SONIDA SENIOR LIVING, INC. Certain information contained in this report 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, which can be identified by the use of forward-looking terminology such as "may," "will," "would," "intend," "could," "believe," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. Examples of forward-looking statements, include, 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. 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, but not limited to, the Company's ability to generate sufficient cash flows from operations, additional proceeds from debt refinancings, and proceeds from the sale of assets to satisfy its short- and long-term debt and lease obligations and to fund the Company's capital improvement projects to expand, redevelop, and/or reposition its senior living communities; 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 and lease agreements, including certain financial covenants and the terms and conditions of its recent forbearance agreements, 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 risks related to an epidemic, pandemic, or other health crisis, such as the recent outbreak of the novel coronavirus (COVID-19); the risk of oversupply and increased competition in the markets which the Company operates; the risk of increased competition for skilled workers due to wage pressure and changes in regulatory requirements; the departure of the Company's key officers and personnel; the cost and difficulty of complying with applicable licensure, legislative oversight, or regulatory changes; the risks associated with a decline in economic conditions generally; the adequacy and continued availability of the Company's insurance policies and the Company's ability to recover any losses it sustains under such policies; changes in accounting principles and interpretations; and the other risks and factors identified from time to time in the Company's reports filed with theSEC .
Overview
The following discussion and analysis addresses (i) the Company's results of operations on a historical consolidated basis for the years endedDecember 31, 2019 and 2018, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company's historical consolidated financial statements and the selected financial data contained elsewhere in this report. The Company is one of the largest operators of senior housing communities inthe United States . The Company's operating strategy is to provide value to its senior living residents by providing 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 its residents' needs as they change over time. This continuum of care, which integrates independent living, assisted living, and memory care, and is bridged by home care through independent home care agencies, sustains residents' autonomy and independence based on their physical and mental abilities. As ofDecember 31, 2019 , the Company operated 126 senior housing communities in 23 states with an aggregate capacity of approximately 16,000 residents, including 80 senior housing communities that the Company owned and 46 senior housing communities that the Company leased.
Significant Financial and Operational Highlights
The Company primarily derives its revenue by providing senior living housing and services to the 75+ population. When comparing fiscal 2019 to fiscal 2018, the Company generated total revenues of approximately$447.1 million compared to total revenues of approximately$460.0 million , respectively, representing a decrease of approximately$12.9 million , or 2.8%. Our resident revenue was positively impacted by the lease-up of our two communities impacted by the aftermath of Hurricane Harvey. These communities were closed beginning in the third quarter of 2017 for physical repairs. The Company began accepting residents during the third quarter of fiscal 2018, which resulted in an increase of approximately$3.2 million in our resident revenue during fiscal 2019 when compared to fiscal 2018. However, the increase in resident revenue from the two properties impacted by Hurricane Harvey was fully offset by a 32 -------------------------------------------------------------------------------- decrease in resident revenue at the Company's other communities of approximately$16.1 million , which was primarily due to a 2.4% decrease in average financial occupancies. Excluding the two senior housing communities impacted by Hurricane Harvey and the three communities sold during 2019, the weighted average financial occupancy rate for fiscal 2019 and 2018 was 82.6% and 85.0%, respectively. Although our occupancies declined, we achieved a 0.2% increase in average monthly rental rates when comparing fiscal 2019 to fiscal 2018. The increase in average monthly rental rates during fiscal 2019 was primarily the result of annual rent increases for our existing residents and the capital improvements we have invested in our communities for unit conversions which enable us to provide a broader range of senior living services at higher levels of care. OnDecember 23, 2019 , the Company obtained$31.5 million of mortgage debt fromFifth Third Bank on itsAutumn Glen andCottonwood Village senior housing communities. The new mortgage loan is interest-only and has a two-year term and an initial variable interest rate of LIBOR plus 3.25%. The Company incurred approximately$0.6 million in deferred financing costs related to this loan, which are being amortized over the term of the loan. On the same date, the Company amended and repaid$24.5 million in principal on its interest-only mortgage loan withBBVA USA , secured by the Company'sCottonwood Village ,Georgetowne Place , Harrison atEagle Valley , andRose Arbor communities. As a result of the amendment,BBVA USA released theCottonwood Village assets from collateral for the mortgage and extended the maturity date fromJuly 11, 2020 toDecember 10, 2021 . The Company had previously exercised its option to extend such mortgage loan fromMay 11, 2020 toJuly 11, 2020 . The amended mortgage has an interest-only variable rate of LIBOR plus 4.5%. As mentioned above, the Company had two of its senior housing communities located in southeastTexas impacted by Hurricane Harvey during the third quarter of fiscal 2017. We maintain insurance coverage on these communities which includes damage caused by flooding. The insurance claim for this incident required a deductible of$100,000 that was expensed as a component of operating expenses in the Company's Consolidated Statement of Operations and Comprehensive Loss in the third quarter of fiscal 2017. Physical repairs have been completed to restore the communities to their condition prior to the incident and these communities reopened and began accepting residents inJuly 2018 . We have incurred approximately$6.2 million in clean-up and physical repair costs, almost all of which have been recovered through insurance proceeds. AtDecember 31, 2019 , we expected to receive an additional$0.3 million in insurance proceeds from our carriers relating to such costs. In addition to the repairs of physical damage to the buildings, the Company's insurance coverage includes loss of business income ("Business Interruption"). Business Interruption includes reimbursement for lost revenue as well as incremental expenses incurred as a result of such Hurricane. The Company received payments from our insurance underwriters during fiscal 2019 and 2018 totaling approximately$2.5 million and$5.1 million related to Business Interruption, respectively, which have been included as a reduction to operating expenses in the Company's Consolidated Statement of Operations and Comprehensive Loss for each respective year. Business Interruption payments ceased in accordance with our insurance policy inJuly 2019 . Facility Leases As ofDecember 31, 2019 , the Company leased 46 senior housing communities from certain real estate investment trusts ("REITs"). The lease terms are generally for 10-15 years with renewal options for five-20 years at the Company's option. Under these lease agreements, the Company is responsible for all operating costs, maintenance and repairs, insurance and property taxes. No new facility leases were entered into by the Company during fiscal 2019.
