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, continued spread of COVID-19, including the speed, depth, geographic reach and duration of such spread, new information that may emerge concerning the severity of COVID-19, the actions taken to prevent or contain the spread of COVID or treat its impact, the legal, regulatory and administrative developments that occur at the federal, state and local levels in response to the COVID-19 pandemic, and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or the Company's response efforts; the impact of COVID-19 on Company's ability to continue as a going concern; the Company's ability to generate sufficient cash flows from operations, additional proceeds from debt refinancing, 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 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, including the transfer of legal ownership of certain communities currently managed by the Company on behalf of Fannie Mae, which holds non-recourse debt on such communities; the risk of oversupply and increased competition in the markets which the Company operates; 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 theSecurities and Exchange Commission ("SEC"), including those set forth under "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and this Quarterly Report on Form 10-Q.
Overview
The following discussion and analysis addresses (i) the Company's results of operations for the three and nine months endedSeptember 30, 2020 and 2019, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company's consolidated financial statements contained elsewhere in this report and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . The Company is one of the largest operators of senior housing communities inthe United States . Our operating strategy is to provide value to our 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. We provide senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of our 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 ofSeptember 30, 2020 , the Company operated 119 senior housing communities in 22 states with an aggregate capacity of approximately 14,700 residents, including 61 senior housing communities that the Company owned, 34 senior housing communities that the Company leased, and 24 senior housing communities that the Company managed on behalf of third parties.
COVID-19 Pandemic
A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread fromChina to many other countries, includingthe United States . The outbreak has been declared to be a pandemic by theWorld Health Organization , and the Health and Human Services Secretary has declared a public health emergency inthe United States in response to the outbreak. Additionally, theCenters for Disease Control and Prevention has stated that older adults are at a higher risk for serious illness from COVID-19.The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to significantly disrupt for some period, the nation's economy, the senior living industry, and the Company's business. 25 -------------------------------------------------------------------------------- In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to recent quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company has restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As a result, COVID-19 has caused, and management expects will continue to cause, a decline in the occupancy levels at the Company's communities, which has negatively impacted, and will likely continue to negatively impact the Company's revenues and operating results, which depend significantly on such occupancy levels. During the second half of March, new resident leads, visits, and move-in activity began to decline compared to typical levels. This trend intensified throughout the third quarter of 2020, and began to adversely impact occupancy, resulting in decrease in consolidated senior housing occupancy (excluding the community sold effectiveMarch 31, 2020 ) from 79.9% for the first quarter to 77.6% for the third quarter of 2020. We expect further deterioration of resident fee revenue resulting from fewer move-ins and typical resident attrition inherent in our business, which may increase due to the impacts of COVID-19. Lower than normal controllable move-out activity during the COVID-19 pandemic may partially offset future adverse revenue impacts. In addition, the outbreak of COVID-19 has required the Company to incur, and management expects will require the Company to continue to incur, significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents. Further, residents at certain of its senior housing communities have tested positive for COVID-19, which has increased the costs of caring for the residents at such communities and has resulted in reduced occupancies at such communities. During the second half ofMarch 2020 , the Company began to incur incremental direct costs to prepare for and respond to the COVID-19 pandemic, and such costs increased throughout the third quarter of 2020. Facility operating expense for the three and nine months endedSeptember 30, 2020 includes$1.4 million and$4.6 million , respectively, of incremental and direct costs as a result of the COVID-19 pandemic, including costs for acquisition of additional personal protective equipment ("PPE"), cleaning and disposable food service supplies, testing of the Company's residents and employees, enhanced cleaning and environmental sanitation costs, and increased labor expense. The Company expects such costs to continue. We are unable to reasonably predict the total amount of costs we will incur related to the pandemic, but such costs are likely to be substantial. We cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on our business, results of operations, cash flow, and liquidity, and our preparation and response efforts may delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impact of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and geographic concentrations of the pandemic and any resurgence of the disease; the impact of COVID-19 on the nation's economy and debt and equity markets and the local economies in our markets; the development and availability of COVID-19 infection and antibody testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents' and their families' ability to afford our resident fees, including due to changes in unemployment rates, consumer confidence, and equity markets caused by COVID-19; changes in the acuity levels of our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our preparation and response efforts, including increased supplies, labor, litigation, and other expenses; the impact of COVID-19 on our ability to complete financings, refinancings, or other transactions (including dispositions) or to generate sufficient cash flow to cover required interest and lease payments and to satisfy financial and other covenants in our debt and lease documents; increased regulatory requirements and enforcement actions resulting from COVID-19, including those that may limit our collection efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts.
Going Concern and Management's Plan
Accounting Standards Codification ("ASC") 205-40, "Disclosure of Uncertainties
about an Entity's Ability to Continue as a Going Concern," requires an
evaluation of whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about an entity's ability to continue as
a going concern for the 12-month period following the date the financial
statements are issued. Initially, this evaluation does not consider the
potential mitigating effect of management's plans that have not been fully
implemented. When substantial doubt exists, management evaluates the mitigating
effect of its plans to determine if it is probable that (1) the plans will be
effectively implemented within one year after the date the financial statements
are issued, and (2) when implemented, the plans will mitigate the relevant
conditions or events that raise substantial doubt about the entity's ability to
continue as a going concern.
In complying with the requirements under ASC 205-40 to complete an evaluation
without considering mitigating factors, the Company considered several
conditions or events including (1) uncertainty around the impact of COVID-19 on
the Company's operations and financial results (see "COVID-19 Pandemic" above),
and (2) operating losses and negative cash flows from operations for projected
fiscal year 2020 and 2021. The above conditions raise substantial doubt about
the Company's ability to continue as a going concern for the twelve-month period
following the date the financial statements are issued.
