NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Sonida Senior Living, Inc., (formerly known as Capital Senior Living Corporation), a Delaware corporation (together with its subsidiaries, the “Company”), is one of the leading owner-operators of senior housing communities in the United States in terms of resident capacity. The Company owns, operates, develops and manages senior housing communities throughout the United States. As of December 31, 2021, the Company operated 75 senior housing communities in 18 states with an aggregate capacity of approximately 9,500 residents, including 60 senior housing communities that the Company owned and 15 communities that the Company managed on behalf of third parties. As of December 31, 2021, the Company had two properties that the Company no longer operates that were in the process of transitioning legal ownership back to the Federal National Mortgage Association ("Fannie Mae"). The accompanying consolidated financial statements include the financial statements of Sonida Senior Living, Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
2. 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 counterparties as collateral pursuant to letters of credit. The deposit must remain so long as the letters of credit, which are subject to renewal annually, are outstanding.
In August 2021, the Company executed a one year extension of the Company's loan agreement with PNC Bank, National Association (successor to BBVA) ("PNC Bank"), which extended the maturity date to December 10, 2022. PNC Bank required a debt service reserve of $0.9 million as part of this extension, which is included in the restricted cash balances as of December 31, 2021. The PNC Bank loan agreement was refinanced with a different lender in March 2022, subsequent to year end, see "Note 17- Subsequent events."
The following table sets forth our cash and cash equivalents and restricted cash (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
Cash and cash equivalents | $ | 78,691 | | | $ | 17,885 | |
Restricted cash | 4,882 | | | 4,982 | |
| $ | 83,573 | | | $ | 22,867 | |
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 reviewed the carrying value of its property and equipment to determine if facts and circumstances suggested that they may be impaired or that the depreciation period may need to be changed. The Company considers internal factors, such as net operating losses, along with external factors relating to each asset, including contract changes, local market developments and other publicly available information to determine whether impairment indicators exist.
If an indicator of impairment is identified, recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, the Company estimates fair value of the asset group and records an impairment loss when the carrying amount exceeds fair value.
Assets Held for Sale
Assets are classified as held for sale when the Company has determined the held-for-sale criteria has 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 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.
During the year ended December 31, 2019, the Company determined a remeasurement write down of approximately $2.3 million was required to adjust the carrying value of a community classified as held for sale to its fair value, net of cost of disposal, which is included in gain (loss) on disposition of assets, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The community was sold prior to December 31, 2019. The Company did not recognize any expense related to assets held for sale during the years ended December 31, 2021 and 2020. 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. There were no senior housing communities classified as held for sale by the Company at December 31, 2021 or 2020.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was approximately $1.1 million, $1.9 million and $3.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet arrangements at December 31, 2021 or 2020.
Income Taxes
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which the Company expected those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies and future expectations of income.
The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted which contained beneficial provisions to the Company, including the deferral of certain employer payroll taxes and the acceleration of the alternative minimum tax credit refunds. Additionally, on December 27, 2020, the Consolidated Appropriations Act was enacted providing that electing real property trades or business electing out of Section 163(j)(7)(B) will apply a 30-year Alternative Depreciation System ("ADS") life to residential real property place in service before January 1, 2018. This property had historically been assigned a 40-year ADS life under the Tax Cuts and Jobs Act. The effects were reflected in the tax provision for the year ended December 31, 2020 through an adjustment to deferred temporary differences.
Revenue Recognition
Resident revenue consists of fees for basic housing and certain support services and fees associated with additional housing and expanded support requirements such as assisted living care, memory care and ancillary services. Basic housing and certain support services revenue is recorded when services are rendered and amounts billed are due from residents in the period in which the rental and other services are provided. Such revenue totaled approximately $187.4 million and $350.6 million, and $440.1 million, respectively, for the fiscal years ended December 31, 2021, 2020 and 2019. Residency agreements are generally short term in nature with durations of one year or less and are typically terminable by either party, under certain circumstances, upon providing 30 days’ notice, unless state law provides otherwise, with resident fees billed monthly in advance. The Company had contract liabilities for deferred fees paid by our residents prior to the month housing and support services were to be provided totaling approximately $2.3 million and $3.3 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets at December 31, 2021 and 2020. Deferred fees paid by our residents recognized into revenue during fiscal years 2021, 2020 and 2019 totaled approximately $3.3 million, $4.3 million and $4.5 million respectively, and were recognized as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
Revenue for certain ancillary services is recognized as services are provided, and includes fees for services such as medication management, daily living activities, beautician/barber, laundry, television, guest meals, pets, and parking which are generally billed monthly in arrears totaled approximately $1.2 million, $2.3 million and $3.7 million for fiscal years 2021, 2020 and 2019, respectively, as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company's senior housing communities have residency agreements that generally require the resident to pay a community fee prior to moving into the community and are recorded initially by the Company as deferred revenue. At December 31, 2021 and 2020, the Company had contract liabilities for deferred community fees totaling approximately $0.8 million and $0.9 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s Consolidated Balance Sheets.
The Company recognized community fees as a component of resident revenue within the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) of approximately $1.6 million, $4.2 million and $2.9 million during the years ended December 31, 2021, 2020, and 2019, respectively.
Revenues from the Medicaid program accounted for approximately 9.6% of the Company’s revenue in fiscal year 2021, 6.4% of the Company’s revenue in fiscal year 2020, and 5.9% of the Company’s revenue in fiscal year 2019. During fiscal years 2021, 2020 and 2019, 42, 41 and 41, respectively, of the Company’s communities were providers of services under the Medicaid program. Accordingly, these communities were entitled to reimbursement under the Medicaid program at established rates that were lower than private pay rates. Resident revenues for Medicaid residents were recorded at the reimbursement rates as the rates were set prospectively by the applicable state upon the filing of an annual cost report. None of the Company’s communities were providers of services under the Medicare program during fiscal years 2021, 2020 or 2019.
Laws and regulations governing the Medicaid program are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on its Consolidated Financial Statements. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicaid program.
The Company has management agreements whereby it manages certain communities on behalf of third party owners under contracts that provide for periodic management fee payments to the Company. The Company recognized revenue from management fees of $3.6 million and $1.8 million during the fiscal years ended December 31, 2021 and 2020, respectively with no comparable amount in 2019. The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company’s estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in “community reimbursement revenue” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The related costs are included in “community reimbursement expense” on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The Company recognized community reimbursement revenue and expense of $40.9 million and $24.9 million during the fiscal years ended December 31, 2021 and 2020, respectively, with no comparable amount in 2019.
Credit Risk and Allowance for Doubtful Accounts
The Company’s resident receivables are generally due within 30 days from the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $4.7 million and $6.1 million at December 31, 2021 and 2020, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts. Adjustments are made to the allowance, as necessary. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses.
Lease Accounting
Effective January 1, 2019, the Company adopted the new lease standard provisions of Accounting Standards Codification ("ASC") 842. Due to the adoption of ASC 842, the unamortized balances of lease acquisition costs and lease incentives were reclassified as a component of the respective operating lease right-of-use asset. Additionally, the unamortized balance of deferred gains associated with sale leaseback transactions totaling approximately $10.0 million was written-off to retained deficit on the date of adoption.
Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
Operating lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term on the lease commencement date. When the implicit lease rate is not determinable, management uses the Company’s incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future minimum lease payments. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms.
Financing lease right-of-use assets are recognized within property and equipment and leasehold improvements, net on the Company’s Consolidated Balance Sheets. The Company recognizes interest expense on the financing lease liabilities utilizing the effective interest method. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term.
Modifications to existing lease agreements, including changes to the lease term or payment amounts, are reviewed to determine whether they result in a separate contract. For modifications that do not result in a separate contract, management reviews the lease classification and re-measures the related right-of-use assets and liabilities at the effective date of the modification.
Certain of the Company’s lease arrangements have lease and non-lease components. The Company accounts for the lease components and non-lease components as a single lease component for all classes of underlying assets. Leases with an expected lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
Self-Insurance Liability Accruals
The Company offers full-time employees an option to participate in its health and dental plans. The Company is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of employee health and dental benefits, net of employee contributions, is shared between the corporate office and the senior housing communities based on the respective number of plan participants. Funds collected are used to pay the actual program costs, including estimated annual claims, third-party administrative fees, network provider fees, communication costs and other related administrative costs incurred by the plans. Claims are paid as they are submitted to the Company’s third-party administrator. The Company records a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. Additionally, the Company may be liable for an Employee Shared Responsibility Payment (“ESRP”) pursuant to the Patient Protection and Affordable Care Act. The ESRP is applicable to employers that (i) had 50 or more full-time equivalent employees, (ii) did not offer minimum essential coverage (“MEC”) to at least 70% of full-time employees and their dependents, or (iii) did offer MEC to at least 70% of full-time employees and their dependents that did not meet the affordable or minimum value criteria and had one or more full-time employees certified as being allowed the premium tax credit. The Internal Revenue Service ("IRS") determines the amount of the proposed ESRP from information returns completed by employers and from income tax returns completed by such employers' employees. Management believes that the recorded liabilities and reserves established for outstanding losses and expenses are adequate to cover the ultimate cost of losses and expenses incurred at December 31, 2021. It is possible that actual claims and expenses may differ from established reserves. Any subsequent changes in estimates are recorded in the period in which they are determined.
The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgments based on projected future events, including among other factors, potential settlements for pending claims, known incidents which may result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums and estimated litigation costs. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, it is possible the actual expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in the period in which they are determined.
Redeemable Preferred Stock
The Company's Series A Preferred Stock is convertible outside of our control and in accordance with ASC 480-10-S99-3A and as such is classified as mezzanine equity. The Series A Preferred Stock was initially recorded at fair value upon issuance, net of issuance costs and discounts. The holders of Series A Preferred Stock are entitled to vote with the holders of common stock on all matters submitted to a vote of stockholders of the Company. As such, the Conversant Investors, in combination with their common stock ownership as of December 31, 2021, have voting rights in excess of 50% of the Company’s total voting stock. It is deemed probable that the Series A Preferred Stock could be redeemed for cash by the Conversant Investors, and as such the Series A Preferred Stock is required to be remeasured to its redemption value each period.
Net Income (Loss) Per Common Share
For the year ended December 31, 2021, the Company used the two-class method to compute net income per common share because the Company has issued securities (Series A Preferred Stock) that entitle the holder to participate in dividends and earnings of the Company. Under this method, net income is reduced by the amount of any dividends earned during the period. The remaining earnings (undistributed earnings) are allocated based on the weighted-average shares outstanding of common stock and Series A Preferred Stock (on an if-converted basis) to the extent that each preferred security may share in earnings as if all of the earnings for the period had been distributed. The total earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the Series A Preferred Stock have no obligation to fund losses.
Diluted net income (loss) per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options, stock based compensation awards and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding Series A Preferred Stock under the "if-converted" method when calculating diluted earnings per share, in which it is assumed that the outstanding Series A Preferred Stock converts into common stock at the beginning of the period or when issued, if later. The Company reports the more dilutive of the approaches (two class or "if-converted") as its diluted net income per share during the period.
