NEW SENIOR INVESTMENT GROUP INC. The following should be read in conjunction with the consolidated financial statements and notes thereto included within this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included under the heading "Cautionary Note Regarding Forward-Looking Statements" and under the heading "Risk Factors" herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . OVERVIEW Our Business We are a REIT with a portfolio of 103 senior housing properties located acrossthe United States . We believe that we are the only REIT focused solely on senior housing and we are one of the largest owners of senior housing properties inthe United States . We are listed on the NYSE under the symbol "SNR" and are headquartered inNew York, New York . We are organized and operate as a single reportable segment, Senior Housing Properties. We changed our structure in the fourth quarter of 2020 and no longer operate in two reportable segments: Managed Independent Living ("IL") Properties, andOther Properties . See our consolidated financial statements and the related notes included in Item 1 "Financial Statements" for additional information regarding our segments. OnJune 28, 2021 , the Company announced that it had entered into an Agreement and Plan of Merger (the "Merger Agreement") withVentas and Cadence Merger Sub LLC , a wholly owned subsidiary of Ventas ("Merger Sub"), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company, with the Company surviving the merger as a subsidiary of Ventas (the "Merger"). Under the Merger Agreement, the consideration to be paid by Ventas in the Merger consists of 0.1561 of a newly issued share of Ventas common stock, par value$0.25 per share, for each share of Company common stock, par value$0.01 per share, issued and outstanding immediately prior to the effective time of the Merger (other than shares of our common stock owned directly by Ventas, Merger Sub or the Company), with holders of record of Company common stock receiving cash in lieu of fractional shares of Ventas common stock. The Merger is expected to close during the second half of 2021, subject to customary closing conditions, including approval by the Company's stockholders. We cannot assure you that the Merger will be completed on the terms or timeline anticipated or at all.
COVID-19 & Considerations Related to Our Business
The COVID-19 global pandemic has caused significant disruptions to theU.S. and global economies and has contributed to volatility and negative pressure in financial markets. The outbreak has led federal, state and local governments and public health authorities to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. Although some of these restrictions have been lifted or scaled back at this time, ongoing resurgences of COVID-19 infections may result in the re-imposition of certain restrictions and may lead to other restrictions being re-implemented to reduce the spread of COVID-19. As an owner of senior living properties, with a portfolio of 102 IL properties and one continuing care retirement community ("CCRC"), COVID-19 has impacted our business in various ways. Our four property managers and one tenant all put into place various protocols to address the COVID-19 pandemic at our communities across theU.S. Some of the measures taken at the onset of the pandemic included restrictions on all non-essential visitors (including family), closure of group dining facilities and other common areas, restrictions on resident movements and group activities, as well as enhanced protocols which have required increased labor, property cleaning expenses and costs related to procuring necessary supplies such as meal containers and personal protective equipment ("PPE"). In mid-2020, our properties started to lift restrictions in a phased approach, based on both the status of state and local regulations that affect the property as well as the status of any COVID-19 cases at the property.
COVID-19 is having and will likely continue to have an impact on three metrics that are fundamental to our business: occupancy, rental rates and operating expenses.
