SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and Corporate Governance.
Information Concerning Directors
The Company’s Boarduncertainties and include all statements that are not historical statements of Directors (the “Board”) consistsfact and those regarding our intent, belief or expectations. Forward-looking statements are generally identifiable by use of nine directorsforward-looking terminology such as "may," "will," "should," "could," "would," "potential," "intend," "expect," "endeavor," "seek," "anticipate," "estimate," "believe," "project," "predict," "continue," "plan," "target," or other similar words or expressions. These forward-looking statements are based on certain assumptions and expectations, and our ability to predict results or the actual effect of future plans or strategies is currently divided into three classes. Weinherently uncertain. Although we believe that expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our assumptions or expectations will be attained and actual results and performance could differ materially from those projected. Factors which could have a material adverse effect on our operations and future prospects or which could cause events or circumstances to differ from the forward-looking statements include, but are not limited to, the impacts of the COVID-19 pandemic, including the response efforts of federal, state, and local government authorities, businesses, individuals, and us on our business, results of operations, cash flow, liquidity, and our strategic initiatives, including plans for future growth, which will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth 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, availability, utilization, and efficacy of COVID-19 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, including our ability to qualify for and satisfy the terms and conditions of financial relief, 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, housing markets, and equity markets caused by COVID-19, changes in the processacuity levels of declassifyingour new residents, the Board usingdisproportionate impact of COVID-19 on seniors generally and those residing in our communities, the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, and other expenses, the impact of COVID-19 on our ability to complete financings, refinancings, or other transactions (including dispositions and our pending Health Care Services transaction) 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, including unfunded, mandatory testing, increased enforcement actions resulting from COVID-19, government action that may limit our collection or discharge 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; events which adversely affect the ability of seniors to afford resident fees, including downturns in the economy, housing market, consumer confidence, or the equity markets and unemployment among resident family members; changes in reimbursement rates, methods, or timing under governmental reimbursement programs including the Medicare and Medicaid programs; the impact of ongoing healthcare reform efforts; the effects of senior housing construction and development, lower industry occupancy (including due to the pandemic), and increased competition; conditions of housing markets, regulatory changes, acts of nature, and the effects of climate change in geographic areas where we are concentrated; terminations of our resident agreements and vacancies in the living spaces we lease, including due to the pandemic; limits on our ability to use net operating loss carryovers to reduce future tax payments; failure to maintain the security and functionality of our information systems, to prevent a phased approachcybersecurity attack or breach, or to comply with applicable privacy and consumer protection laws, including HIPAA; our ability to complete our capital expenditures in accordance with our plans; our ability to identify and pursue development, investment and acquisition opportunities and our ability to successfully integrate acquisitions; competition for the acquisition of assets; our ability to complete pending or expected disposition, acquisition, or other transactions (including our pending Health Care Services transaction) on agreed upon terms or at all, including in respect of the satisfaction of closing conditions, the risk that regulatory approvals are not obtained or are subject to unanticipated conditions, and uncertainties as to the timing of closing, and our ability to identify and pursue any such opportunities in the future; risks related to the implementation of our strategy, including initiatives undertaken to execute on our strategic priorities and their effect on our results; delays in obtaining regulatory approvals; disruptions in the financial markets or decreases in the appraised values or performance of our communities that affect our ability to obtain financing or extend or refinance debt as it matures and our financing costs; our ability to generate sufficient cash flow to cover required interest and long-term lease payments and to fund our planned capital projects; the effect of our non-compliance with any of our debt or lease agreements (including the financial covenants contained therein), including the risk of lenders or lessors declaring a cross default in the event of our non-compliance with any such agreements and the risk of loss of our property securing leases and indebtedness due to any resulting lease terminations and foreclosure actions; the effect of our indebtedness and long-term leases on our liquidity; the potential phasing out of LIBOR which may increase the costs of our debt obligations; our ability to obtain additional capital on terms acceptable to us; departures of key officers and potential disruption caused by changes in management; increased competition for or a shortage of personnel (including due to the pandemic), wage pressures resulting from increased competition, low unemployment levels, minimum wage increases and changes in overtime laws, and union activity; environmental contamination at any of our communities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us, including class action and stockholder derivative complaints; the cost and difficulty of complying with increasing and evolving regulation; costs to respond to, and adverse determinations resulting from, government reviews, audits and investigations; unanticipated costs to comply with legislative or regulatory developments; the risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, costs of salaries, wages, benefits, and insurance, interest rates, and tax rates; the impact of seasonal contagious illness or an outbreak of COVID-19 or other contagious disease in the markets in which we operate; actions of activist stockholders, including a proxy contest; as well as other risks detailed from
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time to time in our filings with the Securities and Exchange Commission, including those set forth under "Item 1A. Risk Factors" contained in this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in such SEC filings. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management's views as of the date of this Annual Report on Form 10-K. We cannot guarantee future results, levels of activity, performance or achievements, and, except as required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
RISK FACTOR SUMMARY
Our business faces significant risks and uncertainties. You should carefully review and consider the full discussion of our risk factors set forth under "Item 1A. Risk Factors" contained in this Annual Report on Form 10-K, in addition to other information contained in this Annual Report on Form 10-K. If any of these risks actually occurs, our business, financial condition, results of operations, cash flow, liquidity, and future prospects could be materially and adversely affected. The following is a summary of the principal risks that could adversely affect our business, results of operations, cash flow, liquidity, and future prospects.
•The COVID-19 pandemic, including the response efforts of federal, state, and local government authorities, businesses, individuals and us, has adversely impacted, and likely will continue to adversely impact our business, results of operations, cash flow, liquidity, and stock price, and such impacts may be material. The ultimate impacts of COVID-19 on our business, results of operations, cash flow, liquidity, and stock price will depend on many factors, some of which cannot be foreseen, including those set forth in amendments“Item 1A. Risk Factors.”
•Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our resident fees (including downturns in the economy, housing market, consumer confidence, or the equity markets and unemployment among resident family members) could cause our occupancy, revenues, results of operations, and cash flow to decline.
•Changes in the reimbursement rates, methods, or timing of payment from government reimbursement programs could adversely affect our revenues, results of operations, and cash flow.
•The impact of ongoing healthcare reform efforts on our business cannot accurately be predicted.
•Senior housing construction and development, lower industry occupancy (including due to pandemic), and increased competition, may have an adverse effect on our occupancy, revenues, results of operations, and cash flow.
•The geographic concentration of our communities could leave us vulnerable to an economic downturn, regulatory changes, acts of nature, or the effects of climate change in those areas, which could negatively impact our financial condition, revenues, results of operations, and cash flow.
•Termination of our resident agreements and vacancies in the living spaces we lease, including due to the pandemic, could adversely affect our occupancy, revenues, results of operations, and cash flow.
•Our ability to use net operating loss carryovers to reduce future tax payments may be limited.
•Failure to maintain the security and functionality of our information systems and data, to prevent a cybersecurity attack or breach, or to comply with applicable privacy and consumer protection laws, including HIPAA, could adversely affect our business, reputation, and relationships with our residents, patients, employees, and referral sources and subject us to remediation costs, government inquiries, and liabilities, any of which could materially and adversely impact our revenues, results of operations, cash flow, and liquidity.
•Failure to complete our capital expenditures in accordance with our plans may adversely affect our anticipated revenues, results of operations, and cash flow.
•To the extent we identify and pursue any future development, investment, or acquisition opportunities, we may encounter difficulties in identifying opportunities at attractive prices or integrating acquisitions with our operations, which may adversely affect our financial condition, results of operations, and cash flow.
•Competition for the acquisition of strategic assets from buyers with greater financial resources or lower costs of capital than us or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.
•Pending disposition transactions are, and any future disposition transactions will be, subject to various closing conditions, including the receipt of regulatory approvals where applicable, likely will result in reductions to our Certificaterevenue and may negatively impact our results of Incorporation approvedoperations and cash flow.
•The closing of the pending sale of 80% of our equity in our Health Care Services segment may not be completed in accordance with our expectations or at all, and may not generate cash proceeds to us in the amount we anticipate, and the pending sale may disrupt our financial condition, results of operations, and cash flow.
•Our execution of our strategy may not be successful, and initiatives undertaken to execute on our strategic priorities may adversely affect our business, financial condition, results of operations, cash flow, and the price of our common stock.
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•Disruptions in the financial markets or decreases in the appraised values or performance of our communities could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our liquidity, financial condition, and the market price of our common stock.
•If we are unable to generate sufficient cash flow to cover required interest and lease payments, this could result in defaults of the related debt or leases and cross-defaults under our other debt or lease documents, which would adversely affect our capital structure, financial condition, results of operations, and cash flow.
•Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business.
•Our debt and lease documents contain financial and other covenants, and any default under such documents could result in the acceleration of our indebtedness and lease obligations, the foreclosure of our mortgaged communities, the termination of our leasehold interests, and/or cross-defaults under our other debt or lease documents, any of which could materially and adversely impact our capital structure, financial condition, results of operations, cash flow, and liquidity and interfere with our ability to pursue our strategy.
•Lease obligations and mortgage debt expose us to increased risk of loss of property, which could harm our ability to generate future revenues and could have an adverse tax effect.
•Increases in market interest rates could significantly increase the costs of our debt obligations, which could adversely affect our results of operations and cash flow.
•We may need additional capital to fund our operations, capital expenditure plans, and strategic priorities, and we may not be able to obtain it on terms acceptable to us, or at all.
•The transition of management or unexpected departure of our key officers could harm our business.
•Increased competition for, or a shortage of, personnel (including due to the pandemic), wage pressures resulting from increased competition, low unemployment levels, increased unemployment benefits, minimum wage increases, changes in overtime laws, and union activity may have an adverse effect on our business, results of operations and cash flow.
•Environmental contamination at any of our communities could result in substantial liabilities to us, which may exceed the value of the underlying assets and which could materially and adversely affect our financial condition, results of operations, and cash flow.
•Failure to comply with existing environmental laws could result in increased expenditures, litigation, and potential loss to our business and in our asset value, which would have an adverse effect on our financial condition, results of operations, and cash flow.
•Significant legal actions and liability claims against us, including class action and stockholder derivative complaints, could subject us to increased operating costs and substantial uninsured liabilities, which may adversely affect our financial condition and results of operations.
•We face periodic and routine reviews, audits, and investigations by government agencies, and any adverse findings could negatively impact our business, financial condition, results of operations, and cash flow.
•The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect on our business, results of operations, and cash flow.
•Compliance with the Americans with Disabilities Act and Fair Housing Act, safety and health standards of the Occupational Safety and Health Administration, and other fire, safety, health, and other regulations may require us to make unanticipated expenditures, which could increase our costs and therefore adversely affect our results of operations and financial condition.
•Anti-takeover provisions in our organizational documents may delay, deter, or prevent a tender offer, merger, or acquisition that investors may consider favorable.
•We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations.
•Various factors, including general economic conditions and the spread of contagious illnesses, could adversely affect our financial performance and other aspects of our business.
•The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
•Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
•Actions of activist stockholders could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect on our business, results of operations, cash flow, and the market price of our common stock.
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PART I
Item 1. Business
Unless otherwise specified, references to "Brookdale," "we," "us," "our," or "the Company" in this Annual Report on Form 10-K mean Brookdale Senior Living Inc. together with its consolidated subsidiaries.
Our Business
As of December 31, 2020, we are the largest operator of senior living communities in the United States based on total capacity, with 726 communities in 43 states and the ability to serve approximately 64,000 residents. We offer our residents access to a broad continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). We also offer a range of home health, hospice, and outpatient therapy services to more than 17,000 patients as of that date.
Our community and service offerings combine housing with hospitality and healthcare services. Our senior living communities offer residents a supportive home-like setting, assistance with activities of daily living ("ADLs") such as eating, bathing, dressing, toileting, transferring/walking, and, in certain communities, licensed skilled nursing services. We also provide home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to age-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives.
Strategy
Our goal is to be the first choice in senior living by being the nation's most trusted and effective senior living provider and employer. We believe there are significant opportunities to create and deliver stockholder value as we execute on our strategy to achieve this goal. We continue to execute our core operational strategy that we initiated in early 2018, and we believe successful execution on that strategy provides the best opportunity for us to navigate and recover from the pandemic and to create stockholder value. We have supplemented our operational strategy with initiatives intended to complement and enhance our core operational efforts and to position us for future growth and success as we encounter changes and trends in demographics, customer preferences, technology, and healthcare delivery and outcomes. Our refined strategy is focused on these priorities:
•Continued Operational Improvement and Efficiency. We are focused on our core senior living communities and intend to continue to drive operational improvements. Through our "win locally" initiative, we intend to provide choices for high quality care and personalized service by caring associates while leveraging our industry-leading scale and experience. Such efforts include optimizing our sales and marketing processes, prioritizing communities with the most opportunities for growth, and ensuring that our communities and their programming are competitive in the market. We also continue to focus on attracting, engaging, developing, and retaining the best associates by maintaining a compelling value proposition in the areas of leadership, career development, and meaningful work. We believe engaged associates lead to lower turnover, improved operations, and ultimately an enhanced resident experience that drives accelerated growth. To sharpen our focus on our core senior living operations, we are (and have been) executing on initiatives to reduce the complexity of our business and to ensure appropriate risk-reward tradeoffs in our highly regulated product lines. Such initiatives include exiting substantially all our entry fee CCRC business in 2020 (which also significantly reduced the number of skilled nursing facilities we operate) and continuing to optimize our management services business.
•Senior Living Portfolio. Since initiating our operational turnaround strategy in early 2018, we have continued our portfolio optimization initiative through which we have disposed of owned and leased communities and restructured leases. Such transactions have included restructuring our leases with our three largest landlords, sales and conveyance of owned communities, and dispositions of substantially all of our remaining ownership interests in unconsolidated ventures, including our entry fee CCRC venture with Healthpeak Properties, Inc. ("Healthpeak"). As we move forward in 2021, we intend to continue to (i) expand our footprint and services in core markets where we have, or can achieve, a clear leadership position, (ii) execute an ongoing capital recycling program through acquiring leased or managed communities and exiting underperforming owned assets or leases when possible, and (iii) pivot back to portfolio growth through targeted development, investment, and acquisition opportunities. We will continue to invest in our development capital expenditures program through which we expand, renovate, reposition, and redevelop selected existing senior living communities where economically advantageous, although at a reduced pace during the pandemic.
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•Expansion of Healthcare and Service Platform. Our vision is to enable those we serve to live well by offering our residents the highest-quality healthcare and wellness platform in the senior living industry. We intend to further integrate our healthcare service model in certain markets in 2021. We also intend to pursue initiatives designed to accelerate growth in our healthcare services offered to residents within our communities and private duty services business. Such initiatives may include implementation of improvements to our sales and marketing efforts associated with our healthcare services, pursuit of additional or expanded relationships with managed care providers, and further development of healthcare relationships to capitalize on growth opportunities. We believe the successful execution of these initiatives and our healthcare strategy will drive incremental revenue by increasing move-ins, improving resident health and wellbeing, and as a result extend residents' average length of stay and increase occupancy. We also believe that we will improve the results of operations as we further develop as a partner of choice for healthcare service or payor organizations seeking to provide services within our communities and/or improve health outcomes at an overall lower cost of care.
•Driving Innovation and Leveraging Technology. We are engaged in a variety of innovation initiatives and over time plan to pilot and test new ideas, technologies, and operating models in order to enhance our residents' engagement and experience, improve outcomes, and increase average length of stay and occupancy. With our technology platform, we also expect to identify solutions to reduce complexity, increase productivity, lower costs, and increase our ability to collaborate with third parties.
Recent Developments
COVID-19 Pandemic
The COVID-19 pandemic has adversely impacted, and likely will continue to adversely impact the senior living industry and our business. Due to the average age and prevalence of chronic medical conditions among our residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. We continue to serve and care for seniors at our communities and their homes through the pandemic. A significant portion of our corporate support associates have worked from home since March 2020.
The health and wellbeing of our residents, patients, and associates is and has been our highest priority. We initiated our COVID-19 preparation efforts in January 2020. Our response efforts center on infection prevention and control protocols, including following requirements and guidance of federal, state, and local governments and agencies, including the U.S. Centers for Disease Control and Prevention ("CDC") and U.S. Centers for Medicare & Medicaid Services ("CMS"). We have enhanced and reinforced training our associates in such protocols and continue to actively monitor government requirements and guidance and adapt our policies, procedures, and response efforts when applicable. Upon confirmation of positive COVID-19 exposure at a community, we take actions intended to minimize further exposure, including associates' adhering to personal protection protocols, isolating residents or finding placement in an alternate care setting to best address their care needs, and in some cases, restricting new resident admissions, as directed by local health authorities.
Seeking to prevent the introduction of COVID-19 into our communities, and to help control further exposure to infections within communities, in March 2020 we began restricting visitors at all our communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and requiring new residents and residents returning from a hospital or nursing home to isolate in their apartment for fourteen days. These restrictions were in place across our portfolio for the three months ended June 30, 2020. We have adopted a framework for determining when to ease restrictions at each of our communities based on several criteria, including regulatory requirements and guidance, completion of baseline testing at the 2018community, and 2019the presence of current confirmed positive COVID-19 cases. Under this framework, we began easing restrictions on a community-by-community basis in July 2020 where regulatory requirements and guidance allowed, which easing may have included permitting outdoor, and in some cases, indoor visits with families, reduced capacity or socially distanced communal dining, limited communal activities programming, and in-person prospective resident visits. Although we are hopeful that administration of the vaccine to our residents and associates will enable us to further ease restrictions at our communities, those restrictions may continue for some time, and we may revert to more restrictive measures if the pandemic worsens, as necessary to comply with regulatory requirements, or at the direction of state or local health authorities.
In April 2020, we proactively commenced a resident and associate testing program for our communities. We undertook the program to identify positive, including asymptomatic, individuals, to better understand how our infection protocols are working, to help minimize the exposure to residents and associates of someone known to be COVID-19 positive, and in some cases to comply with state and local testing requirements. In July 2020, we completed baseline testing at all of our communities,
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and we have continued testing residents and associates at many of our communities. We also continue to utilize rapid point of care antigen test kits supplied by the U.S. Department of Health and Human Services ("HHS") at those of our communities with Clinical Laboratory Improvement Amendments ("CLIA") waivers. Our testing program has accumulated approximately 320,000 test results. Approximately 1.2% of our residents were known to have current COVID-19 positive test results on February 22, 2021. Further testing, whether undertaken proactively, as a result of regulatory requirements, or at the direction of state or local health authorities, may result in significant additional expense, additional temporary restrictions on move-ins at affected communities, continued need for isolating positive residents, increased use of personal protective equipment ("PPE") by our associates, and increased employee-related costs.
In December 2020, two COVID-19 vaccines received emergency use authorization from the U.S. Food and Drug Administration. We elected to work with CVS Health Corporation, with whom we have a longstanding relationship to provide flu shot clinics in our communities, to administer vaccinations on site to our eligible residents and associates through the Pharmacy Partnership for Long-Term Care Program offered through the CDC. Our work to prepare for and host vaccine clinics includes extensive planning, gathering insurance information, obtaining consents, scheduling appointments, holding educational sessions with residents, families, and associates and detailed coordination of traffic flow and observation areas. We hosted our first clinics on December 18, 2020 and by January 22, 2021 had hosted over 500 community vaccine clinics. As of February 22, 2021, first dose vaccine clinics had been completed for residents and associates at 100% of our communities and approximately 85% of our communities have had second dose vaccine clinics.
The pandemic, including the related restrictions at our communities, have significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. We believe potential residents and their families are more cautious regarding moving into senior living communities while the pandemic continues, and such caution may persist for some time. In response to these developments, we have redesigned our sales process to include virtual tours, video engagement, and outdoor prospective resident meetings, enhanced and adapted our marketing programs to address the social distancing environment, and sought to strengthen our relationships with referral sources. During the third quarter of 2020, we returned to using in-person prospective resident visits for a majority of our communities. However, several large markets continue with virtual-only prospective resident visits as of December 31, 2020. We have placed restrictions on move-ins at our communities when circumstances warrant, including at the direction of state or local health authorities. Although these restrictions began to ease considerably in August 2020, restrictions on move-ins escalated throughout the fourth quarter of 2020 due to the resurgence of the virus. At the end of the second, third, and fourth quarters of 2020, 86%, 98%, and 89% of our communities, respectively, were accepting new move-ins. As of February 22, 2021, 97% of our communities were accepting new move-ins. We cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on demand may adversely affect the amount of resident fees we are able to collect from our residents.
The pandemic, including the related restrictions at our communities, began to adversely impact our occupancy and resident fee revenue significantly during March 2020, as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. The year-over-year decrease in monthly move-ins of our same community portfolio has moderated from 64.2% in April 2020 to 26.5% in December 2020. Our consolidated senior housing portfolio's weighted average occupancy has declined in each month of the pandemic, from 82.7% in March 2020 to 71.5% in December 2020, and was 70.0% in January 2021. We estimate that the pandemic, including the related restrictions at our communities, resulted in $281.1 million of lost resident fee revenue for the year ended December 31, 2020, including $228.5 million of lost resident fee revenue in our consolidated senior housing portfolio. Further deterioration of our resident fee revenue will result from lower move-in activity and the resident attrition inherent in our business, which may increase due to the impacts of COVID-19. Our home health average daily census also began to decrease in March 2020 due to lower occupancy in our communities and fewer elective medical procedures and hospital discharges, resulting in a 14.6% year-over-year decline in home health average daily census for the year ended December 31, 2020. We expect home health average daily census to continue to gradually recover sequentially with increased elective medical procedures and hospital discharges and senior housing occupancy. We estimate that the pandemic, including the related restrictions at our communities, resulted in $52.6 million of lost resident fee revenue for the Health Care Services segment for the year ended December 31, 2020.
Facility operating expense for the year ended December 31, 2020 includes $125.5 million of incremental direct costs to prepare for and respond to the pandemic, including costs for: acquisition of additional PPE, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs may continue to be substantial. We also recorded non-cash impairment charges in our operating results of $105.6 million for the year ended December 31, 2020 for our operating lease right-of-use assets and property, plant and equipment and leasehold intangibles, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities with impaired assets.
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We have taken, and continue to take, actions to enhance and preserve our liquidity in response to the pandemic. During the year ended December 31, 2020, we completed our financing plans in the regular course of business, including refinancing substantially all of our 2020 and 2021 maturities. In addition, on August 31, 2020, we terminated our $250 million revolving credit facility and obtained $266.9 million of non-recourse mortgage financing on 16 communities, most of which had secured the credit facility prior to its termination. During the year ended December 31, 2020, we accepted $109.8 million of cash for grants under the Public Health and Social Services Emergency Fund ("Provider Relief Fund") and $87.5 million of accelerated/advanced Medicare payments, and we deferred $72.7 million of the employer portion of social security payroll taxes. These programs were created or expanded under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), as described below. We also delayed or canceled a number of elective capital expenditure projects, resulting in an approximate $67 million reduction to our pre-pandemic full-year 2020 capital expenditure plans, and suspended repurchases under our existing share repurchase program. On July 26, 2020, we restructured our 120 community triple-net master lease with Ventas, Inc. ("Ventas") in a multipart transaction. The components included, among other things, reducing our initial annual minimum rent to $100 million, representing a reduction of approximately $86 million over the twelve months ending June 30, 2021, and removal of the prior requirements that we satisfy financial covenants and maintain a security deposit with Ventas. We paid a $119.2 million one-time cash lease payment to Ventas in connection with our lease restructuring transaction effective July 26, 2020.
As of December 31, 2020, our total liquidity was $575.5 million, consisting of $380.4 million of unrestricted cash and cash equivalents, $172.9 million of marketable securities, and $22.2 million of availability on our secured credit facility. We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline, continuing to evaluate our financing structure and the state of debt markets, seeking further government-sponsored financial relief related to the COVID-19 pandemic, and completing the pending sale of 80% of the equity in our Health Care Services segment. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief, or that the closing of the pending transaction will be completed in accordance with our expectations, or at all, or generate cash proceeds to us in the amount we anticipate.
The CARES Act, signed into law on March 27, 2020, and Paycheck Protection Program and Health Care Enhancement Act, signed into law on April 24, 2020, provide liquidity and financial relief to certain businesses, among other things. The impacts to us of certain provisions of the CARES Act are summarized below.
•During the year ended December 31, 2020, we accepted $109.8 million of cash for grants from the Provider Relief Fund under which grants have been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The accepted grants were made available pursuant to the following distributions from the Provider Relief Fund:
•$101.7 million pursuant to General Distributions, with the aggregate amount ultimately determined based on a percentage of our year-over-year changes in patient care revenue and certain operating and other expenses for the first and second quarters of 2020.
•$4.6 million pursuant to the Skilled Nursing Facility Targeted Distribution, which generally related to our certified skilled nursing facilities.
•$3.5 million pursuant to the Nursing Home Infection Control Distribution, including incentive payments, which related to our skilled nursing care provided through our CCRCs.
Grants received from the Provider Relief Fund are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for healthcare related expenses or lost revenues that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. The permissible uses of grants from the Nursing Home Infection Control Distribution are further limited to certain infection control expenses. The program requires us to report to HHS on our use of the grants, and our reporting is subject to audit. During the year ended December 31, 2020, we recognized $109.8 million of the grants as other operating income based upon our estimates of our satisfaction of the conditions of the grants during such period.
HHS continues to evaluate future allocations of, and regulation and guidance regarding, grants made under the Provider Relief Fund. We intend to pursue additional funding that may become available. However, there can be no assurance that we will qualify for, or receive, grants in the amount we expect, that additional restrictions on the permissible uses or terms and conditions of the grants will not be imposed by HHS, or that future funding programs will be made available for which we qualify.
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•During the year ended December 31, 2020, we received $87.5 million under the Accelerated and Advance Payment Program administered by CMS, which was temporarily expanded by the CARES Act. Approximately $75.2 million related to our Health Care Services segment and the remainder related to our CCRCs segment. Under the program, we requested acceleration/advancement of 100% of our Medicare payment amount for a three-month period. The Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment terms for accelerated/advanced payments. As amended, recoupment of accelerated/advanced payments will begin one year after payments were issued. Payments will be recouped at a rate of 25% of Medicare payments for the first eleven months following the anniversary of issuance and at a rate of 50% of Medicare payments for the next six months. Any outstanding balance of accelerated/advanced payments will be due following such recoupment period. Pursuant to the Purchase Agreement (as defined below) we expect to repay the then outstanding balance of such accelerated/advance payments related to our Health Care Services segment at the closing of the sale of 80% of our equity in our Health Care Services segment.
•Under the CARES Act, we have elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 through December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. As of December 31, 2020, we have deferred payment of $72.7 million under the program.
•The CARES Act temporarily suspended the 2% Medicare sequestration for the period May 1, 2020 to December 31, 2020, which primarily benefited our Health Care Services segment. This suspension had a favorable impact of $4.0 million on the segment’s resident fee revenue for the year ended December 31, 2020. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended the sequestration suspension through March 31, 2021.
•We are eligible to claim the employee retention tax credit for certain of our associates under the CARES Act. The refundable tax credit for 2020 is available to employers that fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, and is equal to 50% of stockholders.qualified wages paid after March 12, 2020 through December 31, 2020 to qualified employees, with a maximum credit of $5,000 per employee. We estimate that we will be eligible to claim tax credits of approximately $10 million for 2020. The credit was modified and extended for wages paid from January 1, 2021 through June 30, 2021 by the Consolidated Appropriations Act, 2021, and we are assessing our eligibility to claim such credit. There can be no assurance that we will qualify for, or receive, tax credits in the amount we expect.
In addition to the grants described above, we have received and recognized $5.9 million of other operating income from grants from other government sources.
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 response efforts may continue to delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth 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, availability, utilization, and efficacy of COVID-19 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, including our ability to qualify for and satisfy the terms and conditions of financial relief; 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, housing markets, 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 response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, 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, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19; government action that may limit our collection or discharge 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.
2021 Pending Sale of Health Care Services
On February 24, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with affiliates of HCA Healthcare, Inc. (“HCA Healthcare”), providing for the sale of 80% of our equity in our Health Care Services segment for a
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purchase price of $400 million in cash, subject to certain adjustments set forth in the Purchase Agreement, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment, which were $75.2 million and $8.2 million, respectively, as of December 31, 2020. We expect our net cash proceeds at the closing will be approximately $300 million, subject to the timing of closing with respect to the adjustments set forth in the Purchase Agreement. The Purchase Agreement also contains certain agreed upon indemnities for the benefit of the purchaser. The closing of the sale transaction is anticipated to occur in the late first half or early second half of 2021, subject to receipt of applicable regulatory approvals and satisfaction of other customary closing conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, at closing of the transaction, we will retain a 20% equity interest in the business. Upon closing, we expect that the results and financial position of our Health Care Services segment will be deconsolidated from our financial statements and that our interest in the joint venture will be accounted for under the equity method of accounting. We anticipate that the sale transaction will utilize a portion of our federal net operating loss carryforwards to offset the expected taxable gain on such transaction.
Community Portfolio Optimization
During 2020, we continued execution on our portfolio optimization initiative through which we have disposed of owned and leased communities and restructured leases. Such activities during 2020 included restructuring our lease arrangements with Ventas announced on July 27, 2020 and closing the multi-part transaction with Healthpeak announced on October 1, 2019. As a result of these initiatives and other lease restructuring, expiration, and termination activity, and other transactions, during the year ended December 31, 2020 we:
•Terminated our triple-net lease obligations on an aggregate of 32 communities, including through the acquisition of 27 formerly leased communities;
•Disposed of an aggregate of seven owned communities;
•Sold substantially all of our remaining ownership interests in unconsolidated ventures, including our entry fee CCRC venture with Healthpeak; and
•Reduced our management of communities on behalf of former unconsolidated ventures and third parties, representing a net reduction of 25 managed communities during the year.
Summaries of these transactions, and their impact on our results of operations are set forth in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations." See also Note 4 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the transactions.
As of December 31, 2020, we owned 350 communities, representing a majority of our consolidated community portfolio, leased 301 communities, and managed 75 communities. The charts below show the foregoing changes in our portfolio from December 31, 2019 to December 31, 2020.
During the year ending December 31, 2021, we expect to close on the dispositions of three owned communities (249 units) classified as held for sale as of December 31, 2020 and terminations of a substantial portion of our management arrangements. The closings of the various pending and expected transactions are, or will be, subject to the satisfaction of various closing
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conditions, including (where applicable) the receipt of regulatory approvals. There can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
Capital Expenditures
Our total community-level capital expenditures were $140.1 million for 2020, which was a decrease of $98.6 million from 2019, and $27.8 million of which was reimbursed by our lessors. The decrease in community-level capital expenditures was partially due to our approximate $48 million reduction to our pre-pandemic full-year 2020 community-level capital expenditure plans as we delayed or canceled a number of elective capital expenditure projects in response to the pandemic. In the aggregate, we expect our full-year 2021 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $140 million. In addition, we expect our full-year 2021 development capital expenditures to be approximately $10 million, net of anticipated lessor reimbursements, and such projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities. We anticipate that our 2021 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, and reimbursements from lessors.
The Senior Living Industry
The senior living industry has undergone dramatic growth in the last 25 years, marked by the emergence of assisted living communities in the mid-1990s, and it remains highly fragmented with numerous local and regional operators. According to data from the National Investment Center for the Seniors Housing & Care Industry ("NIC"), there were approximately 2,500 local and regional senior housing operators as of December 31, 2020, of which more than 90% operated five or fewer communities. We are one of a limited number of large operators that provide a broad range of community locations and service level offerings at varying price levels.
The industry has attracted additional investment resulting in increased construction and development of new senior housing supply. New community openings have subjected the senior housing industry to oversupply and increased competitive pressures. Data from NIC shows that industry occupancy began to decrease starting in 2016 as a result of new openings and oversupply. During and since 2016, we have experienced an elevated rate of competitive new openings, with significant new competition opening in many markets, which has adversely affected our occupancy, revenues, results of operations, and cash flow. In 2020, competitive new openings remained elevated, but declined from 2019. Beginning in early 2020, the COVID-19 pandemic resulted in additional occupancy pressure for our industry. NIC data shows that seniors housing occupancy decreased for three consecutive quarters between March 31, 2020 and December 31, 2020, with nearly all markets falling to record low occupancy by the fourth quarter of 2020. We cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on demand may adversely affect the amount of resident fees we are able to collect from our residents.
The primary market of the senior living industry is individuals age 80 and older. Due to demographic trends, and continuing advances in science, nutrition, and healthcare, the senior population will continue to grow. US Census projections suggest that, starting in 2022, there will be nearly one million new potential residents per year, and we believe that demand for senior care will increase as a result.
As seniors are living longer and this segment of the population rapidly grows, so will the number living with Alzheimer's disease and other dementias and the burden of chronic diseases and conditions. As a result of increased mobility in society, a reduction of average family size, and increased number of two-wage earner couples, families struggle to provide care for seniors and therefore look for alternatives outside of their family for care. There is a growing consumer awareness among seniors and their families concerning the types of services provided by senior living operators, which has further contributed to the demand for senior living services.
In recent years, the high level of new openings, nursing and caregiver shortages due to the pandemic, lower levels of unemployment, and implementation of higher minimum wages generally have contributed to wage pressures and increased competition for community leadership and personnel. We continue to address new competition by focusing on operations with the objective to ensure high customer satisfaction, retain key leadership, and actively engage district and regional management in community operations; enhancing our local and national marketing and public relations efforts; and evaluating current community position relative to competition and repositioning if necessary (e.g., services, amenities, programming, and price). Like other companies, our financial results may be negatively impacted by increasing salaries, wages, and benefits costs for our associates, particularly if such costs cannot be covered by implementing price increases. Higher costs of food, utilities, equipment and supplies, insurance, and real estate taxes may also have a negative impact on our financial results.
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The COVID-19 pandemic has presented significant challenges to our industry, as outlined above. Additional challenges in our industry include increased state and local regulation of the assisted living, memory care, and skilled nursing sectors, which has led to an increase in the cost of doing business. The regulatory environment continues to intensify in the number and types of laws and regulations affecting us, accompanied by increased enforcement activity by state and local officials. In addition, there continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future. We cannot predict what action, if any, Congress will take on reimbursement policies of the Medicare or Medicaid programs or what future rule changes CMS will implement. Changes in the reimbursement rates or methods or timing of government reimbursement programs could adversely affect our revenues, results of operations, and cash flow.