The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except for per share amounts):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Basic net (loss) income per common share calculation: | | | | | |
Net income (loss) | $ | 125,607 | | | $ | (295,368) | | | $ | (36,030) | |
Less: Dividends on Series A Preferred Stock | (718) | | | — | | | — | |
Less: Remeasurement of Series A Preferred Stock | (13,474) | | | — | | | — | |
Less: Undistributed earnings to participating securities | (6,266) | | | — | | | — | |
Net (loss) income attributable to common stockholders | $ | 105,149 | | | $ | (295,368) | | | $ | (36,030) | |
Weighted average shares outstanding — basic (1) | 2,750 | | | 2,050 | | | 2,016 | |
Basic net income (loss) per share | $ | 38.24 | | | $ | (144.08) | | | $ | (17.87) | |
| | | | | |
Diluted net (loss) income per common share calculation: | | | | | |
Net (loss) income attributable to common stockholders | $ | 105,149 | | | $ | (295,368) | | | $ | (36,030) | |
Weighted average shares outstanding — diluted | 2,773 | | | 2,050 | | | 2,016 | |
Diluted net income (loss) per share | $ | 37.92 | | | $ | (144.08) | | | $ | (17.87) | |
(1) Results for the period ended December 31, 2019 and share amounts have been adjusted to reflect the 1-for-15 Reverse Stock Split. See "Note 10- Equity."
The following weighted-average shares of securities were not included in the computation of diluted net income (loss) per common share as their effect would have been antidilutive:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(shares in thousands) | 2021 | | 2020 | | 2019 |
Series A Preferred Stock (if converted) | 163.8 | | | — | | | — | |
Restricted stock awards | 26.6 | | | 23.7 | | | 63.5 | |
Warrants | 163.8 | | | — | | | — | |
Stock options | 9.8 | | | 9.8 | | | 9.8 | |
Total | 364.0 | | | 33.5 | | | 73.3 | |
Segment Information
The Company evaluates the performance and allocates resources of its senior living communities based on current operations and market assessments on a property-by-property basis. The Company does not have a concentration of operations geographically or by product or service as its management functions are integrated at the property level. The Company has determined that its operating units meet the criteria in ASC Topic 280, Segment Reporting, to be aggregated into one reporting segment. As such, the Company operates in one segment.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The Company early adopted ASU 2020-06 effective January 1, 2021 using the modified retrospective method of adoption. The adoption of ASU 2020-06 did not have a material impact on its consolidated financial statements and disclosures.
Effective January 1, 2019, the Company adopted the new lease standard provisions of ASC 842. Due to the adoption of ASC 842, the unamortized balances of lease acquisition costs and lease incentives were reclassified as a component of the respective operating lease right-of-use asset. Additionally, the unamortized balance of deferred gains associated with sale leaseback transactions totaling approximately $10.0 million was written-off to retained deficit on that date of adoption.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies certain disclosure requirements in Topic 820, such as the removal of the need to disclose the amount of and reason for transfers between Level 1 and Level 2 of the fair value hierarchy, and several changes related to Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 on January 1, 2020, the adoption of which did not have a material impact on its consolidated financial statements and disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. Current U.S. generally accepted accounting principles require an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU 2016-13 replaces the current incurred loss methodology for credit losses and removes the thresholds that companies apply to measure credit losses on financial statements measured at amortized cost, such as loans, receivables and held-to-maturity debt securities with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. For smaller reporting companies, ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR"). The provisions of this standard are available for election through December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by ASU 2020-04.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related footnotes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to current period presentation.
3. Impairment of Long-Lived Assets
The Company recognized non-cash impairment charges of property and equipment, net of $6.5 million during the year ended December 31, 2021, which related to one owned community. Due to the recurring net operating losses, the Company concluded the assets related to this community had indicators of impairments and the carrying value was not fully recoverable. The fair value of the property and equipment, net of this community was determined using an income capitalization approach considering stabilized facility operating income and market capitalization rates of 8.25%. This impairment charge is primarily due to the COVID-19 pandemic and lower than expected operating performance at the community and reflects the amount by which the carrying amount of these assets exceeded their fair value.
During the first quarter of 2020, the Company determined that the modifications of certain of its master lease agreements (see “Note 4- Significant Transactions”) and adverse impacts on the Company’s operating results resulting from the COVID-19 pandemic were indicators of potential impairment of its long-lived assets. As such, the Company evaluated its long-lived asset groups for impairment and identified communities with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets.
In March 2020, the Company entered into forbearance agreements with Ventas, Inc. ("Ventas") and Welltower, Inc. ("Welltower"), which, among other things, provided that the lease agreements covering the communities would be converted into property management agreements with the Company as manager on December 31, 2020 if the properties had not transitioned to a successor operator on or prior to such date (see “Note 4- Significant Transactions”). The Company’s leases with Ventas and Welltower were originally scheduled to mature in 2025 and 2026. Due to the modification of the lease term and the expected impacts of the COVID-19 pandemic, the Company evaluated certain owned communities and all leased communities for impairment and tested the recoverability of these assets by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values. For communities in which the historical carrying value was not recoverable, the Company compared the estimated fair value of the assets to their carrying amount and recorded an impairment charge for the excess of carrying amount over fair value. For the operating lease right-of-use assets, fair value was
estimated utilizing a discounted cash flow approach based on historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio. The fair values of the property and equipment, net of these communities, were primarily determined utilizing the cost approach, which determines the current replacement cost of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence, and economic obsolescence. This value represents the amount required to replace the asset as if new and adjusts to reflect usage. These fair value measurements are considered Level 3 measurements within the valuation hierarchy. During the first quarter of 2020, the Company recorded non-cash impairment charges of $6.2 million and $29.8 million to operating lease right-of-use assets, net and property and equipment, net, respectively.
During the third quarter of 2020, the Company recorded non-cash impairment charges of $1.3 million and $1.1 million to operating lease right-of-use assets, net and property and equipment, net, respectively, due to a change in the useful life of 15 of its communities, all of which transferred to new operators. Due to the changes in useful lives, the Company concluded the assets related to those properties had indicators of impairment and the carrying values were not fully recoverable. The fair values of the right-of-use assets were estimated, using Level 3 inputs, as defined in the accounting standards codification, utilizing a discounted cash flow approach based upon historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio. In addition, during the third quarter of 2020, the Company recorded a non-cash impairment charge of $0.8 million to property and equipment, net of one owned community. The fair value of the property and equipment, net of this community was determined using the sales comparison approach, which utilizes the sales of comparable properties, and the income capitalization approach, which reflects the property’s income-producing capabilities. This impairment charge is primarily due to the COVID-19 pandemic and lower than expected operating performance at the community and reflects the amount by which the carrying amount of these assets exceeded their fair value.
At December 31, 2020, the Company reviewed the carrying value of its property and equipment and determined that impairment indicators existed for one of its properties due to the challenged occupancy at the property driven by the impact of COVID-19. The fair value of the property and equipment, net of this community was determined using the sales comparison approach, which utilizes the sales of comparable properties, and the income capitalization approach, which reflects the property’s income-producing capabilities. The Company compared the carrying value of the community’s assets to the anticipated undiscounted cash flows and determined that the carrying value was not recoverable. The Company determined the fair value of the fixed assets using inputs classified as Level 3 in the fair value hierarchy, which are unobservable inputs based on the Company’s assumptions, and recorded a $2.6 million impairment to property and equipment, net in the fourth quarter of 2020.
In total, the Company recognized non-cash impairment charges of property and equipment, net and operating lease right of use assets of $34.3 million and $7.5 million, respectively, for the year ended December 31, 2020.
During the year ended December 31, 2019 the Company recorded impairment charges of $1.6 million and $1.4 million related to fixed assets and operating lease right of use assets, respectively, due to a change in the useful life of its community located in Boca Raton, Florida, which transferred to a new operator in the first quarter of 2020. Due to the change in useful life, the Company concluded the assets related to that property were not recoverable. During the year ended December 31, 2021, 2020 and 2019, for long-lived assets where indicators of impairment were identified, tests of recoverability were performed and the Company has concluded its property and equipment is recoverable and does not warrant adjustment to the carrying value or remaining useful lives, except for the long-lived assets noted above.
4. Significant Transactions
Investment Agreement
On October 1, 2021, the Company entered into an Amended and Restated Investment Agreement (the "A&R Investment Agreement") with Conversant Dallas Parkway (A) LP (“Conversant Fund A”) and Conversant Dallas Parkway (B) LP ("Conversant Fund B" and, together with Conversant Fund A, the “Conversant Investors”), affiliates of Conversant Capital LLC, which amended and restated in its entirety an Investment Agreement that the Company entered into with the Conversant Investors on July 22, 2021 and was subsequently amended (the “Original Investment Agreement”). Pursuant to the A&R Investment Agreement, (i) the Conversant Investors agreed to purchase from the Company, and the Company agreed to sell to the Conversant Investors, in a private placement (the “Private Placement”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), 41,250 shares of newly designated Series A convertible preferred stock, par value $0.01 per share (the “Series A Preferred Stock”) at a price per share equal to $1,000 and 1,650,000 shares of common stock, par value $0.01 per share, at a price per share equal to $25; (ii) subject to the consummation of the transactions contemplated by the A&R Investment Agreement, the Conversant Investors would receive 1,031,250 warrants, each evidencing the right to purchase one share of common stock at a price per share of $40 and with an exercise expiration date of five years after the Closing Date; (iii) the Company amended the terms of its previously announced rights offering under the Original Investment Agreement to allow the holders of record of its outstanding shares of common stock at the close of business on September 10, 2021 the right
to purchase at $30 per share, 1.1 shares of common stock for each share of common stock held, which would result in gross cash proceeds to the Company of approximately $72.3 million (the “Rights Offering”), in each case as more fully described in the A&R Investment Agreement.
In addition, pursuant to the A&R Investment Agreement, the Conversant Investors agreed to partially backstop the Amended Rights Offering up to $50.5 million through the purchase of additional shares of the Company's common stock at $30 per share. In consideration for the backstop commitments of the Conversant Investors, the Company agreed to pay to the Conversant Investors, as a premium, 174,675 shares of common stock. On or after the closing date under the A&R Investment Agreement, the Company may from time to time request additional investments from the Conversant Investors in shares of Series A Preferred Stock for future investment in accretive capital expenditures and acquisitions post-closing up to an aggregate amount equal to $25.0 million, subject to certain conditions.
Simultaneously with the entry into the Investment Agreement, the Company and the Conversant Investors entered into a $17.3 million secured promissory note (the “Promissory Note”) to provide interim debt financing which was scheduled to mature in July 2022 and was subsequently amended. The Promissory Note was amended by the A&R Investment Agreement to reduce the aggregate indebtedness outstanding by $1.3 million, resulting in an amended secured promissory note in the amount of $16.0 million. The Promissory Note was fully repaid upon closing of the transactions contemplated by the A&R Investment Agreement and the Company recognized a $1.0 million loss on extinguishment of the Promissory Note. See "Note 9- Notes Payable."
