Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in one community for possible sale or closure. If and when these sales and closures are completed, our management agreements with DHC for those communities will terminate. For the three and nine months ended September 30, 2020, we recognized $886 and $3,124, respectively, of management fees related to these communities.thousands, except per share amounts)
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 $2,061$1,795 and $2,349$2,123 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $6,535$3,599 and $7,122$4,474 for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively, which amounts include reimbursements for our share of RMR LLC’s costs for providing internal audit services.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 affiliated withrelated 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 SeptemberJune 30, 2020,2021, 10,691,658 of our common shares, or 33.9%33.7% 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 former managing trustee and the secretary of DHC. Effective asIncluded in accrued expenses and other current liabilities on our condensed consolidated balance sheets at June 30, 2021 and December 31, 2020 are $19,570 and $30,090, respectively, of January 1, 2020,expenses we completed the Restructuring Transactions, pursuant to which we restructured our existing business arrangementsincurred in connection with DHC. We participate in a DHC property insurance program for the senior living communities we ownmanage for DHC. DHC will reimburse us those amounts, and lease. The premiums we pay for this coverage are allocated pursuant to a formula based on the profiles of the propertieshave included those amounts in the program. Our program cost for the policy year ended June 30, 2021 is $500.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 for RMR LLC to provide business management services to us. See Note 12 for more information regarding our relationship with RMR LLC.
ABP Trust.ABP Trust and its subsidiaries owned 1,972,783 of our common shares, representing 6.2% of our outstanding common shares, as of June 30, 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 $559 and $424 for the three months ended June 30, 2021 and 2020, respectively, and $1,036 and $859 for the six months ended June 30, 2021 and 2020, which is included in general and administrative expenses. As a result of renewing this lease, we increased each of our right-of-use asset and lease liability noted below on our condensed consolidated balance sheets by $9,746 to reflect the terms of the amendment. We recognized a right-of-use asset and lease liability, which amounts were $9,872 and $496 for the lease liability and $9,708 and $452 for the right-of-use asset as of June 30, 2021 and December 31, 2020, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 3.9%. The right-of-use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.
For further information about these and other such relationships and certain other related person transactions, see our Annual Report.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
ABP Trust.ABP Trust and its subsidiaries, owned 1,972,783 of our common shares, representing 6.2% of our outstanding common shares as of September 30, 2020.
We lease our headquarters from a subsidiary of ABP Trust. Our rent expense for our headquarters, including utilities and real estate taxes that we pay as additional rent, was $442 and $467 for the three months ended September 30, 2020 and 2019, respectively, and $1,302 and $1,438 for the nine months ended September 30, 2020 and 2019, respectively. The adoption of ASC Topic 842 resulted in the recognition of a lease liability and right of use asset, which amount was $740 and $1,675 as of September 30, 2020 and 2019, respectively, with respect to our headquarters lease, using an incremental borrowing rate of 4.6%. The right of use asset has been reduced by the amount of accrued lease payments, which amounts are not material to our condensed consolidated financial statements.
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 September 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $11 and $298, respectively. These amounts are presented as equity investment of an investee in our condensed consolidated balance sheets. In June 2020, we received $287 in connection with AIC's dissolution. We did not recognize any income related to our investment in AIC for the three or nine months ended September 30, 2020, and recognized income of $83 and $617 for the three and nine months ended September 30, 2019, respectively, 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 and nine months ended September 30, 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 their respective retirements, we entered into retirement agreements with our former officers, Bruce J. Mackey Jr. and Richard A. Doyle. Additionally, we entered into a separation agreement with our former Senior Vice President, Senior Living Operations, R. Scott Herzig. Pursuant to these agreements, we made cash payments of $600 and $510 to Mr. Mackey and Mr. Herzig, respectively, in January 2019, and made cash payments of $260 to Mr. Doyle in each of June 2019 and January 2020. In addition, we made release and transition payments to Mr. Mackey, in cash, totaling $132 and $400 for the three and nine months ended September 30, 2019, respectively, and transition payments to Mr. Doyle, in cash, totaling $22 and $30 for the three and nine months ended September 30, 2019, respectively. The full severance costs for Messrs. Mackey and Herzig were recorded during the fourth quarter of 2018 and the full severance cost for Mr. Doyle was recorded during the second quarter of 2019, as they met the criteria in ASC Topic 420, Exit or Disposal Cost Obligations.
For further information about these and other such relationships and certain other related person transactions, see our Annual Report.
14. Legal Proceedings and Claims
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 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 minimum or best estimate amount may be increased or decreased when events result in a changed expectation.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
We arewere 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:included: (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 ofin Lefevre v. Five Star Quality Care, Inc., agreed, without admitting fault, to settle theirMs. Lefevre's individual and PAGA claims. The settlement remains subject to a final definitive settlement agreement and towas approved by the court and regulatory approvals.final judgement on the settlement has been entered. The settlement will effectively extinguishamount was $3,062, of which $2,400 was allocated to us and $662 was allocated to DHC. The total settlement amount was paid on May 12, 2021. The settlement extinguished the Mandviwala v. Five Star Quality Care, Inc. d/b/a Five Star Quality Care - CA, Inc. and FVE Managers, Inc. lawsuit. We recognized $0 and $2,473 in other senior living operating expenses related toour allocated amount for the settlement as an expense in our condensed consolidated statements of these claimsoperations during the three and nine months ended September 30,second 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 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 completed our review and assessment of these matters and together, we will submit final supplemental disclosure to the OIG in November 2020. We expect to recognize $120 during the fourth quarter of 2020 as a reduction in management fees from DHC for the management fees that were previously paid to us with respect to the historical Medicare payments DHC received that are expected to be repaid.
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.pandemic, or the Pandemic. The global spread of COVID-19 has created significant volatility, uncertainty andcaused economic disruption worldwide.worldwide, and although conditions have significantly improved in the United States since the low points experienced, significant uncertainty regarding the Pandemic's ultimate duration, severity and near and long term impacts remain. Governments in affected regions have implemented and may continue to implement, safety precautions, including quarantines, travel restrictions, business closures and other public safety measures. On March 13, 2020, the pandemic was declared a national emergency by the President of the United States declared the Pandemic a national emergency, effective as of March 1, 2020, or the National Emergency. The National Emergency and itremains in effect. The Pandemic has significantly disrupted, and it and its aftermath will likely will continue to significantly disrupt, the United States economy, 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 impact related to the decrease in average occupancy levels and increased PPE costs since the first quarter of 2020. caused by the Pandemic, but to date, they have not been and we expect they will not be.
During 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 June 30, 2021, $6,535 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. For the three and six months ended June 30, 2021, we deployed $2,205 and $3,057, respectively, of PPE to senior living communities that we manage on behalf of DHC.
In response to the COVID-19 pandemic,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 COVID-19 pandemic.Pandemic.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
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 2.0%2% of a provider's 2018 (or most recent complete tax year) gross receipts, regardless of the provider's payer mix. We received $1,740 in Phase 1 General Distribution funds primarily for our rehabilitation clinics and home health operations that participate in Medicare as of September 30, 2020. We recognized $0 and $1,499 as other operating income for the three and nine months ended September 30, 2020, respectively, for Phase 1 General Distribution funds for which we believe we met the required terms and conditions. On September 19, 2020, HHS released reporting requirements that differed materially from the original terms and conditions of the Provider Relief Fund. On October 22, 2020, HHS provided clarification and updated guidance related to the original terms and conditions and the reporting requirements provided on September 19, 2020. As of September 30, 2020, we had $241 of funds, for which we are evaluating whether we can retain such funds, included in accrued expenses and other current liabilities in the condensed consolidated financial statements at September 30, 2020. As of September 30, 2020, we believe we met the required terms and conditions to retain the funds recognized as other operating income and will continue to assess our compliance with the terms and conditions as necessary.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
On June 9, 2020, HHS announced additional distributions from the Provider Relief Fund, or Phase 2 General Distributions,Distribution, including the Medicaid and Children's Health Insurance Program, programs, or the Medicaid and CHIP Targeted Distribution. HHS stated that it would disburse a payment that, at a minimum, is equal to 2.0%2% of reported total revenue from patient care to eligible providers serving Medicaid and CHIP beneficiaries. Providers who had not yet received a disbursement from the Phase 1 General Distribution arewere eligible for the Medicaid and CHIP Targeted Distribution. On October 14, 2020, we received $1,562 in Medicaid and CHIP Targeted Distribution funds for certain assisted living units in our owned and leased communities. We did not recognize any of these funds as other operating income for the three and nine months ended September 30, 2020.
The terms and conditionsInformation on future allocations of the Provider Relief Fund require that the funds are utilized to compensate for lost revenues that are attributable to the COVID-19 pandemic and for eligible costs to prevent, prepare for and respond to the COVID-19 pandemic that are not covered byyet 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 other sources. In addition Provider Reliefoperating income of $2 and $1,499 for the three months ended June 30, 2021 and 2020, respectively, and $7,795 and $1,499 for the six months ended June 30, 2021 and 2020, respectively, related to General Distribution Funds recipients are subject to otherprimarily for our senior living communities for which we believe we have met the required terms and conditions, including certain reporting requirements. Any funds not used in accordance with the terms and conditions, must be returned to HHS.conditions.
The CARES Act also delays the payment of required federal tax deposits for certain payroll taxes, including the employer's share of Old-Age, Survivors, and Disability Insurance Tax, or Social Security, employment taxes, incurred between 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 SeptemberJune 30, 2021 and December 31, 2020, we have deferred $18,157$27,593 of employer payroll taxes, of which $14,627 are required to be funded by us and will be reimbursed by DHC pursuant to the New Management Agreements, and are included in accrued compensation and benefits in theour condensed consolidated financial statements.
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 suspendssuspended the 2% Medicare Sequestration for the period from May 1, 2020 to DecemberMarch 31, 2020,2021 which may benefitbenefited 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. On April 14, 2021, President Biden signed into law legislation that further extended the temporary suspension of the 2% Medicare Sequestration until December 31, 2021.
The Tax Cuts and Jobs Act of 2017 repealed the AMT and allowed corporations to fully offset regular tax liability with AMT credits. Any remaining AMT credit amount became refundable incrementally from tax years 2018 through 2021. The CARES Act accelerates the refund schedule, permitting corporate taxpayers to claim the refund in full in either tax year 2018 or 2019. We have appliedexpect 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. Restructuring Expense
On April 9, 2021, we announced, as part of the Strategic Plan, the repositioning of the Company's 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. We expect these transition activities to be completed prior to December 31, 2021. See Notes 1, 11 and 17 for more information on the Strategic Plan and our business arrangements with DHC.
During the three months ended June 30, 2021, the following actions were taken pursuant to the repositioning phase of the Strategic Plan, we:
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
•Amended our management arrangements with DHC on June 9, 2021. See Note 11 for additional information regarding the amendments to the management arrangements with DHC,
•Closed 1,473 of the approximately 1,500 SNF living units planned for closure in 26 of the 27 CCRCs,
•Closed 27 of the planned 37 Ageility inpatient rehabilitation clinics,
•Recognized severance and retention costs of $14,544, and
•Incurred other costs in connection with the closure of communities and units of $845
A summary of the liabilities incurred combined with a reconciliation of the related components of the Strategic Plan restructuring expense recognized in the three and six months ended June 30, 2021, follows, first by cost component and then by segment, the expenses are aggregated and reported in the line item Restructuring expenses in our condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Summary of Liabilities and Expenses as of and for the Three Months Ended June 30, 2021 (1) |
| Type of Expense: | | Beginning Balance | | Expenses Incurred | | Payments | | Ending Balance |
| Retention bonuses | | $ | 0 | | | $ | 5,605 | | | $ | 3,110 | | | $ | 2,495 | |
| Severance, benefits and transition expenses | | 0 | | | 8,939 | | | 5,445 | | | 3,494 | |
| Transaction expenses | | 250 | | | 845 | | | 357 | | | 738 | |
| Total | | $ | 250 | | | $ | 15,389 | | | $ | 8,912 | | | $ | 6,727 | |
| | | | | | | | |
(1) No obligations related to the Strategic Plan were incurred in 2020. Accrued bonuses and other compensation are reported in the condensed consolidated balance sheet as part of Accrued compensation and benefits and accrued transaction expenses are reported as part of Accrued expenses and other current liabilities in the condensed consolidated balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Summary of Liabilities and Expenses as of and for the Three Months Ended June 30, 2021 (1) |
| By Segment: | | Beginning Balance | | Expenses Incurred | | Payments | | Ending Balance |
| Senior Living | | $ | 0 | | | $ | 11,531 | | | $ | 7,387 | | | $ | 4,144 | |
| Rehabilitation and Wellness Services | | 0 | | | 1,720 | | | 1,144 | | | 576 | |
| Corporate and Other | | 250 | | | 2,138 | | | 381 | | | 2,007 | |
| Total | | $ | 250 | | | $ | 15,389 | | | $ | 8,912 | | | $ | 6,727 | |
| | | | | | | | |
(1) No obligations related to the Strategic Plan were incurred in 2020. Accrued bonuses and other compensation are reported in the condensed consolidated balance sheet as part of Accrued compensation and benefits and accrued transaction expenses are reported as part of Accrued expenses and other current liabilities in the condensed consolidated balance sheet.
In addition to the restructuring expenses recorded for the three months ended June 30, 2021, there were transaction expenses of $250 recorded in corporate and other in the three months ended March 31, 2021.
In connection with the COVID-19 pandemic,implementation of the repositioning of other senior living management services, we have experienced occupancy declines, increased labor costsexpect to incur restructuring obligations, recognized under ASC 420, Exit or Disposal Cost Obligations and increased costs relatedASC 712, Compensation — Nonretirement Postemployment Benefits - special termination benefits, of up to COVID-19 testing, medical$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 sanitation suppliestransition expenses, and certain other costs. Additionally,up to $2,800 of transaction expenses, of which we have purchased personal protective equipment, or PPE,expect DHC to reimburse approximately $5,900, $7,500 and $1,600, respectively.
For the three and six months ended June 30, 2021, we recorded expenses of $15,389 and $15,639, respectively, $11,531 of which we expect to be used atreimbursed by DHC which is recorded in other reimbursed expenses for both the three and six months ended June 30, 2021.
Five Star Senior Living Inc.
Notes to Condensed Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
(unaudited)
See Notes 1, 11 and 17 for more information on the Strategic Plan and our business arrangements with DHC.
17. Subsequent Events
In July 2021 we continued to make progress on the Strategic Plan as we transitioned 26 senior living communities and rehabilitation and wellness clinics. At September 30, 2020, $11,101(with approximately 1,500 living units) to new operators. In addition, DHC entered into agreements to transition the management of PPE for future use was included in prepaid expenses and other current assets as of September 30, 2020. PPE that is deployed toan additional 50 senior living communities that we manage on behalf of DHC is reimbursable(approximately 3,700 living units) to us by DHC.new operators.
We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. We also cannot predict the extent the relief provided by the CARES Act will offset the financial losses caused by the COVID-19 pandemic, or if we will receive additional funds under the other Provider Relief Fund or other programs, but we expect it will not make us whole.
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, including to:
•Reposition our senior living management service offering to focus on larger independent living, assisted living and memory care communities, as well as stand-alone independent living and active adult communities; and exit skilled nursing;
•Evolve through an enhanced scalable shared service center to support operations and growth, and the development of delivery of differentiated, customer focused resident experiences, as well as through home health and concierge offerings. We are expanding our Ageility service line by introducing innovative fitness and personal training offerings to complement outpatient therapy, and home health services, including strength training, orthopedic rehabilitation, fall prevention, cognitive or memory enhancement, aquatic therapy, and general personal fitness and wellness programs; and
•Diversify with a focus on revenue diversification opportunities, including growing Ageility rehabilitation services and expanding ancillary services to provide choice based, financially flexible resident experience and to reach customers outside of our senior living communities.
During the three months ended June 30, 2021, we made the following progress with respect to implementation of the Strategic Plan:
•We amended our management arrangements with DHC on June 9, 2021, see Note 11 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 amendment to the management arrangements with DHC,
•Closed as of June 30, 2021, 1,473 of the approximately 1,500 SNF living units planned for closure in 26 of the 27 CCRCs and is in the process of repositioning these SNF living units.
•Closed as of June 30, 2021, 27 of the planned 37 Ageility inpatient rehabilitation clinics.
•In July 2021, DHC entered into agreements to transition the management of 76 of the 108 transitioning senior living communities (approximately 5,200 living unit) to new operators in 2021.
In connection with the repositioning of our senior living management services, we expect to incur restructuring 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 transaction expenses, of which we expect DHC to reimburse approximately $5.9 million, $7.5 million and $1.6 million, respectively. See Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on the expected restructuring costs.
In the three and six months ended June 30, 2021, in connection with the implementation of the repositioning of our senior living management services, we incurred restructuring expenses of $15.4 million and $15.6 million, respectively; approximately $11.5 million of the obligations we have incurred through June 30, 2021, we expect DHC will reimburse. The obligations we incurred in the three months ended June 30, 2021 included $5.6 million of retention bonus payments, $8.9 million of severance, benefits and transition expenses and $0.8 million of transaction expenses.
