended December 31, 2019, all of which amounts are included in general and administrative expenses in our consolidated statements of operations.corresponding liability.
Reclassifications. We have made reclassifications to the prior years’ financial statements of the prior years to conform to the current year’s presentation. These reclassifications had no effect on net loss or shareholders’ equity. As of January 1, 2020, we reclassified certain of our investments from debt 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 reclassified the related unrealized gain of $1,694 from accumulated other comprehensive income to accumulated deficit on January 1, 2020.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Recently Adopted Accounting Pronouncements.
As previously discussed, on January 1, 2019,On December 31, 2021, we adopted FASB ASU No. 2016-02 and FASB ASU No. 2018-11 under ASC Topic 842,2020-04, LeasesReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions on contract modifications meeting certain criteria to ease the financial reporting burdens of the expected market transition from the London Inter-bank Offered Rate, or ASC Topic 842, utilizingLIBOR, and other interbank offered rates to the modified retrospective transition method with no adjustments to comparative periods presented. Accordingly,alternative reference rates. For a contract that meets the information presented for 2018 has not been restated and remains as previously reported under ASC 840 and related interpretations.Additionally, we elected the practical expedients withincriteria, this ASU No. 2016-02 that allowgenerally allows an entity to not reassessaccount for and present modifications 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 the adoption of these ASUs did not affect the rent we pay, the rent expense amounts presented in our consolidated statements of operations were impacted primarily due to changes in how we accounted for our deferred gain on the sale and leaseback transaction we entered into with DHC in 2017. As such, on January 1, 2019, we recorded through retained earnings our total deferred gain of $67,473 on our consolidated balance sheets as of December 31, 2018, $55 of which was in accounts payable and accrued expenses, $6,724 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.
On January 1, 2019, we adopted FASB 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 ASUevent that does not require anmeasurement at the modification date or reassessment of a previous accounting change for securities held at a discount; the discount continues to be amortized to maturity.determination. The adoption of this ASU did not have a material impact on our consolidated financial statements.
On January 1, 2019,December 31, 2021, we adopted FASB ASU No. 2018-02,2021-10, Income Statement-Reporting Comprehensive IncomeGovernment Assistance (Topic 220)832): Disclosures by Business Entities about Government Assistance, which permits an entity to reclassify the tax effectsrequires annual disclosures about transactions with a government that remain recorded within other comprehensive income to retained
earnings asare accounted for by applying a result of the tax reform legislation that became effective in December 2017. The adoption of this ASU did not have a material impact on our consolidated financial statements.
On January 1, 2019, we adopted FASB ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), which expands the scope of ASU Topic 718 to include share based payment transactions for acquiring goods and services from non-employees.grant or contribution accounting model by analogy. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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 us, 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, 2022. We are assessing the potential impact that the adoption of these ASUsthis ASU (and the related clarifying guidance issued by the FASB) will have on our consolidated financial statements.
AlerisLife 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 FASB issued ASU No. 2018-13, nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors:
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| Residential | | Lifestyle Services | | | | Total |
| Private payer | $ | 63,495 | | | $ | 1,066 | | | | | $ | 64,561 | |
| Medicare and Medicaid programs | 1,143 | | | 41,596 | | | | | 42,739 | |
| Other third-party payer programs | — | | | 25,352 | | | | | 25,352 | |
| Residential management fees | 47,479 | | (1) | — | | | | | 47,479 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 722,857 | | (1) | — | | | | | 722,857 | |
| Other reimbursed expenses | 31,605 | | (1) (2) | — | | | | | 31,605 | |
| Total revenues | $ | 866,579 | | | $ | 68,014 | | | | | $ | 934,593 | |
(1)Fair Value Measurement (Topic 820) Represents separate revenue sources earned from DHC; see Note 4 for discussion of Segment Information.
(2), which modifies certain disclosure requirements in Topic 820, such as Includes $13,311 of restructuring expenses reimbursed by DHC for the removalyear ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| Residential | | Lifestyle 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 | — | | | 36,993 | | | | | 36,993 | |
| Residential management fees | 62,880 | | (1) | — | | | | | 62,880 | |
| Reimbursed community-level costs incurred on behalf of managed communities | 916,167 | | (1) | — | | | | | 916,167 | |
| Other reimbursed expenses | 25,648 | | (1) | — | | | | | 25,648 | |
| Total revenues | $ | 1,081,710 | | | $ | 82,032 | | | | | $ | 1,163,742 | |
(1) Represents separate revenue streams earned from DHC; see Note 4 for discussion of Segment Information.
