Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 978K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 19K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 19K
11: R1 Cover Page HTML 72K
12: R2 Condensed Consolidated Balance Sheets HTML 115K
13: R3 Condensed Consolidated Balance Sheets HTML 48K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 108K
(Unaudited)
15: R5 Condensed Consolidated Statements of Shareholders' HTML 76K
Equity (Deficit) (Unaudited)
16: R6 Condensed Consolidated Statements of Cash Flows HTML 111K
(Unaudited)
17: R7 Basis of Presentation HTML 26K
18: R8 Significant Accounting Policies and Recently HTML 59K
Issued Accounting Standards
19: R9 Property and Equipment, net HTML 38K
20: R10 Accrued expenses HTML 29K
21: R11 Notes Payable HTML 56K
22: R12 Redeemable Preferred Stock HTML 28K
23: R13 Revenue HTML 43K
24: R14 Stock-Based Compensation HTML 26K
25: R15 Commitments and Contingencies HTML 22K
26: R16 Related Party Transactions HTML 23K
27: R17 Fair Value Measurements HTML 32K
28: R18 Derivatives and Hedging HTML 36K
29: R19 Subsequent Events HTML 20K
30: R20 Significant Accounting Policies and Recently HTML 88K
Issued Accounting Standards (Policies)
31: R21 Significant Accounting Policies and Recently HTML 29K
Issued Accounting Standards (Tables)
32: R22 Property and Equipment, net (Tables) HTML 37K
33: R23 Accrued expenses (Tables) HTML 29K
34: R24 Notes Payable (Tables) HTML 45K
35: R25 Revenue (Tables) HTML 40K
36: R26 Stock-Based Compensation (Tables) HTML 24K
37: R27 Fair Value Measurements (Tables) HTML 26K
38: R28 Derivatives and Hedging (Tables) HTML 39K
39: R29 Basis of Presentation (Details) HTML 27K
40: R30 Significant Accounting Policies and Recently HTML 39K
Issued Accounting Standards - Schedule of Cash and
Cash Equivalents and Restricted Cash (Detail)
41: R31 Significant Accounting Policies and Recently HTML 62K
Issued Accounting Standards - Narrative (Detail)
42: R32 Property and Equipment, net - Schedule of Net HTML 59K
Property and Equipment and Leasehold Improvements
(Details)
43: R33 Property and Equipment, net - Narrative (Details) HTML 26K
44: R34 Accrued expenses - Schedule of accounts payable HTML 34K
and accrued liabilities (Details)
45: R35 Notes Payable - Schedule of Notes Payable (Detail) HTML 41K
46: R36 Notes Payable - Schedule of Aggregate Scheduled HTML 39K
Maturities of Notes Payable (Details)
47: R37 Notes Payable - Narrative (Detail) HTML 99K
48: R38 Redeemable Preferred Stock (Detail) HTML 40K
49: R39 Revenue (Details) HTML 43K
50: R40 Share-Based Compensation - Crats of Market-Based HTML 27K
Restricted Stock Awards (Detail)
51: R41 Stock-Based Compensation - Narrative (Detail) HTML 20K
52: R42 Commitments and Contingencies (Details) HTML 20K
53: R43 Related Party Transactions (Details) HTML 34K
54: R44 Fair Value Measurements - Carrying Amounts and HTML 27K
Fair Values of Financial Instruments (Detail)
55: R45 Fair Value Measurements - Narrative (Detail) HTML 38K
56: R46 Derivatives and Hedging - Narrative (Details) HTML 27K
57: R47 Derivatives and Hedging - Schedule of Derivative HTML 26K
Instruments in Balance Sheet (Details)
58: R48 Derivatives and Hedging - Schedule of Derivative HTML 24K
Instruments in Statement of Operations (Details)
59: R49 Subsequent Events (Details) HTML 21K
62: XML IDEA XML File -- Filing Summary XML 112K
60: XML XBRL Instance -- snda-20220930_htm XML 1.13M
61: EXCEL IDEA Workbook of Financial Reports XLSX 109K
7: EX-101.CAL XBRL Calculations -- snda-20220930_cal XML 140K
8: EX-101.DEF XBRL Definitions -- snda-20220930_def XML 418K
9: EX-101.LAB XBRL Labels -- snda-20220930_lab XML 1.15M
10: EX-101.PRE XBRL Presentations -- snda-20220930_pre XML 660K
6: EX-101.SCH XBRL Schema -- snda-20220930 XSD 113K
63: JSON XBRL Instance as JSON Data -- MetaLinks 310± 468K
64: ZIP XBRL Zipped Folder -- 0001628280-22-029902-xbrl Zip 276K
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
iCommon Stock,
$0.01 par value per share
iSNDA
iNew York Stock Exchange
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No ¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
iNon-accelerated
filer
x
Smaller reporting company
ix
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
Certain information contained in this Quarterly Report on Form 10-Q of Sonida Senior Living, Inc. (together with its consolidated subsidiaries, “Sonida,”“we,”“our,”“us,” or the “Company”) constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, those relating to the Company’s future business prospects and strategies, financial results, working capital, liquidity,
capital needs and expenditures, interest costs, insurance availability and contingent liabilities, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as “may,”“will,”“would,”“intend,”“could,”“believe,”“expect,”“anticipate,”“project,”“plans,”“estimate” or “continue” or the negatives thereof or other variations thereon or comparable terminology.
