Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Organization and Business
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 March 31, 2023, the Company operated 72 senior housing communities in 18 states with an aggregate capacity of approximately 8,000 residents, including 62 senior housing communities that the Company owned and 10 communities that the Company managed on behalf of third parties. As of December 31, 2022, the Company had two properties that the Company no longer operated that were in the process of transitioning legal ownership back to the Federal National Mortgage Association ("Fannie Mae"). The transfer of ownership was completed during January 2023. The accompanying condensed 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.
Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our condensed consolidated financial position as of March 31, 2023 and December 31, 2022, and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2023 and 2022.
Reclassifications
Certain amounts previously reflected in the prior year condensed consolidated balance sheet have been reclassified to conform to our March 31, 2023 presentation. The condensed consolidated statements of operations include the consolidation of “stock-based compensation expense” within “general and administrative expenses.” The condensed consolidated statements of cash flows include reclassifying “property tax and insurance deposits” to restricted cash and lender reserves from “other assets, net” to restricted cash. Additionally, “lease expense adjustment” was reclassified to “other non-cash items.”
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items related to the accounting for: income taxes, including assessments of probabilities of realization of income tax benefits; impairment of long-lived assets, including applicable cash flow projections, holding periods and fair value evaluations; self-insurance liabilities and expense; stock-based compensation; and depreciation and amortization including determination of estimated useful lives. Actual results could differ from those estimates.
2. Going Concern Uncertainty and Related Strategic Cash Preservation Initiatives
Accounting Standards Codification (“ASC”) 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within 12 months after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine
if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including: (1) the continued impact of the COVID-19 pandemic, the current inflationary environment and the impact of elevated interest rates on the Company’s operations and financial results; (2) $81.2 million of principal payments and $38.5 million of scheduled interest payments due in the next 12 months; (3) recurring operating losses and projected operating losses for fiscal periods through June 30, 2024; (4) the Company’s working capital deficit; and (5) events of non-compliance with certain of our mortgage agreements, as noted in "Note 6–Notes Payable". The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the 12-month period following the date the March 31, 2023 financial statements are issued.
As discussed below, the Company has implemented plans which encompass short-term cash preservation initiatives to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its March 31, 2023 financial statements are issued, in addition to creating sustained cash flow generation thereafter. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) net cash generated from operations; (2) COVID-19 or related relief grants from various state agencies; and (3) debt modifications, refinancings and extensions to the extent available on acceptable terms.
Strategic and Cash Preservation Initiatives
The Company has either taken, or intends to take, the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to continue as a going concern:
•Upon its management team transition in September 2022, the Company promptly implemented new strategic and operational plans to accelerate margin recovery, including the following:
◦Design and execution of a comprehensive resident rate review program to align revenues with the significant increase in the operating cost environment.
◦Implementation of a global purchasing organization function to leverage scaled purchasing to lower unit operating costs.
◦Use of several internally developed and external programs to provide alternative mitigants to a challenging labor environment.
•We have adopted a comprehensive cash optimization strategy aimed at improving working capital management.
•The Company is engaged in discussions with certain of its lenders in regard to potential modifications of certain mortgage debt on more favorable terms, which does not preclude a potential ownership transfer on select communities based on various financial metrics.
•Through recently integrated systems and revised process workflows, the Company has implemented additional proactive spending reductions, including reduced discretionary spending and more stringent, return-based capital spending.
•The Company received approximately $2.0 million in various state grants during the quarter ended March 31, 2023, and has outstanding applications for additional grants not yet received.
•Under the terms of the A&R Investment Agreement, the Company may request additional investments from the Conversant Investors in shares of Series A Preferred Stock (up to an aggregate amount equal to $25.0 million) that can be used for future investment in accretive capital expenditures and acquisitions, subject to certain conditions.
While the Company’s plans are designed to provide it with adequate liquidity to meet its obligations for at least the 12-month period following the date its financial statements are issued, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control, and no assurances can be given that certain options will be available on terms acceptable to the Company, or at all. Accordingly, management could not conclude that it was probable that the plans will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going
concern. In addition, it is probable that the Company will not be able to comply with some of the financial covenants and other restrictions contained in our debt instruments, which would in turn trigger an event of default under our loan agreements. An event of default, subject to cure provisions in certain instances, would give the respective lenders the right to accelerate the related debt and to declare all amounts outstanding to be immediately due and payable, or foreclose on collateral securing the outstanding indebtedness. We cannot assure that we could pay these debt obligations if they became due prior to their stated dates.