We expect to complete the transitions and closures and repositioning contemplated by the Strategic Plan, or the Transition, by the end of 2021. See Notes 1, 11, 16 and 17 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 June 30, 2021 and the projected number of units to be operated after the Transition, or the Retained Portfolio:
| | | | | | | | | | | | | | |
| | As of June 30, 2021 | | Retained |
| | Units (1) | | Units (2)(3) |
| Independent living | | 10,979 | | 10,421 |
| Assisted living | | 12,023 | | 7,854 |
| Memory care | | 3,247 | | 1,874 |
| Skilled nursing | | 1,484 | | — |
| Total | | 27,733 | | 20,149 |
(1) The units operated as of June 30, 2021 include 2,099 owned, 152 leased, and 25,482 managed.
(2) Includes 2,099 owned, 152 leased, and 17,898 managed units.
(3) Excludes one community that we lease with 51 living units, which has been out of service due to a fire on April 4, 2021.
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 June 30, 2021 and for the retained communities that we will continue to manage for DHC after the conclusion of the Strategic Plan (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended June 30, 2021 |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees (2) |
Independent and assisted living communities (4) | | 209 | | 22,980 | | 70.0% | | 71.9% | | $ | 149,998 | | | $ | 8,011 | |
Continuing care retirement communities (4) | | 10 | | 1,547 | | 69.1% | | 66.3% | | 77,637 | | | 4,097 | |
| Skilled nursing facilities | | 9 | | 955 | | 65.2% | | 66.2% | | 16,312 | | | 819 | |
| Total | | 228 | | 25,482 | | 69.5% | | 71.3% | | $ | 243,947 | | | $ | 12,927 | |
| | | | | | | | | | | | |
| | Retained |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees (3) |
Independent and assisted living communities (4) | | 120 | | 17,898 | | 72.9% | | 73.3% | | $ | 159,014 | | | $ | 8,552 | |
| Continuing care retirement communities | | — | | — | | —% | | —% | | — | | | — | |
| Skilled nursing facilities | | — | | — | | —% | | —% | | — | | | — | |
| Total | | 120 | | 17,898 | | 72.9% | | 73.3% | | $ | 159,014 | | | $ | 8,552 | |
(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) The 1,473 SNF units in 26 CCRCs that were closed in the three months ended June 30, 2021, and are to be repositioned, had management fee revenue of $458 for the three months ended June 30, 2021.
(3) Excludes management fee revenue of $4,378 in the quarter ended June 30, 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) 1,473 SNF units in 26 CCRCs that were closed during the three months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC.
(4) During the three months ended June 30, 2021 we closed 1,473 SNF units in 26 CCRCs. Due to these SNF unit closures, these communities are no longer CCRCs and have been included in the community and unit totals and spot occupancy as independent and assisted living communities as of June 30, 2021. However, average occupancy, community revenues and management fees for those 26 CCRCs are included in the CCRC totals for the three months ended June 30, 2021. The average occupancy, community revenues and management fees for these communities for the three months ended June 30, 2021 were 69.7%, $56,408 and $3,007, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Six Months Ended June 30, 2021 |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees (2) |
Independent and assisted living communities (4) | | 209 | | 22,980 | | 69.8% | | 71.9% | | $ | 299,383 | | | $ | 16,115 | |
Continuing care retirement communities (4) | | 10 | | 1,547 | | 69.6% | | 66.3% | | 172,377 | | | 9,045 | |
| Skilled nursing facilities | | 9 | | 955 | | 64.0% | | 66.2% | | 32,153 | | | 1,617 | |
| Total | | 228 | | 25,482 | | 69.5% | | 71.3% | | $ | 503,913 | | | $ | 26,777 | |
| | | | | | | | | | | | |
| | Retained |
| | Communities | | Units | | Average Occupancy | | Spot Occupancy | | Community Revenues (1) | | Management Fees (3) |
Independent and assisted living communities (4) | | 120 | | 17,898 | | 72.8% | | 73.3% | | $ | 317,291 | | | $ | 17,158 | |
| Continuing care retirement communities | | — | | — | | —% | | —% | | — | | | — | |
| Skilled nursing facilities | | — | | — | | —% | | —% | | — | | | — | |
| Total | | 120 | | 17,898 | | 72.8% | | 73.3% | | $ | 317,291 | | | $ | 17,158 | |
(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) The 1,473 SNF units in 26 CCRCs that were closed in the six months ended June 30, 2021 and are to be repositioned had management fee revenues of $1,759 for the six months ended June 30, 2021.
(3) Excludes management fee revenue of $9,619 for the six months ended June 30, 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) 1,473 SNF units in 26 CCRCs that were closed during the six months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC.
(4) During the six months ended June 30, 2021 we closed 1,473 SNF units in 26 CCRCs. Due to these SNF unit closures, these communities are no longer CCRCs and have been included in the community and unit totals and spot occupancy as independent and assisted living communities as of June 30, 2021. However, average occupancy, community revenues and management fees for those 26 CCRCs are included in the CCRC totals for the six months ended June 30, 2021. The average occupancy, community revenues and management fees for these communities for the six months ended June 30, 2021 were 70.5%, $129,946 and $6,864, respectively.
Following the Transition, we will continue to manage 120 senior living communities for DHC, representing 17,898 living units as of June 30, 2021 and approximately 65% of our management fee revenues for the six months ended June 30, 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 and with other growth in business.
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 closed and pending closing and repositioning of approximately 1,500 SNF units in 27 of the CCRCs) for the three months ended June 30, 2021 with approximately 270 basis points higher operating margin.
In addition to the Transition of 108 managed communities owned by DHC, the landlord of our four leased senior living communities with approximately 200 living units is currently marketing these properties for sale and we are unlikely to operate these communities long-term. One leased community with 51 living units has been out of service due to a fire on April 4, 2021.
Presented below is a summary of our Ageility rehabilitation clinics as of and for the three and six months ended June 30, 2021 and the number of clinics to be operated after the Transition (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the
Three Months Ended June 30, 2021 | | Retained |
| | Number of Clinics | | Total Revenue (3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin | | Number of Clinics | | Total Revenue (1)(3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin |
| Inpatient Clinics in DHC Communities | | 10 | | $ | 2,630 | | | $ | n/m | | 4.8 | % | | — | | $ | — | | | $ | — | | | — | % |
| Outpatient Clinics in DHC Communities | | 91 | | 8,354 | | | 92 | | | 13.3 | % | | 91 | | 8,354 | | | 92 | | | 13.3 | % |
Outpatient Clinics in Transition Communities (2) | | 44 | | 1,919 | | | 44 | | | 17.1 | % | | 44 | | 1,919 | | | 44 | | | 17.1 | % |
| Total Clinics at DHC Communities | | 145 | | 12,903 | | | 89 | | | 12.1 | % | | 135 | | 10,273 | | | 76 | | | 14.0 | % |
Outpatient Clinics at Other Communities (4) | | 83 | | 4,242 | | | 51 | | | 8.5 | % | | 83 | | 4,242 | | | 51 | | | 8.5 | % |
| Total Clinics | | 228 | | $ | 17,145 | | | $ | 75 | | | 11.2 | % | | 218 | | $ | 14,515 | | | $ | 67 | | | 12.4 | % |
n/m - not meaningful because the revenues include revenue earned from 37 inpatient clinics but at June 30, 2021 there were only ten inpatient clinics
(1) Excludes revenue of $2,630 for the three months ended June 30, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed during the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics which are expected to be closed during the remainder of 2021 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 outpatient clinics at non-Company operated or managed communities and 16 outpatient clinics at communities we own.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the
Six Months Ended June 30, 2021 | | Retained |
| | Number of Clinics | | Total Revenue (3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin | | Number of Clinics | | Total Revenue (1)(3) | | Average Revenue per Clinic | | Adjusted EBITDA Margin |
| Inpatient Clinics in DHC Communities | | 10 | | $ | 8,071 | | | $ | n/m | | 19.6% | | — | | $ | — | | | $ | — | | | —% |
| Outpatient Clinics in DHC Communities | | 91 | | 16,099 | | | 177 | | | 14.0% | | 91 | | 16,099 | | | 177 | | | 14.0% |
Outpatient Clinics in Transition Communities (2) | | 44 | | 3,782 | | | 86 | | | 17.8% | | 44 | | 3,782 | | | 86 | | | 17.8% |
| Total Clinics at DHC Communities | | 145 | | 27,952 | | | 193 | | | 10.0% | | 135 | | 19,881 | | | 147 | | | 14.8% |
Outpatient Clinics at Other Communities (4) | | 83 | | 8,465 | | | 102 | | | 10.3% | | 83 | | 8,465 | | | 102 | | | 10.3% |
| Total Clinics | | 228 | | $ | 36,417 | | | $ | 160 | | | 10.1% | | 218 | | $ | 28,346 | | | $ | 130 | | | 13.4% |
n/m - not meaningful because the revenues include revenue earned from 37 inpatient clinics but at June 30, 2021 there were only ten inpatient clinics
(1) Excludes revenue of $8,071 for the six months ended June 30, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed during the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics which are expected to be closed during the remainder of 2021 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 outpatient clinics at non-Company operated or managed communities and 16 outpatient clinics at communities we own.
We expect the rehabilitation and wellness services segment to grow and diversify through our expanded emphasis on fitness and home health care services. Fitness offerings started as an extension of the rehabilitation product and, while representing only 4.7% of segment revenues for the three months ended June 30, 2021, fitness revenues increased by 56.0% to $0.8 million over the same period in 2020. For the six months ended June 30, 2021, fitness revenues increased to $1.6 million or a 44.8% increase over the same period in 2020.
We currently expect to continue to evolve and diversify through growth of our ancillary rehabilitation and wellness service offerings, including rehabilitation and wellness services, by opening new clinics and expanding our fitness and other home-based service offerings within and outside of our senior living communities. Since January 1, 2019, we have opened 89 net new outpatient rehabilitation clinics, 17 of which were opened in 2020, and 11 of which were opened during the six months ended June 30, 2021.
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, based on demographic studies, the fastest-growing age population is over 85. Also, asolder. As a result of medical advances, adults are living longer and expanding their options as to where they choose to reside as they age. The aging of the Baby Boomers and their increasing life expectancy are leading to a fundamental demographic shift. The U.S. Census Bureau expects the 65+ population to grow by 30% to 73 million from 2020 to 2030, and by 69% to 95 million by 2060.
Due to these demographic trends, the senior living industry is evolving to serve the growing number of older adults and we expect the demand for senior living services to increase in future years. However, inyears regardless of where the last ten years, as the senior living industry evolved to serve the growing number of older adults it has also faced operational challenges such as workforce shortages and low retention, occupancy pressures, challenges related to new technology and the increasing desire for a differentiated customer experience. Recently,may reside. More recently, the senior living industry has been materially adversely impacted by the novel coronavirus SARS-CoV-2, or COVID-19, and the resulting pandemic, or the Pandemic, and resultingits economic recession.impact. As we continuously evaluate market opportunities related to older adults, we are cognizant of the demographic trends and projections that indicate that the age 65 and older demographic will represent the largest growth population in the United States over the next decade and beyond. We believe that increased longevity, coupled with evolving consumer preferences, will heighten demand for physical and recreational activities, as well as lifestyle-enhancing services, as older adults seek quality of life, ongoing engagement and sustained independence.
COVID-19 Pandemic
The COVID-19 pandemicPandemic has significantly disrupted and likely willmay continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. States and municipalities across the United States have generally re-opened their economies and eased certain restrictions they had previously implemented in response to theThe World Health Organization declared COVID-19 a pandemic often in stages that are phased in over time. Economic data has indicated that the United States economy has improved since the lowest periods experienced in March and April2020. From March 2020 although the United States gross domestic product remains below pre-pandemic levels. Recently, certain areasthrough July 31, 2021, there have been approximately 34.5 million reported cases of the United States, including regions in which we operate, have experienced increased numbers of COVID-19 infections following the re-openings of their economies and easing of restrictions and, in some cases, certain states have again required the closure of certain business activity and imposed other restrictions. The United States has generally seen the number of reported COVID-19 cases increasing since early September 2020 and has recently experienced new peaks of COVID-19 infections. It is unclear whether the number of new infections will continue to increase in the United States or anyand 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 the Pandemic conditions have significantly improved in the United States from their low points. Commercial activities have been increasingly returning to pre-pandemic practices and operations as a result and because of recent and expected future government spending on relief from the Pandemic, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the specific regions in which we operate, particularly as we enter flu season duringPandemic on commercial activities, including risks that may arise from (i) mutations or related strains of the upcoming winter months. It is also unknown if and whenvirus, (ii) the ability to successfully administer vaccinations to a vaccinesufficient number of persons or attain immunity to the virus by natural or other therapeutic treatmentmeans 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 vaccination clinics scheduled at all communities and as of July 31, 2021 over 87% of our residents at our senior living communities had received a COVID-19 vaccine. On June 1, 2021, we announced that all team members who work in or visit our communities or Ageility clinics as part of their responsibilities will become available. If the COVID-19 pandemic continues and a vaccine or other therapeutic treatment does not become widely available, we anticipate that there will continuebe required to be an adverse effect on human healthfully vaccinated against COVID-19 by September 1, 2021 and safety, the economy, the senior living industryas of July 31, 2021, 66.3% of our team members had received a COVID-19 vaccine.
Protective Measures for Residents and our business.
Team Members. Our residents and clients are older adultspart of a population that tend to have more chronic medical conditions thanhas been disproportionately affected by the general population. Those with pre-existing medical conditions are at a disproportionate risk of serious illness or death, or both, if they contract COVID-19. In addition, ourPandemic. 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. WeFor further information regarding the protective measures we have among other steps:
restricted access totaken for our senior living communities to essential visitorsresidents, clients and team members and only reopened communities when it was determined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and our internal criteria;
re-opened our rehabilitation clinics for in-person services when it was determined safe to do so and in accordance with federal, state and local regulations;
re-opened our corporate office when it was safe to do so at a reduced capacity in accordance with federal, state and local regulations and guidelines;
enhanced infectious disease prevention and control policies, procedures and protocols;
provided additional and enhanced training to team members at all levels ofover the organization;
worked with vendors to provide adequate supplies and PPE to our senior living communities and rehabilitation clinics; and
effectively transitioned to virtual sales and marketing activities and thoughtfully proceeded with resident move-ins, when appropriate.
Item 2.last year, see the section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition, we have taken actions to safeguard and support our team members, residents and communities including:
provided meals to team members;
provided COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to or tested positive for COVID-19 and offered flexible work schedules;
offered COVID-19 testing to team members;
recognized and rewarded team members with bonusesOperations—General Industry Trends” in addition to our total rewards package;
provided corporate team members with appropriate information technology, including laptop computers, smart phones, computer applications, information technology security applications and technical support, to work remotely during mandatory work from home orders directed by local governments;
promoted access to mental health services and other benefits to support residents' and team members' mental and physical well-being;
hosted virtual all-hands meetings to communicate our policies, procedures and guidelines related to COVID-19 response and re-opening efforts and to ensure team members are supported with assistance and guidance;
implemented new virtual group activities for residents that allow for engagement while maintaining social distancing;
expanded effective communication channels to residents, their families and team members;
provided devices and connectivity options for residents' interactions with family members, virtual programming opportunities and distance learning; and
focused on learning and development opportunities.
We have also been impacted by mandatory work from home orders directed by local governments in the jurisdictions in which we operate. However, essential work exemptions permit certainPart II, Item 7 of our team members to work to meet the needs of our residents and clients at our communities and clinics. Effective as of July 13, 2020, our corporate office was re-opened in compliance with state and local guidelines and restrictions and, as of October 5, 2020, most team members returned to the corporate office at a reduced capacity.Annual Report.
We continue to monitor regulations and guidance from federal, state and local governments and agencies and will adapt and update our policies and procedures to continue to prioritize the health and safety of our residents, clients and team members. Our team members at our corporate office have been able to support the needs of the business while working remotely or in the corporate office. At our corporate office, we continue to provide enhanced cleaning protocols and abide by social distancing guidelines to reduce the possibility of our team members gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for the spread of COVID-19 infections. Included among these protocols and measures are focusing on sanitizing high touch points in common areas and restrooms, shutting down certain building amenities, limiting staff interactions and reducing non-essential building services.