21
--------------------------------------------------------------------------------Occupancy:
Following the COVID-19 outbreak, occupancy at our properties began to decrease materially as move-ins at those properties slowed due to the voluntary restrictions our property managers imposed on move-ins at our properties as discussed above. We do not know the ultimate impact that COVID-19 will have on our business, and whether it will fundamentally alter the demand for senior housing in general or in our properties in particular. Ending occupancy in the second quarter of 2021 increased for the first time since the outset of the pandemic, growing 90 basis points compared to the first quarter of 2021. The shape and length of the recovery in occupancy is difficult to predict and could be harmed by the incidence of COVID-19 at our properties or the perception that outbreaks could occur. The impact of COVID-19 may be mitigated by the distribution of COVID-19 vaccines, but it remains unclear how vaccines will ultimately impact demand and occupancy over the longer term. As of the date of this filing, all of our properties have made COVID-19 vaccines available to residents and employees. However, although we have seen recent improvements, it is too early to determine how vaccination levels will ultimately influence demand and occupancy at our properties. The senior housing industry offers a full continuum of care to seniors with product types that range from "mostly housing" (i.e., senior apartments) to "mostly healthcare" (i.e., skilled nursing, hospitals, etc.). We primarily focus on product types at the center of this continuum, namely IL properties. We believe that our focused portfolio of primarily IL properties will allow investors to participate in the positive fundamentals of the senior housing sector. However, according to theU.S. Centers for Disease Control and Prevention (the "CDC"), older adults and people of any age who have serious underlying medical conditions might be at higher risk for severe illness from COVID-19. TheCDC guidance also states that people age 65 and older and those living in nursing homes or long-term care facilities are at high-risk for severe illness from COVID-19. While we do not own nursing facilities, the age and other demographics of our residents fall within theCDC guidance. We do not know if or how this will affect seniors' views on different types of senior living and whether it will alter demand for our types of senior living properties in the future. Rental Rates: Our cash flows from operating activities are primarily driven by rental revenues and fees received from residents of our managed properties, and we typically increase rental fees annually. Seniors, like much of theU.S. population, may be experiencing deteriorating financial conditions as a result of the COVID-19 pandemic, which may make it difficult for them to pay rent. In addition, there may be pressure for us to reduce rental rates or offer other concessions in light of the pandemic and its effects on our residents and our business. Operating Expenses: Throughout the pandemic, our property managers have incurred certain additional property level expenses associated with the COVID-19 pandemic, including the procurement of PPE and other supplies such as packaging necessary for in-room meal deliveries to residents. These expenses have been largely offset by variable expense savings associated with lower occupancy and strong expense management from our property managers. In the second quarter of 2021, these costs have continued but declined for the fourth consecutive quarter. Depending on how the pandemic continues to evolve, there may be other future operating expenses that we may be required to bear or need to continue to bear, such as costs for testing kits for residents and staff, additional cleaning equipment, or new protocols related to the properties. Given the evolving nature of the COVID-19 pandemic, all of the observations and forward-looking statements above represent our current good faith views based upon the information that we have available to us at this time. We believe that the extent of the pandemic's effect on our business, operational and financial performance and liquidity will depend upon many factors and future developments, including the duration, spread, intensity and recurrence of the pandemic, health and safety actions taken to contain its spread, the availability, continuing efficacy and public usage and acceptance of vaccines, and how quickly and to what extent normal economic and operating conditions can resume within the markets in which we operate, each of which is highly uncertain and difficult to predict at this time. Even after the COVID-19 pandemic subsides, we may continue to experience adverse impacts to our business and financial results as a result of its global economic impact, including any economic downturn or recession that may occur in the future. See also Item 1A. "Risk Factors" and below "Liquidity and Capital Resources," for additional discussions regarding COVID-19 and its impact on our business. Other Recent Developments
Property Transition to Atria Senior Living ("Atria")
In
22
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Property Transitions to Hawthorn Senior Living ("Hawthorn") and
In
During transition periods, we expect to incur integration costs and may experience a temporary disruption in operations, which can adversely impact our results of operations.
At-The-Market Common Stock Offering Program
OnFebruary 26, 2021 , we established an at-the-market equity offering program (the "ATM Program") through which we may issue and sell, from time to time, up to an aggregate of$100 million of our common stock. Sales of common stock, if any, may be offered and sold in accordance with the Company's instructions pursuant to a Distribution Agreement, datedFebruary 26, 2021 , between New Senior and a consortium of banks acting as sales agents. During the six months endedJune 30, 2021 , we did not issue any shares under the Distribution Agreement. Pursuant to the Merger Agreement, we agreed that we would not issue equity securities, including under the ATM Program, subject to certain limited exceptions described in the Merger Agreement.
MARKET CONSIDERATIONS
Senior housing is a$300 billion market, and ownership of senior housing assets is highly fragmented. Given these industry fundamentals and compelling demographics that are expected to drive increased demand for senior housing, we believe the senior housing industry presents an attractive investment opportunity. However, increased competition from other buyers of senior housing assets, the impact of COVID-19 on the senior housing industry, increasing construction costs, as well as liquidity constraints and other factors, could impair our ability to source attractive investment opportunities within the senior housing industry and thus to seek investments in the broader healthcare industry. According to data from theNational Investment Center for Seniors Housing and Care ("NIC") on the 99 Primary and Secondary Markets, occupancy in the second quarter of 2021 declined 550 basis points year-over-year, and increased 30 basis points quarter-over-quarter - the first sequential increase since before the COVID-19 pandemic. New Senior's occupancy results performed in line with the industry in the second quarter, with same store managed occupancy down 550 basis points year-over-year. Industry occupancy for majority IL facilities was down 500 basis points year-over-year, while industry occupancy for majority AL facilities was down 620 basis points year-over-year. Industry-wide, new supply levels have continued to trend lower for the past several years. Units under construction represent 4.7% of inventory, and that ratio has decreased 270 basis points from the recent high in the third quarter of 2018. The ratio of IL construction to inventory (4.8%) is slightly higher than the ratio for AL (4.7%). While supply trends have improved recently, rate growth has continued to decelerate over the past several quarters. Industry rate growth was 1.4% in the second quarter of 2021, down 200 bps from the recent high of 3.4% in the first quarter of 2019. Rate growth for IL facilities (1.4%) was in line with rate growth for AL facilities.