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
3. Summary of Significant Accounting Policies
Cash, 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 reserve accounts for property insurance, real estate taxes, capital expenditures, and debt service required by certain loan agreements. In addition, restricted cash includes deposits required by certain counterparties as collateral pursuant to letters of credit which must remain so long as the letters of credit are outstanding, which are subject to renewal annually.
In March 2022, the Company completed the refinancing of certain existing mortgage debt with Ally Bank. Ally Bank required a debt service reserve of $1.5 million as part of this transaction, which is included in the restricted cash balances as of March 31, 2023 and December 31, 2022. See "Note 6–Notes Payable."
The following table sets forth our cash and cash equivalents and restricted cash (in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Cash and cash equivalents | $ | 12,972 | | | $ | 16,913 | |
| Restricted cash: | | | |
| Property tax and insurance reserves | 4,361 | | | 6,184 | |
| Lender reserve | 1,500 | | | 1,500 | |
| Capital expenditures reserves | 2,202 | | | 2,034 | |
Deposits pursuant to outstanding letters of credit | 4,111 | | | 4,111 | |
| Total restricted cash | 12,174 | | | 13,829 | |
| Total cash, cash equivalents, and restricted cash | $ | 25,146 | | | $ | 30,742 | |
Long-Lived Assets
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation period may need to be changed. The Company considers internal factors such as net operating losses along with external factors relating to each asset, including contract changes, local market developments, and other publicly available information to determine whether impairment indicators exist.
If an indicator of impairment is identified, recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, we estimate fair value of the asset group and record an impairment loss when the carrying amount exceeds fair value. There were no impairments on long-lived assets during the three months ended March 31, 2023 and March 31, 2022.
In evaluating our long-lived assets for impairment, we undergo continuous evaluations of property level performance and real estate trends, and management makes several estimates and assumptions, including, but not limited to, the projected date of disposition, estimated sales price and future cash flows of each property during our estimated holding period. If our analysis or
assumptions regarding the projected cash flows expected to result from the use and eventual disposition of our properties change, we incur additional costs and expenses during the holding period, or our expected hold periods change, we may incur future impairment losses.
Upon the acquisition of new communities accounted for as an acquisition of an asset, we recognize the assets acquired and the liabilities assumed as of the acquisition date, measured at their relative fair values once we have determined the fair value of each of these assets and liabilities. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed consist of land, inclusive of associated rights, buildings, assumed debt, and identified intangible assets and liabilities. See “Note 4– Property and Equipment, net.”
Revenue Recognition
Resident revenue consists of fees for basic housing and certain support services and fees associated with additional housing and expanded support requirements such as assisted living care, memory care, and ancillary services. Basic housing and certain support services revenue is recorded when services are rendered, and amounts billed are due from residents in the period in which the rental and other services are provided. Residency agreements are generally short term in nature with durations of one year or less and are typically terminable by either party, under certain circumstances, upon providing 30 days’ notice, unless state law provides otherwise, with resident fees billed monthly in advance. Revenue for certain ancillary services is recognized as services are provided, and includes fees for services such as medication management, daily living activities, beautician/barber, laundry, television, guest meals, pets, and parking which are generally billed monthly in arrears. Other operating revenue consists of “Provider Relief Funds” received from various states due to the financial distress impacts of COVID-19.
The Company's senior housing communities have residency agreements that generally require the resident to pay a community fee and other amounts prior to moving into the community which are initially recorded by the Company as deferred revenue. 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 $3.9 million and $3.4 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.
Revenues from the Medicaid program accounted for approximately 9.3% and 9.6% of the Company’s revenue in the three months ended March 31, 2023 and March 31, 2022, respectively. During the three months ended March 31, 2023 and 2022, 24 and 28, 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 quarters ended March 31, 2023 and 2022.
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 Condensed 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 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 “managed community reimbursement revenue” on the Company’s condensed consolidated statements of operations. The related costs are included in “managed community reimbursement expense” on the Company’s condensed consolidated statements of operations. See “Note 8– Revenue.”
In January and February 2023, the Company received approximately $2.0 million in various Provider Relief Funds received from state departments due to financial distress impacts of COVID-19. For the three months ended March 31, 2022, the Company received approximately $0.7 million in various Provider Relief Funds from state departments due to financial distress impacts of COVID-19.