The Company is implementing plans as discussed below, which includes strategic
and cash-preservation initiatives, which are designed to provide the Company
with adequate liquidity to meet its obligations for at least the twelve-month
period following the
26
-------------------------------------------------------------------------------- date its financial statements are issued. The Company's primary sources of near- and medium-term liquidity are expected to be (1) improved operating cash flows due to strategic and cash preservation initiatives discussed below, (2) debt forbearance, to the extent available on acceptable terms, and (3) forbearance on rent payments to landlords, to the extent available on acceptable terms.
Strategic and Cash Preservation Initiatives
The Company has taken or intends to take the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to operate as a going concern:
• In the first quarter of 2019, the Company implemented a three-year
operational improvement plan which began to show improved operating results
in 2020, prior to the onset of COVID-19, and is expected to continue to
drive incremental profitability improvements.
• The Company has implemented additional proactive spending reductions to
improve liquidity, including reduced discretionary spending and monitoring
capital spending.
• The Company has recently taken measures to exit underperforming leases in
order to strengthen the Company's balance sheet and allow the Company to
strategically invest in certain existing communities. Recent actions the
Company has taken to improve the Company's future financial position
include:
o In the first quarter of 2020, the Company entered into agreements withtwo of its largest landlords, Welltower, Inc. ("Welltower") and Ventas,
Inc. ("Ventas") providing for the early termination of the Master Lease
Agreements with such landlords covering certain of our senior housing
communities. Pursuant to such agreements, the Company agreed to pay
Welltower and Ventas reduced monthly rental amounts, beginning February
1, 2020, and to convert such lease agreements into property management
agreements with the Company as manager on
communities have not been transitioned to a successor operator. At
operator. On
different operators.
o In the first quarter of 2020, the Company also entered into an agreement
with Healthpeak Properties, Inc. ("Healthpeak") providing for the early
termination of one of two Master Lease Agreements with Healthpeak
covering six of its senior housing communities. This Master Lease
Agreement was converted to a management agreement under a
Diversification Act ("RIDEA") structure pursuant to which the Company
agreed to manage the communities that were subject to such lease
agreement until such communities are sold by Healthpeak.
o In the first quarter of 2020, the Company transitioned one of the
communities leased from Healthpeak to a new operator. On October 15,
2020 , the Company transitioned a second Healthpeak community to a new
operator.
• The Company is currently evaluating the opportunity to sell certain
communities that would provide positive net proceeds.
• In
with a number of its lenders and continues to discuss further debt relief
with its lenders. In October 2020 , the Company enhanced and extended its
short-term forbearance agreement with Protective Life.
• In
began paying Healthpeak rent of approximately $0.7 million per month for
eight senior housing communities subject to a Master Lease Agreement with
Healthpeak in lieu of approximately $0.9 million of monthly rent due and
payable under the Master Lease Agreement covering such communities. Theremaining rent is subject to payment by the Company pursuant to a three-year
note payable with final payment to be on or before November 1, 2023 . On
November 2, 2020 , subsequent to quarter-end, the Company entered into anagreement with Healthpeak to extend the end of the lease term from October
31, 2020 to April 30, 2021 (with two possible three-month extensions) and
modify the monthly rent such that the amount owed to Healthpeak will beequal to any excess cash flows of the communities. In addition, the Company
will earn a management fee for continuing to manage the communities.• The Company has elected to utilize the Coronavirus Aid, Relief, and Economic
Security Act of 2020 (CARES Act) payroll tax deferral program and expects to
delay payment of approximately
payroll taxes estimated to be incurred from
2020.
• In conjunction with the CARES Act, the Company had received approximately
applying for additional federal and state funding. On
subsequent to quarter-end, the Company accepted
grants from the
"
the CARES Act to provide grants or other funding mechanisms to eligible
healthcare providers for healthcare related expenses or lost revenues
attributable to COVID-19. The Company has also applied for additional grants
pursuant to the
which the
to
grant amounts to ensure that they have received approximately 2% of their
27
--------------------------------------------------------------------------------annual patient care revenue, plus an additional percentage of their change
in revenues minus their operating expenses, in each case from patient care
attributable to COVID-19.
• In
the operations and ownership of 18 communities that are either
underperforming or are in underperforming loan pools to Fannie Mae, the
holder of nonrecourse debt on such communities. In conjunction with theagreement, the Company discontinued recognizing revenues and expenses on the
properties as of
behalf of Fannie Mae. The Company earns a management fee for providing such
services. As a result of these events of default and the appointment of a
receiver to take possession of the communities, the Company concluded that,
in accordance with ASC 610-20, "Gains and Losses from the Derecognition of
Nonfinancial Assets," a
derecognition of the assets as a loss of control of the assets occurred
during the three months ended
the properties transfers to Fannie Mae and the liabilities relating to such
communities are extinguished, the Company expects to recognize a gain
related to the extinguishment in accordance with ASC 470, "Debt." At
in current portion of notes payable, net of deferred loan costs, and
million of accrued interest in accrued expenses on the Company's
Consolidated Balance Sheets related to these properties.
• The Company is evaluating possible debt and capital options.