Other operating income. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. Under the CARES Act, the U.S. Department of Health and Human Services, or HHS, established the Provider Relief Fund. The Provider Relief Fund was further supplemented on December 27, 2020 by the Consolidated Appropriations Act, 2021. Retention and use of the needfunds received under the CARES Act are subject to disclosecertain terms and conditions, including certain reporting requirements. Other operating income includes income recognized for funds we have received pursuant to the Provider Relief Fund of the CARES Act for which we have determined that we were in compliance with the terms and conditions of the Provider Relief Fund of the CARES Act. We recognize other operating income in our consolidated statements of operations to the extent we estimate we have COVID-19 incurred losses or related costs for which provisions of the CARES Act is intended to compensate. The amount of income we recognize for these estimated losses and costs is limited to the amount of funds we received during the period in which the estimated losses and reasoncosts were recognized or incurred or, if funds were received subsequently, the period in which the funds were received. We recognized other operating income of $7,795 and $3,435 for transfers between Level 1the years ended December 31, 2021 and Level 22020, respectively. See Note 18 for more information.
4. Segment Information
We do not allocate assets to operating segments and, therefore, no asset information is provided for reportable segments. Certain of our general and administrative expenses incurred at our corporate office are deemed centralized services and allocated amongst operating segments. Centralized services are largely determined by job function and allocated by percentage of each communities and clinics gross revenues. At December 31, 2021, we changed the names of our segments to better describe the business and operations of those segments. The segment formerly known as senior living is now called residential and the segment formerly known as rehabilitation and wellness services is now called lifestyle services. There were no changes in the composition of the fair value hierarchy,segments. Results of operations and several changesselected financial information by reportable segment and the reconciliation to the consolidated financial statements are as follows:
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| Residential (1) | | Lifestyle Services (2) | | Corporate and Other (3) | | Total |
| Revenues | $ | 866,579 | | | $ | 68,014 | | | $ | — | | | $ | 934,593 | |
| Other operating income | 7,776 | | | 19 | | | — | | | 7,795 | |
| Operating expenses | 831,380 | | | 61,227 | | | 75,640 | | | 968,247 | |
| Operating income (loss) | 42,975 | | | 6,806 | | | (75,640) | | | (25,859) | |
| Allocated corporate and other costs | (43,781) | | | (3,403) | | | 47,184 | | | — | |
| Other income (loss), net | (2,360) | | | — | | | (1,295) | | | (3,655) | |
| (Loss) income before income taxes and equity in losses of an investee | (3,166) | | | 3,403 | | | (29,751) | | | (29,514) | |
| Provision for income taxes | — | | | — | | | (234) | | | (234) | |
| Equity in losses of an investee | — | | | — | | | (177) | | | (177) | |
| Net (loss) income | $ | (3,166) | | | $ | 3,403 | | | $ | (30,162) | | | $ | (29,925) | |
_______________________________________(1) As more fully described in Note 19, the residential segment recognized $13,311 of restructuring expenses related to Level 3 fair value measurements. This ASU is effective for reporting periods beginning afterthe Strategic Plan and $13,311 of other reimbursed expenses in the year ended December 15, 2019. We expect this ASU will not have a material impact on our consolidated financial statements.31, 2021.
In August 2018,(3) As more fully described in Note 19, corporate and other recognized $4,452 of restructuring expenses related to the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40), which alignsStrategic Plan in 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. This ASU is effective for reporting periods beginning afteryear ended December 15, 2019. We expect this ASU will not have a material impact on our consolidated financial statements.31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| Residential | | Lifestyle Services | | Corporate and Other | | Total |
| Revenues | $ | 1,081,710 | | | $ | 82,032 | | | $ | — | | | $ | 1,163,742 | |
| Other operating income | 1,715 | | | 1,720 | | | — | | | 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 | | | — | |
| Other income (loss), net | (288) | | | — | | | (22,580) | | | (22,868) | |
| Income (loss) before income taxes | 7,766 | | | 12,322 | | | (27,014) | | | (6,926) | |
| Provision for income taxes | — | | | — | | | (663) | | | (663) | |
| Net income (loss) | $ | 7,766 | | | $ | 12,322 | | | $ | (27,677) | | | $ | (7,589) | |
In December 2019, the FASB also issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies certain requirements under Topic 740, including eliminating the exception to intraperiod tax allocation when there is a loss from continuing operations and income from other sources, such as other comprehensive income or discontinued operations. This ASU is effective for reporting periods beginning after December 15, 2020. We expect this ASU will not have a material impact on our consolidated financial statements.