Ventas
As ofDecember 31, 2019 , the Company leased seven senior housing communities (collectively the "Ventas Lease Agreements") from Ventas. EffectiveJanuary 31, 2017 , the Company acquired from Ventas the underlying real estate associated with four of its operating leases for a total acquisition price of$85.0 million (the "Four Property Lease Transaction"). The Company obtained interim, interest-only, bridge financing fromCommercial Mortgage LLC ("Berkadia") for$65.0 million of the acquisition price with an initial variable interest rate of LIBOR plus 4.0% and a 36-month term, with an option to extend six months, and the balance of the acquisition price paid was from the Company's existing cash resources. Prior to the Four Property Lease Transaction, the Company previously leased 11 senior housing communities from Ventas. 33 -------------------------------------------------------------------------------- During the second quarter of fiscal 2015, the Company executed amendments to the master lease agreements with Ventas to facilitate up to$24.5 million of leasehold improvements for 10 communities within the Ventas lease portfolio and extend the lease terms untilSeptember 30, 2025 , with two five-year renewal extensions available at the Company's option. During the second quarter of fiscal 2016, the Company executed amendments to the master lease agreements with Ventas to increase the funds budgeted for leasehold improvements (the "Special Project Funds") from$24.5 million to$28.5 million and extend the date for completion of the leasehold improvements toJune 30, 2017 . During the second quarter of fiscal 2017, the Company executed amendments to the master lease agreements with Ventas to decrease the Special Project Funds for leasehold improvements from$28.5 million to approximately$17.0 million due to the Four Property Lease Transaction and extend the date for completion of the leasehold improvements toJune 30, 2018 . During the second quarter of fiscal 2019, the Company executed amendments to the master lease agreements with Ventas to increase the Special Project Funds for leasehold improvements from approximately$17.0 million to approximately$20.0 million and extend the date for completion of the leasehold improvements toDecember 31, 2020 . The initial lease rates under each of the Ventas Lease Agreements ranged from 6.75% to 8% and are subject to contingent rent escalation clauses. When a contingency is resolved and an escalation occurs, the amount is included within lease payments and reflected in the right-of-use "(ROU") asset and lease liability. OnMarch 10, 2020 , the Company entered into an agreement with Ventas, which was subsequently amended onMarch 26, 2020 , providing for the early termination of a Master Lease Agreement between it and Ventas covering seven communities. Pursuant to such agreement, among other things, fromFebruary 1, 2020 throughDecember 31, 2020 , the Company agreed to pay Ventas rent of approximately$1.0 million per month for such communities as compared to approximately$1.3 million per month that would otherwise have been due and payable under the Master Lease Agreements. The Company will not be required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period. In conjunction with the agreement, the Company agreed to release$3.9 million in security deposits held by Ventas. In addition, the agreement with Ventas provides for the conversion of the lease agreements covering the communities into property management agreements with the Company onDecember 31, 2020 if Ventas has not transitioned such communities to a successor operator. Healthpeak As ofDecember 31, 2019 , the Company leased 15 senior housing communities (collectively the "Healthpeak Lease Agreements") from Healthpeak Properties, Inc., formerly HCP, Inc. ("Healthpeak"). During the fourth quarter of fiscal 2013, the Company executed an amendment to the master lease agreement with Healthpeak to facilitate up to$3.3 million of leasehold improvements for one community within the Healthpeak lease portfolio and extend the initial lease terms for nine communities untilOctober 31, 2020 . During the second quarter of fiscal 2015, the Company exercised its right to extend the lease term with Healthpeak for the remaining six communities in the Healthpeak lease portfolio untilApril 30, 2026 . The initial lease rates under the Healthpeak Lease Agreements ranged from 7.25% to 8% and are subject to certain conditional escalation clauses. When a contingency is resolved and an escalation occurs, the amount is included within lease payments and reflected in the ROU asset and lease liability. OnOctober 22, 2019 , the Company executed an amendment to the master lease agreement with Healthpeak, which was later amended, to transition one of the Healthpeak communities to a new operator on or aroundJanuary 15, 2020 , and to sell the remaining eight communities as soon as possible to one or more buyers. The Company was obligated to pay a$250,000 termination fee on the transition of the one community to a new operator. OnMarch 1, 2020 , the Company executed an agreement providing for the early termination of its master lease agreement with Healthpeak, previously scheduled to mature inApril 2026 . The master lease agreement was converted to a management agreement under a RIDEA structure pursuant to which the Company agreed to manage the six communities that was subject to such lease agreement until the communities have been sold by Healthpeak. In conjunction with the agreement, the Company agreed to release approximately$1.9 million of security deposits held by Healthpeak.