Competition
The senior living industry is highly competitive. We compete with numerous organizations, including not-for-profit entities, that offer similar communities and services, such as home health care and hospice agencies, community-based service programs, retirement communities, convalescent centers, and other senior living providers. In general, regulatory and other barriers to competitive entry in the independent living, assisted living, and memory care sectors of the senior living industry are not substantial. Consequently, we may encounter competition that could limit our ability to attract and retain residents and associates, raise or maintain resident fees, and expand our business, which could have a material adverse effect on our occupancy, revenues, results of operations, and cash flows. Due to the industry's low occupancy levels, certain competitors may price aggressively in order to capture market share. Our major publicly-traded senior housing competitors are Capital Senior Living Corporation and Five Star Senior Living, Inc. Our major private senior housing competitors include Holiday Retirement, Life Care Services, LLC, Atria Senior Living Inc., Senior Lifestyle Corp., and Sunrise Senior Living, LLC, as well as a large number of not-for-profit entities.
Over the long term we plan to evaluate and, where opportunities arise, pursue development, investment, and acquisition opportunities. The market for acquiring and/or operating senior living communities is highly competitive, and some of our present and potential senior living competitors have, or may obtain, greater financial resources than us and may have a lower cost of capital. In addition, several publicly-traded and non-traded real estate investment trusts ("REITs") and private equity firms have similar objectives as we do, along with greater financial resources and/or lower costs of capital than we are able to obtain. Partially as a result of tax law changes enacted through REIT Investment Diversification and Empowerment Act ("RIDEA"), we now compete more directly with the various publicly-traded healthcare REITs for the acquisition of senior housing properties, the largest of which are Ventas and Welltower.
Our History
Brookdale Senior Living Inc. was formed as a Delaware corporation in June 2005 for the purpose of combining two leading senior living operating companies, Brookdale Living Communities, Inc. and Alterra Healthcare Corporation, which had been operating independently since 1986 and 1981, respectively. On November 22, 2005, we completed our initial public offering of common stock, and on July 25, 2006, we acquired American Retirement Corporation, another leading senior living provider that had been operating independently since 1978. On September 1, 2011, we completed the acquisition of Horizon Bay, which was the then-ninth largest operator of senior living communities in the United States. On July 31, 2014, we completed our acquisition by merger of Emeritus Corporation, which was the then-second largest operator of senior living communities in the United States.
Segments
As of December 31, 2020, we had five reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services; and Management Services. These segments were determined based on the way that our chief operating decision maker organizes our business activities for making operating decisions, assessing performance, developing strategy, and allocating capital resources.
Communities that we own or lease are included in the Independent Living, Assisted Living and Memory Care, or CCRCs segment, as applicable. The home health, hospice, and outpatient therapy services provided to our residents and seniors living outside of our communities are generally included in the Health Care Services segment, while skilled nursing and inpatient healthcare services provided in our skilled nursing units are included in the CCRCs segment. Communities that we manage on behalf of third parties or unconsolidated ventures in which we have an ownership interest are included in the Management Services segment. The table below shows the number of communities and units within each of our senior housing and Management Services segments as of December 31, 2020.
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| Communities | Units | % of Total Units | Average Number of Units per Community | |||||||||||||||||||||||
| Independent Living | 68 | 12,534 | 19.9 | % | 184 | |||||||||||||||||||||
| Assisted Living and Memory Care | 563 | 35,126 | 55.7 | % | 62 | |||||||||||||||||||||
| CCRCs | 20 | 5,322 | 8.4 | % | 266 | |||||||||||||||||||||
| Management Services | 75 | 10,129 | 16.0 | % | 135 | |||||||||||||||||||||
| Total | 726 | 63,111 | 100.0 | % | 87 | |||||||||||||||||||||
For the year ended December 31, 2020, we generated 81.9% of our resident fee revenue from private pay customers, 14.5% from government reimbursement programs (primarily Medicare) and 3.6% from other payor sources. Approximately 87.3% of resident fee revenue was derived from our senior housing segments, of which 50.9% of our resident fee revenue was generated from owned communities and 36.4% was generated from leased communities. Our Health Care Services segment generated 12.7% of resident fee revenue. The table below shows the percentage of our resident fee and management fee revenue attributable to each of our segments for the year ended December 31, 2020.
| (in thousands) | Resident Fee and Management Fee Revenue | % of Total | ||||||||||||
| Independent Living | $ | 512,598 | 17.0 | % | ||||||||||
| Assisted Living and Memory Care | 1,691,276 | 55.9 | % | |||||||||||
| CCRCs | 321,883 | 10.6 | % | |||||||||||
| Health Care Services | 366,810 | 12.1 | % | |||||||||||
| Management Services | 130,690 | 4.4 | % | |||||||||||
| Total resident fee and management fee revenue | $ | 3,023,257 | 100.0 | % | ||||||||||
Further operating results and financial metrics from our five segments are discussed further in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 20 to our consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."
Our Community Offerings
We offer a variety of senior living communities in locations across the United States. We operate and manage independent living, assisted living, and memory care communities, and CCRCs. The majority of our units are organized in campus-like settings or stand-alone communities offering multiple service levels.
Independent Living Communities
Our independent living communities are primarily designed for middle to upper income seniors who desire to live in a residential setting that feels like home, without the efforts of ownership. Some of our independent living residents choose to relocate to a community in a metropolitan area that is closer to their adult children. The majority of our independent living communities consist of both independent and assisted living units in a single community, which allows residents to age-in-place by providing them with a broad continuum of senior independent and assisted living services to accommodate their changing needs. While the number varies depending upon the particular community, as of December 31, 2020 approximately 80% of all of the units at our independent living communities were independent living units, with the balance of the units licensed for assisted living and memory care.
Our independent living communities are generally large multi-story buildings averaging 184 units with extensive common areas and amenities to support the lifestyle preferences of more independent seniors. Residents may choose from studio, one-bedroom, and two-bedroom units, depending upon the specific community. Each independent living community provides residents with basic services such as dining service options, 24-hour emergency response, housekeeping, education and wellness programs, and recreational activities. Most of these communities also offer custom tailored concierge and personal assistance/private duty services at an additional charge, which may include medication reminders, daily check-in, transportation, shopping, escort, and companion services.
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In addition to the basic services, our independent living communities that include assisted living also provide residents with personal care and convenience service options to provide assistance with ADLs. The levels of care provided to residents vary from community to community depending, among other things, upon the licensing requirements and healthcare regulations of the state in which the community is located.
Residents in our independent living communities are able to maintain their residency for an extended period of time due to the range of service options available (not including skilled nursing). Residents with cognitive or physical frailties and higher level service needs can often be accommodated with supplemental services in their own units or, in certain communities, are cared for in a more structured and supervised environment on a separate wing or floor. These communities also generally have a dedicated assisted living staff and separate assisted living dining rooms and activity areas.
Assisted Living and Memory Care Communities
Our assisted living and memory care communities offer housing and 24-hour assistance with ADLs for mid-acuity and frail elderly residents. Residents typically enter an assisted living or memory care community due to a relatively immediate need for services that may have been triggered by a medical event. Our assisted living and memory care communities include both freestanding, multi-story communities with more than 50 beds, as well as smaller, freestanding, single story communities. Although building layouts will vary depending on specific location, the community may include (i) private studio, one-bedroom, and one-bedroom deluxe apartments, or (ii) individual rooms for one or two residents in wings or "neighborhoods" scaled to a single-family home, that would include a living room, dining room, patio or enclosed porch, laundry room, and personal care area, as well as a caregiver work station.
We also provide memory care services at freestanding memory care communities that are specifically designed for residents with dementia, including Alzheimer's disease and other forms of cognitive impairment. Our freestanding memory care communities have approximately 20 to 70 beds and some are part of a campus-like setting which includes a freestanding assisted living community. As of December 31, 2020, we provide memory care services at 371 of our communities, aggregating 9,796 memory care units across our segments. These communities include 110 freestanding memory care communities with 4,279 units included in our Assisted Living and Memory Care segment.
All residents at our assisted living and memory care communities are eligible to receive the basic care level, which includes ongoing health assessments, three meals per day and snacks, coordination of special diets planned by a registered dietitian, 24-hour staff assistance, assistance with medical care coordination, education and wellness programs, social and recreational activities providing socialization and engagement, housekeeping, and personal laundry services. In some locations, we offer our residents exercise programs and programs designed to address needs associated with early stages of Alzheimer's disease and other dementias. For an additional cost at these communities, we offer higher levels of personal care services to residents who are more physically frail or require more frequent or intensive physical assistance or increased personal care and supervision due to cognitive impairments.
As a result of their progressive cognitive decline, residents at our memory care units typically require higher levels of personal care and services than in assisted living and therefore pay higher monthly service fees. Specialized services include assistance with ADLs, behavior management, and an activities program, the goal of which is to provide a normalized environment that supports residents' decreased functional abilities.
CCRCs
Our CCRCs are large communities that offer a variety of living arrangements and services to accommodate a broad spectrum of physical ability and healthcare needs. Most of our CCRCs have independent living, assisted living, memory care, and skilled nursing available on one campus or within the immediate area. Our CCRC residents are generally seniors who are seeking a community that offers a broad continuum of care that will enable them to age in place. Generally, these residents will initially enter the community as an independent living resident and may, at a later time, advance into an assisted living or skilled nursing area as their needs change.
Our Healthcare Services Offerings
Through our Health Care Services segment we currently provide home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. As of December 31, 2020, our Health Care Services segment platform included networks in 28 states with the ability to provide home health services to approximately 60% of our units, hospice services to approximately 25% of our units, and outpatient therapy to approximately 20% of our units. The Health Care Services segment does not include the skilled nursing and inpatient healthcare services
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provided in our skilled nursing units, which are included in our CCRCs segment. During the year ended December 31, 2020, we generated approximately 45% of our Health Care Services segment revenue from residents at our communities and approximately 55% from our patients outside our communities. As described above, we expect to sell 80% of our equity in our Health Care Services segment pursuant to the Purchase Agreement with HCA Healthcare, which transaction is expected to occur in the late first half or early second half of 2021. Upon closing, we expect that the results and financial position of our Health Care Services segment will be deconsolidated from our financial statements.
The home health services we provide include skilled nursing, physical therapy, occupational therapy, speech language pathology, home health aide services, and social services as needed. Our hospice services include clinical and skilled care, as well as spiritual and emotional counseling. Our outpatient therapy services include physical therapy, occupational therapy, speech language pathology services, and other specialized therapy. The majority of our home health, hospice, and outpatient therapy services are reimbursed by government reimbursement programs, primarily Medicare, and non-covered services are paid directly by patients from private pay sources.
Management Services
As of December 31, 2020, we managed 72 communities (9,202 units) on behalf of third parties and three communities (927 units) for which we have an equity interest, which represented approximately 16% of our senior housing capacity. Under our management arrangements, we receive management fees, which are generally determined by an agreed upon percentage of gross revenues (as defined in the management arrangement), as well as reimbursed expenses, which represent the reimbursement of certain expenses we incur on behalf of the owners. During 2021, we expect terminations of a substantial portion of our management arrangements. Generally either party to our management arrangements may terminate upon the occurrence of an event of default caused by the other party, generally subject to cure rights. Several long-term agreements also provide for early termination rights of the owner which may in some cases require an early termination fee.
Competitive Strengths
We believe our national network of senior living communities and healthcare services networks are well positioned to benefit from the future growth in the industry. Some of our most significant competitive strengths are:
•Skilled management team with extensive experience. Our senior management team and our Board of Directors have extensive experience in the senior living, healthcare, hospitality, and real estate industries, including the operation and management of a broad range of senior living assets.
•Geographically diverse, high-quality, purpose-built communities. As of December 31, 2020, we are the largest operator of senior living communities in the United States based on total capacity, with 726 communities in 43 states and the ability to serve approximately 64,000 residents.
•Ability to provide a broad spectrum of care. Given our diverse mix of independent living, assisted living and memory care communities, and CCRCs, as well as our healthcare services offerings, through our clinical team and high-quality relationships with providers, we are able to meet a wide range of our residents' and patients' needs. We believe that we are one of the few companies in the senior living industry with this capability and the only company that does so at scale on a national basis. We believe that our multiple product offerings create marketing synergies and cross-selling opportunities.
•Significant experience in providing healthcare services. Through our Health Care Services segment, we currently provide, and following the closing of our transaction with HCA Healthcare, the venture will provide a range of home health, hospice, and outpatient therapy services in certain of our communities. Additionally, through our clinical team, we provide education, wellness, and other services to residents, which we believe is a distinct competitive difference among senior housing operators. We have significant experience in providing these services and expect to expand our offerings of these services to additional residents.
•The size of our business allows us to realize cost and operating efficiencies while continuing a local-community focus. The size of our business allows us to realize cost savings, economies of scale in the procurement of goods and services, and access to favorable debt and financing terms. Our scale also allows us to achieve increased efficiencies with respect to various corporate functions. We negotiate contracts for food, insurance, and other goods and services with the advantages that scale provides. In addition, we leverage our centralized corporate functions such as finance, human resources, legal, information technology, and marketing. We intend to utilize our expertise and size to capitalize on economies of scale resulting from our national platform and to enhance our residents' and patients' experiences. We believe that our geographic
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footprint and centralized infrastructure provide us with a significant operational advantage over local and regional operators of senior living communities.
Seasonality
Our senior housing business has typically experienced some seasonality, which we experience in certain regions more than others, due to weather patterns, geography, and higher incidence and severity of flu and other illnesses during winter months. Although our seasonal pattern varies from year to year and occupancy patterns have been affected by the COVID-19 pandemic, historically our average monthly occupancy has generally begun to decline sequentially in the fourth quarter of the year, and we have generally expected average monthly occupancy to begin to increase towards the end of the second quarter each year. Utility expenses trend seasonally high in the first quarter and third quarter of each year. Facility operating expenses, such as labor, food, and supplies also trend higher in the second half of the year compared with the first half due to an increased number of working days.
Operations
Operations Overview
We have implemented intensive standards, policies and procedures, and systems, including detailed staff resources and training, which we believe have contributed to high levels of customer service. Further, we believe our centralized support infrastructure allows our community-based leaders and personnel to focus on resident care and family connections.
Consolidated Corporate Operations Support
We have developed a centralized support infrastructure and services platform, which we believe provides us with a significant operational advantage over local and regional operators of senior living communities. The size of our business also allows us to achieve increased efficiencies with respect to various corporate functions such as procurement, human resources, finance, accounting, legal, information technology, and marketing. We are also able to realize cost efficiencies in the purchasing of food, supplies, insurance, benefits, and other goods and services. In addition, we have established centralized operations groups to support all of our product lines and communities in areas such as training, regulatory affairs, asset management, dining, clinical services, sales, customer engagement, marketing, and procurement. We have also established company-wide policies and procedures relating to, among other things: resident care; community design and community operations; billing and collections; accounts payable; finance and accounting; risk management; development of associate training materials and programs; advertising and marketing activities; the hiring and training of management and other community-based personnel; compliance with applicable local and state regulatory requirements; and implementation of our acquisition, development, and leasing plans.
Community Staffing and Training
Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of care and service, social services, and financial performance. Each Executive Director receives specialized training from our learning and development associates. In addition, a portion of each Executive Director's compensation is directly tied to the operating performance of the community. We continue to take actions intended to simplify the role of our Executive Directors to allow them to focus on our residents and their families and our associates. We believe that the quality of our communities, coupled with support provided by the regional support infrastructure and our ability to provide industry-leading systems and training, has enabled us to attract high-quality, professional community Executive Directors.
Depending upon the size and type of the community, each Executive Director is supported by key leaders, a Health and Wellness Director (or nursing director), and/or a Sales Director. The Health and Wellness Director or nursing director is directly responsible for day-to-day care of residents. The Sales Director oversees the community's sales, marketing, and community outreach programs. Other key positions supporting each community may include individuals responsible for food service, healthcare services, activities, housekeeping, and maintenance.
We believe that quality of care and operating efficiency can be maximized by direct resident and staff contact. Associates involved in resident care, including administrative staff, are trained in support and care protocols, including emergency response techniques. We have adopted formal training and evaluation procedures to help ensure quality care for our residents. We have extensive policy and procedure manuals and hold regular training sessions for management and staff at each community.
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Quality Assurance
We maintain quality assurance programs at each of our communities through our corporate and regional staff. Our quality assurance programs are designed to achieve a high degree of resident and family member satisfaction through the care and services that we provide and we have continued to transform our efforts throughout the pandemic through collaboration with our vendors and a combination of remote and in-person visits. Our quality control measures include, among other things, community inspections conducted by corporate staff on a regular basis. These inspections cover the appearance of the exterior and grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; quality of resident care (including assisted living services, nursing care, therapy, and home health programs); the quality of activities and the dining program; observance of residents in their daily living activities; and compliance with government regulations. Our quality control measures also include the survey of residents and family members on a regular basis to monitor their perception of the quality of services we provide to residents.
In order to foster a sense of belonging and engagement, as well as to respond to residents' needs and desires, at many of our communities, we have established a resident council or other resident advisory committees that meet at least monthly with the Executive Director of the community. Separate resident committees also exist at many of these communities for food service, activities, marketing, and hospitality. These committees promote resident involvement and satisfaction and enable community management to be more responsive to their residents' needs and desires.
Marketing and Sales
Our marketing efforts are intended to create awareness of our brand and services to educate prospects and referral sources about the Brookdale difference. We meet prospects where they are in their journey, whether they are learning about senior living for the first time or need to schedule a visit at one of our communities. We target a variety of audiences who have a role in the decision-making process for senior housing and our healthcare services, including potential residents, their family members and referral sources, including the medical community (hospital discharge planners, physicians, skilled nursing facilities, home health agencies, and social workers), professional organizations, employer groups, clergy, area agencies for the elderly, and paid referral organizations. Our marketing associates develop strategies to promote our communities at the local market and national level. We execute an integrated marketing campaign approach, including local media and outreach programs, digital advertising, social media, print advertising, e-mail, direct mail, and special events, such as health fairs and community receptions. We generate hundreds of thousands of customer inquiries that go directly to our communities and Brookdale website. All online forms and many calls are handled by trained senior living advisors in our Brookdale Connection Center, who schedule visits directly to our communities. Certain resident referral programs have been established and promoted at many communities within the limitations of federal and state laws.
We will continue to leverage and grow our Brookdale brand to win locally in the markets we serve. In many markets where we offer more choices for senior living based on budget, lifestyle, and care needs, we use a network selling methodology to educate prospects on all of the options available. With our selling model, sales associates are organized to support individual and multiple communities directly. To meet the needs of local demand and supply, we create differentiated value through the segmentation of our communities based on price, service offerings, amenities, and programs offered.
Human Capital Resources
At Brookdale, we are dedicated to enriching the lives of those we serve with compassion, respect, excellence, and integrity. We know that our success is dependent on attracting, engaging, developing, and retaining the best associates. As of December 31, 2020, we employed approximately 45,000 associates, 70% of which were full time. Approximately 900 associates work in or through our Brentwood, Tennessee headquarters and Milwaukee, Wisconsin office, supporting our community- and agency-based associates.
Our Culture
We promote a culture based on servant leadership, where we believe purpose-driven work allows each of us to have a positive impact on the residents, patients, and associates we interact with every day. Our 2020 associate engagement survey showed that 93% of respondents know how they contribute to our success and 95% have a good understanding of our mission, vision, and cornerstones of passion, courage, partnership, and trust. We hire associates who we believe make serving seniors their calling, do what is right even when no one is watching, connect with fellow associates and our residents and patients, and treat one another with respect.
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Inclusion and Diversity
We are a business of people taking care of people, where our associates do extraordinary things every day as part of their shared commitment to Brookdale’s cornerstones and mission. To attract and retain associates, we are committed to maintaining a welcoming and inclusive environment where people have an equal chance to grow and succeed. We support our associates by providing an open door policy, offering training to help our people grow and to understand our commitment to providing a workplace free from discrimination and harassment, consistently enforcing our policies, and maintaining the expectation that all our associates will be treated with dignity and respect.
We also believe that true commitment to creating and fostering an inclusive and diverse workplace is best accomplished by example. Our Board of Directors has purposefully evolved its gender composition to more closely resemble our customer and employee base, of which the majority are women. Women now comprise 44% of our Board of Directors. Over the last two years, we also increased the diversity of our Board of Directors and executive leadership team. Two of the top three positions are held by women and 14% of our executive officers are racially or ethnically diverse. Our commitment to diversity is further reflected in our workforce. As of December 31, 2020, approximately 81% of our associates are women, who comprise approximately 73% of the leadership roles at our communities, agencies, and corporate offices, and approximately 53% of our associates and 12% of our leadership roles are people of color. Our commitment to developing, retaining, and promoting diverse talent and advancing our inclusion strategy is ongoing.
Talent Acquisition, Development, and Retention:
In order to attract people who want to do challenging yet rewarding work, we offer competitive wages and benefits as well as opportunities to grow a career at Brookdale through mentorship, education, and training opportunities. We use a variety of recruitment strategies to attract diverse talent to our organization, including partnerships with local and national organizations. In 2020, we established new nursing school partnerships in Jacksonville, Florida and Denver, Colorado to continue to strengthen our pipeline for caregiver and clinical roles. Additionally, we launched a new career section on our website to attract veterans and military spouses/partners to join Brookdale.
We offer learning opportunities for our associates when they join Brookdale and throughout the year. Our newly implemented iLearn platform provides associates access to regulatory training, continuing education courses, and leadership and professional skill courses. We also offer a tuition reimbursement program for associates to continue to grow their career. To identify future leaders, we conduct strategic talent reviews regularly to provide senior leaders with visibility into succession for key leadership roles.
We believe the performance of individual communities is correlated to retention of our community leaders. Our Executive Director (ED) and Health and Wellness Director (HWD) combined annual retention at our same community portfolio has remained around 70%.
Total Rewards
We consider offering a competitive total rewards program an important aspect of being an employer of choice. Both full-time and part-time associates may participate in our 401(k) retirement savings plan with an opportunity for a matching contribution, our associate stock purchase plan, and other benefit plans. We provide full-time associates additional benefits, including paid time off ("PTO") and holidays as well as adoption benefits. In 2020, over 50% of eligible full-time associates participated in our medical and dental insurance plans.
We also recognize that there may be a time when associates need financial assistance due to extraordinary circumstances such as a fire, a tornado or hurricane, or the pandemic. Our Associate Compassion Fund provides this type of assistance for associates in need. In 2020, approximately $1.8 million of donations of PTO by our associates were provided directly to associates in need, approximately $0.3 million of which was donated by our senior leadership team to specifically support those associates affected by COVID-19.
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Industry Regulation
The regulatory environment surrounding the senior living industry continues to intensify in the number and type of laws and regulations affecting it. Federal, state, and local officials are increasingly focusing their efforts on enforcement of these laws and regulations. This is particularly true for large for-profit, multi-community providers like us. Some of the laws and regulations that impact our industry include: state and local laws impacting licensure, protecting consumers against deceptive practices, and generally affecting the communities' management of property and equipment and how we otherwise conduct our operations, such as fire, health, safety, and privacy laws and regulations; federal and state laws governing Medicare and Medicaid, which regulate allowable costs, pricing, quality of services, quality of care, food service, resident rights (including abuse and neglect) and fraud; federal and state residents' rights statutes and regulations; Anti-Kickback and physicians referral ("Stark") laws; and safety and health standards set by the Occupational Safety and Health Administration. We are unable to predict the future course of federal, state, and local legislation or regulation. Changes in the regulatory framework could have a material adverse effect on our business.
Many senior living communities are also subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although requirements vary from state to state, these requirements may address, among others, the following: personnel education, training, and records; community services; staffing; physical plant specifications; furnishing of resident units; food and housekeeping services; emergency evacuation plans; emergency power generator requirements; professional licensing and certification of staff; and resident rights and responsibilities. In several of the states in which we operate there are different levels of care that may be provided based on the level of licensure. Several of the states in which we operate, or intend to operate, assisted living and memory care communities, home health and hospice agencies, and/or skilled nursing facilities require a certificate of need before the community or agency may be opened or the services at an existing community may be expanded. Senior living communities may also be subject to state and/or local building, zoning, fire, and food service codes and must be in compliance with these local codes before licensing or certification may be granted. These laws and regulatory requirements could affect our ability to expand into new markets and to expand our services and communities in existing markets.
Unannounced surveys or inspections may occur annually or bi-annually, or following a regulator's receipt of a complaint about a provider. From time to time in the ordinary course of business, we receive survey reports from state or federal regulatory bodies resulting from such inspections or surveys. Most inspection deficiencies are resolved through a plan of corrective action relating to the community's operations, but the reviewing agency may have the authority to take further action against a licensed or certified community or agency, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal and/or state reimbursement programs, or imposition of other sanctions, including criminal penalties. Loss, suspension, or modification of a license may also cause us to default under our debt and lease documents and/or trigger cross-defaults. Sanctions may be taken against providers or facilities without regard to the providers' or facilities' history of compliance. We may also expend considerable resources to respond to federal and state investigations or other enforcement action under applicable laws or regulations. To date, none of the deficiency reports received by us has resulted in a suspension, fine, or other disposition that has had a material adverse effect on our revenues, results of operations, or cash flows. However, any future substantial failure to comply with any applicable legal and regulatory requirements could result in a material adverse effect to our business as a whole. In addition, states' Attorneys General vigorously enforce consumer protection laws as those laws relate to the senior living industry. State Medicaid Fraud and Abuse Units may also investigate assisted living and memory care communities even if the community or any of its residents do not receive federal or state funds.
Regulation of the senior living industry is evolving at least partly because of the growing interests of a variety of advocacy organizations and political movements attempting to standardize regulations for certain segments of the industry, particularly assisted living and memory care. Our operations could suffer from future regulatory developments, such as federal assisted living and memory care laws and regulations, as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials or an increase the number of citations that can result in civil or criminal penalties. Certain current state laws and regulations allow enforcement officials to make determinations on whether the care provided by one or more of our communities exceeds the level of care for which the community is licensed. Furthermore, certain states may allow citations in one community to impact other communities in the state. Revocation or suspension of a license, or a citation, at a given community could therefore impact our ability to obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our loan or lease agreements and trigger cross-defaults or may also trigger defaults under certain of our credit agreements, or adversely affect our ability to operate and/or obtain financing in the future. If a state were to find that one community's citation will impact another of our communities, this will also increase costs and result in increased surveillance by the state survey agency. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the enforcement of existing rules, including increased enforcement brought about by advocacy groups, in addition to federal and state regulators, our operations could be adversely affected. Any adverse
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finding by survey and inspection officials may serve as the basis for false claims lawsuits by private plaintiffs and may lead to investigations under federal and state laws, which may result in civil and/or criminal penalties against the community or individual.
There are various extremely complex federal and state laws governing a wide array of referrals, relationships, and arrangements and prohibiting fraud by healthcare providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud initiatives. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Balanced Budget Act of 1997 expanded the penalties for healthcare fraud. With respect to our participation in federal healthcare reimbursement programs, the government or private individuals acting on behalf of the government may bring an action under the False Claims Act alleging that a healthcare provider has defrauded the government and seek treble damages for false claims and the payment of additional monetary civil penalties. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government's recovery. Because of these incentives, so-called "whistleblower" suits have become more frequent.
Additionally, since we operate communities and agencies that participate in federal and/or state healthcare reimbursement programs, we are subject to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent, or are for items or services that were not provided as claimed. Similar state laws vary from state to state. Violation of any of these laws can result in loss of licensure, citations, sanctions, and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid programs, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults.
We are subject to certain federal and state laws that regulate financial arrangements by healthcare providers, such as the Federal Anti-Kickback Law, the Stark laws, and certain state referral laws. The Federal Anti-Kickback Law makes it unlawful for any person to offer or pay (or to solicit or receive) "any remuneration ... directly or indirectly, overtly or covertly, in cash or in kind" for referring or recommending for purchase any item or service which is eligible for payment under the Medicare and/or Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and relationships between healthcare providers and sources of patient referral. If we were to violate the Federal Anti-Kickback Law, we may face criminal penalties and civil sanctions, including fines and possible exclusion from government reimbursement programs, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our business, it is difficult to predict how our revenues could be affected if we were subject to an action alleging such violations.
We are subject to federal and state laws designed to protect the confidentiality of patient health information. The United States Department of Health and Human Services has issued rules pursuant to HIPAA relating to the privacy of such information. Rules that became effective in 2003 govern our use and disclosure of health information at certain HIPAA covered communities. We established procedures to comply with HIPAA privacy requirements at these communities. We were required to be in compliance with the HIPAA rule establishing administrative, physical, and technical security standards for health information by 2005. To the best of our knowledge, we are in compliance with these rules. In addition, states have begun to enact more comprehensive privacy laws and regulations addressing consumer rights to data protection or transparency. For example, the California Consumer Privacy Act became effective in 2020, and we expect additional federal and state legislative and regulatory efforts to regulate consumer privacy protection in the future. These legislative and regulatory developments will impact the design and operation of our business and our privacy and security efforts.
We are subject to federal and state laws, regulations and executive orders relating to healthcare providers’ response to the COVID-19 pandemic. These requirements vary based on provider type and jurisdiction but generally include mandatory requirements for testing of residents and/or staff, implementation of infection control standards and procedures, imposition of restrictions on new admissions or readmissions of residents, requiring screening of all persons entering a community, imposition of restrictions or limitations on who and how residents may be visited, and imposition of mandatory notification requirements to residents, families, staff, and regulatory bodies related to positive COVID-19 cases. Enhanced or additional penalties may apply for violation of such requirements.
Medicare and Medicaid Programs
We rely on reimbursement from government programs, including the Medicare program and, to a lesser extent, Medicaid programs, for a portion of our revenues. Reimbursements from Medicare and Medicaid represented 11.3% and 3.2%, respectively, of our total resident fee revenues for the year ended December 31, 2020. During the period, Medicare reimbursements represented 76.8% of our Health Care Services segment revenue, and Medicare and Medicaid reimbursements represented 18.5% of our CCRCs segment revenue.
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Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and certain disabled persons. We receive revenue for our home health, hospice, skilled nursing, and outpatient therapy services from Medicare. Medicaid is a medical assistance program administered by each state, funded with federal and state funds pursuant to which healthcare benefits are available to certain indigent or disabled patients. We receive reimbursements under Medicaid (including state Medicaid waiver programs) for many of our assisted living and memory care communities.
These government reimbursement programs are highly regulated, involve significant administrative discretion, and are subject to frequent and substantial legislative, administrative, and interpretive changes, which may significantly affect reimbursement rates and the methods and timing of payments made under these programs. Continuing efforts of government to contain healthcare costs could materially and adversely affect us, and reimbursement levels may not remain at levels comparable to present levels or may not be sufficient to cover the costs allocable to patients eligible for reimbursement.
Medicare reimbursement for home health and skilled nursing services is subject to fixed payments under the Medicare prospective payment systems. In accordance with Medicare laws, CMS makes annual adjustments to Medicare payment rates in many prospective payment systems under what is commonly known as a "market basket update." Each year, the Medicare Payment Advisory Commission ("MedPAC"), a commission chartered by Congress to advise it on Medicare payment issues, recommends payment policies to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt MedPAC recommendations and based on previous years, there can be no assurance that Congress will adopt MedPAC's recommendations in any given year.
Medicaid reimbursement rates for many of our assisted living and memory care communities also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, those adjustments may not reflect actual increases of the cost of providing healthcare services. In addition, Medicaid reimbursement can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments.
Audits and Investigations
As a result of our participation in the Medicare and Medicaid programs, we are subject to various government reviews, audits, and investigations to verify our compliance with these programs and applicable laws and regulations. CMS has engaged a number of third party firms, including Recovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC) to conduct extensive reviews of claims data to evaluate the appropriateness of billings submitted for payment. Audit contractors may identify overpayments based on coverage requirements, billing and coding rules, or other risk areas. In addition to identifying overpayments, audit contractors can refer suspected violations of law to government enforcement authorities. An adverse determination of government reviews, audits, and investigations may result in citations, sanctions, other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid programs. Our costs to respond to and defend any such audits, reviews, and investigations may be significant and are likely to increase in the current enforcement environment, and any resulting sanctions or criminal, civil, or regulatory penalties could have a material adverse effect on our business, financial condition, results of operations, and cash flow.
The Improving Medicare Post-Acute Care Transformation Act of 2014
The Improving Medicare Post-Acute Care Transformation Act of 2014 (the "IMPACT Act"), which became law in 2014, requires standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of post-acute care, including home health, hospice, and skilled nursing. The IMPACT Act will require such agencies and facilities to begin reporting standardized patient assessment data, new quality measures, and resource use measures. Failure to report such data when required would subject an agency or facility to a 2% reduction in market basket prices then in effect. The IMPACT Act further requires HHS and MedPAC to study and report to Congress by 2022 regarding alternative post-acute care payment models, including payment based upon individual patient characteristics and not care setting. The IMPACT Act also includes provisions impacting Medicare-certified hospices, including increasing survey frequency to once every 36 months, imposing a medical review process for facilities with a high percentage of stays in excess of 180 days, and updating the annual aggregate Medicare payment cap.
Home Health Claim Review Demonstrations
In 2016, CMS announced that it would implement a 3-year Medicare pre-claim review demonstration for home health services in the states of Illinois, Florida, Texas, Michigan, and Massachusetts. The pre-claim review is a process through which a request for provisional affirmation of coverage is submitted for review before a final claim is submitted for payment. CMS began the
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pre-claim review demonstration in Illinois in August 2016, which CMS paused in April 2017. The pre-claim review demonstration resulted in increased administrative costs and reimbursement delays for our Illinois home health agency. In December 2018, CMS indicated it was continuing the process for obtaining approval under the Paperwork Reduction Act of a 5-year Medicare claim review demonstration for Illinois, which would be further expanded to Florida, Texas, North Carolina, and Ohio. The Home Health Review Choice Demonstration ("RCD") was implemented on June 1, 2019 in Illinois and September 30, 2019 in Ohio. To allow home health agencies to transition to the Patient-Driven Grouping Model ("PDGM"), CMS announced in October 2019 that it was rescheduling the implementation of the RCD for the remaining states of Texas, North Carolina, and Florida. The demonstration began in Texas on March 2, 2020, and in North Carolina and Florida on August 31, 2020. CMS has stated that they will monitor the transition to PDGM and assess the need for any changes. Under the RCD, as currently proposed, providers have an initial choice of three options for review: pre-claim review, post-payment review, or minimal post-payment review with a 25% payment reduction for all home health services. We derive a significant portion of our home health revenue from these states. The implementation of the RCD has adversely affected our revenue, results of operations, and cash flows.
