5. Property and Equipment, net
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 or group of assets may not be recoverable. If there is an indication that the carrying value of an asset or group of assets is not recoverable, we estimate the recoverability of these assets by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values. If we conclude that an impairment exists, we determine the amount of impairment loss by comparing the historical carrying value of the asset or group of assets to their 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 of impairment charges to certain of our long-lived assets for the three months ended March 31, 2019. The fair value of the impaired assets was $4,520 as of March 31, 2019. NaN impairment charges were recorded for the three months ended March 31, 2020.9
As of December 31, 2019, we had $4,813 of net property and equipment classified as held for sale and presented separately in our condensed consolidated balance sheets in connection with the Transaction Agreement. As of March 31, 2020, we did not have net property and equipment classified as held for sale.
6. Accumulated Other Comprehensive Income
The following tables detail the changes in accumulated other comprehensive income, net of tax, for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Equity Investment of an Investee | | Investments | | Accumulated Other Comprehensive Income |
Balance at January 1, 2020 | | $ | (175 | ) | | $ | 2,838 |
| | $ | 2,663 |
|
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 | | — |
| | 427 |
| | 427 |
|
Realized loss on debt investments reclassified and included in net loss, net of tax | | — |
| | (10 | ) | | (10 | ) |
Balance at March 31, 2020 | | $ | (175 | ) | | $ | 1,561 |
| | $ | 1,386 |
|
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
6. Accumulated Other Comprehensive Income
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Equity Investment of an Investee | | Investments | | Accumulated Other Comprehensive Income |
Balance at January 1, 2019 | | $ | (266 | ) | | $ | 2,008 |
| | $ | 1,742 |
|
Unrealized loss on debt investments, net of tax | | — |
| | (205 | ) | | (205 | ) |
Equity in unrealized gain of an investee, net of tax | | 65 |
| | — |
| | 65 |
|
Realized gain on debt investments reclassified and included in net loss, net of tax | | — |
| | 4 |
| | 4 |
|
Balance at March 31, 2019 | | $ | (201 | ) | | $ | 1,807 |
| | $ | 1,606 |
|
The following tables detail the changes in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| | Equity Investment of an Investee | | Investments | | Accumulated Other Comprehensive Income |
Balance at January 1, 2021 | | $ | (175) | | | $ | 1,491 | | | $ | 1,316 | |
Unrealized loss on debt investments, net of tax | | 0 | | | (294) | | | (294) | |
Balance at March 31, 2021 | | $ | (175) | | | $ | 1,197 | | | $ | 1,022 | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Equity Investment of an Investee | | Investments | | Accumulated Other Comprehensive Income |
Balance at January 1, 2020 | | $ | (175) | | | $ | 2,838 | | | $ | 2,663 | |
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 | | 0 | | | (1,694) | | | (1,694) | |
Unrealized gain on debt investments, net of tax | | 0 | | | 427 | | | 427 | |
Realized gain on debt investments reclassified and included in net loss, net of tax | | 0 | | | (10) | | | (10) | |
Balance at March 31, 2020 | | $ | (175) | | | $ | 1,561 | | | $ | 1,386 | |
Accumulated other comprehensive income represents the unrealized gains and losses of our debt investments, net of tax, and our share of other comprehensive income of(loss) relating to our former investment in Affiliates Insurance Company, or AIC.AIC, which dissolved on February 13, 2020. The cost of debt investments sold and for which realized gains and losses are reclassified and included in net loss, net of taxincome are determined on a specific identification basis. See Note 13 for more information regarding our arrangements with AIC. AIC dissolved on February 13, 2020.
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. See Note 9 for more information regarding these investments.
7. Income Taxes
We recognized a provision for income taxes of $1,408$200 and $1,490$1,408 for the three months ended March 31, 2021 and 2020, and 2019, respectively. The provision for income taxes for the three months ended March 31, 2021 is related to state income taxes. The provision for income taxes for the three months ended March 31, 2020 is related to federal income taxes, partially offset by a federal alternative minimum tax, or AMT, credit refund benefit and a federal benefit related to lease termination expense, plus state income taxes, including a state valuation allowance. The provisionSee Note 15 for more information regarding the impact of certain provisions of the CARES Act relating to income taxes for the three months ended March 31, 2019, is due to state income taxes, partially offset by the intraperiod tax allocation benefit related to unrealized gains on available for sale securities.and other taxes.
We previously determined it was more likely than not that a majority of our net deferred tax assets would not be realized and concluded that a valuation allowance was required, which eliminated the majority of our net deferred tax assets recorded in our condensed consolidated balance sheets. 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.
8. EarningsNet Income (Loss) Per Share
WeBasic net income per share is calculated basic earnings per common share, or EPS, usingby dividing net income (loss) by the weighted average number of shares of ouroutstanding common shares outstanding during the periods.period. When applicable, net income (loss) per share—diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. For the three months ended March 31, 2020 and 2019, 123,660 and 108,210 unvested common shares, respectively, were not included in the calculation of diluted EPS because to do so would have been antidilutive.
9. Fair Values of Assets and Liabilities
10
Our assets recorded at fair value have been categorized based on 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.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
earnings per share using the weighted average number of our common shares calculated using the two-class method, or the treasury stock method.
Level 3 - Inputs are generated from model-based techniques that use significant assumptions that are not observableThe following table provides a reconciliation of the weighted average number of common shares used in the market.calculation of basic and diluted net income (loss) per share (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Weighted average shares outstanding—basic | 31,530 | | | 31,448 | | | | | |
Effect of dilutive securities: unvested share awards | 132 | | | 0 | | | | | |
Weighted average shares outstanding—diluted (1) | 31,662 | | | 31,448 | | | | | |
(1) For the three months ended March 31, 2020, 124 of our unvested common shares were not included in the calculation of net loss per share—diluted because to do so would have been anti-dilutive.
9. Fair Values of Assets and Liabilities
Recurring Fair Value Measures
The tables below present certain of our assets measured at fair value at March 31, 20202021 and December 31, 2019,2020, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP,input used in the valuation of each asset. |
| | | | | | | | | | | | | | | | |
| | As of March 31, 2020 |
| | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Description | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
Cash equivalents(1) | | $ | 25,847 |
| | $ | 25,847 |
| | $ | — |
| | $ | — |
|
Investments: | | | | | | | | |
Equity investments(2) | | | | | | | | |
High yield fund(3) | | 2,608 |
| | — |
| | 2,608 |
| | — |
|
International bond fund(4) | | 2,742 |
| | — |
| | 2,742 |
| | — |
|
Financial services industry | | 1,022 |
| | 1,022 |
| | — |
| | — |
|
Healthcare | | 399 |
| | 399 |
| | — |
| | — |
|
Technology | | 203 |
| | 203 |
| | — |
| | — |
|
Other(5) | | 3,904 |
| | 3,904 |
| | — |
| | — |
|
Total equity investments | | 10,878 |
| | 5,528 |
| | 5,350 |
| | — |
|
Debt investments(6) | | | | | | | | |
Industrial bonds | | 1,164 |
| | — |
| | 1,164 |
| | — |
|
Technology bonds | | 1,952 |
| | — |
| | 1,952 |
| | — |
|
Government bonds | | 10,063 |
| | 10,063 |
| | — |
| | — |
|
Energy bonds | | 619 |
| | — |
| | 619 |
| | — |
|
Financial bonds | | 1,540 |
| | — |
| | 1,540 |
| | — |
|
Other | | 1,025 |
| | — |
| | 1,025 |
| | — |
|
Total debt investments | | 16,363 |
| | 10,063 |
| | 6,300 |
| | — |
|
Total investments | | 27,241 |
| | 15,591 |
| | 11,650 |
| | — |
|
Total | | $ | 53,088 |
| | $ | 41,438 |
| | $ | 11,650 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 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) | | $ | 26,231 | | | $ | 26,231 | | | $ | 0 | | | $ | 0 | |
Investments: | | | | | | | | |
Equity investments (2) | | | | | | | | |
High yield fund (3) | | 3,162 | | | 0 | | | 3,162 | | | 0 | |
International bond fund (4) | | 2,781 | | | 0 | | | 2,781 | | | 0 | |
Financial services industry | | 1,376 | | | 1,376 | | | 0 | | | 0 | |
Healthcare | | 492 | | | 492 | | | 0 | | | 0 | |
Technology | | 801 | | | 801 | | | 0 | | | 0 | |
Other | | 3,851 | | | 3,851 | | | 0 | | | 0 | |
Total equity investments | | 12,463 | | | 6,520 | | | 5,943 | | | 0 | |
Debt investments (5) | | | | | | | | |
Industrial bonds | | 529 | | | 0 | | | 529 | | | 0 | |
Technology bonds | | 1,443 | | | 0 | | | 1,443 | | | 0 | |
Government bonds | | 7,123 | | | 7,123 | | | 0 | | | 0 | |
Energy bonds | | 478 | | | 0 | | | 478 | | | 0 | |
Financial bonds | | 1,330 | | | 0 | | | 1,330 | | | 0 | |
Other | | 1,107 | | | 0 | | | 1,107 | | | 0 | |
Total debt investments | | 12,010 | | | 7,123 | | | 4,887 | | | 0 | |
Total investments | | 24,473 | | | 13,643 | | | 10,830 | | | 0 | |
Total | | $ | 50,704 | | | $ | 39,874 | | | $ | 10,830 | | | $ | 0 | |
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | $ | 0 | | | $ | 0 | |
Investments: | | | | | | | | |
Equity investments (2) | | | | | | | | |
High yield fund (3) | | 3,156 | | | 0 | | | 3,156 | | | 0 | |
International bond fund (4) | | 2,818 | | | 0 | | | 2,818 | | | 0 | |
Financial services industry | | 1,348 | | | 1,348 | | | 0 | | | 0 | |
Healthcare | | 477 | | | 477 | | | 0 | | | 0 | |
Technology | | 765 | | | 765 | | | 0 | | | 0 | |
Other | | 3,875 | | | 3,875 | | | — | | | 0 | |
Total equity investments | | 12,439 | | | 6,465 | | | 5,974 | | | 0 | |
Debt investments (5) | | | | | | | | |
Industrial bonds | | 540 | | | 0 | | | 540 | | | 0 | |
Technology bonds | | 1,471 | | | 0 | | | 1,471 | | | 0 | |
Government bonds | | 7,301 | | | 7,301 | | | 0 | | | 0 | |
Energy bonds | | 484 | | | 0 | | | 484 | | | 0 | |
Financial bonds | | 1,359 | | | 0 | | | 1,359 | | | 0 | |
Other | | 1,155 | | | 0 | | | 1,155 | | | 0 | |
Total debt investments | | 12,310 | | | 7,301 | | | 5,009 | | | 0 | |
Total investments | | 24,749 | | | 13,766 | | | 10,983 | | | 0 | |
Total | | $ | 51,040 | | | $ | 40,057 | | | $ | 10,983 | | | $ | 0 | |
(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 condensed consolidated balance sheets as cash and cash equivalents and current and long-term restricted cash and cash equivalents. Cash equivalents include $22,531 and $22,837 of balances that were restricted at March 31, 2021 and December 31, 2020, respectively. In addition to the cash equivalents of $26,231 and $26,291 at March 31, 2021 and December 31, 2020, respectively, reflected above, there were cash balances of $105,785 and $80,897 and restricted cash balances of $2,375 and $2,409 at March 31, 2021 and December 31, 2020, respectively.
