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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-13445

 

Capital Senior Living Corporation

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

75-2678809

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

14160 Dallas Parkway, Suite 300, Dallas, Texas

 

75254

(Address of Principal Executive Offices)

 

(Zip Code)

(972) 770-5600

(Registrant’s Telephone Number, Including Area Code)

NONE

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of exchange on which registered

Common Stock, $0.01 par value per share

 

CSU

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes        No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes        No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July 31, 2020, the Registrant had 31,922,755 outstanding shares of its Common Stock, $0.01 par value, per share.

 

 


 

CAPITAL SENIOR LIVING CORPORATION

INDEX

 

 

 

Page

Number

 

Part I. Financial Information

 

 

3

 

Item 1. Financial Statements.

 

 

3

 

Consolidated Balance Sheets — June 30, 2020 and December 31, 2019

 

 

3

 

Consolidated Statements of Operations and Comprehensive Loss — Three and Six Months Ended June 30, 2020 and 2019

 

 

4

 

Consolidated Statements of Shareholders’ Equity (Deficit)— Three and Six Months Ended June 30, 2020 and 2019

 

 

5

 

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2020 and 2019

 

 

6

 

Notes to Unaudited Consolidated Financial Statements

 

 

7

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

23

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

36

 

Item 4. Controls and Procedures

 

 

36

 

Part II. Other Information

 

 

36

 

Item 1. Legal Proceedings

 

 

36

 

Item 1A. Risk Factors

 

 

36

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

39

 

Item 3. Defaults Upon Senior Securities

 

 

39

 

Item 4. Mine Safety Disclosures

 

 

39

 

Item 5. Other Information

 

 

39

 

Item 6. Exhibits

 

 

40

 

Signature

 

 

41

 

 

2


 

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,460

 

 

$

23,975

 

Restricted cash

 

 

3,382

 

 

 

13,088

 

Accounts receivable, net

 

 

8,832

 

 

 

8,143

 

Federal and state income taxes receivable

 

 

76

 

 

 

72

 

Property tax and insurance deposits

 

 

7,955

 

 

 

12,627

 

Prepaid expenses and other

 

 

5,823

 

 

 

5,308

 

Total current assets

 

 

51,528

 

 

 

63,213

 

Property and equipment, net

 

 

895,127

 

 

 

969,211

 

Operating lease right-of-use assets, net

 

 

12,068

 

 

 

224,523

 

Deferred taxes, net

 

 

76

 

 

 

76

 

Other assets, net

 

 

5,454

 

 

 

10,673

 

Total assets

 

$

964,253

 

 

$

1,267,696

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,776

 

 

$

10,382

 

Accrued expenses

 

 

52,081

 

 

 

46,227

 

Current portion of notes payable, net of deferred loan costs

 

 

227,653

 

 

 

15,819

 

Current portion of deferred income

 

 

7,017

 

 

 

7,201

 

Current portion of financing obligations

 

 

 

 

 

1,741

 

Current portion of lease liabilities

 

 

20,336

 

 

 

45,988

 

Federal and state income taxes payable

 

 

647

 

 

 

420

 

Customer deposits

 

 

1,126

 

 

 

1,247

 

Total current liabilities

 

 

317,636

 

 

 

129,025

 

Financing obligations, net of current portion

 

 

 

 

 

9,688

 

Lease liabilities, net of current portion

 

 

645

 

 

 

208,967

 

Notes payable, net of deferred loan costs and current portion

 

 

690,452

 

 

 

905,637

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value:

 

 

 

 

 

 

Authorized shares – 15,000; no shares issued or outstanding

 

 

 

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

 

 

 

Authorized shares – 65,000; issued and outstanding shares – 31,432 and

   31,441 in 2020 and 2019, respectively

 

 

319

 

 

 

319

 

Additional paid-in capital

 

 

191,461

 

 

 

190,386

 

Retained deficit

 

 

(232,830

)

 

 

(172,896

)

Treasury stock, at cost – 494 shares in 2020 and 2019

 

 

(3,430

)

 

 

(3,430

)

Total shareholders’ equity (deficit)

 

 

(44,480

)

 

 

14,379

 

Total liabilities and shareholders’ equity (deficit)

 

$

964,253

 

 

$

1,267,696

 

 

See accompanying notes to unaudited consolidated financial statements.