Home Health Value-Based Purchasing
On January 1, 2016, CMS implemented Home Health Value-Based Purchasing ("HHVBP"). The HHVBP model was designed to give Medicare certified home health agencies incentives or penalties, through payment bonuses, to give higher quality and more efficient care. HHVBP was rolled out to nine pilot states: Arizona, Florida, Iowa, Maryland, Massachusetts, Nebraska, North Carolina, Tennessee, and Washington, a majority of which we currently have home health operations. Bonuses and penalties began in 2018 with the maximum of plus or minus 3% and are scheduled to grow to plus or minus 8% by 2022. Payment adjustments are calculated based on performance in three process measures, nine outcome measures, five patient satisfaction measures, and three agency self-reported measures. During the year ended December 31, 2020, our home health revenue declined approximately 1% due to HHVBP and we expect an additional decline of approximately 1% during 2021.
The Bipartisan Budget Act of 2018
The Bipartisan Budget Act of 2018 (the "BBA"), enacted in February 2018, includes several provisions impacting Medicare reimbursement to home health, hospice, and outpatient therapy providers. With respect to home health providers, the BBA (1) bases payment on a 30-day episode of care beginning January 1, 2020, coupled with annual determinations by CMS to ensure budget neutrality (including taking into account provider behavior), (2) eliminated retroactive payment adjustments based upon the level of therapy services required beginning January 1, 2020, (3) extended the 3% add-on payment for home health services provided to residents in rural areas beginning January 1, 2018, coupled with a reduction and phase out of such add-on payment over the following four fiscal years, and (4) established a market basket update of 1.5% for the year beginning January 1, 2020. With respect to hospice providers, the BBA established a new payment policy related to early discharges to hospice care from hospitals, which imposes a financial penalty on hospitals for each early discharge to hospice care beginning October 1, 2018. With respect to outpatient therapy providers, the BBA permanently repealed the Medicare Part B outpatient therapy cap effective January 1, 2018 and continued the targeted medical review process with a reduction of the applicable threshold triggering such review to $3,000 effective January 1, 2018.
CMS Final Rule 1689-FC for Medicare Home Health Prospective Payment
Based on the CMS final rule published in September, 2019, beginning in fiscal year 2021 (as amended by the CARES Act), CMS estimated that the net impact of the payment provisions of the proposed changes would result in an increase of 1.3% in reimbursement to home health providers and finalized the methodology used to determine the rural add-on payment for 2020 through 2022 as well as regulations text changes regarding certifying and recertifying patient eligibility for Medicare home health services and remote patient monitoring. Additionally, the proposed rule includes changes to the home health prospective payment system ("HHPPS") case-mix adjustment methodology through the use of a new PDGM for home health payments. This change affected home health revenue beginning on or after January 1, 2020 and also includes a change in the unit of payment from 60-day episodes of care to 30-day episodes of care.
Pandemic-Related Legislation
The CARES Act, signed into law on March 27, 2020, and Paycheck Protection Program and Health Care Enhancement Act, signed into law on April 24, 2020, provide liquidity and financial relief to certain businesses, among other things. The CARES Act temporarily suspended the 2% Medicare sequestration for the period May 1, 2020 to December 31, 2020. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended the sequestration suspension through March 31, 2021. During the year ended December 31, 2020, we received $87.5 million under the Accelerated and Advance Payment Program administered by CMS, which was temporarily expanded by the CARES Act. Under the program, we requested acceleration/
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advancement of 100% of our Medicare payment amount for a three-month period. The Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment terms for accelerated/advanced payments. As amended, recoupment of accelerated/advanced payments will begin one year after payments were issued. Payments will be recouped at a rate of 25% of Medicare payments for the first eleven months following the anniversary of issuance and at a rate of 50% of Medicare payments for the next six months. Any outstanding balance of accelerated/advanced payments will be due following such recoupment period.
Environmental Matters
Under various federal, state, and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in certain circumstances for the costs of investigation, removal, or remediation of certain hazardous or toxic substances, including, among others, petroleum and materials containing asbestos, that could be located on, in, at, or under a property, regardless of how such materials came to be located there. Additionally, such an owner or operator of real property may incur costs relating to the release of hazardous or toxic substances, including government fines and payments for personal injuries or damage to adjacent property. The cost of any required investigation, remediation, removal, mitigation, compliance, fines, or personal or property damages and our liability therefore could exceed the property's value and/or our assets' value. The presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents, retain existing residents, to borrow using such property as collateral, or to develop or redevelop such property. Such laws impose liability for investigation, remediation, removal, and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third-party sites. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release, or disposal of such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Moreover, the imposition of such liability upon us could be joint and several, which means we could be required to pay for the cost of cleaning up contamination caused by others who have become insolvent or otherwise judgment proof. We do not believe that we have incurred such liabilities that would have a material adverse effect on our business, financial condition, results of operations, and cash flow.
Our operations are subject to regulation under various federal, state, and local environmental laws, including those relating to: the handling, storage, transportation, treatment, and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents, including, for example, blood-contaminated bandages, swabs and other medical waste products, and incontinence products of those residents diagnosed with an infectious disease. The management of infectious medical waste, including its handling, storage, transportation, treatment, and disposal, is subject to regulation under various federal, state, and local environmental laws. These environmental laws set forth the management requirements for such waste, as well as related permit, record-keeping, notice, and reporting obligations. Our communities' engagement of waste management companies for the proper disposal of all infectious medical waste does not immunize us from alleged violations of such medical waste laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with environmental laws could adversely affect our business, financial condition, results of operations, and cash flow.
Federal regulations require building owners and those exercising control over a building's management to identify and warn, via signs and labels, their employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. The regulations also set forth employee training, record-keeping requirements, and sampling protocols pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building's management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling, and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or
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operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.
The presence of mold, lead-based paint, contaminants in drinking water, radon, and/or other substances at any of the communities we own or may acquire may lead to the incurrence of costs for remediation, mitigation, or the implementation of an operations and maintenance plan. Furthermore, the presence of mold, lead-based paint, contaminants in drinking water, radon, and/or other substances at any of the communities we own or may acquire may present a risk that third parties will seek recovery from the owners, operators, or tenants of such properties for personal injury or property damage. In some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community's market value.
We believe that we are in material compliance with applicable environmental laws. We are unable to predict the future course of federal, state, and local environmental regulation and legislation. Changes in the environmental regulatory framework (including legislative or regulatory efforts designed to address climate change) could have a material adverse effect on our business. Because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.
Available Information
Information regarding our community and service offerings can be found at our website, www.brookdale.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports are available free of charge through our Certificatewebsite as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC, at the following address: www.brookdale.com/investor. The information within, or that can be accessed through, our website addresses is not part of Incorporationthis report.
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Item 1A.Risk Factors
Our business faces significant risks and uncertainties. The discussion below addresses the most material factors, of which we are currently providesaware, that could affect our business, financial condition, results of operations, cash flow, liquidity, and future prospects. However, other factors not currently known to us or that we currently deem immaterial could also adversely affect our business, financial condition, results of operations, cash flow, liquidity, and future prospects. Therefore, the risk factors below should not be considered a complete list of potential risks that we may face. If any of these risks actually occurs, our business, financial condition, results of operations, cash flow, liquidity, and future prospects could be materially and adversely affected.
COVID-19 Pandemic
The COVID-19 pandemic, including the response efforts of federal, state, and local government authorities, businesses, individuals and us, has adversely impacted, and likely will continue to adversely impact our business, results of operations, cash flow, liquidity, and stock price, and such impacts may be material.
We expect that the pandemic, and the response efforts of federal, state, and local government authorities, businesses, individuals and us, likely will continue to adversely impact our business, results of operations, cash flow, and liquidity through at least 2022. We cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on our business, results of operations, cash flow, liquidity, and stock price, and such impacts may be material and persist for some time. Further, our response efforts may continue to delay or negatively impact our strategic initiatives, including plans for future growth.
Due to the average age and prevalence of chronic medical conditions among our residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. Upon confirmation of positive COVID-19 exposure at a community, we take actions intended to minimize further exposure, including associates’ adhering to personal protection protocols, isolating residents or finding placement in an alternate care setting to best address their care needs, and in some cases, restricting new resident admissions as directed by local health authorities. Seeking to prevent the introduction of COVID-19 into our communities, and to help control further exposure to infections within communities, in March 2020 we began restricting visitors at all our communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and requiring new residents and residents returning from a hospital or nursing home to isolate in their apartment for fourteen days. These restrictions were in place across our portfolio for the three months ended June 30, 2020. We have adopted a framework for determining when to ease restrictions at each of our communities based on several criteria, including regulatory requirements and guidance, completion of baseline testing at the community, and the presence of current confirmed positive COVID-19 cases. Under this framework, we began easing restrictions on a community-by-community basis in July 2020 where regulatory requirements and guidance allowed, which easing may have included permitting outdoor, and in some cases, indoor visits with families, reduced capacity or socially distanced communal dining, limited communal activities programming, and in-person prospective resident visits. These restrictions at our communities may continue for some time, and we may revert to more restrictive measures if the pandemic worsens, as necessary to comply with regulatory requirements, or the direction of state or local health authorities. In July 2020, we completed baseline testing at all of our communities, and we have continued testing residents and associates at many of our communities.Further testing, whether undertaken proactively, as a result of regulatory requirements, or at the direction of state or local health authorities, may result in significant additional expense, additional temporary restrictions on move-ins at affected communities, continued need for isolating positive residents, increased use of PPE by our associates, and increased employee-related costs.
The pandemic, including the related restrictions at our communities, have significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. During the third quarter of 2020, we returned to using in-person prospective resident visits for a majority of our communities. However, several large markets continue with virtual-only prospective resident visits as of December 31, 2020. We have placed restrictions on move-ins at our communities when circumstances warrant, including at the direction of state or local health authorities.Although these restrictions began to ease considerably in August 2020, restrictions on move-ins escalated throughout the fourth quarter of 2020 due to the resurgence of the virus.At the end of the second, third, and fourth quarters of 2020, 86%, 98%, and 89% of our communities, respectively, were accepting new move-ins. As of February 22, 2021, 97% of our communities were accepting new move-ins. We believe potential residents and their families are more cautious regarding moving into senior living communities while the pandemic continues, and such caution may persist for some time. Our efforts to adapt our sales and marketing efforts to meet demand may not be successful. In addition, expanded use of telemedicine and
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home healthcare by seniors, for which regulatory barriers have been relaxed during the pandemic, may result in less demand for our services. We cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on demand may adversely affect the amount of resident fees we are able to collect from our residents.
The pandemic, including the related restrictions at our communities, began to adversely impact our occupancy and resident fee revenue significantly during March 2020, as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. The year-over-year decrease in monthly move-ins of our same community portfolio has moderated from 64.2% in April 2020 to 26.5% in December 2020. Our consolidated senior housing portfolio's weighted average occupancy has declined in each month of the pandemic, from 82.7% in March 2020 to 71.5% in December 2020, and was 70.0% in January 2021. We estimate that the pandemic, including the related restrictions at our communities, resulted in $281.1 million of lost resident fee revenue for the year ended December 31, 2020, including $228.5 million of lost resident fee revenue in our consolidated senior housing portfolio. Further deterioration of our resident fee revenue will result from lower move-in activity and the resident attrition inherent in our business, which may increase due to the impacts of COVID-19. In addition, our home health average daily census began to decrease in March 2020 due to lower occupancy in our communities and fewer elective medical procedures and hospital discharges, resulting in a 14.6% year-over-year decline in home health average daily census for the year ended December 31, 2020. We estimate that the pandemic, including the related restrictions at our communities, resulted in $52.6 million of lost resident fee revenue for the Health Care Services segment for the year ended December 31, 2020.
Facility operating expense for the year ended December 31, 2020 includes $125.5 million of incremental direct costs to prepare for and respond to the pandemic, including costs for: acquisition of additional PPE, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs may continue to be substantial. We have taken, and may take in future periods, significant impairment charges related to COVID-19 due to lower than expected operating performance at communities.
We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline, continuing to evaluate our financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief.
Grants received from the Provider Relief Fund are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for healthcare related expenses or lost revenues that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. HHS continues to evaluate and provide regulation and guidance regarding grants made under the Provider Relief Fund. We cannot provide assurance that additional restrictions on the permissible uses or terms and conditions of the grants will not be imposed by HHS. The program requires us to report to HHS on our use of the grants, and our reporting is subject to audit.
The pandemic has also caused substantial volatility in the market prices and trading volumes in the equity markets, including our stock. Our stock price and trading volume may continue to be subject to wide fluctuations as a result of the pandemic, and may decline in the future.
The ultimate impacts of COVID-19 on our business, results of operations, cash flow, liquidity, and stock price will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth 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, availability, utilization, and efficacy of COVID-19 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, including our ability to qualify for, and satisfy the terms and conditions of, financial relief; 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, housing markets, 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
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communities; the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, 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, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19; government action that may limit our collection or discharge 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.
Business, Operations, and Strategy
Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our resident fees (including downturns in the economy, housing market, consumer confidence, or the equity markets and unemployment among resident family members) could cause our occupancy, revenues, results of operations, and cash flow to decline.
For the year ended December 31, 2020, we generated 81.9% of our resident fee revenue from private pay customers. Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs such as Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities are located typically can afford to pay our monthly resident fees. Economic downturns, softness in the housing market, higher levels of unemployment among resident family members, lower levels of consumer confidence, stock market volatility, and/or changes in demographics could adversely affect the ability of seniors to afford our resident fees. If we are unable to retain and/or attract seniors with sufficient income, assets, or other resources required to pay the fees associated with independent and assisted living services and other service offerings, our occupancy, revenues, results of operations, and cash flow could decline.
Changes in the reimbursement rates, methods, or timing of payment from government reimbursement programs could adversely affect our revenues, results of operations, and cash flow.
We rely on reimbursement from government programs for a portion of our revenues, and we cannot provide assurance that reimbursement levels will not decrease in the future, which could adversely affect our revenues, results of operations, and cash flow. For the year ended December 31, 2020, reimbursements from government programs represented 14.5% of our total resident fee revenues, and Medicare reimbursements represented 76.8% of our Health Care Services segment revenue. See "Item 1. Business–Medicare and Medicaid Programs" for more information regarding these programs, including the impact of recent legislation and rulemaking on such programs.
Congress continues to discuss medical spending reduction measures, leading to a high degree of uncertainty regarding potential reforms to government reimbursement programs. These discussions, along with broader healthcare reform, could result in major changes in the healthcare delivery and reimbursement systems on both the national and state levels.
Healthcare reform and regulations may have a material adverse effect on our business, financial position, results of operations, and cash flow through, among other things, decreasing funds available for our services or increasing our operating costs. Continuing efforts of government to contain healthcare costs could materially and adversely affect us, and reimbursement levels may not remain at levels comparable to present levels or may not be sufficient to cover the costs allocable to patients eligible for reimbursement.
The impact of ongoing healthcare reform efforts on our business cannot accurately be predicted.
The healthcare industry in the United States is subject to fundamental changes due to ongoing healthcare reform efforts and related political, economic, and regulatory influences. Notably, the Affordable Care Act resulted in expanded healthcare coverage to millions of previously uninsured people beginning in 2014 and has resulted in significant changes to the United States healthcare system. To help fund this expansion, the Affordable Care Act outlines certain reductions for Medicare reimbursed services, including skilled nursing, home health, hospice, and outpatient therapy services, as well as certain other changes to Medicare payment methodologies. This comprehensive healthcare legislation has resulted and will continue to result in extensive rulemaking by regulatory authorities, and also may be altered, amended, repealed, or replaced. It is difficult to predict the full impact of the Affordable Care Act due to the complexity of the law and implementing regulations, as well our inability to foresee how CMS and other participants in the healthcare industry will respond to the choices available to them under the law. The provisions of the legislation and other regulations implementing the provisions of the Affordable Care Act
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or any amended or replacement legislation may increase our costs, adversely affect our revenues, expose us to expanded liability, or require us to revise the ways in which we conduct our business.
In addition to its impact on the delivery and payment for healthcare, the Affordable Care Act and the implementing regulations have resulted and may continue to result in increases to our costs to provide healthcare benefits to our employees. We also may be required to make additional employee-related changes to our business as a result of provisions in the Affordable Care Act or any amended or replacement legislation impacting the provision of health insurance by employers, which could result in additional expense and adversely affect our results of operations and cash flow.
Senior housing construction and development, lower industry occupancy, and increased competition, may have an adverse effect on our occupancy, revenues, results of operations, and cash flow.
The senior living industry is highly competitive. We compete with numerous organizations, including not-for-profit entities, that offer similar communities and services, such as home health care and hospice agencies, community-based service programs, retirement communities, convalescent centers, and other senior living providers. In general, regulatory and other barriers to competitive entry in the independent living, assisted living, and memory care sectors of the senior living industry are not substantial. The industry has attracted additional investment resulting in increased construction and development of new senior housing supply. New community openings have subjected our industry to oversupply and increased competitive pressures. Industry data shows that industry occupancy began to decrease starting in 2016 as a result of new openings and oversupply. During and since 2016 we have experienced an elevated rate of competitive new openings, with significant new competition opening in many markets, which has adversely affected our occupancy, revenues, results of operations, and cash flow. Such new competition could limit our ability to attract new residents and associates, to retain existing residents and associates, and to raise or maintain resident fees or expand our business, which could have a material adverse effect on our occupancy, revenues, results of operations, and cash flow. Beginning in early 2020, the COVID-19 pandemic resulted in additional occupancy pressure for our industry. Industry data shows that seniors housing occupancy decreased for three consecutive quarters between March 31, 2020 and December 31, 2020, with nearly all markets falling to record low occupancy by the fourth quarter of 2020. Due to the industry's low occupancy levels, certain competitors may price aggressively in order to capture market share.
The geographic concentration of our communities could leave us vulnerable to an economic downturn, regulatory changes, acts of nature, or the effects of climate change in those areas, which could negatively impact our financial condition, revenues, results of operations, and cash flow.
We have a high concentration of communities in various geographic areas, including the states of California, Florida, and Texas. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental regulations, acts of nature, and other factors that may result in a decrease in demand for senior living services in these areas could have an adverse effect on our financial condition, revenues, results of operations, and cash flow. Given the location of our communities, we are particularly susceptible to revenue loss, cost increase, or damage caused by severe weather conditions or natural disasters such as hurricanes, wildfires, earthquakes, or tornados. Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase in the cost of insurance or unavailability on acceptable terms. Climate change may also have effects on our business by increasing the cost of property insurance or making coverage unavailable on acceptable terms. To the extent that significant changes in the climate occur in areas where our communities are located, we may experience increased frequency of severe weather conditions or natural disasters or other changes to weather patterns, all of which may result in physical damage to or a decrease in demand for properties affected by these conditions. Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition, revenues, results of operations, or cash flow may be adversely affected. In addition, government regulation intended to mitigate the impact of climate change, severe weather patterns, or natural disasters could result in additional required capital expenditures to comply with such regulation without a corresponding increase in our revenues.
Termination of our resident agreements and vacancies in the living spaces we lease could adversely affect our occupancy, revenues, results of operations, and cash flow.
State regulations governing assisted living and memory care communities require written resident agreements with each resident. Several of these regulations also require that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, many of our assisted living and memory care resident agreements allow residents to terminate their agreements upon 30 days' or less notice. Our independent living resident agreements generally provide for termination of the lease upon death or allow a resident to terminate his or her lease upon the need for a higher level of care not provided at the community. If multiple residents terminate their resident agreements at or
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around the same time, including as a result of the pandemic, our occupancy, revenues, results of operations, and cash flow could be adversely affected. In addition, because of the demographics of our typical residents, including age and health, resident turnover rates in our communities are difficult to predict. As a result, the living spaces we lease may be unoccupied for a period of time, which could adversely affect our occupancy, revenues, results of operations, and cash flow.
Our ability to use net operating loss carryovers to reduce future tax payments may be limited.
Section 382 of the Internal Revenue code contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of 50% of its stock over a three-year period, to utilize its net operating loss carryforward and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by a company. Any such annual limitations may result in our being unable to utilize all of our net operating loss carryforwards generated in tax years prior to 2018 before their expiration.
Failure to maintain the security and functionality of our information systems and data, to prevent a cybersecurity attack or breach, or to comply with applicable privacy and consumer protection laws, including HIPAA, could adversely affect our business, reputation, and relationships with our residents, patients, employees, and referral sources and subject us to remediation costs, government inquiries, and liabilities, any of which could materially and adversely impact our revenues, results of operations, cash flow, and liquidity.
We are dependent on the proper function and availability of our information systems, including hardware, software, applications, and electronic data storage, to store, process, and transmit our business information, including proprietary business information and personally identifiable information of our residents, patients, and employees. Though we have taken steps to protect the cybersecurity and physical security of our information systems and have implemented policies and procedures to comply with HIPAA and other privacy laws, rules, and regulations, there can be no assurance that our security measures and disaster recovery plan will prevent damage to, or interruption or breach of, our information systems or other unauthorized access to proprietary or private information.
Because the techniques used to obtain unauthorized access to systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. Components of our information systems that we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the security or functionality of our information systems. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud or other forms of deceiving our employees or contractors such as email phishing attacks. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our cybersecurity or to investigate and remediate any cybersecurity vulnerabilities, attacks, or incidents.
In addition, we rely on software support of third parties to secure and maintain our information systems. Our inability, or the inability of these third parties, to continue to maintain and upgrade our information systems could disrupt or reduce the efficiency of our operations. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.
Failure to maintain the security and functionality of our information systems, to prevent a cybersecurity attack or other unauthorized access to our information systems, or to comply with applicable privacy and consumer protection laws, including HIPAA, could expose us to a number of adverse consequences, many of which are not insurable, including: (i) interruptions to our business, (ii) the theft, destruction, loss, misappropriation, or release of sensitive information, including proprietary business information and personally identifiable information of our residents, patients, and employees, (iii) significant remediation costs; (iv) negative publicity which could damage our reputation and our relationships with our residents, patients, employees, and referral sources, (v) litigation and potential liability under privacy, security, and consumer protection laws, including HIPAA, or other applicable laws, rules, or regulations, and (vi) government inquiries which may result in sanctions and other criminal or civil fines or penalties. Any of the foregoing could materially and adversely impact our revenues, results of operations, cash flow, and liquidity.
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Failure to complete our capital expenditures in accordance with our plans may adversely affect our anticipated revenues, results of operations, and cash flow.
Our planned full-year 2021 non-development capital expenditures include maintenance, renovations, upgrades, and other major building infrastructure projects for our communities. Such projects may be needed to ensure that our communities are in appropriate physical condition to support our strategy and to protect the value of our community portfolio. In addition, our planned full-year 2021 development capital expenditure projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities.
Our capital projects are in various stages of planning and development and are subject to a number of factors over which we may have little or no control. These factors include work restrictions at our communities due to COVID-19, the necessity of arranging separate leases, mortgage loans, or other financings to provide the capital required to complete these projects; difficulties or delays in obtaining zoning, land use, building, occupancy, licensing, certificate of need, and other required governmental permits and approvals; failure to complete construction of the projects on budget and on schedule; failure of third-party contractors and subcontractors to perform under their contracts; shortages of labor or materials that could delay projects or make them more expensive; adverse weather conditions that could delay completion of projects; increased costs resulting from general economic conditions or increases in the cost of materials; and increased costs as a result of changes in laws and regulations.
We cannot provide assurance that we will undertake or complete all of our planned capital expenditures, or that we will not experience delays in completing those projects. In addition, we may incur substantial costs prior to achieving stabilized occupancy for certain capital projects and cannot assure that these costs will not be greater than we have anticipated. We also cannot provide assurance that any of our capital projects will be economically successful or provide a return on investment in accordance with our plans or at all. Furthermore, our failure to complete, or delays in completing, our planned community-level capital expenditures could harm the value of our communities and our revenues, results of operations, and cash flow.
To the extent we identify and pursue any future development, investment, or acquisition opportunities, we may encounter difficulties in identifying opportunities at attractive prices or integrating acquisitions with our operations, which may adversely affect our financial condition, results of operations, and cash flow.
We may not be able to identify development, investment, and acquisition opportunities on attractive terms and that are compatible with our strategy. To the extent we identify any such opportunities and enter into definitive agreements in connection therewith, we cannot provide assurance that the transactions will be completed. Failure to complete transactions after we have entered into definitive agreements may result in significant expenses to us.
To the extent we identify and close on any such opportunities, the integration of acquired communities or companies into our existing business may result in unforeseen difficulties, divert managerial attention, or require significant financial or other resources. Further, any such closings may require us to incur additional indebtedness and contingent liabilities and may result in unforeseen expenses or compliance issues, which may adversely affect our revenue growth, results of operations, and cash flow. Moreover, any future development, investment, or acquisition transactions may not generate any additional income for us or provide any benefit to our business.
Competition for the acquisition of strategic assets from buyers with greater financial resources or lower costs of capital than us or that have lower return expectations than we do could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.
There is significant competition among potential acquirers in the senior living industry, and there can be no assurance that we will be able to successfully complete acquisitions, which could limit our ability to grow our business. Several publicly-traded and non-traded real estate investment trusts, or REITs, and private equity firms have similar asset acquisition objectives as we do, along with greater financial resources and/or lower costs of capital than we are able to obtain. Partially as a result of tax law changes enacted through RIDEA, we now compete more directly with the various publicly-traded healthcare REITs for the acquisition of senior housing properties.
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Pending disposition transactions are, and any future disposition transactions will be, subject to various closing conditions, including the receipt of regulatory approvals where applicable, likely will result in reductions to our revenue, and may negatively impact our results of operations and cash flow.
During 2021, we expect to close on the dispositions of three owned communities classified as held for sale as of December 31, 2020 and terminations of a substantial portion of our management arrangements. Over the longer term, we may dispose of owned or leased communities through asset sales and lease terminations and expirations. The closings of any such transactions, or those that we identify in the future, generally are or will be subject to closing conditions, which may include the receipt of regulatory approvals, and we cannot provide assurance that any such transactions will close or, if they do, when the actual closings will occur. The sales price for pending or future dispositions may not meet our expectations due to the underlying performance of such communities or conditions beyond our control, and we may be required to take impairment charges in connection with such sales if the carrying amounts of such assets exceed the proposed sales prices, which could adversely affect our financial condition and results of operations. Further, we cannot provide assurance that we will be successful in identifying and pursuing disposition opportunities on terms that are acceptable to us, or at all. We may be required to pay significant amounts to restructure or terminate leases and we may be required to take charges in connection with such activity, which could adversely affect our financial condition and results of operations.
Completion of the dispositions of communities through sales or lease terminations and the termination of our management arrangements, including pending transactions and those we enter into in the future, likely will result in reductions to our revenue and may negatively impact our results of operations and cash flow. Further, if we are unable to reduce our general and administrative expense with respect to completed dispositions and management arrangement terminations in accordance with our expectations, we may not realize the expected benefits of such transactions, which could negatively impact our anticipated results of operations and cash flow.
Our execution of our strategy may not be successful, and initiatives undertaken to execute on our strategic priorities may adversely affect our business, financial condition, results of operations, cash flow, and the price of our common stock.
The success of our strategy depends on our ability to successfully identify and implement initiatives to execute on our strategic priorities, as well as factors outside of our control. Such initiatives may not be successful in achieving our expectations or may require more time and resources than expected to implement. There can be no assurance that our strategy or initiatives undertaken to execute on our strategic priorities will be successful and, as a result, such initiatives may adversely affect our business, financial condition, results of operations, cash flow, and the price of our common stock.
The closing of the pending sale of 80% of our equity in our Health Care Services segment may not be completed in accordance with our expectations or at all, and may not generate cash proceeds to us in the amount we anticipate, and the pending sale may disrupt our financial condition, results of operations, and cash flow.
Closing the sale of 80% of our equity in our Health Care Services segment, which we expect to occur in the late first half or early second half of 2021, is subject to receipt of certain regulatory approvals and other customary closing conditions set forth in the Purchase Agreement. We cannot provide assurance that such regulatory approvals will be received or that such closing conditions will be satisfied. If the conditions to closing are not satisfied or waived on a timely basis or at all, we may be unable to complete the sale transaction, or such completion may be delayed or completed on terms that are less favorable than set forth in the Purchase Agreement. In the event the transaction does not close, we may have expended significant management resources to complete the transaction and incurred significant transaction costs without obtaining any corresponding benefit, and we may be subject to litigation or obligations for damages. Our inability to close the transaction in accordance with expectations, or at all, may adversely affect our financial condition, results of operations, cash flow, and stock price. In addition, any significant diversion of management’s or our associates’ attention away from our ongoing business, or loss of associates, due to the pending transaction, or difficulties encountered in transitioning the Health Care Services business, may adversely affect our financial condition, results of operations, and cash flow.
Liquidity and Indebtedness
Disruptions in the financial markets or decreases in the appraised values or performances of our communities could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our liquidity, financial condition, and the market price of our common stock.
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As of December 31, 2020, we had outstanding $3.9 billion principal amount of mortgage financing and $80.7 million letters of credit. If we are unable to extend or refinance our indebtedness prior to scheduled maturity dates, our liquidity and financial condition could be adversely impacted. Even if we are able to extend or refinance our maturing debt or credit or letter of credit facilities, the terms of the Class I and Class II directors will expire at the annual meeting of stockholdersnew financing may not be as favorable to be held in 2020,us as the terms of the Class III directorsexisting financing. In addition, the amount of mortgage financing available for our communities is generally dependent on their appraised values and performance. Decreases in the appraised values of our communities, including due to adverse changes in real estate market conditions, or their performance, could result in available mortgage refinancing amounts that are less than the communities' maturing indebtedness. Our inability to obtain refinancing proceeds sufficient to cover maturing indebtedness could adversely impact our liquidity, and may cause us to seek alternative sources of financing, which may be less attractive or unavailable.
We are heavily dependent on mortgage financing provided by Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which are currently operating under a conservatorship begun in 2008 and conducting business under the direction of the Federal Housing Finance Agency. Reform efforts related to Fannie Mae and Freddie Mac may make such financing sources less available or unavailable in the future and may cause us to seek alternative sources of financing, which may be less attractive or unavailable.
Disruptions or prolonged downturns in the financial markets may cause us to seek alternative sources of potentially less attractive financing and may require us to further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance of common stock. Disruptions in the financial markets could have an adverse effect on our business. If we are not able to obtain additional financing on favorable terms, we also may have to forgo, delay, or abandon some or all of our planned capital expenditures or any development, investment, or acquisition opportunities that we identify, which could adversely affect our revenues, results of operations, and cash flow.
If we are unable to generate sufficient cash flow to cover required interest and lease payments, this could result in defaults of the related debt or leases and cross-defaults under our other debt or lease documents, which would adversely affect our capital structure, financial condition, results of operations, and cash flow.
We have significant indebtedness and lease obligations, and we intend to continue financing our communities through mortgage financing, long-term leases, and other types of financing. Our required lease payments are generally subject to an escalator that is either fixed or tied to changes in the consumer price index or leased property revenue. We cannot give any assurance that we will expiregenerate sufficient cash flow from operations to cover required interest, principal, and lease payments. Any non-payment or other default under our financing arrangements could, subject to cure provisions, cause the lender to foreclose upon the community or communities securing such indebtedness or, in the case of a lease, cause the lessor to terminate the lease, each with a consequent loss of revenue and asset value to us. In some cases, indebtedness is secured by both a mortgage on a community (or communities) and a guaranty by us and/or one or more of our subsidiaries. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on real property by declaring all amounts outstanding under the guaranty immediately due and payable, and requiring the respective guarantor to fulfill its obligations to make such payments. The realization of any of these scenarios would have an adverse effect on our financial condition and capital structure. Because many of our outstanding debt and lease documents contain cross-default and cross-collateralization provisions, a default by us related to one community could affect a significant number of our other communities and their corresponding financing arrangements and leases (including documents with other lenders or lessors). In the event of such a default, we may not be able to obtain a waiver from the lender or lessor on terms acceptable or favorable to us, or at all, which would have a negative impact on our capital structure and financial condition.
Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business.
Our level of indebtedness and our long-term leases could adversely affect our future operations and/or impact our stockholders for several reasons, including, without limitation:
•We may have little or no cash flow apart from cash flow that is dedicated to the payment of any interest or principal required with respect to outstanding indebtedness and lease payments with respect to our long-term leases;
•Increases in our outstanding indebtedness, leverage, and long-term lease obligations will increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure;
•Increases in our outstanding indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures, expansions, repositionings, new developments, acquisitions, general corporate, and other purposes; and
•Our ability to pay dividends to our stockholders (should we initiate dividend payments in the future) may be limited.
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If we are unable to generate sufficient cash flow from operations in the future to service our debt or to make lease payments on our leases, we may be required, among other things, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness or leases, sell selected assets, reduce or delay planned capital expenditures, or delay or abandon desirable acquisitions. These measures might not be sufficient to enable us to service our debt or to make lease payments on our leases. The failure to make required payments on our debt or leases could result in an adverse effect on our future ability to generate revenues and our results of operations and cash flow. Any contemplated financing, refinancing, restructuring, or sale of assets might not be available on economically favorable terms to us.
Our debt and lease documents contain financial and other covenants, and any default under such documents could result in the acceleration of our indebtedness and lease obligations, the foreclosure of our mortgaged communities, the termination of our leasehold interests, and/or cross-defaults under our other debt or lease documents, any of which could materially and adversely impact our capital structure, financial condition, results of operations, cash flow, and liquidity and interfere with our ability to pursue our strategy.