Forward-looking statements are subject to certain risks and uncertainties that could cause the Company’s actual results and financial condition to differ materially from those indicated in the forward-looking statements, including, among others, the risks, uncertainties and factors set forth under
“Item. 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2022, and also include the following:
•the impact of COVID-19, including the actions taken to prevent or contain the spread of COVID-19, the transmission of its highly contagious variants and sub-lineages and the development and availability of vaccinations and other related treatments, or another epidemic, pandemic or other health crisis;
•the Company’s ability to generate sufficient cash flows from operations, additional
proceeds from debt financings or refinancings, and proceeds from the sale of assets to satisfy its short and long-term debt obligations and to fund the Company’s capital improvement projects to expand, redevelop, and/or reposition its senior living communities;
•increases in market interest rates that increase the cost of certain of our debt obligations;
•increased competition for, or a shortage of, skilled workers, including due to the COVID-19 pandemic or general labor market conditions, along with wage pressures resulting from such increased competition, low unemployment levels, use of contract labor, minimum wage increases and/or changes in overtime laws;
•the
Company’s ability to obtain additional capital on terms acceptable to it;
•the Company’s ability to extend or refinance its existing debt as such debt matures;
•the Company’s compliance with its debt agreements, including certain financial covenants, and the risk of cross-default in the event such non-compliance occurs;
•the Company’s ability to complete acquisitions and dispositions upon favorable terms or at all;
• the risk of oversupply
and increased competition in the markets which the Company operates;
•the Company’s ability to improve and maintain controls over financial reporting and remediate the identified material weakness discussed in Item 4 of this Quarterly Report on Form 10-Q;
•the departure of the Company’s key officers and personnel;
•the cost and difficulty of complying with applicable licensure, legislative oversight, or regulatory changes;
•risks associated
with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, competition in the labor market, costs of salaries, wages, benefits, and insurance, interest rates, and tax rates; and
•changes in accounting principles and interpretations.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or outcomes that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Quarterly Report on Form 10-Q apply
only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Current
portion of notes payable, net of deferred financing costs
i46,137
i69,769
Deferred
income
i3,576
i3,162
Federal
and state income taxes payable
i176
i599
Other current
liabilities
i732
i758
Total
current liabilities
i97,811
i120,482
Notes
payable, net of deferred financing costs and current portion
i619,798
i613,342
Other
liabilities
i143
i288
Total liabilities
i717,752
i734,112
Commitments
and contingencies
i
i
Redeemable preferred stock:
Series
A convertible preferred stock, $ii0.01/
par value; ii41/ shares authorized, iiii41///
shares issued and outstanding as of September 30, 2022 and December 31, 2021
i42,384
i41,250
Shareholders’
equity (deficit):
Preferred stock $ii0.01/
par value per share; ii15,000/
shares authorized; iiiinone///
issued or outstanding, except Series A convertible preferred stock as noted above
i—
i—
Common
stock $ii0.01/ par value per share; ii15,000/
shares authorized; ii6,670/ and ii6,634/
shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
i67
i66
Additional
paid-in capital
i295,595
i295,781
Retained
deficit
(i380,484)
(i342,657)
Total
shareholders’ equity (deficit)
(i84,822)
(i46,810)
Total
liabilities, redeemable preferred stock and shareholders’ equity (deficit)
$
i675,314
$
i728,552
See
Notes to Condensed Consolidated Financial Statements.
4
Sonida Senior Living, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
i28,940
i27,811
Amortization
of deferred financing costs
i946
i1,121
Lease
expense adjustment
i7
(i256)
Loss
on disposition of assets, net
i—
i436
Write-off
of other assets
i535
i—
Unrealized
gain on interest rate cap, net
(i206)
i—
Loss
(gain) on extinguishment of debt
i641
(i168,292)
Provision
for bad debt
i908
i747
Non-cash
stock-based compensation expense
i3,479
i1,269
Changes
in operating assets and liabilities:
Accounts receivable, net
(i1,760)
i763
Prepaid
expenses and other
i6,755
i369
Other
assets, net
(i115)
(i95)
Accounts
payable and accrued expense
i566
i5,199
Federal
and state income taxes payable
(i423)
i211
Deferred
resident revenue
i414
(i502)
Other
current liabilities
i43
(i375)
Net
cash provided by (used in) operating activities
i2,903
(i7,162)
Cash
flows from investing activities:
Acquisition of new communities
(i12,342)
i—
Capital
expenditures
(i18,317)
(i7,096)
Net
cash used in investing activities
(i30,659)
(i7,096)
Cash
flows from financing activities:
Proceeds from notes payable
i80,000
i17,168
Repayments
of notes payable
(i98,535)
(i10,513)
Cash
payments for finance leases and financing obligations
(i81)
(i74)
Purchase
of common stock
(i263)
i—
Dividends
paid to Series A preferred stockholders
(i2,987)
i—
Purchase
of interest rate cap
(i258)
i—
Deferred
financing costs paid
(i2,180)
i—
Net
cash (used in) provided by financing activities
(i24,304)
i6,581
Decrease
in cash and cash equivalents and restricted cash
(i52,060)
(i7,677)
Cash,
cash equivalents, and restricted cash at beginning of period
i92,876
i30,504
Cash,
cash equivalents, and restricted cash at end of period
$
i40,816
$
i22,827
Supplemental
Disclosures of Cash Flow Information
Cash paid during the period for:
Interest
$
i21,536
$
i23,221
Income
taxes
$
i672
$
i309
See
Notes to Condensed Consolidated Financial Statements.
7
Sonida Senior Living, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. iBasis
of Presentation
Organization and Business
Sonida Senior Living, Inc., a Delaware corporation, is one of the leading owner-operators of senior housing communities in the United States in terms of resident capacity. As used herein, the “Company,”“we,”“us,” or “our” refers to Sonida Senior Living, Inc. and its subsidiaries. The Company owns, operates, develops, and manages senior housing communities throughout the United States. As of September 30, 2022, the Company operated i76
senior housing communities in i18 states with an aggregate capacity of approximately i8,000 residents, including
i62 senior housing communities that the Company owned and i14 communities that the
Company managed on behalf of third parties. The accompanying condensed consolidated financial statements include the financial statements of Sonida Senior Living, Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31,
2021. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our condensed consolidated financial position as of September 30, 2022 and December 31, 2021, and our condensed consolidated results of operations and cash
flows for the periods ended September 30, 2022 and 2021.
Reclassifications
Certain amounts previously reflected in the prior year condensed consolidated balance sheet have been reclassified to conform to our September 30, 2022 presentation. The consolidated balance sheet as of December 31, 2021 reflects reclassifying “operating lease right-of-use assets, net” to “other assets, net”, “property tax and insurance deposits” to “restricted cash” and lender reserves from “other assets, net” to “restricted cash.”“Current portion of lease liabilities” and “customer deposits” were
combined into “other current liabilities.”“Lease liabilities, net of current portion” has been reclassified as “other liabilities.” The consolidated statements of operations include the consolidation of “stock-based compensation expense” within “general and administrative expenses.” These reclassifications had no effect on the previously reported total assets or total liabilities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items related to the accounting for: income taxes, including assessments of probabilities of realization of income tax benefits; impairment of long-lived
assets, including applicable cash flow projections, holding periods and fair value evaluations; self-insurance liabilities and expense; stock-based compensation; and depreciation and amortization including determination of estimated useful lives. Actual results could differ from those estimates.
8
2. iSignificant
Accounting Policies and Recently Issued Accounting Standards
i
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The Company has deposits
in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal.
Restricted cash consists of reserve accounts for property insurance, real estate taxes, capital expenditures, and debt service required by certain loan agreements. In addition, restricted cash includes deposits required by certain counterparties as collateral pursuant to letters of credit which must remain so long as the letters of credit are outstanding, which are subject to renewal annually.