3


 

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited, in thousands, except per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident revenue

 

$

99,442

 

 

$

113,126

 

 

$

205,058

 

 

$

227,302

 

Management fees

 

 

159

 

 

 

 

 

 

215

 

 

 

 

Community reimbursement revenue

 

 

1,876

 

 

 

 

 

 

2,333

 

 

 

 

Total revenues

 

 

101,477

 

 

 

113,126

 

 

 

207,606

 

 

 

227,302

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (exclusive of facility lease expense and

   depreciation and amortization expense shown below)

 

 

71,307

 

 

 

74,430

 

 

 

146,709

 

 

 

149,835

 

General and administrative expenses

 

 

6,473

 

 

 

6,642

 

 

 

12,908

 

 

 

14,212

 

Facility lease expense

 

 

6,520

 

 

 

14,238

 

 

 

17,308

 

 

 

28,473

 

Stock-based compensation expense

 

 

478

 

 

 

1,638

 

 

 

1,074

 

 

 

660

 

Depreciation and amortization expense

 

 

16,321

 

 

 

15,975

 

 

 

32,036

 

 

 

31,949

 

Long-lived asset impairment

 

 

 

 

 

 

 

 

35,954

 

 

 

 

Community reimbursement expense

 

 

1,876

 

 

 

 

 

 

2,333

 

 

 

 

Total expenses

 

 

102,975

 

 

 

112,923

 

 

 

248,322

 

 

 

225,129

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

15

 

 

 

57

 

 

 

69

 

 

 

114

 

Interest expense

 

 

(11,233

)

 

 

(12,602

)

 

 

(22,903

)

 

 

(25,166

)

Write down of assets held for sale

 

 

 

 

 

 

 

 

 

 

 

(2,340

)

Gain on facility lease modification and termination, net

 

 

 

 

 

 

 

 

11,240

 

 

 

 

Gain (loss) on disposition of assets, net

 

 

 

 

 

38

 

 

 

(7,356

)

 

 

38

 

Other income (expense)

 

 

(8

)

 

 

(113

)

 

 

(7

)

 

 

(90

)

Loss from continuing operations before provision for income taxes

 

 

(12,724

)

 

 

(12,417

)

 

 

(59,673

)

 

 

(25,271

)

Provision for income taxes

 

 

(29

)

 

 

(117

)

 

 

(261

)

 

 

(247

)

Net loss

 

$

(12,753

)

 

$

(12,534

)

 

$

(59,934

)

 

$

(25,518

)

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(0.42

)

 

$

(0.41

)

 

$

(1.96

)

 

$

(0.85

)

Diluted net loss per share

 

$

(0.42

)

 

$

(0.41

)

 

$

(1.96

)

 

$

(0.85

)

Weighted average shares outstanding — basic

 

 

30,592

 

 

 

30,279

 

 

 

30,502

 

 

 

30,191

 

Weighted average shares outstanding — diluted

 

 

30,592

 

 

 

30,279

 

 

 

30,502

 

 

 

30,191

 

Comprehensive loss

 

$

(12,753

)

 

$

(12,534

)

 

$

(59,934

)

 

$

(25,518

)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

4


 

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Total

 

Balance at December 31, 2018

 

 

31,273

 

 

$

318

 

 

$

187,879

 

 

$

(149,502

)

 

$

(3,430

)

 

$

35,265

 

Adoption of ASC 842

 

 

 

 

 

 

 

 

 

 

 

12,636

 

 

 

 

 

 

12,636

 

Restricted stock awards (cancellations), net

 

 

(150

)

 

 

(2

)

 

 

2

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

(978

)

 

 

 

 

 

 

 

 

(978

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,984

)

 

 

 

 

 

(12,984

)

Balance at March 31, 2019

 

 

31,123

 

 

 

316

 

 

 

186,903

 

 

 

(149,850

)

 

 

(3,430

)

 

 

33,939

 

Restricted stock awards (cancellations), net

 

 

346

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,638

 

 

 

 

 

 

 

 

 

1,638

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,534

)

 

 

 

 

 

(12,534

)

Balance at June 30, 2019

 