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service and lease coverage ratios, and requiring us not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. Net worth is generally calculated as stockholders' equity, as calculated in accordance with accounting principles generally accepted in the United States, or GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. The debt service and lease coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or lease payment. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
These restrictions and covenants may interfere with our ability to obtain financing or to engage in other business activities, which may inhibit our ability to pursue our strategy. In addition, certain of our outstanding indebtedness and leases limit or restrict, among other things, our ability and our subsidiaries' ability to borrow additional funds, engage in a change in control transaction, dispose of all or substantially all of our or their assets, or engage in mergers or other business combinations without consent of the applicable lender or lessor. In certain circumstances, the consent of the applicable lender or, if certain objective conditions are not satisfied, lessor may be based on the lender's or lessor's sole discretion. Our inability to obtain the consent of applicable lenders and landlords in connection with our pursuit of any such transactions may forestall our ability to consummate such transactions. Furthermore, the costs of obtaining such consents may reduce the value that our stockholders may realize in any such transactions.
The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. We typically guarantee the performance and lease payment obligations of our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio could result in a default on the entire master lease portfolio.
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities, and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
In addition, certain of our master leases and management agreements contain radius restrictions, which limit our ability to own, develop, or acquire new communities within a specified distance from certain existing communities covered by such
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agreements. These radius restrictions could negatively affect our ability to expand or develop or acquire senior housing communities and operating companies.
Lease obligations and mortgage debt expose us to increased risk of loss of property, which could harm our ability to generate future revenues and could have an adverse tax effect.
Lease obligations and mortgage debt increase our risk of loss because defaults on leases or indebtedness secured by properties may result in lease terminations by lessors and foreclosure actions by lenders. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could negatively impact our results of operations and cash flow. Further, because many of our outstanding debt and lease documents contain cross-default and cross-collateralization provisions, a default by us related to one community could affect a significant number of our other communities and their corresponding financing arrangements and leases.
In addition, our leases generally provide for renewal or extension options and, in certain cases, purchase options. We expect to renew, extend, or exercise purchase options with respect to our leases in the normal course of business; however, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal, extension, or purchase options. Furthermore, the terms of any such purchase options that are based on fair market value are inherently uncertain and could be unacceptable or unfavorable to us depending on the circumstances at the annual meetingtime of stockholdersexercise. If we are not able to renew or extend our existing leases, or purchase the communities subject to such leases, at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, results of operations, and cash flow could be adversely affected.
Increases in market interest rates could significantly increase the costs of our debt obligations, which could adversely affect our results of operations and cash flow.
Our variable-rate debt obligations and any such obligations incurred in the future expose us to interest rate risk. In the normal course of business, we enter into interest rate agreements with major financial institutions to manage our risk above certain interest rates on variable rate debt. These agreements only limit our exposure to increases in interest rates above certain levels and generally must be renewed every two to three years. Increases in prevailing interest rates will increase our payment obligations on our existing variable-rate obligations to the extent they are unhedged and may increase our future borrowing and hedging costs, which would negatively impact our results of operations and cash flow.
The potential phasing out of LIBOR may increase the interest costs of our debt obligations, which could adversely affect our results of operations and cash flow.
The interest rates for substantially all of our variable-rate debt obligations are calculated based on the London Interbank Offer Rate (LIBOR) plus a spread, and our interest rate cap agreements are indexed to LIBOR. LIBOR is administered by the ICE Benchmark Administration, which has announced that it plans to phase-out one week and two month LIBOR by the end of 2021 and the other LIBOR tenors by June 30, 2023. If LIBOR were to be discontinued, substantially all of our variable-rate debt agreements provide that the lender may choose an alternative index based on comparable information, and our interest rate cap agreements provide that the calculation agent may choose an alternative index. It is unclear whether LIBOR will cease to exist or if new methods of calculating LIBOR will evolve by the applicable phase-out dates, or whether alternative and comparable index rates will be established and adopted by our lenders and other financial institutions. If LIBOR ceases to exist or if the methods of calculating LIBOR change, interest rates on our variable-rate debt obligations may increase or become more volatile, which would adversely affect our results of operations and cash flow.
We may need additional capital to fund our operations, capital expenditure plans, and strategic priorities, and we may not be able to obtain it on terms acceptable to us, or at all.
Funding our capital expenditure plans, pursuing any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or funding investments to support our strategy may require additional capital. Financing may not be available to us or may be available to us only on terms that are not favorable. In addition, certain of our outstanding indebtedness and long-term leases restrict, among other things, our ability to incur additional debt. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon some or all of our plans or opportunities. Further, if additional funds are raised through the issuance of additional equity securities, the percentage
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ownership of our stockholders would be diluted. Any newly issued equity securities may have rights, preferences, or privileges senior to those of our common stock.
Human Capital
The transition of management or unexpected departure of our key officers could harm our business.
We are dependent on the efforts of our senior management. The transition of management, the unforeseen loss or limited availability of the services of any of our executive leaders, or our inability to recruit and retain qualified personnel in the future, could, at least temporarily, have an adverse effect on our business, results of operations, and financial condition and be negatively perceived in the capital markets.
Increased competition for, or a shortage of, personnel, wage pressures resulting from increased competition, low unemployment levels, increased unemployment benefits, minimum wage increases, changes in overtime laws, and union activity may have an adverse effect on our business, results of operations, and cash flow.
Our success depends on our ability to retain and attract qualified management and other personnel who are responsible for the day-to-day operations of each of our communities. We compete with various healthcare service providers, other senior living providers, and hospitality and food services companies in retaining and attracting qualified personnel. Increased competition for, or a shortage of, nurses, or other personnel (including due to the pandemic), low levels of unemployment, increased unemployment benefits, or general inflationary pressures have required and may require in the future that we enhance our pay and benefits package to compete effectively for such personnel. In addition, we have experienced and may continue to experience wage pressures due to minimum wage increases mandated by state and local laws and the increase in the minimum salary threshold for overtime exemptions under the Fair Labor Standards Act, which the Department of Labor increased effective January 1, 2020. Changes to minimum wage laws may result in higher operating costs, and we may not be able to offset the added costs resulting from competitive, inflationary or regulatory pressures by increasing the rates we charge to our residents or our service charges, which would negatively impact our results of operations and cash flow.
Turnover rates of our personnel and the magnitude of the shortage of nurses or other personnel varies substantially from market to market. If we fail to attract and retain qualified personnel, our ability to conduct our business operations effectively, our overall operating results, and cash flow could be harmed.
In addition, efforts by labor unions to unionize any of our community personnel could divert management attention, lead to increases in our labor costs, and/or reduce our flexibility with respect to certain workplace rules. If we experience an increase in organizing activity, if onerous collective bargaining agreement terms are imposed upon us, or if we otherwise experience an increase in our staffing and labor costs, our results of operations and cash flow would be negatively affected.
Regulatory, Compliance, and Legal
Environmental contamination at any of our communities could result in substantial liabilities to us, which may exceed the value of the underlying assets and which could materially and adversely affect our financial condition, results of operations, and cash flow.
Under various federal, state, and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in 2021,certain circumstances for the costs of investigation, removal or remediation of, or related to the release of, certain hazardous or toxic substances, that could be located on, in, at, or under a property, regardless of how such materials came to be located there. The cost of any required investigation, remediation, removal, mitigation, compliance, fines, or personal or property damages and our liability therefore could exceed the property's value and/or our assets' value. In addition, the presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents and retain existing residents, to borrow using such property as collateral, or to develop or redevelop such property. In addition, such laws impose liability, which may be joint and several, for investigation, remediation, removal, and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third party sites. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release, or disposal of such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Although we do not believe that we have incurred such liabilities as would have a material adverse effect on our business, financial condition, and results of operations, we could be subject to substantial future liability for environmental contamination that we have no knowledge about as of the date of this report and/or for which we may not be at fault.
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Failure to comply with existing environmental laws could result in increased expenditures, litigation, and potential loss to our business and in our asset value, which would have an adverse effect on our financial condition, results of operations, and cash flow.
Our operations are subject to regulation under various federal, state, and local environmental laws, including those relating to: the handling, storage, transportation, treatment, and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents. Our communities’ engagement of waste management companies for the proper disposal of all infectious medical waste does not immunize us from alleged violations of such laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed.
Federal regulations require building owners and those exercising control over a building's management to identify and warn their employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their buildings. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building's management may be subject to an increased risk of personal injury lawsuits. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling, and/or disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.
The presence of mold, lead-based paint, contaminants in drinking water, radon, and/or other substances at any of the communities we own or may acquire may lead to the incurrence of costs for remediation, mitigation, or the implementation of an operations and maintenance plan and may result in third party litigation for personal injury or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community's market value.
Although we believe that we are currently in material compliance with applicable environmental laws, if we fail to comply with such laws in the future, we would face increased expenditures both in terms of fines and remediation of the underlying problem(s), potential litigation relating to exposure to such materials, and potential decrease in value to our business and in the value of our underlying assets. Therefore, our failure to comply with existing environmental laws would have an adverse effect on our financial condition, results of operations, and cash flow.
We are unable to predict the future course of federal, state, and local environmental regulation and legislation. Changes in the environmental regulatory framework (including legislative or regulatory efforts designed to address climate change) could have a material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.
Significant legal actions and liability claims against us, including class action and stockholder derivative complaints, could subject us to increased operating costs and substantial uninsured liabilities, which may adversely affect our financial condition and results of operations.
We have been and are currently involved in litigation and claims incidental to the conduct of our business, which we believe are generally comparable to other companies in the senior living and healthcare industries, including, but not limited to, putative class action claims from time to time regarding staffing at our communities and compliance with consumer protection laws and the Americans with Disabilities Act. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. As a result, we maintain general liability, professional liability, and other insurance policies in amounts and with coverage and deductibles we believe are appropriate, based on the nature and risks of our business, historical
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experience, availability, and industry standards. Our current policies provide for deductibles for each claim and contain various exclusions from coverage. Effective December 31, 2020, we began using our wholly-owned captive insurance company for the purpose of insuring certain portions of our risk retention under our general and professional liability insurance programs. Accordingly, we are, in effect, self-insured for claims that are less than the deductible amounts and for claims that exceed the funding level of our captive, and for claims or portions of claims that are not covered by such policies and/or exceed the policy limits. If we experience a greater number of losses than we anticipate, or if certain claims are not covered by insurance, our results of operations and financial condition could be adversely affected.
The senior living and healthcare services businesses entail an inherent risk of liability, particularly given the demographics of our residents and patients, including age and health, and the services we provide. In recent years, we, as well as other participants in our industry, have been subject to an increasing number of claims and lawsuits alleging that our services have resulted in resident injury or other adverse effects. Many of these lawsuits involve large damage claims and significant legal costs. The frequency and magnitude of such alleged claims and legal costs may increase due to the COVID-19 pandemic or our response efforts. Many states continue to consider tort reform and how it will apply to the senior living industry. We may continue to be faced with the threat of large jury verdicts in jurisdictions that do not find favor with large senior living or healthcare providers. There can be no guarantee that we will not have any claims that exceed our policy limits in the future, which could subject us to substantial uninsured liabilities.
If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of operations could be materially and adversely affected. In some states, state law may prohibit or limit insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation. As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of our insurance policy limits. Also, our insurance policies' deductibles, or self-insured retention, are accrued based on an actuarial projection of future liabilities. If these projections are inaccurate and if there is an unexpectedly large number of successful claims that result in liabilities in excess of our accrued reserves, our operating results could be negatively affected. Claims against us, regardless of their merit or eventual outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote time to matters unrelated to the day-to-day operation of our business. We also have to renew our policies every year and negotiate terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases and changes in coverage and other terms. There can be no assurance that we will be able to obtain liability insurance in the future or, if available, that such coverage will be available on acceptable terms.
We face periodic and routine reviews, audits, and investigations by government agencies, and any adverse findings could negatively impact our business, financial condition, results of operations, and cash flow.
The senior living and healthcare industries are continuously subject to scrutiny by governmental regulators, which could result in reviews, audits, investigations, enforcement actions, or litigation related to regulatory compliance matters. In addition, we are subject to various government reviews, audits, and investigations to verify our compliance with Medicare and Medicaid programs and other applicable laws and regulations. CMS has engaged a number of third party firms, including Recovery Audit Contractors (RAC), Zone Program Integrity Contractors (ZPIC), and Unified Program Integrity Contractors (UPIC), to conduct extensive reviews of claims data to evaluate the appropriateness of billings submitted for payment. Audit contractors may identify overpayments based on coverage requirements, billing and coding rules, or other risk areas. In addition to identifying overpayments, audit contractors can refer suspected violations of law to government enforcement authorities. An adverse determination of government reviews, audits, and investigations may result in citations, sanctions, and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, and termination of participation in Medicare and Medicaid programs, and/or damage to our business reputation. Our costs to respond to and defend any such audits, reviews, and investigations may be significant and are likely to increase in the current enforcement environment, and any resulting sanctions or criminal, civil, or regulatory penalties could have a material adverse effect on our business, financial condition, results of operations, and cash flow.
The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect on our business, results of operations, and cash flow.
The regulatory environment surrounding the senior living industry continues to evolve and intensify in the amount and type of laws and regulations affecting it, many of which vary from state to state. In addition, many senior living communities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. In several of the states in which we operate there are different levels of care that may be provided based on the level of licensure. Several of the states in which we operate, or intend to operate, assisted living and memory care communities, home health and
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hospice agencies, and/or skilled nursing facilities require a certificate of need before the community or agency may be opened or the services at an existing community may be expanded. These regulatory requirements, and the increased enforcement thereof, could affect our ability to expand into new markets, to expand our services and communities in existing markets, and if any of our presently licensed communities were to operate outside of its licensing authority, may subject us to penalties including closure of the community. See "Item 1. Business-Industry Regulation" for more information regarding regulation and enforcement in our industry.
Federal, state, and local officials are increasingly focusing their efforts on enforcement of these laws and regulations. This is particularly true for large for-profit, multi-community providers like us. Future regulatory developments as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials could cause our operations to suffer. We are unable to predict the future course of federal, state, and local legislation or regulation. If regulatory requirements increase, whether through enactment of new laws or regulations or changes in the enforcement of existing rules, our business, results of operations, and cash flow could be adversely affected.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by governmental authorities and consequent citations for failure to comply with regulatory requirements. We also expend considerable resources to respond to federal and state investigations or other enforcement action. From time to time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such inspections or surveys. Although most inspection deficiencies are resolved through a plan of corrective action, the reviewing agency may have the authority to take further action against a licensed or certified facility, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal reimbursement programs, or imposition of other sanctions, including criminal penalties. Furthermore, certain states may allow citations in one community to impact other communities in the state. Revocation of a license at a given community could therefore impact our ability to obtain new licenses or to renew existing licenses at other communities, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults. The failure to comply with applicable legal and regulatory requirements could result in a material adverse effect to our business as a whole.
There are various extremely complex federal and state laws governing a wide array of referrals, relationships, and arrangements and prohibiting fraud by healthcare providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such anti-fraud initiatives. Some examples are the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997, and the False Claims Act, which gives private individuals the ability to bring an action on behalf of the federal government. The violation of any of these laws or regulations may result in the imposition of fines or other penalties that could increase our costs and otherwise jeopardize our business. Because of incentives allowing a private individual to bring a claim on behalf of the federal government, so-called "whistleblower" suits have become more frequent.
Additionally, since we operate communities and agencies that participate in federal and/or state healthcare reimbursement programs, we are subject to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent, or are for items or services that were not provided as claimed. Similar state laws vary from state to state. Violation of any of these laws can result in loss of licensure, citations, sanctions, and other criminal or civil fines and penalties, the refund of overpayments, payment suspensions, or termination of participation in Medicare and Medicaid programs, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults.
We are subject to certain federal and state laws that regulate financial arrangements by healthcare providers, such as the Federal Anti-Kickback Law, the Stark laws, and certain state referral laws. Authorities have interpreted the Federal Anti-Kickback Law very broadly to apply to many practices and relationships between healthcare providers and sources of patient referral. If we were to violate the Federal Anti-Kickback Law, we may face criminal penalties and civil sanctions, including fines and possible exclusion from government reimbursement programs, which may also cause us to default under our debt and lease documents and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our business, it is difficult to predict how our revenues could be affected if we were subject to an action alleging such violations.
We are subject to federal and state laws, regulations and executive orders relating to healthcare providers’ response to the COVID-19 pandemic. These requirements vary based on provider type and jurisdiction but generally include mandatory requirements for testing of residents and/or staff, implementation of infection control standards and procedures, imposition of restrictions on new admissions or readmissions of residents, requiring screening of all persons entering a community, imposition of restrictions or limitations on who and how residents may be visited, and imposition of mandatory notification
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requirements to residents, families, staff and regulatory bodies related to positive COVID-19 cases. Enhanced or additional penalties may apply for violation of such requirements.
Compliance with the Americans with Disabilities Act and Fair Housing Act, safety and health standards of the Occupational Safety and Health Administration, and other fire, safety, health, and other regulations may require us to make unanticipated expenditures, which could increase our costs and therefore adversely affect our results of operations and financial condition.
Certain of our communities, or portions thereof, may be subject to compliance with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for "public accommodations" and "commercial properties," but generally requires that buildings be made accessible to people with disabilities. If applicable, compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of damages to private litigants.
We must also comply with the Fair Housing Act, which prohibits us from discriminating against individuals on certain bases in any of our practices if it would cause such individuals to face barriers in gaining residency in any of our communities. Additionally, the Fair Housing Act and other state laws require that we advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our marketing techniques to comply with these requirements.
In addition, we are required to operate our communities in compliance with applicable safety and health standards of the Occupational Safety and Health Administration, and other fire, health, and safety regulations, building codes and other land use regulations, and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like other healthcare facilities, senior living communities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance with regulatory requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint filed by a resident, a family member, or one of our competitors. We may be required to make substantial capital expenditures to comply with those requirements.
Legislation was adopted in the State of Florida in March 2018 that requires skilled nursing homes and assisted living communities in Florida to obtain generators and fuel necessary to sustain operations and maintain comfortable temperatures in the event of a power outage. Our cost to comply with this legislation has been approximately $20 million without a corresponding increase in our revenues. If other states or jurisdictions were to adopt similar legislation or regulation, the cost to comply with such requirements may be substantial and may not result in any additional revenues.
The increased costs and capital expenditures that we may incur in order to comply with any of the above would result in a negative effect on our results of operations and financial condition.
Corporate Organization and Structure
Anti-takeover provisions in our organizational documents may delay, deter, or prevent a tender offer, merger, or acquisition that investors may consider favorable.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws may delay, deter, or prevent a tender offer, merger, or acquisition that investors may consider favorable or prevent the removal of our current board of directors. Such provisions include:
•provisions allowing the Board of Directors to issue blank-check preferred stock;
•provisions preventing stockholders from calling special meetings or acting by written consent;
•advance notice requirements for stockholders with respect to director nomineesnominations and actions to be taken at annual meetings; and
•no provision in our amended and restated certificate of incorporation for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for electionelection.
Additionally, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders in certain situations, will not apply to us.
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We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations.
We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries. As a result, we are dependent on loans, distributions, and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us.
Other Market Factors
Various factors, including general economic conditions and the spread of contagious illnesses, could adversely affect our financial performance and other aspects of our business.
General economic conditions, such as inflation, the consumer price index, commodity costs, fuel and other energy costs, costs of salaries, wages, benefits and insurance, interest rates, and tax rates, affect our facility operating, facility lease, general and administrative and other expenses, and we have no control or limited ability to control such factors. Current global economic conditions and uncertainties, including due to the COVID-19 pandemic, the potential for failures or realignments of financial institutions, and the related impact on available credit may affect us and our business partners, landlords, counterparties, and residents or prospective residents in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk that certain of our business partners, landlords or counterparties would be unable to fulfill their obligations to us, and other impacts which we are unable to fully anticipate. In addition to the impact of the COVID-19 pandemic on our occupancy, seasonal contagious illnesses such as cold and flu, which typically more severely impact seniors than the general population may negatively affect our occupancy. The continued COVID-19 pandemic, severe cold and flu season, or an outbreak of other contagious disease in the markets in which we operate could result in a regulatory ban on admissions, decreased occupancy, and otherwise adversely affect our business.
The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, stockholders may be unable to resell their shares at or afterabove their purchase price. The market price of our common stock may fluctuate or decline significantly in the 2019 annual meetingfuture. Some of the factors that could negatively affect our share price, result in fluctuations in the price, or trading volume of our common stock include:
•variations in our quarterly results of operations and cash flow;
•changes in our operating performance and liquidity guidance;
•the contents of published research reports about us or the senior living, healthcare, or real estate industries or the failure of securities analysts to cover our common stock;
•additions or departures of key management personnel;
•any increased indebtedness we may incur or lease obligations we may enter into in the future;
•actions by institutional stockholders;
•changes in market valuations of similar companies;
•announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•speculation or reports by the press or investment community with respect to us, other senior living operators or healthcare providers, or the senior living, healthcare, or real estate industries in general;
•proxy contests or other stockholder activism;
•increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
•downturns in the real estate market or changes in market valuations of senior living communities;
•changes or proposed changes in laws or regulations affecting the senior living and healthcare industries or enforcement of these laws and regulations, or announcements relating to these matters; and
•general market and economic conditions.
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Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by offering additional debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, convertible securities, series of preferred shares, or shares of our common stock. Upon liquidation, holders of our debt securities and preferred stock, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both. Shares of our preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their shareholdings in us.
We may issue all of the shares of our common stock that are authorized but unissued (and not otherwise reserved for issuance under our stock incentive or purchase plans) without any action or approval by our stockholders. We may issue shares of common stock in connection with development, investment, and acquisition opportunities, including de novo development, acquisitions of senior living communities and operating companies, and expansion of our healthcare services business. Any shares issued in connection with our acquisitions or otherwise would dilute the holdings of our current stockholders.
Actions of activist stockholders could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect on our business, results of operations, cash flow, and the market price of our common stock.
We value constructive input from our stockholders and engage in dialogue with our stockholders regarding our governance practices, strategy, and performance. However, activist stockholders may disagree with the composition of our Board of Directors or management, our strategy, or capital allocation decisions and may seek to effect change through various strategies that range from private engagement to public campaigns, proxy contests, efforts to force proposals, or transactions not supported by our Board of Directors and litigation. Responding to these actions may be costly and time-consuming, disrupt our operations, divert the attention of our Board of Directors, management, and our associates and interfere with our ability to pursue our strategy and to attract and retain qualified Board and executive leadership. The perceived uncertainty as to our future direction that may result from actions of activist stockholders may also negatively impact our ability to attract and retain residents at our communities. We cannot provide assurance that constructive engagement with our stockholders will be successful. Any such stockholder activism may have an adverse effect on our business, results of operations, cash flow, and the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Communities
As of December 31, 2020, we operated and managed 726 communities across 43 states, with the capacity to serve approximately 64,000 residents. As of December 31, 2020, we owned 350 communities, leased 301 communities, managed 72 communities on behalf of third parties, and managed three communities for which we have an equity interest. Substantially all of our owned communities are subject to mortgage debt. The following table sets forth certain information regarding our owned, leased, and managed communities as of December 31, 2020, or, for occupancy, represents the weighted average occupancy for December 2020.
| Number of Communities | ||||||||||||||||||||||||||||||||||||||
| State | Units | Owned | Leased | Managed | Total | |||||||||||||||||||||||||||||||||
| Texas | 9,023 | 56 | 19 | 17 | 92 | |||||||||||||||||||||||||||||||||
| California | 6,961 | 26 | 20 | 12 | 58 | |||||||||||||||||||||||||||||||||
| Florida | 6,384 | 44 | 29 | 3 | 76 | |||||||||||||||||||||||||||||||||
| North Carolina | 3,401 | 7 | 50 | — | 57 | |||||||||||||||||||||||||||||||||
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| Number of Communities | ||||||||||||||||||||||||||||||||||||||
| State | Units | Owned | Leased | Managed | Total | |||||||||||||||||||||||||||||||||
| Colorado | 3,380 | 13 | 11 | 5 | 29 | |||||||||||||||||||||||||||||||||
| Illinois | 3,027 | 3 | 9 | 3 | 15 | |||||||||||||||||||||||||||||||||
| Ohio | 2,971 | 15 | 15 | 6 | 36 | |||||||||||||||||||||||||||||||||
| Washington | 2,833 | 15 | 18 | — | 33 | |||||||||||||||||||||||||||||||||
| Arizona | 2,153 | 17 | 9 | 1 | 27 | |||||||||||||||||||||||||||||||||
| Oregon | 1,805 | 12 | 11 | — | 23 | |||||||||||||||||||||||||||||||||
| Michigan | 1,678 | 9 | 22 | — | 31 | |||||||||||||||||||||||||||||||||
| New York | 1,500 | 10 | 9 | 2 | 21 | |||||||||||||||||||||||||||||||||
| Tennessee | 1,494 | 16 | 6 | 1 | 23 | |||||||||||||||||||||||||||||||||
| Virginia | 1,206 | 7 | 3 | 2 | 12 | |||||||||||||||||||||||||||||||||
| New Jersey | 1,147 | 7 | 5 | 1 | 13 | |||||||||||||||||||||||||||||||||
| Kansas | 1,114 | 8 | 10 | — | 18 | |||||||||||||||||||||||||||||||||
| Oklahoma | 979 | 3 | 15 | 5 | 23 | |||||||||||||||||||||||||||||||||
| Missouri | 913 | 2 | — | 2 | 4 | |||||||||||||||||||||||||||||||||
| Massachusetts | 899 | 3 | 3 | — | 6 | |||||||||||||||||||||||||||||||||
| Indiana | 830 | 4 | 4 | 1 | 9 | |||||||||||||||||||||||||||||||||
| Alabama | 804 | 5 | — | — | 5 | |||||||||||||||||||||||||||||||||
| Pennsylvania | 766 | 7 | 3 | — | 10 | |||||||||||||||||||||||||||||||||
| Georgia | 717 | 8 | — | 1 | 9 | |||||||||||||||||||||||||||||||||
| Wisconsin | 712 | 5 | 7 | 2 | 14 | |||||||||||||||||||||||||||||||||
| Connecticut | 636 | 2 | 3 | 1 | 6 | |||||||||||||||||||||||||||||||||
| South Carolina | 611 | 4 | 6 | 1 | 11 | |||||||||||||||||||||||||||||||||
| Maryland | 560 | 3 | — | 3 | 6 | |||||||||||||||||||||||||||||||||
| Idaho | 548 | 6 | 1 | — | 7 | |||||||||||||||||||||||||||||||||
| Minnesota | 538 | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||
| Rhode Island | 532 | 3 | — | 1 | 4 | |||||||||||||||||||||||||||||||||
| Arkansas | 494 | 4 | — | 1 | 5 | |||||||||||||||||||||||||||||||||
| Louisiana | 486 | 6 | — | — | 6 | |||||||||||||||||||||||||||||||||
| New Mexico | 457 | 2 | 1 | 1 | 4 | |||||||||||||||||||||||||||||||||
| Mississippi | 386 | 5 | — | — | 5 | |||||||||||||||||||||||||||||||||
| Kentucky | 283 | 3 | — | — | 3 | |||||||||||||||||||||||||||||||||
| Nevada | 256 | 4 | — | — | 4 | |||||||||||||||||||||||||||||||||
| Montana | 137 | 1 | — | 1 | 2 | |||||||||||||||||||||||||||||||||
| Delaware | 105 | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||
| Vermont | 101 | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||
| West Virginia | 93 | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||
| New Hampshire | 90 | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||
| Utah | 55 | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||
| Wyoming | 46 | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||
| Total | 63,111 | 350 | 301 | 75 | 726 | |||||||||||||||||||||||||||||||||
| Occupancy rate (weighted average) | 70.4 | % | 73.2 | % | 70.5 | % | 71.4 | % | ||||||||||||||||||||||||||||||
Corporate Offices
Our main corporate offices are leased, including our 107,713 square foot headquarters in Brentwood, Tennessee and our 156,016 square foot office in Milwaukee, Wisconsin.
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Item 3. Legal Proceedings
The information contained in Note 12 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "BKD". As of February 22, 2021, there were approximately 352 holders of record of our common stock.
Dividend Policy
On December 30, 2008, our Board of Directors voted to suspend our quarterly cash dividend indefinitely. We may determine to pay a regular quarterly dividend to the holders of our common stock in the future, but in the near term, we anticipate deploying capital to, among other uses, fund: planned capital expenditures; any acquisition, investment, development, or potential lease restructuring opportunities that we identify; investments to support our strategy; or reductions to our debt and lease leverage.
Our ability to pay and maintain cash dividends in the future will be based on many factors, including then-existing contractual restrictions or limitations, our ability to execute our strategy, our ability to negotiate favorable lease and other contractual terms, anticipated operating expense levels, our capital expenditure plans, the level of demand for our units, occupancy rates, the rates we charge, and our liquidity position. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain dividends. We can give no assurance as to our ability to pay or maintain dividends in the future. As we have done in the past, we may also pay dividends in the future that exceed our net income for the relevant period as calculated in accordance with GAAP.
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Share Price Performance Graph
The following graph compares the five-year cumulative total return for Brookdale common stock with the comparable cumulative return of the Russell 3000 and S&P Health Care Indices.
The graph assumes that a person invested $100 in Brookdale stock and each of the indices on December 31, 2015 and that dividends are reinvested. The comparisons in this graph are not intended to forecast or be indicative of possible future performance of Brookdale shares or such indices.
| 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | |||||||||||||||||||||||||||||||||
| Brookdale Senior Living Inc. | $ | 100.00 | $ | 67.28 | $ | 52.55 | $ | 36.29 | $ | 39.38 | $ | 24.00 | ||||||||||||||||||||||||||
| Russell 3000 | 100.00 | 112.74 | 136.56 | 129.40 | 169.54 | 204.95 | ||||||||||||||||||||||||||||||||
| S&P Health Care | 100.00 | 97.31 | 118.79 | 126.47 | 152.81 | 173.36 | ||||||||||||||||||||||||||||||||
The performance graph and related information shall not be deemed to be filed as part of this Annual Report on Form 10-K and do not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing by us under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate them by reference into such filing.
Recent Sales of Unregistered Securities
None during the quarter ended December 31, 2020.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information regarding purchases of our common stock made during the quarter ended December 31, 2020 by or on behalf of us or any ''affiliated purchaser,'' as defined by Rule 10b-18(a)(3) of the Exchange Act:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in thousands) (2) | ||||||||||||||||||||||
| 10/1/2020 - 10/31/2020 | — | $ | — | — | $ | 44,026 | ||||||||||||||||||||
| 11/1/2020 - 11/30/2020 | 6,311 | $ | 4.04 | — | $ | 44,026 | ||||||||||||||||||||
| 12/1/2020 - 12/31/2020 | — | $ | — | — | $ | 44,026 | ||||||||||||||||||||
| Total | 6,311 | $ | 4.04 | — | ||||||||||||||||||||||
(1)Consists entirely of shares withheld to satisfy tax liabilities due upon the vesting of restricted stock. The average price paid per share for such share withholding is based on the closing price per share on the vesting date of the restricted stock or, if such date is not a trading day, the trading day immediately prior to such vesting date.
(2)On November 1, 2016, we announced that our Board of Directors had approved a share repurchase program that authorizes us to purchase up to $100.0 million in the aggregate of our common stock. The share repurchase program is intended to be implemented through purchases made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or block trades, or by any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The size, scope, and timing of any purchases will be based on business, market, and other conditions and factors, including price, regulatory, and contractual requirements, and capital availability. The repurchase program does not obligate us to acquire any particular amount of common stock and the program may be suspended, modified, or discontinued at any time at our discretion without prior notice. Shares of stock repurchased under the program will be held as treasury shares. As of December 31, 2020, approximately $44.0 million remained available under the repurchase program.
Item 6. (Removed and Reserved).
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with our historical consolidated financial statements and related notes contained in "Item 8. Financial Statements and Supplementary Data." In addition to historical information, this discussion and analysis may contain forward-looking statements that involve risks, uncertainties, and assumptions, which could cause actual results to differ materially from management's expectations. See additional risks and uncertainties described in "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995" for more information. Factors that could cause such differences include those described in this section and "Item 1A. Risk Factors" of this Annual Report on Form 10-K.
Executive Overview and Recent Developments
Our Business
As of December 31, 2020, we are the largest operator of senior living communities in the United States based on total capacity, with 726 communities in 43 states and the ability to serve approximately 64,000 residents. We offer our residents access to a broad continuum of services across the most attractive sectors of the senior living industry. We operate and manage independent living, assisted living, memory care, and CCRCs. We also offer a range of home health, hospice, and outpatient therapy services to more than 17,000 patients as of that date.
Our community and service offerings combine housing with hospitality and healthcare services. Our senior living communities offer residents a supportive home-like setting, assistance with ADLs such as eating, bathing, dressing, toileting, transferring/walking, and, in certain communities, licensed skilled nursing services. We also provide home health, hospice, and outpatient therapy services to residents of many of our communities and to seniors living outside of our communities. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to age-in-place, which we believe enables them to maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions for their elderly relatives.
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Strategy
Our goal is to be the first choice in senior living by being the nation's most trusted and effective senior living provider and employer. We believe there are significant opportunities to create and deliver stockholder value as we execute on our strategy to achieve this goal. We continue to execute our core operational strategy that we initiated in early 2018, and we believe successful execution on that strategy provides the best opportunity for us to navigate and recover from the pandemic and to create stockholder value. We have supplemented our operational strategy with initiatives intended to complement and enhance our core operational efforts and to position us for future growth and success as we encounter changes and trends in demographics, customer preferences, technology, and healthcare delivery and outcomes. Our refined strategy is focused on these priorities:
•Continued Operational Improvement and Efficiency. We are focused on our core senior living communities and intend to continue to drive operational improvements. Through our "win locally" initiative, we intend to provide choices for high quality care and personalized service by caring associates while leveraging our industry-leading scale and experience. Such efforts include optimizing our sales and marketing processes, prioritizing communities with the most opportunities for growth, and ensuring that our communities and their programming are competitive in the market. We also continue to focus on attracting, engaging, developing, and retaining the best associates by maintaining a compelling value proposition in the areas of leadership, career development, and meaningful work. We believe engaged associates lead to lower turnover, improved operations, and ultimately an enhanced resident experience that drives accelerated growth. To sharpen our focus on our core senior living operations, we are (and have been) executing on initiatives to reduce the complexity of our business and to ensure appropriate risk-reward tradeoffs in our highly regulated product lines. Such initiatives include exiting substantially all our entry fee CCRC business in 2020 (which also significantly reduced the number of skilled nursing facilities we operate) and continuing to optimize our management services business.