Credit Risk and Allowance for Doubtful Accounts
The Company’s resident accounts receivable are generally due within 30 days after the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $6.2 million and $5.9 million as of March 31, 2023 and December 31, 2022, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance, as necessary. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses.
Concentration of Credit Risk and Business Risk
Substantially all of our revenues are derived from senior living communities we own and senior living communities that we manage. Senior living operations are particularly sensitive to adverse economic, social and competitive conditions and trends, including the effects of the COVID-19 pandemic, which has adversely affected, and may continue to adversely affect, our business, financial condition, and results of operations.
We have a concentration of owned properties operating in Texas (16), Indiana (12), Ohio (11) and Wisconsin (8), which we estimate represented approximately 25%, 18%, 19% and 10%, respectively, of our resident revenues for the three months ended March 31, 2023.
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 as of March 31, 2023. 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.
Income Taxes
Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. The effective tax rates for the three months ended March 31, 2023 and 2022 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance.
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. As of December 31, 2022, the Company had a three-year cumulative net operating loss for its U.S. operations and is subject to annual operating loss utilization limits and accordingly, has provided a full valuation allowance on its U.S. and state net deferred tax assets. The valuation allowance reduces the Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) to be realized. However, in the event that the Company were to ultimately 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 such determination was made. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.
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.
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 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 (“Conversant Investors”) 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 March 31, 2023 and December 31, 2022, 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 and adjusted to its maximum redemption value at the end of each reporting period. However, to the extent that the maximum redemption value of the Series A Preferred Stock does not exceed the fair value of the shares at the date of issuance, the shares are not adjusted below the fair value at the date of issuance. As of March 31, 2023 and December 31, 2022, the Series A Preferred Stock is carried at the maximum redemption value. The Series A Preferred Stock does not have a maturity date and therefore is considered as perpetual.
Dividends on redeemable preferred stock are recorded to retained earnings or additional paid-in capital if retained earnings is an accumulated deficit. Dividends are cumulative, and any declaration of dividends is at the discretion of the Company’s Board of Directors. If the Board does not declare a dividend in respect of any dividend payment date, the amount of such accrued and unpaid dividend is added to the liquidation preference and compounds quarterly thereafter. During the three months ended March 31, 2023, the Board did not declare a dividend with respect to the Series A Preferred Stock, and accordingly, $1.2 million was added to the liquidation preference of the Series A Preferred Stock, effectively increasing the carrying value of the redeemable preferred stock.
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with the fluctuations in interest rates. We are also required to enter into interest rate derivative instruments in compliance with certain debt agreements. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes. We record all derivatives at fair value. As of March 31, 2023, our derivative instruments consisted of interest rate caps that were not designated as hedge instruments. Changes in fair value of undesignated hedge instruments are recorded in current period earnings in interest expense. See “Note14–Derivatives and Hedging.”
Net Income (Loss) Per Common Share
The Company uses the two-class method to compute net income (loss) 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. See “Note 9 - Net Income (Loss) Per Share.”
Segment Reporting
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
Allowance for Doubtful Accounts
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. Current U.S. generally accepted accounting principles (GAAP) require an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU 2016-13 replaces the current incurred loss methodology for credit losses and removes the thresholds that companies apply to measure credit losses on financial statements measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The determination of the allowance for credit losses under the new standard would typically be based on evaluation of a number of factors, including, but not limited to, general economic conditions, payment status, historical collection patterns and loss experience, financial strength of the borrower, and nature, extent and value of the underlying collateral. 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. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company adopted ASU 2016-13 on January 1, 2023. The effect of the adoption had an immaterial impact on our condensed consolidated financial statements.
Reference Rate Reform
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 InterBank Offered Rate. The new standard was effective upon issuance and elections can be made through December 31, 2024. The adoption of the optional expedient has not had and is not expected to have a material impact on the Company's condensed consolidated financial statements.