 

31,469

 

 

 

320

 

 

 

188,537

 

 

 

(162,384

)

 

 

(3,430

)

 

 

23,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

31,441

 

 

$

319

 

 

$

190,386

 

 

$

(172,896

)

 

$

(3,430

)

 

$

14,379

 

Restricted stock awards (cancellations), net

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

597

 

 

 

 

 

 

 

 

 

597

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(47,181

)

 

 

 

 

 

(47,181

)

Balance at March 31, 2020

 

 

31,389

 

 

$

319

 

 

$

190,983

 

 

$

(220,077

)

 

$

(3,430

)

 

$

(32,205

)

Restricted stock awards (cancellations), net

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

478

 

 

 

 

 

 

 

 

 

478

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,753

)

 

 

 

 

 

(12,753

)

Balance at June 30, 2020

 

 

31,432

 

 

$

319

 

 

$

191,461

 

 

$

(232,830

)

 

$

(3,430

)

 

$

(44,480

)

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

CAPITAL SENIOR LIVING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(59,934

)

 

$

(25,518

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

32,036

 

 

 

31,949

 

Amortization of deferred financing charges

 

 

931

 

 

 

954

 

Deferred income

 

 

(51

)

 

 

209

 

Operating lease expense adjustment

 

 

(13,852

)

 

 

(2,457

)

Loss (gain) on disposition of assets, net

 

 

7,356

 

 

 

(38

)

Gain on facility lease modification and termination, net

 

 

(11,240

)

 

 

 

Long-lived asset impairment

 

 

35,954

 

 

 

 

Write-down of assets held for sale

 

 

 

 

 

2,340

 

Provision for bad debts

 

 

1,409

 

 

 

1,613

 

Stock-based compensation expense

 

 

1,074

 

 

 

660

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,576

)

 

 

(1,744

)

Property tax and insurance deposits

 

 

2,671

 

 

 

2,233

 

Prepaid expenses and other

 

 

(16

)

 

 

(2,251

)

Other assets

 

 

(1,715

)

 

 

(745

)

Accounts payable

 

 

(193

)

 

 

(7,083

)

Accrued expenses

 

 

6,351

 

 

 

1,207

 

Federal and state income taxes receivable/payable

 

 

227

 

 

 

(227

)

Deferred resident revenue

 

 

(55

)

 

 

(336

)

Customer deposits

 

 

(121

)

 

 

(15

)

Net cash provided by (used in) operating activities

 

 

(744

)

 

 

751

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,081

)

 

 

(7,812

)

Proceeds from disposition of assets

 

 

6,396

 

 

 

4,888

 

Net cash used in investing activities

 

 

(1,685

)

 

 

(2,924

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

2,172

 

 

 

5,268

 

Repayments of notes payable

 

 

(7,639

)

 

 

(11,905

)

Cash payments for financing lease and financing obligations

 

 

(311

)

 

 

(538

)

Deferred financing charges paid

 

 

(14

)

 

 

(221

)

Net cash used in financing activities

 

 

(5,792

)

 

 

(7,396

)

Decrease in cash and cash equivalents

 

 

(8,221

)

 

 

(9,569

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

37,063

 

 

 

44,320

 

Cash and cash equivalents and restricted cash at end of period

 

$

28,842

 

 

$

34,751

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

16,932

 

 

$

23,509

 

Lease modification and termination

 

$

6,791

 

 

$

 

Income taxes

 

$

11

 

 

$

505

 

 

See accompanying notes to unaudited consolidated financial statements.

6


 

CAPITAL SENIOR LIVING CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

 

1. BASIS OF PRESENTATION

Capital Senior Living Corporation, a Delaware corporation (together with its subsidiaries, the “Company”), is one of the largest operators of senior housing communities in the United States in terms of resident capacity. The Company owns, operates, and manages senior housing communities throughout the United States. As of June 30, 2020, the Company operated 124 senior housing communities in 23 states with an aggregate capacity of approximately 15,600 residents, including 79 senior housing communities that the Company owned, 39 senior housing communities that the Company leased, and six communities that the Company managed on behalf of a third party. The accompanying consolidated financial statements include the financial statements of Capital Senior Living Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying Consolidated Balance Sheet, as of December 31, 2019, has been derived from audited consolidated financial statements of the Company for the year ended December 31, 2019, and the accompanying unaudited consolidated financial statements, as of and for the three and six month periods ended June 30, 2020 and 2019, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have not been included pursuant to those rules and regulations. For further information, refer to the financial statements and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2020.  The Company meets the SEC’s definition of a “Smaller Reporting Company,” and therefore qualifies for the SEC’s reduced disclosure requirements for smaller reporting companies.