The value of our existing portfolio could be impacted by new construction, as well as increased availability and popularity of home health care or other alternatives to senior housing, by hampering occupancy and rate growth. In addition, operating expenses could be driven higher by supply and labor shortages, as well as other factors.
Additionally, as discussed in more detail above, the COVID-19 pandemic has
continued to impact our business in 2021. The timing of a recovery is difficult
to predict, and could be harmed by the incidence of COVID-19 at our properties
or the perception that outbreaks could occur. In recent months, we have seen
fewer active cases, and increased inquiry and tour volume across our
communities, which may be due to the prevalence of vaccination clinics at our
communities and high levels of uptake by residents and associates, or may be the
result of declining positivity rates in the particular communities in which we
operate, or may be due to other factors.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Segment Overview
Our primary business is investing in senior housing properties. We currently operate and report results in one reportable segment, Senior Housing Properties. Prior to the fourth quarter of 2020, we had two reportable segments (Managed IL Properties andOther Properties ). Due to the AL/MC Portfolio Disposition which resulted in the sale of all but one of the assets in theOther Properties segment, we changed the composition of our reportable segments to be in line with the financial information reviewed and used by the chief operating decision maker to make operating decisions, assess performance, develop strategy and allocate capital resources. Accordingly, all prior period segment information has been reclassified to conform to the current period presentation.
Net Operating Income
Net operating income ("NOI") and Cash NOI are financial measures not determined
under U.S. generally accepted accounting principles ("GAAP") that we use to
evaluate the performance of our properties. We consider NOI and Cash NOI
important supplemental measures used to evaluate the operating performance of
our properties because they allow investors, analysts and our management to
assess our unleveraged property-level operating results and to compare our
operating results between periods and to the operating results of other real
estate companies on a consistent basis. We define NOI as total revenues less
property level operating expenses, which include property management fees and
travel cost reimbursements. We define Cash NOI as NOI excluding the effects of
straight-line rental revenue, amortization of above/ below market lease
intangibles and the amortization of deferred community fees and other, which
includes the net change in deferred community fees and other rent discounts or
incentives.
Our Senior Housing Properties segment is primarily comprised of independent
living senior housing properties that are operated by property managers to which
we pay a management fee. We also own one CCRC leased on a long-term basis, and
our tenant is typically responsible for bearing property-related expenses
including maintenance, utilities, taxes, insurance, repairs, capital
improvements and the payroll expense of property-level employees. Depreciation
and amortization, interest expense, acquisition, transaction and integration
expense, termination fee, management fees and incentive compensation to
affiliate, general and administrative expense, loss on extinguishment of debt,
impairment of real estate, other expense (income), gain (loss) on sale of real
estate, gain on lease termination, litigation proceeds, net, income tax expense
(benefit) and discontinued operations, net are not allocated to individual
segments for purposes of assessing property performance. In deciding how to
allocate resources and assess performance, our chief operating decision maker
regularly evaluates the performance of our reportable segment on the basis of
NOI and Cash NOI.
Same Store
Same store information is intended to enable management to evaluate the
performance of a consistent portfolio of real estate in a manner that eliminates
variances attributable to changes in the composition of our portfolio over time,
due to sales and various other factors. Properties acquired, sold, transitioned
to other property managers, or classified as held for sale or discontinued
operations during the comparable periods are excluded from the same store
amounts.