•Senior Living Portfolio. Since initiating our operational turnaround strategy in early 2018, we have continued our portfolio optimization initiative through which we have disposed of owned and leased communities and restructured leases. Such transactions have included restructuring our leases with our three largest landlords, sales and conveyance of owned communities, and dispositions of substantially all of our remaining ownership interests in unconsolidated ventures, including our entry fee CCRC venture with Healthpeak. As we move forward in 2021, we intend to continue to (i) expand our footprint and services in core markets where we have, or can achieve, a clear leadership position, (ii) execute an ongoing capital recycling program through acquiring leased or managed communities and exiting underperforming owned assets or leases when possible, and (iii) pivot back to portfolio growth through targeted development, investment, and acquisition opportunities. We will continue to invest in our development capital expenditures program through which we expand, renovate, reposition, and redevelop selected existing senior living communities where economically advantageous, although at a reduced pace during the pandemic.
•Expansion of Healthcare and Service Platform. Our vision is to enable those we serve to live well by offering our residents the highest-quality healthcare and wellness platform in the senior living industry. We intend to further integrate our healthcare service model in certain markets in 2021. We also intend to pursue initiatives designed to accelerate growth in our healthcare services offered to residents within our communities and private duty services business. Such initiatives may include implementation of improvements to our sales and marketing efforts associated with our healthcare services, pursuit of additional or expanded relationships with managed care providers, and further development of healthcare relationships to capitalize on growth opportunities. We believe the successful execution of these initiatives and our healthcare strategy will drive incremental revenue by increasing move-ins, improving resident health and wellbeing, and as a result extend residents' average length of stay and increase occupancy. We also believe that we will improve the results of operations as we further develop as a partner of choice for healthcare service or payor organizations seeking to provide services within our communities and/or improve health outcomes at an overall lower cost of care.
•Driving Innovation and Leveraging Technology. We are engaged in a variety of innovation initiatives and over time plan to pilot and test new ideas, technologies, and operating models in order to enhance our residents' engagement and experience, improve outcomes, and increase average length of stay and occupancy. With our technology platform, we also expect to identify solutions to reduce complexity, increase productivity, lower costs, and increase our ability to collaborate with third parties.
COVID-19 Pandemic
The COVID-19 pandemic has adversely impacted, and likely will continue to adversely impact the senior living industry and our business. Due to the average age and prevalence of chronic medical conditions among our residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. We continue
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to serve and care for seniors at our communities and their homes through the pandemic. A significant portion of our corporate support associates have worked from home since March 2020.
The health and wellbeing of our residents, patients, and associates is and has been our highest priority. We initiated our COVID-19 preparation efforts in January 2020. Our response efforts center on infection prevention and control protocols, including following requirements and guidance of federal, state, and local governments and agencies, including the CDC and the CMS. We have enhanced and reinforced training our associates in such protocols and continue to actively monitor government requirements and guidance and adapt our policies, procedures, and response efforts when applicable. Upon confirmation of positive COVID-19 exposure at a community, we take actions intended to minimize further exposure, including associates' adhering to personal protection protocols, isolating residents or finding placement in an alternate care setting to best address their care needs, and in some cases, restricting new resident admissions, as directed by local health authorities.
Seeking to prevent the introduction of COVID-19 into our communities, and to help control further exposure to infections within communities, in March 2020 we began restricting visitors at all our communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and requiring new residents and residents returning from a hospital or nursing home to isolate in their apartment for fourteen days. These restrictions were in place across our portfolio for the three months ended June 30, 2020. We have adopted a framework for determining when to ease restrictions at each of our communities based on several criteria, including regulatory requirements and guidance, completion of baseline testing at the community, and the presence of current confirmed positive COVID-19 cases. Under this framework, we began easing restrictions on a community-by-community basis in July 2020 where regulatory requirements and guidance allowed, which easing may have included permitting outdoor, and in some cases, indoor visits with families, reduced capacity or socially distanced communal dining, limited communal activities programming, and in-person prospective resident visits. Although we are hopeful that administration of the vaccine to our residents and associates will enable us to further ease restrictions at our communities, those restrictions may continue for some time, and we may revert to more restrictive measures if the pandemic worsens, as necessary to comply with regulatory requirements, or at the direction of state or local health authorities.
In April 2020, we proactively commenced a resident and associate testing program for our communities. We undertook the program to identify positive, including asymptomatic, individuals, to better understand how our infection protocols are working, to help minimize the exposure to residents and associates of someone known to be COVID-19 positive, and in some cases to comply with state and local testing requirements. In July 2020, we completed baseline testing at all of our communities, and we have continued testing residents and associates at many of our communities. We also continue to utilize rapid point of care antigen test kits supplied by HHS at those of our communities with CLIA waivers. Our testing program has accumulated approximately 320,000 test results. Approximately 1.2% of our residents were known to have current COVID-19 positive test results on February 22, 2021. Further testing, whether undertaken proactively, as a result of regulatory requirements, or at the direction of state or local health authorities, may result in significant additional expense, additional temporary restrictions on move-ins at affected communities, continued need for isolating positive residents, increased use of PPE by our associates, and increased employee-related costs.
In December 2020, two COVID-19 vaccines received emergency use authorization from the U.S. Food and Drug Administration. We elected to hold officework with CVS Health Corporation, with whom we have a longstanding relationship to provide flu shot clinics in our communities, to administer vaccinations on site to our eligible residents and associates through the Pharmacy Partnership for Long-Term Care Program offered through the CDC. Our work to prepare for and host vaccine clinics includes extensive planning, gathering insurance information, obtaining consents, scheduling appointments, holding educational sessions with residents, families, and associates and detailed coordination of traffic flow and observation areas. We hosted our first clinics on December 18, 2020 and by January 22, 2021 had hosted over 500 community vaccine clinics. As of February 22, 2021, first dose vaccine clinics had been completed for residents and associates at 100% of our communities and approximately 85% of our communities have had second dose vaccine clinics.
The pandemic, including the related restrictions at our communities, have significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. We believe potential residents and their families are more cautious regarding moving into senior living communities while the pandemic continues, and such caution may persist for some time. In response to these developments, we have redesigned our sales process to include virtual tours, video engagement, and outdoor prospective resident meetings, enhanced and adapted our marketing programs to address the social distancing environment, and sought to strengthen our relationships with referral sources. During the third quarter of 2020, we returned to using in-person prospective resident visits for a majority of our communities. However, several large markets continue with virtual-only prospective resident visits as of December 31, 2020. We have placed restrictions on move-ins at our communities when circumstances warrant, including at the direction of state or local health authorities. Although these restrictions began to ease considerably in August 2020, restrictions on move-ins
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escalated throughout the fourth quarter of 2020 due to the resurgence of the virus. At the end of the second, third, and fourth quarters of 2020, 86%, 98%, and 89% of our communities, respectively, were accepting new move-ins. As of February 22, 2021, 97% of our communities were accepting new move-ins. We cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on demand may adversely affect the amount of resident fees we are able to collect from our residents.
The pandemic, including the related restrictions at our communities, began to adversely impact our occupancy and resident fee revenue significantly during March 2020, as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. The year-over-year decrease in monthly move-ins of our same community portfolio has moderated from 64.2% in April 2020 to 26.5% in December 2020. Our consolidated senior housing portfolio's weighted average occupancy has declined in each month of the pandemic, from 82.7% in March 2020 to 71.5% in December 2020, and was 70.0% in January 2021. We estimate that the pandemic, including the related restrictions at our communities, resulted in $281.1 million of lost resident fee revenue for the year ended December 31, 2020, including $228.5 million of lost resident fee revenue in our consolidated senior housing portfolio. Further deterioration of our resident fee revenue will result from lower move-in activity and the resident attrition inherent in our business, which may increase due to the impacts of COVID-19. Our home health average daily census also began to decrease in March 2020 due to lower occupancy in our communities and fewer elective medical procedures and hospital discharges, resulting in a 14.6% year-over-year decline in home health average daily census for the year ended December 31, 2020. We expect home health average daily census to continue to gradually recover sequentially with increased elective medical procedures and hospital discharges and senior housing occupancy. We estimate that the pandemic, including the related restrictions at our communities, resulted in $52.6 million of lost resident fee revenue for the Health Care Services segment for the year ended December 31, 2020.
Facility operating expense for the year ended December 31, 2020 includes $125.5 million of incremental direct costs to prepare for and respond to the pandemic, including costs for: acquisition of additional PPE, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs may continue to be substantial. We also recorded non-cash impairment charges in our operating results of $105.6 million for the year ended December 31, 2020 for our operating lease right-of-use assets and property, plant and equipment and leasehold intangibles, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities with impaired assets.
We have taken, and continue to take, actions to enhance and preserve our liquidity in response to the pandemic. During the year ended December 31, 2020, we completed our financing plans in the regular course of business, including refinancing substantially all of our 2020 and 2021 maturities. In addition, on August 31, 2020, we terminated our $250 million revolving credit facility and obtained $266.9 million of non-recourse mortgage financing on 16 communities, most of which had secured the credit facility prior to its termination. During the year ended December 31, 2020, we accepted $109.8 million of cash for grants under the Provider Relief Fund and $87.5 million of accelerated/advanced Medicare payments, and we deferred $72.7 million of the employer portion of social security payroll taxes. These programs were created or expanded under the CARES Act, as described below. We also delayed or canceled a number of elective capital expenditure projects, resulting in an approximate $67 million reduction to our pre-pandemic full-year 2020 capital expenditure plans, and suspended repurchases under our existing share repurchase program. On July 26, 2020, we restructured our 120 community triple-net master lease with Ventas in a multipart transaction. The components included, among other things, reducing our initial annual minimum rent to $100 million, representing a reduction of approximately $86 million over the twelve months ending June 30, 2021, and removal of the prior requirements that we satisfy financial covenants and maintain a security deposit with Ventas. We paid a $119.2 million one-time cash lease payment to Ventas in connection with our lease restructuring transaction effective July 26, 2020.
As of December 31, 2020, our total liquidity was $575.5 million, consisting of $380.4 million of unrestricted cash and cash equivalents, $172.9 million of marketable securities, and $22.2 million of availability on our secured credit facility. We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline, continuing to evaluate our financing structure and the state of debt markets, seeking further government-sponsored financial relief related to the COVID-19 pandemic, and completing the pending sale of 80% of the equity in our Health Care Services segment. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief, or that the closing of the pending transaction will be completed in accordance with our expectations, or at all, or generate cash proceeds to us in the amount we anticipate.
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The CARES Act, signed into law on March 27, 2020, and Paycheck Protection Program and Health Care Enhancement Act, signed into law on April 24, 2020, provide liquidity and financial relief to certain businesses, among other things. The impacts to us of certain provisions of the CARES Act are summarized below.
•During the year ended December 31, 2020, we accepted $109.8 million of cash for grants from the Provider Relief Fund under which grants have been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The accepted grants were made available pursuant to the following distributions from the Provider Relief Fund:
•$101.7 million pursuant to General Distributions, with the aggregate amount ultimately determined based on a percentage of our year-over-year changes in patient care revenue and certain operating and other expenses for the first and second quarters of 2020.
•$4.6 million pursuant to the Skilled Nursing Facility Targeted Distribution, which generally related to our certified skilled nursing facilities.
•$3.5 million pursuant to the Nursing Home Infection Control Distribution, including incentive payments, which related to our skilled nursing care provided through our CCRCs.
Grants received from the Provider Relief Fund are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for healthcare related expenses or lost revenues that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. The permissible uses of grants from the Nursing Home Infection Control Distribution are further limited to certain infection control expenses. The program requires us to report to HHS on our use of the grants, and our reporting is subject to audit. During the year ended December 31, 2020, we recognized $109.8 million of the grants as other operating income based upon our estimates of our satisfaction of the conditions of the grants during such period.
HHS continues to evaluate future allocations of, and regulation and guidance regarding, grants made under the Provider Relief Fund. We intend to pursue additional funding that may become available. However, there can be no assurance that we will qualify for, or receive, grants in the amount we expect, that additional restrictions on the permissible uses or terms and conditions of the grants will not be imposed by HHS, or that future funding programs will be made available for which we qualify.
•During the year ended December 31, 2020, we received $87.5 million under the Accelerated and Advance Payment Program administered by CMS, which was temporarily expanded by the CARES Act. Approximately $75.2 million related to our Health Care Services segment and the remainder related to our CCRCs segment. Under the program, we requested acceleration/advancement of 100% of our Medicare payment amount for a three-month period. The Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, amended the repayment terms for accelerated/advanced payments. As amended, recoupment of accelerated/advanced payments will begin one year after payments were issued. Payments will be recouped at a rate of 25% of Medicare payments for the first eleven months following the anniversary of issuance and at a rate of 50% of Medicare payments for the next six months. Any outstanding balance of accelerated/advanced payments will be due following such recoupment period. Pursuant to the Purchase Agreement we expect to repay the then outstanding balance of such accelerated/advance payments related to our Health Care Services segment at the closing of the sale of 80% of our equity in our Health Care Services segment.
•Under the CARES Act, we have elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 through December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. As of December 31, 2020, we have deferred payment of $72.7 million under the program.
•The CARES Act temporarily suspended the 2% Medicare sequestration for the period May 1, 2020 to December 31, 2020, which primarily benefited our Health Care Services segment. This suspension had a favorable impact of $4.0 million on the segment’s resident fee revenue for the year ended December 31, 2020. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extended the sequestration suspension through March 31, 2021.
•We are eligible to claim the employee retention tax credit for certain of our associates under the CARES Act. The refundable tax credit for 2020 is available to employers that fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, and is equal to 50% of qualified wages paid after March 12, 2020 through December 31, 2020 to qualified employees, with a maximum credit of $5,000 per employee. We estimate that we will be eligible to claim tax credits of
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approximately $10 million for 2020. The credit was modified and extended for wages paid from January 1, 2021 through June 30, 2021 by the Consolidated Appropriations Act, 2021, and we are assessing our eligibility to claim such credit. There can be no assurance that we will qualify for, or receive, tax credits in the amount we expect.
In addition to the grants described above, we have received and recognized $5.9 million of other operating income from grants from other government sources.
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 response efforts may continue to delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth 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, availability, utilization, and efficacy of COVID-19 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, including our ability to qualify for and satisfy the terms and conditions of financial relief; 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, housing markets, 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 response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, 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, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19; government action that may limit our collection or discharge 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.
2021 Pending Sale of Health Care Services
On February 24, 2021, we entered into the Purchase Agreement with affiliates of HCA Healthcare providing for the sale of 80% of our equity in our Health Care Services segment for a purchase price of $400 million in cash, subject to certain adjustments set forth in the Purchase Agreement, including a reduction for the remaining outstanding balance as of the closing of Medicare advance payments and deferred payroll tax payments related to the Health Care Services segment, which were $75.2 million and $8.2 million, respectively, as of December 31, 2020. We expect our net cash proceeds at the closing will be approximately $300 million, subject to the timing of closing with respect to the adjustments set forth in the Purchase Agreement. The Purchase Agreement also contains certain agreed upon indemnities for the benefit of the purchaser. The closing of the sale transaction is anticipated to occur in the late first half or early second half of 2021, subject to receipt of applicable regulatory approvals and satisfaction of other customary closing conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, at closing of the transaction, we will retain a 20% equity interest in the business. Upon closing, we expect that the results and financial position of our Health Care Services segment will be deconsolidated from our financial statements and that our interest in the joint venture will be accounted for under the equity method of accounting. We anticipate that the sale transaction will utilize a portion of our federal net operating loss carryforwards to offset the expected taxable gain on such transaction.
Transaction Activity and Impact of Dispositions on Results of Operations
Overview
During 2020, we continued execution on our portfolio optimization initiative through which we have disposed of owned and leased communities and restructured leases. Such activities during 2020 included restructuring our lease arrangements with Ventas announced on July 27, 2020 and closing the multi-part transaction with Healthpeak announced on October 1, 2019. As a result of these initiatives and other lease restructuring, expiration, and termination activity, and other transactions, during the year ended December 31, 2020 we:
•Terminated our triple-net lease obligations on an aggregate of 32 communities, including through the acquisition of 27 formerly leased communities;
•Disposed of an aggregate of seven owned communities;
•Sold substantially all of our remaining ownership interests in unconsolidated ventures, including our entry fee CCRC venture with Healthpeak; and
•Reduced our management of communities on behalf of former unconsolidated ventures and third parties, representing a net reduction of 25 managed communities during the year.
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As of December 31, 2020, we owned 350 communities, representing a majority of our consolidated community portfolio, and leased 301 communities. We also managed 75 communities on behalf of third parties or ventures for which we have an equity interest. The charts below show the foregoing changes in our portfolio from December 31, 2019 to December 31, 2020.
During the year ending December 31, 2021, we expect to close on the dispositions of three owned communities (249 units) classified as held for sale as of December 31, 2020 and terminations of a substantial portion of our management arrangements. The closings of the various pending and expected transactions are, or will be, subject to the satisfaction of various closing conditions, including (where applicable) the receipt of regulatory approvals. There can be no assurance that the transactions will close or, if they do, when the actual closings will occur.
Summaries of the foregoing transactions, and their impact on our results of operations, are below. See also Note 4 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the transactions.
Completed Dispositions of Owned Communities
In addition to the conveyance of five communities to Ventas, during the year ended December 31, 2020, described below, we completed the sale of two owned communities (375 units) for cash proceeds of $38.1 million, net of transaction costs.
During the year ended December 31, 2019, we completed the sale of 14 owned communities (1,768 units) for cash proceeds of $85.4 million, net of transaction costs. We utilized a portion of the cash proceeds from the asset sales to repay approximately $5.1 million of associated mortgage debt and debt prepayment penalties.
2020 Ventas Lease Restructuring
On July 26, 2020 (the "Effective Date"), we entered into definitive agreements with Ventas in connection with the restructuring of our lease arrangements with Ventas, including a Master Transaction Letter Agreement (the "Master Agreement"). Pursuant to the Master Agreement:
•On the Effective Date the parties entered into the Amended and Restated Master Lease and Security Agreement (the "Master Lease") and Amended and Restated Guaranty (the "Guaranty"), which amended and restated the prior Master Lease and Security Agreement and prior Guaranty, each dated as of April 26, 2018 and as amended from time to time. Pursuant to the Master Lease, we continue to lease 120 communities (10,174 units) for an aggregate initial annual minimum rent of approximately $100 million, which reflects a reduction of approximately $83 million of annual minimum rent in effect prior to the transaction. Effective on January 1 of each lease year, beginning January 1, 2022, the annual minimum rent will be subject to a 3% escalator. The initial term of the Master Lease ends December 31, 2025, with two 10-year extension options available to us. The annual minimum rent for the initial lease year of any such renewal term will be the greater of the fair market rental of the communities or the increased annual minimum rent for such lease year applying the foregoing 3% escalator. The Master Lease removed the prior provision that would have automatically extended the initial term in the event of the consummation of a change of control transaction by us. The Master Lease
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requires us to spend (or escrow with Ventas) a minimum of $1,500 per unit on a community-level basis and $3,600 per unit on an aggregate basis of all communities, in each case per 24-month period ending December 31 during the lease term, commencing with the 24-month period ending December 31, 2021. In addition, Ventas agreed to fund costs associated with certain pre-approved capital expenditure projects in the aggregate amount of up to $37.8 million. Upon disbursement of such expenditures, the annual minimum rent under the Master Lease will increase by the amount of the disbursement multiplied by 50% of the sum of the then current 10-year treasury note rate and 4.5%. The transaction agreements with Ventas further provide that the Master Lease and certain other agreements between the parties will be cross-defaulted.
Our subsidiaries’ obligations under the Master Lease are guaranteed at the parent level pursuant to the Guaranty. The Guaranty removed the prior requirements that we satisfy, at the parent level, financial covenants and that we maintain a security deposit with Ventas. The Guaranty also removed the prior right of Ventas to terminate the Master Lease on the basis of parent level financial covenants. Pursuant to the terms of the Guaranty, we may consummate a change of control transaction without the need for consent of Ventas so long as certain objective conditions are satisfied, including the post-transaction guarantor’s maintaining a minimum tangible net worth of at least $600.0 million, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas. The Guaranty removed the prior provisions that would have required that such post-transaction guarantor satisfy a maximum leverage ratio level, that we fund additional capital expenditures, and that we extend the term upon the occurrence of the change in control transaction. Under the terms of the Guaranty, commencing January 1, 2024 (and until such time (if any) as we exercise our lease term extension option with respect to the Master Lease), Ventas shall have the right to terminate the Master Lease (with respect to one or more communities), provided that the trailing twelve month coverage ratio of each such community is less than 0.9x and provided further that the removal and termination of any such communities does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such removal and termination.
•On the Effective Date, we entered into a Second Amended and Restated Omnibus Agreement with Ventas, which provides that if a default occurs and is continuing under certain other material leases or under certain material financings and if the same continues beyond the permitted cure period or the applicable landlord or lender exercises any material remedies, Ventas shall have the right to transition all or a portion of the communities from the Master Lease to a management arrangement with us pursuant to a market management agreement (which is terminable by either party). Notwithstanding the foregoing, Ventas may only transition one or more communities from the Master Lease to a management arrangement if such transition does not result in a portfolio coverage ratio with respect to the remaining communities in the Master Lease that is less than the portfolio coverage ratio prior to such transition.
•On the Effective Date, we conveyed five owned communities (471 units) to Ventas in full release and satisfaction of $78.4 million principal amount of indebtedness secured by the communities. Upon closing, the parties entered into new terminable, market rate management agreements pursuant to which we manage the communities. We also paid to Ventas $115.0 million in cash, released all security deposits to Ventas under the former guaranty (which included the release of a $42.4 million deposit held by Ventas and the payment of $4.2 million in cash as settlement of the amount of letters of credit), and issued a $45.0 million unsecured interest-only promissory note to Ventas. The initial interest rate of the promissory note is 9.0% per annum and will increase by 0.50% on each anniversary of the date of issuance. We may prepay the outstanding principal amount in whole or in part at any time without premium or penalty. The promissory note matures on the earlier of December 31, 2025 or the occurrence of a change of control transaction (as defined in the Guaranty).
•On the Effective Date, we issued to Ventas a warrant (the "Warrant") to purchase 16.3 million shares of our common stock, $0.01 par value per share, at a price per share of $3.00. The Warrant is exercisable at Ventas’ option at any time and from time to time, in whole or in part, until December 31, 2025. The exercise price and the number of shares issuable on exercise of the Warrant are subject to certain anti-dilution adjustments, including for cash dividends, stock dividends, stock splits, reclassifications, non-cash distributions, certain repurchases of common stock and business combination transactions. To the extent that the number of shares owned by Ventas (including shares underlying the Warrant) would be more than 9.6% of the total combined voting power of all our classes of capital stock or of the total value of shares of all our classes of capital stock (the "Ownership Cap") (other than as a result of actions taken by Ventas), we would generally be required to repurchase the number of shares necessary to avoid Ventas exceeding the Ownership Cap unless Ventas makes an election to require us to pay Ventas cash in lieu of issuing shares pursuant to the Warrant in excess of the Ownership Cap. The Warrant and the shares issuable upon exercise thereof have not been registered under the Securities Act of 1933, as amended, and were issued in a private placement pursuant to Section 4(a)(2) thereof. On the Effective Date, the parties entered into a Registration Rights Agreement, pursuant to which Ventas and its permitted transferees are entitled to certain registration rights. Pursuant to the terms of the agreement, we filed a shelf registration statement with the SEC with respect to the shares of common stock underlying the Warrant, which was declared effective on August 17, 2020. Ventas is entitled
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to customary underwritten offering, piggyback, and additional demand registration rights with respect to the shares underlying the Warrant.
2019 Healthpeak CCRC Venture and Master Lease Transactions
On October 1, 2019, we entered into definitive agreements, including a Master Transactions and Cooperation Agreement (the "MTCA") and an Equity Interest Purchase Agreement (the "Purchase Agreement"), providing for a multi-part transaction with Healthpeak. The parties subsequently amended the agreements to include one additional entry fee CCRC community as part of the sale of our interest in our unconsolidated entry fee CCRC venture with Healthpeak (the "CCRC Venture") (rather than removing the community from the CCRC Venture for joint marketing and sale). The components of the multi-part transaction included:
•CCRC Venture Transaction. Pursuant to the Purchase Agreement, on January 31, 2020, Healthpeak acquired our 51% ownership interest in the CCRC Venture, which held 14 entry fee CCRCs (6,383 units) for a total purchase price of $289.2 million, net of a $5.9 million post-closing net working capital adjustment paid to Healthpeak during the three months ended June 30, 2020 (representing an aggregate valuation of $1.06 billion less portfolio debt, subject to a net working capital adjustment). We recognized a $369.8 million gain on sale of assets for year ended December 31, 2020, and we derecognized the net equity method liability for the sale of the ownership interest in the CCRC Venture. At the closing, the parties terminated the existing management agreements on the 14 entry fee CCRCs, Healthpeak paid us a $100.0 million management agreement termination fee, and we transitioned operations of the entry fee CCRCs to a new operator. We recognized $100.0 million of management fee revenue for the three months ended March 31, 2020 for the management termination fee. The sale of our interest in the CCRC Venture and the $100.0 million of management termination fees generated approximately $579.0 million of taxable income in three months ended March 31, 2020. We will utilize any 2020 operating losses generated and tax loss carryforwards (including our capital loss carryforward that was generated in 2018) to offset the taxable gain on this transaction. Prior to the January 31, 2020 closing, the parties moved the remaining two entry fee CCRCs (889 units) into a new unconsolidated venture on substantially the same terms as the CCRC Venture to accommodate the sale of such two communities. Subsequent to these transactions, we will have exited substantially all of our entry fee CCRC operations.
•Master Lease Transactions. Pursuant to the MTCA, on January 31, 2020, the parties amended and restated our existing master lease pursuant to which we continued to lease 25 communities (2,711 units) from Healthpeak, and we acquired 18 formerly leased communities (2,014 units) from Healthpeak, at which time the 18 communities were removed from the master lease. At the closing, we paid $405.5 million to acquire such communities and to reduce our annual rent under the amended and restated master lease. We funded the community acquisitions with $192.6 million of non-recourse mortgage financing and the proceeds from the multi-part transaction. In addition, Healthpeak agreed to terminate the lease for one leased community (159 units), which occurred during December 2020. With respect to the continuing 24 communities (2,552 units), our amended and restated master lease: (i) has an initial term to expire on December 31, 2027, subject to two extension options at our election for ten years each, which must be exercised with respect to the entire pool of leased communities; (ii) the initial annual base rent for the 24 communities is $41.7 million and is subject to an escalator of 2.4% per annum on April 1st of each year; and (iii) Healthpeak agreed to make available up to $35.0 million for capital expenditures for a five-year period related to the 24 communities at an initial lease rate of 7.0%. As a result of the community acquisition transaction, we recognized a $19.7 million gain on debt extinguishment during the year ended December 31, 2020 and derecognized the $105.1 million carrying amount of financing lease obligations for eight communities which were previously subject to sale-leaseback transactions in which we were deemed to have continuing involvement. During March 2020, we obtained $30.0 million of additional non-recourse mortgage financing on the acquired communities.
2018 Welltower Lease and RIDEA Venture Restructuring
Pursuant to transactions we entered into with Welltower on June 27, 2018, our triple-net lease obligations on 37 communities (4,095 units) were terminated effective June 30, 2018. We paid Welltower an aggregate lease termination fee of $58.0 million. In addition, effective June 30, 2018, we sold our 20% equity interest in our Welltower RIDEA venture to Welltower for net proceeds of $33.5 million. We also elected not to renew two master leases with Welltower which matured on September 30, 2018 (11 communities; 1,128 units). As of December 31, 2020, we continue to operate 74 communities (3,674 units) under triple-net leases with Welltower, and our remaining lease agreements with Welltower contain an objective change of control standard that allows us to engage in certain change of control and other transactions without the need to obtain Welltower's consent, subject to the satisfaction of certain conditions.
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2018 Ventas Lease Portfolio Restructuring
On April 26, 2018, we entered into several agreements to restructure a portfolio of 128 communities (10,567 units) we leased from Ventas as of such date, including a Master Lease and Security Agreement (the "Former Ventas Master Lease"), which was subsequently amended and restated on July 26, 2020 as described above. The Former Ventas Master Lease amended and restated prior leases comprising an aggregate portfolio of 107 communities (8,459 units) into the Former Ventas Master Lease and Ventas agreed to observe, perform, and enforce separate leases for 21 additional communities (2,107 units) as if they had been combined into the Former Ventas Master Lease effective April 26, 2018, to the extent not in conflict with any mortgage debt underlying such communities. The transaction agreements with Ventas further provided that the Former Ventas Master Lease and certain other agreements between us and Ventas were subject to cross-default provisions.
The Former Ventas Master Lease had an initial term ending December 31, 2025 and provided us with two 10-year extension options. The transaction agreements provided that if we had consummated a change of control transaction on or before December 31, 2025, the initial term of the Former Ventas Master Lease would be extended automatically through December 31, 2029. The Former Ventas Master Lease and separate lease agreements with Ventas, which were guaranteed at the parent level by us, provided for total rent in 2018 of $175.0 million for the 128 communities, including the pro-rata portion of an $8.0 million annual rent credit for 2018. We received an annual rent credit of $8.0 million in 2019 and an annual rent credit of $7.0 million in 2020, prior to giving effect to the reduction from the agreements on July 26, 2020 as described above. The annual minimum rent was subject to an escalator equal to the lesser of 2.25% or four times the Consumer Price Index ("CPI") increase for the prior year (or zero if there was a CPI decrease).
The Former Ventas Master Lease required us to spend (or escrow with Ventas) a minimum of $2,000 per unit per 24-month period commencing with the 24-month period ended December 31, 2019 and thereafter each 24-month period ending December 31 during the lease term, subject to annual increases commensurate with the escalator beginning with the second lease year of the first extension term (if any), and provided that if we had consummated a change of control transaction, we would have been required within 36 months to invest (or escrow with Ventas) an aggregate of $30.0 million in the communities for revenue-enhancing capital projects.
Under the definitive agreements with Ventas, we, at the parent level, were required to satisfy certain financial covenants (including tangible net worth and leverage ratios) and may have consummated a change of control transaction without the need for consent of Ventas so long as certain objective conditions were satisfied, including the post-transaction guarantor's satisfying certain enhanced minimum tangible net worth and maximum leverage ratio, having minimum levels of operational experience and reputation in the senior living industry, and paying a change of control fee of $25.0 million to Ventas.
Pursuant to the Former Ventas Master Lease, we exercised our right to direct Ventas to use its commercially reasonable, diligent efforts to market for sale certain communities. During 2019, seven communities (358 units) were sold by Ventas and removed from the Former Ventas Master Lease, and the annual minimum rent was prospectively reduced by $1.7 million. During 2020, one community (32 units) was sold by Ventas and removed from the Former Ventas Master Lease, and the annual minimum rent was prospectively reduced by $0.1 million.
We recognized a $125.7 million non-cash loss on lease modification during the year ended December 31, 2018, primarily for the extensions of the triple-net lease obligations for communities with lease terms that are unfavorable to us given market conditions on the amendment date in exchange for modifications to the change of control provisions and financial covenant provisions of the community leases.
Additional Acquisitions Pursuant to Purchase Option
On January 22, 2020, we acquired eight formerly leased communities (336 units) from National Health Investors, Inc. pursuant to our exercise of a purchase option for a purchase price of $39.3 million. We funded the community acquisitions with cash on hand. During the three months ended March 31, 2020, we obtained $29.2 million of non-recourse mortgage financing, primarily secured by the acquired communities. On August 31, 2020, we acquired one formerly leased community (103 units) pursuant to our exercise of a purchase option for a purchase price of $25.0 million and funded the acquisition with cash on hand and non-recourse mortgage financing secured by the acquired community.
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Summary of Financial Impact of Completed Dispositions
The following table sets forth, for the periods indicated, the amounts included within our consolidated financial data for the 36 communities that we disposed through sales, conveyances, and lease terminations during the years ended December 31, 2020 and 2019, through the respective disposition dates.
| Year Ended December 31, 2020 | |||||||||||||||||
| (in thousands) | Actual Results | Amounts Attributable to Completed Dispositions | Actual Results Less Amounts Attributable to Completed Dispositions | ||||||||||||||
| Resident fees | |||||||||||||||||
| Independent Living | $ | 512,598 | $ | — | $ | 512,598 | |||||||||||
| Assisted Living and Memory Care | 1,691,276 | 14,080 | 1,677,196 | ||||||||||||||
| CCRCs | 321,883 | 20,495 | 301,388 | ||||||||||||||
| Senior housing resident fees | $ | 2,525,757 | $ | 34,575 | $ | 2,491,182 | |||||||||||
| Facility operating expense | |||||||||||||||||
| Independent Living | $ | 341,608 | $ | — | $ | 341,608 | |||||||||||
| Assisted Living and Memory Care | 1,325,260 | 13,008 | 1,312,252 | ||||||||||||||
| CCRCs | 287,157 | 19,997 | 267,160 | ||||||||||||||
| Senior housing facility operating expense | $ | 1,954,025 | $ | 33,005 | $ | 1,921,020 | |||||||||||
| Cash lease payments | $ | 427,711 | $ | 4,696 | $ | 423,015 | |||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
| (in thousands) | Actual Results | Amounts Attributable to Completed Dispositions | Actual Results Less Amounts Attributable to Completed Dispositions | ||||||||||||||
| Resident fees | |||||||||||||||||
| Independent Living | $ | 544,558 | $ | — | $ | 544,558 | |||||||||||
| Assisted Living and Memory Care | 1,815,938 | 50,775 | 1,765,163 | ||||||||||||||
| CCRCs | 402,175 | 64,791 | 337,384 | ||||||||||||||
| Senior housing resident fees | $ | 2,762,671 | $ | 115,566 | $ | 2,647,105 | |||||||||||
| Facility operating expense | |||||||||||||||||
| Independent Living | $ | 340,817 | $ | — | $ | 340,817 | |||||||||||
| Assisted Living and Memory Care | 1,297,302 | 43,880 | 1,253,422 | ||||||||||||||
| CCRCs | 330,103 | 58,813 | 271,290 | ||||||||||||||
| Senior housing facility operating expense | $ | 1,968,222 | $ | 102,693 | $ | 1,865,529 | |||||||||||
| Cash lease payments | $ | 377,714 | $ | 9,011 | $ | 368,703 | |||||||||||
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The following table sets forth the number of communities and units in our senior housing segments disposed through sales, conveyances, and lease terminations during the years ended December 31, 2020 and 2019:
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Number of communities | |||||||||||||||||
| Assisted Living and Memory Care | 10 | 20 | |||||||||||||||
| CCRCs | 2 | 4 | |||||||||||||||
| Total | 12 | 24 | |||||||||||||||
| Total units | |||||||||||||||||
| Assisted Living and Memory Care | 827 | 1,600 | |||||||||||||||
| CCRCs | 456 | 827 | |||||||||||||||
| Total | 1,283 | 2,427 | |||||||||||||||
Other Recent Developments
Increased Competitive Pressures
Data from NIC shows that industry occupancy began to decrease starting in 2016 as a result of new openings and oversupply. During and since 2016, we have experienced an elevated rate of competitive new openings, with significant new competition opening in many markets, which has adversely affected our occupancy, revenues, results of operations, and cash flow. In 2020, competitive new openings remained elevated, but declined from 2019. Beginning in early 2020, the COVID-19 pandemic resulted in additional occupancy pressure for our industry. NIC data shows that senior housing occupancy decreased for three consecutive quarters between March 31, 2020 and December 31, 2020, with nearly all markets falling to record low occupancy by the fourth quarter of 2020.