Welltower
As ofDecember 31, 2019 , the Company leased 24 senior housing communities (collectively the "Welltower Lease Agreements") from Welltower, formerlyHealth Care REIT, Inc. The Welltower Lease Agreements each have an initial term of 15 years. The initial lease rates under the Welltower Lease Agreements ranged from 7.25% to 8.5% and are subject to certain conditional escalation clauses. When a contingency is resolved and an escalation occurs, the amount is 34 --------------------------------------------------------------------------------
included within lease payments and reflected in the ROU asset and lease
liability. The initial terms on the Welltower Lease Agreements expire on various
dates through from
OnMarch 15, 2020 , the Company entered into an agreement with Welltower, providing for the early termination of three Master Lease Agreements between it and Welltower covering 24 communities. Pursuant to such agreement, among other things, fromFebruary 1, 2020 throughDecember 31, 2020 , the Company agreed to pay Welltower rent of approximately$2.2 million per month for such communities as compared to approximately$2.8 million per month that would otherwise have been due and payable under the Master Lease Agreements. The Company will not be required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period. In conjunction with the agreement, the Company agreed to release$6.5 million in security deposits held by Welltower. In addition, the agreement with Welltower provides for the conversion of the lease agreements covering the communities into property management agreements with the Company onDecember 31, 2020 , if the transition of such communities have not been transitioned to a successor operator.
The following table summarizes each of the Company's facility lease agreements
as of
Lease
Acquisition
Initial and Deferred
Number of Value of Current Expiration Lease Modification Gains / Lease Landlord Initial Date of Lease Communities Transaction
and Renewal Term Rate (1) Costs (2) Concessions (3) Ventas
September 30, 2005 4 $ 61.4 September 30, 2025 8 % $ 7.7 $ 4.2
(4)
(Two five-year
renewals)
Ventas January 31, 2008 1 5.0 September 30, 2025 7.75 % 0.2 -
(4)
(Two five-year
renewals)
Ventas June 27, 2012 2 43.3
September 30, 2025 6.75 % 0.8 -
(4)
(Two five-year
renewals)
Healthpeak May 1, 2006 3 54.0 October 31, 2020 8 % 0.3 12.8
(5)
(Two 10-year
renewals)
Healthpeak May 31, 2006 6 43.0 April 30, 2026 (6) 8 % 0.2 0.6
(One 10-year
renewal)
Healthpeak December 1, 2006 4 51.0 October 31, 2020 8 % 0.7 -
(5)
(Two 10-year
renewals)
Healthpeak December 14, 2006 1 18.0 October 31, 2020 7.75 % 0.3 -
(5)
(Two 10-year
renewals)
Healthpeak April 11, 2007 1 8.0 October 31, 2020 7.25 % 0.1 -
(5)
(Two 10-year
renewals)
Welltower April 16, 2010 5 48.5
April 30, 2025 (15 8.25 % 0.6 0.8
years)
(One 15-year
renewal)
Welltower May 1, 2010 3 36.0 April 30, 2025 (15 8.25 % 0.2 0.4
years)
(One 15-year
renewal)
Welltower September 10, 2010 12 104.6 September 30, 2025 8.50 % 0.4 2.0
(15 years)
(One 15-year
renewal)
Welltower April 8, 2011 4 141.0
April 30, 2026 (15 7.25 % 0.9 16.3
years)
(One 15-year
renewal)
Subtotal 12.4 37.1
Accumulated amortization through December 31, 2018 (7.9 ) -
Accumulated deferred gains / lease concessions recognized through
- (26.2 )
Adoption of ASC 842 (4.5 ) (10.9 )
Net lease acquisition costs / deferred gains / lease concessions as of
$ - $ -
(1) Initial lease rates are measured against agreed upon fair market values and
are subject to conditional lease escalation provisions as set forth in each
respective lease agreement.
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(2) Prior to the adoption of Accounting Standards Codification ("ASC") 842,
lease acquisition and modification costs were amortized over the respective
lease terms. The unamortized portion of lease acquisition and modification
costs totaling approximately
lease right-of-use assets in conjunction with the Company's adoption of ASC
842 on
(3) Prior to the adoption of ASC 842, deferred gains of
concessions of
Statements of Operations and Comprehensive Loss as a reduction in facility
lease expense over the respective initial lease term. The unamortized
balance of deferred gains associated with sale leaseback transactions
totaling approximately
conjunction with the Company's adoption of ASC 842 on
concessions of
approximately
right-of-use assets in conjunction with the Company's adoption of ASC 842 on
(4) Effective
agreements with Ventas to facilitate leasehold improvements for 10 of the
leased communities, of which the underlying real estate associated with four
of its operating leases was acquired by the Company upon closing the Four
Property Lease Transaction on
through
at the Company's option.