4. Property and Equipment, net
As of March 31, 2023 and December 31, 2022, property and equipment, net and leasehold improvements, which include assets under finance leases, consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Asset Lives | | March 31,
2023 | | December 31,
2022 |
| Land | | | $ | 47,384 | | | $ | 47,476 | |
| Land improvements | 5 to 20 years | | 20,121 | | | 20,053 | |
| Buildings and building improvements | 10 to 40 years | | 844,770 | | | 842,854 | |
| Furniture and equipment | 5 to 10 years | | 54,389 | | | 53,236 | |
| Automobiles | 5 to 7 years | | 2,707 | | | 2,704 | |
Assets under financing leases and leasehold improvements (1) | | | 3,749 | | | 1,899 | |
| Construction in progress | | | 697 | | | 666 | |
| Total property and equipment | | | 973,817 | | | 968,888 | |
| Less accumulated depreciation and amortization | | | (362,872) | | | (353,134) | |
| Total property and equipment, net | | | $ | 610,945 | | | $ | 615,754 | |
__________
(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 $0.2 million and $0.2 million of financing lease right-of-use assets as of March 31, 2023 and December 31, 2022, respectively.
There were no impairments of long-lived assets for the quarters ended March 31, 2023 and March 31, 2022.
5. Accrued expenses
The following is a summary of accrued expenses as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Accrued payroll and employee benefits | $ | 14,187 | | | $ | 13,795 | |
| Accrued interest | 5,897 | | | 9,374 | |
| Accrued taxes | 5,876 | | | 6,939 | |
| Accrued professional fees | 3,571 | | | 3,179 | |
| Accrued other expenses | 2,326 | | | 3,657 | |
| Total accrued expenses | $ | 31,857 | | | $ | 36,944 | |
6. Notes Payable
Notes payable consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average
interest rate | | Maturity Date | | March 31,
2023 | | December 31,
2022 |
| Fixed rate mortgage notes payable | 4.6% | | 2024 to 2045 | | $ | 500,721 | | | $ | 503,312 | |
Fannie Mae 18 mortgage notes payable (1) | | | | | — | | | 31,991 | |
Variable rate mortgage notes payable (2) | 5.9% | | 2026 to 2029 | | 137,453 | | | 137,652 | |
| Notes payable - insurance | 5.6% | | 2023 | | 800 | | | 1,724 | |
| Notes payable - other | 7.9% | | 2023 | | 1,619 | | | 1,619 | |
| Notes payable, excluding deferred loan costs | | | | | $ | 640,593 | | | $ | 676,298 | |
| Deferred loan costs, net | | | | | (4,719) | | | (5,267) | |
| Total notes payable, net | | | | | $ | 635,874 | | | $ | 671,031 | |
Less current portion (3) | | | | | (81,151) | | | (46,029) | |
| Total long-term notes payable, net | | | | | $ | 554,723 | | | $ | 625,002 | |
The following schedule summarizes our notes payable as of March 31, 2023 (in thousands):
| | | | | |
| Principal payments due in: | |
2023 (4) | $ | 80,081 | |
| 2024 | 150,220 | |
| 2025 | 76,031 | |
| 2026 | 136,116 | |
| 2027 | 3,980 | |
| Thereafter | 194,165 | |
| Total notes payable, excluding deferred loan costs | $ | 640,593 | |
__________(1) See “Foreclosure Proceedings on Fannie Mae Loans (18 properties)” disclosure below.
(2) See Note 14 for interest rate cap agreements on variable rate mortgage notes payable.
(3) March 31, 2023 includes $69.8 million aggregate outstanding principal due under the loans currently in default with Protective Life Insurance Company.
(4) See “Protective Life Insurance Company Non-recourse Mortgages” disclosure below.
As of March 31, 2023, our fixed rate mortgage notes bear interest rates ranging from 3.6% to 6.3%. Our variable rate mortgage notes are based on either one-month LIBOR or the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin. As of March 31, 2023, one-month LIBOR and one-month SOFR were 4.9% and 4.9%, respectively, and the applicable margins were 2.14% and 3.50%, respectively.
As of March 31, 2023, we had property and equipment with a net carrying value of $599.8 million that is secured by outstanding notes payable, and two unencumbered properties with a net book value of $11.2 million which could provide a
source of liquidity from either sales proceeds or new debt.