(2) The fair value of our equity investments is readily determinable. During the three months ended March 31, 2021 and March 31, 2020, we received gross proceeds of $337 and $45, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $96 and $0, respectively, and gross realized losses totaling $0 and $30, respectively.
(3) The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly.
(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) As of March 31, 2021, our debt investments, which are classified as available for sale, had a fair value of $12,010 with an amortized cost of $11,548; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $462, net of unrealized losses of $36. 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 amounts resulted from unrealized gains of $756, net of unrealized losses of $4. Debt investments include $8,187 and $8,395 of balances that were restricted as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, 4 debt investments we held, with a fair value of $778, had been in a loss position for less than 12 months and we did not hold any debt investments with a fair value in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these investments remain strong with solid fundamentals as of March 31, 2021, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery, and other factors that support our conclusion that the loss is temporary. During the three months ended March 31, 2021 and 2020, we received gross proceeds of $0 and $1,409, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $0 and $10, respectively. There were no gross realized losses for the three months ended March 31, 2021 and 2020, respectively. We record gains and losses on the sales of these investments using the specific identification method.
12
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
Description | | Total | | (Level 1) | | (Level 2) | | (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(6) | | | | | | |
| | |
High yield fund(3) | | 2,977 |
| | — |
| | 2,977 |
| | — |
|
International bond fund(4) | | 2,680 |
| | — |
| | 2,680 |
| | — |
|
Industrial bonds | | 1,180 |
| | — |
| | 1,180 |
| | — |
|
Technology bonds | | 2,189 |
| | — |
| | 2,189 |
| | — |
|
Government bonds | | 9,537 |
| | 9,537 |
| | — |
| | — |
|
Energy bonds | | 625 |
| | — |
| | 625 |
| | — |
|
Financial bonds(5) | | 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 |
| | $ | — |
|
| |
(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 condensed consolidated balance sheets as cash and cash equivalents and current and long term restricted cash and cash equivalents. Cash equivalents include $23,300 and $23,014 of balances that are restricted at March 31, 2020 and December 31, 2019, respectively. |
| |
(2) | The fair value of our equity investments is readily determinable. During the three months ended March 31, 2020 and 2019, we received gross proceeds of $45 and $1,115, respectively, in connection with the sales of equity investments and recorded gross realized gains totaling $0 and $136, respectively, and gross realized losses totaling $30 and $40, respectively. |
| |
(3) | 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. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment. |
| |
(4) | The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly. As of January 1, 2020, we reclassified this investment from a debt investment to an equity investment to reflect the nature of the investment rather than the nature of the securities held by the investment. |
| |
(5) | As of January 1, 2020, we reclassified an investment with a fair value of $286 from a debt investment to an equity investment. |
| |
(6) | As of March 31, 2020, our debt investments, which are classified as available for sale, had a fair value of $16,363 with an amortized cost of $15,536; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $834, net of unrealized losses of $7. As of December 31, 2019, our debt investments had a fair value of $21,766 with an amortized cost of $19,662; the difference between the fair value and amortized cost amounts resulted from unrealized gains of $2,114, net of unrealized losses of $10. Debt investments include $12,318 and $12,477 of balances that are restricted as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, 8 of the investments we held, with a fair value of $1,059, had been in a loss position for less than 12 months and we did not hold any debt investments with a fair value in a loss position for greater than 12 months. We do not believe these investments are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these investments remain strong with solid fundamentals as of March 31, 2020, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery, and other factors that support our conclusion
|
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
that the loss is temporary. During the three months ended March 31, 2020 and 2019, we received gross proceeds of $1,409 and $1,528, respectively, in connection with the sales of debt investments and recorded gross realized gains totaling $10 and $2, respectively, and gross realized losses totaling $0 and $6, respectively. We record gains and losses on the sales of these investments using the specific identification method.
The amortized cost basis and fair value of available for sale debt securities at March 31, 2020,2021, by contractual maturity, are shown below.
| | | | | | | | | | | | | | |
| | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 1,796 | | | $ | 1,826 | |
Due after one year through five years | | 5,522 | | | 5,773 | |
Due after five years through ten years | | 4,230 | | | 4,411 | |
| | | | |
Total | | $ | 11,548 | | | $ | 12,010 | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | |
| | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 1,503 |
| | $ | 1,512 |
|
Due after one year through five years | | 8,702 |
| | 9,034 |
|
Due after five years through ten years | | 5,331 |
| | 5,817 |
|
Total | | $ | 15,536 |
| | $ | 16,363 |
|
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 three months ended March 31, 2020,2021, 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.
The carrying value of accounts receivable and accounts payable approximates fair value as of March 31, 20202021 and December 31, 2019.2020. The carrying value and fair value of our mortgage notes payable were $7,445$7,076 and $9,412,$7,818, respectively, as of March 31, 20202021 and $7,533$7,171 and $8,861,$8,177, respectively, as of December 31, 2019,2020, and are categorized in Level 3 of the fair value hierarchy in their entirety.hierarchy. We estimate the fair valuesvalue of our mortgage notesnote payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date.
Non-Recurring Fair Value Measures
We review the carrying value of our long-lived assets, including our right of useright-of-use assets, property and equipment and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. See Note 5 for more information regarding fair value measurements related to impairments of our long-lived assets we recorded.
10. Indebtedness
In June 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 aOur $65,000 secured revolving credit facility, scheduled to mature onor Credit Facility, is governed by a credit agreement with a syndicate of lenders. The current maturity date of our Credit Facility is June 12, 2021. AtOn March 16, 2021, we exercised our option we mayto extend the maturity dateCredit Facility for a one year period, which isone-year, until June 12, 2022, subject to payment of anthe extension fee and meetingsatisfaction of other conditions.
We paid fees of $1,271 in 2019 in connection with the closing of our credit facility, which these fees were deferred and are being amortized over the initial term of our credit facility. Our credit facilityCredit Facility is available for general business purposes, including acquisitions, and provides for the issuance of letters of credit. 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,Credit Agreement, plus 150 basis points per annum, on borrowings under our credit facility;Credit Facility; the effective annual interest rates,rate options, as of March 31, 2020,2021, were 3.49%2.61% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available borrowingscapacity under our credit facility. We did not borrow any funds under our credit facility during the three months ended March 31, 2020. The weighted average annual interest rate for borrowings under our prior credit facility was 5.00% for the three months ended March 31, 2019.Credit Facility. As of March 31, 2021 and 2020, we had 0 borrowings outstanding under our credit facility.Credit Facility. As of March 31, 2020,2021, we had letters of credit issued under the Credit Facility in an aggregate amount of $3,238$2,442 and $54,450we had $14,935 available for borrowings under our credit facility.Credit Facility. We incurred aggregate interest expense and other associated costs related to our credit facilitiesCredit Facility of $254$253 and $772$254 for the three months ended March 31, 2021 and 2020, and 2019, respectively.
Our credit facilityCredit Facility is secured by real estate mortgages on 11 senior living communities we own with a combined 1,2451,236 living units owned by certain of our subsidiaries that guarantee our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility is also secured by these subsidiaries’senior living communities' accounts receivable and related collateral. The amount of available borrowings under our credit facilityCredit Facility is subject to our having sufficient qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our Credit Facility. Our Credit Facility provides for the acceleration of payment of all amounts outstanding under our Credit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our Credit Agreement. Our Credit Agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.
At March 31, 2021, we had 7 irrevocable standby letters of credit outstanding, totaling $29,292. One of these letters of credit in the amount of $26,850, which secures our workers' compensation insurance program, is collateralized by approximately $21,566 of cash equivalents and $7,723 of debt and equity investments. This letter of credit expires in June 2021
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
obligations under our credit facility. Our credit facility provides for acceleration of payment of all amounts outstanding under our credit facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our credit agreement. Our credit agreement contains financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.
At March 31, 2020, we had 7 irrevocable standby letters of credit outstanding, totaling $28,626. One of these letters of credit in the amount of $25,388, which secures our workers' compensation insurance program, is currently collateralized by approximately $21,707 of cash equivalents and $6,586 of debt and equity investments. This letter of credit currently expires in June 2020 and is automatically extended for one yearone-year terms unless notice of nonrenewal is provided by the issuing bank prior to the end of the applicable term. As of May 4, 2020,5, 2021, we have not received a notice of nonrenewal. We expect that our workers'worker's compensation insurance program will require an increase in the amount of this letter of credit in June 2020.2021. At March 31, 2020,2021, the cash equivalents collateralizing this letter of credit including accumulated interest, wereare classified as short-term restricted cash and cash equivalents in our condensed 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 condensed consolidated balance sheets. The remaining 6 irrevocable standby letters of credit outstanding at March 31, 2020,2021, totaling $3,238,$2,442, which are issued under the Credit Facility, secure certain of our other obligations. As of March 31, 2020,May 5, 2021, these letters of credit arewere scheduled to mature between June 20202021 and October 2020September 2021 and are required to be renewed annually. As of March 31, 2020, our obligations under these 6 letters of credit, totaling $3,238, remain issued and outstanding under our credit facility.
At March 31, 2020,2021, 1 of our senior living communities was encumbered by a mortgage that secured a note. This mortgage note contains standard mortgage covenants. We recorded a discount in connection with the assumption of this mortgage note as part of our acquisition of the senior living community secured by this mortgage in order to record this mortgage note at its then estimated fair value. We amortize this discount as an increase in interest expense until the maturity of this mortgage note. This mortgage note requires payments of principal and interest monthly until maturity. The following table is a summary of this mortgage note as of March 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2021 | | Contractual Stated Interest Rate | | Effective Interest Rate | | Maturity Date | | Monthly Payment | | Lender |
$ | 7,297 | | (1) | 6.20 | % | | 6.70 | % | | September 2032 | | $ | 72 | | | Federal Home Loan Mortgage Corporation |
(1) Contractual principal payments excluding unamortized discount $221. |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2020 | | Contractual Stated Interest Rate | | Effective Interest Rate | | Maturity Date | | Monthly Payment | | Lender Type |
$ | 7,691 | | (1) | 6.20 | % | | 6.70 | % | | September 2032 | | $ | 72 | | | Federal Home Loan Mortgage Corporation |
| |
(1) | Contractual principal payment excluding unamortized discount and debt issuance costs of $246. |
We incurred interest expense, net of discount amortization, of $128$122 and $134$128 with respect to the mortgage note for the three months ended March 31, 2021 and 2020, and 2019, respectively. Our mortgage note requires monthly payments into escrows for taxes, insurance and property replacement funds; certain withdrawals from escrows require Federal Home Loan Mortgage Corporation approval.