The transactions contemplated by the A&R Investment Agreement were subject to stockholder approval, which was received on October 22, 2021. The Rights Offering expired on October 27, 2021 with subscription rights to purchase 1,133,941 shares exercised by existing stockholders. The transactions contemplated by the A&R Investment Agreement closed (the “Closing”) on November 3, 2021 and resulted in net proceeds to the Company of $141.4 million after paying customary transaction and closing costs of approximately $13.4 million. The Conversant Investors and Arbiter Partners QP, LP (“Arbiter”) backstopped the Rights Offering, pursuant to which they purchased an additional 1,160,806 shares of common stock and 114,911 shares of common stock, respectively, and received a backstop fee of 174,675 shares of common stock and 17,292 shares of common stock, respectively.
At the Closing, the Company, the Conversant Investors and Silk Partners LP (“Silk”) entered into an Investor Rights Agreement, pursuant to which, among other things, the Company's board of directors was reconstituted to consist of four new directors designated by the Conversant Investors, two new directors designated by Silk and three continuing directors.
At the Closing, all outstanding performance-based stock based compensation including restricted shares were converted at target award levels to time-based restricted stock awards that will vest on the applicable scheduled vesting dates or the relevant award termination date applicable to such performance shares. See “Note 11- Stock-Based Compensation.”
In March 2022, subsequent to year end, the Company completed the refinancing of certain existing mortgage debt. See "Note 17- Subsequent Events." This debt refinancing, together the enhanced liquidity from the proceeds raised by the A&R Investment Agreement and other liquidity sources addressed the relevant conditions and events that previously raised substantial doubt about the Company's ability to continue as a going concern.
Disposition of Boca Raton, Florida Community
Effective January 15, 2020, the Company’s leased senior living community located in Boca Raton, Florida transitioned to a new operator. In conjunction with the transition, the Company paid the lessor, Healthpeak Properties, Inc ("Healthpeak"), a one-time $0.3 million termination payment as a prepayment against the remaining lease payments and was relieved of any additional obligation to Healthpeak with regard to that property and the lease was terminated as to this property. The Company recorded an approximate $1.8 million gain on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.
Disposition of Merrillville, Indiana Community
Effective March 31, 2020, the Company sold one community located in Merrillville, Indiana for a total purchase price of $7.0 million and received approximately $6.9 million in cash proceeds after paying customary closing costs. The community was unencumbered by any mortgage debt. The Company recognized a loss of $7.4 million on the disposition, which is included in loss on disposition of assets, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020. The community was comprised of 171 assisted living and 42 memory care units.
Disposition of Canton, Ohio Community
On November 24, 2020, the Company closed on the sale of one senior housing community located in Canton, Ohio, for a total purchase price of $18.0 million and received approximately $6.4 million in net proceeds after retiring outstanding mortgage debt of $10.8 million and paying customary transaction and closing costs. The Company recorded a $2.0 million gain on the sale of the property, which is included in gain (loss) on disposition of assets, net in the year ended December 31, 2020. In November 2020, the Company entered into a management agreement with the successor owner to manage the senior living community, pursuant to which the Company receives a management fee based on the gross revenues of the property.
Early Termination of Master Lease Agreements
As of December 31, 2020, the Company had exited all of its master lease agreements as described below.
As of December 31, 2019, the Company leased 46 senior housing communities from certain real estate investment trusts (“REITs”). The Company transitioned one community to a different operator effective January 15, 2020. During the first quarter of 2020, the Company entered into agreements that restructured or terminated certain of its master lease agreements with each of its landlords as further described below.
Ventas
As of December 31, 2019, the Company leased seven senior housing communities from Ventas, Inc. ("Ventas"). The term of the Ventas lease agreement was previously scheduled to expire on September 30, 2025. On March 10, 2020, the Company entered into an agreement with Ventas (as amended, the “Ventas Agreement”), providing for the early termination of its Master Lease Agreement with Ventas covering all seven communities. Pursuant to such agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Ventas rent of approximately $1.0 million per month for such communities as compared to approximately $1.3 million per month that would otherwise have been due and payable under the Master Lease Agreement. In addition, the Ventas Agreement provided that the Company would not be required to comply with certain financial covenants of the Master Lease Agreement during the forbearance period, which terminated on December 31, 2020. In conjunction with the Ventas Agreement, the Company released to Ventas $4.1 million in security deposits and $2.5 million in escrow deposits held by Ventas, and Ventas reduced the amounts and term of the Company’s lease payments, and effectively eliminated the Company’s lease termination obligation, which was $11.4 million at December 31, 2019. The Master Lease Agreement terminated on December 31, 2020.
In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Ventas and modification of the lease term pursuant to the Ventas Agreement was determined to be a modification of the Master Lease Agreement. As such, the Company reassessed the classification of the Master Lease Agreement with Ventas based on the modified terms and determined that the lease continued to be classified as an operating lease until the communities transitioned to a different operator or management agreement, at which time the lease would terminate. The modification resulted in a reduction to the lease termination obligation, lease liability and operating lease right-of-use asset recorded in the Company’s Consolidated Balance Sheets by approximately $11.4 million, $51.6 million and $47.8 million, respectively, during the first quarter of 2020. The Company recognized a net gain of approximately $8.4 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020 and was primarily due to the impact of the change in lease term on certain of the right-of-use asset balances. As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment during the first quarter of 2020. See “Note 3- Impairment of Long-Lived Assets.”
Under the terms of the Ventas Agreement, on December 31, 2020, Ventas elected to enter into a property management agreement with the Company as manager for a management fee based on gross revenues of the applicable community payable to the Company and other customary terms and conditions. As a result of these transactions, the Company had no remaining lease transactions with Ventas on January 1, 2021. The Company managed these seven communities on behalf of Ventas for the year ended December 31, 2021 and in November 2021, the Company announced the expansion of the Ventas relationship with three additional managed communities in Arkansas effective December 1, 2021.
Welltower
As of December 31, 2019, the Company leased 24 senior housing communities from Welltower, Inc. ("Welltower"). The initial terms of the Welltower lease agreements were previously scheduled to expire on various dates from April 2025 through April 2026. On March 15, 2020, the Company entered into an agreement with Welltower (the “Welltower Agreement”), providing for the early termination of three Master Lease Agreements between it and Welltower covering all 24 communities. Pursuant to the Welltower Agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Welltower rent of approximately $2.2 million per month for such communities as compared to approximately $2.8 million per month that would otherwise have been due and payable under the Master Lease Agreements. In addition, the Welltower Agreement provided that the Company was not required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period, which terminated on December 31, 2020. In conjunction with the
Welltower Agreement, the Company agreed to release $6.5 million in letters of credit to Welltower, which were released during the second quarter of 2020. The Welltower Agreement provided that Welltower could terminate such agreement, with respect to any or all communities upon 30 days' notice, but no later than December 31, 2020. Upon termination, Welltower could elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. The Welltower Agreement also provided that the Company was not obligated to fund certain capital expenditures under the Master Lease Agreements during the applicable forbearance period and that Welltower would reimburse the Company for certain specified capital expenditures.
In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Welltower under the then- existing Master Lease Agreements with Welltower and modification to the lease terms pursuant to the Welltower Agreement was determined to be a modification of the Master Lease Agreements. As such, the Company reassessed the classification of the Master Lease Agreements based on the modified terms and determined that each of the leases continued to be classified as an operating lease until the applicable communities transitioned to a different operator or management agreement, at which time such lease would terminate. The modification resulted in a reduction to the lease liability and operating lease right-of-use asset recorded in the Company’s Consolidated Balance Sheets by approximately $129.9 million and $121.9 million, respectively, during the first quarter of 2020. The Company recognized a gain of approximately $8.0 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020. As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment during the first quarter of 2020. See “Note 3- Impairment of Long-Lived Assets.”
During the third quarter of 2020, Welltower elected to terminate the Welltower Agreement with respect to five communities, all of which transferred to a different operator on September 10, 2020. During the fourth quarter 2020, Welltower elected to terminate the Welltower Agreement with respect to 14 communities. The Company recorded a loss on the transaction of $0.7 million, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.
The Master Lease Agreements with respect to the remaining five communities terminated on December 31, 2020, and Welltower elected to enter into a property management agreement with the Company that provided for the Company to serve as manager for a management fee based on gross revenues of the applicable community payable to the Company and other customary terms and conditions. As a result of these transactions, the Company had no remaining lease transactions with Welltower on January 1, 2021. At December 31, 2021, the Company managed four communities on behalf of Welltower.
Healthpeak
On March 1, 2020, the Company entered into an agreement with Healthpeak Properties, Inc. ("Healthpeak") (“the Healthpeak Agreement”), effective February 1, 2020, providing for the early termination of one of its Master Lease Agreements with Healthpeak, which was previously scheduled to mature in April 2026. Such Master Lease Agreement terminated and was converted into a Management Agreement under a Real Estate Investment Trust Investment Diversification and Empowerment Act structure (a “RIDEA structure”) pursuant to which the Company agreed to manage the six communities that were subject to the Master Lease Agreement until such communities were sold by Healthpeak. Pursuant to the Management Agreement, the Company received a management fee based on the gross revenues at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities. In conjunction with the Healthpeak Agreement, the Company released to Healthpeak approximately $2.6 million of security deposits held by Healthpeak. The Company remeasured the lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets at December 31, 2019 to zero, resulting in a net loss of $7.0 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for year ended December 31, 2020.
On May 20, 2020, the Company entered into an additional amendment to the other Master Lease Agreement with Healthpeak (the "Amended Healthpeak Agreement"), effective April 1, 2020 until the end of the lease term under a second Master Lease Agreement. Pursuant to the Amended Healthpeak Agreement, the Company began paying Healthpeak rent of approximately $0.7 million per month for eight senior housing communities subject to the Amended Healthpeak Agreement in lieu of approximately $0.9 million of monthly rent due and payable under the Master Lease Agreement before the agreement covering such communities. The rents paid to Healthpeak represent approximately 75% of their scheduled rates, with the remaining rent being subject to payment by the Company pursuant to a three-year note payable with final payment including accrued interest from November 1, 2021, to be made on or before November 1, 2023. At December 31, 2020, the Company had deferred $2.1 million in rent payments, which is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets. Given that the total minimum lease payments and the lease term remain unchanged, the Company has elected not to evaluate the deferral as a rent concession and did not account for the deferral as a modification to the existing lease agreement. The Company concluded the concessions provided to the Company were not contemplated by the existing lease. The Company accounted for the concession in the form of a deferral as if the lease terms
were unchanged. Accordingly, once interest begins to accrue on the deferral amount, the Company will record interest expense and accrued interest payable on the portion of the deferral amount that has yet to be paid on a monthly basis until such interest payments become due. At December 31, 2021, the Company had deferred $2.1 million in rent payments, which is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets.