2022 Mortgage Refinance
In March 2022, the Company completed the refinancing of certain existing mortgage debt (“Refinance Facility”) for ten of its communities. The Refinance Facility includes an initial term loan of $80 million. In addition, $10 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. In addition, the Company provided a limited payment guaranty (“Limited Payment Guaranty”) of 33%, that reduces to 25% and then to 10%, of the then outstanding balance of the Refinance Facility based upon achieving certain financial covenants and then maintained over the life of the loan. As defined and required in the Limited Payment Guaranty, the Company is required to maintain certain covenants including maintaining a Tangible Net Worth of $150 million and Liquid Assets of at least $13 million, which is inclusive of a $1.5 million debt service reserve provided by the Company at the closing of the Refinance Facility. The debt service reserve may be released upon terms described in the “Loan Agreement” and is included in restricted cash.
In conjunction with the Refinance Facility, the Company incurred costs of $2.2 million in March 2022. These costs, net of amortization of $0.6 million, are included in deferred loan costs as of March 31, 2023.
On December 13, 2022, the Company amended the Refinance Facility with Ally Bank by adding two additional subsidiaries of the Company as borrowers and mortgaging their communities. The amendment increased the principal by $8.1 million to $88.1 million. In conjunction with the amendment, the Company incurred costs of approximately $0.2 million in December 2022 that are included in deferred loan costs as of March 31, 2023 and will be deferred and amortized over the remaining life of the term loan.
The Refinance Facility also requires the financial performance of the twelve communities to meet certain financial covenants, including a minimum debt service coverage ratio and a minimum debt yield (as defined in the Loan Agreement) with a first measurement date as of June 30, 2022 and quarterly measurement dates thereafter. As of March 31, 2023, we were in compliance with the financial covenants. We can provide no assurance that any financial covenants will be met in the future.
The Refinance Facility requires the Company to purchase and maintain an interest rate cap facility during the term of the Refinance Facility. To comply with the lender’s requirement, the Company entered into an interest rate cap agreement for an aggregate notional amount of $88.1 million in November 2022.
Notes Payable - Insurance
In December 2022, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $1.1 million. As of March 31, 2023, the Company had finance agreements totaling $0.8 million, with fixed interest rates ranging from 4.75% to 5.60%, and weighted average rate of 5.59%, with principal amounts being fully repaid over a seven-month term.
Foreclosure Proceedings on Fannie Mae Loans (18 properties)
The Coronavirus Aid, Relief and Economic Security (“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. During 2020, the Company entered into several loan forbearance agreements with the Federal National Mortgage Association (“Fannie Mae”). In July 2020, the Company elected not to pay $3.8 million on the loans for 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.
As a result of the events of default and receivership order obtained by Fannie Mae, 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, that all amounts held in escrow by Fannie Mae were forfeited, and that the Company no longer had control of the properties in accordance with GAAP. Accordingly, the Company derecognized the net carrying value of the properties and related assets from the financial statements and recorded a loss from the forbearance. The Company continued to recognize the related debt and liabilities until the debt was formally released. Once the debts were formally released, the net carrying value of the debts were derecognized and a gain on extinguishment of debt was recognized. As of December 31, 2022, Fannie Mae had completed the transition of legal ownership of 16 of the Company's properties.
On January 11, 2023, the Company received notice that the foreclosure sales conducted by Fannie Mae had successfully transitioned the remaining two properties to new owners. This event relieved the Company of the existing Fannie Mae debt relating to the two properties. Accordingly, the Company recognized a total of $36.3 million for the gain on debt extinguishments for the quarter ended March 31, 2023. With the transition of these two remaining properties, the 18 total Fannie Mae properties’ foreclosure was completed.
Protective Life Insurance Company Non-recourse Mortgages
During the first quarter of 2023, the Company elected to not make principal and interest payments due under certain non-recourse mortgage loan agreements with an aggregate outstanding principal amount of $69.8 million for four communities as of March 31, 2023. Therefore, the Company is in default on these loans, and has presented the total amount due as current notes payable on the condensed consolidated balance sheet. The Company is currently engaged in discussions with Protective Life Insurance Company (“Protective”), the lender of such debt, in order to resolve this matter.
Letters of Credit
The Company has letters of credit outstanding totaling $4.1 million as of March 31, 2023.
7. Redeemable Preferred Stock
In November 2021, the Company issued 41,250 shares of Series A Preferred Stock. The Series A Preferred Stock is convertible outside of the Company's control and, in accordance with GAAP, is classified as mezzanine equity, outside the stockholders’ equity (deficit) section, on our condensed consolidated balance sheets.