As of March 31, 2020, weWe believe we were in compliance with all applicable covenants under our credit facilityCredit Facility and mortgage note.note as of March 31, 2021.
See Note 11 for information regarding the $25,000 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 borrow any funds under the DHC credit facility during its term.
11. Leases with DHC and Healthpeak Properties Inc. and Management Agreements with DHC
As2020 Restructuring of December 31, 2019, we leased 166 senior living communities from DHC pursuant to 5 master leases and we managed for DHC's account 78 senior living communities pursuant to management agreements. Effective as of January 1, 2020, we restructured our business arrangements with DHC as further described below, and after giving effect to the Restructuring Transactions, we manage 244 senior living communities for the account of DHC pursuant to the New Management Agreements.
Restructuring our Business Arrangements with DHC. Pursuant to the Transaction AgreementEffective as of the Conversion Time:January 1, 2020:
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
•our 5 then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all those senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;
we completed the Share Issuances pursuant to which •we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019; and
•as consideration for the Share Issuances,share issuances, DHC provided to us $75,000 by assuming certain of our working capital liabilities and through cash payments; we recognized $22,899 in loss on termination of leases, representing the excess of the fair value of the Share Issuancesshare issuances of $97,899 compared to the consideration of $75,000 paid by DHC. As of March 31, 2020, DHC assumed $51,547 of our working capital liabilities. We received cash of $23,453 from DHC during 2020, subsequent to March 31, 2020.
2020; and
Also pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to DHC by us under our master leases with DHC was reduced to $11,000, subject to adjustment, and subsequently reduced in accordance with the Transaction Agreement as a result of DHC’s subsequent sales of certain of the leased senior living communities, and no additional rent was payable to DHC by us from such date through the Conversion Time; and (2) as of April 1, 2019, DHC purchased from us •$49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to DHC's senior living communities leased and operated by us.
In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to DHC under our then- existing master leases with DHC pursuant to the Transaction Agreement was determined to be a modification of these master leases, and we reassessed the classification of these master leases based on the modified terms and determined that these master leases continued to be classified as long-term operating leases until certain contingent events were achieved. The remaining contingent events were achieved and accordingly, we remeasured the lease liability and right of use asset recorded in our condensed consolidated balance sheets as of December 31, 2019, to zero.
Pursuant to the Transaction Agreement, we agreed to expand our Board of Directors within six months of January 1, 2020, to add an Independent Director (as defined in our Bylaws) reasonably satisfactory to DHC. As a result, on February 26, 2020, our Board of Directors elected Michael E. Wagner, M.D. as an Independent Director.
Pursuant to the New Management Agreements, we will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for our direct costs and expenses related to such communities, as well as, commencing with the 2021 calendar year, an annual incentive fee equal to 15% of the amount by which the annual EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.
The New Management Agreements expire in 2034, subject to our right to extend them for 2 consecutive five-year terms if we achieve certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements provide DHC with the right to terminate any New Management Agreement for a community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided DHC may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as of January 1, 2020, made by us in favor of DHC’s applicable subsidiaries, we have guaranteed the payment and performance of each of our applicable subsidiary’s obligations under the applicable New Management Agreements.
We recognized transaction costs of $1,095$1,095 related to the Transaction Agreement for the three months ended March 31, 2020.
In connection2021 Amendments to our Management Arrangements with DHC. As part of our Strategic Plan, we have agreed to amend our management arrangements with DHC. See Note 16 for additional information on our Strategic Plan. The principal changes to the Transaction Agreement, we entered into the DHC credit facility pursuant to which DHC extended to us a $25,000 line of credit. 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.
management arrangements will include:
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
•Senior Living Communities Formerly Leased from DHC. Prior to the Conversion Time, we were DHC's largest tenant and DHC was our largest landlord. Under our prior master leaseswill cooperate with DHC we paid DHC annual rent plus percentage rent equal to 4.0%in transitioning the management of the increase in gross revenues at the applicable108 senior living communities over basewith approximately 7,500 living units, to other third party managers without payment of any termination fee to us;
•DHC will no longer have the right to sell up to an additional $682,000 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 is (i) extended 2 years to 2025, (ii) the maximum amount of communities that may be terminated will be reduced to 10% (from 20%) of the total managed portfolio by revenue per year gross revenuesand (iii) achieving less than 80% (from 90%) of budgeted earnings before interest, taxes, depreciation and taxes, or EBITDA, will be required to qualify as specifieda “Non Performing Asset”,
•we will continue to manage 120 senior living communities for DHC;
•we will close and reposition the 27 skilled nursing units in CCRC communities that we will continue to manage with approximately 1,500 living units;
•the incentive fee calculation included in our existing management agreements with DHC will be amended for the senior living communities that we will continue to manage for DHC such that there will no longer be a cap placed on any incentive fee we earn in any calendar year and that any senior living communities that are undergoing a major renovation or repositioning will be excluded from the calculation and reset pursuant to the terms of the management agreements as a result of expected capital projects DHC is planning in the applicable lease. Pursuantnext five years;
•DHC will assume control of major community renovation or repositioning activities at the senior living communities that we will continue to the Transaction Agreement, we were no longer required to pay any additional rent to DHC beginning February 1, 2019.manage for DHC; and
Our total rent expense under all•the term of our leasesexisting management agreements with DHC was $53,782 forwill be extended by two years to December 31, 2036.
We expect that the transition of management of the 108 senior living communities and the closure of 27 skilled nursing units will be completed before year end 2021. For the three months ended March 31, 2019,2021, we recognized $5,255 of management fees related to the management of these communities and units.
Senior Living Communities Leased from Healthpeak Properties, Inc. As of March 31, 2021, we leased 4 senior living communities under 1 lease with Healthpeak Properties, Inc., or PEAK. This lease is a “triple net” lease which requires that we pay all costs incurred in the operation of the communities, including the cost of insurance and real estate taxes, maintaining the communities, and indemnifying the landlord for any liability which may arise from the operations during the lease term. We recognized rent expense for this lease for actual rent paid plus or minus a straight-line adjustment for scheduled minimum rent increases, which were not material to our condensed consolidated financial statements. The right-of-use asset balance has been decreased for the amount included estimated percentage rent of $1,549accrued lease payments, which amounts are not material to our condensed consolidated financial statements.
On March 8, 2021, we entered into a second amendment to our master lease with PEAK, pursuant to which we agreed to pay a lease termination fee upon the sale by PEAK of any of the 4 communities we lease in an amount equal to the difference between: (i) the net present value of the allocated minimum rate payments that would otherwise have been payable with respect to that community for the period beginning on the sale date and ending on April 30, 2023 (discounted at 9%) and (ii) the net present value of the reinvestment returns of the net proceeds from the sale of the community (discounted at 9%), and assuming such net proceeds are reinvested for the period commencing on the sale date and ending on April 30, 2023 at a rate of 5.5%. The aggregate maximum termination fee payable by us with respect to the termination of the 4 communities is capped at $3,100. On April 4, 2021, one of the communities that we lease from PEAK had a fire which has caused extensive damage and the residents of the community to be relocated. We believe our liability with respect to this event is limited to a $1,000 insurance deductible which we expect to recognize in the three months ended March 31, 2019. Pursuant to the Transaction Agreement, our rent payable to DHC was reduced by a total of $13,840 in aggregate for February and March 2019 and we did not pay such amount to DHC. However, as the Transaction Agreement was not entered into until April 1, 2019, our rent expense for the three months ended March 31, 2019, was not adjusted for the rent reduction for February and March 2019. Instead, the rent reduction for February and March 2019 was determined to be a lease inducement, for which a liability for the $13,840 was recorded as a reduction of the right of use asset on our condensed consolidated balance sheets as of March 31, 2019, and was amortized as a reduction of rent expense over the remaining terms of our master leases.
As of December 31, 2019, we had 0 outstanding rent obligation to DHC.
Our previously existing leases with DHC were “triple net” leases, which generally required us to pay rent and all property operating expenses, to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased communities, to indemnify DHC from liability which may arise by reason of its ownership of the communities, to maintain the communities at our expense, to remove and dispose of hazardous substances on the communities in compliance with applicable laws and to maintain insurance on the communities for DHC’s and our benefit.
Prior to the Transaction Agreement, under our previously existing leases with DHC, we could request that DHC purchase certain improvements to the leased communities in return for increases in annual rent in accordance with a formula specified in the applicable lease. Pursuant to the Transaction Agreement, the $22,578 of capital improvements to the leased communities that we sold to DHC during the three months ended March 31, 2019, did not result in increased rent.
June 30, 2021.
In accordance with FASB ASC Topic 840, Leases, the sale and leaseback transaction we completed in June 2016 with DHC qualified for sale-leaseback accounting and we classified the related lease as an operating lease. Accordingly, the gain generated from the sale of $82,644 was deferred and was being amortized as a reduction of rent expense over the initial term of the related lease. Upon our adoption of ASC Topic 842 on January 1, 2019, we recorded a cumulative effect adjustment through retained earnings of $67,473, eliminating our remaining deferred gain.
Senior Living Communities Managed for the Account of DHC and its Related Entities. As of March 31, 20202021 and 2019,2020, we managed 244228 and 76244 senior living communities, respectively, for the account of DHC. We earned management fees of $16,462$12,910 and $3,718$16,462 from the senior living communities we managed for the account of DHC for the three months ended March 31, 20202021 and 2019,2020, respectively. In addition, we earned fees for our management of capital expenditure projects at the communities we
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
managed for the account of DHC of $462$834 and $195$462 for the three months ended March 31, 20202021 and 2019,2020, respectively. These amounts are included in management fee revenue in our condensed consolidated statements of operations. In connection with the completion of the Restructuring Transactions, effective as of January 1, 2020, we and DHC terminated the long-term management and pooling agreements and replaced them with the New Management Agreements, the terms of which are discussed above.
We also provide certain otherancillary services to residents at some of the senior living communities we manage for the account of DHC, such as rehabilitation and wellness services. At senior living communities we manage for the account of DHC where we provide rehabilitation and wellness services on an outpatient basis, the residents, third party payers or government programs pay us for those rehabilitation and wellness services. At senior living communities we manage for the account of DHC where we provide inpatient rehabilitation and wellness services, DHC generally pays us for these services and charges for such services are included in amounts charged to residents, third party payers or government programs. We earned revenues of $8,057$5,441 and $1,675$8,057 for the three months ended March 31, 20202021 and 2019,2020, respectively, for rehabilitation and wellness services we provided at senior living communities we manage for the account of DHC and that are payable by DHC. These amounts are included in rehabilitation and wellness services in our condensed consolidated statements of operations. Consistent with our historical accounting for these services at our managed communities, the revenues earned at these inpatient clinics that were previously located at senior living communities that we leased from DHC but as of the Conversion Time, we now manage, no longer constitute intercompany revenues and thus will
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
not be eliminated in consolidation and will be recognized and reported as rehabilitation and wellness services revenues in our condensed consolidated statements of operations.