In November 2020, upon the expiration of the other Master Lease Agreement with Healthpeak, the Company entered into a short-term excess cash flow lease amendment pursuant to which the Company agreed to manage the seven communities that were then subject to such lease amendment until the earlier of such time that the communities were sold by Healthpeak or until April 30, 2021. Pursuant to such agreement, the Company began paying Healthpeak monthly rent equal to any excess cash flow of the communities and earning a management fee for management of the seven communities.
In April 2021, the Company executed an agreement with Healthpeak to amend and extend its existing agreement for the remaining three properties managed by the Company on behalf of Healthpeak. In addition to a management fee based on a percentage of revenue, the Company was entitled to a monthly flat fee for three months with such fee increasing thereafter until such properties were sold or December 31, 2021, whichever was earlier. On September 30, 2021, Healthpeak sold the three remaining properties and terminated all agreements with the Company related to those three properties.
Disposition of Springfield, Missouri and Peoria, Illinois Communities
Effective October 1, 2019, the Company sold two communities located in Springfield, Missouri and Peoria, Illinois, for $64.8 million. The properties were sold in order to monetize assets deemed at peak performance and resulted in net proceeds to the Company of approximately $14.8 million. The Company recognized a gain of $38.8 million on the disposition of the two communities, which is included in gain (loss) on disposition of assets, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2019.
Disposition of Kokomo, Indiana Community
Effective May 1, 2019, the Company closed on the sale of one senior housing community located in Kokomo, Indiana, for a total purchase price of $5.0 million and received approximately $1.4 million in net proceeds after retiring outstanding mortgage debt of $3.5 million and paying customary transaction and closing costs (the “Kokomo Sale Transaction”). The community was comprised of 96 assisted living units. The Company had reported these assets as held for sale at March 31, 2019 and recorded a remeasurement write-down of approximately $2.3 million to adjust the carrying values of these assets to the sales price, less costs to sell, which was included in Gain (loss) on disposition of assets, net, on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2019.
5. Property and Equipment
As of December 31, 2021 and 2020, property and equipment, net and leasehold improvements, which include assets under financing leases, consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Asset Lives | | 2021 | | 2020 |
Land | | | $ | 46,069 | | | $ | 46,896 | |
Land improvements | 5 to 20 years | | 19,146 | | | 19,345 | |
Buildings and building improvements | 10 to 40 years | | 814,035 | | | 803,434 | |
Furniture and equipment | 5 to 10 years | | 52,602 | | | 48,694 | |
Automobiles | 5 to 7 years | | 2,662 | | | 2,824 | |
Assets under financing leases and leasehold improvements | (1) | | 2,276 | | | 10,576 | |
Construction in progress | NA | | 392 | | | 581 | |
| | | 937,182 | | | 932,350 | |
Less accumulated depreciation and amortization | | | (315,983) | | | (276,619) | |
Property and equipment, net | | | $ | 621,199 | | | $ | 655,731 | |
_____________________________________
(1)Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. Assets under financing leases and leasehold improvements include $0.3 million and $0.4 million of financing lease right-of-use assets, net of accumulated amortization, as of December 31, 2021 and 2020, respectively. Refer to “Note 16- Leases” for further information on the Company’s financing leases.
At December 31, 2021 and 2020, furniture and equipment included $4.3 million and $4.2 million of capitalized computer software development costs of which $3.8 million and $3.4 million, respectively, has been amortized and is included as a component of accumulated depreciation and amortization. At December 31, 2021 and 2020, property and equipment, net included $0.1 million and $0.5 million, respectively, of capital expenditures which had been incurred but not yet paid.
During the years ended December 31, 2021 and 2020, the Company recognized non-cash impairment of property and equipment charges of $6.5 million and $34.3 million, respectively. See “Note 3- Impairment of Long-Lived assets.”
In July 2020, the Company initiated a process which transferred the operations and ownership of 18 communities that were either underperforming or were in underperforming loan pools to Fannie Mae, the holder of non-recourse debt on such communities. As a result of events of default and the appointment of a receiver to take possession of the communities, the Company disposed of all long-lived assets for those respective properties. See “Note 8- Notes Payable.”
6. Other Assets
Other assets consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Security and other deposits | $ | 3,037 | | | $ | 2,525 | |
Other | 489 | | | 613 | |
| $ | 3,526 | | | $ | 3,138 | |
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Accrued salaries, bonuses and related expenses | $ | 9,757 | | | $ | 11,170 | |
Accrued property taxes | 7,278 | | | 9,122 | |
Accrued interest | 7,311 | | | 13,594 | |
Accrued health claims and workers compensation | 3,835 | | | 4,728 | |
Accrued professional fees | 4,102 | | | 2,599 | |
Other | 4,743 | | | 7,302 | |
| $ | 37,026 | | | $ | 48,515 | |
8. Notes Payable
Notes payable consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
December 31, |
| Weighted average interest rate | | Maturity Date | | 2021 | | 2020 |
Fixed mortgage notes payable | 4.67 | | 2022 to 2031 | | $ | 592,997 | | | $ | 787,029 | |
Variable mortgage notes | 3.36 | | 2022 to 2029 | | 88,711 | | | 122,742 | |
Notes payable - insurance | 4.60 | | 2022 | | 3,483 | | | 3,887 | |
Notes payable - other | 4.85 | | 2023 | | 2,121 | | | 2,121 | |
Notes payable, excluding deferred financing costs | | | | | $ | 687,312 | | | $ | 915,779 | |
Deferred financing costs, net | | | | | 4,201 | | | 6,886 | |
Total long-term debt | | | | | $ | 683,111 | | | $ | 908,893 | |
Less current portion | | | | | 69,769 | | | 304,164 | |
Total long-term debt, less current portion | | | | | $ | 613,342 | | | $ | 604,729 | |
2022 Mortgage Refinance
On March 10, 2022, subsequent to year end, the Company completed the refinancing of certain existing mortgage debt (the "Refinance Facility"). The Refinance Facility includes an initial term loan of $80.0 million. In accordance with ASC 470, the Company has classified $51.6 million of notes payable previously scheduled to mature in the year ended December 31, 2022 in notes payable, net of deferred loan costs and current portion on the consolidated balance sheet at December 31, 2022. See "Note 17 - Subsequent Events."
The aggregate scheduled maturities of notes payable at December 31, 2021 are as follows (in thousands) after consideration of the Refinance Facility in accordance with ASC 470:
| | | | | |
2022 (1) | $ | 70,848 | |
2023 | 24,776 | |
2024 | 152,363 | |
2025 | 114,055 | |
2026 | 127,252 | |
Thereafter | 198,018 | |
| $ | 687,312 | |
(1)At December 31, 2021, the Company included $32.0 million in outstanding debt in the current portion of notes payable, net of deferred loan costs for Fannie Mae as a result of the events of default as discussed below.
Simultaneously with the entry into the Investment Agreement, the Company and the Conversant Investors entered into a $17.3 million secured Promissory Note to provide interim debt financing to the Company and received proceeds of $16.0 million and incurred related costs of $1.0 million. The Promissory Note bore interest at a rate of 15.0% per annum on the $15.0 million net balance. Interest payments were made in cash. On October 1, 2021, the Promissory Note was amended to reduce the aggregate indebtedness outstanding by $1.3 million, resulting in an amended secured promissory note in the amount of $16.0 million. On November 3, 2021, in conjunction with the Closing of the A&R Investment Agreement, the total principal amount of $16.0 million Promissory Note was repaid and the Company recognized a $1.0 million loss on extinguishment of the Promissory Note.
Notes Payable - Insurance
In June 2021, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $1.5 million, of which $0.5 million was outstanding at December 31, 2021. The finance agreement has a fixed interest rate of 4.60% with the principal being repaid over a ten-month term.
In July 2021, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $0.2 million, of which $0.1 million was outstanding at December 31, 2021. The finance agreement has a fixed interest rate of 4.45% with the principal being repaid over a ten-month term.
In December 2021, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $3.0 million, of which $3.0 million was outstanding at December 31, 2021. The finance agreement has a fixed interest rate of 4.45% with the principal being repaid over a ten-month term.
Loan Extension and Debt Forbearance Agreement on PNC Bank Loan
In August 2021, the Company executed a one year extension of the Company's $40.5 million loan agreement with PNC Bank, National Association (successor to BBVA) ("PNC Bank") which extended the maturity date to December 10, 2022. The extension also included an additional six-month extension option if certain financial criteria were met. The loan agreement extension included a waiver for non-compliance with certain financial ratios on December 31, 2020 and eliminated the compliance requirements for minimum financial ratios. The extension required monthly principal payments of $0.2 million, an additional principal payment of $1.0 million in December 2021 and quarterly principal payments of $0.5 million beginning in March 2022 unless a certain financial ratio is attained. The required $1.0 million principal payment was made in December 2021. In March 2022, subsequent to year-end, the Company refinanced this loan with a different lender. See "Note 17- Subsequent Events."
In the second quarter of fiscal 2020, the Company entered into a loan amendment with PNC Bank pursuant to which the Company deferred monthly debt service payments for April, May and June 2020 and the deferred payments were added to principal. The deferred monthly debt service payments were paid by the Company in June 2021. At December 31, 2021, no deferred payments remained outstanding.
Transactions Involving Certain Fannie Mae Loans
The Coronavirus Aid, Relief and Economic Security Act of 2020 ("CARES Act"), among other things, permitted borrowers with mortgages from Government Sponsored Enterprises who experienced a financial hardship related to the COVID-19 pandemic to obtain forbearance of their loans for up to 90 days. On May 7, 2020, the Company entered into forbearance agreements with Berkadia Commercial Mortgage LLC, as servicer of 23 of its Fannie Mae loans covering 20 of the Company's properties. On May 9, 2020, the Company entered into a forbearance agreement with Wells Fargo Bank (“Wells Fargo”), as servicer of one Fannie Mae loan covering one of the Company's properties. On May 20, 2020, the Company entered into forbearance agreements with KeyBank, as servicer of three Fannie Mae loans covering two of the Company's properties. The forbearance agreements allowed the Company to withhold the loan payments due under the loan agreements for the months of April, May and June 2020 and Fannie Mae agreed to forbear in exercising its rights and remedies during such three month period. During this three-month loan payment forbearance, the Company agreed to pay to Fannie Mae monthly net operating income, if any, as defined in the forbearance agreement, for the properties receiving forbearance.
On July 8, 2020, the Company entered into forbearance extension agreements with Fannie Mae, which provided for a one-month extension of the forbearance agreements between the Company and Fannie Mae covering 23 of the Company's properties. The forbearance extension agreements extended the forbearance period until July 31, 2020, and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. By July 31, 2020, the Company was required to repay to Fannie Mae the deferred payments, less any payments made during the forbearance period.