The Company's plans are designed to provide the Company with adequate liquidity
to meet its obligations for at least the twelve-month period following the date
its financial statements are issued; however, the remediation plan is dependent
on conditions and matters that may be outside of the Company's control or may
not be available on terms acceptable to the Company, or at all, many of which
have been made worse or more unpredictable by COVID-19. Accordingly, management
determined it was not probable that the plans, when implemented, will mitigate
the relevant conditions or events that raise substantial doubt about the
entity's ability to continue as a going concern. If the Company is unable to
successfully execute all of these initiatives or if the plan does not fully
mitigate the Company's liquidity challenges, the Company's operating plans and
resulting cash flows along with its cash and cash equivalents and other sources
of liquidity may not be sufficient to fund operations for the twelve-month
period following the date the financial statements are issued.
As a result of COVID-19's short- and long-term impact to the Company's financial
position, management has concluded that there is substantial doubt about the
Company's ability to continue as a going concern. The Company's continuation as
a going concern depends upon many factors, including the ability to increase its
revenues, reduce costs and/or pursue other transactions to raise capital,
including, without limitation, by selling assets, and no assurances can be given
that the Company will be able to successfully do so.
Significant Financial and Operational Highlights
The Company primarily derives its revenue by providing senior living and healthcare services to seniors. When comparing the third quarter of fiscal 2020 to the third quarter of fiscal 2019, the Company generated resident revenue of approximately$85.9 million compared to resident revenue of approximately$111.1 million , respectively, representing a decrease of approximately$25.0 million , or 22.5%. The decrease in revenue is primarily due to the disposition of three communities since the second quarter of 2019 and the Company transitioning six of its senior housing communities to different operators and 24 communities to management agreements during 2020, which together accounted for a decrease in revenue of approximately$21.0 million . The remaining decrease of approximately$4.0 million was primarily due to a decrease of 520 basis points in total occupancies at the Company's remaining senior housing communities. The decrease in the total occupancy was primarily due to reduced move-in activity, which began in the second half ofMarch 2020 and intensified through the end of third quarter of 2020, related to the COVID-19 pandemic and our response efforts. The decreases in total revenue were partially offset by increases in management fees and community reimbursement revenue of$0.6 million and$9.6 million , respectively, which were due to the Company's management of six and 18 communities on the behalf of third parties, which commenced onMarch 1, 2020 andAugust 1, 2020 , respectively. The Company continues to evaluate its portfolio of senior housing communities and explore opportunities to monetize certain of its assets, including through the sale of various owned communities that it believes are operating in challenging markets or that no longer fit its portfolio criteria. During the first nine months of 2020, the Company transitioned six communities to a different operator, transitioned 24 properties to a management agreement, and sold one property. 28
-------------------------------------------------------------------------------- Consolidated financial occupancy for the third quarters of fiscal 2020 and 2019 was 76.1% and 81.3%, respectively. Although average financial occupancies decreased for such periods, the Company experienced an increase in average monthly rental rates of 270 basis points when comparing the third quarter of fiscal 2020 to the third quarter of fiscal 2019.
Facility Lease Transactions
As ofDecember 31, 2019 , the Company leased 46 senior housing communities from certain real estate investment trusts and transitioned one community to a different operator effectiveJanuary 15, 2020 . During the first nine months of fiscal 2020, the Company restructured certain of its Master Lease Agreements with each of its landlords as further described below, and after giving effect to such transactions and as ofSeptember 30, 2020 , the Company leased 34 senior living communities and managed six senior living communities for the account of Healthpeak. Ventas As ofDecember 31, 2019 , the Company leased seven senior housing communities from Ventas. The term of the Ventas lease agreement was scheduled to expire onSeptember 30, 2025 . OnMarch 10, 2020 , the Company entered into the Ventas Agreement providing for the early termination of its Master Lease Agreement with Ventas covering all 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 Agreement. In addition, the Ventas Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreement during the forbearance period, which terminates onDecember 31, 2020 absent any defaults by the Company. In conjunction with the Ventas Agreement, the Company released to Ventas$4.1 million in security deposits and$2.5 million in escrow deposits held by Ventas, and Ventas forgave the Company's lease termination obligation, which was$11.4 million atDecember 31, 2019 . The Ventas Agreement provides that Ventas can terminate the Master Lease Agreement with respect to any or all communities upon 30 days' notice. The effective date of termination may not be later thanDecember 31, 2020 . Upon termination, Ventas may elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. If, as ofDecember 1, 2020 , Ventas has not delivered a termination notice for any communities subject to the Master Lease Agreement, then, with respect to any such communities, Ventas will be deemed to have delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date ofDecember 31, 2020 . Any such management agreement will provide for a management fee equal to 5% of the gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Ventas Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreement during the applicable forbearance period and Ventas will reimburse the Company for certain specified capital expenditures. In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Ventas and modification of the lease term pursuant to the Ventas Agreement was determined to be a modification of the Master Lease Agreement. As such, the Company reassessed the classification of the Master Lease Agreement with Ventas based on the modified terms and determined that the lease continued to be classified as an operating lease until the communities transitioned to a different operator or management agreement, at which time the lease would terminate. During the first quarter of 2020, the Company reduced the lease termination obligation, lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets atSeptember 30, 2020 by approximately$11.1 million ,$51.6 million , and$47.8 million , respectively, and recognized a net gain of approximately$8.4 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company's Consolidated Statements of Operations and Comprehensive Loss for the nine months endedSeptember 30, 2020 .