(5) On
agreement associated with nine of its leased communities with Healthpeak to
facilitate leasehold improvements for one of the leased communities and
extend the respective lease terms through
renewal extensions available at the Company's option.
(6) On
with Healthpeak through
remaining available at the Company's option. See the description above under
Healthpeak for amendment affecting all of the Healthpeak leased properties.
There are various financial covenants and other restrictions in the Company's lease agreements. The Company was in compliance with all of its lease covenants atDecember 31, 2018 . With regard to its Master Lease Agreements with Ventas and Welltower, the Company was not in compliance with certain financial covenants as ofDecember 31, 2019 . InFebruary 2020 , the Company began paying Ventas and Welltower monthly rental amounts based on the estimated monthly cash flows generated by the communities in Ventas' and Welltower's respective portfolios, which were less than the rental amounts due and payable under the terms of the Master Lease Agreements. Although the Company has entered into forbearance agreements with Ventas and Welltower with respect to such defaults, no assurances can be given that we will be able to comply with the terms and conditions of such forbearance agreements or the other terms and conditions of the Master Lease Agreements. 36
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Debt Transactions
OnDecember 23, 2019 , the Company obtained$31.5 million of mortgage debt fromFifth Third Bank on itsAutumn Glen andCottonwood Village senior housing communities. The new mortgage loan is interest-only and has a two-year term and an initial variable interest rate of LIBOR plus 3.25%. The Company incurred approximately$0.5 million in deferred financing costs related to this loan, which are being amortized over the remaining initial loan term. On the same date, the Company amended and repaid$24.5 million in principal on its interest-only mortgage loan withBBVA USA for the Company'sCottonwood Village ,Georgetowne Place , Harrison atEagle Valley , andRose Arbor communities. As a result of the amendment,BBVA USA released theCottonwood Village assets from collateral for the mortgage and extended the maturity date fromJuly 11, 2020 toDecember 10, 2021 . The Company had previously exercised its option to extend such mortgage loan fromMay 11, 2020 toJuly 11, 2020 . The amended mortgage has an interest-only variable rate of LIBOR plus 4.5%. OnMay 31, 2019 , the Company renewed certain insurance policies and entered into two finance agreements totaling approximately$2.6 million and$2.7 million , respectively. The finance agreements each have a fixed interest rate of 4.4%, with the principal being repaid over a 11-month and 18-month term, respectively.
The Company issued standby letters of credit with
The Company issued standby letters of credit withJPMorgan Chase Bank ("Chase"), totaling approximately$6.5 million , for the benefit of Welltower on certain leases between Welltower and the Company, which remain outstanding as ofDecember 31, 2019 . The Company issued standby letters of credit with Chase, totaling approximately$2.9 million , for the benefit of Healthpeak on certain leases between Healthpeak and the Company, which remain outstanding as ofDecember 31, 2019 .
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The Company believes the following are our most critical accounting policies and/or typically require management's most difficult, subjective and complex judgments.
Revenue Recognition
Resident revenue consists of fees for basic housing and certain support services
and fees associated with additional housing and expanded support requirements
such as assisted living care, memory care, and ancillary services. Basic housing
and certain support services revenue is recorded when services are rendered and
amounts billed are due from residents in the period in which the rental and
other services are provided. Residency 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, with resident fees billed monthly in advance. Revenue
for certain ancillary services is recognized as services are provided, and
includes fees for services such as medication management, daily living
activities, beautician/barber, laundry, television, guest meals, pets, and
parking, which are generally billed monthly in arrears.
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 and are recorded initially by the Company as deferred revenue. The
deferred amounts are amortized over the respective residents' initial lease
term, which is consistent with the contractual obligation associated with the
estimated stay of the resident.
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Revenues from the Medicaid program accounted for approximately 5.9% of the
Company's revenue in fiscal 2019 and 5.4% of the Company's revenue in fiscal
2018. During fiscal 2019 and 2018, 41 and 40, respectively, of the Company's
communities were providers of services under Medicaid programs. Accordingly,
these communities were entitled to reimbursement under the foregoing program at
established rates that were lower than private pay rates. Patient service
revenue for Medicaid patients was recorded at the reimbursement rates as the
rates were set prospectively by the applicable state upon the filing of an
annual cost report. None of the Company's communities were providers of services
under the Medicare program during fiscal 2019 or 2018.
Laws and regulations governing the Medicaid program are complex and subject to
interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicaid program.