We earned management fees of $127$106 and $70$127 for the three months ended March 31, 20202021 and 2019,2020, respectively, for management services at a part of a senior living community DHC subleases to an affiliate, which amounts are included in management fee revenuerevenues in our condensed consolidated statements of operations.
In 2020, DHC sold 9 senior living communities that we previously managed. Upon completion of these sales, our management agreements with DHC with respect to those communities were terminated. In addition, in 2020, DHC also closed 7 additional senior living communities and 1 building in 1 community. While those closed communities and building are no longer being operated as senior living communities, we continue to manage the related back-office operations and empty communities. For the three months ended March 31, 2020, we recognized $1,052 of management fees related to these sold and closed communities.
Ageility Clinics Leased from DHC.We lease space from DHC at certain of the senior living communities that we manage for DHC. We use this leased space for outpatient rehabilitation and wellness services clinics. We recognized rent expense of $397 and $294 for the three months ended March 31, 2021 and 2020, respectively, with respect to these leases.
12. Business Management Agreement with RMR LLC
The RMR Group LLC, or RMR LLC provides us certain services pursuant to a business management agreement. Pursuantservices to us pursuant to our business management agreement with RMR LLC, weand shared services agreement. We incurred aggregate fees and certain cost reimbursements payable to RMR LLC of $2,351$1,804 and $2,364$2,351 for the three months ended March 31, 2021 and 2020, and 2019, respectively, which amounts include reimbursements for our share of RMR LLC’s costs for providing our internal audit function.respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of operations.
For further information about our relationship with RMR LLC, see our Annual Report.
13. Related Person Transactions
We have relationships and historical and continuing transactions with DHC, RMR LLC 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 and 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 and one of our Managing Directors, Adam D. Portnoy, asis the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc. andMr. Portnoy is also a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Jennifer B. Clark, our other Managing Director and our Secretary, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer and employee of RMR LLC and an officer of ABP Trust. Certain of our officers, and DHC’s officers, are also officers and employees of RMR LLC. Some of our Independent Directors also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these companies. Other officers of RMR LLC, including Ms. Clark, serve as managing trustees or managing directors of certain of these companies.
DHC. DHC is currently our largest shareholder, owning, as of March 31, 2020,2021, 10,691,658 of our common shares, or 33.9%33.8% of our outstanding common shares. We manage for the account of DHC a substantial majority of the senior living communities we operate. RMR LLC provides management services to both us and DHC and Adam Portnoy is chair of the board of trustees and a managing trustee of DHC. Jennifer Clark is a managing trustee and the secretary of DHC. Effective as of January 1,Included in accrued expenses and other current liabilities on our condensed
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
consolidated balance sheets at March 31, 2021 and December 31, 2020 we completed the Restructuring Transactions, pursuant toare $31,771 and $30,090, respectively, which we restructured our existing business arrangements with DHC.will be reimbursed by DHC and are included in due from related person. See Note 11for more information regarding our relationships, agreements and transactions with DHC and certain parties related to it and us.
RMR LLC. We have an agreement with RMR LLC to provide business management services to us. See Note 12 for more information regarding our relationship with RMR LLC. RMR also provides management services to DHC.
ABP Trust. ABP Trust and its subsidiaries, owned 1,972,783 of our common shares, representing 6.3%6.2% of our outstanding common shares as of March 31, 2020.2021.
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 an 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 $435$477 and $520$435 for the three months ended March 31, 2021 and 2020, respectively, which is included in general and 2019, respectively. The adoptionadministrative expenses. As a result of ASC Topic 842 resulted inrenewing this lease, we increased each of our right-of-use asset and lease liability noted below on our condensed consolidated balance sheets by $9,746 to reflect the recognitionterms of the amendment. We recognized a right-of-use asset and lease liability, which amounts were $10,027 and $496 for the lease liability and right of use$9,964 and $452 for the right-of-use asset which amount was $1,215 and $2,119 as of March 31, 20202021 and 2019,December 31, 2020, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 4.4%3.9%. The right of useright-of-use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
AIC. Until its dissolution on February 13, 2020, we, ABP Trust, DHC and 4 other companies to which RMR LLC provides management services owned AIC in equal amounts. Certain of our Directors and certain trustees or directors of the other AIC shareholders served on the board of directors of AIC.
We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by 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 have instead purchased standalone property insurance coverage from unrelated third-party insurance providers.
At both March 31, 2020 and December 31, 2019, our investment in AIC had a carrying value of $298. These amounts are presented as equity investment of an investee in our condensed consolidated balance sheets. We did not recognize any income related to our investment in AIC for the three months ended March 31, 2020, and recognized income of $404 for the three months ended March 31, 2019, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of operations. Our other comprehensive income for the three months ended March 31, 2019, includes our proportionate part of unrealized gains (losses) on securities that are owned by AIC related to our investment in AIC.
Retirement and Separation Arrangements. In connection with his retirement, we entered into a retirement agreement with our former officer, Bruce J. Mackey Jr. Additionally, we entered into a separation agreement with our former Senior Vice President, Senior Living Operations, R. Scott Herzig. Pursuant to these agreements, we made cash payments of $600 and $510 to Mr. Mackey and Mr. Herzig, respectively, in January 2019. In addition, we made release and transition payments to Mr. Mackey, in cash, totaling $110 and $132 for the three months ended March 31, 2020 and 2019, respectively. The full severance costs for Messrs. Mackey and Herzig were recorded during the fourth quarter of 2018 as they met the criteria in FASB ASC Topic 420, Exit or Disposal Cost Obligations, or ASC Topic 420.
For further information about these and other such relationships and certain other related person transactions, see our Annual Report.
14. Legal ProceedingsCommitments 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, the defense and resolution of these claims, lawsuits, and regulatory and other government audits, investigations and proceedings may require us to incur significant expense. We account for claims and litigation losses in accordance with FASB ASC Topic 450, Contingencies, or ASC Topic 450. Under 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, is recorded; then, as information becomes known, the minimum loss amount is updated, as appropriate. A
We were defendants in 2 lawsuits filed by former employees in California. The first lawsuit, Lefevre v. Five Star Quality Care, Inc. was filed in San Bernardino County Superior Court in May 2015 and the second lawsuit, Mandviwala v. Five Star Quality Care, Inc. d/b/a 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 asserted causes of action on behalf of themselves and on behalf of other similarly situated employees, including causes of action pursuant to the California Labor Code Private Attorney General Act, or PAGA.
On July 10, 2020, the parties of Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault, to settle their individual and PAGA claims. The settlement was approved by the court and final judgement on the settlement has been entered. Payment on the claims is expected to be made before the end of the second quarter of 2021. The settlement effectively extinguished the Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. Our share of the settlement amount of $2,473 was recognized on our condensed consolidated statements of operations during the third quarter of 2020.
As a result of routine monitoring protocols that are a part of our compliance program activities related to Medicare billing, we discovered potentially inadequate documentation at a SNF that we manage on behalf of DHC. This monitoring was not initiated in response to any specific complaint or allegation, but was monitoring of the type that we periodically undertake
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
to test compliance with applicable Medicare billing rules. As a result of this discovery, we, along with DHC made a voluntary disclosure to HHS, Office of the Inspector General, or the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We and DHC entered into a settlement agreement with the OIG effective January 5, 2021 and the settlement amount was paid by DHC.
15. COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the disease caused by the novel coronavirus SARS-CoV-2, or COVID-19, a pandemic, or the Pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption worldwide. Governments in affected regions have implemented and may continue to implement, safety precautions, including quarantines, travel restrictions, business closures and other public safety measures. On March 13, 2020, the President of the United States declared the Pandemic a national emergency, effective as of March 1, 2020, or the National Emergency. The Pandemic has significantly disrupted, and will likely continue to disrupt, our business and the senior living industry as a whole. We cannot predict whether the relief provided by the CARES Act together with any additional funds under the other Provider Relief Fund or other programs that we may receive will be sufficient to offset the financial losses caused by the Pandemic, but we expect they will not be.
In connection with the Pandemic, we have experienced occupancy declines, increased labor costs and increased costs related to COVID-19 testing, medical and sanitation supplies and certain other costs. Additionally, we have purchased personal protective equipment, or PPE, to be used at our senior living communities and rehabilitation and wellness clinics. At March 31, 2021, $8,773 of PPE for future use was included in prepaid expenses and other current assets in our condensed consolidated balance sheets. PPE that is deployed to senior living communities that we manage on behalf of DHC is reimbursable to us by DHC. In the first quarter of 2021, we deployed $852 of PPE to senior living communities that we manage on behalf of DHC.
In response to the Pandemic, the CARES Act was enacted on March 27, 2020. The CARES Act, among other things, provides billions of dollars of relief to certain individuals and businesses suffering from the impact of the Pandemic.
Under the CARES Act, a Provider Relief Fund was established for allocation by HHS and was further supplemented by the Consolidated Appropriations Act, 2021 on December 27, 2020. The terms and conditions of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the Pandemic and for eligible costs to prevent, prepare for and respond to the Pandemic that are not covered by other sources. In addition Provider Relief Funds recipients are subject to other terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions must be returned to HHS.
On April 10, 2020, HHS began to distribute these funds, or the Phase 1 General Distribution, to healthcare providers who received Medicare fee-for-service reimbursement in 2018 and 2019. Each healthcare provider's allocation of the Phase 1 General Distribution was determined based on 2% of a provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix.
On June 9, 2020, HHS announced additional distributions from the Provider Relief Fund, or Phase 2 General Distributions, including the Medicaid and Children's Health Insurance Program, or the Medicaid and CHIP Targeted Distribution. HHS stated that it would disburse a payment that, at a minimum, or best estimate amount may be increased or decreased when events result inis equal to 2% of reported total revenue from patient care to eligible providers serving Medicaid and CHIP beneficiaries. Providers who had not yet received a changed expectation.disbursement from the Phase 1 General Distribution were eligible for the Medicaid and CHIP Targeted Distribution.
Information on future allocations of the Provider Relief Fund are not yet known, though the statute requires that no less than 85% of unobligated balances of the fund and funds recovered from providers after the enactment date be allocated based on financial losses and changes in operating expenses occurring in the third or fourth quarter of calendar year 2020. We recognized $7,793 as other operating income for the three months ended March 31, 2021 related to General Distribution Funds primarily for our senior living communities for which we believe we have met the required terms and conditions.
15.The CARES Act delays the payment of required federal tax deposits for certain payroll taxes, including the employer's share of Old-Age, Survivors, and Disability Insurance Tax, or Social Security, employment taxes, incurred between March 27, 2020 and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022. As of March 31, 2021 and December 31, 2020, we deferred $27,593 of employer payroll taxes, which are included in accrued compensation and benefits in our condensed consolidated balance sheets,
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
of which $22,194 are required to be funded by us and will be reimbursed by DHC pursuant to the New Management Agreements and are included in due from related persons in our condensed consolidated balance sheets.