24
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Three months ended
The following table presents the total portfolio results as of and for the three
months ended
Three Months Ended June 30, Increase (Decrease)
(dollars in thousands) 2021 2020 Amount Percentage
Resident fees and services $ 77,507 $ 82,951 $ (5,444) (6.6) %
Rental revenue 1,582 1,582 - - %
Less: Property operating expense 49,698 48,760 938 1.9 %
Total NOI 29,391 35,773 (6,382) (17.8) %
Straight-line rental revenue (67) (108) 41 (38.0) %
Amortization of deferred community fees and
other 4 (432) 436 (100.9) %
Cash NOI 29,328 35,233 (5,905) (16.8) %
Addback adjustments (A) 63 540 (477) (88.3) %
Expenses
Depreciation and amortization 15,586 16,782 (1,196) (7.1) %
Interest expense 14,350 15,281 (931) (6.1) %
General and administrative expense 6,579 5,894 685 11.6 %
Acquisition, transaction and integration
expense 5,607 19 5,588 NM
Other expense (income) 205 433 (228) (52.7) %
Total expenses 42,327 38,409 3,918 10.2 %
Loss before income taxes (12,936) (2,636) (10,300) NM
Income tax expense 33 22 11 50.0 %
Net income (loss) (12,969) (2,658) (10,311) NM
Deemed dividend on redeemable preferred
stock (299) (599) 300 (50.1) %
Net income (loss) attributable to common
stockholders $ (13,268) $ (3,257) $ (10,011) NM
Total properties as of the period ended 103 103
Average available beds 12,438 12,439
NM - Not meaningful (A) Represents straight-line rental revenue and amortization of deferred community fees and other adjustments to Cash NOI.
The following table presents same store and total portfolio results for the
three months ended
Same Store Portfolio Total Portfolio
(dollars in thousands) 2021 2020 Change % 2021 2020 Change %
Resident fees and services
(5.8) % $ 77,507 $ 82,951 $ (5,444) (6.6) %
Rental revenue 1,582 1,582 - - % 1,582 1,582 - - %
Less: Property operating
expense 38,758 37,739 1,019 2.7 % 49,698 48,760 938 1.9 %
NOI 22,344 27,006 (4,662) (17.3) % 29,391 35,773 (6,382) (17.8) %
Straight-line rental revenue (67) (108) 41 (38.0) % (67) (108) 41 (38.0) %
Amortization of deferred
community fees and other 166 (284) 450 (158.5) % 4 (432) 436 (100.9) %
Cash NOI $ 22,443 $ 26,614 $ (4,171) (15.7) % 29,328 35,233 (5,905) (16.8) %
Less: non-SS Cash NOI (A)
(6,885) (8,619) 1,734 (20.1) %
SS Cash NOI $ 22,443 $ 26,614 $ (4,171) (15.7) %
Total properties as of the
period ended 82 82 103 103
Average available beds 9,867 9,868 12,438 12,439
(A) Relates to the Cash NOI of 21 assets that were managed under Holiday and
transitioned to Atria in
25
--------------------------------------------------------------------------------Resident fees and services
Total portfolio resident fees and services decreased
Same store portfolio resident fees and services decreased
Rental revenue
Rental revenue relates to rents from our triple net lease property. Same store and total rental revenue remained unchanged for the comparative periods. As a percentage of rental revenue, NOI was 100% of revenue for each fiscal year as the lessee operates the property and bears the related costs, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees. Property operating expense
Total portfolio property operating expense increased
Same store portfolio property operating expense increased$1.0 million . This increase is primarily due to higher marketing and labor-related costs, which were partially offset by lower costs incurred in response to the COVID-19 pandemic.
NOI
Total portfolio NOI decreased
Same store portfolio NOI decreased
Cash NOI
Total portfolio Cash NOI decreased$5.9 million . This is primarily due to lower NOI and more rent incentives given to residents. See above for the NOI variance explanations. Same store portfolio Cash NOI decreased$4.2 million . This is primarily due to lower NOI and more rent incentives given to residents. See above for the NOI variance explanations. Expenses
Depreciation and amortization
Depreciation and amortization decreased$1.2 million primarily due to certain furniture, fixtures, and equipment becoming fully depreciated as ofJune 30, 2020 . Interest expense Interest expense decreased$0.9 million primarily due to a lower average debt balance as a result of debt repayments and a decrease in LIBOR for the comparative periods. The weighted average effective interest rates for the three months endedJune 30, 2021 and 2020 were 3.79% and 3.81%, respectively.
General and administrative expense
General and administrative expense increased
26
--------------------------------------------------------------------------------Acquisition, transaction and integration expense
Acquisition, transaction and integration expense increased
Other expense
Other expense decreased by
Income tax expense
We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. However, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes. Income tax expense was relatively unchanged during the comparative periods.