3.5. Property and Equipment, net
Property and equipment, net consist of the following:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | | 2021 | | 2020 |
| Land | | $ | 12,155 | | | $ | 12,155 | |
| Buildings, construction in process and improvements | | 207,333 | | | 202,679 | |
| Furniture, fixtures and equipment | | 62,606 | | | 60,713 | |
| Property and equipment, at cost | | 282,094 | | | 275,547 | |
| Less: accumulated depreciation | | (122,251) | | | (116,296) | |
| Property and equipment, net | | $ | 159,843 | | | $ | 159,251 | |
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Land | $ | 12,155 |
| | $ | 16,383 |
|
| Buildings and improvements | 201,447 |
| | 208,375 |
|
| Furniture, fixtures and equipment | 59,174 |
| | 239,240 |
|
| Property and equipment, at cost | 272,776 |
| | 463,998 |
|
| Accumulated depreciation | (105,529 | ) | | (220,125 | ) |
| Property and equipment, net | $ | 167,247 |
| | $ | 243,873 |
|
On September 30, 2021, we terminated our lease for the 4 communities that we leased from PEAK. Under the terms of the termination agreements, we recorded a loss on lease termination of $3,278. Included in the calculation of the loss on lease termination was the derecognition of $1,174 of all property and equipment at the 4 previously leased communities. The loss was the aggregate of the lease termination fee of $3,100, other obligations of $548, legal transaction costs of $37, and the net derecognition carrying amounts of our right of use asset of $16,055, leasehold improvements and other fixed assets of $1,174, partially offset by the remaining lease obligations of $17,636. See Note 11 for further information on our determination of the loss on termination of the 4 leased communities.
On April 4, 2021, 1 of the 4 previously leased communities had a fire that caused extensive damage to the community. As a result, we recorded an impairment on certain furniture, fixtures and equipment and building improvements for the year ended December 31, 2021 of $890, which is recorded in other residential expenses in the statement of operations.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
Insurance proceeds received for property damages to the previously leased community caused by the fire of $1,500 were subsequently transferred to PEAK. No impairment charges were recorded for the year ended December 31, 2020.
We recorded depreciation expense relating to our property and equipment of $16,640$10,758 and $35,859$10,767 for the years ended December 31, 20192021 and 2018,2020, 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-lived assets impairment review, we recorded $3,148 and $387 of impairment charges to certain of our long-lived assets for the years ended December 31, 2019 and 2018, respectively. The fair values of the impaired assets were $4,520 and $362 as of December 31, 2019 and 2018, respectively. We also recorded long-lived asset impairment charges of $134 for the year ended December 31, 2019, to reduce the carrying value of 5 senior living communities we and DHC sold to their estimated fair value less costs to sell. For the year ended December 31, 2018, we recorded long-lived asset impairment charges of $74 to reduce the carrying value of 1 senior living community we and DHC sold to its estimated fair value less costs to sell. See Notes 9 and 11 for further information regarding the sales of these communities.
As of December 31, 2019 and 2018, we had $4,813 and $0, respectively, of net property and equipment classified as held for sale and presented separately on our consolidated balance sheets. See Notes 9 and 11 for more information regarding our communities classified as held for sale.
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 subsequently sold during the year ended December 31, 2019 to DHC for increased rent pursuant In relation to the termscommunities previously leased from PEAK, the disposal of our leases with DHC. Asfixed assets resulted in a decrease in accumulated depreciation of January 1, 2020, pursuant to the Transaction Agreement, DHC assumed $4,803.
$4,813 of net property and equipment related to our leased senior living communities that were classified as held for sale as of December 31, 2019. See Note 9 for more information regarding our leases and other arrangements with DHC.
4. Other Intangible Assets
The other intangible assets balance includes 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, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | 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 | ) | | — |
| | 3,767 |
| | (3,767 | ) | | — |
|
| | $ | 3,958 |
| | $ | (3,767 | ) | | $ | 191 |
| | $ | 3,958 |
| | $ | (3,767 | ) | | $ | 191 |
|
In connection with the Restructuring Transactions, the indefinite lived intangible assets have been reclassified to assets held for sale as of December 31, 2019 on our consolidated balance sheets.