Occupancy.As a result of the COVID-19 pandemic,Pandemic, we experienced declines in average occupancy at our owned and leased senior living communities from 78.3% as offor the three months ended June 30, 2020 to 74.7% as of September68.1% for the three months ended June 30, 2020.2021. 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 78.7% as of June 30, 2020 to 75.2% as of September 30, 2020. Additionally, per certain federal, state and local regulatory requirements, in conjunction with our own policies and procedures, we ceased or limited admissions to and tours of certain of our senior living communities as a precautionary measure and only have reopened communities to resident admissions and in-person tours when it was determined safe to do so. During the three months ended September 30, 2020, the number of new residents moving into our communities was higher compared tofor the three months ended June 30, 2020 reducingto 69.5% for the rate of decline compared to the preceding quarter.three months ended June 30, 2021. At September 30, 2020, 96%July 31, 2021, all of our senior living communities were accepting new residents in at least oneall of our service linelines of business (independent living, assisted living skilled nursing or memory care). AsWe expect that the impact of the administration of the widespread vaccination for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and as of July 31, 2021 there were less than 50 confirmed cases among our over 20,300 residents. With the reduction of confirmed cases, we have been able to significantly reduce and in some cases eliminate restrictions at our senior living communities, which has enabled us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing effects of the COVID-19 pandemic, we expectPandemic, there is a possibility of continued or increased occupancy declines forin the reasonably foreseeable future,near term, due to possible surge of COVID variant viruses, current residents leaving our senior living communities, and 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Expenses.We have also incurred and willmay continue to incur significant costs to address the COVID-19 pandemic,Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 testing to our residents and team members that were not otherwise covered by government payer or third-party insurance sources and disposable food supplies as well as increased sanitation and janitorial supplies and increased labor costs. We have, for example, entered into temporary staffing agreements with staffing agencies in order to supply additional workers in the event that our team members contract COVID-19. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic and by team members pursuing elective procedures they deferred or were not able to obtain during 2020 during the Pandemic. Although
COVID-19 pandemic. Wevaccinations have been made available to residents and team members at our senior living communities, we expect thesethe increased costs associated with the Pandemic to continue throughout the fourth quarter of 2020 and for the reasonably foreseeable future. We incur these costs for our owned and leased senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the senior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our management arrangements. The COVID-19 pandemic has also disrupted the global supply chain, including many
Results of our medical and technological suppliers, due to factory closures and reduced manufacturing output. We believe that our current supplies and supplies we currently have on order should be sufficient to support our needs for the remainder of 2020. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of critical materials to meet our expected increased needs through the remainder of 2020 and by identifying and engaging alternative suppliers. We continue to be alert to the potential for disruptions that could arise from COVID-19, and remain in close contact with our suppliers.
Operations.We have experienced negative impacts on our operating results of operations, cash flows and financial conditionon the operating results for those communities we manage for DHC as a result of the COVID-19 pandemicPandemic, and we expect those negative impacts to continue. Going continue for the reasonably foreseeable future. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 at those communities and will eventually decrease our costs and the negative impacts of the Pandemic on our operating results and the operating results for those communities we manage for DHC. Despite the approval and increasing availability of several COVID-19 vaccines, 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: the speed, depth, geographic reach and duration of the spread of the disease; the developmentdistribution, availability and effectiveness of effective vaccines, therapeutic treatments and testing for COVID-19 and the distribution and availability of those resources to our residents, clients and team members; the legal, regulatory and administrative developments that occur, including the availability of governmental financial and regulatory relief to businesses; our infectious disease control and prevention efforts; the duration and severity of the economic downturn in response to the COVID-19 pandemic;Pandemic; and consumer confidence and the demand for our communities and services.
Additionally, 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 services.
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 impact new development, we expect that new inventory will enter the recent increasemarket in newthe near term due to the increased development of senior living communities prior toin the COVID-19 pandemicpast several years. That increase will continue to have a competitive effect on our business. 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, andyears; these pressureschallenges may be intensified as a result of the COVID-19 pandemicPandemic and the associated economic downturn.
During most of 2019 and the first quarter of 2020, low unemployment, the competitive labor market and, 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 team members, which increased our operating expenses and negatively impacted our financial results.Labor Market. As noted above, in connection with the COVID-19 pandemic,Pandemic, we are incurringincurred increased labor costs as a result of increased overtime pay for team members, increased costs associated with employeeteam member engagement and retention programs, such as meals for certain of our team members and bonuses to team members at our senior living communities and rehabilitation and wellness clinics, and increaseincreased health insurance and workers' compensation costs. We also have increased staffing needs, for which we have entered into temporary staffing agreements with staffing agencies and we have experienced increased costs associated with PPE and testing requirementsto accommodate staffing shortages due to a tight labor market in addition to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19. The market for skilled front line workers within and outside of the COVID-19 pandemic.senior living industry continues to be very competitive, and the current demand for those workers remains strong.
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 the New Management Agreements;new management agreements for all those senior living communities, together with a related omnibus agreement;
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
we effected the Share Issuances pursuant to which •we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019;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 the Strategic Plan, we amended our management arrangements with DHC. For more information regardingon the amendments to our leases and management agreements and other transactionsarrangements with DHC, see Note 11 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. For more information on the expected impact of the Strategic Plan, see Notes 1, 11, 16 and 1117 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 $46.5 million was available for borrowing as of June 30, 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 clinics,and wellness services, 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 and our rehabilitation clinics, Medicare and Medicaid programs provide operating revenues for certain of our skilled nursing and rehabilitation and wellness services. We derived approximately 3.5%4.1% and 22.6%3.5% of our consolidated revenues from these government-funded programs during the ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019, respectively. OurRevenues from Medicare revenuesprograms totaled $29.9$21.3 million and $86.7$19.2 million during the ninesix months ended SeptemberJune 30, 20202021 and 2019, respectively. Our2020. Revenues from Medicaid revenuesprograms totaled $1.2$0.6 million and $98.6$1.0 million during the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively. As we implement the repositioning of our senior management services, the concentration of revenues derived from Medicare and 2019, respectively. Our Medicaid will become less of a percentage of our total revenue sources and will, principally, be earned in connection with our rehabilitation and wellness services.
Medicare and Medicaid revenues have declined significantly as a resultfor skilled nursing, and rehabilitation and wellness services provide operating revenue at our rehabilitation clinics, and also at some of the Restructuring Transactions pursuant to which we now manage the SNFs that we previously leased from DHC. However, although the amount of net Medicare and Medicaid revenues that we recognize declined as a result, Medicare and Medicaid revenues still comprise a significant part of the revenues generated at these SNFs and weour senior living communities (principally our SNF's). We earn management fees based on these revenues.
Since January 1, 2020, DHC has sold sixIn connection with the repositioning phase of the Strategic Plan, we intend to transition 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that we previously managed.currently manage for DHC has identified 20 senior living communities and one building in one community for possible sale or closure.to new operators. If and when these sales and closurestransitions are completed, our interim management agreements with DHC for those communities will terminate. In addition, we and DHC have closed and are in the process of repositioning substantially all of our approximately 1,500 SNF units in 27 CCRCs. For the three and ninesix months ended SeptemberJune 30, 2020,2021, we recognized $0.9$4.4 million and $3.1$9.6 million respectively, of management fees related to these communities.senior living communities and units, respectively.
In addition, in connection with implementing the Strategic Plan, through June 30, 2021, we have closed 27 of the 37 Ageility inpatient rehabilitation clinics we intend to close. For the three and six months ended June 30, 2021, we recognized $2.6 million and $8.1 million of revenue related to all 37 clinics that were or will be closed this year, respectively.
For more information regarding the terms, conditions and progress of the Strategic Plan, please see Notes 1, 11, 16 and 17 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Federal and state governments have taken a number of actions to respond to the COVID-19 pandemic.Pandemic. 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 long-term care and senior living facilitiescommunities like us. Federal actions in response to the COVID-19 pandemicPandemic that may impact our operations and financial performance include, but are not limited to, the following:
HHS has announced•On March 11, 2021, the American Rescue Plan Act of 2021, or ARPA, was signed into law. In addition to broad-based public and private financial relief, ARPA included a number of additional distributions frommeasures intended to assist the Provider Relief Fund underhealth care industry, including funding to support COVID-19 research, testing, and vaccination efforts. In addition, ARPA provided $450 million to support SNFs in protecting against COVID-19: $200 million for the CARES Act. These have included, among other things, distributions to eligible providers serving Medicaiddevelopment and CHIP beneficiaries through the Medicaid and CHIP Targeted Distributions, state licensed or certified private-pay assisted living providers through Phase 2 General Distributions, as well as distributions to nursing homes and long-term care facilities for increased testing, staffing, personal protective equipment and establishmentdissemination of COVID-19 isolation facilities.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 distributions madeARPA temporarily increased the Federal Medical Assistance Percentage specifically for the provision of home- and community- based services, or HCBS, which include home health care services and rehabilitative services, by HHS were and continueten points from April 1, 2021 through March 31, 2022, provided states maintain state spending levels as of April 1, 2021. ARPA further specified that states must use the enhanced funds to be subject to various eligibility criteria. During the three months ended September 30, 2020, we did not receive any Phase 2 General Distribution funding for our private-pay assisted living communities, but on October 14, 2020, we received $1.6 million in Medicaid and CHIP Targeted Distribution funds for certain assisted living units within our owned and leased communities. Additionally, we have submitted applications to receive Phase 3 General Distribution funds that were announced by HHS on October 1, 2020.
Item 2. Management’s Discussion and Analysis
“implement, or supplement the implementation of, Financial Condition and Results of Operationsone or more activities to enhance, expand, or strengthen” Medicaid HCBS.
On August 25, 2020,•The Federal government, in coordination with the Centers for Medicare & Medicaid Services, or CMS published an interim final rule that set forth newstates, has continued its COVID-19 testing requirements for long-term care facility residents and staff based on certain parameters. CMS offered guidance on testing residents and staff in cases where a symptomatic individual is identified, where there is an outbreak and where community COVID-19 activity dictates routine testing, as well as guidance on documentation to demonstrate compliance with testing requirements. The interim rule also enhances CMS’s ability to enforce previously issued long-term care facility COVID-19 reporting requirements by imposing civil monetary penalties for failure to report required datavaccination efforts. According to the Centers for Disease Control and Prevention, or CDC.
For more information regarding the terms and conditionsCDC’s COVID Data Tracker, as of July 31, 2021, approximately 89.7% of the Provider Relief Fund as well as other considerations related to theU.S. population 65 years or older has received at least one dose of a COVID-19 pandemic, see Note 15 to our condensed consolidated financial statements in Part I, Item 1vaccine, and 79.9% is fully vaccinated. As of this Quarterly Report on Form 10-Q.
Federal agencies have continued to investigate and assess adherence to federal guidelines related to infection control in nursing homes. CMS has imposedJuly 31, 2021, more than $15.0189 million people in fines on nursing home operators during the National Emergency for noncompliance with infection control requirementsU.S., or 57.2% of the population, have received at least one dose of a COVID-19 vaccine, and failure to report COVID-19 data. In addition, CMS continues to issue guidance concerning in-person visitation in nursing homes duringover 163 million people, or 49.4% of the National Emergency and associated best practices for COVID-19 infection prevention.population, is fully vaccinated.
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, and expect to continue to experience, 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 full impact of these efforts is unclear. In addition, we have incurred costs and will continue to incur costs, which may be significant, to address COVID-19 and related ever-evolving requirements such as testing of team members, which include incremental supply costs, preventative and responsive costs and additional labor costs.
In response to a rising number of complaints and lawsuits against senior living communities, certain state Attorneys General have continued efforts to increase scrutiny of long-term care facilities. While these investigations and initiatives have been related to the COVID-19 pandemic, they have focused on a broad range of alleged misconduct that extends beyond facility responses to the pandemic, including both civil and criminal theories of liability related to patient abuse and neglect, consumer fraud and false advertising and Medicaid fraud. Initiatives often include the establishment or enhancement of mechanisms for reporting fraud, abuse or neglect. We cannot predict whether and to what extent increased scrutiny by state Attorneys General or other regulators may impact our operations and financial performance. Further, the risk of future private party litigation in the senior living industry is expected to increase as a result of the COVID-19 pandemic and its impact. While some states, such as Virginia, have granted certain liability protections to senior living community operators to reduce these risks, other states, such as New York, are removing or reducing the scope of liability protections that were enacted earlier in the COVID-19 pandemic.
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 Regulation and Reimbursement” in Part I, Item I and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Revenues” in Part II, Item 7 of our Annual Report and the section captioned “Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Revenues” in Part I, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.Report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
As of September 30, 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 community 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 a comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in inpatient and outpatient clinics.clinics as well as home health and fitness services.
AllFor the three and six months ended June 30, 2021, we recognized $4.4 million and $9.6 million, respectively, of management fee revenue related to the senior living communities and units that we have managed for DHC and will be transitioned to other operators or will be closed. For the three and six months ended June 30, 2021, we recognized rehabilitation and wellness services revenue of $2.6 million and $8.1 million, respectively, related to the Ageility inpatient rehabilitation clinics that have been or will be closed pursuant to the Strategic Plan. The information in the Key Statistical Data table below includes those communities, units and clinics in the results reported.
Key Statistical Data For the Three Months Ended June 30, 2021 and 2020:
The following tables present a summary of our operations for the three months ended June 30, 2021 and assets2020 (dollars and visits in thousands, except RevPAR and RevPOR):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Increase/(Decrease) | |
| | 2021 (1) | | 2020 (1) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Rehabilitation and wellness services | | $ | 17,453 | | | $ | 19,268 | | | $ | (1,815) | | | (9.4) | % | |
| Senior living | | 16,378 | | | 19,590 | | | (3,212) | | | (16.4) | % | |
| Management fees | | 12,927 | | | 15,705 | | | (2,778) | | | (17.7) | % | |
| Total management and operating revenues | | 46,758 | | | 54,563 | | | (7,805) | | | (14.3) | % | |
| Reimbursed community-level costs incurred on behalf of managed communities | | 195,271 | | | 224,104 | | | (28,833) | | | (12.9) | % | |
| Other reimbursed expenses | | 16,592 | | | 6,417 | | | 10,175 | | | n/m | |
| Total revenues | | 258,621 | | | 285,084 | | | (26,463) | | | (9.3) | % | |
| | | | | | | | | |
| Other operating income | | 2 | | | 1,499 | | | (1,497) | | | (99.9) | % | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Rehabilitation and wellness services expenses | | 15,668 | | | 16,144 | | | (476) | | | (2.9) | % | |
| Senior living wages and benefits | | 9,896 | | | 9,705 | | | 191 | | | 2.0 | % | |
| Other senior living operating expenses | | 8,968 | | | 9,016 | | | (48) | | | (0.5) | % | |
| Community-level costs incurred on behalf of managed communities | | 195,271 | | | 224,104 | | | (28,833) | | | (12.9) | % | |
| General and administrative | | 22,748 | | | 23,392 | | | (644) | | | (2.8) | % | |
| Restructuring expenses | | 15,389 | | | 175 | | | 15,214 | | | n/m | |
| Depreciation and amortization | | 2,989 | | | 2,703 | | | 286 | | | 10.6 | % | |
| Total operating expenses | | 270,929 | | | 285,239 | | | (14,310) | | | (5.0) | % | |
| | | | | | | | | |
| Operating (loss) income | | (12,306) | | | 1,344 | | | (13,650) | | | n/m | |
| | | | | | | | | |
| Interest, dividend and other income | | 76 | | | 182 | | | (106) | | | (58.2) | % | |
| Interest and other expense | | (409) | | | (409) | | | — | | | — | % | |
| Unrealized gain (loss) on equity investments | | 398 | | | 867 | | | (469) | | | (54.1) | % | |
| Realized gain on sale of debt and equity investments | | 97 | | | 116 | | | (19) | | | (16.4) | % | |
| | | | | | | | | |
| Income (loss) before income taxes | | (12,144) | | | 2,100 | | | (14,244) | | | n/m | |
| (Provision) benefit for income taxes | | (158) | | | 902 | | | (1,060) | | | n/m | |
| Net (loss) income | | $ | (12,302) | | | $ | 3,002 | | | $ | (15,304) | | | n/m | |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
| Number of communities (end of period) | | 24 | | | 24 | | | — | | | — | % | |
| Number of living units (end of period) | | 2,251 | | | 2,312 | | | (61) | | | (2.6) | % | |
| Spot occupancy at June 30, | | 69.7 | % | | 76.3 | % | | (6.6) | % | | n/m | |
| Average occupancy | | 68.1 | % | | 78.3 | % | | (10.2) | % | | n/m | |
RevPAR (2) | | $ | 2,425 | | | $ | 2,813 | | | $ | (388) | | | (13.8) | % | |
RevPOR (3) | | $ | 3,524 | | | $ | 3,555 | | | $ | (31) | | | (0.9) | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 228 | | | 241 | | | (13) | | | (5.4) | % | |
| Number of living units (end of period) | | 25,482 | | | 28,348 | | | (2,866) | | | (10.1) | % | |
| Spot occupancy at June 30, | | 71.3 | % | | 77.5 | % | | (6.2) | % | | n/m | |
| Average occupancy | | 69.5 | % | | 78.7 | % | | (9.2) | % | | n/m | |
RevPAR (2) | | $ | 3,086 | | | $ | 3,576 | | | $ | (490) | | | (13.7) | % | |
RevPOR (3) | | $ | 4,389 | | | $ | 4,496 | | | $ | (107) | | | (2.4) | % | |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 67 | | | $ | 63 | | | $ | 4 | | | 6.3 | % | |
| Number of visits at outpatient clinics | | 156 | | | 139 | | | 17 | | | 12.2 | % | |
| Number of inpatient clinics (end of period) | | 10 | | | 40 | | | (30) | | | (75.0) | % | |
| Number of outpatient clinics (end of period) | | 218 | | | 206 | | | 12 | | | 5.8 | % | |
| Total clinics | | 228 | | | 246 | | | (18) | | | (7.3) | % | |
_______________________________________
n/m - not meaningful
(1) The summary of operations includes (i) 108 senior living communities managed on behalf of DHC, with approximately 7,500 living units, that are locatedexpected to be transitioned to new operators, (ii) 1,473 SNF units in 26 CCRCs that were closed in the United States, exceptthree months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed in the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed during the remainder of 2021. In addition, one leased community with 51 living units is currently out of service due to a fire on April 4, 2021 and the landlord of the other three 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 communities long-term.