The Sequestration Transparency Act of 2012 subjected all Medicare fee-for-service payments to a 2% sequestration reduction, or the 2% Medicare Sequestration. The CARES Act temporarily suspended the 2% Medicare Sequestration for the period from May 1, 2020 to March 31, 2021 which benefited our rehabilitation and wellness services segment and the senior living communities we manage in the form of increased rates for services provided and the management fees we earn from these communities as a result. Increases in rates are recognized in revenue in the period services are provided.
The Tax Cuts and Jobs Act of 2017 repealed the AMT and allowed corporations to fully offset regular tax liability with AMT credits. Any remaining AMT credit amount became refundable incrementally from tax years 2018 through 2021. The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim the refund in full in either tax year 2018 or 2019. We expect to apply an AMT credit refund of $554 for tax year 2019 to our 2021 tax return, as we do not have a federal tax liability to utilize the refund against our the 2020 tax return.
16. Subsequent Events
AsOn April 9, 2021, we announced the Strategic Plan to reposition our senior living 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 intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC, to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in CCRCs we will continue to manage for DHC, (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities and (iv) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics. We expect to complete the transitions and closures by the end of May 5, 2020, we settled all outstanding amounts due from DHC associated with the Share Issuances.2021. See Notes 1 andNote 11 for more information regarding our agreement to amend our management agreements with DHC.
In connection with implementing the Share Issuances.Strategic Plan, we expect to incur non-recurring cash expenses of up to $20,500, approximately $15,000 of which we expect DHC will reimburse. These expenses are expected to include up to $7,500 of retention bonus payments, up to $10,200 of severance, benefits and transition expenses, and up to $2,800 of restructuring expenses, of which we expect DHC to reimburse approximately $5,900, $7,500 and $1,600, respectively. We recognized transaction costs of $250 related to the Strategic Plan for the three months ended March 31, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report.
Strategic Plan.On April 9, 2021, we announced a new strategic plan, or the Strategic Plan, to reposition our senior living 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 intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC, to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in community care retirement communities, or CCRCs, we will continue to manage for DHC, (iii) close 37 Ageility inpatient rehabilitation clinics in certain transitioning communities and (iv) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.
In connection with implementing the Strategic Plan, we expect to incur non-recurring cash expenses of up to $20.5 million, approximately $15.0 million of which we expect DHC will reimburse. These expenses are expected to include up to $7.5 million of retention bonus payments, up to $10.2 million of severance, benefits and transition expenses, and up to $2.8 million of restructuring expenses, of which we expect DHC to reimburse approximately $5.9 million, $7.5 million and $1.6 million, respectively.
We expect to complete the transitions and closures contemplated by the Strategic Plan, or the Transition, by the end of 2021. See Notes 1, 11 and 16 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on the Strategic Plan.
Presented below is a summary of the units we operated (owned, leased and managed) as of March 31, 2021 and the projected number of units to be operated after the Transition, as if it had been completed as of January 1, 2021:
| | | | | | | | | | | | | | |
| | As of March 31, 2021 | | After Transition |
| | Units (1) | | Units (2) |
Independent living | | 10,979 | | 10,421 |
Assisted living | | 12,109 | | 7,940 |
Alzheimer’s living | | 3,220 | | 1,847 |
Skilled nursing | | 2,957 | | — |
Total | | 29,265 | | 20,208 |
(1) The units operated as of March 31, 2021 include 2,099 owned, 203 leased, and 26,963 managed.
(2) As if the Transition had been completed on January 1, 2021, the units operated as of March 31, 2021 include 2,099 owned, 203 leased, and 17,906 managed.
Presented below is a summary of the communities, units, average occupancy, spot occupancy, revenues and management fees for the communities we managed for DHC as of March 31, 2021 and for the communities to be managed for DHC after the Transition as if it had been completed as of January 1, 2021 (dollars in thousands):
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees |
Independent and assisted living communities | | 182 | | 17,435 | | 69.6 | % | | 70.0 | % | | $ | 149,385 | | | $ | 8,104 | |
Continuing care retirement communities | | 37 | | 8,573 | | 70.1 | % | | 71.0 | % | | 94,740 | | | 4,948 | |
Skilled nursing facilities | | 9 | | 955 | | 62.8 | % | | 65.4 | % | | 15,841 | | | 798 | |
Total | | 228 | | 26,963 | | 69.5 | % | | 70.2 | % | | $ | 259,966 | | | $ | 13,850 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | After Transition |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees (2) |
Independent and assisted living communities | | 91 | | 12,012 | | 70.7 | % | | 71.3 | % | | $ | 104,221 | | | $ | 5,689 | |
Continuing care retirement communities | | 29 | | 5,894 | | 76.8 | % | | 76.9 | % | | 54,057 | | | 2,891 | |
Skilled nursing facilities | | — | | — | | — | % | | — | % | | — | | | — | |
Total | | 120 | | 17,906 | | 72.7 | % | | 73.2 | % | | $ | 158,278 | | | $ | 8,580 | |
_______________________________________(1) Represents the revenues of the senior living communities we manage on behalf of DHC. Managed senior living communities' revenues do not represent our revenues, and are included to provide supplemental information regarding the operating results and financial condition of the communities from which we earn management fees.
(2) Excludes management fee revenue of $5.3 million in the quarter ended March 31, 2021 related to (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators and (ii) approximately 1,500 skilled nursing facility units that are expected to be closed and repositioned in 27 CCRCs that we will continue to manage for DHC.
Following the Transition, we will continue to manage 120 senior living communities for DHC, representing 17,906 living units and approximately 60% of our management fee revenues as of March 31, 2021, and to operate our existing owned portfolio of 20 communities with approximately 2,100 living units. We expect to partially offset the resulting revenue loss from fees we earn from the 108 transitioning senior living communities with expense reductions to right-size operations.
The 120 senior living communities that we will continue to manage for DHC after the Transition outperformed the total DHC managed portfolio (exclusive of the pending closing and repositioning of approximately 1,500 skilled nursing facility units in 27 of the CCRCs) for the quarter ended March 31, 2021 with approximately 400 basis points higher operating margin and earnings before interest, taxes, depreciation and amortization, or EBITDA, margin.
In addition to the Transition of 108 managed communities owned by DHC, the landlord of our four leased senior living communities with 203 living units is currently marketing these properties for sale and we are unlikely to operate these four communities long-term.
Presented below is a summary of our Ageility rehabilitation clinics as of March 31, 2021 and the number of clinics to be operated after the Transition as if it had been completed as of January 1, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 | | After Transition |
| | 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 DHC Communities | | 37 | | $ | 5,441 | | | $ | 147 | | | 26.1 | % | | — | | $ | — | | | $ | — | | | — | % |
Outpatient Clinics in DHC Communities | | 91 | | 7,734 | | | 85 | | | 15.3 | % | | 91 | | 7,734 | | | 85 | | | 15.3 | % |
Outpatient Clinics in Transition Communities(2) | | 44 | | 1,863 | | | 42 | | | 18.5 | % | | 44 | | 1,863 | | | 42 | | | 18.5 | % |
Total Clinics at DHC Communities | | 172 | | 15,038 | | | 87 | | | 19.6 | % | | 135 | | 9,597 | | | 71 | | | 15.9 | % |
Outpatient Clinics at Other Communities (4) | | 80 | | 4,234 | | | 53 | | | 11.8 | % | | 80 | | 4,234 | | | 53 | | | 11.8 | % |
Total Clinics | | 252 | | $ | 19,272 | | | $ | 76 | | | 17.9 | % | | 215 | | $ | 13,831 | | | $ | 64 | | | 14.6 | % |
_______________________________________(1) Excludes revenue of $5.4 million in the quarter ended March 31, 2021 for inpatient clinics, which are expected to be closed as part of the Transition.
(2) As part of the Transition, the Company expects 108 senior living communities managed on behalf of DHC to be transitioned to new operators. These communities have 44 Ageility outpatient rehabilitation clinics, which, due to the transfer to a new operator, may be subject to closure by the new operator.
(3) Total Ageility revenue excludes home health care services, which are part of the rehabilitation and wellness services segment.
(4) Other communities includes 16 outpatient clinics at owned communities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General Industry Trends
We believe that, in the United States, the current primary market for senior living services is focused towardson individuals age 80 and older, and that the fastest-growing age population is over 85. Also, asolder. As a result of medical advances, adults are living longer.longer and expanding their options as to where they choose to reside as they age. 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 evolved to serve the growing number of older adults itand we expect the demand for senior living services to increase in future years regardless of where the older adults may reside. More recently, the senior living industry has also faced challenges in connection with an economic recession, such as workforce shortages and low retention, occupancy pressures, challenges related to new technology and the increasing desire for a differentiated customer experience.
We are continuing to monitor the risks related to the worldwide pandemic ofbeen materially adversely impacted by the disease caused by the novel coronavirus SARS-COV2,SARS-CoV-2, or COVID-19, and the impactresulting pandemic, or the Pandemic, and economic recession. 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 likely will 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 May 1, 2021, there have been approximately 32.5 million reported cases of COVID-19 in the United States and approximately 0.6 million related deaths, which have disproportionately impacted older adults like our residents and clients.
The U.S. economy has been growing as COVID-19 vaccinations are increasingly administered and commercial activities are increasingly returning to pre-pandemic practices and operations 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, (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 our Annual Report.
Vaccinations. Throughout the first quarter of 2021, we coordinated multiple vaccination clinics for our residents and team members in all service lines of business at no cost to those individuals. As of May 1, 2021, we had completed all vaccination clinics scheduled at communities and over 85% of our residents at our senior living communities had received a COVID-19 vaccine.
Protective Measures for Residents and Team Members. Our residents and clients are part of a population that has been disproportionately affected by the Pandemic. Our team members who work in our communities may be at a higher risk of contracting or spreading COVID-19 due to the nature of their work environment when caring for our residents and clients. Our highest priority is maintaining the health and well-being of our residents, clients and team members. As a result, we continue to monitor, evaluate and adjust our plans to address the impact to our business. For further information regarding the protective measures we have among other steps:taken for our residents, clients and team members over the last year, see the section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations—General Industry Trends” in Part II, Item 7 of our Annual Report.
restricted accessWe 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 81.3% for the three months ended March 31, 2020 to 68.3% for the three months ended March 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 82.6% for the three months ended March 31, 2020 to 69.5% for the three months ended March 31, 2021. At May 1, 2021, all of our senior living communities to only essential visitorswere accepting new residents in at least one service line of business (independent living, assisted living, skilled nursing or memory care). We expect that the impact of the administration of the widespread vaccination for COVID-19 among our residents and team members;
closed 11members will decrease the incidence of COVID-19 in our Ageility clinics for in-person services;
limited sales and marketing activities;
enhanced infectious disease prevention and control policies, procedures and protocols;
provided additional and enhanced trainingsenior living communities. With the reduction of confirmed cases, we expect to team memberseventually cease restrictions at all levels of the organization; and
worked with vendors to ensure adequate supplies and personal protective equipment are available to our communities.
Also in connection with the COVID-19 pandemic, we are experiencing occupancy declines, increased labor costs and increased costs related to medical and sanitation supplies, and expect these negative trends to continue throughout at least the second quarter of 2020.