The statement of cash flows reflects cash flow changes and balances for cash, cash equivalents and restricted cash on an aggregated basis. iThe
following table reconciles cash, cash equivalents and restricted cash as reported on the condensed consolidated balance sheets to the aggregated amounts presented on the condensed consolidated statements of cash flows (in thousands):
Deposits
pursuant to outstanding letters of credit
i4,111
i4,882
Total
restricted cash
i13,770
i14,185
Total
cash, cash equivalents, and restricted cash
$
i40,816
$
i92,876
/i
Property
and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation period may need to be changed. The Company considers internal factors such as net operating losses along with external factors relating to each asset, including contract changes, local market developments, and other publicly available information to determine whether impairment indicators exist.
If
an indicator of impairment is identified, recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, we estimate fair value of the asset group and record an impairment loss when the carrying amount exceeds fair value. There were iiiino///
impairments of long-lived assets during the three or nine months ended September 30, 2022 or 2021.
In evaluating our long-lived assets for impairment, we undergo continuous evaluations of property level performance and real estate trends, and management makes several estimates and assumptions, including, but not limited to, the projected date of disposition, estimated sales price and future cash flows of each property during our estimated holding period. If our analysis or assumptions regarding the projected cash flows expected to result from the use and eventual disposition of our properties change, we incur additional costs and expenses during the holding period, or our expected hold periods change, we may incur future impairment losses.
Upon the acquisition of new communities accounted for as an acquisition
of an asset, we recognize the assets acquired and the liabilities assumed as of the acquisition date, measured at their relative fair values once we have determined the fair value of each of these assets and liabilities. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed consist of land, inclusive of associated rights, buildings, assumed debt, and identified intangible assets and liabilities.
/
9
i
Revenue
Recognition
Resident revenue primarily consists of fees for basic housing and certain support services provided to residents which are accounted for under GAAP in accordance with lease accounting standards. The Company's residency lease agreements are generally short term in nature, with durations of one year or less, and are typically terminable by either party, under certain circumstances, upon providing 30 days’ notice, unless state law provides otherwise. Resident leases do not contain purchase options or require significant assumptions or judgments. Resident fees are billed monthly in advance. Basic housing and certain support services revenue is recorded when services are rendered and amounts are billable to residents in the period in which the rental and other services are provided. At September 30,
2022 and December 31, 2021, the Company had contract liabilities for deferred fees paid by its residents prior to the month that housing and support services were to be provided totaling approximately $i2.6 million and $i2.3
million, respectively, which are included in deferred income.
Revenue for certain ancillary services is recognized as services are provided to customers and includes fees for certain services, such as medication management, daily living activities, beautician/barber, laundry, television, guest meals, pets, and parking, which are generally billed monthly in arrears and are included in resident revenue.
Other operating revenue generally includes nonrecurring state grants and is included in resident revenue as earned.
The Company's senior housing communities have residency agreements that generally require the resident to pay a community fee prior to moving into the community which are initially recorded as deferred revenue and subsequently amortized evenly
each month over the term of the agreement. At September 30, 2022 and December 31, 2021, the Company had contract liabilities for deferred community fees totaling approximately $i0.9 million and $i0.8
million, respectively, which are included in deferred income.
The Company has management agreements whereby it manages certain communities on behalf of third party owners under agreements that provide for management fee payments to the Company. The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company’s estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and
related costs incurred. Such revenue is included in “managed community reimbursement revenue.” The related costs are included in “managed community reimbursement expense.”Although these costs are funded by the community owners, accounting guidance requires the Company to report these fees on a gross basis as both revenues and expenses.
In April 2022 and January 2021, the Company accepted $i9.1 million
and $i8.7 million of cash, respectively, through grants from the Public Health and Social Services Emergency Fund’s (the “Provider Relief Fund”) Phases 4 and 3 General Distribution, respectively, which was expanded by the CARES Act to provide grants or other funding mechanisms to eligible healthcare providers for healthcare-related or lost revenues attributable to COVID-19. Both the Phase 4 and Phase 3 Provider Relief Funds were recorded as other income in the periods ended September 30, 2022 and 2021,
respectively. iiNo/ grants were received during the three month periods ended September
30, 2022 and September 30, 2021. The CARES Act Provider Relief Funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act.
/i
Credit Risk and Allowance for Doubtful Accounts
The
Company’s resident accounts receivable are generally due within i30 days after the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $i5.6
million and $i4.7 million at September 30, 2022, and December 31, 2021, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical
payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance, as necessary. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses.
/
i
Concentration
of Credit Risk and Business Risk
Substantially all of our revenues are derived from senior living communities we own and senior living communities that we manage. Senior living operations are particularly sensitive to adverse economic, social and competitive conditions and trends, including the effects of the COVID-19 pandemic, which has adversely affected, and may continue to adversely affect, our business, financial condition, and results of operations.
10
We have a concentration of owned properties operating in Texas (i16),
Indiana (i12), Ohio (i11) and Wisconsin (i8).
i
Self-Insurance
Liability Accruals
The Company offers full-time employees an option to participate in its health and dental plans. The Company is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of employee health and dental benefits, net of employee contributions, is shared between the corporate office and the senior housing communities based on the respective number of plan participants. Funds collected are used to pay the actual program costs, including estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by the plans. Claims are paid as they are submitted to the
Company’s third-party administrator. The Company records a liability for outstanding claims as well as claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health and dental insurance claims.
The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgment based on projected future events, including among other factors, potential settlements for pending claims, known incidents which may result in
claims, estimates of incurred but not yet reported claims, changes in insurance premiums and/or estimated litigation costs. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, it is possible the actual expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in the period in which they are determined.
i
Income Taxes
Income
taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. The effective tax rates for the three and nine months ended September 30, 2022 and 2021 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance.
Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which the
Company expects those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. As of December 31, 2021, the Company had a three-year cumulative net operating loss for its U.S. operations and is subject to annual operating loss utilization limits and accordingly, has provided a full valuation allowance on its U.S. and state net deferred tax assets. The valuation allowance reduces the
Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) to be realized. However, in the event that the Company were to ultimately determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period such determination was made. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.
The Company evaluates uncertain tax positions through consideration of accounting
and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide enhanced financial statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if management’s assessment is that such position is “more likely than not” to be upheld on audit based solely on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense.
i
Redeemable
Preferred Stock
The Company evaluates the classification of redeemable preferred stock based on the instrument’s specific terms and rights. Perpetual convertible preferred stock which can be converted to common stock outside of the Company’s control is classified as mezzanine equity, outside of the stockholders’ equity (deficit) section, and recorded at the maximum liquidation or conversion amount. During the year ended December 31, 2021, the Company issued i41,250
shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Dividends on redeemable preferred stock are recorded to retained earnings or additional paid-in capital if retained earnings is an accumulated deficit. If the Board does not declare a dividend in respect of any dividend payment date, the amount of such accrued and unpaid dividend is added to the liquidation preference and compounds quarterly.