Six months ended
The following table presents the total portfolio results as of and for the six
months ended
Six Months Ended June 30, Increase (Decrease)
(dollars in thousands) 2021 2020 Amount Percentage
Resident fees and services $ 155,620 $ 167,958 $ (12,338) (7.3) %
Rental revenue 3,165 3,165 - - %
Less: Property operating expense 99,146 99,825 (679) (0.7) %
Total NOI 59,639 71,298 (11,659) (16.4) %
Straight-line rental revenue (162) (242) 80 (33.1) %
Amortization of deferred community fees and
other (693) (735) 42 (5.7) %
Cash NOI 58,784 70,321 (11,537) (16.4) %
Addback adjustments (A) 855 977 (122) (12.5) %
Expenses
Depreciation and amortization 31,475 34,318 (2,843) (8.3) %
Interest expense 28,703 32,500 (3,797) (11.7) %
General and administrative expense 12,854 11,740 1,114 9.5 %
Acquisition, transaction and integration
expense 6,000 152 5,848 NM
Loss on extinguishment of debt - 5,884 (5,884) NM
Other expense (income) 820 328 492 150.0 %
Total expenses 79,852 84,922 (5,070) (6.0) %
Loss before income taxes (20,213) (13,624) (6,589) 48.4 %
Income tax expense 67 82 (15) (18.3) %
Loss from continuing operations (20,280) (13,706) (6,574) 48.0 %
Discontinued Operations:
Gain on sale of real estate - 19,992 (19,992) NM
Loss from discontinued operations - (3,107) 3,107 NM
Discontinued operations, net - 16,885 (16,885) NM
Net income (loss) (20,280) 3,179 (23,459) NM
Deemed dividend on redeemable preferred
stock (595) (1,197) 602 (50.3) %
Net income (loss) attributable to common
stockholders $ (20,875) $ 1,982 $ (22,857) NM
Total properties as of the period ended 103 103
Average available beds 12,438 12,439
NM - Not meaningful (A) Represents straight-line rental revenue and amortization of deferred community fees and other adjustments to Cash NOI.
27
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The following table presents same store and total portfolio results for six
months ended
Same Store Portfolio Total Portfolio
(dollars in thousands) 2021 2020 Change % 2021 2020 Change %
Resident fees and services
(6.7) % $ 155,620 $ 167,958 $ (12,338) (7.3) %
Rental revenue 3,165 3,165 - - % 3,165 3,165 - - %
Less: Property operating
expense 76,832 76,730 102 0.1 % 99,146 99,825 (679) (0.7) %
NOI 45,502 54,227 (8,725) (16.1) % 59,639 71,298 (11,659) (16.4) %
Straight-line rental revenue (162) (242) 80 (33.1) % (162) (242) 80 (33.1) %
Amortization of deferred
community fees and other (350) (499) 149 (29.9) % (693) (735) 42 (5.7) %
Cash NOI $ 44,990 $ 53,486 $ (8,496) (15.9) % 58,784 70,321 (11,537) (16.4) %
Less: non-SS Cash NOI (A) (13,794) (16,835) 3,041 (18.1) %
SS Cash NOI $ 44,990 $ 53,486 $ (8,496) (15.9) %
Total properties as of the
period ended 82 82 103 103
Average available beds 9,867 9,868 12,438 12,439
(A) Relates to the Cash NOI of 21 assets that were managed under Holiday and
transitioned to Atria in
Resident fees and services
Total portfolio resident fees and services decreased
Same store portfolio resident fees and services decreased$8.6 million . This decrease is primarily attributable to a decrease in occupancy, partially offset by an increase in average rental rates.
Rental revenue
Rental revenue relates to rents from our triple net lease property. Same store and total rental revenue remained unchanged for the comparative periods. As a percentage of rental revenue, NOI was 100% of revenue for each fiscal year as the lessee operates the property and bears the related costs, including maintenance, utilities, taxes, insurance, repairs, capital improvements and the payroll expense of property-level employees.
Property operating expense
Total portfolio property operating expense decreased$0.7 million . This decrease is primarily due to lower management fees and costs incurred in response to the COVID-19 pandemic, offset by higher marketing fees, insurance premiums and uninsured casualty losses. Same store portfolio property operating expense was relatively flat for the comparative periods. This is primarily due to lower management fees and costs incurred in response to the COVID-19 pandemic, offset by higher marketing fees, insurance premiums and uninsured casualty losses.