Additionally, federal, state or local health departments may ban or limit admissions to our senior living communities, and enable us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a precautionary measure. The pandemic has already resulted inresult of the ongoing
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
effects of the Pandemic, there is a decline inpossibility of continued occupancy at some of our communities and we expect that it will continue to cause declines in occupancy,the near term, due to current residents leaving our senior living communities, and any continued limitationsrestrictions on new residents moving into and/or touring our communities. senior living communities and the possibility that older adults will forego or delay moving into senior living communities because of perceived safety issues associated with the Pandemic.Our revenues are largely dependent on occupancy at our senior living communities and any decline in occupancy adversely impacts our revenues, unless we are able to offset those lost revenues with increased rates we charge our residents and clients or other sources of increased revenues.
Expenses. We have also incurred and will continue to incur significant costs to address the Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 which includetesting 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 supply costs, including for personal protective equipment,sanitation and additionaljanitorial supplies and increased labor costs. TheOur labor costs have also increased as a result of rising health insurance costs caused by the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, we expect the increased costs associated with the Pandemic to continue throughout the first half of 2021 and for the reasonably foreseeable future thereafter. We incur these costs for our owned and leased senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the senior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our management arrangements.
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 at least through the first half of 2021. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 at those communities and will eventually decrease our costs and the negative impacts 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, goingforward, the amounts and type of revenue, expense and cash flow impacts resulting from the COVID-19 pandemicPandemic will be dependent on a number of additional factors, including,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;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 downturn in response to the COVID-19 pandemicPandemic; consumer confidence and the demand for our communities and services. Given the uncertain nature of these circumstances, the impact on our results of operations, cash flows and financial condition cannot be reasonably estimated at this time, but may be substantial.
Continuation or deepening of the current economic downturn, other direct and indirect impacts of the COVID-19 pandemic, softness in the U.S. housing market, higher unemployment, lower levels of consumer confidence, stock market volatility and/or changes in demographics will adversely affect the ability of older adults and their families to afford our charges.
Senior Living Development.For the past few years prior to the Pandemic, increased access to capital and continued low interest rates appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancies.occupancy. This has resulted in a significant increase in new senior living community inventory entering the market in recent years. years, increasing competitive pressures on us, particularly in certain of our geographic markets.Although new development had been slowing prior to the onset of the COVID-19 pandemic,Pandemic, and the impact of the COVID-19 pandemic and the economic slowdownPandemic may further affectimpact new development, we expect that new inventory will enter the recent increasemarket in
Item 2. Management’s Discussion and Analysis the near term due to the increased development of Financial Condition and Results of Operations
new senior living communities priorin the past several years. That increase will continue to the COVID-19 pandemic will have a continuing impactcompetitive effect on competition. The new senior living community inventory has increased competitive pressures on us, particularly in certain of our geographic markets, and we expect these challenges to continuebusiness for at least the next few years.
During mostyears; these challenges may be intensified as a result of 2019the Pandemic and the first quarter of 2020, low unemployment, the competitive labor market and,associated economic downturn.
Labor Market. As noted above, in certain jurisdictions, increased minimum wages, caused employment costs to increase, including for salaries, wages and benefits, such as health care benefit coverage, for our employees, which increased our operating expenses and negatively impacted our financial results. In connection with the COVID-19 pandemic,Pandemic, we are incurringincurred increased labor costs as a result of increased overtime pay for employees covering for additional shifts andteam members, increased costs associated with employeeteam member engagement and retention programs, such as free meals for certain of our employees.team members and bonuses to team members at our senior living communities and rehabilitation and wellness clinics, and increased health insurance and workers' compensation costs. We also have increased staffing needs, and costs associatedfor which we have entered into temporary staffing agreements with increased personal protective equipment requirementsstaffing agencies to accommodate staffing shortages due to the COVID-19 pandemic. During the year ended 2019, we increasedquarantine protocols of our investments in our workforce and we are continuingcurrent staff that may have contracted or been potentially exposed to focus on enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits.COVID-19.
Transaction Agreement with DHC
On April 1, 2019, we entered into the Transaction Agreement with DHC to restructure our business arrangements with DHC, pursuant to which, effective as of January 1, 2020:
•our five then existing master leases with DHC as well as our then existing management and pooling agreements with DHC were terminated and replaced with new management agreements for all those senior living communities, together with a related omnibus agreement, or collectively, the New Management Agreements;
we effected the Share Issuances pursuant to which
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•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;2019, or, together, the Share Issuances; and
•as consideration for the Share Issuances, DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments.
As part of our Strategic Plan, we have agreed to amend our management arrangements with DHC. For more information on the expected impact of the Strategic Plan on our management arrangements, and regarding our leases and management agreements and other transactions, with DHC, see Notes 1, 11 and 1116 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Credit FacilitiesFacility
We have a $65.0 million secured revolving credit facility with a syndicate of lenders that is available for us to use for general business purposes.purposes, of which $14.9 million was available for borrowing as of March 31, 2021.
For more information regarding our credit facility and our irrevocable standby letters of credit, see Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our Revenues
Our revenues are derived from the services we provide to residents at our senior living communities and to older adults through our rehabilitation and wellness services clinics, and these revenues are our primary source of cash to fund our operating expenses, including capital expenditures at the senior living communities we own or lease and principal and interest payments on our debt.
At some of our senior living communities (principally our SNFs) and our rehabilitation and wellness services clinics, Medicare and Medicaid programs provide operating revenues for skilled nursing and rehabilitation and wellness services. We derived approximately 3.6%4.3% and 23.6%3.6% of our consolidated revenues from these government fundedgovernment-funded programs during the three months ended March 31, 2021 and 2020, and 2019, respectively. Our netRevenues from Medicare revenuesprograms totaled $10.1$11.5 million and $30.4$10.1 million during the three months ended March 31, 20202021 and 2019, respectively. Our net2020. Revenues from Medicaid revenuesprograms totaled $0.6$0.3 million and $34.9$0.6 million during the three months ended March 31, 2021 and 2020, and 2019, respectively. Our net Medicare and Medicaid revenues have declined significantly duefor skilled nursing, and rehabilitation and wellness services provide operating revenue at our rehabilitation clinics, and also at some of our senior living communities (principally our SNF's), we earn management fees based on these revenues.
In connection with the Strategic Plan, we intend to the SNFstransition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that we previously leased fromcurrently manage for DHC to new operators. If and nowwhen these transitions are completed, our management agreements with DHC for those communities will terminate. In addition, we and DHC intend to close and reposition approximately 1,500 skilled nursing facility units, in 27 CCRCs that we will continue to manage for DHC. For the three months ended March 31, 2021, we recognized $5.3 million of management fees related to these senior living communities and which received a significant partunits. In addition, in connection with the Strategic Plan, we intend to close 37 Ageility inpatient rehabilitation clinics. For the three months ended March 31, 2021, we recognized $5.4 million of their revenue fromrelated to these resources.clinics.
On February 10, 2020,For more information regarding the Trump Administration released its proposed fiscal year 2021 budget. The proposed budget proposed reductions to federal health care spending, including a net $1.6 trillion reduction in health care entitlements over the next decade. We expect that someterms and conditions of the proposed reforms, if implemented, would impactStrategic Plan, please see Notes 1, 11 and 16 to our operations andcondensed consolidated financial performance. Such proposals include: (1) expansionstatements in Part I, Item 1 of value-based payment methodologies in federal healthcare programs; (2) a unified Prospective Payment System for both inpatient and outpatient post-acute care providers that may reduce Medicarethis Quarterly Report on Form 10-Q.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
payments to inpatient post-acute care providers, including SNFs; and (3) changes to state survey methodology designed to enhance state oversight of long-term care facilities. We cannot predict whether and to what extent the proposed policies will be enacted or what the impact will be on our operations.
Federal agencies have announced intentions to enhance enforcement efforts to improve the quality and safety of care in nursing homes, which will impact our operations and increase our operating costs. For example, in accordance with the previously announced attention by the Centers for Medicare & Medicaid Services, or CMS, regarding overuse of antipsychotics in nursing homes, CMS stated its intention to use civil monetary penalties and denial of Medicare reimbursement to penalize nursing homes that fail to adopt strategies to lower medically-unnecessary use of antipsychotic medications. Further, the U.S. Department of Justice, or DOJ, announced that it is launching a National Nursing Home Initiative to pursue civil and criminal penalties against “nursing homes that provide grossly substandard care to their residents.” The DOJ stated that it would consider a number of factors in identifying problematic nursing homes, including: (1) consistent failure to provide adequate nursing staff; (2) failure to adhere to basic protocols for hygiene and infection control; (3) failure to provide sufficient food to residents; (4) withholding of pain medication; and (5) use of physical or chemical restraints to restrain or sedate residents.
On April 10, 2020, CMS issued a proposed rule updating Medicare payments to SNFs for federal fiscal year 2021, which CMS estimates would increase payments to SNFs by an aggregate of 2.3%, or approximately $784.0 million, compared to federal fiscal year 2020. The proposed rule would also make changes to certain clinical diagnosis codes included in patient case-mix groups, which determine the rate paid under Medicare’s prospective payment system for SNFs known as the Patient Driven Payment Model. Finally, if adopted, the proposed rule would formalize deadlines related to quarterly quality reporting under Medicare’s SNF Value-Based Payment Program, and establish performance periods and performance standards for upcoming program years.
Federal and state governments have taken a number of actions to respond to the COVID-19 pandemic. As noted above, certainPandemic. Certain of these actions may increase our operational costs or reduce our revenue, while others are designed to alleviate the adverse operational and financial consequences related to the COVID-19 pandemicPandemic on operators of post-acutelong-term care and senior living facilitiescommunities like us. Federal actions in response to COVID-19the Pandemic that may impact our operations and financial performance include, but are not limited to, the following:
•On March 13, 2020, CMS issued a memorandum that requires nursing homes to follow The Centers for Disease Control and Prevention,11, 2021, the American Rescue Plan Act of 2021, or CDC, guidelines to, among other things, limit access to nursing homes by visitors and non-essential personnel, increase the availability of certain supplies, such as hand sanitizer and personal protective equipment, and cancel all communal activities and communal dining. On March 23, 2020, CMS issued guidance that temporarily amended the state survey inspection process for nursing homes to target and assess compliance with CDC-recommended infection control measures. The new state survey process prioritizes complaint inspections, targeted infection control inspections and self-assessments of nursing homes, and suspends standard and revisit inspections of nursing homes. On April 2, 2020, CMS issued further guidance instructing nursing homes to immediately implement symptom screening for all staff, residents and visitors, and ensure staff are using appropriate personal protective equipment when interacting with residents. The guidance also suggests that nursing homes use separate staffing teams for residents who have tested positive for COVID-19 and those who have tested negative for COVID-19.