On July 31, 2020, the Company made required payments to Fannie Mae totaling $0.6 million, which included the deferred payments, less payments made during the forbearance period, for five of the Company's properties with forbearance agreements. The Company elected not to pay $3.8 million on the loans for the remaining 18 properties as of that date as it initiated a process intended to transfer the operations and ownership of such properties to Fannie Mae. Therefore, the Company was in default on such loans, which were non-recourse loans.
As a result of the default, Fannie Mae filed a motion with the United States District Court (the "District Court") requesting that a receiver be appointed over the 18 properties, which was approved by the District Court. The Company agreed to continue to manage the 18 communities, subject to earning a management fee, until management of the communities was transitioned to a successor operator or legal ownership of the properties was transferred to Fannie Mae or its designee. Management fees earned from the properties were recognized as revenue when earned. In conjunction with the receivership order, the Company was required to obtain approval from the receiver for all payments and received reimbursements from Fannie Mae for reasonable operating expenses incurred on behalf of any of the 18 communities under the receivership order. As a result of the events of default and receivership order, the Company discontinued recognizing revenues and expenses related to the 18 properties effective August 1, 2020, which was the date of default. In addition, the Company concluded that it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, all amounts held in escrow by Fannie Mae were forfeited and the Company no longer had control of the properties in accordance with ASC 610-20.
During the year ended December 31, 2021, Fannie Mae completed the transition of legal ownership of 16 of the Company's properties and the Company recorded a gain on extinguishment of debt of $200.9 million, which is included in gain on extinguishment of debt in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss). At December 31, 2021, the Company included $32.0 million in outstanding debt in current portion of notes payable, net of
deferred loan costs, and $2.7 million of accrued interest in accrued expenses on the Company’s Consolidated Balance Sheets related to the remaining two properties. At December 31, 2021, the Company did not manage any properties on behalf of Fannie Mae.
Debt Forbearance Agreement on HUD Loan
The Company also entered into a debt forbearance agreement with ORIX Real Estate Capital, LLC (“ORIX”), related to a U.S. Department of Housing and Urban Development (“HUD”) loan covering one of the Company's properties pursuant to which the Company deferred monthly debt service payments for April, May and June 2020, which deferred payments were added to the regularly scheduled payments in equal installments for one year following the forbearance period and were paid in the third quarter of 2021. At December 31, 2021, no deferred payments remained outstanding.
Protective Life Amendments to Loan Agreements and Loan Modification and Temporary Deferral Agreements
On May 21, 2020, the Company entered into amendments to its loan agreements with one of its lenders, Protective Life Insurance Company (“Protective Life”), related to loans (the "Protective Life Loans") covering ten of the Company's properties. These amendments allowed the Company to defer principal and interest payments for April, May and June 2020 and to defer principal payments for July 2020 through March 2021. The Company made all required debt service payments in July, August and September 2020. On October 1, 2020, the Company entered into further amendments to its loan agreements with Protective Life Insurance Company. These amendments allowed the Company to defer interest payments for October, November and December 2020, and to extend the deferral period of principal payments through September 1, 2021, with such deferral amounts being added to principal due at maturity in either 2025, 2026 or 2031, depending upon the loan. At December 31, 2021, the Company had deferred payments of $7.2 million related to the Protective Life Insurance Company loans, of which $2.6 million was included in accrued expenses in the Company’s Consolidated Balance Sheets. The remaining $4.6 million is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets.
Other Debt Related Transactions
On May 20, 2020, the Company entered into an agreement with Healthpeak (the “Healthpeak Forbearance”), effective from April 1, 2020 through the lease term ending October 31, 2020, to defer a percentage of rent payments. At December 31, 2021, the Company had deferred $2.1 million in rent payments, which is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets. See “Note 4- Significant Transactions.”
Deferred Financing Charges
At December 31, 2021 and December 31, 2020, the Company had gross deferred loan costs of approximately $11.5 million and $14.0 million, respectively. Accumulated amortization was approximately $7.3 million and $7.1 million at September 30, 2021 and December 31, 2020, respectively.
Debt Covenant Compliance
Except for the non-compliance with Fannie Mae mortgages for the two remaining properties expected to transition back to Fannie Mae, as noted above, the Company was in compliance with all other aspects of its outstanding indebtedness at December 31, 2021.
Letters of Credit
The Company previously issued standby letters of credit with Wells Fargo, totaling approximately $3.4 million, for the benefit of Hartford Financial Services (“Hartford”) in connection with the administration of workers’ compensation. On August 27, 2020, the available letters of credit were increased to $4.0 million, all of which remained outstanding as of December 31, 2021.
The Company issued standby letters of credit with Wells Fargo, totaling approximately $1.0 million, for the benefit of Calpine Corporation in connection with certain of its energy provider agreements. In December 2021, the letters of credit were released to the Company and were included in cash and cash equivalents on the Company's Consolidated Balance Sheets at December 31, 2021.
The Company previously issued standby letters of credit with JP Morgan Chase Bank (“Chase”), totaling approximately $6.5 million, for the benefit of Welltower, in connection with certain leases between Welltower and the Company. The letters of credit were surrendered and paid to Welltower in conjunction with the Welltower Agreement during the quarter ended June 30, 2020.
The Company previously issued standby letters of credit with Chase, totaling approximately $2.9 million, for the benefit of Healthpeak in connection with certain leases between Healthpeak and the Company. The letters of credit were released to the Company during the first quarter of 2020 and were included in cash and cash equivalents on the Company’s Consolidated Balance Sheets.
9. Equity
Reverse Stock Split
On December 9, 2020, the Company’s Board of Directors approved and effected a Reverse Stock Split of the Company’s common stock at a ratio of 1-for-15. The Reverse Stock Split reduced the number of issued and outstanding shares of common stock from approximately 31,268,943 shares to approximately 2,084,596 shares. The authorized number of shares of common stock was also proportionately reduced from 65,000,000 shares to 4,333,334 shares. All share amounts for the year ended December 31, 2019 has been recast to give effect to the 1-for-15 Reverse Stock Split.
In conjunction with the Reverse Stock Split in December 2020, the Company retired all of the Treasury shares outstanding and recorded an entry to reduce additional paid in capital for $3.4 million.
10. Securities Financing
Series A Preferred Stock
The Company entered into an investment agreement with the Conversant Investors on July 22, 2021 that was subsequently amended and restated on October 1, 2021 and completed and closed on November 3, 2021. On November 3, 2021 (“Closing Date”) under the terms of the A&R Investment Agreement, the Company raised approximately $154.8 million through (i) the issuance to the Conversant Investors of 41,250 shares of newly designated Series A Preferred Stock of the Company, par value $0.01, per share at $1,000 per share (“Series A Preferred Stock”) that generated approximately $41.25 million in proceeds, 1,650,000 shares of common stock of the Company, par value $0.01 per share, per share at $25 per share and 1,031,250 warrants to purchase common stock at $40 per share that generated approximately $41.25 million in proceeds and (ii) a common stock rights offering to the Company’s existing stockholders (the “Rights Offering”), pursuant to which such common stock holders purchased an additional 1,133,941 shares of common stock at $30 per share that generated approximately $34.0 million in proceeds. The Conversant Investors and Arbiter backstopped the Rights Offering, pursuant to which they purchased an additional 1,160,806 and 114,911 shares of common stock, respectively, that generated approximately $38.3 million in proceeds, and received a backstop fee amounting to 174,675 shares of common stock and 17,292 shares of common stock, respectively. Of this total, approximately $16.0 million was used to retire the Promissory Note described herein.
With respect to the distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the Series A Preferred Stock will rank: (i) on a parity basis with each other class or series of capital stock of the Company now existing or hereafter authorized, classified or reclassified, the terms of which expressly provide that such class or series ranks on a parity basis with the Series A Preferred Stock as to dividends or rights; and (ii) junior to each other class or series of capital stock of the Company hereafter authorized, classified or reclassified, the terms of which expressly provide that class or series. In the event of a Change of Control (as defined in the A&R Investment Agreement), the Series A Preferred Stock holders hold a liquidation preference that is equal to $1,000 per share plus the sum of preferred dividends and other dividends paid as additional stock plus any accrued and unpaid dividends (the “Liquidation Preference”).
The Series A Preferred Stock has an 11% annual dividend calculated on the original investment of $41.25 million accrued quarterly in arrears and compounded. Dividends are guaranteed and may be paid in cash or in additional Series A Preferred Stock shares at the discretion of the Company’s Board of Directors. Generally, the Series A Preferred Stock holders do not have special voting rights and have voting rights consistent with common stock holders as if they were one class. Series A Preferred Stock holders are entitled to a number of votes in respect of the shares of Series A Preferred Stock owned by them equal to the number of shares of common stock into which such shares of Series A Preferred Stock would be converted. On December 31, 2021, the Company declared $0.7 million of dividends on the Series A Preferred Stock, which is included in accrued liabilities in the Consolidated Balance Sheets of the Company at December 31, 2021, with no such amount in 2020.
The Series A Preferred Stock holders ("Holder") have the right at any time to convert (an “Optional Conversion”) each share of Series A Preferred Stock into common stock as described in the Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock. The right of Optional Conversion may be exercised as to all or any portion of such Holder’s Series A Preferred Stock from time to time, except that, in each case, no right of Optional Conversion may be exercised by a Holder in respect of fewer than 1,000 shares of Series A Preferred Stock (unless such conversion relates to all shares of Series A Preferred Stock held by such Holder). If an Optional Conversion Date occurs on or after the Record Date for a Dividend and on or before the immediately following Dividend Payment Date and Dividends have been declared for such Dividend Payment Date, then (x) on such Dividend Payment Date, such Dividend will be paid to the Holder of each share of Series A Preferred Stock as of the close of business on the applicable Record Date for such Dividend, notwithstanding the Holder’s exercise of an Optional Conversion, and (y) the amount of such Dividend, if a Preferred Dividend, will not be included in the Liquidation Preference referred to in clause (a) above. As such, the Series A Preferred Stock is redeemable outside of the Company’s control and is therefore classified as mezzanine equity in the Consolidated Balance Sheet of the Company at December 31, 2021.
At any time on or after the third anniversary of the Closing Date, the Company may elect, upon the approval of a majority of the independent and disinterested directors of the Board of Directors, to convert all, but not less than all, of the outstanding shares of Series A Series A Preferred Stock into shares of common stock by delivery to the Series A Preferred Stock holders of a notice of Mandatory Conversion (as defined in the A&R Investment Agreement), provided, that the Company shall not be entitled to deliver an irrevocable notice of Mandatory Conversion unless the volume-weighted average price (“VWAP”) per share of common stock exceeds 150% of the Conversion Price (as defined in the A&R Investment Agreement) for the 30 consecutive trading days immediately preceding the notice. The Company has the option to exercise its right to require the Conversant Investors to convert their Series A Preferred Stock, once VWAP has met the above requirements for this contingent call.