Welltower
As ofDecember 31, 2019 , the Company leased 24 senior housing communities from Welltower. The initial terms of the Welltower lease agreements were scheduled to expire on various dates fromApril 2025 throughApril 2026 . OnMarch 15, 2020 , the Company entered into an agreement with Welltower (the "Welltower Agreement"), providing for the early termination of threeMaster Lease Agreements between it and Welltower covering all 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. In addition, the Welltower Agreement provides that the Company will not be required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period, which terminates onDecember 31, 2020 , absent any defaults by the Company. In conjunction with the Welltower Agreement, the Company released$6.5 million in letters of credit to Welltower during the second quarter of 2020. The Welltower Agreement provides that Welltower can terminate the agreement, with respect to any or all communities upon 30 days' notice. The effective date of termination may not be later thanDecember 31, 2020 . Upon termination, Welltower may elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. If, as ofDecember 1, 2020 , Welltower has not delivered a termination notice for any communities subject to the Master Lease Agreements, then, with respect to any such communities, Welltower will be deemed to have 29 -------------------------------------------------------------------------------- delivered a termination notice electing to enter into a property management agreement with the Company as manager for such communities with an effective date ofDecember 31, 2020 . Any such management agreement will provide for a management fee equal to 5% of the gross revenues of the applicable community payable to the Company and other customary terms and conditions. The Welltower Agreement also provides that the Company will not be obligated to fund certain capital expenditures under the Master Lease Agreements during the applicable forbearance period and Welltower will reimburse the Company for certain specified capital expenditures. In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Welltower under the then existing Master Lease Agreements with Welltower and modification to the lease term pursuant to the Welltower Agreement was determined to be a modification of the Master Lease Agreements. As such, the Company reassessed the classification of the Master Lease Agreements based on the modified terms and determined that the leases continued to be classified as operating leases until the community transitioned to a different operator or management agreement, at which time the lease would terminate. The modification resulted in a reduction to the lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets atSeptember 30, 2020 by approximately$129.9 million , and$121.9 million , respectively, during the first quarter of 2020. The Company recognized a net gain of approximately$8.0 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company's Consolidated Statements of Operations and Comprehensive Loss for the nine months endedSeptember 30, 2020 . During the three months endedSeptember 30, 2020 , Welltower elected to terminate the agreement with respect to five communities, all of which transferred to a different operator onSeptember 10, 2020 . The Company recorded an approximate$0.7 million loss on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company's Consolidated Statements of Operations and Comprehensive Loss for the three and nine months endedSeptember 30, 2020 . Healthpeak OnMarch 1, 2020 , the Company entered into an agreement with Healthpeak ("the Healthpeak Agreement"), effectiveFebruary 1, 2020 , providing for the early termination of one of its Master Lease Agreements with Healthpeak, which was previously scheduled to mature inApril 2026 . Such Master Lease Agreement terminated and was converted into a Management Agreement under a RIDEA structure pursuant to which the Company agreed to manage the six communities that were subject to the Master Lease Agreement until such communities are sold by Healthpeak. Pursuant to the Management Agreement, the Company will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities. In conjunction with the Healthpeak Agreement, the Company released to Healthpeak approximately$2.6 million of security deposits held by Healthpeak. The Company remeasured the lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets atDecember 31, 2019 to zero, which resulted in the Company recognizing an approximate$7.0 million loss on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company's Consolidated Statements of Operations and Comprehensive Loss for the nine months endedSeptember 30, 2020 . OnMay 20, 2020 , the Company entered into an agreement with Healthpeak ("the Healthpeak Forbearance"), effectiveApril 1, 2020 through the end of the lease term, pursuant to which the Company began paying Healthpeak rent of approximately$0.7 million per month for eight senior housing communities subject to a Master Lease Agreement with Healthpeak in lieu of approximately$0.9 million of monthly rent due and payable under the Master Lease Agreement covering such communities. The rents paid to Healthpeak represent approximately 75% of their scheduled rates, with the remaining rent being subject to payment by the Company pursuant to a three-year note payable with final payment to be made on or beforeNovember 1, 2023 . AtSeptember 30, 2020 , the Company had deferred$1.4 million of monthly rent, which was included in notes payable, net of deferred loan costs and current portion on the Company's Consolidated Balance Sheets. OnNovember 1, 2020 , subsequent to quarter-end, the Company entered into an agreement to extend the end of the lease term fromOctober 31, 2020 toApril 30, 2021 (subject to two possible three month extensions). Pursuant to such agreement, the Company will begin paying Healthpeak monthly rent of any excess cash flow of the communities and earning a management fee for continuing to manage the communities.
Recent Accounting Developments
InAugust 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 afterDecember 15, 2019 . The Company adopted ASU 2018-13 onJanuary 1, 2020 , the adoption of which did not have a material impact on its consolidated financial statements and disclosures.
In
30
--------------------------------------------------------------------------------
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.
Website
The Company's Internet website, www.capitalsenior.com, contains an Investor Relations section, which provides links to the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and Section 16 filings and any amendments to those reports and filings. These reports and filings are available free of charge through the Company's Internet website as soon as reasonably practicable after such material is electronically filed with or furnished to theSEC .
Results of Operations
The following table sets forth for the periods indicated selected Consolidated
Statements of Operations and Comprehensive Loss data in thousands of dollars and
expressed as a percentage of total revenues.