NOI
Total portfolio NOI decreased
Same store portfolio NOI decreased
Cash NOI
Total portfolio Cash NOI decreased
28
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Same store portfolio Cash NOI decreased
Expenses
Depreciation and amortization
Depreciation and amortization decreased$2.8 million primarily due to certain furniture, fixtures, and equipment becoming fully depreciated as ofJune 30, 2020 . Interest expense Interest expense decreased$3.8 million primarily due to a lower average debt balance in conjunction with lower effective interest rates as a result of debt repayments in conjunction with the AL/MC Portfolio Disposition, lower interest rate on the newly refinanced debt and a decrease in LIBOR for the comparative periods. The weighted average effective interest rates for the six months endedJune 30, 2021 and 2020 were 3.79% and 4.12%, respectively.
General and administrative expense
General and administrative expense increased
Acquisition, transaction and integration expense
Acquisition, transaction and integration expense increased
Loss on extinguishment of debt
Loss on extinguishment of debt decreased
Other expense
Other expense increased
Income tax expense
We are organized and conduct our operations to qualify as a REIT under the requirements of the Code. However, certain of our activities are conducted through our TRS and therefore are subject to federal and state income taxes. Income tax expense was relatively unchanged during the comparative periods.
Discontinued operations, net
InFebruary 2020 , we completed the sale of the AL/MC Portfolio Disposition which resulted in a gain on sale of real estate of$20.0 million . This gain was partially offset by a loss from discontinued operations of$16.9 million which reflects the operations of the properties sold.
LIQUIDITY AND CAPITAL RESOURCES
Our principal liquidity needs are to (i) fund operating expenses, (ii) meet debt service requirements, (iii) fund recurring capital expenditures and investment activities, if applicable, and (iv) make distributions to stockholders. As ofJune 30, 2021 , we had approximately$23.2 million in liquidity, consisting of unrestricted cash and cash equivalents. A portion of this amount is held in operating accounts used to fund expenses at our managed properties and, therefore, may not be available for distribution to stockholders. 29 -------------------------------------------------------------------------------- OnFebruary 26, 2021 , we established an at-the-market equity offering program (the "ATM Program") through which we may issue and sell, from time to time, up to an aggregate of$100 million of our common stock. Sales of the common stock, if any, may be offered and sold in accordance with the Company's instructions pursuant to a Distribution Agreement, datedFebruary 26, 2021 , between New Senior and a consortium of banks acting as sales agents. During the six months endedJune 30, 2021 , we did not issue any shares under the Distribution Agreement. Pursuant to the Merger Agreement, we agreed that we would not issue equity securities, including under the ATM Program, subject to certain limited exceptions described in the Merger Agreement. OnJuly 13, 2021 , we redeemed all 200,000 shares of our outstanding Series A Preferred Stock at the liquidation preference of$100 per share plus all accrued and unpaid dividends up to, but excluding, the redemption date. In total, we paid$20.3 million for the redemption of the Series A Preferred Stock using proceeds from drawing down on our Revolver. Our principal sources of liquidity are (i) cash flows from operating activities, (ii) proceeds from financing in the form of debt, and, from time to time, (iii) proceeds from dispositions of assets. Our cash flows from operating activities are primarily driven by (i) resident fees and services received from residents of our managed properties and (ii) rental revenues from the tenant of our triple net lease property, less (iii) operating expenses (primarily property operating expense of our managed properties, general and administrative expenses, professional fees, insurance and taxes) and (iv) interest payments on our debt. Our principal uses of liquidity are the expenses included in cash flows from operating activities, plus capital expenditures, principal payments on debt, and distributions to our stockholders. We anticipate that our cash on hand, our cash flows provided by operating activities, and cash available to be drawn down from the Revolver will be sufficient to fund our business operations, recurring capital expenditures, principal payments, and the distributions we are required to make to comply with REIT requirements over the next 12 months. Our actual distributions to stockholders have historically been higher than the REIT distribution requirement. The Revolver is an important source of liquidity for us. Our balance drawn under the Revolver fluctuates over time and was$3.5 million as ofJune 30, 2021 . Our cash flows from operating activities, less capital expenditures and principal payments, have historically been less than the amount of distributions to our stockholders. We have in the past funded the shortfall using cash on hand. In light of the impacts of COVID-19, the board of directors reduced our quarterly cash dividend on shares of our common stock for the first quarter of 2020 by 50% to$0.065 per share. The board of directors maintained the same dividend level for the remainder of 2020 and the first half of 2021. The board of directors believed that the dividend reduction in 2020 is the most prudent course of action and it continues to monitor our financial performance