In the case of a Mandatory Conversion, each share of Series A Preferred Stock then outstanding will be converted into (i) a number of shares of common stock equal to the quotient of (a) the Liquidation Preference of such share of Series A Preferred Stock as of the applicable Mandatory Conversion date, divided by (b) the Conversion Price as of the applicable Mandatory Conversion date and (ii) cash in lieu of fractional shares. If the Mandatory Conversion date occurs on or after the record date for a dividend and on or before the immediately following dividend payment date and dividends have been declared for such date, then such dividend will be paid to the Series A Preferred Stock holder of each share of Series A Preferred Stock as of the close of business on the applicable record date, notwithstanding the Company’s exercise of a Mandatory Conversion, and the amount of such dividend, if a Series A Preferred Stock dividend, will not be included in the Liquidation Preference.
The Company may, at its option, irrevocably elect to redeem the Series A Preferred Stock, in whole or in part, at any time (i) on or after the forty-second month anniversary of the Closing Date (and before the seventh anniversary), at a cash redemption price per share of Series A Preferred Stock equal to the greater of (A) 100% of the Liquidation Preference as of such redemption date and (B) an amount equal to (a) the number of shares of common stock issuable upon conversion of such share of Series A Preferred Stock as of the redemption date, multiplied by (b) the VWAP of common stock for the 30 trading days immediately preceding the notice date and (c) on or after the seventh anniversary of the original issue date, at a redemption price per share of Series A Preferred Stock equal to 100% of the Liquidation Preference as of the redemption date. The Conversant Investors, in combination with their common stock ownership as of December 31, 2021, have voting rights in excess of 50% of the Company’s total voting stock. It is therefore deemed probable that the Series A Preferred Stock could be redeemed for cash by the Conversant Investors, and as such the Series A Preferred Stock is required to be remeasured to its redemption value each period.
The Series A Preferred Stock does not have a maturity date and therefore is considered perpetual. The Series A Preferred Stock is redeemable outside of the Company’s control and is therefore classified as mezzanine equity in the Consolidated Balance Sheet of the Company as of December 31, 2021.
Changes in the Series A Preferred Stock are as follows:
| | | | | | | | | | | |
| Series A Preferred Stock |
| Shares | | Amount |
(In thousands) | | | |
Balance at January 1, 2021 | $ | — | | | $ | — | |
Issuance of Series A Preferred Stock, net of transaction costs | 41 | | | 27,776 | |
Remeasurement of Series A Preferred Stock | — | | | 13,474 | |
Balance at December 31, 2021 | $ | 41 | | | $ | 41,250 | |
No Series A Preferred Stock was outstanding as of December 2020.
Warrants
On the Closing Date, the Company issued 1,031,250 warrants to the Conversant Investors, each evidencing the right to purchase one share of common stock at a price per share of $40 and with an exercise expiration date of five years after the Closing Date. The value of the warrants, adjusted for the pro-rata share of issuance costs and other discounts was included in Additional Paid in Capital in the Consolidated Balance Sheet of the Company at December 31, 2021.
Investor Rights
For so long as the Conversant Investors beneficially own at least 33% of the Company’s outstanding common stock on an as-converted basis, Investor A shall be entitled to designate four members of the Company’s Board of Directors including the Chairperson. For so long as the Conversant Investors beneficially own less than 33% but at least 15% or more of the outstanding shares of common stock of the Company on an as-converted basis, Investor A will have the right to designate a number of directors, rounded to the nearest whole number, equal to the quotient of the total number of outstanding shares of common stock of the Company on an as-converted basis beneficially owned by the Conversant Investors divided by the total
number of outstanding shares of common stock of the Company on an as-converted basis, multiplied by the total number of directors then on the Board including the Chairperson for so long as the Conversant Investors beneficially own at least 20% or more of the outstanding shares of common stock on an as-converted basis. For so long as the Conversant Investors beneficially own less than 15% but at least 5% or more of the outstanding shares of common stock of the Company on an as-converted basis, Investor A will have the right to designate one designee for inclusion in the Company’s slate of individuals nominated for election to the Board (which slate will include a number of nominees equal to the number of director positions to be filled). After 3.5 years the Conversant Investors can designate 5 board seats if their beneficial ownership exceeds 50%.
For so long as Silk Partners, LLC with its affiliates (collectively, “Silk”) beneficially own at least 5% of the outstanding shares of common stock of the Company on an as-converted basis, Silk will have the right to designate two designees for inclusion in the Company’s slate of individuals nominated for election to the Board of Directors (which slate will include a number of nominees equal to the number of director positions to be filled).
Additionally, there were various stock awards to employees of the Company (See "Note 11- Stock-based compensation.”
Issuance Costs and Other Discounts
The Company incurred approximately $13.4 million in issuance costs associated with the A&R Investment Agreement. Additionally, the fair value of the private placement preferred stock and common stock along with the warrants issued to the Conversant Investors exceeded the proceeds received, the excess of which, along with the issuance costs, were applied as a discount to the private placement preferred stock, common stock and warrants on a relative fair value basis. These discounts resulted in a net reduction to the balance of Series A Preferred Stock and Additional Paid In Capital in the Consolidated Balance Sheets of the Company at December 31, 2021.
Loss on Settlement of Backstop
On October 1, 2021 the Conversant Investors and Arbiter provided backstop commitments to the Company in exchange for a backstop fee of 174,675 and 17,292 shares of common stock, respectively. Upon settlement of the commitment, the fair value of the fee provided, net of the financial benefit of the commitment when settled, was recorded as a loss on backstop of $4.6 million in the Consolidated Statements of Net Operations and Comprehensive Income (Loss) for the Company for the year ended December 31, 2021.
11. Stock-Based Compensation
The Company recognizes compensation expense for share-based stock awards to certain employees and directors, including grants of employee stock options and awards of restricted stock, in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) based on their fair values.
On May 14, 2019, the Company’s stockholders approved the Capital Senior Living Corporation 2019 Omnibus Stock and Incentive Plan (the “2019 Plan”), which replaced the previous plan. The 2019 Plan provides for, among other things, the grant of restricted stock awards, restricted stock units and stock options to purchase shares of the Company’s common stock. The 2019 Plan authorizes the Company to issue up to 150,000 shares of common stock, as adjusted for the Reverse Stock Split, plus reserved shares not issued or subject to outstanding awards under the previous plan. The Company has reserved shares of common stock for future issuance pursuant to awards under the 2019 Plan. Effective March 26, 2019, the 2007 Plan was terminated and no additional awards will be granted under that plan.
On October 22, 2021, the Company's stockholders approved an amendment to the 2019 Plan to (i) increase the number of shares of common stock that the Company may issue under such plan from 150,000 shares to 797,699 shares and to (ii) to exclude 257,000 shares from the minimum vesting provisions of such plan.
Stock Options
The Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for employees, officers and directors and to more closely align stockholder and employee interests. The Company’s stock options generally vest over one to five years and the related expense is amortized on a straight-line basis over the vesting period.
There were no stock options granted during the years ended December 31, 2021 and 2020.
The fair value of the stock options granted in 2019 was estimated using the Black-Scholes option pricing model. The Black-Scholes model requires the input of certain assumptions including expected volatility, expected dividend yield, expected life of the option and the risk-free interest rate. The expected volatility used by the Company is based primarily on an analysis of historical prices of the Company’s common stock. The expected term of options granted is based primarily on historical
exercise patterns on the Company’s outstanding stock options. The risk-free rate is based on zero-coupon U.S. Treasury yields in effect at the date of grant with the same period as the expected option life. The Company does not expect to pay dividends on its common stock and therefore has used a dividend yield of zero in determining the fair value of its awards. The option forfeiture rate assumption used by the Company is based primarily on the Company’s historical option forfeiture patterns. The fair value of stock options was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | |
| Year Ended December 31, 2019 |
Expected volatility | 37.0% |
Expected dividend yield | 0.0% |
Expected term in years | 6.0 |
Risk free rate | 2.55% |
Expected forfeiture rate | 0.0% |
The options outstanding at December 31, 2021, 2020 and 2019 had no intrinsic value, a weighted-average remaining contractual life of 7.0 years, and a weighted-average exercise price of $111.90, as adjusted for the Reverse Stock Split. A summary of the Company’s stock option transactions for the years ended December 31, 2021, 2020, and 2019 is as follows, as adjusted for the Reverse Stock Split:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Beginning of Year | | Granted | | Exercised | | Forfeited | | Outstanding End of Year | | Options Exercisable |
December 31, 2021 | | | | | | | | | | | |
Shares | 9,816 | | | — | | | — | | | — | | | 9,816 | | | 6,479 | |
Weighted average price | $ | 112 | | | $ | — | | | $ | — | | | — | | | $ | 112 | | | $ | 112 | |
December 31, 2020 | | | | | | | | | | | |
Shares (1) | 9,816 | | | — | | | — | | | — | | | 9,816 | | | 3,272 | |
Weighted average price | $ | 112 | | | $ | — | | | $ | — | | | — | | | $ | 112 | | | $ | 112 | |
December 31, 2019 | | | | | | | | | | | |
Shares (1) | — | | | 9,816 | | | — | | | — | | | 9,816 | | | — | |
Weighted average price | $ | — | | | 112 | | | $ | — | | | — | | | $ | 112 | | | $ | — | |
(1)Amounts for 2019 have been adjusted to reflect the 1-for-15 Reverse Stock Split. See "Note 2- Summary of Significant Accounting Policies."
At December 31, 2021, there was less than $0.1 million of total unrecognized compensation expense related to unvested stock option awards, which is expected to be recognized over a weighted average period of 0.1 years. The fair value of the stock options is amortized as compensation expense over the vesting periods of the options. The Company recorded stock-based compensation expense related to stock options of approximately $0.1 million, $0.1 million, and $0.1 million in the years ended December 31, 2021, 2020, and 2019, respectively.
Restricted Stock Units
Restricted stock units ("RSUs") may be granted to members of the Company’s Board of Directors as part of their compensation. Awards have a vesting period of one year. Compensation expense is recognized over the vesting period on a straight-line basis. The fair value of RSUs is the market close price of the Company’s common stock on the date of the grant. In fiscal years 2021 and 2019, 9,954 and 3,980 RSUs were issued with a weighted average grant date fair value per share of $52.75 and $56.40, respectively, and had intrinsic values of $0.5 million and $0.2 million on the date of grant, respectively. In the fourth quarter of 2021, in conjunction with the A&R Investment Agreement, the RSUs granted in 2021 became fully vested. There were no RSUs granted in fiscal 2020.
Restricted Stock Awards
Restricted stock awards (“RSAs”) entitle the holder to receive shares of the Company’s common stock as the awards vest. RSAs are considered outstanding at the time of grant since the holders thereof are entitled to dividends, upon vesting, and voting rights. Grants of restricted stock awards are classified as time-based, performance-based, or market-based, depending on the vesting criteria of the award.