The Secretary of the U.S. Department of Health and Human Services has waived certain Medicare requirements applicable to long-term care facilities, including SNFs. Under the March 13, 2020 waiver: (1) the requirement that covered SNF care be preceded by an inpatient hospital stay of at least three days’ duration is waived for those Medicare beneficiaries who need to be transferred as a result of the COVID-19 pandemic; (2) SNF coverage is renewed for certain Medicare beneficiaries who have recently exhausted SNF benefits; and (3) the deadlines for performance of clinical assessment of SNF residents and submission of such clinical assessment data are waived. The Secretary also subsequently waived certain requirements related to the submission of staffing data, pre-admission screenings, in-person resident groups, certain nurse aide training, and long-term care facility transfer and discharge protocols. Further, given the need for surge capacity overall and the need to isolate residents who have been or may be affected by the COVID-19 pandemic, the Secretary waived certain physical environment requirements to allow for non-SNF buildings to be temporarily certified and for non-resident rooms to be used for patient care. Finally, CMS waived the requirement for physicians and non-physician practitioners to perform in-person visits for residents and to allow visits to be conducted, as appropriate, via telehealth options. These waivers are retroactive to March 1, 2020, and are in effect through the end of the National Emergency.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act,ARPA, was signed into law on March 27, 2020.law. In addition to broad-based public and private financial relief, the CARES ActARPA included a number of measures intended to assist the healthcarehealth care industry, including changesfunding 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 Medicare accelerateddevelopment and advance payment program, which is a
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
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
programincreased 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 offers expedited Medicare paymentsstates must use the enhanced funds to eligible healthcare providers when there is a disruption in claims submission“implement, or claims processing. The CARES Act expanded the Medicare accelerated and advanced payment program to: (1) cover all Medicare-enrolled providers; (2) increase prepayment amounts from 70% to 100%; (3) increase the length of time covered by accelerated payments from three months to six months; and (4) delay due dates and date of recoupment for outstanding balances. CMS announcedsupplement the implementation of, these measures on March 28, 2020. one or more activities to enhance, expand, or strengthen” Medicaid HCBS.
•The CARES Act temporarily suspended 2% Medicare sequestration payment reductions from May 1, 2020 through December 31, 2020. The CARES Act also delayedFederal government, in coordination with the expirationstates, has continued its COVID-19 vaccination efforts. According to the CDC’s COVID Data Tracker, as of April 29, 2021, approximately 82.1% of the Money FollowsU.S. population 65 years or older has received at least one dose of a COVID-19 vaccine, and 68.4% is fully vaccinated. As of April 29, 2021, more than 143 million people in the Person ProgramU.S., or 43.3% of the population, have received at least one dose of a COVID-19 vaccine, and over 99 million people, or 30.0% of the population, is fully vaccinated. Further, on April 6, 2021, President Biden directed all states to November 30, 2020. The Money Follows the Person Program provides states enhanced federal matching funds for servicesopen up COVID-19 vaccinations to support the movement of seniorsall U.S. residents 18 years and people with disabilities from institutional care to home-based care.older by April 19, 2021.
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 COVID-19 pandemicPandemic 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 COVID-19 pandemic.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. As noted above, we have experienced continued declines in occupancy in our senior living communities as a result of efforts to control the risks posed by the COVID-19 pandemic and the further impact of these efforts is unclear. Further, we have incurred costs and will continue to incur costs, which may be significant, to address COVID-19, which include incremental supply costs, preventative and responsive costs and additional labor costs.
In addition to the responses to the COVID-19 pandemicPandemic discussed above, shifting policy priorities, the current and projected federal budget deficit, other federal spending priorities and challenging fiscal conditions in some states, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates, state Medicaid rates and federal payments to states for Medicaid programs. We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate changes or other changes that may be implemented, but we believe that some of these changes will cause these government funded healthcare programs to fail to provide rates that match our increasing expenses, and that such changes may be material and adverse to our operations and to our future financial results of operations.
For further information regarding federal actions in response to the Pandemic, government healthcare funding and regulation and thetheir possible impact on us and our business, revenues and operations, see Note 15 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Reporting on Form 10-Q and the sections captioned “Business-Government“Business—Government Regulation and Reimbursement” in Part I, Item I and “Management’s Discussion and Analysis of Financial Condition and Results of Operations-OurOperations—Our Revenues” in Part II, Item 7 of our Annual Report.
Results of Operations
As of March 31, 2020, we operatedWe operate in two reportable segments: (1) senior living and (2) rehabilitation and wellness services. In the senior living segment, we manage for the account of others and operate for our own account, respectively, independent living communities, assisted living communities, continuing care retirement communities,CCRCs, SNFs and an active adult communitiescommunity that are subject to centralized oversight and provide housing and services to older adults. Included in the results of the assisted living communities and CCRCs are memory care living units specializing in the care of those with Alzheimer's.In the rehabilitation and wellness services reporting segment, we provide therapya comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in the inpatient setting and in outpatient clinics.clinics as well as home health and fitness services.
All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.
As previously noted, pursuant to the Strategic Plan, we intend to, among other things, (i) amend our management arrangements with DHC to transition 108 senior living communities, with approximately 7,500 living units, that we currently manage for DHC to new operators, (ii) close and reposition 27 skilled nursing units, with approximately 1,500 living units, in CCRCs that we will continue to manage for DHC and (iii) close 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities. For the three months ended March 31, 2021, we recognized $5.3 million of management fees related to these senior living communities and units. For the three months ended March 31, 2021, we recognized rehabilitation and wellness services revenue of $5.4 million related to the Ageility inpatient rehabilitation clinics which will be closed. The information in the Key Statistical Data table below includes those communities, units and clinics in the results reported.
Key Statistical Data For the Three Months Ended March 31, 2021 and 2020:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Statistical Data For the Three Months Ended March 31, 2020 and 2019:
The following tables present a summary of our operations for the three months ended March 31, 20202021 and 20192020 (dollars in thousands, except average monthly rate)RevPAR): | | | | | | | | | | | | | Three Months Ended March 31, | | Increase/(Decrease) | |
| | Three Months Ended March 31, | | Increase/(Decrease) | | 2021 | | 2020 | | Amount | | Percent | |
| | 2020 | | 2019 | | Amount | | Percent | |
Revenues: | | | | | | | | | |
REVENUES | | REVENUES | | | | | | | | | |
Rehabilitation and wellness services | | Rehabilitation and wellness services | | $ | 19,553 | | | $ | 21,384 | | | $ | (1,831) | | | (8.6) | % | |
Senior living | | $ | 21,338 |
| | $ | 266,529 |
| | $ | (245,191 | ) | | (92.0 | )% | Senior living | | 17,057 | | | 20,997 | | | (3,940) | | | (18.8) | % | |
Management fees | | 17,051 |
| | 3,983 |
| | 13,068 |
| | 328.1 | % | Management fees | | 13,850 | | | 17,051 | | | (3,201) | | | (18.8) | % | |
Rehabilitation and wellness services | | 21,043 |
| | 10,406 |
| | 10,637 |
| | 102.2 | % | |
Total management and operating revenues | | 59,432 |
| | 280,918 |
| | (221,486 | ) | | (78.8 | )% | Total management and operating revenues | | 50,460 | | | 59,432 | | | (8,972) | | | (15.1) | % | |
Reimbursed community-level costs incurred on behalf of managed communities | | 232,016 |
| | 74,605 |
| | 157,411 |
| | 211.0 | % | Reimbursed community-level costs incurred on behalf of managed communities | | 213,160 | | | 232,016 | | | (18,856) | | | (8.1) | % | |
Other reimbursed expenses | | 5,997 |
| | — |
| | 5,997 |
| | n/m |
| Other reimbursed expenses | | 5,480 | | | 5,997 | | | (517) | | | (8.6) | % | |
Total revenues | | 297,445 |
| | 355,523 |
| | (58,078 | ) | | (16.3 | )% | Total revenues | | 269,100 | | | 297,445 | | | (28,345) | | | (9.5) | % | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | |
Other operating income | | Other operating income | | 7,793 | | | — | | | 7,793 | | | n/m | |
| | OPERATING EXPENSES | | OPERATING EXPENSES | | |
Rehabilitation and wellness services expenses | | Rehabilitation and wellness services expenses | | 16,210 | | | 17,501 | | | (1,291) | | | (7.4) | % | |
Senior living wages and benefits | | 10,202 |
| | 136,841 |
| | (126,639 | ) | | 92.5 | % | Senior living wages and benefits | | 12,013 | | | 9,800 | | | 2,213 | | | 22.6 | % | |
Other senior living operating expenses | | 3,294 |
| | 75,737 |
| | (72,443 | ) | | 95.7 | % | Other senior living operating expenses | | 6,266 | | | 3,938 | | | 2,328 | | | 59.1 | % | |
Rehabilitation and wellness services expenses | | 16,566 |
| | 7,820 |
| | 8,746 |
| | (111.8 | )% | |
Community-level costs incurred on behalf of managed communities | | 232,016 |
| | 74,605 |
| | 157,411 |
| | (211.0 | )% | Community-level costs incurred on behalf of managed communities | | 213,160 | | | 232,016 | | | (18,856) | | | (8.1) | % | |
General and administrative | | 22,865 |
| | 26,502 |
| | (3,637 | ) | | 13.7 | % | General and administrative | | 22,641 | | | 22,865 | | | (224) | | | (1.0) | % | |
Rent | | 1,177 |
| | 54,542 |
| | (53,365 | ) | | 97.8 | % | |
Depreciation and amortization | | 2,701 |
| | 8,165 |
| | (5,464 | ) | | 66.9 | % | Depreciation and amortization | | 2,940 | | | 2,701 | | | 239 | | | 8.8 | % | |
Long-lived asset impairment | | — |
| | 3,148 |