/
11
During the three months ended September 30, 2022, the Board did not declare a dividend, and accordingly, $i1.1 million
was added to the liquidation preference, effectively increasing the carrying value of the redeemable preferred stock.
i
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with the fluctuations in interest rates. We may also be required to enter into interest rate derivative instruments in compliance with debt agreements. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not
enter into derivative financial instruments for trading or speculative purposes. We record all derivatives at fair value. As of September 30, 2022, our derivative instruments consisted of an interest rate cap that was not designated as a hedge instrument. Changes in fair value of undesignated hedge instruments are recorded in current period earnings in interest expense. We did not have any derivative instruments as of December 31, 2021.
i
Net
Income (Loss) Per Common Share
Basic income (loss) per share is computed by dividing net income (loss) less distributions to participating securities using the two-class method and preferred stock dividends, including redeemable preferred stock classified as mezzanine equity, divided by the weighted average number of shares of common stock outstanding. Under the two-class method, net income is reduced by the amount of any dividends earned during the period. The remaining earnings (undistributed earnings) are allocated based on the weighted-average shares outstanding of common stock and Series A Preferred Stock (on an if-converted basis) to the extent that each preferred security may share in earnings as if all of the earnings for the period had been distributed. The total earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per
share. The two-class method is not applicable during periods with a net loss, as the holders of the Series A Preferred Stock have no obligation to fund losses.
Diluted net income (loss) per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of instruments convertible into common stock, stock options, stock-based compensation awards and warrants. The Company analyzes the potential dilutive effect of convertible instruments under the “if-converted” method, in which it is assumed that the instruments convert into common stock at the beginning of the period or when issued, if later. The
Company reports the more dilutive of the approaches (two class or “if-converted”) as its diluted net income per share during the period. Dilutive securities are excluded from the calculation of diluted income per share if the effect would be anti-dilutive.
i
Segment Reporting
The Company evaluates the performance and allocates resources of its senior living communities based on current operations and market assessments
on a property-by-property basis. The Company does not have a concentration of operations geographically or by product or service as its management functions are integrated at the property level. The Company has determined that its operating units meet the criteria in ASC Topic 280, Segment Reporting, to be aggregated into one reporting segment. As such, the Company operates in ione
segment.
/
i
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss”
methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU 2016-13 replaces the current incurred loss methodology non-lease revenue credit losses and removes the thresholds that companies apply to measure credit losses on financial statements measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. For smaller reporting companies, ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of this guidance will have on its condensed consolidated
financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”). The provisions of this standard are available for election through December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided
by this update.
Assets
under financing leases and leasehold improvements (1)
i2,311
i2,276
Construction
in progress
i1,289
i392
Total
property and equipment
i967,241
i937,182
Less
accumulated depreciation and amortization
(i344,488)
(i315,983)
Total
property and equipment, net
$
i622,753
$
i621,199
__________
(1)
Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. Assets under financing leases and leasehold improvements include $i0.5 million and $i0.3 million
of financing lease right-of-use assets as of September 30, 2022 and December 31, 2021, respectively.
/
On February 1, 2022, the Company completed the acquisition of itwo
senior living communities located in Indiana for a combined purchase price of $i12.3 million. The communities consist of a total of i157 independent
living units. The acquisition price was funded with cash on hand. The acquired assets did not meet the definition of a business and, as such, the transaction was accounted for as an asset acquisition pursuant to the guidance in subsection 805-50 of Accounting Standards Codification ("ASC") 805, Business Combinations.
(1) Includes
accrued interest related to the remaining two Fannie Mae communities totaling $i3.7 million and $i2.7 million as of September 30, 2022 and December
31, 2021, respectively. See “Transactions Involving Certain Fannie Mae Loans” disclosure below.
13
5. iNotes Payable
i
Notes
payable consists of the following (in thousands):
The
following schedule summarizing our notes payable as of September 30, 2022 (in thousands):
Principal payments due in:
2022 (1)
$
i35,813
2023
i15,054
2024
i152,155
2025
i114,285
2026
i155,919
Thereafter
i198,145
Total
notes payable, excluding deferred financing costs
$
i671,371
__________
(1) See “Transactions Involving Certain Fannie Mae Loans” disclosure below.
(2) See Note 12 for interest rate cap agreements on variable rate mortgage notes payable.
/
As
of September 30, 2022, our fixed rate mortgage notes bear interest rates ranging from i3.6% to i6.3%. Our variable rate
mortgage notes are based on either one-month LIBOR or the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin. As of September 30, 2022, one-month LIBOR and one-month SOFR were i3.2% and i3.0%,
respectively, and the applicable margins were i2.14% and i3.50%, respectively.
As of
September 30, 2022, we had property and equipment with a net carrying value of $i599.2 million that is secured by outstanding notes payable.
2022 Mortgage Refinance
In March 2022, the Company completed the refinancing of certain existing mortgage debt (“Refinance Facility”) for iten
of its communities. The Refinance Facility includes an initial term loan of $i80 million. In addition, $i10 million
is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $i40 million may be available to fund future growth initiatives. In addition, the Company provided a limited payment guaranty (“Limited Payment Guaranty”) of i33%,
that reduces to i25% and then to i10%,
of the then outstanding balance of the Refinance Facility based upon achieving certain financial covenants and then maintained over the life of the loan. As defined and required in the Limited Payment Guaranty, the Company is required to maintain certain covenants including maintaining a Tangible Net Worth of $i150 million and Liquid Assets of at least $i13 million
which is inclusive of a $i1.5 million debt service reserve provided by the Company at the closing of the Refinance Facility. The debt service reserve may be released upon terms described in the “Loan Agreement” and is included in restricted cash.
The Refinance Facility also requires the financial performance of the iten
communities to meet certain financial covenants, including a minimum debt service coverage ratio and a minimum debt yield (as defined in the Loan Agreement) with a first
14
measurement date as of June 30, 2022and quarterly measurement dates thereafter. As of September 30, 2022, we were in compliance with the financial covenants. We can provide no assurance that any financial covenants will be met in the future.
The Refinancing Facility requires that the Company purchase and maintain an interest
rate cap facility during the term of the Refinancing Facility. The Company is in process of obtaining the interest rate cap facility in compliance with the lender’s requirements.
In conjunction with the Refinancing Facility, the Company incurred costs of $i2.2 million in March 2022. These costs, net of amortization of $i0.3 million,
are included in deferred financing costs at September 30, 2022.
The financing transaction generated a loss on refinancing of notes payable of $i0.6 million which is included in loss on extinguishment of debt for the nine months ended September 30, 2022.
Transactions Involving Certain Fannie Mae Loans
The
Coronavirus Aid, Relief and Economic Security (“CARES”) Act, among other things, permitted borrowers with mortgages from Government Sponsored Enterprises who experienced a financial hardship related to the COVID-19 pandemic to obtain forbearance of their loans for up to 90 days. During 2020, the Company entered into several loan forbearance agreements with the Federal National Mortgage Association (“Fannie Mae”). In July 2020, the Company elected not to pay $i3.8
million on the loans for i18 properties as of that date as it initiated a process intended to transfer the operations and ownership of such properties to Fannie Mae. Therefore, the Company was in default on such loans.