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 year ended December 31, 2018 was $80. There was 0 amortization expense for definite lived intangible assets for the year ended December 31, 2019.
5.6. Income Taxes
Significant components of our deferred tax assets and liabilities at December 31, 20192021 and 2018,2020, which are included in other long-term assets on our consolidated balance sheets, were as follows:
|
| | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| Non-current deferred tax assets: | | | |
| Allowance for doubtful accounts | $ | 1,204 |
| | $ | 894 |
|
| Deferred gains on sale and leaseback transactions | 357 |
| | 18,789 |
|
| Insurance reserves | 2,500 |
| | 2,558 |
|
| Tax credits | 19,394 |
| | 19,636 |
|
| Tax loss carryforwards | 62,098 |
| | 57,914 |
|
| Interest expense | 958 |
| | 801 |
|
| Depreciable assets | 5,778 |
| | 4,831 |
|
| Goodwill | 2,536 |
| | 2,992 |
|
| Right of use lease obligation | 5,886 |
| | — |
|
| Other assets | 528 |
| | 1,050 |
|
| Total non-current deferred tax assets before valuation allowance | 101,239 |
| | 109,465 |
|
| Valuation allowance: | (87,665 | ) | | (101,300 | ) |
| Total non-current deferred tax assets | 13,574 |
| | 8,165 |
|
| | | | |
| Non-current deferred tax liabilities: | | | |
| Lease expense | (4,914 | ) | | (5,434 | ) |
| Employee stock grants | (7 | ) | | (35 | ) |
| Right of use lease asset | (5,886 | ) | | — |
|
| Other liabilities | (1,818 | ) | | (1,374 | ) |
| Total non-current deferred tax liabilities | (12,625 | ) | | (6,843 | ) |
| Net deferred tax assets | $ | 949 |
| | $ | 1,322 |
|
| | | | | | | | | | | |
| As of December 31, |
| | 2021 | | 2020 |
| Non-current deferred tax assets: | | | |
| Insurance reserves | $ | 2,087 | | | $ | 2,661 | |
| Tax credits | 1,938 | | | 1,060 | |
| Tax loss carryforwards | 39,297 | | | 36,838 | |
| Depreciable assets | 2,377 | | | 7,469 | |
| Goodwill | 2,431 | | | 2,536 | |
| Right-of-use lease obligation | 982 | | | 6,242 | |
| Other assets | 1,698 | | | 1,469 | |
| Total non-current deferred tax assets before valuation allowance | 50,810 | | | 58,275 | |
| Valuation allowance: | (47,926) | | | (46,485) | |
| Total non-current deferred tax assets | 2,884 | | | 11,790 | |
| | | |
| Non-current deferred tax liabilities: | | | |
| Lease expense | — | | | (4,381) | |
| Right-of-use lease asset | (868) | | | (6,180) | |
| Other liabilities | (1,873) | | | (1,085) | |
| Total non-current deferred tax liabilities | (2,741) | | | (11,646) | |
| Net deferred tax asset | $ | 143 | | | $ | 144 | |
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.
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.
As of December 31, 2019, our federal net operating loss carryforwards, which are scheduled to begin expiring in 2027 if unused, were approximately $184,850, and our federal tax credit carryforwards, which begin expiring in 2026 if unused, were approximately $18,723. At December 31, 2019, our federal tax returns filed for the 2016, 2017, and 2018 tax years are subject to examination and our net operating loss carryforwards and tax credit carryforwards are subject to adjustment by the Internal Revenue Service. While we have significant net operating losses, due to a “change of control”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 Issuancesshare issuances on January 1, 2020, further described in Note 10, we expect a significanthave 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, in the year ended December 31, 2020, we determined that a portion of our federal net operating losses and federal tax credits of $88,601 and $18,498, respectively, would lapse before they could be utilized and therefore we wrote off our deferred tax assets for federal net operating losses and federal tax credits by $18,606 and $18,498, respectively, and our corresponding valuation allowance by $37,104. As of December 31, 2021, our federal net operating loss carryforwards, which are scheduled to begin expiring in 2027 if unused, were $120,315, after the reduction of $88,601 in 2020, for net operating losses that we will lapse before they can be ableutilized, due to utilize subsequentthe change of ownership discussed above. Our deferred tax asset for state net operating losses were $14,031 and our state net operating loss carryforwards, which are scheduled to 2019.begin expiring in 2022 if unused, were $278,410. Our federal tax credit carryforwards, which begin expiring in 2026 if unused, were $1,114 after the reduction of $18,498, in 2020, for federal tax credits that will lapse before they can be utilized, also due to the change of ownership. We are subject to U.S. federal income tax, as well as income tax in multiple state and local jurisdictions. As of December 31, 2021, 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 losses and tax credits may be subject to adjustment until they are utilized and the year of utilization is closed to adjustment.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
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-year period ending December 31, 2019.2021. 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 realization 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, 20192021 and 2018.2020. 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.