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
$ % $ % $ % $ %
Revenues:
Resident revenue $ 85,894 89.4 $ 111,110 100.0 $ 290,952 95.8 $ 338,412 100.0
Management fees 604 0.6 - 0.0 819 0.3 - 0.0
Community reimbursement
revenue 9,555 10.0 - 0.0 11,888 3.9 - 0.0
Total revenues 96,053 100.0 111,110 100.0 303,659 100.0 338,412 100.0
Expenses:
Operating expenses (exclusive
of facility lease expense
and depreciation and
amortization expense shown
below) 65,165 67.8 80,394 72.4 211,874 69.8 230,229 68.0
General and administrative
expenses 8,128 8.5 7,554 6.8 21,036 6.9 21,766 6.4
Facility lease expense 5,926 6.2 14,233 12.8 23,234 7.7 42,706 12.6
Stock-based compensation
expense 421 0.4 898 0.8 1,494 0.5 1,558 0.5 Depreciation and amortization expense
15,547 16.2 16,136 14.5 47,584 15.7 48,085 14.2 Long-lived asset impairment 3,240 3.4
- 0.0 39,194 12.9 - 0.0
Community reimbursement
expense 9,555 10.0 - 0.0 11,888 3.9 - 0.0
Total expenses 107,982 112.4 119,215 107.3 356,304 117.3 344,344 101.8
Other income (expense):
Interest income 14 0.0 59 0.1 83 0.0 173 0.1
Interest expense (11,141 ) (11.6 ) (12,562 ) (11.3 ) (34,044 ) (11.2 ) (37,728 ) (11.2 ) Write-down of assets held for sale
- 0.0 - 0.0 - 0.0 (2,340 ) (0.7 )
Gain (loss) on facility lease
modification and termination,
net (753 ) (0.8 ) - 0.0 10,487 3.5 (97 ) (0.0 )
Gain (loss) on disposition of
assets, net (191,032 ) (198.9 ) - 0.0 (198,388 ) (65.3 ) 38 0.0
Other income 9 0.0 1 0.0 2 0.0 8 0.0
Loss from continuing
operations before provision
for income taxes (214,832 ) (223.7 ) (20,607 ) (18.6 ) (274,505 ) (90.4 ) (45,878 ) (13.6 ) Provision for income taxes
(132 ) (0.1 ) (124 ) (0.1 ) (393 ) (0.1 ) (371 ) (0.1 )
Net loss from operations $ (214,964 ) (223.8 ) $ (20,731 ) (18.7 ) $ (274,898 ) (90.5 ) $ (46,249 ) (13.7 )
31
--------------------------------------------------------------------------------
Three Months Ended
Revenues.
Revenue was$96.1 million for the three month period endedSeptember 30, 2020 compared to$111.1 million for the three month period endedSeptember 30, 2019 , representing a decrease of$15.0 million , or approximately 13.3%. The decrease in revenue is primarily due to the disposition of three communities since the second quarter of 2019 and the Company transitioning six of its senior housing communities to different operators and 24 communities to management agreements during 2020, which together accounted for a decrease in revenue of approximately$21.0 million . The remaining decrease in resident revenue at the Company's remaining senior housing communities of approximately$4.0 million was primarily due to a decrease of 520 basis points in total occupancy. The decrease in the financial occupancy was primarily due to reduced move-in activity, which began in the second half ofMarch 2020 and intensified through the end of the third quarter of 2020, related to the COVID-19 pandemic and our response efforts. The decreases in total revenue were partially offset by increases in management fees and community reimbursement revenue of$0.6 million and$9.6 million , respectively, which were due to the Company's management of six and 18 communities on the behalf of third parties, which commenced onMarch 1, 2020 andAugust 1, 2020 , respectively. Expenses. Total expenses were$108.0 million in the third quarter of fiscal 2020 compared to$119.2 million in the third quarter of fiscal 2019, representing a decrease of$11.2 million , or 9.4%. This decrease is primarily the result of a$15.2 million decrease in operating expenses, an$8.1 million decrease in facility lease expenses, a$0.6 million decrease in depreciation expense, and a$0.5 million decrease in stock-based compensation expense, partially offset by a$3.2 million increase in impairment expense, a$9.6 million increase in community reimbursement expense and a$0.6 million increase in general and administrative expenses.
• The quarter-over-quarter decrease in operating expenses of
primarily due to a
decrease in labor and employee-related expenses, a
promotion expenses, a
million decrease in utilities, a
a $0.5 million decrease in insurance-related expenses, a $0.2 million
decrease in travel and a $2.4 million decrease in all other operating
expenses, all of which were primarily due to the disposition of three
communities since the second quarter of 2019, the transition of 24communities to management agreements during 2020 and reduced occupancy
levels at our communities.
• The increase in general and administrative expenses of
primarily due to a
expenses to supplement and maintain current staffing levels in a competitive
labor market and due to COVID-19, increases in transaction and conversion
costs of
retention costs due to a reduction in force during the third quarter of
2020, and an increase in all other general and administrative expenses of
$0.1 million , partially offset by decreases in labor-related costs of$0.8 million . • The$8.3 million decrease in facility lease expense is primarily attributable to the Company transitioning six communities to property
management agreements effective
agreements with two of the Company's landlords, which resulted in reduced
rent obligations, and the transition of five communities to a different
operator on
• The
attributable to previously issued stock awards vesting and becoming fully
amortized. The Company did not issue any stock awards during the nine months
ended
• The
results from a decrease in depreciable assets at the Company's communities
resulting from the transition of 24 properties to management agreements
during 2020 and impairment on fixed assets recorded during the first quarter
of 2020, partially offset by an increase in expense due to a decrease in the
useful lives of fixed assets related to leased properties due to the
decrease in the remaining lease term as a result of the Ventas Agreement and
the Welltower Agreement.
• During the third quarter of 2020, the Company recorded
non-cash impairment charges, of which
equipment for one owned community due to the COVID-19 pandemic and lower
than expected operating performance at the community, as well as
million related to property and equipment for certain leased communities,
and $1.3 million related to operating lease right-of-use assets.
32
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• The
reimbursements due from the owners of six and 18 communities for which the
Company began providing management services on
2020, respectively.
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 in the third quarter of fiscal 2020 when compared
to the third quarter of fiscal 2019 primarily due to the early repayment of
mortgage debt associated with the disposition of four senior housing
communities since the first quarter of 2019 and a decrease in variable
interest rates quarter over quarter.