As a result of the events of default and receivership order obtained by Fannie Mae, the Company discontinued
recognizing revenues and expenses related to the i18 properties effective August 1, 2020, which was the date of default. In addition, the Company concluded that it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, that all amounts held in escrow by Fannie Mae were forfeited, and that the Company no longer had control of the properties
in accordance with GAAP. Accordingly, the Company derecognized the net carrying value of the properties and related assets from the financial statements and recorded a loss from the forbearance. The Company continues to recognize the related debt and liabilities until the debts are formally released. When these debts are formally released, the net carrying value of the debts is derecognized and a gain on extinguishment of debt is recognized. During the three and nine months ended September 30, 2021, Fannie Mae completed the transition of legal ownership of ifive
and ifourteen, cumulatively, of the Company's properties, respectively, and the Company recorded a gain on extinguishment of this debt for such periods of $i54.1 million
and $i168.3 million, respectively.
As of September 30, 2022, itwo
properties remain for which the legal ownership has not been transferred back to Fannie Mae. At both September 30, 2022 and December 31, 2021, the Company included $ii31.8/ million
in outstanding debt in current portion of notes payable, net of deferred financing costs of $ii0.2/ million.
As September 30, 2022 and December 31, 2021, accrued interest related to the remaining itwo properties was $i3.7 million
and $i2.7 million, respectively. As of September 30, 2022 and December 31, 2021, the Company did not manage these properties (or any properties) on behalf of Fannie Mae. Except for the non-compliance with Fannie Mae mortgages for the itwo
remaining properties expected to transition back to Fannie Mae, as noted above, the Company was in compliance with all other aspects of its outstanding indebtedness at September 30, 2022.
6. iRedeemable Preferred Stock
In
November 2021, the Company issued i41,250 shares of Series A Preferred Stock. The Series A Preferred Stock is convertible outside of the Company's control and in accordance with GAAP is classified as mezzanine equity, outside the stockholders’ equity (deficit) section, on our condensed consolidated balance sheets. The Series A Preferred Stock was initially recorded at fair value upon issuance in 2021,
net of issuance costs. The holders of Series A Preferred Stock are entitled to vote with the holders of common stock on all matters submitted to a vote of stockholders of the Company. It is deemed probable that the Series A Preferred Stock could be redeemed for cash, and as such, the Series A Preferred Stock is required to be remeasured and adjusted to its maximum redemption value at the end of each reporting period. However, to the extent that the maximum redemption value of the Series A Preferred Stock does not exceed the fair value of the shares at the date of issuance, the shares are not adjusted below the fair value at the date of issuance. As of September 30, 2022 and December 31, 2021, the Series A Preferred Stock is carried at the maximum redemption value. The Series A Preferred
Stock does not have a maturity date and therefore is considered as perpetual.
The Series A Preferred Stock has an i11% annual dividend calculated on the original investment of approximately $i41.3 million
accrued quarterly in arrears and compounded. Dividends are cumulative, and any declaration of dividends is at the discretion of the Company’s Board of Directors. If the Board does not declare a dividend in respect of any dividend payment date, the
15
amount of such accrued and unpaid dividend is added to the liquidation preference and compounds quarterly thereafter. During the three months ended September 30, 2022, the Board did not declare a dividend, and accordingly, $i1.1 million
was added to the liquidation preference of the Series A Preferred Stock, effectively increasing the carrying value of the Series A Preferred Stock. On June 8, 2022, the Company declared a $i1.1 million cash dividend on the Series A Preferred Stock, which was paid in June 2022. On March 31, 2022, the
Company declared a $i1.1 million cash dividend on the Series A Preferred Stock which was included in accounts payable and accrued expense as of March 31, 2022, and paid in April 2022. There were ino
corresponding amounts for the three or nine months ended September 30, 2021, as there were ino shares of Series A Preferred Stock outstanding during such periods.
7. iRevenue
i
Revenue
for the three and nine months ended September 30, 2022 and 2021 is comprised of the following components (in thousands):
(1) Other
operating revenue consists of Provider Relief Funds received from state departments due to financial distress impacts of COVID-19. The Company intends to pursue additional funding that may become available in the future, but there is no guarantee of qualifying for, or receiving, any additional relief funds in the future.
Community fees, ancillary services, management fees, and community reimbursement revenue represent revenue from contracts with customers in accordance with GAAP.
8. iStock-Based
Compensation
During the three months ended September 30, 2022, the Company granted restricted stock units and restricted stock awards under the Company’s 2019 Omnibus Incentive Plan. iGrants of stock units and awards were as follows:
The
Company recognized $(i0.6) million and $i0.6 million in stock-based compensation expense for the three months ended September 30,
2022 and 2021, respectively. The negative expense for the three months ended September 30, 2022 is due to forfeiture credits as a result of executive personnel changes in September 2022. The Company recognized $i3.5 million and $i1.3
million in stock-based compensation expense for the nine months ended September 30, 2022 and 2021, respectively.
9.iCommitments and Contingencies
As of September 30, 2022, we had
contractual commitments of $i7.0 million related to future renovations and technology enhancements to our communities. We expect these amounts to be substantially expended during 2023.
The Company has claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to deductibles, normal reservations of rights by the insurance companies and
possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal counsel, should not have a material impact on the condensed consolidated financial statements of the Company.
16
10. iRelated
Party Transactions
As of September 30, 2022, affiliates of Conversant Capital LLC owned approximately i57.9% of our outstanding shares of common stock (inclusive of common stock issuable upon conversion of outstanding Series A Preferred Stock and outstanding warrants). Series A Preferred Stock dividends recognized in additional paid-in capital were $i1.1 million
and $i3.4 million for the three and nine months ended September 30, 2022, respectively. The $i1.1 million
recognized for the three months ended September 30, 2022 was not paid in cash, but was instead added to the liquidation preference of the Series A Preferred Stock, effectively increasing the carrying value of the Series A Preferred Stock. Dividends of $i3.0 million were paid on the Series A Preferred Stock during the nine months ended September 30, 2022, which included $i2.3 million
of dividends declared in 2022, and $i0.7 million of dividends declared in 2021. There were iino/
corresponding amounts for the three or nine months ended September 30, 2021 as there were ino shares of Series A Preferred Stock outstanding during such period.