In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position as of June 30, 2020, results of operations for the three and six month periods ended June 30, 2020 and 2019, and cash flows for the six month periods ended June 30, 2020 and 2019. The results of operations for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020.

2. GOING CONCERN UNCERTAINTY

A new strain of coronavirus, which causes the viral disease known as COVID-19, has spread from China to many other countries, including the United States. The United States broadly continues to experience the pandemic caused by COVID-19, which has significantly disrupted, and likely will continue to disrupt for some period, the nation’s economy, the senior living industry, and the Company’s business.

In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to recent quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company has restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As a result, COVID-19 has caused, and management expects will continue to cause, a decline in the occupancy levels at the Company’s communities, which has negatively impacted, and likely will continue to negatively impact the Company’s revenues and operating results, which depend significantly on such occupancy levels.  Reduced controllable move-out activity during the pandemic may partially offset future adverse revenue impacts.

In addition, the recent outbreak of COVID-19 has required the Company to incur, and management expects will require the Company to continue to incur, significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company’s residents and employees, labor and specialized disinfecting and cleaning services. Further, residents at certain of its senior housing communities have tested positive for COVID-19, which has increased the costs of caring for the residents and resulted in reduced occupancies at such communities. The Company incurred $3.2 million in COVID-19 related expenses since the onset of the pandemic, $2.9 million of which was incurred in the second quarter of 2020.

 

Accounting Standards Codification (“ASC”) 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

7


 

In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including (1) uncertainty around the impact of COVID-19 on the Company’s operations and financial results, and (2) operating losses and negative cash flows from operations for projected fiscal years 2020 and 2021. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the twelve-month period following the date the financial statements are issued.

 

The Company is implementing plans as discussed below, which includes strategic and cash-preservation initiatives, which are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) improved operating cash flows due to strategic and cash preservation initiatives discussed below, (2) debt forbearance, to the extent available on acceptable terms, and (3) forbearance on rent payments to landlords, to the extent available on acceptable terms.

 

Strategic and Cash Preservation Initiatives

 

The Company has taken or intends to take the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to operate as a going concern:

 

 

In the first quarter of 2019, the Company implemented a 3-year operational improvement plan which began to show improved operating results during 2020, prior to the onset of COVID-19, and is expected to continue to drive incremental profitability improvements.

 

The Company has implemented additional proactive spending reductions to improve liquidity, including reduced discretionary spending and monitoring capital spending.

 

The Company has recently taken measures to exit underperforming leases in order to strengthen the Company’s balance sheet and allow the Company to strategically invest in certain existing communities (see “Note 5- Dispositions and Other Significant Transactions”). Recent actions the Company has taken to improve the Company’s future financial position include:

 

o

In the first quarter of 2020, the Company entered into agreements with two of its largest landlords, Welltower, Inc. (“Welltower”) and Ventas, Inc. (“Ventas”) providing for the early termination of the Master Lease Agreements with such landlords covering certain of its senior housing communities. Pursuant to such agreements, the Company agreed to pay Welltower and Ventas reduced monthly rental amounts, beginning February 1, 2020, and to convert such lease agreements into property management agreements with the Company as manager on December 31, 2020, if such communities have not been transitioned to a successor operator.

 

o

In the first quarter of 2020, the Company also entered into an agreement with Healthpeak Properties, Inc. (“Healthpeak”) providing for the early termination of one of two Master Lease Agreements with Healthpeak covering six of its senior housing communities. This Master Lease Agreement was converted to a management agreement under a REIT Investment Diversification Act (“RIDEA”) structure pursuant to which the Company agreed to manage the communities that were subject to such lease agreement until such communities are sold by Healthpeak.