Time-Based Restricted Stock Awards
Time-based RSAs generally vest over three to five years unless the award is subject to certain accelerated vesting requirements. The fair value of time-based RSAs is based on the closing price of the Company’s common stock on the date of grant. Compensation expense for time-based RSAs is recognized over the vesting period on a straight-line basis, net of actual forfeitures. A summary of time-based restricted stock awards’ activity, as adjusted for the Reverse Stock Split, is presented in the table below:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant-Date Fair Value |
Non-vested shares at January 1, 2019 | 57,705 | | | $ | 185.42 | |
Granted | 22,449 | | | 67.31 | |
Forfeited/Cancelled | (14,031) | | | 168.66 | |
Vested | (25,717) | | | 192.83 | |
Non-vested shares at December 31, 2019 | 40,406 | | | $ | 121.95 | |
Forfeited/Cancelled | (6,726) | | | 140.00 | |
Vested | (20,388) | | | 118.45 | |
Non-vested shares at December 31, 2020 | 13,292 | | | $ | 117.90 | |
Granted | 51,982 | | | 32.66 | |
Forfeited/Cancelled | (3,080) | | | 111.67 | |
Converted to Time-Based | 78,182 | | | 40.18 | |
Vested | (15,242) | | | 85.43 | |
Non-vested shares at December 31, 2021 | 125,134 | | | $ | 35.64 | |
Performance-Based Restricted Stock Awards
Vesting of performance-based stock awards ("PSUs") is dependent upon attainment of various levels of performance that equal or exceed targeted levels and generally vest in their entirety one to three years from the date of the grant. Compensation expense for performance-based restricted stock awards is recognized over the performance period and is based on the probability of achievement of the performance condition. Expense is recognized net of actual forfeitures.
During the fourth quarter of 2021, in conjunction with the A&R Investment Agreement, all outstanding performance- based stock based awards were converted to time-based restricted stock awards that will vest on the applicable scheduled vesting dates or the relevant award termination date applicable to such performance shares. These modifications were accounted for as equity award modifications under ASC Topic 718. There was no incremental stock-based expense based on the fair value of the modified awards. There were no PSUs outstanding at December 31, 2021. A summary of performance-based restricted stock awards’ activity, as adjusted for the Reverse Stock Split, is presented in the table below:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant-Date Fair Value |
Non-vested shares at January 1, 2019 | 31,972 | | | $ | 184.54 | |
Granted | 8,878 | | | 56.40 | |
Forfeited/Cancelled | (18,863) | | | 179.14 | |
Vested | (2,587) | | | 170.25 | |
Non-vested shares at December 31, 2019 | 19,400 | | | $ | 123.79 | |
Forfeited/Cancelled | (12,005) | | | 144.18 | |
Non-vested shares at December 31, 2020 | 7,395 | | | $ | 94.34 | |
Granted | 60,618 | | | 36.42 | |
Forfeited/Cancelled | (2,647) | | | 162.00 | |
Converted to Time-Based | (65,366) | | | 37.62 | |
Non-vested shares at December 31, 2021 | — | | | $ | — | |
Market-Based Restricted Stock Awards
Market-based restricted stock awards become eligible for vesting upon the achievement of specific market-based conditions based on the per share price of the Company’s common stock.
During the fourth quarter of 2021, in conjunction with the A&R Investment Agreement, the Company granted certain employees market-based restricted stock awards. The shares were issued in three tranches that vest if the Company’s stock price closes at or above an established threshold for each tranche for fifteen consecutive trading days within five years of the date of the grant. Compensation expense related to market-based restricted stock awards is recognized over the requisite service period on a straight-line basis. The requisite service period is a measure of the expected time to reach the respective vesting threshold and was estimated by utilizing a Monte Carlo simulation, considering only those stock price-paths in which the threshold was exceeded.
During the fourth quarter of 2021, in conjunction with the A&R Investment Agreement, all previously outstanding market-based stock based awards were converted to time-based restricted stock awards that will vest on the applicable scheduled vesting dates or the relevant award termination date applicable to such performance shares. These modifications were accounted for as equity award modifications under ASC Topic 718. There was no incremental stock-based expense based on the fair value of the modified awards. A summary of market-based restricted stock awards’ activity, as adjusted for the Reverse Stock Split, is presented in the table below:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant-Date Fair Value |
Non-vested shares at January 1, 2019 | — | | | $ | — | |
Granted | 12,816 | | | 72.58 | |
Non-vested shares at December 31, 2019 | 12,816 | | | $ | 72.58 | |
Granted | — | | | — | |
Non-vested shares at December 31, 2020 | 12,816 | | | $ | 72.58 | |
Granted | 188,411 | | | 28.20 | |
Converted to Time-Based | (12,816) | | | 72.58 | |
Non-vested shares at December 31, 2021 | 188,411 | | | $ | 28.20 | |
The Company recognized $2.8 million, $1.7 million, and $2.5 million in stock-based compensation expense during fiscal years 2021, 2020 and 2019, respectively, that is primarily associated with employees whose corresponding salaries and wages are included in general and administrative expenses within the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Unrecognized stock-based compensation expense is $7.6 million at December 31, 2021. If all awards granted are earned, the Company expects this expense to be recognized over a five-year period for market-based RSAs and a three-year period for time-based RSAs. There were no performance-based RSAs outstanding at December 31, 2021.
12. Income Taxes
The (benefit) provision for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current: | | | | | |
Federal | $ | — | | | $ | 3 | | | $ | (71) | |
State | 583 | | | 386 | | | 443 | |
Deferred: | | | | | |
Federal | — | | | — | | | 76 | |
(Benefit) Provision for income taxes | $ | 583 | | | $ | 389 | | | $ | 448 | |
The provision (benefit) for income taxes differed from the amounts of income tax provision (benefit) determined by applying the U.S. federal statutory income tax rate to income before (benefit) provision for income taxes as a result of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Tax benefit at federal statutory rates | $ | 26,496 | | | $ | (61,946) | | | $ | (7,472) | |
State income tax benefit, net of federal effects | 3,814 | | | (7,592) | | | (548) | |
Change in deferred tax asset valuation allowance | (31,819) | | | 69,139 | | | 7,478 | |
Other | 2,092 | | | 788 | | | 990 | |
(Benefit) Provision for income taxes | $ | 583 | | | $ | 389 | | | $ | 448 | |
The effective tax rate for fiscal year 2021 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance and other permanent tax differences. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas and accounts for the majority of the Company’s current state tax expense. The fiscal year 2021 other permanent tax differences include $0.4 million of stock compensation shortfalls and $0.4 million of Section 162(m) compensation limitation and $1.2 million of loss on settlement of backstop. The valuation allowance recorded as of fiscal year 2021 was $88.0 million, which decreased from the prior year by $31.8 million due to current year activity.
The effective tax rate for fiscal year 2020 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance and other permanent tax differences. The Company is impacted by the Texas Margin Tax (“TMT”), which effectively imposes tax on modified gross revenues for communities within the State of Texas and State of South Carolina income tax in the amount of $0.4 million for the gain recognized on the foreclosure of a Fannie Mae property and accounts for the majority of the Company’s current state tax expense. The fiscal year 2020 other permanent tax differences include $0.4 million of stock compensation shortfalls and $0.3 million of Section 162(m) compensation limitation. The valuation allowance recorded as of December 31, 2020 was $119.8 million, which had increased from the prior year by $69.1 million due to current year activity.
The effective tax rate for fiscal year 2019 differs from the statutory tax rate primarily due to state income taxes, changes in the deferred tax asset valuation allowance, and other permanent tax differences. The fiscal year 2019 other permanent tax differences include $0.7 million of stock compensation shortfalls and $0.4 million of Section 162(m) compensation limitation.
A summary of the Company’s deferred tax assets and liabilities, are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Lease liabilities | $ | 590 | | | $ | 200 | |
Net operating loss carryforward | 73,605 | | | 66,369 | |
Compensation costs | 2,446 | | | 2,888 | |
Depreciation and amortization | — | | | 42,999 | |
Other | 12,252 | | | 8,338 | |
Total deferred tax assets | 88,893 | | | 120,794 | |
Deferred tax asset valuation allowance | (88,019) | | | (119,838) | |
Total deferred tax assets, net | 874 | | | 956 | |
Deferred tax liabilities: | | | |
Operating lease right-of-use assets | (501) | | | (956) | |
Depreciation and amortization | (373) | | | — | |
Total deferred tax liabilities | (874) | | | (956) | |
Deferred taxes, net | $ | — | | | $ | — | |
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable. Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which the Company expects those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. Based upon this evaluation, a valuation allowance has been recorded to reduce the Company’s net deferred tax assets to the amount that is more likely than not to be realized. A significant component of objective evidence evaluated was the cumulative losses before income taxes incurred by the Company over the past several fiscal years. Such objective evidence severely limits the ability to consider other subjective evidence such as the Company’s ability to generate sufficient taxable income in future periods to fully recover the deferred tax assets. However, in the event that the Company were to determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period of such a determination. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.
The CARES Act contains beneficial provisions to the Company, including the deferral of certain employer payroll taxes and the acceleration of the alternative minimum tax credit refunds. Additionally, on December 27, 2020, the Consolidated Appropriations Act was enacted providing that electing real property trades or business electing out of Section 163(j)(7)(B) will apply a 30 year ADS life to residential real property placed in service before January 1, 2018. This property had historically been assigned a 40 year ADS life under the Tax Cuts and Jobs Act of 2017 ("TJCA"). The effects were reflected in the tax provision for the year ended December 31, 2020 through an adjustment to deferred temporary differences.
As of December 31, 2021 and 2020, the Company has federal and state net operating loss ("NOL") carryforwards of $303.0 million and $252.1 million and related deferred tax assets of $63.6 million and $12.3 million, respectively. The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of the unrecognized benefits. If not used, the federal NOL generated prior to fiscal year 2018 will expire during fiscal years 2033 to 2037 and non-conforming state NOLs will expire during fiscal years 2021 to 2041. Federal NOLs generated in fiscal 2018 and beyond currently have no expiration due to changes to tax laws enacted with the TCJA. Some state jurisdictions conform to the unlimited net operating loss carryforward provisions as modified by the TCJA. However, some jurisdictions do not conform to the above-mentioned provisions.
In general, utilization of the net operating loss carryforwards are subject to a substantial annual limitation due to ownership changes that occur or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes limit the amount of NOL carryforwards that can be utilized annually to offset taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups.
The Company had a change in ownership as defined by Section 382 of the Code on November 3, 2021. The Company has completed initial analysis of the annual Section 382 limitation and determined the annual utilization of its tax attributes is limited substantially, including consideration of net unrealized built-in gains on the Company’s assets resulting in an increase in the Section 382 limit over the five-year recognition period. Tax attributes to which the annual Section 382 limitation would apply include net operating losses generated prior to the ownership change. The Company maintains a valuation allowance in all jurisdictions where the NOL carryovers are present.