11. iFair
Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company uses interest rate cap arrangements with financial institutions to manage exposure to interest rate changes for loans that utilize floating interest rates. As of September 30, 2022, we had an interest rate cap with an aggregate notional value of $i50.3 million
that was entered into on March 1, 2022. The fair value of this interest rate cap as of September 30, 2022 was $i0.5 million (See Note 12, Derivatives and Hedging), and was determined using significant observable inputs (Level 2), including quantitative models that
utilize multiple market inputs to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Financial Instruments Not Reported at Fair Value
i
For those financial instruments not carried at fair value, the carrying amount and estimated fair values of our financial assets and liabilities were as follows at September 30,
2022 and December 31, 2021 (in thousands):
We
believe the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities approximate fair value due to their short-term nature.
The fair value of notes payable, excluding deferred financing costs, is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements, which represent Level 2 inputs as defined in ASC 820, Fair Value Measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.
During the year ended December, 31, 2021, the Company recorded non-cash impairment charges of $i6.5 million to property and equipment, net. The fair value of the impaired assets was $i14.0 million
at December 31, 2021. The fair value of the property and equipment, net was primarily determined utilizing an income capitalization approach considering stabilized facility operating income and market capitalization rates of i8.25%. There were iiiino///
impairment losses for the three and nine months ended September 30, 2022 and September 30, 2021.
12. iDerivatives and Hedging
The Company uses derivatives as part of our overall
strategy to manage our exposure to market risks associated with the fluctuations in interest rates. We may also be required to enter into interest rate derivative instruments in compliance with debt agreements. We do not enter into derivative financial instruments for trading or speculative purposes.
17
On March 1, 2022, the Company entered into an interest rate cap transaction for an aggregate notional amount of $i50.3 million
to reduce exposure to interest rate fluctuations associated with a portion of our variable mortgage notes payable. The interest rate cap agreement has a i24-month term and effectively caps LIBOR at i4.00% from March 1,
2022 through March 1, 2024 with respect to the portion of our floating rate indebtedness. In the event LIBOR is less than the capped rate, we will pay interest at the lower LIBOR rate. In the event LIBOR is higher than the capped rate, we will pay interest at the capped rate of 4.00%. The interest rate cap is not designated as a cash flow hedge under ASC 815-20, Derivatives - Hedging, therefore all changes in the fair value of the instrument are captured as a component of interest expense in the condensed consolidated statements of operations.
i
The
following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets (in thousands):
Gain
on derivative not designated as hedge included in interest expense
i251
i—
i206
i—
/
13.
iSubsequent Event
On August 9, 2022, the Company received a notice of intent from Welltower Victory II TRS LLC (“Welltower”) to transition management of its ifour
properties that were under an interim management agreement. The transition was completed on October 20, 2022.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the risks, uncertainties and other factors described under “Cautionary Note Regarding Forward-Looking Statements” above in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on April 15, 2022. Actual results may differ materially from those projected in such statements as a result of such risks, uncertainties and other factors.
Critical Accounting Policies and Estimates
For
a discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes to our critical accounting policies since December 31, 2021.
Overview
The following discussion and analysis addresses (i) the Company’s results of operations for the three and nine months ended September 30, 2022 and 2021, and (ii) liquidity and capital resources of the Company.
The
Company is one of the leading owner-operators of senior housing communities in the United States. The Company’s operating strategy is to provide value to its senior living residents by offering quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company provides senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet each resident’s needs as they change over time. This continuum
of care, which integrates independent living, assisted living, and memory care which may be bridged by home care through independent home care agencies, sustains our residents’ autonomy and independence based on their physical and mental abilities.
As of September 30, 2022, the Company operated 76 senior housing communities in 18 states with an aggregate capacity of approximately 8,000 residents, including 62 owned senior housing communities and 14 communities that we manage on behalf of third parties.
COVID-19 Pandemic
The COVID-19 pandemic significantly disrupted the nation’s economy,
the senior living industry and the Company’s business beginning in March 2020. The COVID-19 pandemic caused a decline in the occupancy levels at the Company’s communities, which negatively impacted the Company’s revenues and operating results, that depend significantly on such occupancy levels. In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company had previously restricted or limited access to its communities, including limitations on in-person prospective resident
tours and, in certain cases, new resident admissions. As of March 31, 2022, all of the Company's senior living communities were open for new resident move-ins, and the Company has continued to make progress to rebuild occupancy lost during the COVID-19 pandemic. Although vaccines are now widely available, we cannot predict the duration of the pandemic or its ongoing impact on our business. If the COVID-19 pandemic worsens, including the transmission of highly contagious variants of the COVID-19 virus, the Company may have to impose or revert to restricted or limited access to its communities.
The
COVID-19 pandemic has required the Company to incur significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company’s residents and employees, labor and specialized disinfecting and cleaning services, which has increased the costs of caring for the residents and resulted in reduced occupancy at such communities. During the three month periods ended September 30, 2022 and 2021, the Company incurred $0.1 million and
$0.4 million, respectively, in direct costs related to the COVID-19 pandemic. During the nine months ended September 30, 2022 and 2021, the Company incurred $0.4 million and $1.7 million, respectively, in direct costs related to the COVID-19 pandemic.
In April 2022 and January 2021, the Company accepted $9.1 million and $8.7 million of cash, respectively, through grants from the Public Health and Social Services Emergency Fund’s (the “Provider Relief Fund”) Phases 4 and 3 General Distribution,
19
respectively,
which was expanded by the CARES Act to provide grants or other funding mechanism to eligible healthcare providers for healthcare-related or lost revenues attributable to COVID-19. Both the Phase 4 and Phase 3 Provider Relief Funds were recorded as other income in the periods ended June 30, 2022 and 2021, respectively. No grants were received during the three months ended September 30, 2022 and September 30, 2021. The CARES Act Provider Relief Funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act.
The Company elected to utilize the CARES Act payroll tax deferral program to delay payment of
a portion of its payroll taxes incurred from April 2020 through December 2020. The Company repaid one-half of the deferral amount in December 2021 and the other half will become due on December 31, 2022. At September 30, 2022 and December 31, 2021, the Company had $3.7 million in deferred payroll taxes, which was included in accrued expenses.
CARES Act Provider Relief Funds are subject to the terms and conditions of the program, including stringent restrictions that funds may only be used to reimburse COVID-19 related expenses or lost revenue that are attributable to COVID-19 and have not been reimbursed
from other sources or that other sources are not obligated to reimburse.While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.
Significant Financial and Operational Highlights
Operations
Weighted average occupancy for the three months ended September 30, 2022 and 2021 for the 60 communities owned by the Company during both
periods was 83.7% and 81.0%, respectively, reflecting continued occupancy recovery. The average monthly rental rate for these communities for the three months ended September 30, 2022 was higher by 290 basis points when compared to the three months ended September 30, 2021.