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, 2018 | $ | 80,154 |
| | $ | — |
| | $ | 21,074 |
| | $ | 72 |
| | $ | 101,300 |
|
| Year Ended December 31, 2019 | $ | 101,300 |
| | $ | — |
| | $ | (13,341 | ) | | $ | (294 | ) | | $ | 87,665 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | $ | 87,665 | | | $ | 584 | | | $ | (41,834) | | | $ | 70 | | | $ | 46,485 | |
| Year Ended December 31, 2021 | $ | 46,485 | | | $ | 1,344 | | | $ | — | | | $ | 97 | | | $ | 47,926 | |
For the year ended December 31, 2019,2021, we recognized a provision for income taxes from operations of $56,$234, attributable to state income taxes.taxes of $233 that includes a charge to the state valuation allowance of $1.
The provision for income taxes from operations is as follows:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Current tax provision (benefit): | | | |
| Federal | $ | (561 | ) | | $ | (554 | ) |
| State | 244 |
| | 151 |
|
| Total current tax benefit | (317 | ) | | (403 | ) |
| Deferred tax provision: | | | |
| Federal | 277 |
| | 554 |
|
| State | 96 |
| | 96 |
|
| Total deferred tax provision | 373 |
| | 650 |
|
| Total tax provision | $ | 56 |
| | $ | 247 |
|
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | |
| Current tax provision (benefit): | | | | | |
| Federal | $ | — | | | $ | (506) | | | |
| State | 233 | | | 365 | | | |
| Total current tax provision (benefit) | 233 | | | (141) | | | |
| Deferred tax provision: | | | | | |
| Federal | — | | | 277 | | | |
| State | 1 | | | 527 | | | |
| Total deferred tax provision | 1 | | | 804 | | | |
| Total tax provision | $ | 234 | | | $ | 663 | | | |
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, |
| | 2021 | | 2020 | | |
| Taxes at statutory U.S. federal income tax rate | (21.0) | % | | (21.0) | % | | |
| State and local income taxes, net of federal tax benefit | 0.3 | % | | 4.5 | % | | |
| Tax credits | (2.2) | % | | 259.3 | % | | |
| Change in valuation allowance | 17.6 | % | | (581.2) | % | | |
| Deferred taxes | 1.9 | % | | — | % | | |
| Federal net operating losses | — | % | | 268.6 | % | | |
| State net operating losses | 3.5 | % | | 50.2 | % | | |
| Return to provision | — | % | | 36.4 | % | | |
| Investments | — | % | | (7.8) | % | | |
| Other differences, net | 0.7 | % | | 0.6 | % | | |
| Effective tax rate | 0.8 | % | | 9.6 | % | | |
|
| | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Taxes at statutory U.S. federal income tax rate | (21.0 | )% | | (21.0 | )% |
| State and local income taxes, net of federal tax benefit | 17.2 | % | | (5.8 | )% |
| Tax credits | (0.9 | )% | | — | % |
| Change in valuation allowance | (67.4 | )% | | 26.8 | % |
| Deferred taxes | 72.4 | % | | — | % |
| Other differences, net | — | % | | 0.3 | % |
| Effective tax rate | 0.3 | % | | 0.3 | % |
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, 20192021 and 2018,2020, there were 0no uncertain tax positions.
AlerisLife Inc.
Notes to Consolidated Financial Statements (continued)
(dollarsin thousands, exceptpershareamounts)
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, 2021 and 2020.
In accordance with the CARES Act, we applied an alternative minimum tax credit, or AMTC, of $554 for the tax year 2019, of which $100 was applied to our 2021 tax return and 2018.$454 was requested as a refund.