(2) RevPAR is defined by us as resident fee revenues for the operationscorresponding portfolio for the period divided by the average number of our Cayman Islands organized captive insurance company subsidiary,available units for the period, divided by the number of months in the period. Amounts for the three months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the three months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
Comparable Communities and Clinics
Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continually owned, leased or managed since April 1, 2020, excluding those communities, units and clinics that have been or will be transitioned or closed in 2021 per the Strategic Plan as well as one leased community which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.has been out of service due to a fire on April 4, 2021):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Increase/(Decrease) | |
| | 2021 (4) | | 2020 (4) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Rehabilitation and wellness services | | $ | 14,151 | | | $ | 13,292 | | | $ | 859 | | | 6.5 | % | |
| Senior living | | 16,332 | | | 19,138 | | | (2,806) | | | (14.7) | % | |
| Management fees | | 8,552 | | | 9,262 | | | (710) | | | (7.7) | % | |
| Other operating income | | 2 | | | 848 | | | (846) | | | (99.8) | % | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Rehabilitation and wellness services expenses | | 12,475 | | | 11,665 | | | 810 | | | 6.9 | % | |
| Senior living wages and benefits | | 9,771 | | | 9,449 | | | 322 | | | 3.4 | % | |
| Other senior living operating expenses | | 7,380 | | | 8,680 | | | (1,300) | | | (15.0) | % | |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
| Number of communities (end of period) | | 23 | | | 23 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 2,251 | | | 2,260 | | | (9) | | | (0.4) | % | |
| Spot occupancy at June 30, | | 69.7 | % | | 76.6 | % | | (6.9) | % | | n/m | |
| Average occupancy | | 68.0 | % | | 78.6 | % | | (10.6) | % | | n/m | |
RevPAR (2) | | $ | 2,421 | | | $ | 2,811 | | | $ | (390) | | | (13.9) | % | |
RevPOR (3) | | $ | 3,520 | | | $ | 3,538 | | | $ | (18) | | | (0.5) | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 120 | | | 120 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 17,898 | | | 17,929 | | | (31) | | | (0.2) | % | |
| Spot occupancy at June 30, | | 73.3 | % | | 81.1 | % | | (7.8) | % | | n/m | |
| Average occupancy | | 72.9 | % | | 82.6 | % | | (9.7) | % | | n/m | |
RevPAR (2) | | $ | 2,961 | | | $ | 3,301 | | | $ | (340) | | | (10.3) | % | |
RevPOR (3) | | $ | 4,018 | | | $ | 3,953 | | | $ | 65 | | | 1.6 | % | |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 71 | | | $ | 66 | | | $ | 5 | | | 7.6 | % | |
| Number of visits at outpatient clinics | | 149 | | | 135 | | | 14 | | | 10.4 | % | |
| Number of inpatient clinics (end of period) | | — | | | — | | | — | | | — | % | |
| Number of outpatient clinics (end of period) | | 195 | | | 195 | | | — | | | — | % | |
| Total clinics | | 195 | | | 195 | | | — | | | — | % | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Statistical Data For the Three Months Ended September 30, 2020 and 2019:
The following tables present a summary of our operations for the three months ended September 30, 2020 and 2019 (dollars in thousands, except per unit amounts): |
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Increase/(Decrease) |
| | | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 18,525 |
| | $ | 257,600 |
| | $ | (239,075 | ) | | (92.8 | )% |
| Management fees | | 15,302 |
| | 4,053 |
| | 11,249 |
| | 277.5 | % |
| Rehabilitation and wellness services | | 21,124 |
| | 12,447 |
| | 8,677 |
| | 69.7 | % |
| Total management and operating revenues | | 54,951 |
| | 274,100 |
| | (219,149 | ) | | (80.0 | )% |
| Reimbursed community-level costs incurred on behalf of managed communities | | 233,783 |
| | 80,909 |
| | 152,874 |
| | 188.9 | % |
| Other reimbursed expenses | | 6,589 |
| | — |
| | 6,589 |
| | n/m |
|
| Total revenues | | 295,323 |
| | 355,009 |
| | (59,686 | ) | | (16.8 | )% |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 11,128 |
| | 137,916 |
| | (126,788 | ) | | (91.9 | )% |
| Other senior living operating expenses | | 6,717 |
| | 76,929 |
| | (70,212 | ) | | (91.3 | )% |
| Rehabilitation and wellness services expenses | | 16,124 |
| | 10,412 |
| | 5,712 |
| | 54.9 | % |
| Community-level costs incurred on behalf of managed communities | | 233,783 |
| | 80,909 |
| | 152,874 |
| | 188.9 | % |
| General and administrative | | 19,916 |
| | 20,094 |
| | (178 | ) | | (0.9 | )% |
| Rent | | 1,282 |
| | 33,169 |
| | (31,887 | ) | | (96.1 | )% |
| Depreciation and amortization | | 2,680 |
| | 2,818 |
| | (138 | ) | | (4.9 | )% |
| Loss on sale of senior living communities | | — |
| | 749 |
| | (749 | ) | | (100.0 | )% |
| Long-lived asset impairment | | — |
| | 18 |
| | (18 | ) | | (100.0 | )% |
| Total operating expenses | | 291,630 |
| | 363,014 |
| | (71,384 | ) | | (19.7 | )% |
| | | | | | | | | |
| Operating income (loss) | | 3,693 |
| | (8,005 | ) | | 11,698 |
| | 146.1 | % |
| | | | | | | | | |
| Interest, dividend and other income | | 104 |
| | 414 |
| | (310 | ) | | (74.9 | )% |
| Interest and other expense | | (379 | ) | | (384 | ) | | 5 |
| | (1.3 | )% |
| Unrealized gain on equity investments | | 435 |
| | 148 |
| | 287 |
| | 193.9 | % |
| Realized gain (loss) on sale of debt and equity investments | | 327 |
| | (9 | ) | | 336 |
| | n/m |
|
| | | | | | | | | |
| Income (loss) before income taxes and equity in earnings of an investee | | 4,180 |
| | (7,836 | ) | | 12,016 |
| | 153.3 | % |
| (Provision) benefit for income taxes | | (465 | ) | | 687 |
| | (1,152 | ) | | (167.7 | )% |
| Equity in earnings of an investee | | — |
| | 83 |
| | (83 | ) | | (100.0 | )% |
| Net income (loss) | | $ | 3,715 |
| | $ | (7,066 | ) | | $ | 10,781 |
| | 152.6 | % |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | |
| Number of communities (end of period) | | 24 |
| | 190 |
| | (166 | ) | | (87.4 | )% |
Number of living units (end of period) (1) | | 2,312 |
| | 20,948 |
| | (18,636 | ) | | (89.0 | )% |
| Occupancy % | | 74.7 | % | | 82.9 | % | | (8.2 | )% | | n/m |
|
RevPAR (2) | | $ | 2,665 |
| | $ | 3,943 |
| | $ | (1,278 | ) | | (32.4 | )% |
| | | | | | | | | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Increase/(Decrease) |
| | | 2020 | | 2019 | | Amount | | Percent |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 239 |
| | 77 |
| | 162 |
| | 210.4 | % |
Number of living units (end of period) (1) | | 28,232 |
| | 10,168 |
| | 18,064 |
| | 177.7 | % |
| Occupancy % | | 75.2 | % | | 84.7 | % | | (9.5 | )% | | n/m |
|
RevPAR (2) | | $ | 3,468 |
| | $ | 3,559 |
| | $ | (91 | ) | | (2.6 | )% |
| | | | | | | | | |
| Rehabilitation and wellness services: | | |
| | | | |
| | |
| Number of inpatient clinics | | 40 |
| | 41 |
| | (1 | ) | | (2.4 | )% |
| Number of outpatient clinics | | 209 |
| | 173 |
| | 36 |
| | 20.8 | % |
| Total clinics | | 249 |
| | 214 |
| | 35 |
| | 16.4 | % |
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.
Comparable communities (senior Amounts for the three months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the three months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(4) The three months ended June 30, 2021 and 2020 include data for 23 owned and leased senior living communities, 120 managed senior living communities and 195 rehabilitation clinics that we have continuously owned, continuously leased or continuously managed since JulyApril 1, 2019) results are listed below. The number2020. Per the Strategic Plan the summary of operations for comparable communities representand 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) 1,473 SNF units in 26 CCRCs that were closed during the three months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units, that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed in the three months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed during the remainder of 2021. Comparable communities also excludes one leased community with 51 living units that has been out of service due to a minorityfire on April 4, 2021. In addition, the landlord of the other three leased communities included in the 23 owned and leased senior living communities data above is currently marketing these properties for sale and it is unlikely that we will operate these communities long-term.
The following is a discussion of our operating results for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Rehabilitation and wellness services.The decrease in rehabilitation and wellness services revenues is primarily due to a significant reduction of inpatient clinic visits associated with the closure of 27 inpatient clinics in the three months ended June 30, 2021 in accordance with the Strategic Plan which resulted in a decrease in revenues of $2.6 million. This was partially offset by the growth of our fitness services, home health visits and other expanded outpatient services. We also realized the full quarter impact of 17 and 8 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the three months ended March 31, 2021, respectively, as well as opening three net new outpatient rehabilitation clinics during the three months ended June 30, 2021. There was an increase in rehabilitation and wellness services revenues at our comparable clinics due to increased visits in the current quarter.
Senior living revenues.The decrease in senior living revenues and the decrease in senior living revenues at our comparable communities are primarily due to the decline in average occupancy from 78.3% for the three months ended June 30, 2020 to 68.1% for the three months ended June 30, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the marketplace reluctance to relocate to senior living communities during the Pandemic. In addition, one of our leased communities was out of service due to a fire on April 4, 2021 which resulted in a decline in revenue attributable to that community of $0.3 million.
Management fees. The decrease in management fees is due to declines in gross revenues at the senior living communities we operated since July 1, 2019 as a resultmanage, primarily caused by the ongoing impacts of the changesPandemic and the closure of 1,473 SNF units in the three months ended June 30, 2021 in accordance with the Strategic Plan. This resulted in a decline in average occupancy in our managed communities from 78.7% for the three months ended June 30, 2020 to our business arrangements with DHC pursuant69.5% for the three months ended June 30, 2021. The closure of 1,473 SNF units resulted in a decrease in management fees of $0.9 million for the three months ended June 30, 2021 as compared to the Restructuring Transactions forthree months ended June 30, 2020. In addition, revenue declines were impacted by the nine senior living communities sold and seven senior living communities closed by DHC in 2020 that we previously managed which reduced management fees by $0.7 million for the three months ended June 30, 2020. The decrease in management fees at our comparable senior living communities was primarily due to the decline in gross revenues at the senior living communities we manage caused by Pandemic related declines in average occupancy in the 2021 period, partially offset by an increase in construction management fees we earn on construction projects we manage.
Reimbursed community-level costs incurred on behalf of DHC (dollarsmanaged communities. The decrease in thousands, except per unit amounts):reimbursed community-level costs incurred on behalf of managed communities was primarily due to the nine senior living communities sold and seven senior living communities closed in 2020 and the closure of 1,473 SNF units in the three months ended June 30, 2021 in accordance with the Strategic Plan. Additionally, there was an overall reduction in community-level costs incurred at the senior living communities we continue to manage, as other operating expenses such as travel and entertainment, professional service fees and other costs that were impacted by continued occupancy declines due to the Pandemic, including wages, dietary costs and repairs and maintenance, which offset increases in costs related to our enhanced infectious disease and prevention protocols related to the Pandemic.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The increase in other reimbursed expenses was due to reimbursements related to restructuring expenses in the three months ended June 30, 2021 of $11.5 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other operating income. Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution.
Rehabilitation and wellness services expenses.The decrease in rehabilitation and wellness services expenses is primarily due to reduced visits at our inpatient clinics as a result of the closure of 27 inpatient clinics in the three months ended June 30, 2021 in accordance with the Strategic Plan. This was partially offset by the growth of our outpatient rehabilitation and other ancillary services businesses. Rehabilitation and wellness services opened 17 and 8 net new outpatient rehabilitation clinics during the year ended December 31, 2020 and the three months ended March 31, 2021, respectively, as well as opened three net new outpatient rehabilitation clinics during the three months ended June 30, 2021. The increase in rehabilitation and wellness services expenses at our comparable communities was due to an increase in labor costs due to increased outpatient visits during the three months ended June 30, 2021.
Senior living wages and benefits.The small increase in senior living wages and benefits is primarily due to increased medical insurance and workers compensation costs related to the Pandemic. The increase in senior living wages and benefits at our comparable communities is primarily due to increased medical insurance costs related to the Pandemic.
Other senior living operating expenses.Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level costs. The decrease in other senior living operating expenses is primarily due to a decrease in self-insurance obligations and decreased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the Pandemic. The decreases were offset by a $0.9 million asset impairment recorded in the three months ended June 30, 2021 related to a community that was damaged by a fire. The decrease in other senior living operating expenses at our comparable communities is primarily due to decreased costs associated with our self-insurance obligations as well as decreases in costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of Pandemic.
General and administrative.The decrease in general and administrative expenses was primarily due to a reduction in health insurance costs and the realized benefit of administrative labor reductions in response to reductions in residents caused principally by the Pandemic.
Restructuring expenses.The increase was primarily due to severance and retention costs related to the Strategic Plan.
Depreciation and amortization.The increase in depreciation and amortization is primarily due to amortization expense incurred on our equipment finance lease, which was entered into during the fourth quarter of 2020.
Interest, dividend and other income.The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned on our cash and cash equivalents due to declines in interest rates during 2021.
Interest and other expense.Interest and other expense consists of deferred financing fees and commitment fees related to our credit facility and interest on our mortgage note.
Unrealized gain (loss) on equity investments. Unrealized gain (loss) on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.
Realized gain on sale of debt and equity investments. Realized gain on sale of debt and equity investments represents our realized gains and losses on investments.
(Provision) benefit for income taxes.For the three months ended June 30, 2021 and 2020, we recognized a provision for income taxes of $0.2 million and a benefit for income taxes of $0.9 million, respectively. The provision for income taxes for the three months ended June 30, 2021 is related to state income taxes. The benefit for income taxes for the three months ended June 30, 2020 is related to a decrease to the annual projection for federal and state income taxes.