Capital Expenditures
Our total community-level capital expenditures were $140.1 million for 2020, which was a decrease of $98.6 million from 2019, and $27.8 million of which was reimbursed by our lessors. The decrease in community-level capital expenditures was partially due to our approximate $48 million reduction to our pre-pandemic full-year 2020 community-level capital expenditure plans as we delayed or canceled a number of elective capital expenditure projects in response to the pandemic. In the aggregate, we expect our full-year 2021 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $140 million. In addition, we expect our full-year 2021 development capital expenditures to be approximately $10 million, net of anticipated lessor reimbursements, and such projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities. We anticipate that our 2021 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, and reimbursements from lessors.
Results of Operations
As of December 31, 2020, our total operations included 726 communities with a capacity to serve approximately 64,000 residents. As of that date we owned 350 communities (31,853 units), leased 301 communities (21,129 units), and managed 75 communities (10,129 units). The following discussion should be read in conjunction with our consolidated financial statements and the related notes, which are included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The results of operations for any particular period are not necessarily indicative of results for any future period. Transactions completed during the period of January 1, 2019 to December 31, 2020 affect the comparability of our results of operations, and summaries of such transactions and their impact on our results of operations are discussed above in "Transaction Activity and Impact of Dispositions on Results of Operations."
We use the operating measures described below in connection with operating and managing our business and reporting our results of operations. Our adoption and application of the new lease accounting standard impacted our results for the year ended December 31, 2019 due to our recognition of additional resident fee revenue and facility operating expense, which are non-cash
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and are non-recurring in years subsequent to December 31, 2019. To aid in comparability between periods, presentations of our results on a same community basis, and RevPAR and RevPOR, exclude the impact of the lease accounting standard.
•Senior housing operating results and data presented on a same community basis reflect results and data of a consistent population of communities by excluding the impact of changes in the composition of our portfolio of communities. The operating results exclude hurricane and natural disaster expense and related insurance recoveries, and for the 2019 period, exclude the additional resident fee revenue and facility operating expense recognized as a result of the application of the lease accounting standard ASC 842. We define our same community portfolio as communities consolidated and operational for the full period in both comparison years. Consolidated communities excluded from the same community portfolio include communities acquired or disposed of since the beginning of the prior year, communities classified as assets held for sale, certain communities planned for disposition, certain communities that have undergone or are undergoing expansion, redevelopment, and repositioning projects, and certain communities that have experienced a casualty event that significantly impacts their operations. Our management uses same community operating results and data for decision making, and we believe such results and data provide useful information to investors, because it enables comparisons of revenue, expense, and other operating measures for a consistent portfolio over time without giving effect to the impacts of communities that were not consolidated and operational for the comparison periods, communities acquired or disposed during the comparison periods (or planned for disposition), and communities with results that are or likely will be impacted by completed or in-process development-related capital expenditure projects. As presented herein, same community results include the direct costs incurred to prepare for and respond to the COVID-19 pandemic.
•RevPAR, or average monthly senior housing resident fee revenue per available unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the 2019 period, the additional resident fee revenue recognized as a result of the application of the lease accounting standard ASC 842), divided by the weighted average number of available units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPAR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPAR for decision making, and we believe the measure provides useful information to investors, because the measure is an indicator of senior housing resident fee revenue performance that reflects the impact of both senior housing occupancy and rate.
•RevPOR, or average monthly senior housing resident fee revenue per occupied unit, is defined as resident fee revenue for the corresponding portfolio for the period (excluding Health Care Services segment revenue and entrance fee amortization, and, for the 2019 period, the additional resident fee revenue recognized as a result of the application of the lease accounting standard ASC 842), divided by the weighted average number of occupied units in the corresponding portfolio for the period, divided by the number of months in the period. We measure RevPOR at the consolidated level, as well as at the segment level with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments. Our management uses RevPOR for decision making, and we believe the measure provides useful information to investors, because it reflects the average amount of senior housing resident fee revenue we derive from an occupied unit per month without factoring occupancy rates. RevPOR is a significant driver of our senior housing revenue performance.
•Weighted average occupancy rate reflects the percentage of units at our owned and leased communities being utilized by residents over a reporting period. We measure occupancy rates with respect to our Independent Living, Assisted Living and Memory Care, and CCRCs segments, and also measure this metric both on a consolidated senior housing and a same community basis. Our management uses weighted average occupancy, and we believe the measure provides useful information to investors, because it is a significant driver of our senior housing revenue performance.
This section includes the non-GAAP performance measure Adjusted EBITDA. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures.
Discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 is presented below. Discussion of our financial condition and results of operations for year ended December 31, 2019 compared to the year ended December 31, 2018 can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 19, 2020.
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Comparison of Year Ended December 31, 2020 and 2019
Summary Operating Results
The following table summarizes our overall operating results for the years ended December 31, 2020 and 2019.
| Years Ended December 31, | Increase (Decrease) | ||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | Amount | Percent | |||||||||||||||||||
| Total resident fees and management fees revenue | $ | 3,023,257 | $ | 3,267,039 | (243,782) | (7.5) | % | ||||||||||||||||
| Other operating income | 115,749 | — | 115,749 | NM | |||||||||||||||||||
| Facility operating expense | 2,341,859 | 2,390,495 | (48,636) | (2.0) | % | ||||||||||||||||||
| Net income (loss) | 81,945 | (268,492) | 350,437 | NM | |||||||||||||||||||
| Adjusted EBITDA | 264,387 | 401,169 | (136,782) | (34.1) | % | ||||||||||||||||||
The decrease in total resident fees and management fees revenue was primarily attributable to a $317.4 million decrease in resident fees, including a 5.1% decrease in same community RevPAR, comprised of a 680 basis points decrease in same community weighted average occupancy and a 3.2% increase in same community RevPOR. We estimate that the COVID-19 pandemic, including the related restrictions at our communities, resulted in $281.1 million of lost resident fee revenue for the year ended December 31, 2020, including $228.5 million and $52.6 million of lost resident fee revenue in our consolidated senior housing portfolio and Health Care Services segment, respectively. Estimated lost resident fee revenue represents the difference between the actual revenue for the period and our expectations prior to estimating the effects of COVID-19. Additionally, the disposition of 36 communities through sales and conveyances of owned communities and lease terminations since the beginning of the prior year resulted in $81.0 million less in resident fees during the year ended December 31, 2020 compared to the prior year. Revenue for the Health Care Services segment decreased $80.5 million, as our home health average daily census began to decrease in March 2020 due to the COVID-19 pandemic and due to the implementation of the PDGM, an alternate home health case-mix adjustment methodology with a 30 day unit of payment, which became effective beginning January 1, 2020. Management fee revenue increased $73.6 million primarily due to $100.0 million of management fee revenue during the year for the management termination fee payment from Healthpeak, partially offset by terminations of management agreements subsequent to the beginning of the prior year.
During the year ended December 31, 2020, we recognized $115.7 million of government grants as other operating income based on our estimates of our satisfaction of the conditions of the grants during the period.
The decrease in facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year, which resulted in $69.7 million less in facility operating expense during the year ended December 31, 2020 compared to the prior year. Additionally, there was a decrease in labor costs for home health services as a result of the lower census and as we adjusted our home health services operational structure, to better align our facility operating expenses and business model in connection with PDGM. The decrease was partially offset by a 6.0% increase in same community facility operating expense, which was primarily due to $107.5 million of incremental costs incurred in our same community portfolio during the year ended December 31, 2020 to respond to the COVID-19 pandemic. The increase in same community facility operating expense was partially offset by repairs and maintenance cost decreases due to fewer move-ins during the current year and a decrease in supplies costs due to the reduced occupancy during the current year.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense of $26.4 million and $49.5 million, respectively, during the year ended December 31, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense excludes approximately $24.1 million and $45.2 million, respectively, of such additional revenue and expenses.
The increase in net income was primarily attributable to a $367.3 million increase in net gain on sale of assets, resulting from the sale of our interest in the CCRC Venture, partially offset by the net impact of the revenue, other operating income, and facility operating expense factors previously discussed.
The decrease in Adjusted EBITDA was primarily attributable to the net impact of the revenue (including the $100.0 million management agreement termination fee payment received from Healthpeak), other operating income, and facility operating expense factors previously discussed and the $119.2 million one-time cash lease payment made to Ventas in connection with our lease restructuring transaction effective July 26, 2020, partially offset by a decrease in general and administrative expense.
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Operating Results - Senior Housing Segments
The following table summarizes the operating results and data of our three senior housing segments (Independent Living, Assisted Living and Memory Care, and CCRCs) on a combined basis for the years ended December 31, 2020 and 2019 including operating results and data on a same community basis. See “Item 12. Security Ownershipmanagement's discussion and analysis of the operating results on an individual segment basis on the following pages.
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Resident fees | $ | 2,525,757 | $ | 2,762,671 | $ | (236,914) | (8.6) | % | |||||||||||||||
| Other operating income | $ | 92,862 | $ | — | $ | 92,862 | NM | ||||||||||||||||
| Facility operating expense | $ | 1,954,025 | $ | 1,968,222 | $ | (14,197) | (0.7) | % | |||||||||||||||
| Number of communities (period end) | 651 | 663 | (12) | (1.8) | % | ||||||||||||||||||
| Number of units (period end) | 52,982 | 54,181 | (1,199) | (2.2) | % | ||||||||||||||||||
| Total average units | 53,687 | 55,501 | (1,814) | (3.3) | % | ||||||||||||||||||
| RevPAR | $ | 3,917 | $ | 4,106 | $ | (189) | (4.6) | % | |||||||||||||||
| Occupancy rate (weighted average) | 77.5 | % | 83.9 | % | (640) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 5,054 | $ | 4,893 | $ | 161 | 3.3 | % | |||||||||||||||
| Same Community Operating Results and Data | |||||||||||||||||||||||
| Resident fees | $ | 2,326,529 | $ | 2,451,352 | $ | (124,823) | (5.1) | % | |||||||||||||||
| Other operating income | $ | 84,265 | $ | — | $ | 84,265 | NM | ||||||||||||||||
| Facility operating expense | $ | 1,781,750 | $ | 1,680,424 | $ | 101,326 | 6.0 | % | |||||||||||||||
| Number of communities | 629 | 629 | — | — | |||||||||||||||||||
| Total average units | 49,237 | 49,232 | 5 | — | |||||||||||||||||||
| RevPAR | $ | 3,938 | $ | 4,149 | $ | (211) | (5.1) | % | |||||||||||||||
| Occupancy rate (weighted average) | 77.8 | % | 84.6 | % | (680) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 5,063 | $ | 4,904 | $ | 159 | 3.2 | % | |||||||||||||||
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Independent Living Segment
The following table summarizes the operating results and data for our Independent Living segment for the years ended December 31, 2020 and 2019, including operating results and data on a same community basis.
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Resident fees | $ | 512,598 | $ | 544,558 | $ | (31,960) | (5.9) | % | |||||||||||||||
| Other operating income | $ | 11,823 | $ | — | $ | 11,823 | NM | ||||||||||||||||
| Facility operating expense | $ | 341,608 | $ | 340,817 | $ | 791 | 0.2 | % | |||||||||||||||
| Number of communities (period end) | 68 | 68 | — | — | |||||||||||||||||||
| Number of units (period end) | 12,534 | 12,514 | 20 | 0.2 | % | ||||||||||||||||||
| Total average units | 12,533 | 12,474 | 59 | 0.5 | % | ||||||||||||||||||
| RevPAR | $ | 3,408 | $ | 3,580 | $ | (172) | (4.8) | % | |||||||||||||||
| Occupancy rate (weighted average) | 81.8 | % | 89.2 | % | (740) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 4,165 | $ | 4,014 | $ | 151 | 3.8 | % | |||||||||||||||
| Same Community Operating Results and Data | |||||||||||||||||||||||
| Resident fees | $ | 482,200 | $ | 505,729 | $ | (23,529) | (4.7) | % | |||||||||||||||
| Other operating income | $ | 10,775 | $ | — | $ | 10,775 | NM | ||||||||||||||||
| Facility operating expense | $ | 318,471 | $ | 307,790 | $ | 10,681 | 3.5 | % | |||||||||||||||
| Number of communities | 64 | 64 | — | — | |||||||||||||||||||
| Total average units | 11,704 | 11,695 | 9 | 0.1 | % | ||||||||||||||||||
| RevPAR | $ | 3,433 | $ | 3,604 | $ | (171) | (4.7) | % | |||||||||||||||
| Occupancy rate (weighted average) | 82.1 | % | 89.2 | % | (710) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 4,185 | $ | 4,042 | $ | 143 | 3.5 | % | |||||||||||||||
The decrease in the segment's resident fees was primarily attributable to a decrease in the segment's same community RevPAR, comprised of a 710 basis points decrease in same community weighted average occupancy and a 3.5% increase in same community RevPOR. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic, including the related restrictions at our communities. We estimate that the COVID-19 pandemic, including the related restrictions at our communities, resulted in $35.9 million of lost resident fee revenue on a same community basis for this segment for the year ended December 31, 2020. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including $14.7 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic. These increases in the segment's same community facility operating expense were partially offset by decreases in repairs and maintenance costs due to fewer move-ins during the current year and supplies costs due to the reduced occupancy during the current year.
We recognized additional resident fee revenue and additional facility operating expense for this segment of $8.7 million and $12.7 million, respectively, during the year ended December 31, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $8.2 million and $12.0 million, respectively, of such additional revenue and expenses.
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Assisted Living and Memory Care Segment
The following table summarizes the operating results and data for our Assisted Living and Memory Care segment for the years ended December 31, 2020 and 2019, including operating results and data on a same community basis.
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Resident fees | $ | 1,691,276 | $ | 1,815,938 | $ | (124,662) | (6.9) | % | |||||||||||||||
| Other operating income | $ | 62,585 | $ | — | $ | 62,585 | NM | ||||||||||||||||
| Facility operating expense | $ | 1,325,260 | $ | 1,297,302 | $ | 27,958 | 2.2 | % | |||||||||||||||
| Number of communities (period end) | 563 | 573 | (10) | (1.7) | % | ||||||||||||||||||
| Number of units (period end) | 35,126 | 35,956 | (830) | (2.3) | % | ||||||||||||||||||
| Total average units | 35,530 | 36,560 | (1,030) | (2.8) | % | ||||||||||||||||||
| RevPAR | $ | 3,967 | $ | 4,106 | $ | (139) | (3.4) | % | |||||||||||||||
| Occupancy rate (weighted average) | 76.5 | % | 82.6 | % | (610) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 5,184 | $ | 4,971 | $ | 213 | 4.3 | % | |||||||||||||||
| Same Community Operating Results and Data | |||||||||||||||||||||||
| Resident fees | $ | 1,632,470 | $ | 1,705,487 | $ | (73,017) | (4.3) | % | |||||||||||||||
| Other operating income | $ | 60,939 | $ | — | $ | 60,939 | NM | ||||||||||||||||
| Facility operating expense | $ | 1,275,032 | $ | 1,186,001 | $ | 89,031 | 7.5 | % | |||||||||||||||
| Number of communities | 551 | 551 | — | — | |||||||||||||||||||
| Total average units | 33,921 | 33,925 | (4) | — | |||||||||||||||||||
| RevPAR | $ | 4,010 | $ | 4,189 | $ | (179) | (4.3) | % | |||||||||||||||
| Occupancy rate (weighted average) | 76.8 | % | 83.3 | % | (650) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 5,222 | $ | 5,032 | $ | 190 | 3.8 | % | |||||||||||||||
The decrease in the segment's resident fees was primarily attributable to a decrease in the segment's same community RevPAR, comprised of a 650 basis points decrease in same community weighted average occupancy and a 3.8% increase in same community RevPOR. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic, including the related restrictions at our communities. We estimate that the COVID-19 pandemic, including the related restrictions at our communities, resulted in $137.7 million of lost resident fee revenue on a same community basis for this segment for the year ended December 31, 2020. The increase in the segment's same community RevPOR was primarily the result of in-place rent increases. Additionally, the disposition of 30 communities since the beginning of the prior year resulted in $36.7 million less in resident fees during the year ended December 31, 2020 compared to the prior year.
The increase in the segment's facility operating expense was primarily attributable to an increase in the segment's same community facility operating expense, including $80.4 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic, and an increase in labor expense arising from increased contract labor costs. The increase in the segment's same community facility operating expense was partially offset by decreases in repairs and maintenance costs due to fewer move-ins during the current year. The increase in the segment's facility operating expense was partially offset by the disposition of communities since the beginning of the prior year, which resulted in $30.9 million less in facility operating expense during the year ended December 31, 2020 compared to the prior year.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $14.7 million and $31.6 million, respectively, during the year ended December 31, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $13.8 million and $29.7 million, respectively, of such additional revenue and expenses.
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CCRCs Segment
The following table summarizes the operating results and data for our CCRCs segment for the years ended December 31, 2020 and 2019, including operating results and data on a same community basis.
| (in thousands, except communities, units, occupancy, RevPAR, and RevPOR) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Resident fees | $ | 321,883 | $ | 402,175 | $ | (80,292) | (20.0) | % | |||||||||||||||
| Other operating income | $ | 18,454 | $ | — | $ | 18,454 | NM | ||||||||||||||||
| Facility operating expense | $ | 287,157 | $ | 330,103 | $ | (42,946) | (13.0) | % | |||||||||||||||
| Number of communities (period end) | 20 | 22 | (2) | (9.1) | % | ||||||||||||||||||
| Number of units (period end) | 5,322 | 5,711 | (389) | (6.8) | % | ||||||||||||||||||
| Total average units | 5,624 | 6,467 | (843) | (13.0) | % | ||||||||||||||||||
| RevPAR | $ | 4,738 | $ | 5,123 | $ | (385) | (7.5) | % | |||||||||||||||
| Occupancy rate (weighted average) | 74.2 | % | 81.3 | % | (710) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 6,389 | $ | 6,298 | $ | 91 | 1.4 | % | |||||||||||||||
| Same Community Operating Results and Data | |||||||||||||||||||||||
| Resident fees | $ | 211,859 | $ | 240,136 | $ | (28,277) | (11.8) | % | |||||||||||||||
| Other operating income | $ | 12,551 | $ | — | $ | 12,551 | NM | ||||||||||||||||
| Facility operating expense | $ | 188,247 | $ | 186,633 | $ | 1,614 | 0.9 | % | |||||||||||||||
| Number of communities | 14 | 14 | — | — | |||||||||||||||||||
| Total average units | 3,612 | 3,612 | — | — | |||||||||||||||||||
| RevPAR | $ | 4,888 | $ | 5,540 | $ | (652) | (11.8) | % | |||||||||||||||
| Occupancy rate (weighted average) | 73.3 | % | 82.7 | % | (940) | bps | n/a | ||||||||||||||||
| RevPOR | $ | 6,674 | $ | 6,704 | $ | (30) | (0.4) | % | |||||||||||||||
The decrease in the segment's resident fees was primarily attributable to the disposition of six communities since the beginning of the prior year, which resulted in $44.3 million less in resident fees during the year ended December 31, 2020 compared to the prior year. Additionally, there was a decrease in the segment's same community RevPAR, comprised of a 940 basis points decrease in same community weighted average occupancy and a 0.4% decrease in same community RevPOR. The decrease in the segment's same community weighted average occupancy primarily reflects the impact of reduced move-in activity related to the COVID-19 pandemic, including the related restrictions at our communities. We estimate that the COVID-19 pandemic, including the related restrictions at our communities, resulted in $36.4 million of lost resident fee revenue on a same community basis for this segment for the year ended December 31, 2020. The decrease in the segment's same community RevPOR was primarily the result of a service mix shift from less skilled nursing services within the segment, partially offset by in-place rent increases.
The decrease in the segment's facility operating expense was primarily attributable to the disposition of communities since the beginning of the prior year, which resulted in $38.8 million less in facility operating expense during the year ended December 31, 2020 compared to the prior year. The decrease in facility operating expense was partially offset by an increase in the segment's same community facility operating expense, including $12.4 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic, partially offset by decreases in labor expense arising from fewer hours worked and healthcare supplies costs during the period as we intentionally scaled back such costs for the reduced occupancy.
In addition to the foregoing factors, we recognized additional resident fee revenue and additional facility operating expense for this segment of approximately $3.0 million and $5.3 million respectively, during the year ended December 31, 2019 as a result of the application of the new lease accounting standard effective January 1, 2019. Same community resident fee revenue and facility operating expense for this segment excludes approximately $2.1 million and $3.6 million, respectively, of such additional revenue and expenses.
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Operating Results - Health Care Services Segment
The following table summarizes the operating results and data for our Health Care Services segment for the years ended December 31, 2020 and 2019.
| (in thousands, except census) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Resident fees | $ | 366,810 | $ | 447,260 | $ | (80,450) | (18.0) | % | |||||||||||||||
| Other operating income | $ | 22,887 | $ | — | $ | 22,887 | NM | ||||||||||||||||
| Facility operating expense | $ | 387,834 | $ | 422,273 | $ | (34,439) | (8.2) | % | |||||||||||||||
| Home health average daily census | 13,196 | 15,447 | (2,251) | (14.6) | % | ||||||||||||||||||
| Hospice average daily census | 1,658 | 1,580 | 78 | 4.9 | % | ||||||||||||||||||
The decrease in the segment's resident fees was primarily attributable to a decrease in revenue for home health services, as our home health average daily census also began to decrease in March 2020 due to the COVID-19 pandemic, which resulted in lower occupancy in our communities and fewer elective medical procedures and hospital discharges. Additionally, the implementation of the PDGM resulted in a decrease in revenue for home health services. We estimate that the COVID-19 pandemic, including the related restrictions at our communities, resulted in $52.6 million of lost resident fee revenue for this segment for the year ended December 31, 2020.
The decrease in the segment's facility operating expense was primarily attributable to a decrease in labor costs for home health services as a result of the lower census and as we adjusted our home health services operational structure, to better align our facility operating expenses and business model in connection with PDGM. The decrease in the segment's facility operating expense was partially offset by $8.2 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic and an increase in labor costs for hospice services arising from wage rate increases and the expansion of our hospice services throughout 2019.
As described above, we expect to sell 80% of our equity in our Health Care Services segment pursuant to the Purchase Agreement with HCA Healthcare, which transaction is expected to occur in the late first half or early second half of 2021. Upon closing, we expect that the results and financial position of our Health Care Services segment will be deconsolidated from our financial statements.
Operating Results - Management Services Segment
The following table summarizes the operating results and data for our Management Services segment for the years ended December 31, 2020 and 2019.
| (in thousands, except communities and units) | Year Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| Management fees | $ | 130,690 | $ | 57,108 | $ | 73,582 | NM | ||||||||||||||||
| Reimbursed costs incurred on behalf of managed communities | $ | 401,189 | $ | 790,049 | $ | (388,860) | (49.2) | % | |||||||||||||||
| Costs incurred on behalf of managed communities | $ | 401,189 | $ | 790,049 | $ | (388,860) | (49.2) | % | |||||||||||||||
| Number of communities (period end) | 75 | 100 | (25) | (25.0) | % | ||||||||||||||||||
| Number of units (period end) | 10,129 | 18,086 | (7,957) | (44.0) | % | ||||||||||||||||||
| Total average units | 11,184 | 21,769 | (10,585) | (48.6) | % | ||||||||||||||||||
The increase in management fees was primarily attributable to $105.0 million of management termination fees recognized for the year ended December 31, 2020, including the $100.0 million management termination fee payment received from Healthpeak during the three months ended March 31, 2020. We received an $8.6 million management termination fee payment during the three months ended December 31, 2020, of which $5.0 million of management fees were recognized for the three
66
months ended December 31, 2020. As of December 31, 2020, we have completed the transition of management arrangements on 130 net communities since the beginning of the prior year, generally for interim management arrangements on former unconsolidated ventures in which we sold our interest and interim management arrangements on formerly leased or owned communities. During 2021, we expect terminations of a substantial portion of our management arrangements. Management fees of $130.7 million for the year ended December 31, 2020 include $104.1 million of management fees attributable to communities for which our management agreements were terminated during such period and approximately $18.0 million of management fees attributable to communities that we expect the terminations of our management agreements to occur (or have occurred) during 2021.
The decrease in reimbursed costs and costs incurred on behalf of managed communities was primarily attributable to terminations of management agreements subsequent to the beginning of the prior year.
Operating Results - Other Income and Expense Items
The following table summarizes other income and expense items in our operating results for the years ended December 31, 2020 and 2019.
| (in thousands) | Years Ended December 31, | Increase (Decrease) | |||||||||||||||||||||
| 2020 | 2019 | Amount | Percent | ||||||||||||||||||||
| General and administrative expense | $ | 206,575 | $ | 219,289 | $ | (12,714) | (5.8) | % | |||||||||||||||
| Facility operating lease expense | 224,033 | 269,666 | (45,633) | (16.9) | % | ||||||||||||||||||
| Depreciation and amortization | 359,226 | 379,433 | (20,207) | (5.3) | % | ||||||||||||||||||
| Asset impairment | 107,308 | 49,266 | 58,042 | 117.8 | % | ||||||||||||||||||
| Loss (gain) on facility lease termination and modification, net | (2,303) | 3,388 | (5,691) | NM | |||||||||||||||||||
| Interest income | 4,799 | 9,859 | (5,060) | (51.3) | % | ||||||||||||||||||
| Interest expense | (208,779) | (248,341) | (39,562) | (15.9) | % | ||||||||||||||||||
| Gain (loss) on debt modification and extinguishment, net | 10,896 | (5,247) | 16,143 | NM | |||||||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | (2,107) | (4,544) | (2,437) | (53.6) | % | ||||||||||||||||||
| Gain (loss) on sale of assets, net | 374,532 | 7,245 | 367,287 | NM | |||||||||||||||||||
| Other non-operating income (loss) | 5,648 | 14,765 | (9,117) | (61.7) | % | ||||||||||||||||||
| Benefit (provision) for income taxes | (5,352) | 2,269 | (7,621) | NM | |||||||||||||||||||
General and Administrative Expense. The decrease in general and administrative expense was primarily attributable to a reduction in our travel costs due to the pandemic, a reduction in our corporate headcount, as we scaled our general and administrative costs in connection with community dispositions, and a reduction in our incentive compensation costs. The decrease was partially offset by a $3.4 million increase in transaction and organizational restructuring costs compared to the prior year, to $13.4 million for the year ended December 31, 2020. Transaction costs include those directly related to acquisition, disposition, financing and leasing activity, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees, and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance costs.
Facility Operating Lease Expense. The decrease in facility operating lease expense was primarily due to the Ventas lease portfolio restructuring during the current year and the acquisition of formerly leased communities and lease termination activity since the beginning of the prior year.
Depreciation and Amortization. The decrease in depreciation and amortization expense was primarily due to leasehold improvements for certain leased communities becoming fully depreciated and disposition activity since the beginning of the prior year.
Asset Impairment. During the year ended December 31, 2020, we recorded $107.3 million of non-cash impairment charges, primarily for right-of-use assets for certain leased communities with decreased future cash flow estimates as a result of the COVID-19 pandemic. During the prior year we recorded $49.3 million of non-cash impairment charges. See Note 5 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data" for more information about the impairment charges.
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Interest Expense. The decrease in interest expense was primarily due to interest expense on long-term debt, reflecting the impact of lower interest rates, and the acquisition of communities previously subject to financing leases since the beginning of the prior year.
Gain (Loss) on Debt Modification and Extinguishment, Net. The increase in gain on debt modification and extinguishment was primarily due to a $19.7 million gain on debt extinguishment recognized during the year ended December 31, 2020 for the extinguishment of financing lease obligations for the acquisition from Healthpeak of eight communities which were previously subject to sale-leaseback transactions in which we were deemed to have continuing involvement.
Gain (Loss) on Sale of Assets, Net. The increase in gain (loss) on sale of assets, net was primarily due to a $369.8 million gain on sale of assets recognized for the sale of our ownership interest in the CCRC Venture during the year ended December 31, 2020.
Benefit (Provision) for Income Taxes. The difference between our effective tax rate for the years ended December 31, 2020 and 2019 was primarily due to the tax impact of the multi-part transaction with Healthpeak that occurred in the three months ended March 31, 2020. The transaction created both federal and state taxable income in the 2020 tax year, requiring the use of all of our federal capital loss carryforwards and a portion of our net operating loss carryforwards reducing the valuation allowance accordingly. This was slightly offset by an increase in state tax expense for the states in which we could not use, or did not have, net operating or capital losses to offset taxable income.
We recorded an aggregate deferred federal, state, and local tax expense of $22.1 million for the year ended December 31, 2020. The expense includes $93.1 million as a result of the gain on the sale of our ownership interest in the CCRC Venture, offset by a benefit of $115.2 million as a result of the operating losses (exclusive of the CCRC Venture sale) for the year ended December 31, 2020.The tax expense for the year ended December 31, 2020 is offset by a reduction in valuation allowance of $27.9 million. We recorded an aggregate deferred federal, state, and local tax benefit of $63.0 million as a result of the operating loss for the year ended December 31, 2019, offset by an increase in the valuation allowance of $60.4 million.
We evaluate our deferred tax assets each quarter to determine if a valuation allowance is required based on whether it is more likely than not that some portion of the deferred tax asset would not be realized. Our valuation allowance as of December 31, 2020 and December 31, 2019 was $381.0 million and $408.9 million, respectively.
We recorded interest charges related to our tax contingency reserve for cash tax positions for the year ended December 31, 2020 and 2019 which are included in provision for income tax for the period. Tax returns for years 2016 through 2019 are subject to future examination by tax authorities. In addition, the net operating losses from prior years are subject to adjustment under examination.
Liquidity and Capital Resources
This section includes the non-GAAP liquidity measure Adjusted Free Cash Flow. See "Non-GAAP Financial Measures" below for our definition of the measure and other important information regarding such measure, including reconciliations to the most comparable GAAP measures.
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Liquidity and Indebtedness
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash flows, and our Adjusted Free Cash Flow:
| Year Ended December 31, | Increase (Decrease) | ||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | Amount | Percent | |||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 205,649 | $ | 216,412 | $ | (10,763) | (5.0) | % | |||||||||||||||
| Net cash provided by (used in) investing activities | (425,111) | (225,539) | 199,572 | 88.5 | % | ||||||||||||||||||
| Net cash provided by (used in) financing activities | 382,913 | (139,394) | 522,307 | NM | |||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 163,451 | (148,521) | 311,972 | NM | |||||||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | 301,697 | 450,218 | (148,521) | (33.0) | % | ||||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of year | $ | 465,148 | $ | 301,697 | $ | 163,451 | 54.2 | % | |||||||||||||||
| Adjusted Free Cash Flow | $ | 24,181 | $ | (76,404) | $ | 100,585 | NM | ||||||||||||||||
The decrease in net cash provided by operating activities was attributable primarily to $125.5 million of incremental direct costs to prepare for and respond to the COVID-19 pandemic during the current year, decreases in same community revenue and revenue for home health services compared to the prior year, and the $119.2 million one-time cash lease payment made to Ventas in connection with our lease restructuring transaction effective July 26, 2020. These changes were partially offset by $115.7 million of government grants accepted, the $100.0 million management termination fee payment received from Healthpeak, $87.5 million of cash received under the Medicare accelerated and advance payment program, and $72.7 million of the employer portion of social security payroll taxes deferred during the current year.
The increase in net cash used in investing activities was primarily attributable to $472.2 million of cash paid for the acquisition of communities during the current year, a $192.0 million increase in purchases of marketable securities compared to the prior year, and a $28.7 million decrease in cash proceeds from notes receivable compared to the prior year. These changes were partially offset by a $238.6 million increase in net proceeds from the sale of assets, a $141.0 million increase in proceeds from sales and maturities of marketable securities, and a $118.2 million decrease in cash paid for capital expenditures compared to the prior year.
The change in net cash provided by (used in) financing activities was primarily attributable to a $641.1 million increase in debt proceeds compared to the prior year. This change was partially offset by a $110.9 million increase in repayment of debt and financing lease obligations compared to the prior year and a $12.3 million increase in cash paid during the current year for financing costs.
The increase in Adjusted Free Cash Flow was primarily attributable to a $96.2 million decrease in non-development capital expenditures, net compared to the prior year, partially offset by the decrease in net cash provided by operating activities.
Our principal sources of liquidity have historically been from:
•cash balances on hand, cash equivalents, and marketable securities;
•cash flows from operations;
•proceeds from our credit facilities;
•funds generated through unconsolidated venture arrangements;
•proceeds from mortgage financing, refinancing of various assets, or sale-leaseback transactions;
•funds raised in the debt or equity markets; and
•proceeds from the disposition of assets.