AlerisLife 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, 2019 and 2018 usingweighted average number of outstanding common shares during the period.
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, |
| 2021 | | 2020 |
| Weighted average shares outstanding—basic | 31,591 | | | 31,471 | |
| Effect of dilutive securities: unvested share awards | — | | | — | |
Weighted average shares outstanding—diluted(1) | 31,591 | | | 31,471 | |
(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, 20192021 and 2018 had 120,7182020, 236 and 140,416,110, 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 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.
Recurring Fair Value Measures
The tables below present certain of our assets measured at fair value at December 31, 20192021 and 2018,2020, categorized by the level of inputs, as defined in the fair value hierarchy under U.S. generally accepted accounting principles, or GAAP,input used in the valuation of each asset.
|
| | | | | | | | | | | | | | | | |
| | | 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) |
Cash equivalents(1) | | $ | 27,456 |
| | $ | 27,456 |
| | $ | — |
| | $ | — |
|
| Investments: | | | | | | | | |
Equity investments(2) | | | | | | | | |
| Financial services industry | | 1,233 |
| | 1,233 |
| | — |
| | — |
|
| Healthcare | | 395 |
| | 395 |
| | — |
| | — |
|
| Technology | | 281 |
| | 281 |
| | — |
| | — |
|
| Other | | 4,500 |
| | 4,500 |
| | — |
| | — |
|
| Total equity investments | | 6,409 |
| | 6,409 |
| | — |
| | — |
|
Debt investments(3) | | | | | | | | |
International bond fund(4) | | 2,680 |
| | — |
| | 2,680 |
| | — |
|
High yield fund(5) | | 2,977 |
| | — |
| | 2,977 |
| | — |
|
| Industrial bonds | | 1,180 |
| | — |
| | 1,180 |
| | — |
|
| Technology bonds | | 2,189 |
| | — |
| | 2,189 |
| | — |
|
| Government bonds | | 9,537 |
| | 9,537 |
| | — |
| | — |
|
| Energy bonds | | 625 |
| | — |
| | 625 |
| | — |
|
| Financial bonds | | 1,853 |
| | — |
| | 1,853 |
| | — |
|
| Other | | 725 |
| | — |
| | 725 |
| | — |
|
| Total debt investments | | 21,766 |
| | 9,537 |
| | 12,229 |
| | — |
|
| Total investments | | 28,175 |
| | 15,946 |
| | 12,229 |
| | — |
|
| Total | | $ | 55,631 |
| | $ | 43,402 |
| | $ | 12,229 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 |
| 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) | | $ | 26,417 | | | $ | 26,417 | | | $ | — | | | $ | — | |
| Investments: | | | | | | | | |
| | | | | | | | |
Total equity investments (2) | | 13,033 | | | 6,980 | | | 6,053 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total debt investments (3) | | 10,375 | | | 4,612 | | | 5,763 | | | — | |
| Total investments | | 23,408 | | | 11,592 | | | 11,816 | | | — | |
| Total | | $ | 49,825 | | | $ | 38,009 | | | $ | 11,816 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2020 |
| 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) | | $ | 26,291 | | | $ | 26,291 | | | $ | — | | | $ | — | |
| Investments: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total equity investments (2) | | 12,439 | | | 6,465 | | | 5,974 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total debt investments (3) | | 12,310 | | | 7,301 | | | 5,009 | | | — | |
| Total investments | | 24,749 | | | 13,766 | | | 10,983 | | | — | |
| Total | | $ | 51,040 | | | $ | 40,057 | | | $ | 10,983 | | | $ | — | |
(1) Cash equivalents consist of short-term, highly liquid investments and money market funds held primarily for obligations arising from our self-insurance programs. Cash equivalents are reported in our consolidated balance sheets as cash and cash equivalents and current and long-term restricted cash and cash equivalents. Cash equivalents include $23,546 and $22,837 of balances that were restricted at December 31, 2021 and December 31, 2020, respectively. In addition to the cash equivalents of $26,417 and $26,291 at December 31, 2021 and December 31, 2020, respectively, reflected above, there were cash balances of $64,116 and $80,898 and restricted cash balances of $2,406 and $2,409 at December 31, 2021 and December 31, 2020, respectively.
(2) The fair value of our equity investments is readily determinable. During the years ended December 31, 2021 and 2020, we received gross proceeds of $741 and $3,845, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $175 and $368, respectively, and gross realized losses totaling $0 and $245, respectively.