A summary of the Company’s unrecognized tax benefits activity and related information for the years ended December 31, 2021, 2020 and 2019 is presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Beginning balance, January 1 | $ | 5,433 | | | $ | 6,789 | | | $ | 4,644 | |
Gross increases – tax positions in prior period | — | | | 388 | | | 2,468 | |
Gross decreases – tax positions in prior period | (3,050) | | | (1,744) | | | — | |
Lapse of statute of limitations | — | | | — | | | (323) | |
Ending balance, December 31 | $ | 2,383 | | | $ | 5,433 | | | $ | 6,789 | |
The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition that is intended to provide better financial-statement comparability among different companies. The Company is required to recognize a tax benefit in its consolidated financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense. As of December 31, 2021, the Company has unrecognized tax benefits of $2.4 million for an uncertain tax position associated with a change in accounting method. The unrecognized tax benefits as of December 31, 2021 are timing-related uncertainties that if recognized would not impact the effective tax rate of the Company. The Company files income tax returns in the U.S. federal jurisdiction and U.S. state jurisdictions. As of December 31, 2021, the Company is generally no longer subject to U.S. federal tax examinations for tax years prior to 2018 and state tax examinations for tax years prior to 2017 with limited exceptions for net operating losses from 2013 forward.
13. Contingencies
The Company has claims incurred in the normal course of its business. Most of these claims are believed by management to be covered by insurance, subject to normal reservations of rights by the insurance companies and possibly subject to certain exclusions in the applicable insurance policies. Whether or not covered by insurance, these claims, in the opinion of management, based on advice of legal counsel, should not have a material detrimental impact on the consolidated financial statements of the Company.
14. Fair Value of Financial Instruments
The carrying amounts and fair values of financial instruments at December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Cash and cash equivalents | $ | 78,691 | | | $ | 78,691 | | | $ | 17,885 | | | $ | 17,885 | |
Restricted cash | 4,882 | | | 4,882 | | | 4,982 | | | 4,982 | |
Notes payable, excluding deferred loan costs | 687,312 | | | 636,836 | | | 915,779 | | | 846,134 | |
The following methods and assumptions were used in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and Restricted cash: The carrying amounts reported in the Company’s Consolidated Balance Sheets for cash and cash equivalents and restricted cash approximate fair value, which represent Level 1 inputs as defined in the accounting standards codification.
Notes payable, excluding deferred loan costs: The fair value of notes payable, excluding deferred loan costs, is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements, which represent Level 2 inputs as defined in the accounting standards codification.
Operating Lease Right-Of-Use Assets: The Company recorded non-cash impairment charges to operating lease right-of-use assets, net of $7.5 million for the year ended December 31, 2020. The fair values of the right-of-use assets were estimated, using Level 3 inputs as defined in the accounting standards codification, utilizing a discounted cash flow approach based upon historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio of 1.1. The range of discount rates utilized was 7.7% to 10.3%, depending upon the property type and geographical location of the respective community. See “Note 3- Impairment of Long-Lived Assets.”
Property and Equipment, Net: During the years ended December 31, 2021 and 2020, the Company evaluated property, plant and equipment, net for impairment and identified properties with a carrying amount of the assets in excess of the estimated future undiscounted net cash flows expected to be generated by the assets. The Company compared the estimated fair value of the assets to their carrying amount for these identified properties and recorded an impairment charge for the excess of carrying amount over fair value.
During the year ended December, 31, 2021, the Company recorded non-cash impairment charges of $6.5 million to property and equipment, net. The fair value of the impaired assets was $14.0 million at December 31, 2021. The fair value of the property and equipment, net of this community was primarily determined utilizing an income capitalization approach considering stabilized facility operating income and market capitalization rates of 8.25%.
During the year ended December 31, 2020, the Company recorded non-cash impairment charges of $34.3 million to property and equipment, net. The fair value of the impaired assets was $10.5 million, $12.5 million and $2.8 million at March 31, 2020, September 30, 2020 and December 31, 2020, respectively. At March 31, 2020, the fair values of the property and equipment, net of these communities were primarily determined utilizing the cost approach, which determines the current replacement cost of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence and economic obsolescence the amount required to replace the asset as if new and adjusts to reflect usage. At September 30, 2020 and December 31, 2020, the fair value of the property and equipment, net were primarily determined utilizing a discounted cash flow approach considering stabilized facility operating income and market capitalization rates of 7.25% and 8.25%, respectively. All of the aforementioned fair value measurements are considered Level 3 measurements within the valuation hierarchy.
The estimated fair value of these assets and liabilities could be affected by market changes and this effect could be material.
15. Allowance for Doubtful Accounts
The components of the allowance for doubtful accounts are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 6,113 | | | $ | 8,643 | | | $ | 6,793 | |
Provision for bad debts, net of recoveries | 1,251 | | | 2,883 | | | 3,765 | |
Write-offs and other (1) | (2,641) | | | (5,413) | | | (1,915) | |
Balance at end of year | $ | 4,723 | | | $ | 6,113 | | | $ | 8,643 | |
(1)For the year ended December 31, 2020 write-offs and other includes $1.7 million for the 18 properties in the process of transitioning legal ownership back to Fannie Mae, $0.1 million for the termination of the Welltower Master Lease Agreements and $0.5 million for the termination of the Healthpeak Master Lease Agreements.
Accounts receivable are reported net of an allowance for doubtful accounts to represent the Company’s estimate of inherent losses at the balance sheet date.
16. Leases
As of December 31, 2021, the Company has operating leases for equipment as well as financing leases for certain vehicles.
As of December 31, 2020, the Company leased 12 senior housing communities from certain real estate investment trusts (“REITs”) all of which the applicable master lease agreements terminated on that date. Under these facility lease agreements, the Company was responsible for all operating costs, maintenance and repairs, insurance and property taxes. Additionally, facility leases included contingent rent increases when certain operational performance thresholds were surpassed, at which time the right-of-use assets and lease liability would have been remeasured. On December 31, 2020, the Company exited all of the Company’s lease agreements for senior housing communities. See “Note 4- Significant Transactions.”
A summary of operating and financing lease expense (including the respective presentation on the Consolidated Statements of Operations and Comprehensive Income (Loss)) and cash flows from leasing transactions for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
Operating Leases | 2021 | | 2020 |
Facility lease expense | $ | — | | | $ | 28,109 | |
General and administrative expenses | 113 | | | 541 | |
Operating expenses, including variable lease expense of $0.1 million and $5.9 million, respectively | 122 | | | 7,097 | |
Total operating lease costs | 235 | | | 35,747 | |
Operating lease expense adjustment | 122 | | | 23,899 | |
Operating cash flows from operating leases | $ | 357 | | | $ | 59,646 | |
As of December 31, 2021, the weighted average discount rate and average remaining lease terms of the Company's operating leases was 6.5% and 2.4 years, respectively. As of December 31, 2020, the weighted average discount rate and average remaining lease terms of the Company's operating leases was 6.2% and 2.4 years, respectively. The expected lease terms include options to extend or terminate the lease when it is reasonably certain the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease terms.
| | | | | | | | | | | |
| Years Ended December 31, |
Financing Leases | 2021 | | 2020 |
Depreciation and amortization | $ | 103 | | | $ | 134 | |
Interest expense: financing lease obligations | 18 | | | 32 | |
Total financing lease costs | 121 | | | 166 | |
Operating cash flows from financing leases | 18 | | | 134 | |
Financing cash flows from financing leases | 103 | | | 32 | |
Total cash flows from financing leases | $ | 121 | | | $ | 166 | |
As of December 31, 2021, the weighted average discount rate and average remaining lease term of the Company's financing leases was 6.6% and 3.0 years, respectively. As of December 31, 2020, the weighted average discount rate and average remaining lease term of the Company's financing leases was 7.0% and 3.0 years, respectively. The right-of-use asset is generally amortized to depreciation and amortization expense on a straight-line basis over the lease term.
The aggregate amounts of future minimum lease payments recognized on the Consolidated Balance Sheet as of December 31, 2021 are as follows (in thousands):
| | | | | | | | | | | |
Years Ended December 31, | Operating Leases | | Financing Leases |
2022 | $ | 182 | | | $ | 121 | |
2023 | 73 | | | 116 | |
2024 | 31 | | | 37 | |
2025 | 2 | | | 34 | |
2026 | — | | | 11 | |
Total | $ | 288 | | | $ | 319 | |
Less: Amount representing interest (present value discount) | (14) | | | (27) | |
Present value of lease liabilities | $ | 274 | | | $ | 292 | |
Less: Current portion of lease liabilities | (171) | | | (107) | |
Lease liabilities, net of current portion | $ | 103 | | | $ | 185 | |
17. Subsequent Events
Acquisition of Indiana Communities
On February 1, 2022, subsequent to year end, the Company completed the acquisition of two senior living communities located in Indiana for a purchase price of $12.3 million. The communities consist of a total of 157 independent living units. The acquisition price was funded with cash on hand.
2022 Mortgage Refinance
In March 2022, subsequent to year end, the Company completed the refinancing of certain existing mortgage debt. The Refinance Facility includes an initial term loan of $80.0 million. In addition, $10.0 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available to fund future growth initiatives. The initial term loan and the delayed loans, if advanced, are collateralized by substantially all of the assets of ten of the Company’s communities. In addition, the Company provided a limited payment guaranty for 33% that reduces to 25% and then to 10% of the then outstanding balance of the Refinance Facility based upon the achievement of certain financial covenants maintained over a certain time period (as defined in the Limited Payment Guaranty). The Limited Payment Guaranty requires the Company to maintain certain covenants (as defined in the Limited Payment Guaranty) including maintaining a Tangible Net Worth of $150 million and Liquidity of no less than $13 million (inclusive of a $1.5 million debt service reserve fund provided at the closing of the Refinance Facility).
The Refinance Facility matures in four years with an optional one-year extensions if certain financial performance metrics and other customary conditions are maintained. The Refinance Facility carries an initial interest rate of one-month SOFR plus 3.50%, subject to a SOFR floor of 0.25% and a lower SOFR spread of 3.25% or 3.00% if the Company achieves and maintains certain financial covenants. The Refinancing Facility requires that the Company purchase and maintain an interest cap facility that provides for an interest cap of 4.5% during the term of the Refinancing Facility (that may be purchased in one-year terms). Such interest cap is required to be in place by no more than 90 days after the closing date of the Refinance Facility. Management believes that this requirement will be met within the timeframe defined in the Refinance Facility.
In accordance with ASC 470, the Company has classified $51.6 million of notes payable previously scheduled to mature in the year ended December 31, 2022 in notes payable, net of deferred loan costs and current portion on the Consolidated Balance Sheet at December 31, 2021.
Acceptance of Provider Relief Fund Grant
On April 13, 2022, the Company accepted $9.1 million of cash for grants from the Provider Relief Fund’s Phase 4 General Distribution, which was expanded by the CARES Act to provide grants or other funding mechanisms to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The CARES Act Phase 4 funds are grants that do not have to be repaid provided the Company satisfies the terms and conditions of the CARES Act.