Key Statistical Data For the Six Months Ended June 30, 2021 and 2020:
The following tables present a summary of our operations for the six months ended June 30, 2021 and 2020 (dollars and visits in thousands, except RevPAR and RevPOR):
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30, | | Increase/(Decrease) | |
| | 2021 (1) | | 2020 (1) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Rehabilitation and wellness services | | $ | 37,006 | | | $ | 40,652 | | | $ | (3,646) | | | (9.0) | % | |
| Senior living | | 33,435 | | | 40,587 | | | (7,152) | | | (17.6) | % | |
| Management fees | | 26,777 | | | 32,756 | | | (5,979) | | | (18.3) | % | |
| Total management and operating revenues | | 97,218 | | | 113,995 | | | (16,777) | | | (14.7) | % | |
| Reimbursed community-level costs incurred on behalf of managed communities | | 408,431 | | | 456,120 | | | (47,689) | | | (10.5) | % | |
| Other reimbursed expenses | | 22,072 | | | 12,414 | | | 9,658 | | | 77.8 | % | |
| Total revenues | | 527,721 | | | 582,529 | | | (54,808) | | | (9.4) | % | |
| | | | | | | | | |
| Other operating income | | 7,795 | | | 1,499 | | | 6,296 | | | n/m | |
| | | | | | | | | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Rehabilitation and wellness services expenses | | 31,878 | | | 33,645 | | | (1,767) | | | (5.3) | % | |
| Senior living wages and benefits | | 21,909 | | | 19,505 | | | 2,404 | | | 12.3 | % | |
| Other senior living operating expenses | | 15,234 | | | 12,954 | | | 2,280 | | | 17.6 | % | |
| Community-level costs incurred on behalf of managed communities | | 408,431 | | | 456,120 | | | (47,689) | | | (10.5) | % | |
| General and administrative | | 45,139 | | | 45,162 | | | (23) | | | (0.1) | % | |
| Restructuring expenses | | 15,639 | | | 1,270 | | | 14,369 | | | n/m | |
| Depreciation and amortization | | 5,929 | | | 5,404 | | | 525 | | | 9.7 | % | |
| Total operating expenses | | 544,159 | | | 574,060 | | | (28,134) | | | (4.9) | % | |
| | | | | | | | | |
| Operating (loss) income | | (8,643) | | | 9,968 | | | (20,378) | | | n/m | |
| | | | | | | | | |
| Interest, dividend and other income | | 160 | | | 521 | | | (361) | | | (69.3) | % | |
| Interest and other expense | | (872) | | | (791) | | | (81) | | | 10.2 | % | |
| Unrealized gain (loss) on equity investments | | 533 | | | (595) | | | 1,128 | | | n/m | |
| Realized gain on sale of debt and equity investments | | 193 | | | 95 | | | 98 | | | n/m | |
| Loss on termination of leases | | — | | | (22,899) | | | 22,899 | | | (100.0) | % | |
| Income (loss) before income taxes | | (8,629) | | | (13,701) | | | 3,305 | | | (24.1) | % | |
| Provision for income taxes | | (358) | | | (506) | | | 148 | | | (29.2) | % | |
| Net loss | | $ | (8,987) | | | $ | (14,207) | | | $ | 5,220 | | | (36.7) | % | |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
| Number of communities (end of period) | | 24 | | | 24 | | | — | | | — | % | |
| Number of living units (end of period) | | 2,251 | | | 2,312 | | | (61) | | | (2.6) | % | |
| Spot occupancy at June 30, | | 69.7 | % | | 76.3 | % | | (6.6) | % | | n/m | |
| Average occupancy | | 68.2 | % | | 79.8 | % | | (11.6) | % | | n/m | |
RevPAR (2) | | $ | 2,453 | | | $ | 2,872 | | | $ | (419) | | | (14.6) | % | |
RevPOR (3) | | $ | 3,577 | | | $ | 3,560 | | | $ | 17 | | | 0.5 | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 228 | | | 241 | | | (13) | | | (5.4) | % | |
| Number of living units (end of period) | | 25,482 | | | 28,348 | | | (2,866) | | | (10.1) | % | |
| Spot occupancy at June 30, | | 71.3 | % | | 77.5 | % | | (6.2) | % | | n/m | |
| Average occupancy | | 69.5 | % | | 80.7 | % | | (11.2) | % | | n/m | |
RevPAR (2) | | $ | 3,150 | | | $ | 3,699 | | | $ | (549) | | | (14.8) | % | |
RevPOR (3) | | $ | 4,507 | | | $ | 4,571 | | | $ | (64) | | | (1.4) | % | |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 130 | | | $ | 126 | | | $ | 4 | | | 3.2 | % | |
| Number of visits at outpatient clinics | | 305 | | | 277 | | | 28 | | | 10.1 | % | |
| Number of inpatient clinics (end of period) | | 10 | | | 40 | | | (30) | | | (75.0) | % | |
| Number of outpatient clinics (end of period) | | 218 | | | 206 | | | 12 | | | 5.8 | % | |
| Total clinics | | 228 | | | 246 | | | (18) | | | (7.3) | % | |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Increase/(Decrease) |
| | | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 18,489 |
| | $ | 20,499 |
| | $ | (2,010 | ) | | (9.8 | )% |
| Management fees | | 4,877 |
| | 3,881 |
| | 996 |
| | 25.7 | % |
| Rehabilitation and wellness services | | 17,563 |
| | 11,921 |
| | 5,642 |
| | 47.3 | % |
| Reimbursed community-level costs incurred on behalf of managed communities | | 71,505 |
| | 73,680 |
| | (2,175 | ) | | (3.0 | )% |
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 10,999 |
| | 10,138 |
| | 861 |
| | 8.5 | % |
| Other senior living operating expenses | | 6,699 |
| | 6,403 |
| | 296 |
| | 4.6 | % |
| Rehabilitation and wellness services expenses | | 13,507 |
| | 9,696 |
| | 3,811 |
| | 39.3 | % |
| Rent | | 1,099 |
| | 1,017 |
| | 82 |
| | 8.1 | % |
| | | | | | | | | |
| 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 % | | 74.7 | % | | 81.3 | % | | (6.6 | )% | | n/m |
|
RevPAR (2) | | $ | 2,665 |
| | $ | 2,954 |
| | (289 | ) | | (9.8 | )% |
| | | | | | | | | |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 75 |
| | 75 |
| | — |
| | — | % |
Number of living units (end of period) (1) | | 9,689 |
| | 9,700 |
| | (11 | ) | | (0.1 | )% |
| Occupancy % | | 76.7 | % | | 85.5 | % | | (8.8 | )% | | n/m |
|
RevPAR (2) | | $ | 3,221 |
| | $ | 3,561 |
| | (340 | ) | | (9.5 | )% |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | |
| Number of inpatient clinics | | 40 |
| | 40 |
| | — |
| | — | % |
| Number of outpatient clinics | | 145 |
| | 145 |
| | — |
| | — | % |
| Total clinics | | 185 |
| | 185 |
| | — |
| | — | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
n/m - not meaningful
(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) 1,473 SNF units in 26 CCRCs that were closed in the six months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed in the six months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed during the remainder of 2021. In addition, one leased community with 51 living units has been out of service due to a fire on April 4, 2021 and the landlord of the other three 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 communities long-term.
(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 six months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the six months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider relief Fund of the CARES Act.
Comparable Communities and Clinics
Comparable communities (senior living communities and rehabilitation and wellness services clinics that we have continually owned, leased or managed since January 1, 2020), excluding those communities, units and clinics that have been or will be transitioned or closed in 2021 per the Strategic Plan as well as one leased community which has been out of service due to a fire on April 4, 2021):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | Increase/(Decrease) | |
| | 2021 (4) | | 2020 (4) | | Amount | | Percent | |
| REVENUES | | | | | | | | | |
| Rehabilitation and wellness services | | $ | 26,240 | | | $ | 25,569 | | | $ | 671 | | | 2.6 | % | |
| Senior living | | 33,008 | | | 39,625 | | | (6,617) | | | (16.7) | % | |
| Management fees | | 17,146 | | | 18,891 | | | (1,745) | | | (9.2) | % | |
| Other operating income | | 7,581 | | | 828 | | | 6,753 | | | n/m | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | |
| Rehabilitation and wellness services expenses | | 22,901 | | | 22,844 | | | 57 | | | 0.2 | % | |
| Senior living wages and benefits | | 21,563 | | | 19,014 | | | 2,549 | | | 13.4 | % | |
| Other senior living operating expenses | | 13,229 | | | 12,279 | | | 950 | | | 7.7 | % | |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | | |
| Number of communities (end of period) | | 23 | | | 23 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 2,251 | | | 2,260 | | | (9) | | | (0.4) | % | |
| Spot occupancy at June 30, | | 69.7 | % | | 76.6 | % | | (6.9) | % | | n/m | |
| Average occupancy | | 68.3 | % | | 80.0 | % | | (11.7) | % | | n/m | |
RevPAR (2) | | $ | 2,451 | | | $ | 2,867 | | | $ | (416) | | | (14.5) | % | |
RevPOR (3) | | $ | 3,566 | | | $ | 3,543 | | | $ | 23 | | | 0.6 | % | |
| | | | | | | | | |
| Managed communities: | | | | | | | | | |
| Number of communities (end of period) | | 120 | | | 120 | | | — | | | — | % | |
Number of living units (end of period) (1) | | 17,898 | | | 17,929 | | | (31) | | | (0.2) | % | |
| Spot occupancy at June 30, | | 73.3 | % | | 81.1 | % | | (7.8) | % | | n/m | |
| Average occupancy | | 72.8 | % | | 84.3 | % | | (11.5) | % | | n/m | |
RevPAR (2) | | $ | 2,954 | | | $ | 3,386 | | | $ | (432) | | | (12.8) | % | |
RevPOR (3) | | $ | 4,035 | | | $ | 3,972 | | | $ | 63 | | | 1.6 | % | |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | | |
| Average revenue per outpatient clinic | | $ | 132 | | | $ | 127 | | | $ | 5 | | | 3.9 | % | |
| Number of visits at outpatient clinics | | 279 | | | 263 | | | 16 | | | 6.1 | % | |
| Number of inpatient clinics (end of period) | | — | | | — | | | — | | | — | % | |
| Number of outpatient clinics (end of period) | | 182 | | | 182 | | | — | | | — | % | |
| Total clinics | | 182 | | | 182 | | | — | | | — | % | |
n/m - not meaningful
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period.
The following is a discussion of our operating results Amounts for the threesix months ended SeptemberJune 30, 2021 and 2020 compared to the three months ended September 30, 2019.
Senior living revenues.The decrease in senior living revenues is primarily due to the conversion of our formerly leasedexclude income received by senior living communities to managed communities pursuant tounder the Transaction Agreement, effective January 1, 2020. The decrease in senior living revenues at our comparable communities was primarily due to the decrease in occupancy caused by the COVID-19 pandemic as move-out rates exceeded move-in rates primarily due to state and company-wide policies to restrict admissions to those communities impacted with a confirmed case of COVID-19 and the decline in demand given the impact that safety concerns related to the COVID-19 pandemic has had on the senior living industry.
Management fees. The increase in management fees is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Management fees increased $10.0 million due to the increase in senior living communities we manage for the account of DHC from 77 to 239. The remaining increase is primarily due to the termsProvider Relief Fund of the New Management Agreements, under which we receive a management fee equal to 5% of the gross revenues realized at senior living communities managed and 3% of the costs of construction projects we manage for the account of DHC. Prior to the Transaction Agreement, our management fee for 46 previously managed communities was equal to 3% of the gross revenues realized at those senior living communities and 3% of the costs of construction projects we managed for the account of DHC. This was partially offset by a decline in gross revenues and reductions in construction
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
projects at the senior living communities we manage caused by the COVID-19 pandemic as we implemented infectious disease protocols that limited non-essential visitors from entering our communities as well as pausing admissions in certain communities to mitigate the spread of COVID-19. The increase in management fees at our comparable communities was primarily due to the two percentage point rate increase from the New Management Agreements and the construction management fee that we began earning on construction projects we manage effective January 1, 2020, partially offset by a decline in gross revenues and construction projects at the senior living communities we manage caused by the COVID-19 pandemic.
Rehabilitation and wellness services.The increase in rehabilitation and wellness services revenues is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and opening of new clinics, partially offset by lower occupancy rates resulting from the COVID-19 pandemic, which reduced the amount of inpatient rehabilitation services we provided. Rehabilitation and wellness services revenues for the three months ended September 30, 2019 excluded $5.8 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, this revenue was eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 36 net new outpatient clinics we opened from October 1, 2019 to September 30, 2020. These increases were partially offset by a reduction of clinic visits as a result of the COVID-19 pandemic. The increase in rehabilitation and wellness services revenues at our comparable communities was due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and the change in how those revenues are accounted for as a result.
Reimbursed community-level costs incurred on behalf of managed communities. The increase in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, resulting in the increase in senior living communities managed for the account of DHC. This was partially offset by a decline in costs incurred at the senior living communities we manage resulting from reduced occupancy due to the COVID-19 pandemic. The decrease in reimbursed community-level costs incurred on behalf of managed communities at our comparable communities was due to lower community-level costs, including marketing expenses and other costs, impacted by occupancy declines due to the COVID-19 pandemic such as labor and food.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements for certain centralized services that support senior living communities we manage on behalf of DHC pursuant to the New Management Agreements.
Senior living wages and benefits.The decrease in senior living wages and benefits is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Senior living wages and benefits related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements. The increase in senior living wages and benefits at our comparable communities is primarily due to increased insurance costs.
Other senior living operating expenses.Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and community-level administrative costs. The decrease in other senior living operating expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, partially offset by increased legal costs, increased insurance costs and increased costs related to testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic. Other senior living operating expenses related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements. The increase in other senior living operating expenses at our comparable communities is primarily due to increased costs related to testing supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic.
Rehabilitation and wellness services expenses.The increase in rehabilitation and wellness services expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services expenses for the three months ended September 30, 2019 excluded $5.8 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, these expenses were eliminated in consolidation pursuant to GAAP. This increase was partially offset by a reduction of labor costs due to reduced visits as a result of the COVID-19 pandemic.
General and administrative.The decrease in general and administrative expenses is primarily due to a decrease of $1.2 million in transaction costs incurred in connection with the Restructuring Transactions, mostly offset by increased costs for certain centralized services we provide pursuant to the New Management Agreements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rent.The decrease in rent expense is due to the termination of our master leases for the senior living communities that we previously leased from DHC, which were replaced with the New Management Agreements, pursuant to the Transaction Agreement. Rent for comparable communities increased primarily due to increases in rent at certain of our rehabilitation clinics.
Depreciation and amortization.The decrease in depreciation and amortization is primarily due to the disposition of assets during 2019.
Loss on sale of senior living communities. A loss on sale of senior living communities of $0.7 million was recognized during the three months ended September 30, 2019 for the sale of 15 SNFs to a third party.
Long-lived asset impairment.For the three months ended September 30, 2019, we recognized a long-lived asset impairment of $0.02 million to reduce the carrying value of certain of our long-lived assets to their estimated fair values.
Interest, dividend and other income.The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned on our cash and cash equivalents and dividends received from our investments in equity securities.
Interest and other expense.Interest and other expense consists of deferred financing fees and commitment fees related to our credit facility and interest on our mortgage note.
Unrealized gain on equity investments.Unrealized gain on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.
Realized gain (loss) on sale of debt and equity investments.Realized gain (loss) on sale of debt and equity investments represents our realized gains and losses on investments.
(Provision) benefit for income taxes.For the three months ended September 30, 2020 and 2019, we recognized a provision for income taxes of $0.5 million and a benefit for income taxes of $0.7 million, respectively. The provision for income taxes for the three months ended September 30, 2020 is related to an increase to our cumulative state income taxes through September 30, 2020. The benefit for income taxes for the three months ended September 30, 2019 is related to a decrease to our cumulative federal and state income taxes through September 30, 2019.
Equity in earnings of an investee.Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC, which was dissolved on February 13, 2020.
Key Statistical Data For the Nine Months Ended September 30, 2020 and 2019:
The following tables present a summary of our operations for the nine months ended September 30, 2020 and 2019 (dollars in thousands, except per unit amounts):
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, | | Increase/(Decrease) |
| | | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 59,112 |
| | $ | 786,771 |
| | $ | (727,659 | ) | | (92.5 | )% |
| Management fees | | 48,058 |
| | 12,060 |
| | 35,998 |
| | 298.5 | % |
| Rehabilitation and wellness services | | 61,776 |
| | 34,707 |
| | 27,069 |
| | 78.0 | % |
| Total management and operating revenues | | 168,946 |
| | 833,538 |
| | (664,592 | ) | | (79.7 | )% |
| Reimbursed community-level costs incurred on behalf of managed communities | | 689,903 |
| | 232,733 |
| | 457,170 |
| | 196.4 | % |
| Other reimbursed expenses | | 19,003 |
| | — |
| | 19,003 |
| | n/m |
|
| Total revenues | | 877,852 |
| | 1,066,271 |
| | (188,419 | ) | | (17.7 | )% |
| | | | | | | | | |
| Other operating income | | 1,499 |
| | — |
| | 1,499 |
| | n/m |
|
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 30,633 |
| | 411,553 |
| | (380,920 | ) | | (92.6 | )% |
| Other senior living operating expenses | | 18,290 |
| | 223,896 |
| | (205,606 | ) | | (91.8 | )% |
| Rehabilitation and wellness services expenses | | 48,595 |
| | 28,031 |
| | 20,564 |
| | 73.4 | % |
| Community-level costs incurred on behalf of managed communities | | 689,903 |
| | 232,733 |
| | 457,170 |
| | 196.4 | % |
| General and administrative | | 66,348 |
| | 67,144 |
| | (796 | ) | | (1.2 | )% |
| Rent | | 3,837 |
| | 120,973 |
| | (117,136 | ) | | (96.8 | )% |
| Depreciation and amortization | | 8,084 |
| | 13,924 |
| | (5,840 | ) | | (41.9 | )% |
| Loss on sale of senior living communities | | — |
| | 850 |
| | (850 | ) | | (100.0 | )% |
| Long-lived asset impairment | | — |
| | 3,278 |
| | (3,278 | ) | | (100.0 | )% |
| Total operating expenses | | 865,690 |
| | 1,102,382 |
| | (236,692 | ) | | (21.5 | )% |
| | | | | | | | | |
| Operating income (loss) | | 13,661 |
| | (36,111 | ) | | 49,772 |
| | 137.8 | % |
| | | | | | | | | |
| Interest, dividend and other income | | 625 |
| | 985 |
| | (360 | ) | | (36.5 | )% |
| Interest and other expense | | (1,170 | ) | | (2,196 | ) | | 1,026 |
| | (46.7 | )% |
| Unrealized (loss) gain on equity investments | | (160 | ) | | 476 |
| | (636 | ) | | (133.6 | )% |
| Realized gain on sale of debt and equity investments | | 422 |
| | 227 |
| | 195 |
| | 85.9 | % |
| Loss on termination of leases | | (22,899 | ) | | — |
| | (22,899 | ) | | n/m |
|
| | | | | | | | | |
| Loss before income taxes and equity in earnings of an investee | | (9,521 | ) | | (36,619 | ) | | 27,098 |
| | (74.0 | )% |
| Provision for income taxes | | (971 | ) | | (98 | ) | | (873 | ) | | 890.8 | % |
| Equity in earnings of an investee | | — |
| | 617 |
| | (617 | ) | | (100.0 | )% |
| Net loss | | $ | (10,492 | ) | | $ | (36,100 | ) | | $ | 25,608 |
| | (70.9 | )% |
| | | | | | | | | |
| Owned and leased communities: | | | | | | | | |
| Number of communities (end of period) | | 24 |
| | 190 |
| | (166 | ) | | (87.4 | )% |
Number of living units (end of period) (1) | | 2,312 |
| | 20,948 |
| | (18,636 | ) | | (89.0 | )% |
| Occupancy % | | 78.1 | % | | 83.0 | % | | (4.9 | )% | | n/m |
|
RevPAR (2) | | $ | 2,803 |
| | $ | 3,975 |
| | $ | (1,172 | ) | | (29.5 | )% |
| | | | | | | | | |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 239 |
| | 77 |
| | 162 |
| | 210.4 | % |
Number of living units (end of period) (1) | | 28,232 |
| | 10,168 |
| | 18,064 |
| | 177.7 | % |
| Occupancy % | | 78.9 | % | | 85.4 | % | | (6.5 | )% | | n/m |
|
RevPAR (2) | | $ | 3,645 |
| | $ | 3,614 |
| | $ | 31 |
| | 0.9 | % |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | |
| Number of inpatient clinics | | 40 |
| | 41 |
| | (1 | ) | | (2.4 | )% |
| Number of outpatient clinics | | 209 |
| | 173 |
| | 36 |
| | 20.8 | % |
| Total clinics | | 249 |
| | 214 |
| | 35 |
| | 16.4 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.CARES Act.