• The
termination, net, is due to the Company recognizing a
the transition of five properties to a different operator during the third
quarter of 2020.
• The Company recognized a
communities during the third quarter of 2020, which occurred in conjunction
with the Company's planned transition of the legal ownership of such
communities to Fannie Mae. The Company wrote off all fixed assets, accounts
receivable, and amounts held in escrow by the communities, and will
extinguish the debt and certain liabilities once legal ownership of the
properties transfers to Fannie Mae.
Provision for income taxes.
Provision for income taxes for the third quarter of fiscal 2020 was$0.1 million , or 0.05% of loss before income taxes, compared to a provision for income taxes of$0.1 million , or 0.6% of loss before income taxes, for the third quarter of fiscal 2019. The effective tax rates for the first quarters of fiscal 2020 and 2019 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 Texas Margin Tax ("TMT"), which effectively imposes tax on modified gross revenues for communities within theState of Texas . The Company consolidates 38 Texas communities, which contributes to the overall provision for income taxes. 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. At year end, the Company had a three-year cumulative operating loss for itsU.S. operations and accordingly, has provided a full valuation allowance on its 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.
Net loss and comprehensive loss.
As a result of the foregoing factors, the Company reported net loss and comprehensive loss of$215.0 million for the three months endedSeptember 30, 2020 , compared to net loss and comprehensive loss of$20.7 million for the three months endedSeptember 30, 2019 .
Nine Months Ended
Revenues. Revenue was$303.7 million for the nine month period endedSeptember 30, 2020 compared to$338.4 million for the nine month period endedSeptember 30, 2019 , representing a decrease of$14.9 million , or approximately 13.4%. The decrease in revenue is primarily due to the disposition of four communities since the first quarter of 2019 and the Company transitioning six of its senior housing communities to different operators and 24 communities to management agreements during 2020, which together accounted for a decrease to resident revenues of approximately$40.1 million , and a decrease in resident revenue at the Company's remaining senior housing communities of approximately$7.5 million , which was primarily due to a decrease of 430 basis points in financial occupancy. The decrease in the financial occupancy was primarily due to reduced move-in activity, which began in the second half ofMarch 2020 and continued throughout the third quarter of 2020, related to the COVID-19 pandemic and our response efforts. The decreases in revenue were partially offset by increases in management fees and community reimbursement revenue of$0.8 million and$11.9 million , respectively, which were due to the Company's management of six and 18 communities on the behalf of third parties, which commenced onMarch 1, 2020 andAugust 1, 2020 , respectively. 33
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Expenses.
Total expenses were$356.3 million in the first nine months of fiscal 2020 compared to$344.3 million in the first nine months of fiscal 2019, representing an increase of$12.0 million , or 3.5%. This increase is primarily the result of a$39.2 million increase in impairment expenses and a$11.9 million increase in community reimbursement expense, partially offset by a$18.4 million decrease in operating expenses, a$0.7 million decrease in general and administrative expenses, a$19.5 million decrease in facility lease expense, a$0.5 million decrease in depreciation and amortization expense, and a$0.1 million decrease in stock-based compensation expense.
• The
expenses, a
decrease in utilities, a
expenses, a
decrease in all other operating expenses, all of which were primarily due to
the disposition of four communities since the first quarter of 2019, the
transition of 24 communities to management agreements during the first nine
months of 2020 and reduced occupancy levels at our communities.
• The decrease in general and administrative expenses of
primarily due to a
primarily related to a decrease in claims paid, a
separation, placement, and retention costs primarily due to the replacement
of the Company's CEO and the separation of the Company's COO during the
first quarter of fiscal 2019, and a
expenses, primarily due to a change in the Company's paid time off policy in
2019, partially offset by increases in transaction and conversion costs of
supplement and maintain current staffing levels in a competitive labor
market, a $0.9 million increase in legal and filing fees, an increase in
other insurance related expenses of $0.3 million , and a $0.4 million
increase in all other general and administrative expenses.
• During the first nine months of 2020, the Company recorded
non-cash impairment charges, of which
equipment for one owned community due to the COVID-19 pandemic and lower
than expected operating performance at the community, as well as
million related to property and equipment for certain leased communities,
and $7.5 million related to operating lease right-of-use assets.
• The $19.5 million decrease in facility lease expense is primarily
attributable to the Company transitioning six communities to property
management agreements, effective March 1, 2020 , and the renegotiation of
lease agreements with two of the Company's landlords, which resulted in
reduced rent obligations.
• The decrease in stock-based compensation expense is primarily attributable
to previously issued stock awards vesting and becoming fully amortized. The
Company did not issue any stock awards during the nine months ended
resulting from the retirement of the Company's CEO and separation of the
Company's COO during the first quarter of fiscal 2019, which resulted in the
cancellation of their unvested restricted stock awards. 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.
• The
reimbursements due from the owners of communities for which the Company
began providing management services during the first nine months 2020.
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 in the first nine months of fiscal 2020 when
compared to the first nine months of fiscal 2019 primarily due to the early
repayment of mortgage debt associated with the closing of the Company's sale
of communities located in Kokomo, Indiana , Springfield, Missouri , and
Peoria, Illinois in 2019 and a decrease in variable interest rates
year-over-year.
• The write-down of assets held for sale during the first nine months of 2019
was attributable to a fair value remeasurement adjustment recorded by the
Company upon classifying one senior living community as held for sale. This
reclassification resulted in the Company determining that the assets had an
aggregate fair value, net of costs of disposal, that exceeded the carrying
values by
• The
termination, net, is due to the Company recognizing a
the Ventas Agreement, an
partially offset by a
during the third quarter of 2020.