Weighted average occupancy for the nine months ended September 30, 2022 and 2021 for the 60 communities owned by the Company during both periods was 83.1% and 78.2%, respectively, reflecting continued occupancy recovery. The average monthly rental rate for these communities for
the nine months endedSeptember 30, 2022 was higher by 340 basis points when compared to the nine months endedSeptember 30, 2021.
During the three and nine months ended September 30, 2022, the Company continued to be impacted by the senior living industry's workforce challenges related to limited staff availability, which required the use of overtime, shift bonuses and contract labor to properly support our senior living
communities and residents.
2022 Mortgage Refinance
In March 2022, the Company completed the refinancing of certain existing mortgage debt (“Refinance Facility”) for ten of its communities. The Refinance Facility includes an initial term loan of $80 million. In addition, $10 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available to fund future growth initiatives. In addition, the Company provided a limited payment guaranty (“Limited Payment Guaranty”) of 33%, that reduces to 25% and then to 10%, of the then outstanding balance of
the Refinance Facility if the Company achieves certain financial covenants maintained over the life of the loan. As defined and required in the Limited Payment Guaranty, the Company is required to maintain certain covenants including maintaining Tangible Net Worth of $150 million and Liquid Assets of at least $13 million, which is inclusive of a $1.5 million debt service reserve provided by the Company at the closing of the Refinance Facility. The debt services reserve may be released upon terms described in the Loan Agreement and is included in restricted cash.
The Refinance Facility also requires the financial performance of the ten communities to meet certain financial
covenants, including a minimum debt service coverage ratio and a minimum debt yield (as defined in the Loan Agreement) with a first measurement date as of June 30, 2022 and quarterly measurement dates thereafter. As of September 30, 2022, the Company was in compliance with such financial covenants. We can provide no assurance that financial covenants will be met in the future.
The Refinance Facility carries an initial interest rate of one-month SOFR plus 3.50%, subject to a SOFR floor of 0.25% and a lower margin spread of 3.25% or 3.00% if the Company achieves and maintains certain financial covenants. The Refinancing Facility requires that the
Company purchase and maintain an interest rate cap facility during the term of the Refinancing Facility. The Company is in process of obtaining the interest rate cap facility in compliance with the lender’s requirement.
Resident
revenue for the three months ended September 30, 2022 was $52.5 million as compared to $49.0 million for the three months ended September 30, 2021,an increase of $3.5 million, or 7.2%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.
Management fee revenue for the three months ended September 30, 2022 decreased by $0.4 million as compared to the three months ended September 30, 2021, primarily as a result of managing fewer communities in 2022.
Managed community reimbursement revenue for the three months ended September 30,
2022 was $7.7 million as compared to $7.9 million for the three months ended September 30, 2021, representing a decrease of $0.2 million. The decrease was primarily a result of transitioning five Fannie Mae communities to other operators during the three-month period ended September 30, 2021.
Expenses
Operating expenses for the three months ended September 30, 2022 were $43.1 million as compared to $40.7 million for the three months ended September 30, 2021, an increase of $2.4 million or 5.9%. The increase is primarily due to a $2.6 million increase in labor and employee-related expenses, a $0.4
million increase in utility costs, and a $0.3 million increase in food expenses, partially offset by the $1.0 million energy provider settlement from winter storm Uri expensed in Q3 2021.
General and administrative expenses for the three months ended September 30, 2022 were $5.9 million as compared to $7.5 million for the three months ended September 30, 2021, representing a decrease of $1.6 million. This decrease is primarily due to a $1.2 million decrease in stock-based compensation expense from prior year due to forfeiture credits in connection with executive personnel changes in September 2022, and a $0.4 million net decrease in recurring corporate expenses.
Managed community reimbursement expense for the three months ended September 30,
2022 was $7.7 million as compared to $7.9 million for the three months ended September 30, 2021, representing a decrease of $0.2 million. The decrease was primarily a result of transitioning of five Fannie Mae communities to other operators during the three-month period ended September 30, 2021.
Interest expense for the three months ended September 30, 2022 was $8.2 million as compared to $9.7 million for the three months ended September 30, 2021, representing a decrease of $1.5 million due to lower overall borrowings in 2022, partially offset by increased interest rates associated with the Company’s variable rate mortgages.
Gain
on extinguishment of debt was $54.1 million for the three months ended September 30, 2021. The 2021 gain related to the derecognition of notes payable and liabilities as a result of the transition of legal ownership of five communities to Fannie Mae, the holder of the related non-recourse debt.
Resident revenue for the nine months ended September 30,
2022 was $155.3 million as compared to $140.8 million for the nine months ended September 30, 2021,an increase of $14.5 million, or 10.3%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.
Management fee revenue for the nine months ended September 30, 2022 decreased by $1.2 million as compared to the nine months ended September 30, 2021, primarily as a result of managing fewer communities in 2022.
Managed community reimbursement revenue for the nine months ended September 30, 2022 was $21.8 million as compared to $33.3 million for
the nine months ended September 30, 2021, a decrease of $11.5 million. The decrease was primarily a result of transitioning of 14 Fannie Mae communities to other operators during the nine-month period ended September 30, 2021.
21
Expenses
Operating expenses for the nine months ended September 30, 2022 were $126.6 million as compared to $115.0 million for the nine months ended September 30, 2021, an increase of $11.6 million or 10.1%. The increase is primarily due to a
$9.2 million increase in labor and employee-related expenses including premium labor, a $1.0 million increase in food costs, and a $1.4 million increase in other operating expenses.
General and administrative expenses for the nine months ended September 30, 2022 were $23.6 million as compared to $24.2 million for the nine months ended September 30, 2021, a decrease of $0.6 million. This decrease is primarily due to a $2.2 million decrease in bonuses and a $1.9 million decrease in payroll and employee-related expenses, partially offset by a $2.2 million increase in stock-based compensation expense and a $1.3 million increase in other expenses.
Managed community reimbursement expense for the nine months ended September 30, 2022 was $21.8
million as compared to $33.3 million for the nine months ended September 30, 2021, a decrease of $11.5 million. The decrease was primarily a result of transitioning 14 Fannie Mae communities to other operators during the nine-month period ended September 30, 2021.
Interest expense for the nine months ended September 30, 2022 was $23.7 million as compared to $28.6 million for the nine months ended September 30, 2021, a decrease of $4.9 million, primarily due to lower overall borrowings in 2022, partially offset by increased interest rates associated with the Company’s variable rate mortgages.
Loss
on extinguishment of debt for the nine months ended September 30, 2022 was $0.6 million as compared to a gain on extinguishment of debt of $168.3 million for the nine months ended September 30, 2021, a decrease of $168.9 million. The 2022 loss relates to the refinancing of debt in Q1 2022. The 2021 gain related to the derecognition of notes payable and liabilities as a result of transition of legal ownership of fourteen communities to Fannie Mae, the holder of the related non-recourse debt.