 

o

In the first quarter of 2020, the Company transitioned one of the communities leased from Healthpeak to a new operator.

 

The Company is currently evaluating the opportunity to sell certain communities that would provide positive net proceeds.

 

In May 2020, the Company entered into short-term debt forbearance agreements with a number of its lenders and continues to discuss further debt relief with its lenders (see “Note 6- Debt Transactions”).

 

In May 2020, the Company entered into an agreement with Healthpeak effective April 1, 2020, through the lease term ending October 31, 2020, under which the Company began paying Healthpeak rent of approximately $0.7 million per month for eight senior housing communities subject to a Master Lease Agreement with Healthpeak in lieu of approximately $0.9 million of monthly rent due and payable under the Master Lease Agreement covering such communities.  The remaining rent is subject to payment by the Company pursuant to a three-year note payable with final payment to be on or before November 1, 2023.

 

The Company has elected to utilize the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) payroll tax deferral program to delay payment of a portion of payroll taxes estimated to be incurred from April 2020 through December 2020.  At June 30, 2020, the Company had deferred $2.7 million in payroll taxes, which was included in accrued expenses on the Company’s Consolidated Balance Sheets.

 

In conjunction with the CARES Act, the Company has received approximately $0.6 million in relief from state agencies, and is applying for additional federal funding.

 

In July 2020, the Company initiated a process which is intended to transfer the operations and ownership of 18 communities that are either underperforming or are in underperforming loan pools to Fannie Mae, the holder of nonrecourse debt on such

8


 

 

communities. The transfer will reduce the Company’s debt by $216.3 million. The Company is in negotiations with Fannie Mae related to an agreement that is intended to assure the orderly transition of such communities.

 

The Company is evaluating possible debt and capital options.

 

The Company’s plans are designed to provide the Company with adequate liquidity to meet its obligations for at least the twelve-month period following the date its financial statements are issued; however, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control or may not be available on terms acceptable to the Company, or at all, many of which have been made worse or more unpredictable by COVID-19.  Accordingly, management determined it was not probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the twelve-month period following the date the financial statements are issued.  

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Restricted cash consists of deposits required by certain lenders as collateral pursuant to letters of credit. The deposits must remain so long as the letters of credit are outstanding which are subject to renewal annually.

The following table sets forth the Company’s cash and cash equivalents and restricted cash (in thousands):

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

25,460

 

 

$

21,698

 

Restricted cash

 

 

3,382

 

 

 

13,053

 

 

 

$

28,842

 

 

$

34,751

 

 

Long-Lived Assets and Impairment

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation period may need to be changed. The Company considers internal factors such as net operating losses along with external factors relating to each asset, including contract changes, local market developments, and other publicly available information to determine whether impairment indicators exist.

If an indicator of impairment is identified, the carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. Recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation and 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, the Company recognizes an impairment loss. Asset groups were established at the individual property level and consist of property and equipment, net for owned properties and property and equipment, net and right-of-use assets, net for leased properties.  The Company determines the fair value of operating lease right-of-use (“ROU”) assets by comparing the contractual rent payments to estimated market rental rates. Long-lived ROU and fixed assets are valued at fair value using inputs classified as Level 3 in the fair value hierarchy, which are unobservable inputs based on the Company’s assumptions. Impairment, if any, is recorded in the period in which the impairment occurred.

Assets Held for Sale

Assets are classified as held for sale when the Company has determined all of the held-for-sale criteria have been met. The Company determines the fair value, net of costs of disposal, of an asset on the date the asset is categorized as held for sale, and the asset is

9


 

recorded at the lower of its fair value, net of cost of disposal, or carrying value on that date. The Company periodically reevaluates assets held for sale to determine if the assets are still recorded at the lower of fair value, net of cost of disposal, or carrying value. The fair values are generally determined based on market rates, industry trends, and recent comparable sales transactions. The actual sales price of these assets could differ significantly from the Company’s estimates.

During the first quarter of 2019, the Company classified one senior housing community located in Kokomo, Indiana, as held for sale, resulting in $4.9 million being reclassified as assets held for sale and $3.5 million of corresponding mortgage debt being reclassified to the current portion of notes payable within the Consolidated Balance Sheets. The Company determined, using level 2 inputs a