The Series A Preferred Stock has an 11% annual dividend calculated on the original investment of approximately $41.3 million accrued quarterly in arrears and compounded. Dividends are cumulative, and any declaration of dividends is at the discretion of the Company’s Board of Directors. If the Board does not declare a dividend in respect of any dividend payment date, the amount of such accrued and unpaid dividend is added to the liquidation preference and compounds quarterly thereafter. On March 31, 2023, the Board did not declare a dividend with respect to the Series A Preferred Stock, and accordingly, $1.2 million was added to the liquidation preference of the Series A Preferred Stock, effectively increasing the carrying value of the Series A Preferred Stock. On March 31, 2022, the Company declared a $1.1 million cash dividend on the Series A Preferred Stock which was included in accounts payable and accrued expense as of March 31, 2022 and paid in April 2022.
8. Revenue
Revenue for the three months ended March 31, 2023 and 2022 is comprised of the following components (in thousands):
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
| 2023 | | 2022 | | | |
| Housing and support services | $ | 53,791 | | | $ | 49,438 | | | | |
| Community fees | 479 | | | 453 | | | | |
| Ancillary services | 273 | | | 254 | | | | |
Other operating revenue (1) | 2,063 | | | 689 | | | | |
| Resident revenue | 56,606 | | | 50,834 | | | | |
| Management fees | 505 | | | 628 | | | | |
| Managed community reimbursement revenue | 4,962 | | | 7,022 | | | | |
| Total revenues | $ | 62,073 | | | $ | 58,484 | | | | |
__________(1) Other operating revenue consists of Provider Relief Funds received from state departments due to financial distress impacts of COVID-19. The Company intends to pursue additional funding that may become available in the future, but there is no guarantee of qualifying for, or receiving, any additional relief funds.
Community fees, ancillary services, management fees, and community reimbursement revenue represent revenue from contracts with customers in accordance with GAAP.
9. Net Income (Loss) Per Share
Basic net income (loss) per share (“EPS”) is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Potentially dilutive securities include warrants, Series A Preferred Stock, shares of restricted stock, restricted stock units and former employee stock options. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities. The Series A Preferred Stock and restricted shares are considered participating securities for the purposes of the Company's EPS calculation.
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except for per share amounts): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Basic net (loss) income per common share calculation: | | | |
| Net income (loss) | $ | 24,145 | | | $ | (16,678) | |
| Less: Dividends on Series A Preferred Stock | (1,198) | | | (1,133) | |
| | | |
| Less: Undistributed earnings allocated to participating securities | (3,182) | | | — |
| Net income (loss) attributable to common stockholders | $ | 19,765 | | | $ | (17,811) | |
Weighted average shares outstanding — basic | 6,855 | | | 6,341 | |
| Basic net income (loss) per share | $ | 2.88 | | | $ | (2.81) | |
| | | |
| Diluted net income (loss) per common share calculation: | | | |
| Net income (loss) attributable to common stockholders | $ | 19,765 | | | $ | (17,811) | |
| Weighted average shares outstanding — diluted | 7,168 | | | 6,341 | |
| Diluted net income (loss) per share | $ | 2.76 | | | $ | (2.81) | |
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:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (shares in thousands) | 2023 | | 2022 |
| Warrants | 1,031 | | | 1,031 | |
| Series A Preferred Stock (if converted) | 1,104 | | | 1,031 | |
| Restricted stock awards | 190 | | | 218 | |
| Stock options | 10 | | | 10 | |
| Total | 2,335 | | | 2,290 | |
10. Stock-Based Compensation
During the three months ended March 31, 2023, the Company granted restricted stock awards under the Company’s 2019 Omnibus Stock and Incentive Plan. Grants of restricted stock awards were as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands, except weighted average amount) | Restricted Stock Awards | | Weighted Average Grant Date Fair Value Per Share | | Total Grant Date Fair Value |
| Three months ended March 31, 2023 | 274 | | | $ | 8.42 | | | $ | 2,303 | |
| | | | | |
| | | | | |
The Company recognized $0.9 million and $1.8 million in stock-based compensation expense for the three months ended March 31, 2023 and 2022, respectively.
11. Commitments and Contingencies
As of March 31, 2023, we had contractual commitments of $2.6 million related to future renovations and technology enhancements to our communities. We expect these amounts to be substantially expended during 2023.
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 deductibles, 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 impact on the condensed consolidated financial statements of the Company.