Credit Risk and Allowance for Doubtful Accounts
The Company's resident receivables are generally due within 30 days from the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of$8.6 million and$6.8 million atDecember 31, 2019 and 2018, 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.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet arrangements at
Lease Accounting EffectiveJanuary 1, 2019 , the Company adopted the new lease standard provisions of ASC 842. Due to the adoption of ASC 842, the unamortized balances of lease acquisition costs and lease incentives were reclassified as a component of the respective operating lease right-of-use asset. Additionally, the unamortized balance of deferred gains associated with sale leaseback transactions totaling approximately$10.0 million was written-off to retained deficit. Management determines if a contract is or contains a lease at the inception or modification of such contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term on the lease commencement date. When the implicit lease rate is not determinable, management uses the Company's incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future minimum lease payments. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms. Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold improvements, net on the Company's consolidated balance sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term. 38
-------------------------------------------------------------------------------- Certain of the Company's lease arrangements have lease and non-lease components. The Company accounts for the lease components and non-lease components as a single lease component for all classes of underlying assets. Leases with an expected lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
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 and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred atDecember 31, 2019 ; however, actual claims and expenses may differ. Any subsequent changes in estimates are recorded in the period in which they are determined. 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 judgments based on projected future events, including potential settlements for pending claims, known incidents that result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, 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.
Long-Lived Assets and Impairment
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 indicate the carrying amount of an asset group may not be recoverable 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, the carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. 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 are required to recognize an impairment loss. The Company determines the fair value of operating lease ROU assets by comparing the contractual rent payments to estimated market rental rates. Long-lived ROU and fixed assets are valued at fair value using inputs classified as Level 3 in the fair value hierarchy, which are unobservable inputs based on the Company's assumptions. Impairment, if any, is recorded in the period in which the impairment occurred. For property and equipment where indicators of impairment were identified, tests of recoverability were performed atDecember 31, 2019 and 2018. The Company recorded impairment charges of$1.6 million and$1.4 million related to fixed assets and lease ROU assets, respectively, related to the Company's property located inBoca Raton, Florida , which transferred to a new operator subsequent to (see Note 18, Subsequent Events, for discussion of the property's transition)December 31, 2019 . The Company has concluded its property and equipment was recoverable and did not warrant adjustment to the carrying value or remaining useful lives as ofDecember 31, 2018 .
Income Taxes
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects of loss
39
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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 we expect 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. Based upon this evaluation, a
valuation allowance has been recorded to reduce the Company's net deferred tax
assets to the amount that is more likely than not to be realized. However, in
the event that we were to 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 we made such a determination. The benefits of
the net deferred tax assets might not be realized if actual results differ from
expectations. The effective tax rates for fiscal 2019 and 2018 differ from the
statutory tax rates due to state income taxes, permanent tax differences, and
changes in the deferred tax asset valuation allowance. The effective tax rate
for fiscal 2017 differs from the statutory tax rate primarily due to state
income taxes, changes in the deferred tax asset valuation allowance, tax reform
impact on deferred income taxes, adoption of ASU 2016-09, and other permanent
tax differences. The Company is impacted by the Texas Margin Tax ("TMT"), which
effectively imposes tax on modified gross revenues for communities within the
State of Texas . During each of fiscal 2019, 2018, and 2017, the Company
consolidated 38 Texas communities and the TMT increased the overall provision
for income taxes.
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 better
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 its position is "more
likely than not" (i.e., a greater than 50 percent likelihood) to be upheld on
audit based only 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. The Company is generally no longer
subject to federal and state income tax audits for years prior to 2016.
Recently Issued Accounting Guidance
In August 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement
(Topic 820), which modifies certain disclosure requirements in Topic 820, such
as the removal of the need to disclose the amount of and reason for transfers
between Level 1 and Level 2 of the fair value hierarchy, and several changes
related to Level 3 fair value measurements. ASU 2018-13 is effective for fiscal
years and interim periods within those fiscal years beginning after December 15,
2019 . The Company does not expect the adoption of ASU 2018-13 to have a material
impact on its consolidated financial statements.
In June 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses: Measurement of Credit Losses on Financial Instruments. Current U.S.
generally accepted accounting principles ("GAAP") require 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 for 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 ASU
2016-13 will have on its consolidated financial statements and disclosures.
In February 2016 , the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends the
existing accounting standards for lease accounting, including requiring lessees
to recognize most leases on their balance sheets and making targeted changes to
lessor accounting. The new lease standard requires lessees to recognize on the
balance sheet a liability to make lease payments and a right-of-use asset
representing the right to use the underlying asset for the lease term.
Additionally, in July 2018 , the FASB issued ASU 2018-11, Leases, Targeted
Improvements, which provided entities with a transition method option to not
restate comparative periods presented, but to recognize a cumulative effect
adjustment to beginning retained earnings in the period of adoption. The Company
adopted the new lease standard on January 1, 2019 , forgoing comparative
reporting using the modified retrospective adoption method, the simplified
transition method available pursuant to the standard. This allowed the Company
to continue to apply the legacy
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accounting guidance under ASC 840, including its disclosure requirements, in the
comparative periods presented in the year of adoption. The Company elected to
utilize certain practical expedients permitted under the transition guidance
within the new standard, which allowed the Company to carryforward the
historical lease classification, not separate the lease and non-lease components
for all classes of underlying assets in which it is the lessee, not reassess
initial direct costs for existing leases, and make an accounting policy election
not to account for leases with an initial term of 12 months or less on the
balance sheet. Adoption of the lease standards by the Company initially resulted
in the recording of operating lease right-of-use assets of $255.4 million and
operating lease liabilities of $289.5 million on the Company's Consolidated
Balance Sheet as of January 1, 2019 . The difference between amounts recorded for
the operating lease right-of-use assets and operating lease liabilities is due
to net reductions for the reclassification of certain deferred lease costs and
lease incentives of $16.3 million and impairment write-down adjustments of $17.8
million recorded to retained deficit. The fair value of the right-of-use assets
was estimated, using level 3 inputs as defined in the accounting standards
codification, utilizing a discounted cash flow approach based upon historical
and projected cash flows and market data, including management fees and a market
supported lease coverage ratio. The estimated future cash flows were discounted
at a rate that is consistent with a weighted average cost of capital from a
market participant perspective. The adoption of the lease standard did not have
a material impact on the consolidated cash flows of the Company and had no
impact on the Company's covenant compliance under its current debt and lease
agreements. See additional discussion at "Note 16 - Leases."