(3) As of December 31, 2021, our debt investments, which are classified as available for sale, had a fair value of $10,375 with an amortized cost of $10,079; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $296, net of unrealized losses of $10. As of December 31, 2020, our debt investments had a fair value of $12,310 with an amortized cost of $11,554; the difference between the fair value and amortized cost
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 |
| 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 |
| | $ | — |
| | $ | — |
|
| Investments: | | | | | | | | |
Equity investments(2) | | | | | | | | |
| Financial services industry | | 1,074 |
| | 1,074 |
| | — |
| | — |
|
| Healthcare | | 291 |
| | 291 |
| | — |
| | — |
|
| Technology | | 174 |
| | 174 |
| | — |
| | — |
|
| Other | | 3,927 |
| | 3,927 |
| | — |
| | — |
|
| Total equity investments | | 5,466 |
| | 5,466 |
| | — |
| | — |
|
Debt investments(3) | | | | | | | | |
International bond fund(4) | | 2,537 |
| | — |
| | 2,537 |
| | — |
|
High yield fund(5) | | 2,669 |
| | — |
| | 2,669 |
| | — |
|
| Industrial bonds | | 1,692 |
| | — |
| | 1,692 |
| | — |
|
| Technology bonds | | 2,375 |
| | — |
| | 2,375 |
| | — |
|
| Government bonds | | 9,791 |
| | 9,791 |
| | — |
| | — |
|
| Energy bonds | | 595 |
| | — |
| | 595 |
| | — |
|
| Financial bonds | | 1,858 |
| | — |
| | 1,858 |
| | — |
|
| Other | | 1,268 |
| | — |
| | 1,268 |
| | — |
|
| Total debt investments | | 22,785 |
| | 9,791 |
| | 12,994 |
| | — |
|
| Total investments | | 28,251 |
| | 15,257 |
| | 12,994 |
| | — |
|
| Total | | $ | 51,641 |
| | $ | 38,647 |
| | $ | 12,994 |
| | $ | — |
|
| |
(1) | Cash equivalents consist of short-term, highly liquid investments and money market funds held primarily for obligations arising from our self-insurance programs. Cash equivalents are reported in our consolidated balance sheets as cash, cash equivalents and current and long-term restricted cash. Cash equivalents include $23,014 and $19,529 of balances that are restricted at December 31, 2019 and 2018, respectively. |
| |
(2) | The fair value of our equity investments is readily determinable. During the years ended December 31, 2019 and 2018, we received gross proceeds of $1,963 and $2,407, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $289 and $280, respectively, and gross realized losses totaling $60 and $72, respectively. |
| |
(3) | As of December 31, 2019, our debt investments, which are classified as available for sale, 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. As of December 31, 2018, our debt investments 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. Debt investments include $12,477 and $13,943 of balances that are restricted as of December 31, 2019 and 2018, respectively. At December 31, 2019, 1 of the debt investments we hold, with a fair value of $292, 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, 2019 and 2018, we received gross proceeds of $3,230 and $7,031, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $7 and $10, respectively, and gross realized losses totaling $7 and $119, 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. |
F-28
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 yearyears ended December 31, 2019,2021 and 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, 2019.
The carrying value of accounts receivable and accounts payable approximates fair value as of December 31, 20192021 and 2018.December 31, 2020. The carrying value and fair value of our mortgage notes payable were $7,533$6,783 and $8,861, respectively, as of
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 traded 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.
We have relationships and historical and continuing transactions with DHC, RMR LLC, ABP Trust Adam D. Portnoy 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. The RMR Group Inc., or RMR Inc., is the managing member of RMR LLC. The Chair of our Board of Directors and one of our Managing Directors, Adam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of The RMR Group Inc., or 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. RMR Inc. is the managing member of RMR LLC. Jennifer B. Clark, our other Managing Director and our Secretary, isalso serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc. and, an officer and employee of RMR LLC and certainan 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 D. Portnoy serves as the chair of the boards of directors or boards of trustees of several of these public companiesboard and as a managing director or managing trustee of all thesethose companies. Other officers of RMR LLC, including Ms. Clark, serve as managing directorstrustees or managing trusteesdirectors 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.
so long as we are a tenant of, or manager for, DHC, we will not permit nor take any action that, in the reasonable judgment of DHC, might jeopardize DHC’s qualification for taxation as a REIT;