| | (3,148 | ) | | 100.0 | % | |
Total operating expenses | | 288,821 |
| | 387,360 |
| | (98,539 | ) | | (25.4 | )% | Total operating expenses | | 273,230 | | | 288,821 | | | (15,591) | | | (5.4) | % | |
| | | | | | | | | | |
Operating income (loss) | | 8,624 |
| | (31,837 | ) | | 40,461 |
| | n/m |
| |
Operating income | | Operating income | | 3,663 | | | 8,624 | | | (4,961) | | | (57.5) | % | |
| | | | | | | | | | |
Interest, dividend and other income | | 339 |
| | 156 |
| | 183 |
| | 117.3 | % | Interest, dividend and other income | | 84 | | | 339 | | | (255) | | | (75.2) | % | |
Interest and other expense | | (382 | ) | | (906 | ) | | 524 |
| | 57.8 | % | Interest and other expense | | (463) | | | (382) | | | (81) | | | 21.2 | % | |
Unrealized (loss) gain on equity investments | | (1,462 | ) | | 366 |
| | (1,828 | ) | | (499.5 | )% | |
Realized (loss) gain on sale of debt and equity investment, net of tax | | (21 | ) | | 92 |
| | (113 | ) | | n/m |
| |
Unrealized gain (loss) on equity investments | | Unrealized gain (loss) on equity investments | | 135 | | | (1,462) | | | 1,597 | | | (109.2) | % | |
Realized gain (loss) on sale of debt and equity investments | | Realized gain (loss) on sale of debt and equity investments | | 96 | | | (21) | | | 117 | | | n/m | |
Loss on termination of leases | | (22,899 | ) | | — |
| | (22,899 | ) | | n/m |
| Loss on termination of leases | | — | | | (22,899) | | | 22,899 | | | (100.0) | % | |
| | | | | | | | | |
Loss before income taxes and equity in earnings of an investee | | (15,801 | ) | | (32,129 | ) | | 16,328 |
| | 50.8 | % | |
Income (loss) before income taxes | | Income (loss) before income taxes | | 3,515 | | | (15,801) | | | 19,316 | | | (122.2) | % | |
Provision for income taxes | | (1,408 | ) | | (1,490 | ) | | 82 |
| | 5.5 | % | Provision for income taxes | | (200) | | | (1,408) | | | 1,208 | | | (85.8) | % | |
Equity in earnings of an investee | | — |
| | 404 |
| | (404 | ) | | (100.0 | )% | |
Net loss | | $ | (17,209 | ) | | $ | (33,215 | ) | | $ | 16,006 |
| | 48.2 | % | |
Net income (loss) | | Net income (loss) | | $ | 3,315 | | | $ | (17,209) | | | $ | 20,524 | | | 119.3 | % | |
| | | | | | | | | | | | | | | | | |
Owned and leased communities: | | | | | | | | | Owned and leased communities: | | | | | | | | | |
Number of communities (end of period) | | 24 |
| | 208 |
| | (184 | ) | | (88.5 | )% | Number of communities (end of period) | | 24 | | | 24 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 2,312 |
| | 22,190 |
| | (19,878 | ) | | (89.6 | )% | Number of living units (end of period) (1) | | 2,302 | | | 2,312 | | | (10) | | | (0.4) | % | |
Occupancy % | | 81.3 | % | | 82.9 | % | | (1.6 | )% | | n/m |
| |
Spot occupancy at March 31, | | Spot occupancy at March 31, | | 68.2 | % | | 80.3 | % | | (12.1) | % | | n/m | |
Average occupancy | | Average occupancy | | 68.3 | % | | 81.3 | % | | (13.0) | % | | n/m | |
RevPAR (2) | | $ | 2,938 |
| | $ | 3,995 |
| | $ | (1,057 | ) | | (26.5 | )% | RevPAR (2) | | $ | 2,479 | | | $ | 2,930 | | | $ | (451) | | | (15.4) | % | |
| | | | | | | | | | |
Managed communities: | | | | | | | | | Managed communities: | | | | | | | | | |
Number of communities (end of period) | | 244 |
| | 76 |
| | 168 |
| | 221.1 | % | Number of communities (end of period) | | 228 | | | 244 | | | (16) | | | (6.6) | % | |
Number of living units (end of period) (1) | | 28,960 |
| | 9,766 |
| | 19,194 |
| | 196.5 | % | Number of living units (end of period) (1) | | 26,963 | | | 28,960 | | | (1,997) | | | (6.9) | % | |
Occupancy % | | 82.6 | % | | 86.3 | % | | (3.7 | )% | | n/m |
| |
Spot occupancy at March 31, | | Spot occupancy at March 31, | | 70.2 | % | | 81.5 | % | | (11.3) | % | | n/m | |
Average occupancy | | Average occupancy | | 69.5 | % | | 82.6 | % | | (13.1) | % | | n/m | |
RevPAR (2) | | $ | 3,820 |
| | $ | 3,688 |
| | $ | 132 |
| | 3.6 | % | RevPAR (2) | | $ | 3,213 | | | $ | 3,820 | | | $ | (607) | | | (15.9) | % | |
| Rehabilitation and wellness services: | | Rehabilitation and wellness services: | | | | | | | | | |
Number of inpatient clinics (end of period) (1) | | Number of inpatient clinics (end of period) (1) | | 37 | | | 41 | | | (4) | | | (9.8) | % | |
Number of outpatient clinics (end of period) | | Number of outpatient clinics (end of period) | | 215 | | | 203 | | | 12 | | | 5.9 | % | |
Total clinics | | Total clinics | | 252 | | | 244 | | | 8 | | | 3.3 | % | |
_______________________________________
n/m - not meaningful
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(1) The summary of operations includes (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators, (ii) approximately 1,500 skilled nursing facility units that are expected to be closed and repositioned in 27 CCRCs that we will continue to manage for DHC and (iii) 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities that are expected to be closed. In addition, the landlord of the four leased communities included in the 24 owned and leased senior living communities data above is currently marketing these properties for sale and it is unlikely that we will operate these four communities long-term.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase/(Decrease) |
| | 2020 | | 2019 | | Amount | | Percent |
Rehabilitation and wellness services: | | |
| | | | |
| | |
Number of inpatient clinics | | 41 |
| | 46 |
| | (5 | ) | | (10.9 | )% |
Number of outpatient clinics | | 203 |
| | 137 |
| | 66 |
| | 48.2 | % |
Total clinics | | 244 |
| | 183 |
| | 61 |
| | 33.3 | % |
(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 three months ended March 31, 2021 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.Comparable Communities and Clinics
Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continually owned, continuously leased or continuously managed since January 1, 2020, excluding those communities, units and clinics to be transitioned or closed in 2021 per the Strategic Plan):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase/(Decrease) | |
| | 2021(3) | | 2020(3) | | Amount | | Percent | |
REVENUES | | | | | | | | | |
Rehabilitation and wellness services | | $ | 12,813 | | | $ | 12,788 | | | $ | 25 | | | 0.2 | % | |
Senior living | | 17,057 | | | 20,330 | | | (3,273) | | | (16.1) | % | |
Management fees | | 8,580 | | | 9,629 | | | (1,049) | | | (10.9) | % | |
Other operating income | | 7,793 | | | — | | | 7,793 | | | n/m | |
| | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | |
Rehabilitation and wellness services expenses | | 11,093 | | | 11,649 | | | (556) | | | (4.8) | % | |
Senior living wages and benefits | | 12,013 | | | 9,509 | | | 2,504 | | | 26.3 | % | |
Other senior living operating expenses | | 6,266 | | | 1,542 | | | 4,724 | | | 306.4 | % | |
| | | | | | | | | |
Owned and leased communities: | | | | | | | | | |
Number of communities (end of period) | | 24 | | | 24 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 2,302 | | | 2,312 | | | (10) | | | (0.4) | % | |
Spot occupancy at March 31, | | 68.2 | % | | 80.3 | % | | (12.1) | % | | n/m | |
Average occupancy | | 68.3 | % | | 81.3 | % | | (13.0) | % | | n/m | |
RevPAR (2) | | $ | 2,479 | | | $ | 2,930 | | | (451) | | | (15.4) | % | |
| | | | | | | | | |
Managed communities: | | | | | | | | | |
Number of communities (end of period) | | 120 | | | 120 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 17,906 | | | 17,932 | | | (26) | | | (0.1) | % | |
Spot occupancy at March 31, | | 73.2 | % | | 85.6 | % | | (12.4) | % | | n/m | |
Average occupancy | | 72.7 | % | | 86.0 | % | | (13.3) | % | | n/m | |
RevPAR (2) | | $ | 2,946 | | | $ | 3,471 | | | (525) | | | (15.1) | % | |
| | | | | | | | | |
Rehabilitation and wellness services: | | | | | | | | | |
Number of inpatient clinics (end of period) | | — | | | — | | | — | | | — | % | |
Number of outpatient clinics (end of period) | | 184 | | | 184 | | | — | | | — | % | |
Total clinics | | 184 | | | 184 | | | — | | | — | % | |
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2)RevPAR or average monthly senior living revenue per available unit, 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 three months ended March 31, 2021 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
Comparable communities(3) (seniorThe three months ended March 31, 2021 and 2020 include data for 24 owned and leased senior living communities, 120 managed senior living communities and 184 rehabilitation clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2019) (dollars2020. Per the Strategic Plan the summary of operations for comparable communities and clinics excludes (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are expected to be transitioned to new operators, (ii) approximately 1,500 skilled nursing facility units, that are expected to be closed and repositioned in thousands, except average monthly rate):27 CCRCs that we will continue to manage for DHC and (iii) 37 Ageility inpatient rehabilitation clinics operating in certain transitioning communities, that are expected to be closed. In addition, the landlord of the four leased communities included in the 24 owned and leased senior living communities data above is currently marketing these properties for sale and it is unlikely that we will operate these four communities long-term.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase/(Decrease) |
| | 2020 | | 2019 | | Amount |
| | Percent |
Revenues: | | | | | | | | |
Senior living | | $ | 20,671 |
| | $ | 20,849 |
| | $ | (178 | ) | | (0.9 | )% |
Management fees | | 5,560 |
| | 3,983 |
| | 1,577 |
| | 39.6 | % |
Rehabilitation and wellness services | | 17,216 |
| | 10,741 |
| | 6,475 |
| | 60.3 | % |
Reimbursed community-level costs incurred on behalf of managed communities | | 73,702 |
| | 73,668 |
| | 34 |
| | — | % |
Senior living wages and benefits | | 9,911 |
| | 9,867 |
| | 44 |
| | (0.4 | )% |
Other senior living operating expenses | | 895 |
| | 5,709 |
| | (4,814 | ) | | 84.3 | % |
Rehabilitation and wellness services expenses | | 13,784 |
| | 8,146 |
| | 5,638 |
| | (69.2 | )% |
| | | | | | | | |
Owned and leased communities: | | | | | | | | |
Number of communities (end of period) | | 24 |
| | 24 |
| | — |
| | — | % |
Number of living units (end of period) (1) | | 2,312 |
| | 2,312 |
| | — |
| | — | % |
Occupancy % | | 81.3 | % | | 81.6 | % | | (0.3 | )% | | n/m |
|
RevPAR (1)(2) | | $ | 2,930 |
| | $ | 2,952 |
| | (22 | ) | | (0.7 | )% |
| | | | | | | | |
Managed communities: | | | | | | | | |
Number of communities (end of period) | | 76 |
| | 76 |
| | — |
| | — | % |
Number of living units (end of period) (1) | | 9,847 |
| | 9,766 |
| | 81 |
| | 0.8 | % |
Occupancy % | | 83.7 | % | | 86.3 | % | | (2.6 | )% | | n/m |
|
RevPAR (1)(2) | | $ | 3,596 |
| | $ | 3,688 |
| | (92 | ) | | (2.5 | )% |
| | | | | | | | |
Rehabilitation and wellness services: | | | | | | | | |
Number of inpatient clinics | | 41 |
| | 41 |
| | — |
| | — | % |
Number of outpatient clinics | | 134 |
| | 134 |
| | — |
| | — | % |
Total clinics | | 175 |
| | 175 |
| | — |
| | — | % |
n/m - not meaningful27
(1)
Includes only living units categorized as in service. As a result, the number
The following is a discussion of our operating results for the three months ended March 31, 20202021 compared to the three months ended March 31, 2019.2020.