The adoption of ASC 842 resulted in the following adjustments to the Company's
Consolidated Balance Sheet at
Assets
Prepaid expenses and other $ (2,050)
Property and equipment, net (15,569)
Operating lease right-of-use assets, net 255,386
Other assets, net (4,715)
Total assets $ 233,052
Liabilities and Shareholders' Equity
Deferred income $ (17,498)
Financing obligations (35,956)
Operating lease liabilities 289,513
Other long-term liabilities (15,643)
Total liabilities $ 220,416
Total shareholders' equity $ 12,636
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Results of Operations
The following tables set forth, for the periods indicated, selected historical
Consolidated Statements of Operations and Comprehensive Loss data in thousands
of dollars and expressed as a percentage of total revenues.
Year Ended December 31,
2019 2018
$ % $ %
Revenues:
Resident revenue $ 447,100 100.0 % $ 460,018 100.0 %
Expenses:
Operating expenses (exclusive of facility
lease expense and
depreciation and amortization expense shown
below) 306,786 68.6 294,661 64.1
General and administrative expenses 27,518 6.2 26,961 5.9
Facility lease expense 57,021 12.8 56,551 12.3
Provision for bad debts 3,765 0.8 2,990 0.7
Stock-based compensation expense 2,509 0.6 8,428 1.6
Depreciation and amortization expense 64,190 14.4 62,824 13.7
Total expenses 461,789 103.3 452,415 98.3
Income (Loss) from operations (14,689 ) (3.3 ) 7,603 1.7
Other income (expense):
Interest income 221 - 165 -
Interest expense (49,802 ) (11.1 ) (50,543 ) (11.0 )
Write-off of deferred loan costs and
prepayment premiums (4,843 ) (1.1 ) (12,623 ) (2.7 )
Long-lived asset impairment (3,004 ) (0.7 ) - -
Gain (Loss) on disposition of assets, net 36,528 8.2
28 -
Other income 7 - 3 -
Loss before benefit (provision) for income
taxes (35,582 ) (8.0 ) (55,367 ) (12.0 )
Benefit (Provision) for income taxes (448 ) (0.1 ) 1,771 0.4
Net loss and comprehensive loss $ (36,030 ) (8.1 )% $ (53,596 ) (11.6 )%
Year Ended
Revenues Resident revenue was$447.1 million for the year endedDecember 31, 2019 , compared to$460.0 million for the year endedDecember 31, 2018 , representing a decrease of$12.9 million , or 2.8%. Our resident revenue was positively impacted by the lease-up of our two communities impacted by the aftermath of Hurricane Harvey. These communities were closed beginning in the third quarter of 2017 for repairs. The Company began accepting residents once repairs were completed during the third quarter of 2018, which resulted in an increase of approximately$3.2 million in our resident revenue during fiscal 2019 when compared to fiscal 2018. However, the increase in resident revenue from the two properties impacted by Hurricane Harvey was fully offset by a net decrease in resident revenue at the Company's other communities of approximately$16.1 million , which was primarily due to a 240 basis points decrease in average financial occupancies. Expenses Total expenses were$461.8 million during fiscal 2019 compared to$452.4 million during fiscal 2018, representing an increase of$9.4 million , or 2.1%. This increase is primarily the result of a$12.1 million increase in operating expenses, a$0.6 million increase in general and administrative expenses, a$0.8 million increase in bad debt expense due to an increase in the Medicaid-related bad debt reserve, a$0.5 million increase in facility lease costs due to lease escalations, and a$1.4 million increase in depreciation and amortization expense, partially offset by a$5.9 million decrease in stock-based compensation expense.
• The increase in operating expenses primarily results from an increase of
a decrease in insurance proceeds the Company received during
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fiscal 2019 related to Business Interruption for two communities located
in southeast Texas that were impacted by Hurricane Harvey, an increase
of $4.5 million due to increased wages and benefits to employees for
annual merit increases and incremental costs, including increased
contract labor expense needed to supplement and maintain current
staffing levels in a competitive labor market, an increase of $1.3
million in promotion and marketing costs, an increase of
service contracts costs, and an increase of
maintenance expenses, and a $0.7 million increase in supplies expenses.