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. During 2020, we also received cash grants and advanced/accelerated Medicare payments under programs expanded or created under the CARES Act, and we have elected to utilize the CARES Act payroll tax deferral program, each as described above. As described above, we expect to sell 80% of our equity in our Health Care Services segment pursuant to the Purchase Agreement with HCA Healthcare, which transaction is expected to occur in the late first half or early second half of 2021, for expected net cash proceeds of approximately $300 million, subject to the timing of closing with respect to the adjustments set forth in the
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Purchase Agreement described above. We are evaluating the use of the net proceeds from the pending Health Care Services transaction.
Our liquidity requirements have historically arisen from:
•working capital;
•operating costs such as employee compensation and related benefits, severance costs, general and administrative expense, and supply costs;
•debt service and lease payments;
•acquisition consideration, lease termination and restructuring costs, and transaction and integration costs;
•capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our current communities and the development of new communities;
•cash collateral required to be posted in connection with our financial instruments and insurance programs;
•purchases of common stock under our share repurchase authorizations;
•other corporate initiatives (including integration, information systems, branding, and other strategic projects); and
•prior to 2009, dividend payments.
Over the near-term, we expect that our liquidity requirements will primarily arise from:
•working capital;
•operating costs such as employee compensation and related benefits, severance costs, general and administrative expense, and supply costs, including those related to the COVID-19 pandemic;
•debt service and lease payments;
•payment of deferred payroll taxes under the CARES Act;
•recoupment of payments received under the Accelerated and Advance Payment Program;
•acquisition consideration;
•transaction costs and expansion of our healthcare services;
•capital expenditures and improvements, including the expansion, renovation, redevelopment, and repositioning of our existing communities;
•cash collateral required to be posted in connection with our financial instruments and insurance programs; and
•other corporate initiatives (including information systems and other strategic projects).
We are highly leveraged and have significant debt and lease obligations. As of December 31, 2020, we had $3.9 billion of debt outstanding, at a weighted average interest rate of 3.6%. As of such date, 98.2%, or $3.8 billion, of our total debt obligations represented non-recourse property-level mortgage financings. As of December 31, 2020, $1.4 billion of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining $128.0 million of our long-term variable rate debt is not subject to any interest rate cap agreements. As of December 31, 2020, $80.7 million of letters of credit had been issued under our secured credit facility and separate secured and unsecured letter of credit facilities and no balance was drawn on our secured credit facility.
As of December 31, 2020, we had $1.5 billion of operating and financing lease obligations. For the year ending December 31, 2021, we will be required to make approximately $274.7 million of cash lease payments in connection with our existing operating and financing leases.
Total liquidity of $575.5 million as of December 31, 2020 included $380.4 million of unrestricted cash and cash equivalents (excluding restricted cash and lease security deposits of $87.9 million in the aggregate), $172.9 million of marketable securities, and $22.2 million of availability on our secured credit facility. Total liquidity as of December 31, 2020 increased $94.2 million from total liquidity of $481.3 million as of December 31, 2019. The increase was primarily attributable to temporary liquidity relief under the CARES Act, the transactions with Healthpeak completed in 2020, including the impact of the related financing transaction, and proceeds from mortgage debt financing, partially offset by the $119.2 million one-time cash lease payment made to Ventas in connection with our lease restructuring transaction effective July 26, 2020.
We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline and increasing occupancy, continuing to evaluate our financing structure and the state of debt markets, seeking further government-sponsored financial relief related to the COVID-19 pandemic, and completing the pending sale of 80% of our equity interest in our Health Care Services segment. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief, or that the closing of the pending transaction will be completed in accordance with our expectations, or at all, or generate cash proceeds to us in the amount we anticipate.
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We currently estimate that our cash flows from operations, including estimates for stabilizing and growing occupancy in 2021, together with cash balances on hand, cash equivalents, marketable securities, amounts available under our secured credit facility, and proceeds from anticipated dispositions of owned communities, and financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming the economy and our industry do not further deteriorate substantially as a result of the continuing impacts of the pandemic.
Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our actual level of capital expenditures, general economic conditions, and the cost of capital, as well as other factors described in "Item 1A. Risk Factors". Disruptions in the financial markets may have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing. Since the amount of mortgage financing available for our communities is generally dependent on their appraised values and performance, decreases in their appraised values, including due to adverse changes in real estate market conditions, or their performance, could result in available mortgage refinancing amounts that are less than the communities’ maturing indebtedness. If we are unable to obtain refinancing proceeds sufficient to cover maturing indebtedness, our liquidity could be adversely impacted and we may seek alternative sources of financing, which may be less attractive or unavailable. Shortfalls in cash flows from estimated operating results or other principal sources of liquidity may have an adverse impact on our ability to fund our planned capital expenditures, or to pursue any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or to fund investments to support our strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are acceptable to us.
Our capital expenditures are comprised of community-level, corporate, and development capital expenditures. Community-level capital expenditures include recurring expenditures (routine maintenance of communities over $1,500 per occurrence and for unit turnovers over $500 per unit) and community renovations, apartment upgrades, and other major building infrastructure projects. Corporate capital expenditures include those for information technology systems and equipment, the expansion of our support platform and healthcare services programs, and the remediation or replacement of assets as a result of casualty losses. Development capital expenditures include community expansions, major community redevelopment and repositioning projects, and the development of new communities.
With our development capital expenditures program, we intend to expand, renovate, redevelop, and reposition certain of our communities where economically advantageous. Certain Beneficial Ownersof our communities may benefit from additions and expansions or from adding a new level of service for residents to meet the evolving needs of our customers. These development projects include converting space from one level of care to another, reconfiguration of existing units, the addition of services that are not currently present, or physical plant modifications.
The following table summarizes our capital expenditures for the year ended December 31, 2020 for our consolidated business:
| (in millions) | |||||
Community-level capital expenditures, net (1) | $ | 112.3 | |||
Corporate capital expenditures, net (2) | 27.3 | ||||
Non-development capital expenditures, net (3) | 139.6 | ||||
| Development capital expenditures, net | 13.7 | ||||
| Total capital expenditures, net | $ | 153.3 | |||
(1)Reflects the amount invested, net of lessor reimbursements of $27.8 million.
(2)Includes $4.1 million of remediation costs at our communities resulting from hurricanes and other natural disasters and for the acquisition of emergency power generators at our impacted Florida communities.
(3)Amount is included in Adjusted Free Cash Flow.
In response to the COVID-19 pandemic, we delayed or canceled a number of elective capital expenditure projects. As a result, our full-year 2020 non-development capital expenditures, net of lessor reimbursements, and development capital expenditures reflect a $50.4 million and $16.3 million reduction to our pre-pandemic plans for 2020, respectively.
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In the aggregate, we expect our full-year 2021 non-development capital expenditures, net of anticipated lessor reimbursements, to be approximately $140 million. In addition, we expect our full-year 2021 development capital expenditures to be approximately $10 million, net of anticipated lessor reimbursements, and such projects include those for expansion, repositioning, redeveloping, and major renovation of selected existing senior living communities. We anticipate that our 2021 capital expenditures will be funded from cash on hand, cash equivalents, marketable securities, cash flows from operations, and reimbursements from lessors.
Funding our planned capital expenditures, pursuing any acquisition, investment, development, or potential lease restructuring opportunities that we identify, or funding investments to support our strategy may require additional capital. We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the percentage ownership of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. Any newly issued equity securities may have rights, preferences, or privileges senior to those of our common stock. If we are unable to raise additional funds or obtain them on terms acceptable to us, we may have to delay or abandon our plans.
Credit Facilities
On August 31, 2020, we terminated our Fifth Amended and Restated Credit Agreement with Capital One, National Association, as administrative agent, lender, and swingline lender and the other lenders from time to time parties thereto (as amended, the "Credit Agreement"). The Credit Agreement had provided commitments for a $250 million revolving credit facility with a $60 million sublimit for letters of credit and a $50 million swingline feature. The credit facility was secured by first priority mortgages on certain of our communities, and availability varied from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and our consolidated fixed charge coverage ratio. The Credit Agreement was terminated in connection with our obtaining approximately $266.9 million of non-recourse mortgage financing on 16 communities on August 31, 2020, most of which had secured the Credit Agreement prior to its termination. At the closing, we repaid the $166.4 million outstanding principal amount under the Credit Agreement, together with accumulated interest, and without payment of any termination fee or penalty.
On December 11, 2020, we entered into a revolving credit agreement with Capital One, National Association, as administrative agent and lender and the other lenders from time to time parties thereto. The agreement provides a commitment amount of $80 million which can be drawn in cash or as letters of credit. The agreement matures on January 15, 2024. Amounts drawn under the facility will bear interest at 30-day LIBOR plus an applicable margin which was 2.75% as of December 31, 2020. Additionally, a quarterly commitment fee of 0.25% per annum was applicable on the unused portion of the facility as of December 31, 2020. The revolving credit facility is currently secured by first priority mortgages and negative pledges on certain of our communities. Available capacity under the facility will vary from time to time based upon borrowing base calculations related to the appraised value and performance of the communities securing the credit facility.
As of December 31, 2020, no borrowings were outstanding on the revolving credit facility, $40.4 million of letters of credit were outstanding, and the revolving credit facility had $22.2 million of availability. We also had separate secured and unsecured letter of credit facilities providing for up to $51.6 million of letters of credit as of December 31, 2020 under which $40.3 million had been issued as of that date.
Long-Term Leases
As of December 31, 2020, we operated 301 communities under long-term leases (235 operating leases and 66 financing leases). The substantial majority of our lease arrangements are structured as master leases. Under a master lease, numerous communities are leased through an indivisible lease. We typically guarantee the performance and lease payment obligations of our subsidiary lessees under the master leases. Due to the nature of such master leases, it is difficult to restructure the composition of our leased portfolios or economic terms of the leases without the consent of the applicable landlord. In addition, an event of default related to an individual property or limited number of properties within a master lease portfolio may result in a default on the entire master lease portfolio.
The leases relating to these communities are generally fixed rate leases with annual escalators that are either fixed or based upon changes in the consumer price index or leased property revenue. We are responsible for all operating costs, including repairs, property taxes, and insurance. As of December 31, 2020, the weighted average remaining lease term of our operating and financing leases was 6.7 and 6.3 years, respectively. The lease terms generally provide for renewal or extension options from 5 to 20 years, and, in some instances, purchase options.
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The community leases contain other customary terms, which may include assignment and change of control restrictions, maintenance and capital expenditure obligations, termination provisions, and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and lease coverage ratios. In addition, our lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage. Certain leases contain cure provisions, which generally allow us to post an additional lease security deposit if the required covenant is not met.
In addition, certain of our master leases contain radius restrictions, which limit our ability to own, develop, or acquire new communities within a specified distance from certain existing communities covered by such agreements. These radius restrictions could negatively affect our ability to expand, develop, or acquire senior housing communities and operating companies.
For the year ended December 31, 2020, our cash lease payments for our financing leases and operating leases were $67.4 million and $379.6 million, respectively. For the year ending December 31, 2021, we will be required to make approximately $274.7 million of cash lease payments in connection with our existing financing and operating leases.
Debt and Lease Covenants
Certain of our debt and lease documents contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum liquidity, net worth, and stockholders' equity levels and debt service and lease coverage ratios, and requiring us not to exceed prescribed leverage ratios, in each case on a consolidated, portfolio-wide, multi-community, single-community, and/or entity basis. Net worth is generally calculated as stockholders' equity as calculated in accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback transactions and deferred entrance fee revenue. The debt service and lease coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital expenditures, divided by the debt (principal and interest) or lease payment. In addition, our debt and lease documents generally contain non-financial covenants, such as those requiring us to comply with Medicare or Medicaid provider requirements and maintain insurance coverage.
Our failure to comply with applicable covenants could constitute an event of default under the applicable debt or lease documents. Many of our debt and lease documents contain cross-default provisions so that a default under one of these instruments could cause a default under other debt and lease documents (including documents with other lenders and lessors).
Furthermore, our debt and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries. Therefore, if an event of default has occurred under any of our debt or lease documents, subject to cure provisions in certain instances, the respective lender or lessor would have the right to declare all the related outstanding amounts of indebtedness or cash lease obligations immediately due and payable, to foreclose on our mortgaged communities, to terminate our leasehold interests, to foreclose on other collateral securing the indebtedness and leases, to discontinue our operation of leased communities, and/or to pursue other remedies available to such lender or lessor. Further, an event of default could trigger cross-default provisions in our other debt and lease documents (including documents with other lenders or lessors). We cannot provide assurance that we would be able to pay the debt or lease obligations if they became due upon acceleration following an event of default.
As of December 31, 2020, we are in compliance with the financial covenants of our debt agreements and long-term leases.
Derivative Instruments
In the normal course of business, we enter into interest rate agreements with major financial institutions to manage our risk above certain interest rates on variable rate debt. As of December 31, 2020, $1.4 billion of our debt is variable rate debt subject to interest rate cap agreements. The remaining $128.0 million of our long-term variable rate debt is not subject to any interest rate cap agreements.
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Contractual Commitments
The following table presents a summary of our material indebtedness, including the related interest payments, lease, and other contractual commitments, as of December 31, 2020.
| Payments Due during the Year Ending December 31, | |||||||||||||||||||||||||||||||||||||||||
| (in millions) | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||
| Contractual Obligations: | |||||||||||||||||||||||||||||||||||||||||
Principal on long-term debt(1) | $ | 3,943.5 | $ | 73.7 | $ | 352.4 | $ | 234.4 | $ | 304.2 | $ | 293.0 | $ | 2,685.8 | |||||||||||||||||||||||||||
Interest on long-term debt(2) | 885.0 | 143.3 | 133.3 | 121.7 | 116.4 | 104.4 | 265.9 | ||||||||||||||||||||||||||||||||||
| Long-term debt | 4,828.5 | 217.0 | 485.7 | 356.1 | 420.6 | 397.4 | 2,951.7 | ||||||||||||||||||||||||||||||||||
Financing lease obligations(3) | 431.3 | 64.9 | 65.5 | 66.3 | 67.5 | 57.5 | 109.6 | ||||||||||||||||||||||||||||||||||
Operating lease obligations(4) | 1,257.2 | 209.8 | 192.8 | 192.4 | 192.0 | 190.0 | 280.2 | ||||||||||||||||||||||||||||||||||
| Total contractual obligations | $ | 6,517.0 | $ | 491.7 | $ | 744.0 | $ | 614.8 | $ | 680.1 | $ | 644.9 | $ | 3,341.5 | |||||||||||||||||||||||||||
(1)Excludes debt discount and deferred financing costs of $27.5 million as of December 31, 2020.
(2)Represents contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31, 2020 rate.
(3)Reflects future cash lease payments after giving effect to fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the applicable index or rate as of December 31, 2020. The cash payments for financing lease obligations exclude $413.4 million of financing lease obligations recognized on our consolidated balance sheet for purchase option liabilities and for sale-leaseback transactions in which we have not transferred control of the underlying asset.
(4)Reflects future cash payments after giving effect to fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the applicable index or rate as of December 31, 2020.
Our capital expenditure plans for 2021 include required minimum spend of approximately $18 million for capital expenditures
under certain of our community leases. Additionally, we are required to spend an average of approximately $26 million per year for each of the following four years and approximately $17 million thereafter under the initial lease terms of such leases.
The foregoing amounts exclude outstanding letters of credit aggregating to $80.7 million as of December 31, 2020.
Impacts of Inflation
Resident fees and management fees are our primary sources of revenue. These revenues are affected by the amount of the monthly resident fee rates we charge and community occupancy rates. The rates charged at communities are highly dependent on local market conditions and the competitive environment in which the communities operate. Substantially all of our senior housing residency agreements allow for adjustments in the monthly fee payable every 12 or 13 months which enables us to seek increases in monthly fees due to inflation, increased levels of care, or other factors. Any pricing increases would be subject to market and competitive conditions and could result in a decrease in occupancy in the communities. We believe, however, that our ability to periodically adjust the monthly fee serves to reduce the adverse effect of inflation. In addition, salaries, wages, and the costs of benefits are a principal element of facility operating expense and are also dependent upon local market conditions and general inflationary pressures. There can be no assurance that monthly resident fee rates can be increased, or that costs will not increase, above inflation rates whether due to inflation or other causes.
Increases in prevailing interest rates as a result of inflation or other factors will increase our payment obligations on our variable-rate obligations to the extent they are unhedged and may increase our future borrowing and hedging costs. Although we have interest rate cap agreements in place for a majority of our variable-rate debt, these agreements only limit our exposure to increases in interest rates above certain levels and generally must be renewed every two to three years. As of December 31, 2020, $128.0 million of our outstanding variable-rate indebtedness is not subject to interest rate cap agreements.
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Off-Balance Sheet Arrangements
As of December 31, 2020, we do not have an interest in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
We own an interest in certain unconsolidated ventures as described under Note 11 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data." Except in limited circumstances, our risk of loss is limited to our investment in each venture. The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures.
Critical Accounting Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. We believe the following accounting estimates are the most critical as they require assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates that could have been selected, could have a material impact on our consolidated results of operations or financial condition. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Our significant accounting policies are discussed in Note 2 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."
Long-Lived Asset Impairment
As of December 31, 2020, our long-lived assets were comprised primarily of $5.1 billion and $0.8 billion of net property, plant and equipment and leasehold intangibles and operating lease right-of-use assets, respectively.
We test long-lived assets for recoverability annually during our fourth quarter or whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. 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 impairment loss is measured by the amount by which the carrying amount of the asset exceeds its estimated fair value.
In estimating the recoverability of asset groups for purposes of our long-lived asset impairment testing, we utilize future cash flow projections that are generally developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at our cash flow projections, we consider our historic operating results, approved budgets and business plans, future demographic factors, expected growth rates, estimated asset holding periods, and other factors. In estimating the future cash flows of asset groups for purposes of our long-lived asset impairment test, we make certain key assumptions. Those assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that we would receive upon a sale of the assets using estimated capitalization rates in the case of communities. We corroborate the estimated capitalization rates we use in these calculations with capitalization rates observable from recent market transactions.
Determining the future cash flows of an asset group involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense growth rates and operating margins used to calculate projected future cash flows. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, and our decision to dispose of assets, either through sales or lease terminations. Significant adverse changes in our future revenues and/or operating margins, significant changes in the market for senior housing, or the valuation of the real estate of senior living communities, as well as other events and circumstances, including, but not limited to, increased competition and changing economic or market conditions, could result in changes in estimated future cash flows and the determination that additional assets are impaired.
During 2020, we evaluated long-lived depreciable assets and lease right-of-use assets and determined that the carrying amount of these assets exceeded the undiscounted cash flows for certain of our communities. Estimated fair values were determined for
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these certain communities and we recorded asset impairment charges of $29.3 million for property, plant and equipment and leasehold intangibles and $76.3 million for operating lease right-of-use assets during the year ended in December 31, 2020. These impairment charges are primarily due to the COVID-19 pandemic and lower than expected operating performance at these communities and reflect the amount by which the carrying amounts of the assets exceeded their estimated fair value. During 2020, there was a wide range of possible outcomes as a result of the pandemic, as there was a high degree of uncertainty about its ultimate impacts. In arriving at our cash flow projections, we considered our estimates of the impacts of the pandemic. Management’s estimates of the impacts of the pandemic are highly dependent on variables that are difficult to predict, as further described in Note 3 to the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data". Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments.
During 2019, we evaluated long-lived depreciable assets and lease right-of-use assets and determined that the undiscounted cash flows exceeded the carrying amount of these assets for all except a small number of communities. Estimated fair values were determined for these certain properties and we recorded asset impairment charges of $27.2 million for property, plant and equipment and leasehold intangibles and $10.2 million for operating lease right-of-use assets during the year ended in December 31, 2019. These impairment charges are primarily due to our decision to dispose of assets, either through sales or lease terminations, or lower than expected performance of the underlying communities and equal the amount by which the carrying amounts of the assets exceed their estimated fair value.
During 2018, we evaluated long-lived depreciable assets and determined in each year that the undiscounted cash flows exceeded the carrying amount of these assets for all except a small number of communities. Estimated fair values were determined for these certain properties and we recorded asset impairment charges of $78.0 million for 2018, for property, plant and equipment, and leasehold intangibles. These impairment charges are primarily due to our decision to dispose of assets, either through sales or lease terminations, or lower than expected performance of the underlying communities and equal the amount by which the carrying amount of the assets exceed the estimated fair value.
Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there have been changes in circumstances that indicate the carrying amount may not be recoverable, the recoverability of asset groups, and, if necessary, the fair value of our assets. As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of the future cash flows of assets, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss.
Goodwill Impairment
As of December 31, 2020, we had a goodwill balance of $154.1 million. Goodwill recorded in connection with business combinations is allocated to the respective reporting unit and included in our application of the provisions of ASC 350, Intangibles – Goodwill and Other.
We test goodwill for impairment annually during our fourth quarter, or more frequently if indicators of impairment arise. Factors we consider important in our analysis of whether an indicator of impairment exists include a significant decline in our stock price or market capitalization for a sustained period since the last testing date, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. We are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The quantitative goodwill impairment test is based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit's carrying amount. The fair values used in the quantitative goodwill impairment test are estimated based upon discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates, and discount rates. We also consider market-based measures such as earnings multiples in our analysis of estimated fair values of our reporting units. If the quantitative goodwill impairment test results in a reporting unit's carrying amount exceeding its estimated fair value, an impairment charge will be recorded based on the difference, with the impairment charge limited to the amount of goodwill allocated to the reporting unit.
In estimating the fair value of our reporting units for purposes of our quantitative goodwill impairment testing, we utilize the income approach, which includes future cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting unknown future circumstances and events and require significant management judgments and estimates. In arriving at our cash flow projections, we consider our historic operating results, approved budgets and business plans, future demographic factors, expected revenue and expense growth rates, and other factors, including the COVID-19 pandemic. In using the income approach to estimate the fair value of reporting units for purposes of our goodwill
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impairment testing, we make certain key assumptions. Those assumptions include future revenues, facility operating expenses, and cash flows, including sales proceeds that we would receive upon a sale of the assets, using estimated capitalization rates in the case of communities. We corroborate the estimated capitalization rates we use in these calculations with capitalization rates observable from recent market transactions. Future cash flows are discounted at a rate that is consistent with a weighted average cost of capital from a market participant perspective. The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
Goodwill allocated to our Independent Living and Health Care Services reporting units is $27.3 million and $126.8 million as of December 31, 2020, respectively. Our annual and interim goodwill impairment analyses did not result in any impairment charges during the year ended December 31, 2020. Based on the results of our goodwill impairment analysis, we estimated that the fair value of our Independent Living reporting unit exceeded its carrying amount by approximately 25% as of December 31, 2020.
Due to the COVID-19 pandemic, we performed an interim quantitative goodwill impairment analysis as of March 31, 2020, which included reduced estimates of projected future cash flows as a result of changes to significant assumptions using information known or knowable about the COVID-19 pandemic, including current industry and economic trends, changes in business plans, and changes in expected revenue and facility operating expense growth rates. Additionally, we considered the additional risk within the future cash flow estimates when selecting risk-adjusted discount rates. During 2020, there was a wide range of possible outcomes as a result of the COVID-19 pandemic, as there was a high degree of uncertainty about its ultimate impacts. Management’s estimates of the impacts of the pandemic are highly dependent on variables that are difficult to predict, as described above. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments.
During 2018, we identified qualitative indicators of impairment of our goodwill, including a significant decline in our stock price and market capitalization for a sustained period during the three months ended March 31, 2018. As a result, we performed an interim quantitative goodwill impairment test as of March 31, 2018, which included a comparison of the estimated fair value of each reporting unit to which the goodwill has been assigned with the reporting unit's carrying amount. In estimating the fair value of the reporting units for purposes of the quantitative goodwill impairment test, we utilized an income approach, which included future cash flow projections that are developed internally. Based on the results of the quantitative goodwill impairment test, we determined that the carrying amount of our Assisted Living and Memory Care segment exceeded its estimated fair value by more than the $351.7 million carrying amount of goodwill as of March 31, 2018. As a result, we recorded a non-cash impairment charge of $351.7 million to goodwill within the Assisted Living and Memory Care segment for the three months ended March 31, 2018.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions that are unpredictable and inherently uncertain. These estimates and assumptions include revenue and expense growth rates and operating margins used to calculate projected future cash flows and risk-adjusted discount rates. Future events may indicate differences from management's current judgments and estimates which could, in turn, result in future impairments. Future events that may result in impairment charges include differences in the projected occupancy rates or monthly service fee rates, changes in the cost structure of existing communities, changes in reimbursement rates from Medicare for healthcare services, and changes in healthcare reform. Significant adverse changes in our future revenues and/or operating margins, significant changes in the market for senior housing or the valuation of the real estate of senior living communities, as well as other events and circumstances, including, but not limited to, increased competition, changes in reimbursement rates from Medicare for healthcare services, and changing economic or market conditions, including market control premiums, could result in changes in fair value and the determination that additional goodwill is impaired.
Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there has been a decline in the fair value of our reporting units, including estimating future cash flows, and if necessary, the fair value of our assets and liabilities. As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment charges in the future. Although we make every reasonable effort to ensure the accuracy of our estimate of the fair value of our reporting units, future changes in the assumptions used to make these estimates could result in the recording of an impairment loss.
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Self-Insurance Liability Accruals
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and professional liability insurance policies for our owned, leased, and managed communities under a master insurance program, our current policies provide for deductibles for each and every claim. As a result, we are effectively self-insured for claims that are less than the deductible amounts. In addition, we maintain a high-deductible workers compensation program. Third-party insurers are responsible for claim costs above program deductibles and retentions.
Outstanding losses and expenses for general liability, professional liability, and workers compensation are estimated based on the recommendations of independent actuaries and management's estimates. The actuarial methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel, and industry data, and adjust accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. These estimates require significant judgment, and as a result these estimates are uncertain and our actual exposure may be different from our estimates. Subsequent changes in actual experience are monitored and estimates are updated as information becomes available.
As of December 31, 2020, we accrued reserves of $127.9 million for general liability, professional liability, and workers compensation programs. During the years ended December 31, 2020, 2019, and 2018, we reduced our estimate of the amount of aggregate accrued liabilities for these programs based on recent claims experience, resulting in decreases to operating expenses by $4.2 million, $11.3 million, and $14.6 million, for the years ended December 31, 2020, 2019, and 2018 respectively.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements contained in "Item 8. Financial Statement and Supplementary Data" for a discussion of new accounting pronouncements.
Non-GAAP Financial Measures
This Annual Report on Form 10-K contains the financial measures Adjusted EBITDA and Adjusted Free Cash Flow, which are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). Presentations of these non-GAAP financial measures are intended to aid investors in better understanding the factors and trends affecting our performance and liquidity. However, investors should not consider these non-GAAP financial measures as a substitute for financial measures determined in accordance with GAAP, including net income (loss), income (loss) from operations, or net cash provided by (used in) operating activities. We caution investors that amounts presented in accordance with our definitions of these non-GAAP financial measures may not be comparable to similar measures disclosed by other companies because not all companies calculate non-GAAP measures in the same manner. We urge investors to review the following reconciliations of these non-GAAP financial measures from the most comparable financial measures determined in accordance with GAAP.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP performance measure that we define as net income (loss) excluding: benefit/provision for income taxes, non-operating income/expense items, and depreciation and amortization; and further adjusted to exclude income/expense associated with non-cash, non-operational, transactional, cost reduction, or organizational restructuring items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between periods. For the periods presented herein, such other items include non-cash impairment charges, gain/loss on facility lease termination and modification, operating lease expense adjustment, amortization of deferred gain, change in future service obligation, non-cash stock-based compensation expense, and transaction and organizational restructuring costs. Transaction costs include those directly related to acquisition, disposition, financing, and leasing activity, and stockholder relations advisory matters, and are primarily comprised of legal, finance, consulting, professional fees, and other third party costs. Organizational restructuring costs include those related to our efforts to reduce general and administrative expense and our senior leadership changes, including severance.
We believe that presentation of Adjusted EBITDA as a performance measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective core operating performance, and to make day-to-day operating decisions; (ii) it provides an assessment of operational factors that management can impact in the short-term, namely revenues and the controllable cost structure of the organization, by eliminating items related to our financing and capital structure and other items that management does not consider as part of our underlying core operating performance and that management believes impact the comparability of performance between
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periods; and (iii) we believe that this measure is used by research analysts and investors to evaluate our operating results and to value companies in our industry.
Adjusted EBITDA has material limitations as a performance measure, including: (i) excluded interest and income tax are necessary to operate our business under our current financing and capital structure; (ii) excluded depreciation, amortization, and impairment charges may represent the wear and tear and/or reduction in value of our communities, goodwill, and other assets and may be indicative of future needs for capital expenditures; and (iii) we may incur income/expense similar to those for which adjustments are made, such as gain/loss on sale of assets, facility lease termination and modification, or debt modification and extinguishment, non-cash stock-based compensation expense, and transaction and other costs, and such income/expense may significantly affect our operating results.
The table below reconciles Adjusted EBITDA from net income (loss).
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | |||||||||||||||
| Net income (loss) | $ | 81,945 | $ | (268,492) | |||||||||||||
| Provision (benefit) for income taxes | 5,352 | (2,269) | |||||||||||||||
| Equity in (earnings) loss of unconsolidated ventures | 2,107 | 4,544 | |||||||||||||||
| Loss (gain) on debt modification and extinguishment, net | (10,896) | 5,247 | |||||||||||||||
| Loss (gain) on sale of assets, net | (374,532) | (7,245) | |||||||||||||||
| Other non-operating (income) loss | (5,648) | (14,765) | |||||||||||||||
| Interest expense | 208,779 | 248,341 | |||||||||||||||
| Interest income | (4,799) | (9,859) | |||||||||||||||
| Income (loss) from operations | (97,692) | (44,498) | |||||||||||||||
| Depreciation and amortization | 359,226 | 379,433 | |||||||||||||||
| Asset impairment | 107,308 | 49,266 | |||||||||||||||
| Loss (gain) on facility lease termination and modification, net | (2,303) | 3,388 | |||||||||||||||
| Operating lease expense adjustment | (136,276) | (19,453) | |||||||||||||||
| Non-cash stock-based compensation expense | 20,747 | 23,026 | |||||||||||||||
| Transaction and organizational restructuring costs | 13,377 | 10,007 | |||||||||||||||
Adjusted EBITDA(1) | $ | 264,387 | $ | 401,169 | |||||||||||||
(1)Adjusted EBITDA includes:
•$115.7 million benefit for the year ended December 31, 2020 of Provider Relief Funds and other government grants recognized in other operating income
•$119.2 million for the year ended December 31, 2020 for the one-time cash lease payment made to Ventas in connection with our lease restructuring transaction effective July 26, 2020
•$100.0 million benefit for the year ended December 31, 2020 for the management agreement termination fee payment received from Healthpeak
•$23.1 million of negative non-recurring net impact for the year ended December 31, 2019 from the application of the lease accounting standard effective January 1, 2019
Adjusted Free Cash Flow
Adjusted Free Cash Flow is a non-GAAP liquidity measure that we define as net cash provided by (used in) operating activities before: distributions from unconsolidated ventures from cumulative share of net earnings, changes in prepaid insurance premiums financed with notes payable, changes in operating lease liability for lease termination, cash paid/received for gain/loss on facility lease termination and modification, and lessor capital expenditure reimbursements under operating leases; plus: property insurance proceeds and proceeds from refundable entrance fees, net of refunds; less: non-development capital expenditures and payment of financing lease obligations. Non-development capital expenditures are comprised of corporate and community-level capital expenditures, including those related to maintenance, renovations, upgrades, and other major building infrastructure projects for our communities and is presented net of lessor reimbursements. Non-development capital expenditures do not include capital expenditures for: community expansions, major community redevelopment and repositioning projects, and the development of new communities.
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We believe that presentation of Adjusted Free Cash Flow as a liquidity measure is useful to investors because (i) it is one of the metrics used by our management for budgeting and other planning purposes, to review our historic and prospective sources of operating liquidity, and to review our ability to service our outstanding indebtedness, pay dividends to stockholders, engage in share repurchases, and make capital expenditures, including development capital expenditures; and (ii) it provides an indicator to management to determine if adjustments to current spending decisions are needed.
Adjusted Free Cash Flow has material limitations as a liquidity measure, including: (i) it does not represent cash available for dividends, share repurchases, or discretionary expenditures since certain non-discretionary expenditures, including mandatory debt principal payments, are not reflected in this measure; (ii) the cash portion of non-recurring charges related to gain/loss on facility lease termination generally represent charges/gains that may significantly affect our liquidity; and (iii) the impact of timing of cash expenditures, including the timing of non-development capital expenditures, limits the usefulness of the measure for short-term comparisons.
The table below reconciles Adjusted Free Cash Flow from net cash provided by (used in) operating activities.
| Years Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 205,649 | $ | 216,412 | |||||||||||||
| Net cash provided by (used in) investing activities | (425,111) | (225,539) | |||||||||||||||
| Net cash provided by (used in) financing activities | 382,913 | (139,394) | |||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 163,451 | $ | (148,521) | |||||||||||||
| Net cash provided by (used in) operating activities | $ | 205,649 | $ | 216,412 | |||||||||||||
| Distributions from unconsolidated ventures from cumulative share of net earnings | (766) | (3,472) | |||||||||||||||
| Changes in assets and liabilities for lessor capital expenditure reimbursements under operating leases | (22,242) | (31,305) | |||||||||||||||
| Non-development capital expenditures, net | (139,592) | (235,797) | |||||||||||||||
| Payment of financing lease obligations | (18,868) | (22,242) | |||||||||||||||
| Adjusted Free Cash Flow | $ | 24,181 | $ | (76,404) | |||||||||||||
(1) Adjusted Free Cash Flow includes transaction and organizational restructuring costs of $13.4 million and $10.0 million for the years ended December 31, 2020 and 2019, respectively. Additionally, Adjusted Free Cash Flow for the year ended December 31, 2020 includes:
•$115.7 million benefit from Provider Relief Funds and other government grants accepted
•$119.2 million one-time cash lease payment made to Ventas in connection with our lease restructuring transaction effective July 26, 2020
•$100.0 million benefit from the management agreement termination fee payment received from Healthpeak
•$87.5 million benefit from accelerated/advanced Medicare payments received
•$72.7 million benefit from payroll taxes deferred
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks from changes in interest rates charged on our credit facilities and other variable-rate indebtedness. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates and prices. As of December 31, 2020, we had approximately $2.4 billion of long-term fixed rate debt and $1.5 billion of long-term variable rate debt. As of December 31, 2020, our total fixed-rate debt and variable-rate debt outstanding had a weighted average interest rate of 3.59%.