(2) (3)RevPAR RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of availableoccupied units for the period, divided by the number of months in the period.
Comparable communities (senior Amounts for the six months ended June 30, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(4) The six months ended June 30, 2021 and 2020 include data for 23 owned and leased senior living communities, 120 managed senior living communities and 182 rehabilitation clinics that we have continuously owned, continuously leased or continuously managed since January 1, 2019) results are listed below. The number2020. Per the Strategic Plan the summary of operations for comparable communities represent a minority of theand clinics excludes (i) 108 senior living communities we operated since January 1, 2019 as a result of the changes to our business arrangements with DHC pursuant to the Restructuring Transactions for senior living communities that we managemanaged on behalf of DHC, (dollars in thousands, except per unit amounts):
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | Increase/(Decrease) |
| | | 2020 | | 2019 | | Amount | | Percent |
| REVENUES | | | | | | | | |
| Senior living | | $ | 58,336 |
| | $ | 61,744 |
| | $ | (3,408 | ) | | (5.5 | )% |
| Management fees | | 14,941 |
| | 11,273 |
| | 3,668 |
| | 32.5 | % |
| Rehabilitation and wellness services | | 47,671 |
| | 31,279 |
| | 16,392 |
| | 52.4 | % |
| Reimbursed community-level costs incurred on behalf of managed communities | | 206,019 |
| | 210,942 |
| | (4,923 | ) | | (2.3 | )% |
| Other operating income | | 1,021 |
| | — |
| | 1,021 |
| | n/m |
|
| OPERATING EXPENSES | | | | | | | | |
| Senior living wages and benefits | | 30,578 |
| | 29,436 |
| | 1,142 |
| | 3.9 | % |
| Other senior living operating expenses | | 12,724 |
| | 15,239 |
| | (2,515 | ) | | (16.5 | )% |
| Rehabilitation and wellness services expenses | | 38,119 |
| | 24,747 |
| | 13,372 |
| | 54.0 | % |
| Rent | | 3,112 |
| | 2,876 |
| | 236 |
| | 8.2 | % |
| | | | | | | | | |
| 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 % | | 78.1 | % | | 81.4 | % | | (3.3 | )% | | n/m |
|
RevPAR (2) | | $ | 2,803 |
| | $ | 2,967 |
| | $ | (164 | ) | | (5.5 | )% |
| | | | | | | | | |
| Managed communities: | | | | | | | | |
| Number of communities (end of period) | | 74 |
| | 74 |
| | — |
| | — | % |
Number of living units (end of period) (1) | | 9,371 |
| | 9,382 |
| | (11 | ) | | (0.1 | )% |
| Occupancy % | | 80.7 | % | | 86.3 | % | | (5.6 | )% | | n/m |
|
RevPAR (2) | | $ | 3,429 |
| | $ | 3,635 |
| | $ | (206 | ) | | (5.7 | )% |
| | | | | | | | | |
| Rehabilitation and wellness services: | | | | | | | | |
| Number of inpatient clinics | | 40 |
| | 40 |
| | — |
| | — | % |
| Number of outpatient clinics | | 124 |
| | 124 |
| | — |
| | — | % |
| Total clinics | | 164 |
| | 164 |
| | — |
| | — | % |
n/m - not meaningful
(1) Includes onlywith approximately 7,500 living units, categorized asthat are expected to be transitioned to new operators, (ii) 1,473 SNF units in service. As a result,26 CCRCs that were closed during the numbersix months ended June 30, 2021 and are in the process of being repositioned and an additional 59 SNF units, that are expected to be closed and repositioned in one CCRC during the remainder of 2021 that we will continue to manage for DHC and (iii) 27 Ageility inpatient rehabilitation clinics that were closed in the six months ended June 30, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed during the remainder of 2021. Comparable communities also excludes one leased community with 51 living units may change from periodthat has been out of service due to period for reasonsa fire on April 4, 2021. In addition, the landlord of the other thanthree leased communities included in the acquisition or disposition of23 owned and leased senior living communities.communities data above is currently marketing these properties for sale and it is unlikely that we will operate these communities long-term.
(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.
The following is a discussion of our operating results for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 2019.
Senior living revenues. The decrease in senior living revenues is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, effective January 1, 2020. The decrease in senior living revenues at our comparable communities was primarily due to the decrease in occupancy caused by the COVID-19 pandemic as move-out rates exceeded move-in rates primarily due to state and company-wide policies that restricted admissions at those communities impacted with a confirmed case of COVID-19 and the decline in demand given the impact that safety concerns related to the COVID-19 pandemic has had on the senior living industry.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management fees. The increase in management fees is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement. Management fees increased $31.4 million due to the increase in senior living communities we manage for the account of DHC from 77 to 239. The remaining increase is primarily due to the terms of the New Management Agreements, under which we receive a management fee equal to 5% of the gross revenues realized at senior living communities managed and 3% of the costs of construction projects we manage for the account of DHC. Prior to the Transaction Agreement, our management fee for 46 previously managed communities was equal to 3% of the gross revenues realized at those senior living communities and 3% of the costs of construction projects we managed for the account of DHC. This was partially offset by a decline in gross revenues and reductions in construction projects at the senior living communities we manage caused by the COVID-19 pandemic as we implemented infectious disease protocols that limited non-essential visitors from entering our communities as well as pausing admissions in certain communities to mitigate the spread of COVID-19 within the communities we operate. The increase in management fees at our comparable communities was primarily due to the two percentage point rate increase from the New Management Agreements and the construction management fee that we began earning on construction projects we manage effective January 1, 2020, partially offset by a decline in gross revenues and construction projects at the senior living communities we manage caused by the COVID-19 pandemic.
Rehabilitation and wellness services. The increasedecrease in rehabilitation and wellness services revenues is due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services revenues for the nine months ended September 30, 2019 excluded $19.4 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, this revenue was eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 36a significant reduction of inpatient clinic visits associated with the closure of 27 inpatient clinics in the three months ended June 30, 2021 in accordance with the Strategic Plan which resulted in a decrease in revenues of $4.1 million. The decrease was partially offset by the growth of fitness services, home health visits, and other expanded outpatient services. We also realized the full six month impact of 17 net new outpatient rehabilitation clinics opened from January 1, 2019 to Septemberduring the year ended December 31, 2020 and the three month impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, respectively, as well as opening three net new outpatient rehabilitation clinics during the three months ended June 30, 2020. These increases were offset by a reduction of visits and closures of clinics as a result of the COVID-19 pandemic as clinics were temporarily closed as part of our infectious disease protocols and services were provided to resident units only, which reduced the number of patients we could treat on a daily basis. The2021. There was an increase in rehabilitation and wellness services revenues at our comparable clinics due to increased visits in the current year.
Senior living revenues.The decrease in senior living revenues and the decrease in senior living revenues at our comparable communities are primarily due to the decline in average occupancy from 79.8% for the six months ended June 30, 2020 to 68.2% for the six months ended June 30, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the conversion of our formerly leasedmarketplace reluctance to relocate to senior living communities during the Pandemic.
Management fees. The decrease in management fees is due to declines in gross revenues at the senior living communities we manage, primarily caused by the ongoing impacts of the Pandemic and the closure of 1,473 SNF units in the three months ended June 30, 2021 in accordance with the Strategic Plan. This resulted in a decline in average occupancy in our managed communities pursuantfrom 80.7% for the six months ended June 30, 2020 to 69.5% for the six months ended June 30, 2021. The closure of 1,473 SNF units resulted in a decrease in management fees of $1.3 million for the six months ended June 30, 2021 as compared to the Transaction Agreementsix months ended June 30, 2020. In addition, revenue declines were impacted by the nine senior living communities sold and seven senior living communities closed by DHC in 2020 that we previously managed which reduced management fees by $1.7 million for the changesix months ended June 30, 2020. The decrease in how those revenues are accounted for as a result, partially offset by amanagement fees at our comparable senior living communities was primarily due to the decline in gross revenues at the senior living communities we manage caused by Pandemic related declines in average occupancy in the COVID-19 pandemic.2021 period, partially offset by an increase in construction management fees we earn on construction projects we manage.
Reimbursed community-level costs incurred on behalf of managed communities.communities. The increasedecrease in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the conversion of our formerly leasednine senior living communities to managed communities pursuant to the Transaction Agreement, resulting in the increase insold and seven senior living communities managed forclosed in 2020 and the accountclosure of DHC. This1,473 SNF units in the three months ended June 30, 2021 in accordance with the Strategic Plan. Additionally, there was partially offset by a declinean overall reduction in community-level costs incurred at the senior living communities we continue to manage, resulting from the COVID-19 pandemic. The decrease in reimbursed community-level costs incurred on behalf of managed communities at our comparable communities was due to lower community-level costs, including marketingas other operating expenses such as travel and entertainment, professional service fees and other costs that were impacted by continued occupancy declines due to the COVID-19 pandemic such as labor, foodPandemic, including wages, dietary costs and maintenance.repairs and maintenance, which offset increases in costs related to our enhanced infectious disease and prevention protocols related to the Pandemic.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The increase in other reimbursed expenses was due to reimbursements related to restructuring expenses in the New Management Agreements.six months ended June 30, 2021 of $11.5 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other operating income.income. Other operating income represents revenues recognized for funds received and recognized under the Provider Relief Fund of the CARES Act for which we have determined we complyGeneral Fund Distribution.
Rehabilitation and wellness services expenses.The decrease in rehabilitation and wellness services expenses is primarily due to reduced visits at our inpatient clinics as a result of the closure of 27 inpatient clinics in the three months ended June 30, 2021 in accordance with the associated termsStrategic Plan. This was partially offset by the growth of fitness services, home health visits and conditions that permit usother expanded outpatient services. Rehabilitation and wellness services opened 17 net new outpatient rehabilitation clinics during the year ended December 31, 2020 and three month impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, respectively, as well as opened three net new outpatient rehabilitation clinics during the three months ended June 30, 2021. The slight increase in rehabilitation and wellness services expenses at our comparable communities was due to retain these funds.an increase in labor costs due to increased outpatient visits during the six months ended June 30, 2021.
Senior living wages and benefits. The decreaseincrease in senior living wages and benefits is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuantincreased medical insurance and workers compensation costs related to the Transaction Agreement. Senior living wages and benefits related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020, pursuant to the New Management Agreements.Pandemic. The increase in senior living wages and benefits at our comparable communities is primarily due to an increase inincreased medical insurance costs bonuses and ongoing benefits packages providedrelated to team members.the Pandemic.
Other senior living operating expenses. Other senior living operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level administrative costs. The decreaseincrease in other senior living operating expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement, partially offset by increased legal costs, increased insurance costsself-insurance obligations and increased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic. Other senior living operating expensesPandemic. In addition, in 2021, we recognized a $0.9 million long lived asset impairment related to communities previously leased to DHC are reimbursed community-level costs incurred on behalf of managed communities effective January 1, 2020,
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
pursuant to the New Management Agreements.a community that was damaged by a fire. The decreaseincrease in other senior living operating expenses at our comparable communities is primarily due to lower repairs and maintenance, reduction in consulting and other purchased service expenses associated with our 2019 strategic sourcing investment program and costs associated with our self-insurance obligations partially offset by increased legal costs, increased insurance costs and increasedas well as increases in costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the COVID-19 pandemic.
Rehabilitation and wellness services expenses.
The increase in rehabilitation and wellness services expenses is primarily due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and growth of our business. Rehabilitation and wellness services expenses for the nine months ended September 30, 2019 excluded $19.4 million related to inpatient clinics at communities we previously leased from DHC. Prior to the effective date of the Transaction Agreement, these expenses were eliminated in consolidation pursuant to GAAP. The remaining increase was primarily due to 36 net new outpatient clinics we opened from October 1, 2019 to September 30, 2020. These increases were partially offset by a reduction of labor costs due to reduced visits and temporary closures of clinics as a result of the COVID-19 pandemic. The increase in rehabilitation and wellness services expenses at our comparable communities was due to the conversion of our formerly leased senior living communities to managed communities pursuant to the Transaction Agreement and the change for how those revenues are accounted for as a result, partially offset by a reduction of labor costs due to reduced visits and temporary closures of clinics as a result of the COVID-19 pandemic.
General and administrative. The decrease in general and administrative expenses iswas not meaningful.
Restructuring expenses.The increase was primarily due to a decrease of $8.7 million in transactionseverance and retention costs incurred in connection with the Restructuring Transactions, partially offset by increased costs for certain centralized services we provide pursuantrelated to the New Management Agreements, increased professional services costs and increased severance costs.Strategic Plan.
Rent.The decrease in rent expense is due to the termination of our master leases for the senior living communities that we previously leased from DHC, which were replaced with the New Management Agreements, pursuant to the Transaction Agreement. Rent for comparable communities increased primarily due to increases in rent at certain of our rehabilitation clinics.
Depreciation and amortization. The decreaseincrease in depreciation and amortization is primarily due to the sale of approximately $110.0 million of fixed assets and improvements to DHC during 2019.
Lossamortization expense incurred on sale of senior living communities. A loss on sale of senior living communities of $0.9 millionour equipment finance lease, which was recognizedentered into during the nine months ended September 30, 2019, in connection with the salefourth quarter of 18 SNFs to third parties during the second and third quarters of 2019.2020.
Long-lived asset impairment.For the nine months ended September 30, 2019, we recognized a long-lived asset impairment of $3.3 million to reduce the carrying value of certain of our long-lived assets to their estimated fair values.
Interest, dividend and other income. The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned on our cash and cash equivalents and dividends received from our investmentsdue to declines in equity securities.interest rates during 2021.
Interest and other expense. The decrease in interestInterest and other expense is primarily dueconsists of deferred financing fees and commitment fees related to decreased amounts of interest incurred on borrowings under our credit facility compared to the nine months ended September 30, 2019. We did not borrow any funds underand interest on our credit facility during the nine months ended September 30, 2020.mortgage note.
Unrealized gain (loss) gain on equity investmentsinvestments.. Unrealized gain (loss) gain on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.
Realized gain on sale of debt and equity investmentsinvestments.. Realized gain on sale of debt and equity investments represents our realized gaingains and losses on investments.
Loss on termination of leases.Loss on termination of leases in the six months ended June 30, 2020 represents the excess of the fair value of the Share Issuances of $97.9 million compared to the consideration of $75.0 million paid by DHC.
Provision for income taxestaxes.. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we recognized a provision for income taxes of $1.0$0.4 million and $0.1$0.5 million, respectively. The provision for income taxes for the ninesix months ended SeptemberJune 30, 2021 is related to state income taxes. The provision for income taxes for the six months ended June 30, 2020 is related to federal income taxes, partially offset by a federal AMTalternative minimum tax credit refund benefit and a federal benefit related to a loss on thelease termination of leases,expense, plus state income taxes, including the reduction of a state valuation allowance. The provision for income taxes for the nine months ended September
Liquidity and Capital Resources
We require cash to fund our operating expenses, to make capital expenditures and to service our debt obligations. As of June 30, 2019 is related to2021, we had $99.3 million of unrestricted cash and cash equivalents. As of June 30, 2021, our federalrestricted cash and state tax obligations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Equity in earnings of an investee.Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC, which was dissolved on February 13, 2020.
Liquidity and Capital Resources
We require cash to fund our operating expenses and to make capital expenditures to the extent not funded or reimbursed by DHC pursuant to the New Management Agreements. As of SeptemberJune 30, 2020, we had $95.8 million of unrestricted cash and cash equivalents. As of September 30, 20202021 and December 31, 2019,2020, we had current assets of $250.7$252.5 million and $143.4$262.3 million, respectively, and current liabilities of $171.9$174.1 million and $164.3$177.9 million, respectively.