• The $0.6 million increase in general and administrative expenses
primarily results from a
primarily attributable to employee incentive compensation and wages for
annual merit increases, an increase of
expenses, a
consulting and contract labor, due to the need to supplement and
maintain current staffing levels in an increasingly competitive labor
market, partially offset by a decrease of
placement and retention costs. Travel expenditure increases were due to
the new members of the Company's corporate operations and marketing
leadership team providing hands-on leadership directly to our
communities, and the creation of peer review teams in the second quarter
of 2019 that provide constructive feedback and best practice
recommendations across our communities.
• The
primarily results from an increase in depreciable assets at the
Company's communities resulting from ongoing capital improvements and
refurbishments.
• The
primarily attributable to the retirement of the Company's former CEO and
separation of the Company's former COO, which resulted in the
cancellation of their unvested restricted stock awards in the first
quarter of 2019. Additionally, the Company concluded performance metrics
associated with certain performance-based restricted stock awards were
no longer probable of achievement, which resulted in remeasurement
adjustments.
Other income and expense.
• Interest income generally reflects interest earned on the investment of
cash balances and escrowed funds or interest associated with certain
income tax refunds or property tax settlements.
• Interest expense decreased
fiscal 2018 primarily due to the early repayment of mortgage debt
associated with the closing of the Company's sale of communities located
in
write-off of deferred loan costs and prepayment premiums is attributable
to the early repayment of certain mortgage debt associated with the
closing of these sale transactions, which resulted in the accelerated
amortization of deferred financing charges and early repayment fees and
retirement costs.
• The $3.0 million increase in impairment expense was due to the Company
recording
fixed assets and the ROU lease asset, respectively, of a leased property
located in Boca Raton, Florida , that transferred to a new operator
subsequent to year-end.
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Benefit (Provision) for income taxes
The provision for income taxes for fiscal 2019 was$(0.4) million , or (0.1%) of revenues, compared to a benefit for income taxes of$1.8 million , or 0.4% of revenues, for fiscal 2018. The effective tax rates for fiscal 2019 and 2018 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance. The Company is impacted by the TMT, which effectively imposes tax on modified gross revenues for communities within theState of Texas . During each of fiscal 2019 and 2018, the Company consolidated 38 Texas communities and the TMT increased the overall provision for income taxes. The variation in benefit (provision) for income taxes from fiscal 2019 to fiscal 2018 was attributable to the Company electing real property trade or business under Section 163(j)(7)(B) of the Internal Revenue code to opt out of the interest expense limitation 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. Based upon this evaluation, adjustments to the deferred tax asset valuation allowance of$4.4 million and$9.5 million were recorded during fiscal 2019 and 2018, respectively, to reduce the Company's net deferred tax assets to the amount that is more likely than not to be realized. Of the$4.4 million adjustment to the valuation allowance during fiscal 2019, a$3.0 million decrease in the valuation allowance was the result of the retained earnings impact related to the adoption of ASC 842 and a$7.4 million increase to the valuation allowance was due to current year activity.
Net loss and comprehensive loss
As a result of the foregoing factors, the Company reported net loss and comprehensive loss of$36.0 million for the fiscal year endedDecember 31, 2019 and net loss and comprehensive loss of$53.6 million for the fiscal year endedDecember 31, 2018 . Quarterly Results The following table presents certain unaudited quarterly financial information for each of the four quarters endedDecember 31, 2019 and 2018. This information has been prepared on the same basis as the audited consolidated financial statements of the Company appearing elsewhere in this report and include, in the opinion of the Company's management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the quarterly results when read in conjunction with the audited consolidated financial statements of the Company and the related notes thereto. 2019 Calendar Quarters First Second Third Fourth (1) (In thousands, except per share amounts) Total revenues$ 114,176 $ 113,126 $ 111,110 $ 108,688 Income (loss) from operations 1,970 203 (8,105 ) (8,757 ) Net income (loss) and comprehensive income (loss) (12,984 ) (12,534 ) (20,731 ) 10,219 Net income (loss) per share, basic$ (0.43 ) $ (0.41 ) $ (0.68 ) $ 0.34 Net income (loss) per share, diluted$ (0.43 ) $ (0.41 ) $ (0.68 ) $ 0.34 Weighted average shares outstanding, basic 30,102 30,279 30,324 30,342
Weighted average shares outstanding, fully diluted 30,102 30,279 30,324
30,412
(1) The fourth quarter of calendar 2019 was impacted by a $38.8 million gain
the Company recognized due to the sale of two communities located in
Springfield, Missouri and Peoria, Illinois on October 1, 2019 .