Other income for the nine months ended September 30, 2022 and for the nine months ended September 30, 2021was $8.7 million. Both current year and
prior year periods include cash received for CARES Act funding for healthcare-related expenses or lost revenues attributable to COVID-19.
Net cash provided by operating activities for the nine months ended September 30, 2022 was $2.9 million as compared to net cash used in operating activities of $7.2 million for the
nine months ended September 30, 2021, an increase of $10.1 million primarily due to the timing of settlements of our receivables, current assets, and payables, as well as improved operations.
Investing activities
Net cash used in investing activities for the nine months ended September 30, 2022 was $30.7 million as compared to $7.1 million for the nine months ended September 30, 2021primarily due to increase in ongoing capital improvements and renovation projects at existing communities totaling $18.3 million, and the acquisition of two new communities in Q1 2022 for
$12.3 million.
Financing activities
Net cash used in financing activities for the nine months ended September 30, 2022 was $24.3 million and primarily results from repayments of notes payable and deferred financing costs paid, net of proceeds from notes payable, of $20.7 million, related to our 2022 debt refinancing and $3.0 million of dividends paid to Series A Preferred Stockholders. The net cash provided by financing activities for the nine months ended September 30, 2021 was $6.6 million and primarily results from proceeds from notes payable, net of repayments.
Liquidity
and Capital Resources
Short-term liquidity
Our primary source of short-term liquidity is our cash and cash equivalents and results from operations. As of September 30, 2022, we had $27.0 million of cash and cash equivalents excluding our restricted cash balance of $13.8 million. Due to the continued effects of the COVID-19 pandemic, our operations have not yet returned to 2019, pre-pandemic levels. We currently anticipate cash flow from operations will continue to be impacted for at least the near-term. Our known liquidity requirements
22
primarily consist of funds necessary to pay for operating
expenses related to our communities and other expenditures, including general and administrative expenses, interest and scheduled principal payments on our debt and dividends on our convertible preferred stock.
The Refinancing Facility we entered into in March 2022 contains financial covenants that were effective beginning June 30, 2022 and quarterly thereafter. As of September 30, 2022, the Company was in compliance with such covenants. There is no assurance that the Company will be able to meet any financial covenant requirements in the future. One of these financial covenants is that we are required to maintain cash and cash equivalents of no less than
$13 million, inclusive of a $1.5 million lender service reserve, which is included in “restricted cash”. In connection with the Refinancing Facility, the Company is in the process of obtaining an interest rate cap to hedge against further exposure in a rising interest rate environment.
Additional short-term sources of liquidity include grants under the CARES Act. As described above, these grants are available to reimburse the Company for COVID-19 related expenses. In April 2022, we received a grant of $9.1 million, where we determined we met the CARES Act requirements which allowed the Company to retain the funds and not repay the grant. There is no assurance that
we will meet such requirements or qualify for, or receive, any additional CARES Act funds in the future, and we do not consider this to be a significant source of liquidity in the future. In addition, the Company has historically received and is eligible for funding in connection with various state programs.
Long-term liquidity
The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt financing or refinancings, purchases and sales of assets, and other transactions. If capital were obtained through the issuance of Company equity, the issuance of Company securities would dilute the ownership
of our existing stockholders and any newly issued securities may have rights, preferences, and/or privileges senior to those of our common stock. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company’s short and long-term capital requirements.
In connection with the refinancing transaction in March 2022, the Company was able to refinance certain debt due during 2022, 2023 and early 2024 with longer-term financing
that matures in 2026. In addition, $10.0 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available to fund future growth initiatives. There is no assurance that we will be able to meet these financial covenant requirements.
As discussed in “Note 5. Notes Payable” of the condensed consolidated financial statements, the Company has scheduled maturities of debt coming due in the next five years and thereafter. The Company currently expects to be able to meet those maturities from cash on hand,future
operations and future refinancings. The Refinance Facility matures in four years with an optional one-year extension if certain financial performance metrics and other customary conditions are maintained. There is no assurance that we will be able to meet such conditions or source refinancings at the time any of our debt matures or whether the terms of such refinancings will be comparable or satisfactory compared to our current loans.
The Company has unencumbered properties with a net book value of $23.6 million as of September 30, 2022, which could provide a source of liquidity from new debt. In the near term, the Company intends to finance
the two Indiana communities purchased in Q1 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Effectiveness of Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),
has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls
and procedures are also designed to ensure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.
23
Based upon the controls evaluation, procedures evaluation and the material weakness described in our Annual Report on Form 10-K, which was filed with the SEC on April 15, 2022, the Company’s CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company’s disclosure controls and procedures are ineffective.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation Plan
As disclosed in previous filings for the quarters
ended June 30, 2021 and September 30, 2021, for the year ended December 31, 2021, and for the quarters ended March 31, 2022 and June 30, 2022, we identified a material weakness in our internal control over financial reporting. Due to challenges in maintaining necessary accounting staffing levels, this material weakness has not been remediated as of September 30, 2022, as disclosed above.
We have developed and initiated a plan for remediation of the material weakness, including developing and maintaining appropriate management review and process level controls. We will continue to monitor the effectiveness
of our remediation measures in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures, and we will make any changes to the design of our plan and take such other actions that we deem appropriate given the circumstances. Based on the current remediation plan, we expect to have implemented the remediation process, including developing and maintaining appropriate management review and process level controls, by the end of the fourth quarter of 2022. Control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively.
24
Part
II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to normal reservations of rights by the insurance companies and possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal counsel, should not have a material effect on the condensed consolidated financial statements of the Company if determined adversely to the
Company.
Item 1A. Risk Factors.
There have been no material changes to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following information is provided pursuant to Item 703 of Regulation S-K. The information
set forth in the table below reflects the common stock purchased by the Company for the quarter ended September 30, 2022:
Period
Total
Number
of
Shares
Purchased (1)
Average Price Paid per Share
Total Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(1) Does
not include shares withheld to satisfy tax liabilities due upon the vesting of restricted stock, all of which have been reported in Form 4 filings relating to the Company. The average price paid per share for such share withholding is based on the closing price per share on the vesting date of the restricted stock or, if such date is not a trading day, the trading day immediately prior to such vesting date.
On January 22, 2009, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $10.0 million of the
Company’s common stock. On January 14, 2016, the Company announced that its board of directors approved a continuation of the share repurchase program. The repurchase program does not obligate the Company to acquire any particular amount of common stock and the share repurchase authorization has no stated expiration date. All shares that have been acquired by the Company under this program were purchased in open-market transactions. The Company may evaluate whether to acquire additional shares of common stock under this program at its discretion.
Item 3.
Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
25
Item 6. Exhibits
The
following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.
The following materials
from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Shareholders’ Equity (Deficit) and (v) related notes.
104*
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