• The
million loss on the sale of a senior housing community located in
loss on the disposition of 18
34
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communities during the third quarter of 2020, which occurred in conjunction
with the Company's planned transition of the legal ownership of such
communities to Fannie Mae. The Company wrote off all fixed assets, accounts
receivable, and amounts held in escrow by the communities, and will
extinguish the debt and certain liabilities once legal ownership of the
properties transfers to Fannie Mae.
Provision for income taxes.
Provision for income taxes for the first nine months of fiscal 2020 was$0.4 million , or 0.1% of loss before income taxes, compared to a provision for income taxes of$0.4 million , or 0.8% of loss before income taxes, for the first nine months of fiscal 2019. The effective tax rates for the first nine months of fiscal 2020 and 2019 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 Texas Margin Tax, which effectively imposes tax on modified gross revenues for communities within theState of Texas . The Company consolidates 38 Texas communities, which contributes to the overall provision for income taxes. 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. At year end, the Company had a three-year cumulative operating loss for itsU.S. operations and accordingly, has provided a full valuation allowance on its 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.
Net loss and comprehensive loss.
As a result of the foregoing factors, the Company reported net loss and comprehensive loss of$274.9 million for the nine months endedSeptember 30, 2020 , compared to net loss and comprehensive loss of$46.2 million for the nine months endedSeptember 30, 2019 .
Liquidity and Capital Resources
In addition to approximately$14.3 million of unrestricted cash balances on hand as ofSeptember 30, 2020 , the Company's principal sources of liquidity are expected to be cash flows from operations, additional proceeds from debt refinancings, COVID-19 relief funding (including the$8.1 million of cash the Company accepted pursuant to theProvider Relief Fund's Phase 2 General Distribution onNovember 6, 2020 , subsequent to quarter-end), equity issuances, and/or proceeds from the sale of owned assets. The Company is implementing plans, which includes strategic and cash-preservation initiatives, which are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. See "Going Concern and Management's Plan." The Company's long-term capital requirements are and will be dependent on its ability to access additional funds through the debt and/or equity markets or additional sales of assets. The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio including debt refinancings, equity issuances, purchases and sales of assets, reorganizations 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. Recent changes in the current 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 or refinancings for the Company or buyers of the Company's properties more difficult or on terms not acceptable to the Company.
In summary, the Company's cash flows were as follows (in thousands):
Nine Months Ended September 30,
2020 2019Net cash provided by (used in) operating activities $ (5,370 )
$ (752 ) Net cash used in investing activities (4,815 ) (9,383 ) Net cash used in financing activities (8,603 ) (13,409 ) Net decrease in cash and cash equivalents$ (18,788 ) $ (23,544 ) Operating activities. The net cash used in operating activities for the nine months endedSeptember 30, 2020 primarily results from a net loss of$274.9 million , decreases in cash flows from current assets of$3.7 million and decreases from current liabilities of$12.1 million , partially offset by net non-cash charges of$261.1 million . The net cash used in operating activities for the nine months endedSeptember 30 , 35
-------------------------------------------------------------------------------- 2019 primarily results from by a net loss of$46.2 million , decreases in cash flows from current assets of$2.1 million and decreases from current liabilities of$4.4 million , partially offset by net non-cash charges of$52.0 million .
Investing activities.
The net cash used in investing activities for the nine months endedSeptember 30, 2020 primarily results from ongoing capital improvements and refurbishments at the Company's senior housing communities of$11.2 million , partially offset by$6.4 million in proceeds from the disposition of assets. The net cash used in investing activities for the nine months endedSeptember 30, 2019 primarily results from capital expenditures of$14.3 million associated with ongoing capital improvements and refurbishments at the Company's senior housing communities and$4.9 million of proceeds from the disposition of assets associated with the Kokomo Sale Transaction.
Financing activities.
The net cash used in financing activities for the nine months endedSeptember 30, 2020 primarily results from proceeds from notes payable of$2.2 million , repayments of notes payable of$10.4 million , and payments on financing obligations of$0.4 million . The net cash used in financing activities for the nine months endedSeptember 30, 2019 primarily results from$5.3 million of proceeds from notes payable related to insurance premium financing, repayments of notes payable of$16.9 million , and payments on financing obligations of$1.1 million . Debt transactions.