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2018 Calendar Quarters
First Second Third Fourth (1)
(In thousands, except per share amounts)
Total revenues $ 114,643 $ 114,627 $ 115,650 $ 115,098
Income (loss) from operations 5,386 3,643 1,696 (3,122 )
Net loss and comprehensive loss (7,156 ) (9,060 ) (11,089 ) (26,291 )
Net loss per share, basic $ (0.24 ) $ (0.30 ) $ (0.37 ) $ (0.88 )
Net loss per share, diluted $ (0.24 ) $ (0.30 ) $ (0.37 ) $ (0.88 )
Weighted average shares outstanding, basic 29,627 29,831 29,877 29,908
Weighted average shares outstanding, fully diluted 29,627 29,831 29,877
29,908
(1) The fourth quarter of calendar 2018 was impacted by $4.2 million ofadditional general and administrative expenses for separation and placement
costs primarily associated with the retirement and replacement of the
Company's former CEO and
and prepayment premiums from the early repayment of certain mortgage debt
on the Company's owned properties due to the opportunity to establish a
master credit facility ("MCF") with Berkadia and extend scheduled
maturities.
Liquidity and Capital Resources
In addition to approximately$24.0 million of unrestricted cash balances on hand as ofDecember 31, 2019 , the Company's principal sources of liquidity are expected to be cash flows from operations, additional proceeds from debt refinancings, equity issuances, and/or proceeds from the sale of assets. The Company expects its available cash and cash flows from operations, additional proceeds from debt refinancings, and proceeds from the sale of assets to be sufficient to fund its short-term working capital requirements. The Company's long-term capital requirements, primarily for acquisitions and other corporate initiatives, could be dependent on its ability to access additional funds through joint ventures and the debt and/or equity markets. The Company from time to time considers and evaluates transactions related to its portfolio including debt re-financings, equity issuances, purchases and sales of assets, reorganizations and other transactions. 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. Recent changes in the economic environment, and other future changes, could result in decreases in the fair value of assets, slowing of transactions, and tightening liquidity and credit markets. These impacts could make securing debt for acquisitions or refinancings for the Company, its joint ventures, or buyers of the Company's properties more difficult or on terms not acceptable to the Company. Additionally, the Company may be more susceptible to being negatively impacted by operating or performance deficits based on the exposure associated with certain lease coverage requirements.
In summary, the Company's cash flows were as follows (in thousands):
Year Ended
December 31,
2019 2018
Net cash provided by operating activities $ 5,229 $ 36,870
Net cash provided by (used in) investing activities 47,778 (21,908 )
Net cash used in financing activities (60,264 ) (1,666 )
Increase (decrease) in cash and cash equivalents
Operating Activities The Company had net cash provided by operating activities of$5.2 million and$36.9 million in fiscal 2019 and 2018, respectively. The net cash provided by operating activities for fiscal 2019 primarily results from net non-cash charges of$39.4 million , an increase in accrued expenses of$4.3 million , an increase in deferred resident revenue of$0.6 million , and a decrease in tax and insurance deposits of$0.5 million , partially offset by a net loss of$36.0 million , a decrease in accounts payable of$0.7 million , and increases in prepaid expenses, accounts receivable, and other assets of$1.0 million ,$1.3 million , and$0.5 million , respectively. The net cash provided by operating activities for fiscal 2018 45 -------------------------------------------------------------------------------- primarily results from net non-cash charges of$87.1 million , a decrease in other assets of$1.4 million , an increase in accounts payable of$1.3 million , a decrease in tax and insurance deposits of$1.2 million , a decrease in prepaid expenses of$1.1 million , an increase in accrued expenses of$1.1 million , and an increase in deferred resident revenue of$0.6 million , partially offset by net loss of$53.6 million and an increase in accounts receivable of$3.2 million .
Investing Activities
The Company had net cash provided by (used in) investing activities of$47.8 million and$(21.9 million) in fiscal 2019 and 2018, respectively. The net cash provided by investing activities for fiscal 2019 primarily results from the Company's receipt of$68.1 million in proceeds from the disposition of assets, partially offset by capital expenditures associated with ongoing capital renovations and refurbishments of the Company's senior housing communities of$20.3 million . The net cash used in investing activities for fiscal 2018 primarily results from capital expenditures associated with ongoing capital renovations and refurbishments at the Company's senior housing communities.
Financing Activities
The Company had net cash flows used in financing activities of$60.3 million and$1.7 million in fiscal 2019 and 2018, respectively. The net cash used in financing activities for fiscal 2019 primarily results from notes payable proceeds of$37.5 million , of which approximately$31.5 million resulted from mortgage debt refinancings and supplemental mortgage debt financings and the remaining$6.0 million related to insurance premium financing, which was offset by repayments of notes payable of$95.1 million , inclusive of$4.4 million in debt prepayment penalties, and deferred financing charges paid of$1.2 million and payments on financing leases and financing obligations of$1.5 million . The net cash used in financing activities for fiscal 2018 primarily results from notes payable proceeds of$208.8 million , of which approximately$206.3 million resulted from mortgage debt refinancings and supplemental mortgage debt financings and the remaining$2.5 million related to insurance premium financing, offset by repayments of notes payable of$204.1 million , inclusive of$11.1 million in debt repayment penalties, deferred financing charges paid of$3.3 million , and payments on capital lease and financing obligations of$3.2 million .
Impact of Inflation
To date, inflation has not had a significant impact on the Company. However,
inflation could affect the Company's future revenues and results of operations
because of, among other things, the Company's dependence on senior residents,
many of whom rely primarily on fixed incomes to pay for the Company's services.
As a result, during inflationary periods, the Company may not be able to
increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
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