On January 1, 2020, in connection with the Restructuring Transactions,Transaction Agreement, we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. As consideration for the Share Issuances, DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments.payments as consideration for the Share Issuances.
The following is a summary of cash flowstable presents selected data on our continuing operations from operating, investing and financing activities, as reflected in our condensed consolidated statements of cash flows:flows for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| Net cash provided by (used in) | | 2021 | | 2020 | | $ Change | | % Change |
| Operating Activities | | $ | 17,880 | | | $ | 40,158 | | | $ | (22,278) | | | (55.5) | % |
| Investing Activities | | (2,662) | | | (350) | | | (2,312) | | | 660.6 | % |
| Financing Activities | | (604) | | | 3,966 | | | (4,570) | | | (115.2) | % |
| Increase in cash and cash equivalents and restricted cash and cash equivalents | | 14,614 | | | 43,774 | | | (29,160) | | | (66.6) | % |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 109,597 | | | 56,979 | | | 52,618 | | | 92.3 | % |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 124,211 | | | $ | 100,753 | | | $ | 23,458 | | | 23.3 | % |
|
| | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, |
| (in thousands) | | 2020 | | 2019 | | $ Change | | % Change |
| Net cash provided by operating activities | | $ | 62,040 |
| | $ | 12,077 |
| | $ | 49,963 |
| | 413.7 | % |
| Net cash provided by investing activities | | 2,270 |
| | 54,785 |
| | (52,515 | ) | | (95.9 | )% |
| Net cash used in financing activities | | (847 | ) | | (53,027 | ) | | 52,180 |
| | (98.4 | )% |
| Change in cash and cash equivalents and restricted cash and cash equivalents | | 63,463 |
| | 13,835 |
| | 49,628 |
| | 358.7 | % |
| Restricted cash included in held for sale assets | | — |
| | (42 | ) | | 42 |
| | (100.0 | )% |
| Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 56,979 |
| | 50,155 |
| | 6,824 |
| | 13.6 | % |
| Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 120,442 |
| | $ | 63,948 |
| | $ | 56,494 |
| | 88.3 | % |
The increasedecrease in cash flows provided by operating activities for the ninesix months ended SeptemberJune 30, 2020,2021 compared to the same period in 2019 is primarily due to the Restructuring Transactions, including the receipt of $23.5 million of cash from DHC, deferral of payroll taxes of $18.2 million as permitted by the CARES Act, of which $14.6 million is expected to be reimbursed from DHC, and changes in working capital, including $12.9 million related to funds received by DHC to fund working capital obligations. The decrease in cash flows provided by investing activities for the nine months ended September 30, 2020 compared to the same period in 2019 is primarily due to a decrease in cash flows due to a change in accrued expenses and other current liabilities of $51.0 million and a reduction in the change in accounts receivable of $24.3 million, partially offset by reduction of cash flows due to change in amounts due from related person of $55.9 million and decrease in net loss for the period, which included $6.3 million in funds received and recognized under the CARES Act as other operating income.
Investing Activities
The increase in cash flows used in investing activities for the six months ended June 30, 2021, compared to the same period in 2020 is primarily due to a decrease in proceeds earned from the sale of property and equipment to DHC of $88.1 million, partially offset by a decrease$2.7 million.
Financing Activities
The increase in net cash used in financing activities for the acquisition of property and equipment of $33.3 million during the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same period in 2019. The increase in net cash provided by financing activities for the nine months ended September 30, 2020 compared to the same period in 2019 is primarily due to targeted SNF distribution funds received on behalf of others in 2020 of $4.7 million.
Capital Expenditures
During the net repayment of our outstanding borrowings on the revolving credit facility during the ninesix months ended SeptemberJune 30, 2019.2021, we invested $4.2 million in our 24 owned and leased senior living communities and rehabilitation and wellness services clinics. During the six months ended June 30, 2020, we invested $2.4 million in our 24 owned and leased senior living communities and rehabilitation and wellness services clinics. DHC funds the capital expenditures at the senior living communities we manage for the account of DHC pursuant to our management agreements with DHC.
We believe we have adequate financial resources from our existing cash flows from operations, together with cash on hand and amounts available under our credit facility to support our business for at least the next twelve months.Pandemic Liquidity Impact
Our liquidity and capital funding requirements depend on numerous factors, including our operating results, our capital expenditures to the extent not funded by DHC pursuant to the New Management Agreements,our management agreements with DHC, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute on our strategy or to maintain appropriate capital spending levels. We believe we have adequate financial resources from our existing cash flows from operations, together with unrestricted cash on hand and amounts available under our credit facility, to support our business for at least the next twelve months.
We are closely monitoring the effect of the COVID-19 pandemicPandemic on our liquidity. We currently expect to use cash on hand orand cash flows from operations as well as our revolving credit facility to fund our future operations and capital expenditures, to the extent not funded or reimbursed by DHC pursuant to the New Management Agreements,our management agreements with DHC, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue streams. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. We intend to conduct our business in a manner that will afford
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
us reasonable access to capital for investment and financing activities, but we cannot be certain that we will be able to successfully carry out this intention, particularly because of the uncertainty surrounding the duration and severity of the current economic impact resulting
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
from the COVID-19 pandemic.Pandemic. A long, protracted and extensive decline in economic recessionconditions or adverse market conditions in the senior living industry may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.
Insurance
Increases over time in the cost of insurance, especially professional and general liability insurance, workers’ compensation and employee health insurance, have had an adverse impact upon our results of operations. Although weWe self-insure a large portion of these costs, andcosts. We also require residents in our senior living communities to buy insurance directly or reimburse usself-insure for insurance that we purchase, ourauto insurance. Our costs have increased as a result of the higher costs that we incur to settle claims and to purchase insurance for claims in excess of the self-insured amounts, some of which related to the senior living communities we manage on behalf of DHC and are reimbursed to us by DHC pursuant to the New Management Agreements.our management agreements with DHC. Further, our health insurance and workers compensation costs have increased as a result of the COVID-19 pandemic.Pandemic, as well as team members now pursuing elective procedures that had been deferred or they were not able to obtain during the Pandemic. These increased costs may continue in the future. We previously participated with other companies to which RMR LLC provides management services in a combined property insurance program through AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we insteadalso have purchased property insurance coverage under DHC's policy with unrelated third party insurance providers. For more information about our purchased propertyOn April 4, 2021, one of the communities that we lease had a fire which has caused extensive damage and the residents of the community to be relocated. The Company has insurance coverage under DHC's policy, see Note 13 to our condensed consolidated financial statements included in Part I, Item 1on this community with a deductible of this Quarterly Report on Form 10-Q.$1.0 million.
For more information about our existing insurance see “Business—Insurance” in Part I, Item I of our Annual Report.
Off-Balance Sheet Arrangements
At September 30, 2020, we had seven irrevocable standby letters of credit outstanding, totaling $29.3 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $21.6 million of cash equivalents and $7.1 million of debt and equity investments. This letter of credit expires in June 2021 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At September 30, 2020, the cash equivalents collateralizing this letter of credit, including accumulated interest, wereclassified 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 investments in our condensed consolidated balance sheets. The remaining six irrevocable standby letters of credit outstanding at September 30, 2020, totaling $2.4 million, secure certain of our other obligations. As of November 2, 2020, these letters of credit are scheduled to mature between June 2021 and September 2021 and are required by the beneficiaries to be renewed annually.
Debt Financings and Covenants
We have a $65.0 million secured revolving credit facility, or our Credit Facility, that is available for general business purposes. Our credit facilityCredit Facility matures inon June 2021, and, subject to12, 2022 after we exercised our payment of an extension fee and other conditions, we have the option to extend the stated maturity date of our credit facilityCredit Facility for a one-year period.one year. We are required to pay interest on borrowings under our credit facilityCredit Facility at a rate of LIBOR plus a premium of 250— basis points per annum; or at a base rate, as defined in the credit agreement, governing our credit facility, plus 150— basis points per annum. The annual interest ratesrate options as of SeptemberJune 30, 2020,2021 were 2.65%2.60% and 4.75%, respectively. We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available capacity under our credit facility.Credit Facility. No principal repayment is due until maturity.
Our credit facilityCredit Facility is secured by 11 senior living communities 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 qualified collateral, which is primarily based on the value and operating performance of the communities securing our obligations under our credit facility.Credit Facility. Our credit facilityCredit Facility provides for acceleration of payment of all amounts outstanding under our credit facilityCredit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined 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 SeptemberJune 30, 2020,2021, we had sevensix irrevocable standby letters of credit outstanding, totaling $29.3$27.6 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $21.5 million of cash equivalents and $5.6 million of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At June 30, 2021, the cash equivalents collateralizing this letter of credit areclassified as more fully described aboveshort-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 five irrevocable standby letters of credit outstanding at June 30, 2021, totaling $0.8 million, which are issued under the heading “—Off-Balance Sheet Arrangements.”credit facility, secure certain of our other obligations. As of August 4, 2021, these letters of credit are scheduled to mature between September 2021 and June 2022 and are required to be renewed annually.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We also have a mortgage note of $7.3 million as of SeptemberJune 30, 2020,2021, that we assumed in connection with a previous acquisition of a senior living community. Payments of principal and interest are due monthly under this mortgage debt until maturity in September 2032. The annual interest rate on this mortgage debt was 6.20% as of SeptemberJune 30, 2020.2021.
As of SeptemberJune 30, 2020,2021, we had no— borrowings outstanding under our credit facility and $2.4Credit Facility, $0.8 million in letters of credit issued under our credit facility, and $42.7Credit Facility, $46.5 million of availabilityavailable for further borrowing under our credit facility,Credit Facility, and we had $7.3$7.0 million in an outstanding on the mortgage note. As of SeptemberJune 30, 2020,2021, we believe we were in compliance with all applicable covenants under our debt agreements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For more information regarding our debt financings and covenants, see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Related Person Transactions
We have relationships and historical and continuing transactions with DHC, RMR LLC, ABP Trust and others related to them. For example: DHC is our former parent company, our former largest landlord, the owner of the senior living communities that we manage and our largest shareholder, owning as of September 30, 2020, 33.9% of our outstanding common shares, and with which we restructured our business arrangements as of January 1, 2020 pursuant to the Transaction Agreement; Adam Portnoy, the Chair of our Board of Directors and one of our Managing Directors, is the sole trustee, an officer and the controlling shareholder of ABP Trust and he is also a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR LLC and the chair of the board of trustees and a managing trustee of DHC; Jennifer Clark, our other Managing Director and Secretary, is a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer of ABP Trust, an officer and employee of RMR LLC and a managing trustee and secretary of DHC; various services we require to operate our business are provided to us by RMR LLC pursuant to our business management agreement with RMR LLC and RMR LLC also provides management services to DHC and DHC’s officers are officers and employees of RMR LLC; RMR LLC employs our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer; Adam Portnoy, directly and indirectly through ABP Trust and its subsidiaries, is a significant stockholder of us, beneficially owning approximately 6.2% of our outstanding common shares as of September 30, 2020; a subsidiary of ABP Trust is also the landlord of our headquarters; and Adam Portnoy, through ABP Trust, is also the controlling shareholder of RMR Inc., which is the managing member of RMR LLC. We have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and some of which have directors, trustees or officers who are also directors, trustees or officers of us, DHC, RMR LLC or RMR Inc. and some of our Directors and officers serve as trustees, directors or officers of these companies.
For further information about these and other such relationships and related person transactions, see Notes 11, 12 and 13 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our 20202021 Annual Meeting of ShareholdersStockholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of"Risk Factors" in our Annual Report and in this Quarterly Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our prior leases, forms of management agreements and related pooling and omnibus agreements with DHC, the Transaction Agreement, our business management agreement with RMR LLC, and our headquarters lease with a subsidiary of ABP Trust, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Seasonality
Revenues derived from our senior living and managed communities are subject to modest effects of seasonality, which we experience in certain regions more than others, due to weather patterns, geography and higher incidence and severity of flu and other illnesses during winter months. We do not expect these seasonal differences to cause material fluctuations in our revenues or operating cash flows. It is uncertain what the long-term survival, recurrence and resurgence of COVID-19 will be, including whether it will weaken, transform or otherwise become a common seasonal virus, which may change or amplify seasonal aspects and effects on our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2020,2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•The continued impactduration and severity of the COVID-19 pandemicPandemic, and its impact on our and DHC's business, results, operations and liquidity, and the impact of the COVID-19 pandemicPandemic on the senior living industry in general,
•The duration, severityavailability, effectiveness, impact and geographic reachextent of the COVID-19 pandemic and the development and availabilityadministration of successful COVID-19 vaccines and therapeutic treatments on public health and safety, economic conditions, the senior living industry and our business,
•The execution of the Strategic Plan and our expectations regarding the related timing, costs, savings and benefits,
•Our expectations for the operation and performance of the business following implementation of the Strategic Plan,
•Our expectations regarding pent-up demand, impacts of information technology and our competitive advantages in the senior living industry,
•Our ability to attract and retain qualified and skilled employees, particularly at our senior living communities,
•Our ability to operate our senior living communities profitably,
•Our ability to grow revenues at the senior living communities we manage and to increase the fees we earn from managing senior living communities,
•Our expectation to focus our expansion activities on internal growth from our existing senior living communities and the clinics we operate and other ancillary services that we may provide,
•Our ability to increase the number of senior living communities we operate, excluding the loss of the communities pursuant to the Transition, and residents we serve, and to grow our other sources of revenues, including rehabilitation and wellness services and other services we may provide,
•Whether the aging U.S. population and increasing life spans of older adults will increase the demand for senior living communities and health and wellness services,
•Our expectations of the types of services seniors will demand and our ability to satisfy those demands,
•Our ability to comply and to remain in compliance with applicable Medicare, Medicaid and other federal and state regulatory, rulemaking and rate setting requirements,
•Our belief regarding the adequacy of our existing cash flows from operations, unrestricted cash on hand and amounts available under our Credit Facility to support our business,
•Our ability to sell communities we may offer for sale, and
•Our ability to access or raise debt or equity capital, andcapital.
Other matters.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks,A summary of the risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, cash flows, liquidity and prospects include, but are not limited to:
•The impact of conditions in the economy and the capital markets on us and our residents, clients and other customers,
•Competition within the senior living and other health and wellness related services businesses,
•Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services from us,
•Increases in our labor costs or in costs we pay for goods and services,
•Increases in tort and insurance liability costs,
•Our operating and debt leverage,
•Actual and potential conflicts of interest with our related parties, including our Managing Directors, DHC, RMR LLC, ABP Trust and others affiliated with them,
•Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations, which could result in reduced Medicare or Medicaid
rates, a failure of such rates to cover our costs or limit the scope or funding of either or both programs, or reductions in private insurance utilization and coverage,
•Delays or nonpayment of government payments to us,
•Compliance with, and changes to, federal, state and local laws and regulations that could affect our services or impose requirements, costs and administrative burdens that may reduce our ability to profitably operate our business,
•Our exposure to litigation and regulatory and government proceedings due to the nature of our business, including adverse determinations resulting from government reviews, audits and investigations and unanticipated costs to comply with legislative or regulatory developments,
Continued•Ongoing healthcare reform efforts, including continued efforts by third-party payers to reduce costs, and
•Acts of terrorism, outbreaks or continuations of public health crises, including COVID-19,so-called pandemics or other man-madehuman-made or natural disasters beyond our control.control, and
•The effects of the implementation of the Strategic Plan on our business and operations.