Transactions Involving Certain Fannie Mae Loans
The CARES Act, among other things, permitted borrowers with mortgages fromGovernment Sponsored Enterprises who experienced a financial hardship related to COVID-19 to obtain forbearance of their loans for up to 90 days. OnMay 7, 2020 , the Company entered into forbearance agreements withBerkadia Commercial Mortgage LLC , as servicer of 23 of its Fannie Mae loans covering 20 properties. OnMay 9, 2020 , the Company entered into a forbearance agreement withWells Fargo Bank ("Wells Fargo"), as servicer of one Fannie Mae loan covering one property. OnMay 20, 2020 , the Company entered into forbearance agreements withKeyBank , as servicer of three Fannie Mae loans covering two properties. The forbearance agreements allowed the Company to withhold the loan payments due under the loan agreements for the months of April, May andJune 2020 ("Deferred Payments") and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. During this three-month loan payment forbearance, the Company agreed to pay to Fannie Mae monthly all net operating income, if any, as defined in the forbearance agreement, for the properties receiving forbearance. OnJuly 8, 2020 , the Company entered into forbearance extension agreements with Fannie Mae, which provided for a one month extension of the forbearance agreements between it and Fannie Mae covering 23 properties. The forbearance extension agreements extended the forbearance period untilJuly 31, 2020 , and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. ByJuly 31, 2020 , the Company was required to repay to Fannie Mae the deferred payments, less payments made during the forbearance period. OnJuly 31, 2020 , the Company made required payments to Fannie Mae totaling$0.6 million , which included the deferred payments, less payments made during the forbearance period, for five properties with forbearance agreements. The Company elected not to pay$3.8 million on the loans for the remaining 18 properties as of that date as it initiated a process which is 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 default, Fannie Mae filed a motion with theUnited States District Court requesting that a receiver be appointed over the 18 properties, which was approved by the court. The Company agreed to continue to manage the 18 communities, subject to earning a management fee, until legal ownership of the properties is transferred to Fannie Mae. In conjunction with the receivership order, the Company must obtain approval from the receiver for all payments, but will receive reimbursements from Fannie Mae for any payments made on behalf of any of the 18 communities under the receivership order. As a result of the events of default and receivership order, the Company discontinued recognizing revenues and expenses related to the 18 properties effectiveAugust 1, 2020 , which was the date of default. Management fees earned from the properties are recognized as revenue when earned. In addition, the Company concluded it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, all amounts held in escrow by Fannie Mae had been forfeited, and that the Company no longer has control of the properties in accordance ASC 610-20. As such, the Company derecognized the assets and recorded a loss of$191.0 million on the transaction for the three and nine months endedSeptember 30, 2020 . Once legal ownership of the properties transfers to Fannie Mae and the liabilities relating to such communities have been extinguished, the Company expects to recognize a gain related to the extinguishment in accordance with ASC 470. AtSeptember 30, 2020 , the Company included$217.7 million in outstanding debt and$6.1 million of accrued interest on the Company's Consolidated Balance Sheets related to these properties.
Debt Forbearance Agreement on BBVA Loan
The Company also entered into a loan amendment with another lender,
36
--------------------------------------------------------------------------------Debt Forbearance Agreement on HUD Loan
The Company also entered into a debt forbearance agreement withORIX Real Estate Capital, LLC ("ORIX"), related to aU.S. Department of Housing and Urban Development ("HUD") loan covering one property pursuant to which the Company deferred monthly debt service payments for April, May andJune 2020 , which deferred payments are added to the regularly scheduled payments in equal installments for one year following the forbearance period.
Protective Life Amendments to Loan Agreements and Loan Modification and Temporary Deferral Agreements
OnMay 21, 2020 , the Company entered into amendments to its loan agreements with one of its lenders,Protective Life Insurance Company , related to loans covering 10 properties. These amendments allowed the Company to defer principal and interest payments for April, May andJune 2020 and to defer principal payments forJuly 2020 throughMarch 2021 . The Company made all required debt service payments in July, August, andSeptember 2020 . OnOctober 1, 2020 , the Company entered into amendments to its loan agreements with one of its lenders,Protective Life Insurance Company , related to loans covering 10 properties. These amendments allow the Company to defer interest payments for October, November, andDecember 2020 and to extend the deferral period of principal payments throughSeptember 1, 2021 , with all such deferral amounts being added to principal due at maturity in either 2025 or 2026, depending upon the loan.
Letters of Credit
The Company previously issued standby letters of credit with Wells Fargo,
totaling approximately
The Company previously issued standby letters of credit withJP Morgan Chase Bank ("Chase"), totaling approximately$6.5 million , for the benefit of Welltower, in connection with certain leases between Welltower and the Company. The letters of credit were surrendered to Welltower in conjunction with the Welltower Agreement during the quarter endedJune 30, 2020 . The Company previously issued standby letters of credit with Chase, totaling approximately$2.9 million , for the benefit of Healthpeak in connection with certain leases between Healthpeak and the Company. The letters of credit were released to the Company during the first quarter of 2020 and were subsequently included in cash and cash equivalents on the Company's Consolidated Balance Sheets.
Notes Payable
OnJune 15, 2020 , the Company renewed certain insurance policies and entered into a finance agreement totaling approximately$2.2 million . The finance agreement has a fixed interest rate of 4.60% with the principal being repaid over a 10-month term. OnMay 20, 2020 , the Company entered into an agreement with Healthpeak, effectiveApril 1, 2020 , through the lease term endingOctober 31, 2020 , to defer a percentage of rent payments. AtSeptember 30, 2020 , the Company had deferred$1.4 million in rent payments, which is included in notes payable, net of deferred loan costs and current portion on the Company's Consolidated Balance Sheets. There are various financial covenants and other restrictions within the Company's debt agreements. Except as noted below, the Company was in compliance with all of its outstanding indebtedness atSeptember 30, 2020 andDecember 31, 2019 . Pursuant to the forbearance agreements described above under "Transactions Involving Certain Fannie Mae Loans," the Company withheld loan payments due under loan agreements with Fannie Mae covering certain of the Company's communities for the months of April through September of 2020. Additionally, the Company does not expect to be in compliance with a certain financial covenant of its loan agreement withFifth Third Bank , on the Company'sAutumn Glen andCottonwood Village properties, as ofSeptember 30, 2020 , in which a minimum debt service coverage ratio must be maintained. However, cure provisions within the debt agreement allow the Company to make a principal payment to bring the debt service coverage ratio into compliance. The Company is in active negotiations withFifth Third Bank to resolve this noncompliance, but cannot give any assurance that a mutually agreed resolution will be reached. If a mutually agreed upon solution is not reached, the Company may be found in default of the debt agreement. In the event of default, Fifth Third has the right to declare all amounts outstanding to be immediately due and payable. 37
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