In the normal course of business, we enter into certain interest rate cap agreements with major financial institutions to manage our risk above certain interest rates on variable rate debt. As of December 31, 2020, $2.4 billion, or 61.2%, of our long-term debt has fixed rates. As of December 31, 2020, $1.4 billion, or 35.5%, of our long-term debt is variable rate debt subject to interest rate cap agreements. The remaining $128.0 million, or 3.3%, of our long-term debt is variable rate debt not subject to any interest rate cap agreements. Our outstanding variable rate debt is indexed to LIBOR, and accordingly our annual interest expense related to variable rate debt is directly affected by movements in LIBOR. After consideration of hedging instruments currently in place, increases in LIBOR of 100, 200 and 500 basis points would have resulted in additional annual interest
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expense of $15.5 million, $31.0 million and $66.1 million, respectively. Certain of our variable debt instruments include springing provisions that obligate us to acquire additional interest rate caps in the event that LIBOR increases above certain levels, and the implementation of those provisions would result in additional mitigation of interest costs.
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Item 8. Financial Statements and Supplementary Data
BROOKDALE SENIOR LIVING INC.
INDEX TO FINANCIAL STATEMENTS
| PAGE | |||||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Brookdale Senior Living Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brookdale Senior Living Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included in the Index at Item 15 (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Evaluation of Goodwill for Impairment | |||||
| Description of the Matter | As of December 31, 2020, the Company's consolidated balance sheet included goodwill of $154.1 million. As discussed in Notes 2 and 5 to the consolidated financial statements, goodwill is qualitatively, and when necessary quantitatively, tested for impairment at least annually during the fourth quarter at the reporting unit level. Auditing management's evaluation of goodwill allocated to the health care services reporting unit for impairment was complex and involved a high degree of subjectivity due to the significant estimation required to estimate the fair value of the health care services reporting unit. In particular, the fair value estimate was sensitive to significant assumptions including the estimation of revenue and expense growth rates, discount rates, and earnings multiples, which are affected by expectations about future market or economic conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's goodwill impairment review process, including controls over management's review of the significant assumptions described above. To test the estimated fair value of the Company's health care services reporting unit, we performed audit procedures that included, among others, assessing the methodologies used to estimate fair value, testing the significant assumptions used to develop the fair value estimate, and testing the underlying data used by the Company in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, and evaluated whether changes to the Company's business and other relevant factors would affect the significant assumptions. The evaluation of the Company's methodology and key assumptions was performed with the assistance of our valuation specialists. We assessed the historical accuracy of the Company's estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the health care services reporting unit that would result from changes in the significant assumptions. | ||||
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| Evaluation of Property, Plant and Equipment and Leasehold Intangibles, Net and Operating Lease Right-of-Use Assets for Impairment | |||||
| Description of the Matter | As of December 31, 2020, the Company's consolidated balance sheet included property, plant and equipment and leasehold intangibles, net and operating lease right-of-use assets of $5.1 billion and $0.8 billion, respectively. As discussed in Notes 2 and 5 to the consolidated financial statements, property, plant and equipment and leasehold intangibles, net and operating lease right-of-use assets are routinely evaluated for indicators of impairment. For property, plant and equipment and leasehold intangibles, net and operating lease right-of-use assets with indicators of impairment, the Company compares the estimated undiscounted future cash flows of each long-lived asset group to its carrying amount. If the long-lived asset group's carrying amount exceeds its estimated undiscounted future cash flows, the fair value of the long-lived asset group is then estimated by management and compared to its carrying amount. An impairment charge is recognized on these long-lived assets when carrying amount exceeds fair value. Auditing management's evaluation of property, plant and equipment and leasehold intangibles, net and operating lease right-of-use assets for impairment was complex and involved a high degree of subjectivity due to the significant estimation required to determine the estimated undiscounted future cash flows and fair values of long-lived asset groups where indicators of impairment were determined to be present. In particular, the future cash flows and fair value estimates were sensitive to significant assumptions including the estimation of revenue and expense growth rates and capitalization rates, which are affected by expectations about future market or economic conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process to evaluate property, plant and equipment and leasehold intangibles, net and operating lease right-of-use assets for impairment, including controls over management's review of the significant assumptions described above. To test the Company's evaluation of long-lived asset groups for impairment, we performed audit procedures that included, among others, assessing the methodologies used to estimate future cash flows and estimate fair values, testing the significant assumptions used to develop the estimates of future cash flows and fair values, and testing the completeness and accuracy of the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and evaluated whether changes to the Company's business and other relevant factors would affect the significant assumptions. The evaluation of the Company's methodology and key assumptions was performed with the assistance of our valuation specialists. We assessed the historical accuracy of the Company's estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the undiscounted future cash flows and fair values of the long-lived asset groups that would result from changes in the key assumptions. | ||||
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1993
Chicago, Illinois
February 25, 2021
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Brookdale Senior Living Inc.
Opinion on Internal Control over Financial Reporting
We have audited Brookdale Senior Living Inc.'s (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included in the Index at Item 15 and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitation of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
February 25, 2021
86
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 380,420 | $ | 240,227 | |||||||
| Marketable securities | 172,905 | 68,567 | |||||||||
| Restricted cash | 28,059 | 26,856 | |||||||||
| Accounts receivable, net | 109,221 | 133,613 | |||||||||
| Assets held for sale | 16,061 | 42,671 | |||||||||
| Prepaid expenses and other current assets, net | 66,937 | 84,241 | |||||||||
| Total current assets | 773,603 | 596,175 | |||||||||
| Property, plant and equipment and leasehold intangibles, net | 5,068,060 | 5,109,834 | |||||||||
| Operating lease right-of-use assets | 788,138 | 1,159,738 | |||||||||
| Restricted cash | 56,669 | 34,614 | |||||||||
| Investment in unconsolidated ventures | 4,898 | 21,210 | |||||||||
| Goodwill | 154,131 | 154,131 | |||||||||
| Other assets, net | 56,259 | 118,731 | |||||||||
| Total assets | $ | 6,901,758 | $ | 7,194,433 | |||||||
| Liabilities and Equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | 68,885 | $ | 339,413 | |||||||
| Current portion of financing lease obligations | 19,543 | 63,146 | |||||||||
| Current portion of operating lease obligations | 146,226 | 193,587 | |||||||||
| Trade accounts payable | 71,233 | 104,721 | |||||||||
| Accrued expenses | 287,851 | 266,703 | |||||||||
| Refundable fees and deferred revenue | 96,995 | 79,402 | |||||||||
| Total current liabilities | 690,733 | 1,046,972 | |||||||||
| Long-term debt, less current portion | 3,847,103 | 3,215,710 | |||||||||
| Financing lease obligations, less current portion | 543,764 | 771,434 | |||||||||
| Operating lease obligations, less current portion | 819,429 | 1,277,178 | |||||||||
| Deferred tax liability | 9,557 | 15,397 | |||||||||
| Other liabilities | 188,443 | 169,017 | |||||||||
| Total liabilities | 6,099,029 | 6,495,708 | |||||||||
| Preferred stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2020 and 2019; 0 shares issued and outstanding | 0 | 0 | |||||||||
| Common stock, $0.01 par value, 400,000,000 shares authorized at December 31, 2020 and 2019; 198,331,663 and 199,593,343 shares issued and 187,804,138 and 192,128,586 shares outstanding (including 4,349,421 and 7,252,459 unvested restricted shares), respectively | 1,983 | 1,996 | |||||||||
| Additional paid-in-capital | 4,212,409 | 4,172,099 | |||||||||
| Treasury stock, at cost; 10,527,525 and 7,464,757 shares at December 31, 2020 and 2019, respectively | (102,774) | (84,651) | |||||||||
| Accumulated deficit | (3,311,184) | (3,393,088) | |||||||||
| Total Brookdale Senior Living Inc. stockholders' equity | 800,434 | 696,356 | |||||||||
| Noncontrolling interest | 2,295 | 2,369 | |||||||||
| Total equity | 802,729 | 698,725 | |||||||||
| Total liabilities and equity | $ | 6,901,758 | $ | 7,194,433 | |||||||
See accompanying notes to consolidated financial statements.
87
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenue | |||||||||||||||||
| Resident fees | $ | 2,892,567 | $ | 3,209,931 | $ | 3,449,211 | |||||||||||
| Management fees | 130,690 | 57,108 | 71,986 | ||||||||||||||
| Reimbursed costs incurred on behalf of managed communities | 401,189 | 790,049 | 1,010,229 | ||||||||||||||
| Other operating income | 115,749 | 0 | 0 | ||||||||||||||
| Total revenue and other operating income | 3,540,195 | 4,057,088 | 4,531,426 | ||||||||||||||
| Expense | |||||||||||||||||
| Facility operating expense (excluding facility depreciation and amortization of $334,768, $349,215, and $407,427, respectively) | 2,341,859 | 2,390,495 | 2,453,328 | ||||||||||||||
| General and administrative expense (including non-cash stock-based compensation expense of $20,747, $23,026, and $26,067, respectively) | 206,575 | 219,289 | 259,475 | ||||||||||||||
| Facility operating lease expense | 224,033 | 269,666 | 303,294 | ||||||||||||||
| Depreciation and amortization | 359,226 | 379,433 | 447,455 | ||||||||||||||
| Asset impairment | 107,308 | 49,266 | 489,893 | ||||||||||||||
| Loss (gain) on facility lease termination and modification, net | (2,303) | 3,388 | 162,001 | ||||||||||||||
| Costs incurred on behalf of managed communities | 401,189 | 790,049 | 1,010,229 | ||||||||||||||
| Total operating expense | 3,637,887 | 4,101,586 | 5,125,675 | ||||||||||||||
| Income (loss) from operations | (97,692) | (44,498) | (594,249) | ||||||||||||||
| Interest income | 4,799 | 9,859 | 9,846 | ||||||||||||||
| Interest expense: | |||||||||||||||||
| Debt | (153,817) | (177,718) | (188,505) | ||||||||||||||
| Financing lease obligations | (48,534) | (66,353) | (83,604) | ||||||||||||||
| Amortization of deferred financing costs and debt discount | (6,428) | (4,270) | (8,160) | ||||||||||||||
| Gain (loss) on debt modification and extinguishment, net | 10,896 | (5,247) | (11,677) | ||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | (2,107) | (4,544) | (8,804) | ||||||||||||||
| Gain (loss) on sale of assets, net | 374,532 | 7,245 | 293,246 | ||||||||||||||
| Other non-operating income (loss) | 5,648 | 14,765 | 14,099 | ||||||||||||||
| Income (loss) before income taxes | 87,297 | (270,761) | (577,808) | ||||||||||||||
| Benefit (provision) for income taxes | (5,352) | 2,269 | 49,456 | ||||||||||||||
| Net income (loss) | 81,945 | (268,492) | (528,352) | ||||||||||||||
| Net (income) loss attributable to noncontrolling interest | 74 | 561 | 94 | ||||||||||||||
| Net income (loss) attributable to Brookdale Senior Living Inc. common stockholders | $ | 82,019 | $ | (267,931) | $ | (528,258) | |||||||||||
| Net income (loss) per share attributable to Brookdale Senior Living Inc. common stockholders: | |||||||||||||||||
| Basic | $ | 0.45 | $ | (1.44) | $ | (2.82) | |||||||||||
| Diluted | $ | 0.44 | $ | (1.44) | $ | (2.82) | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 183,498 | 185,907 | 187,468 | ||||||||||||||
| Diluted | 184,386 | 185,907 | 187,468 | ||||||||||||||
See accompanying notes to consolidated financial statements.
88
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total equity, balance at beginning of period | $ | 698,725 | $ | 1,018,413 | $ | 1,530,291 | |||||||||||
| Common stock: | |||||||||||||||||
| Balance at beginning of period | $ | 1,996 | $ | 1,968 | $ | 1,913 | |||||||||||
| Issuance of common stock under Associate Stock Purchase Plan | 2 | 2 | 1 | ||||||||||||||
| Restricted stock, net | (9) | 31 | 26 | ||||||||||||||
| Shares withheld for employee taxes | (6) | (5) | (4) | ||||||||||||||
| Other, net | 0 | 0 | 32 | ||||||||||||||
| Balance at end of period | $ | 1,983 | $ | 1,996 | $ | 1,968 | |||||||||||
| Additional paid-in-capital: | |||||||||||||||||
| Balance at beginning of period | $ | 4,172,099 | $ | 4,151,147 | $ | 4,126,549 | |||||||||||
| Compensation expense related to restricted stock grants | 20,747 | 23,026 | 26,067 | ||||||||||||||
| Issuance of common stock under Associate Stock Purchase Plan | 638 | 1,160 | 1,468 | ||||||||||||||
| Issuance of warrants | 22,883 | 0 | 0 | ||||||||||||||
| Restricted stock, net | 9 | (31) | (26) | ||||||||||||||
| Shares withheld for employee taxes | (4,037) | (3,308) | (3,057) | ||||||||||||||
| Other, net | 70 | 105 | 146 | ||||||||||||||
| Balance at end of period | $ | 4,212,409 | $ | 4,172,099 | $ | 4,151,147 | |||||||||||
| Treasury stock: | |||||||||||||||||
| Balance at beginning of period | $ | (84,651) | $ | (64,940) | $ | (56,440) | |||||||||||
| Purchase of treasury stock | (18,123) | (19,711) | (8,500) | ||||||||||||||
| Balance at end of period | $ | (102,774) | $ | (84,651) | $ | (64,940) | |||||||||||
| Accumulated deficit: | |||||||||||||||||
| Balance at beginning of period | $ | (3,393,088) | $ | (3,069,272) | $ | (2,541,294) | |||||||||||
| Cumulative effect of change in accounting principle (Note 2) | (115) | (55,885) | 0 | ||||||||||||||
| Net income (loss) | 82,019 | (267,931) | (528,258) | ||||||||||||||
| Other, net | 0 | 0 | 280 | ||||||||||||||
| Balance at end of period | $ | (3,311,184) | $ | (3,393,088) | $ | (3,069,272) | |||||||||||
| Noncontrolling interest: | |||||||||||||||||
| Balance at beginning of period | $ | 2,369 | $ | (490) | $ | (437) | |||||||||||
| Net income (loss) attributable to noncontrolling interest | (74) | (561) | (94) | ||||||||||||||
| Noncontrolling interest contribution | 0 | 6,566 | 41 | ||||||||||||||
| Noncontrolling interest distribution | 0 | (3,146) | 0 | ||||||||||||||
| Balance at end of period | $ | 2,295 | $ | 2,369 | $ | (490) | |||||||||||
| Total equity, balance at end of period | $ | 802,729 | $ | 698,725 | $ | 1,018,413 | |||||||||||
| Common stock share activity | |||||||||||||||||
| Outstanding shares of common stock: | |||||||||||||||||
| Balance at beginning of period | 192,129 | 192,356 | 191,276 | ||||||||||||||
| Issuance of common stock under Associate Stock Purchase Plan | 224 | 181 | 207 | ||||||||||||||
| Restricted stock, net | (830) | 3,073 | 2,593 | ||||||||||||||
| Shares withheld for employee taxes | (656) | (476) | (439) | ||||||||||||||
| Purchase of treasury stock | (3,063) | (3,005) | (1,281) | ||||||||||||||
| Balance at end of period | 187,804 | 192,129 | 192,356 | ||||||||||||||
See accompanying notes to consolidated financial statements.
89
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||
| Net income (loss) | $ | 81,945 | $ | (268,492) | $ | (528,352) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||||||||
| Loss (gain) on debt modification and extinguishment, net | (10,896) | 5,247 | 11,677 | ||||||||||||||
| Depreciation and amortization, net | 365,654 | 383,703 | 455,615 | ||||||||||||||
| Asset impairment | 107,308 | 49,266 | 489,893 | ||||||||||||||
| Equity in (earnings) loss of unconsolidated ventures | 2,107 | 4,544 | 8,804 | ||||||||||||||
| Distributions from unconsolidated ventures from cumulative share of net earnings | 766 | 3,472 | 2,896 | ||||||||||||||
| Amortization of deferred gain | 0 | 0 | (4,358) | ||||||||||||||
| Amortization of entrance fees | (2,122) | (1,634) | (1,670) | ||||||||||||||
| Proceeds from deferred entrance fee revenue | 734 | 3,544 | 3,218 | ||||||||||||||
| Deferred income tax (benefit) provision | (5,840) | (2,654) | (52,367) | ||||||||||||||
| Operating lease expense adjustment | (136,276) | (19,453) | (17,218) | ||||||||||||||
| Loss (gain) on sale of assets, net | (374,532) | (7,245) | (293,246) | ||||||||||||||
| Loss (gain) on facility lease termination and modification, net | (2,303) | 3,388 | 140,957 | ||||||||||||||
| Non-cash stock-based compensation expense | 20,747 | 23,026 | 26,067 | ||||||||||||||
| Non-cash interest expense on financing lease obligations | 0 | 0 | 10,894 | ||||||||||||||
| Non-cash management contract termination gain | 0 | (969) | (8,724) | ||||||||||||||
| Other | (2,777) | (8,700) | (1,292) | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable, net | 24,277 | 292 | (4,964) | ||||||||||||||
| Prepaid expenses and other assets, net | 24,707 | 55,873 | 26,762 | ||||||||||||||
| Trade accounts payable and accrued expenses | 27,294 | (12,984) | (37,307) | ||||||||||||||
| Refundable fees and deferred revenue | 62,614 | (25,117) | (128) | ||||||||||||||
| Operating lease assets and liabilities for lessor capital expenditure reimbursements | 22,242 | 31,305 | 10,400 | ||||||||||||||
| Operating lease assets and liabilities for lease termination | 0 | 0 | (33,596) | ||||||||||||||
| Net cash provided by (used in) operating activities | 205,649 | 216,412 | 203,961 | ||||||||||||||
| Cash Flows from Investing Activities | |||||||||||||||||
| Change in lease security deposits and lease acquisition deposits, net | 3,569 | (859) | 1,163 | ||||||||||||||
| Purchase of marketable securities | (378,269) | (186,224) | (14,823) | ||||||||||||||
| Sale and maturities of marketable securities | 275,000 | 134,000 | 293,273 | ||||||||||||||
| Capital expenditures, net of related payables | (185,871) | (304,092) | (225,473) | ||||||||||||||
| Acquisition of assets, net of related payables and cash received | (472,193) | (497) | (271,771) | ||||||||||||||
| Investment in unconsolidated ventures | (4,082) | (4,346) | (9,124) | ||||||||||||||
| Distributions received from unconsolidated ventures | 0 | 9,635 | 12,850 | ||||||||||||||
| Proceeds from sale of assets, net | 331,316 | 92,735 | 499,807 | ||||||||||||||
| Proceeds from notes receivable | 5,419 | 34,109 | 1,580 | ||||||||||||||
| Property insurance proceeds | 0 | 0 | 1,292 | ||||||||||||||
| Net cash provided by (used in) investing activities | (425,111) | (225,539) | 288,774 | ||||||||||||||
| Cash Flows from Financing Activities | |||||||||||||||||
| Proceeds from debt | 963,099 | 321,996 | 606,921 | ||||||||||||||
| Repayment of debt and financing lease obligations | (538,859) | (427,923) | (896,744) | ||||||||||||||
| Proceeds from line of credit | 166,381 | 0 | 200,000 | ||||||||||||||
| Repayment of line of credit | (166,381) | 0 | (200,000) | ||||||||||||||
| Purchase of treasury stock, net of related payables | (18,123) | (23,955) | (4,256) | ||||||||||||||
| Payment of financing costs, net of related payables | (19,649) | (7,309) | (16,317) | ||||||||||||||
| Proceeds from refundable entrance fees, net of refunds | 0 | 0 | (422) | ||||||||||||||
| Payments for lease termination | 0 | 0 | (12,548) | ||||||||||||||
| Payments of employee taxes for withheld shares | (4,037) | (3,313) | (3,061) | ||||||||||||||
| Other | 482 | 1,110 | 1,364 | ||||||||||||||
| Net cash provided by (used in) financing activities | 382,913 | (139,394) | (325,063) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 163,451 | (148,521) | 167,672 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 301,697 | 450,218 | 282,546 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 465,148 | $ | 301,697 | $ | 450,218 | |||||||||||
See accompanying notes to consolidated financial statements.
90
BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Brookdale Senior Living Inc. ("Brookdale" or the "Company") is an operator of senior living communities throughout the United States. The Company is committed to providing senior living solutions primarily within properties that are designed, purpose-built, and operated to provide quality service, care, and living accommodations for residents. The Company operates and manages independent living, assisted living, memory care, and continuing care retirement communities ("CCRCs"). The Company also offers a range of home health, hospice, and outpatient therapy services to residents of many of its communities and to seniors living outside of its communities.
The Company has 5 reportable segments: Independent Living; Assisted Living and Memory Care; CCRCs; Health Care Services; and Management Services.
2. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles ("GAAP"). Except for the changes for the impact of the recently adopted accounting pronouncements discussed in this Note, the Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements. The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Brookdale and Related Stockholder Matters” belowits consolidated subsidiaries. The ownership interest of consolidated entities not wholly-owned by the Company are presented as noncontrolling interests in the accompanying consolidated financial statements. Intercompany balances and transactions have been eliminated in consolidation, and net income (loss) is reduced by the portion of net income (loss) attributable to noncontrolling interests. The Company reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting.
The Company evaluates its potential variable interest entity ("VIE") relationships under certain criteria as provided for in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 810, Consolidation ("ASC 810"). ASC 810 broadly defines a VIE as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity's activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company performs this evaluation on an ongoing basis and consolidates any VIEs for which the Company is determined to be the primary beneficiary, as determined by the Company's power to direct the VIE's activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE.
Use of Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue, other operating income, asset impairments, self-insurance reserves, performance-based compensation, the allowance for credit losses, depreciation and amortization, leasing transactions, income taxes, and other contingencies. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the original estimates.
Revenue Recognition
Resident Fees
Resident fee revenue is reported at the amount that reflects the consideration the Company expects to receive in exchange for the services provided. These amounts are due from residents or third-party payors and include variable consideration for retroactive adjustments from estimated reimbursements, if any, under reimbursement programs. Performance obligations are
91
determined based on the nature of the services provided. Resident fee revenue is recognized as performance obligations are satisfied.
Under the Company's senior living residency agreements, which are generally for a descriptioncontractual term of 30 days to one year, the Company provides senior living services to residents for a stated daily or monthly fee. The Company has elected the lessor practical expedient within ASC 842, Leases ("ASC 842") and recognizes, measures, presents, and discloses the revenue for services under the Company's senior living residency agreements based upon the predominant component, either the lease or nonlease component, of the contracts. The Company has determined that the services included under the Company's independent living, assisted living, and memory care residency agreements have the same timing and pattern of transfer and are performance obligations that are satisfied over time. The Company recognizes revenue under ASC 606, Revenue Recognition from Contracts with Customers ("ASC 606") for its independent living, assisted living, and memory care residency agreements for which it has estimated that the nonlease components of such residency agreements are the predominant component of the contract.
The Company enters into contracts to provide home health, hospice, and outpatient therapy services. Each service provided under the contract is capable of being distinct, and thus, the services are considered individual and separate performance obligations. The performance obligations are satisfied as services are provided and revenue is recognized as services are provided.
The Company receives payment for services under various third-party payor programs which include Medicare, Medicaid, and other third-party payors. Estimates for settlements with third-party payors for retroactive adjustments from estimated reimbursements due to audits, reviews, or investigations are included in the determination of the estimated transaction price for providing services. The Company estimates the transaction price based on the terms of the contract with the payor, correspondence with the payor, and historical payment trends. Changes to these estimates for retroactive adjustments are recognized in the period the change or adjustment becomes known or when final settlements are determined.
Billings for services under third-party payor programs are recorded net of estimated retroactive adjustments, if any. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid or withheld). Subsequent adjustments to these accrued amounts are recorded in net revenues when known.
Management Services
The Company manages certain communities under contracts which provide periodic management fee payments to the Company and reimbursement for costs and expense related to such communities. Management fees are generally determined by an agreed upon percentage of gross revenues (as defined in the management agreement). Certain management contracts also provide for an annual incentive fee to be paid to the Company upon achievement of certain metrics identified in the contract. The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company estimates the amount of incentive fee revenue expected to be earned, if any, during the annual contract period and revenue is recognized as services are provided.The Company's estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the consolidated statements of operations. The related costs are included in "costs incurred on behalf of managed communities" on the consolidated statements of operations.
Government Grants
The Company recognizes income for government grants on a systematic and rational basis over the periods in which the Company recognizes the related expenses or loss of revenue for which the grants are intended to compensate when there is reasonable assurance that the Company will comply with the applicable terms and conditions of the grant and there is reasonable assurance that the grant will be received.
Lease Accounting
Refer to the Company's revenue recognition policy for discussion of the accounting policy for residency agreements, which include a lease component.
92
The following is the Company's lease accounting policy subsequent to the adoption of ASC 842 on January 1, 2019. Refer to Recently Adopted Accounting Pronouncements in this Note 2for significant changes that resulted from the adoption. The Company, as lessee, recognizes a right-of-use asset and a lease liability on the Company's consolidated balance sheet for its community, office, and equipment leases. As of the commencement date of a lease, a lease liability and corresponding right-of-use asset is established on the Company's consolidated balance sheet at the present value of future minimum lease payments. The Company's community leases generally contain fixed annual rent escalators or annual rent escalators based on an index, such as the consumer price index. The future minimum lease payments recognized on the consolidated balance sheet include fixed payments (including in-substance fixed payments) and variable payments estimated utilizing the index or rate on the lease commencement date. The Company recognizes lease expense as incurred for additional variable payments. For the Company's leases that do not contain an implicit rate, the Company utilizes its estimated incremental borrowing rate to determine the present value of lease payments based on information available at commencement of the lease. The Company's estimated incremental borrowing rate reflects the fixed rate at which the Company could borrow a similar amount for the same term on a collateralized basis. The Company elected the short-term lease exception policy which permits leases with an initial term of 12 months or less to not be recorded on the Company's consolidated balance sheet and instead to be recognized as lease expense as incurred.
The Company, as lessee, makes a determination with respect to each of its community, office, and equipment leases as to whether each should be accounted for as an operating lease or financing lease. The classification criteria is based on estimates regarding the fair value of the leased asset, minimum lease payments, effective cost of funds, economic life of the asset, and certain other terms in the lease agreements.
Lease right-of-use assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of right-of-use assets are assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset, calculated utilizing the lowest level of identifiable cash flows. If estimated future undiscounted net cash flows are less than the carrying amount of the asset then the fair value of the asset is estimated. The impairment expense is determined by comparing the estimated fair value of the asset to its carrying amount, with any amount in excess of fair value recognized as an expense in the current period. Undiscounted cash flow projections and estimates of fair value amounts are based on a number of assumptions such as revenue and expense growth rates and estimated lease coverage ratios (Level 3).
Operating Leases
The Company recognizes operating lease expense for actual rent paid, generally plus or minus a straight-line adjustment for estimated minimum lease escalators if applicable. The right-of-use asset is generally reduced each period by an amount equal to the difference between the operating lease expense and the amount of expense on the lease liability utilizing the effective interest method. Subsequent to the impairment of an operating lease right-of-use asset, the Company recognizes operating lease expense consisting of the reduction of the right-of-use asset on a straight-line basis over the remaining lease term and the amount of expense on the lease liability utilizing the effective interest method.
Financing Leases
Financing lease right-of-use assets are recognized within property, plant and equipment and leasehold intangibles, 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 unless the lease contains an option to purchase the underlying asset that the Company is reasonably certain to exercise. If the Company is reasonably certain to exercise the purchase option, the asset is amortized over the useful life.
Sale-Leaseback Transactions
For transactions in which an owned community is sold and leased back from the buyer (sale-leaseback transactions), the Company recognizes an asset sale and lease accounting is applied if the Company has transferred control of the community. For such transactions, the Company removes the transferred assets from the consolidated balance sheet and a gain or loss on the sale is recognized for the difference between the carrying amount of the asset and the transaction price for the sale transaction.
For sale‑leaseback transactions in which the Company has not transferred control of the underlying asset, the Company does not recognize an asset sale or derecognize the underlying asset until control is transferred. For such transactions, the Company recognizes the underlying assets within assets under financing leases as a component of property, plant and equipment and leasehold intangibles, net on the consolidated balance sheets and continues to depreciate the assets over their useful lives.
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Additionally, the Company accounts for any amounts received as a financing lease liability and the Company recognizes interest expense on the financing lease liability utilizing the effective interest method with the interest expense limited to an amount that is not greater than the cash payments on the financing lease liability over the term of the lease.
Gain (Loss) on Sale of Assets
The Company regularly enters into real estate transactions which may include the disposition of certain communities, including the associated real estate. The Company recognizes gain or loss from real estate sales when the transfer of control is complete.
The Company recognizes gain or loss from the sale of equity method investments when the transfer of control is complete and the Company has no continuing involvement with the transferred financial assets.
Purchase Accounting
For the acquisition of assets that do not meet the definition of a business, the Company accounts for the transaction as an asset acquisition at the purchase price, including acquisition costs, allocated among the acquired assets and assumed liabilities, including identified intangible assets and liabilities, based upon the relative fair values using Level 3 inputs at the date of acquisition.
For acquisitions of a business, the Company accounts for the transaction as a business combination pursuant to the acquisition method and assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at fair value. In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities assumed, the Company makes estimates of fair value using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities, and/or independent appraisals.
In connection with a business combination, the excess of the fair value of liabilities assumed and common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred.
Deferred Financing Costs
Third-party fees and costs incurred to obtain debt are recorded as a direct adjustment to the carrying amount of debt and amortized on a straight-line basis, which approximates the effective yield method, over the term of the related debt. Unamortized deferred financing fees are written-off if the associated debt is retired before the maturity date. Upon the refinancing of mortgage debt or amendment of the line of credit, unamortized deferred financing fees and additional financing costs incurred are accounted for in accordance with ASC 470-50, Debt Modifications and Extinguishments.
Stock-Based Compensation
Measurement of the cost of employee services received in exchange for stock compensation is based on the grant-date fair value of the employee stock awards, which is based on the quoted price of the Company's common shares on the grant date for the majority of the Company's awards. Generally, this cost is recognized as compensation expense ratably over the employee's requisite service period. The Company recognizes forfeitures as they occur and any previously recognized compensation expense is reversed for forfeited awards. Awards that vest over a requisite service period, other than those with performance or market conditions, generally vest ratably in annual installments over a period of three to four years. Incremental compensation costs arising from subsequent modifications of awards after the grant date are recognized when incurred.
Certain of the Company's employee stock awards vest only upon the achievement of performance conditions. The Company recognizes compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance conditions. Performance conditioned awards that vest dependent upon attainment of various levels of performance that equal or exceed threshold levels generally vest based upon performance at the end of a three-year performance period. The number of shares that ultimately vest can range from 0% to 125% of the stock awards granted depending on the level of achievement of the performance criteria.
Certain of the Company's employee stock awards vest only upon the achievement of a market condition where the measurement period is three years and vesting of the awards is based on the Company's level of attainment of a specified total stockholder return relative to the percentage appreciation of a specified index of companies for the respective three-year measurement period. Compensation expense for awards with market conditions is recognized over the service period, which is generally four
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years, and the actual achievement of the market condition does not impact expense recognition. The Company uses a Monte Carlo valuation model to estimate the grant date fair value of such awards. Depending on the results achieved during the three-year measurement period, the number of shares that ultimately vest may range from 0% to 150% of the stock awards granted. The expected volatility of the Company's common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period and the estimated expected weighted average volatility was 42.5% and 45.2% for awards granted in 2020 and 2019, respectively. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year measurement period and the estimated weighted average risk free interest rate was 1.4% and 2.4% for awards granted in 2020 and 2019, respectively.
For all share-based awards with graded vesting other than performance conditioned awards, the Company records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For performance conditioned awards, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance condition is deemed probable of achievement. Performance conditions are evaluated quarterly. If such conditions are not ultimately met or it is not probable the conditions will be achieved, no compensation expense for performance conditioned awards is recognized and any previously recognized compensation expense is reversed.
Income Taxes
The Company accounts for income taxes under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences between the financial reporting and tax basis of assets and liabilities using the tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance reduces deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. When it is determined that it is more likely than not that the Company will be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset is made and reflected in income. This determination is made by considering various factors, including the reversal and timing of existing temporary differences, tax planning strategies, and estimates of future taxable income exclusive of the reversal of temporary differences.
Fair Value of Financial Instruments
Fair value measurements are based on a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 – quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Marketable Securities
Marketable securities beneficially ownedare investments in commercial paper and short-term corporate bond instruments with maturities of greater than 90 days as of their acquisition date by our directors.the Company.
Accounts Receivable, Net
Accounts receivable are reported net of an allowance for credit losses to represent the Company's estimate of expected losses at the balance sheet date. The adequacy of the Company's allowance for credit losses is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, a review of specific accounts, as well as expected future economic conditions and market trends, and adjustments are made to the allowance as necessary.
Assets Held for Sale
The Company designates communities as held for sale when certain criteria are met, including when management has committed to a plan to sell the community and the sale is probable within one year of the reporting date. The Company records
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these assets on the consolidated balance sheet at the lesser of the carrying amount and fair value less estimated selling costs. If the carrying amount is greater than the fair value less the estimated selling costs, the Company records an impairment charge. The Company evaluates the fair value of the assets held for sale each period to determine if it has changed. The long-lived assets are not depreciated while classified as held for sale.
Property, Plant and Equipment and Leasehold Intangibles, Net
Property, plant and equipment and leasehold intangibles, net are recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
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| Asset Category | Estimated Useful Life (in years) | |||||||
| Buildings and improvements | 40 | |||||||
| Furniture and equipment | 3 – 10 | |||||||
| Resident lease intangibles | 1 – 3 | |||||||
What We Do
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