For example:
•Challenging conditions in the senior living industry continue to exist and our business and operations remain subject to substantial risks, many of which are beyond our control. As a result, our operations may not be profitable in the future and we may realize losses,
•We may not successfully execute our strategic growth initiatives,
•Our ability to operatedeliver senior living communitiesmanagement or rehabilitation clinicsand wellness services profitably and increase the revenues generated by us depends upon many factors, including our ability to integrate new communities and clinics into our existing operations, as well as some factors that are beyond our control, such as the demand for our services arising from economic conditions generally and competition from other providers of services to older adults. We may not be able to successfully integrate, operate, compete and profitably manage our senior living communities and rehabilitation and wellness services clinics,
•We expect to enter into additional management arrangements with DHC or other owners for additional senior living communities that DHC owns or may acquire in the future.communities. However, we cannot be sure that we will enter any additional management arrangements, with DHC,
•Our belief that the aging of the U.S. population and increasing life spans of older adults will increase demand for senior living communities and health and wellness services may not be realized or may not result in increased demand for our services,
•Our investments in our workforce and continued focus on reducing our employeeteam member turnover level by enhancing our competitiveness in the marketplace with respect to cash compensation and other benefits, as well as our innovative efforts to attract talent, may not be successful and may not result in the benefits we expect to achieve through such investments,
•We may not be able to implement each aspect of the Strategic Plan by the end of 2021 or at all, for example:
◦We and DHC may not be able to identify and agree to terms with new operators or otherwise transition the remaining 82 senior living communities that we currently manage for DHC to new operators, or the timing of such transitions may be delayed or may change,
◦We may not be able to successfully reposition the 1,473 SNF units that have been closed to other types of units,
◦We may not be able to close or reposition certain of the 59 SNF units in one CCRC that we will continue to manage for DHC, or the timing of such closures or repositions may be delayed or may change,
◦We may not be able to close the ten remaining Ageility inpatient rehabilitation clinics operating in some transitioning communities, or the timing of such closures may be delayed or may change,
•The costs of implementing the Strategic Plan may be more than we expect,
•We may not realize the benefits we anticipate from the Strategic Plan,
•We may not be able to achieve our objectives following implementation of the Strategic Plan, including partially offsetting the revenue loss from the senior living communities we intend to transition with expense reductions to right-size operations, on the anticipated timeline, or at all,
•We cannot be sure that the terms of our new management arrangements with DHC will achieve the anticipated benefit on our operating results,
•Our marketing initiatives may not succeed in increasing our revenues, and they may cost more than any increased revenues they may generate,
•Our strategic investments to enhance efficiencies in, and benefits from, our purchasing of services may not be successful or generate the returns we expect,
•Circumstances that adversely affect the ability of older adults or their families to pay for our services, such as economic downturns, weakening housing market conditions, higher levels of unemployment among our customers or their family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the revenues and profitability of our business,
•Customers who pay for our services with their private resources may become unable to afford our services, resulting in decreased revenues, at our senior living communities and rehabilitation clinics,
•The various federal and state government agencies that pay us for the services we provide to some of our customers are still experiencing budgetary constraints and may lower the Medicare, Medicaid and other rates they pay us. On August 3,December 27, 2020, CMS issued a proposed rule that, if effective, would among other things, result in policy changes for Medicare payments that could reduce our revenues related to outpatient therapy on or after January 1, 2021,were reduced by 3.5% as a result of the Consolidated Appropriations Act,
•Our preparation efforts in anticipationto mitigate the continued effects of continued COVID-19 pandemic challengesthe Pandemic may not be sufficient,
•We believe that our insurance costs may continue to rise as a result of claims or litigation associated with the COVID-19 pandemic,Pandemic, coupled with general market conditions prior to the Pandemic,
•We may be unable to repay or refinance our debt obligations when they become due,
•At SeptemberJune 30, 2020,2021, we had $95.8$99.3 million of unrestricted cash and cash equivalents. As of SeptemberJune 30, 2020,2021, we had no— borrowings under our credit facility,Credit Facility, letters of credit issued under the Credit Facility in an aggregate amount of $2.4 $0.8
million and $42.7$46.5 million available for borrowing under our credit facility.Credit Facility. In addition, we believe that we have adequate financial resources to fund our business for at least the next 12 months. However, we have incurred in the most recent, and in prior periods, and we may continue to incur in future periods, operating losses and we have a large accumulated deficit. Moreover, certain aspects of our operations and future growth opportunities that we may pursue in our business may require significant amounts of working cash and require us to make significant capital expenditures. Further, the impact of the COVID-19 pandemic and resulting economic conditionsPandemic has adversely impacted usour business and will likelyis expected to continue to do so. As a result, we may not have sufficient cash liquidity,
•Actual costs under our credit facility will be higher than LIBOR plus a premium because of other fees and expenses associated with our credit facility,Credit Facility,
•The amount of available borrowings under our credit facilityCredit Facility is subject to our having qualified collateral, which is primarily based on the value of the assets securing our obligations under our credit facility.Credit Facility. Accordingly, the availability ofavailable borrowings under our credit facilityCredit Facility at any time may be less than $65.0 million. Also, the availability of borrowings under our credit facilityCredit Facility is subject to our satisfying certain financial covenants and other conditions that we may be unable to satisfy. As of September 30, 2020, we had no borrowings under our credit facility, letters of credit issued in an aggregate amount of $2.4 million and $42.7 million available for borrowing under our credit facility,satisfy,
•We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not be able to successfully carry out this intention. Further, market disruptions, such as may be caused and continued by the COVID-19 pandemicPandemic and the current economic conditions, may significantly limit our availabilityaccess to capital,
•Our actions and approach to managing our insurance costs, including our operating an offshore captive insurance company and self-insuring with respect to certain liability matters, may not be successful and could result in our incurring significant costs and liabilities that we will be responsible for funding,
•Contingencies in any applicable acquisition or sale agreements we or DHC have entered into, or may enter into, may not be satisfied and our and DHC’s applicable acquisitions or sales, and any related management arrangements we may expect to enter into or exit, may not occur, may be delayed or the terms of such transactions or arrangements may change,
•We may be unable to meet collateral requirements related to our workers’ compensation insurance program for future policy years, which may result in increased costs for such insurance program,
•We may not be able to sell senior living communities that we own, and DHC may not be able to sell communities welease or manage, that we, our landlord or DHC may seek to sell, on acceptable terms or we may incur losses in connection with any such sales,
•We believe that our relationships with our related parties, including DHC, RMR LLC, ABP Trust and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and
•Our senior living communitiesmanagement and rehabilitation clinicsand wellness services are subject to extensive government regulation, licensure and oversight. We sometimes have regulatory issues in the operation of our senior living communities and rehabilitation and wellness services clinics and, as a result, some of our communities and clinics may periodically be prohibited from admitting new residents, or clients, or our license to continue operations at a community or clinic may be suspended or revoked. Also, operating deficiencies or a license revocation at one or more of our senior living communities or rehabilitation and wellness services clinics may have an adverse impact on our ability to operate, obtain licenses for, or attract residents or clients to, our other communities and clinics, andclinics.
We expect that the COVID-19 pandemic will continue to adversely affect our business, operating results and financial condition, due to continual deterioration of occupancy of our senior living communities, staffing pressures and potential medical and food supply shortages that may have an adverse effect on our operating costs of our senior living facilities.
Currently, unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, natural disasters, epidemics and other widespread illnesses including the COVID-19 pandemic, changed Medicare or Medicaid rates, new legislation, regulations or rulemaking affecting our business, or changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the SEC, including under the caption “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
You should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
PART II. Other Information
Item 1. Legal Proceedings
Information on material developments in our legal proceedings is included in Note 14 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Our business faces many risks, a number of which are described under the caption “Risk Factors” in our Annual Report. The COVID-19 pandemic and its aftermath may subject us to additional risks that areReport, as supplemented by the risk factors described below. The risks described in our Annual Report and below may not be the only risks we face. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report or described below occurs, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report and below,this Quarterly Report, and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.
The COVID-19 pandemic has had,We may be unable to implement the Strategic Plan in a timely manner or at all, and it may not result in the benefits we expect.
On 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, among other things, amended our management arrangements with DHC to facilitate the transition of 108 senior living communities that we currently manage for DHC to new operators, and we intend to (i) reposition 1,473 SNF units that were closed in 26 CCRCs and to close and reposition 59 SNF units in one CCRC that we have not already closed pursuant to the Strategic Plan and that we will continue to have, a materially adverse effectmanage for DHC, (ii) close the remaining ten Ageility inpatient rehabilitation clinics in certain transitioning communities and (iii) eliminate certain positions in our corporate, regional and divisional teams as well as impacted units and clinics.
We may not be able to transition management of the senior living communities to other operators or to reposition or close SNF units before year end 2021, as anticipated, or at all.
We believe the Strategic Plan will enable us to build on our business, operations, financial resultsoperational strengths at larger senior living communities and liquiditystand-alone independent living and its duration is unknown.
COVID-19 has been declared a pandemic by the World Health Organization,active adult communities while continuing to evolve our choice-based, financially flexible rehabilitation and the Secretary of HHS has declared a public health emergency in the United States in response to the outbreak. COVID-19 has had a devastating impact on the global economy, including the U.S. economy, and has resulted in a global economic recession.
These conditions have had, and will likely continue to have, a material and adverse impactwellness services. However, our business resultsremains subject to various risks, including, among others, the highly competitive nature of operationsthe senior living industry; medical advances and liquidity, including reducing occupancyhealth and wellness services that allow some potential residents to defer the time when they require the services available at our senior living communities, putting pressurescommunities; significant regulatory requirements imposed on revenue due to restrictions on admitting new residents, increasingour business; and other factors. Many of these factors are beyond our control. In addition, the costcosts of operations or necessitatingimplementing the closure of our facilities. Occupancy at our senior living communities has experienced continual declines during the COVID-19 pandemic so farStrategic Plan may be greater than we expect and we may be unable to offset such costs, as well as the revenue loss from the communities we intend to transition, through expense reductions to right-size operations. As a result, we may not achieve the benefits we expect, continuing declines over a sustained period of time will likelyeven if we implement the Strategic Plan.
In connection with the Strategic Plan, we intend to eliminate positions in our corporate, regional and divisional teams and impacted units and clinics, which may have a significantan adverse impact on our business and financial results. Although
In connection with the Strategic Plan, through June 30, 2021, we have not experienced a significant changeeliminated approximately 900 staff and management positions. When completed, we intend to eliminate approximately 150, or 38.5% of the positions in our corporate, regional and divisional teams and approximately 1,180, or 8.3%, of the positions in our communities and clinics. This reduction in force may result in the ratesloss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across the organization, which could adversely affect our operations and increase the risk that we charge residentsmay not comply with accounting, legal and regulatory requirements and may not be able to date as a resultpursue certain business opportunities. Our management may also need to divert attention away from our strategic and operational activities to manage these organizational changes. In addition, we may not achieve anticipated benefits from the reduction in force, including the expected cost savings and operational efficiencies.
The substantial majority of the COVID-19 pandemic, that could change in the future if the pandemic continues or economic conditions worsen. We earn management fees based on a percentage of revenues generated at the senior living communities that we manage; therefore, declines in occupancy, without sufficient offsets from increased rates or other revenues,operate are owned by DHC and vice versa, have already and likely will continue to reduce the management fees we earn. In addition, the COVID-19 pandemic may further adversely impact our business by causing temporary holdsis substantially dependent on our relationship with DHC.
Our business is substantially dependent upon our continued relationship with DHC. Of the admission of new residents at certain of our communities, by disrupting or delaying production and delivery of materials we need to operate our senior living communities or by causing staffing shortages in those communities. Additionally, the COVID-19 pandemic could continue to significantly increase certain aspects of the operating costs for our senior living communities, including by increasing our staffing needs or overtime pay and our costs to obtain PPE, to incorporate enhanced infection control measures and to implement quarantines for residents. For the communities we manage on behalf of DHC, the operating costs are borne by DHC. However, those costs may reduce the earnings of those senior living communities and thereby reduce our ability to earn incentive fees. Moreover, for252 senior living communities we own and lease, we incur these costs, which reduces our earnings from those communities. Finally, we believe that our insurance costs may continue to rise as a result of claims or litigation associatedoperated at June 30, 2021, 228 are owned by DHC. In connection with the COVID-19 pandemic.
Our abilityStrategic Plan, we and DHC amended our management agreements to operate ourfacilitate the transition of 108 senior living communities that we currently manage for DHC to new operators and close and reposition approximately 1,500 SNF units in 27 CCRCs that we will continue to be negatively impacted if we are unable to maintain or improve occupancy levels or to secure the necessary staffing and supplies, if our team members become ill, if we continue to experience shortagesmanage for DHC. The transition of supplies due to supply chain or production challenges, or for other reasons. Additionally, downturns or stagnation in the U.S. housing market as a resultmanagement of the economic downturn related to the COVID-19 pandemic and its aftermath could adversely affect the ability, or perceived ability, of seniors to afford the resident fees at our108 senior living communities that we currently manage for DHC to other operators as prospective residentswell as the closing and repositioning of the SNF units will result in lower operating revenues and may have plannedan adverse impact on our relationship with DHC, each of which could harm our financial condition and ability to use the proceeds from the sale of their homes to cover the cost of such fees.
achieve our long-term growth initiatives. In addition, the COVID-19 pandemic has significantly adversely impacted our Ageility business, resulting in our closing certain of our outpatient clinics for a temporary period. Additionally, we have significantly reduced the number of new clinics we planned to open during 2020. As a result, revenues from our Ageility business were negatively impacted and it is possible that further impacts will occur as a result of the COVID-19 pandemic and the resulting economic conditions.
We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates is uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the COVID-19 pandemic abates and may remain at depressed levels compared to prior to the outbreak of the COVID-19 pandemic and those conditions may continue for an extended period.
Certain capital expenditures have been delayed due to COVID-19 restrictions, including capital expenditures at the108 senior living communities that we manage for DHC; these reductions may harm our competitive position and will result in our earning reduced construction management fees.
Most of the senior living communities we operate are managed on behalf of DHC. DHC funds the operating and capital expenditures for those managed senior living communities. DHC announced it plansexpect to continue investing essential capital in their senior living communities, but certain projectstransition to new operators, have been delayed and may continue to be delayed in the future44 Ageility outpatient rehabilitation clinics, which due to community access restrictions and other state and local ordinances relatedthe transfer to COVID-19 thata new operator may limit their abilitybe subject to proceed with these projects on a timely basis. Toclosure.
DHC may terminate our management agreements in certain circumstances, including if the extent DHC defers capital expendituresEBITDA we generate at our managed senior living communities does not exceed target levels or for our uncured material breach. The loss of our management agreements with DHC, or a material change to their terms, could have a material adverse effect on our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer purchases of equity securities.The following table provides information about our purchases of our equity securities during the applicable senior living communities may be harmed competitively if other senior living communitiesquarter ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| June 2021 | | 483 | | | $ | 5.76 | | | — | | | $ | — | |
| Total | | 483 | | | $ | 5.76 | | | — | | | $ | — | |
(1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of current and former employees and officers of us and of RMR LLC in those markets are newer or are undergoing enhanced capital improvements. In addition, we typically manage capital improvement projectsconnection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the senior living communities we manage for DHC and DHC pays us fees basedclose of trading on a percentage of construction costs for managing those projects. A decline in capital improvement projects at the senior living communities we manage for DHC will result in our earning less construction management fees.
The high levels of infected COVID-19 patients and deaths at senior living communities and resulting negative publicity may have a long-term significant detrimental impactNasdaq on the senior living industry, including us, even if our senior living communities do not experience similar levels of COVID-19 infections and deaths as others in the industry.purchase date.
COVID-19 has proven to be particularly harmful to seniors and persons with other pre-existing health conditions. If the senior living industry continues to experience high levels of residents infected with COVID-19 and related deaths, and news accounts emphasize these experiences, seniors may delay or forgo moving into senior living communities or using other services provided by senior living operators. These trends could be realized across the senior living industry and not discriminate among owners and operators that have higher or lower levels of residents experiencing COVID-19 infections and related deaths. As a result, our senior living communities’ business and our results of operations may experience a long-term significant detrimental impact.
Item 6. Exhibits
|
| | |
Exhibit
Number
| Description |
3.1 | |
3.2 | |
4.1 | |
4.2 | |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document- the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document.
|
101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | Description | | Form | | Exhibit Number | | File Number | | Filing Date | | Filed
Herewith |
| 3.1 | | | 10-Q | | 3.1 | | 001-16817 | | 11/6/2019 | | |
| 3.2 | | | 10-K | | 3.6 | | 001-16817 | | 3/3/2017 | | |
| 4.1 | | | 10-Q | | 4.1 | | 001-16817 | | 11/6/2019 | | |
| 4.2 | | | 8-K | | 10.1 | | 001-16817 | | 10/6/2016 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 10.1 | | | 8-K | | 10.1 | | 001-16817 | | 6/9/2021 | | |
| 10.2 | | | 8-K | | 10.2 | | 001-16817 | | 6/9/2021 | | |
| 10.3 | | | 8-K | | 10.3 | | 001-16817 | | 6/8/2021 | | |
| 31.1 | | | 10-Q | | 31.1 | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | Description | | Form | | Exhibit Number | | File Number | | Filing Date | | Filed
Herewith |
| 31.2 | | | 10-Q | | 31.2 | | | | | | X |
| 32.1 | | | 10-Q | | 32.1 | | | | | | X |
| 101.INS | XBRL Instance Document- the instance document does not appear in the Interactive Date File because its XBRL tags are embedded within the Inline XBRL document.
| | | | | | | | | | X |
| 101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.)
| | | | | | | | | | X |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
| | | | | | | | | | X |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
| | | | | | | | | | X |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
| | | | | | | | | | X |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
| | | | | | | | | | X |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
| | | | | | | | | | X |
|
| | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
|
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
|
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
|
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
|
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
|
| |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| |
| FIVE STAR SENIOR LIVING INC. |
| |
| |
| FIVE STAR SENIOR LIVING INC. |
| |
| /s/ Katherine E. Potter |
| Katherine E. Potter |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| Dated: November 5, 2020August 4, 2021 |
| |
| |
| /s/ |
| Jeffrey C. Leer |
| Jeffrey C. Leer |
| Executive Vice President, Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
| Dated: November 5, 2020 |
| |
| |
| /s/ Ellen E. Snow |
| Ellen E. Snow |
| Chief Accounting Officer |
| ( and Principal Accounting Officer) |
| Dated: November 5, 2020August 4, 2021 |
| |
| |
| |
| |
| |
| |
| |
| |
| |