12. Related Party Transactions
As of March 31, 2023, affiliates of Conversant Capital LLC owned approximately 56.5% of our outstanding shares of common stock (inclusive of common stock issuable upon conversion of outstanding Series A Preferred Stock and outstanding warrants). See “Note 3– Significant Accounting Policies and Recently Issued Accounting Standards” and “Note 7– Redeemable Preferred Stock.”
13. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company uses interest rate cap arrangements with financial institutions to manage exposure to interest rate changes for loans that utilize floating interest rates. As of March 31, 2023, we had interest rate cap agreements with an aggregate notional value of $138.4 million that were entered into during 2022. The fair value of these derivative assets as of March 31, 2023 was $2.1 million and was determined using significant observable inputs (Level 2), including quantitative models that utilize multiple market inputs to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Financial Instruments Not Reported at Fair Value
For those financial instruments not carried at fair value, the carrying amount and estimated fair values of our financial assets and liabilities were as follows as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| | | | | | | |
| | | | | | | |
| Cash and cash equivalents | $ | 12,972 | | | $ | 12,972 | | | $ | 16,913 | | | $ | 16,913 | |
| Restricted cash | 12,174 | | | $ | 12,174 | | | 13,829 | | | 13,829 | |
| Notes payable, excluding deferred loan costs | $ | 640,593 | | | $ | 568,769 | | | $ | 676,298 | | | $ | 638,485 | |
We believe the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses approximate fair value due to their short-term nature.
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 ASC 820, Fair Value Measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired. During the year ended December 31, 2022, the Company recorded a non-cash impairment charge of $1.6 million related to the management's commitment to a plan to sell the community shortly after the balance sheet date, and the agreed-upon selling price being below the community's carrying amount. There were no impairment losses for the three months ended March 31, 2023.
14. Derivatives and Hedging
The Company uses derivatives as part of our overall strategy to manage our exposure to market risks associated with the fluctuations in interest rates. We are also required to enter into interest rate derivative instruments in compliance with certain debt agreements. We do not enter into derivative financial instruments for trading or speculative purposes.
On March 1, 2022, the Company entered into an interest rate cap transaction for an aggregate notional amount of $50.3 million to reduce exposure to interest rate fluctuations associated with certain of our variable mortgage notes payable. The interest rate cap agreement has a 24-month term and effectively caps LIBOR at 4.00% from March 1, 2022 through March 1, 2024 with respect to such floating rate indebtedness. In the event LIBOR is less than the capped rate, we will pay interest at the lower LIBOR rate plus the applicable margin. In the event LIBOR is higher than the capped rate, we will only pay interest at the capped rate of 4.00% plus the applicable margin. The interest rate cap is not designated as a cash flow hedge under ASC
815-20, Derivatives - Hedging, and therefore, all changes in the fair value of the instrument are captured as a component of interest expense in our condensed consolidated statements of operations.
On November 30, 2022, in order to comply with the lender’s requirements under the Ally Bank Refinance Facility, the Company entered into a SOFR-based interest rate cap transaction for an aggregate notional amount of $88.1 million at a cost of $2.4 million. The interest rate cap agreement has a 12-month term and effectively caps the interest rate of the SOFR portion of the Ally Bank debt at 2.25%. The interest rate cap is not designated as a hedge under ASC 815-20, Derivatives - Hedging, and therefore, all changes in the fair value of the instrument are included as a component of interest expense in our condensed consolidated statements of operations.
As of March 31, 2023, the entire balance of our outstanding variable-rate debt obligations was covered by the interest rate transactions entered into during 2022 to better manage our exposure to market risks associated with the fluctuations in interest rates.
The following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Derivative Asset | | Derivative Liability |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| Interest rate cap (LIBOR-based) | $ | 50,260 | | | $ | 460 | | | $ | — | | | $ | — | |
| Interest rate cap (SOFR-based) | 88,125 | | | 1,671 | | | — | | | — | |
| Total derivative | 138,385 | | | 2,131 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
The following table presents the effect of the derivative instruments on the condensed consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | |
| |
| Three months ended March 31, | | |
| 2023 | | 2022 | | | | |
| Derivative not designated as hedge | | | | | | | |
| Interest rate cap | | | | | | | |
| Loss on derivative not designated as hedge included in interest expense | (572) | | | — | | | | | |
| | | | | | | |
| | | | | | | |