and liquidity. The board of directors will continue to re-evaluate the level of future dividends; however, pursuant to the Merger Agreement the board may not declare or pay a quarterly dividend in excess of$0.065 per share without the consent of Ventas. As required by the Merger Agreement relating to the pending Merger with Ventas, the Company and Ventas agreed to synchronize the record and payment dates for their dividends toOctober 1, 2021 andOctober 14, 2021 , respectively, which are the dates typically used by Ventas. The Company's dividend for the second quarter of 2021 is expected to remain at$0.065 per share, subject to the approval of our board of directors. There can be no assurance that we will pay cash dividends in an amount consistent with prior quarters. Any difference between the amount of any future dividend and the amount of dividends in prior quarters could be material, and there can be no assurance that our board of directors will declare any dividend at all. The impacts of the COVID-19 pandemic has also affected our liquidity in other ways. As discussed above in "Overview - COVID-19 & Considerations Related to Our Business," if further decreases in occupancy in our properties occur, it will result in a reduction in our revenues and our cash flows. Over time, if financial results at the properties which secure the Revolver underperform, our availability to borrow funds under the Revolver could be limited. In addition, if rental revenues and fees received from residents of our managed properties decline as a result of financial or other difficulties in residents making rent payments to us, it would have a significant effect on our cash flows from operating activities. The expectations set forth above are forward-looking and subject to a number of uncertainties and assumptions, which are described in more detail in our Annual Report on Form 10-K filed with theSEC under "Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations" and "Risk Factors," as well as below in "Risk Factors." If our expectations about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or no notice, which would limit our ability to address the shortfall on a timely basis. 30 --------------------------------------------------------------------------------
Other Factors That Could Impact Our Liquidity, Capital Resources and Capital Obligations
The following factors could impact our liquidity, capital resources and capital obligations:
•Access to Financing: Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with covenant terms, industry and market trends, the availability of capital and our investors', counterparties' and lenders' policies and rates applicable thereto and the relative attractiveness of alternative investment or lending opportunities. •Impact of Expected Additional Borrowings or Sales of Assets on Cash Flows: The availability and timing of and proceeds from additional borrowings or refinancing of existing debt may be different than expected or may not occur as expected. The timing of any sale of assets, and the proceeds from any such sales, are unpredictable and may vary materially from an asset's estimated fair value and carrying value. •Compliance with Debt Obligations: Our financings subject us and our property managers to a number of obligations, and a failure to satisfy certain obligations, including (without limitation) a failure by the guarantors of our leases to satisfy certain financial covenants that depend in part on the performance of our leased assets, which is outside of our control, could give rise to a requirement to prepay outstanding debt or result in an event of default and the acceleration of the maturity date for repayment. We may also seek amendments to these debt covenants, and there can be no assurance that we will be able to obtain any such amendment on commercially reasonable terms, if at all. As noted elsewhere in this Quarterly Report on Form 10-Q, the impacts of the COVID-19 pandemic will affect the Company's liquidity in various ways, including among other things, by further impairing our ability to access the capital markets, by reducing our revenues due to decreased occupancy at our properties and reduced asset values, which over time may limit the borrowing availability under the Revolver. Debt Obligations Our debt agreements contain various customary financial and other covenants, in some cases including, but not limited to, debt service coverage ratios, lease coverage ratio, and project yield, as defined in the agreements. We are in compliance with the covenants in our debt agreements as ofJune 30, 2021 .
Capital Expenditures
We anticipate that capital expenditures will be funded through operating cash flows from our senior housing properties. Capital expenditures, net of insurance proceeds for the managed properties were$7.7 million for the six months endedJune 30, 2021 . As landlord, we did not incur any capital expenditures for the CCRC leased to the tenant for the six months endedJune 30, 2021 . After the onset of the pandemic inMarch 2020 , we temporarily halted all elective capital expenditure projects and limited projects to those deemed essential. In summer 2020, we resumed elective capital expenditure projects that could be completed safely. With respect to our CCRC under a triple net lease arrangement, the terms of this arrangement require the tenant to fund all necessary capital expenditures in order to maintain and improve the applicable property. To the extent that our tenant is unwilling or unable to fund these capital expenditure obligations under the existing lease arrangement, we may fund capital expenditures with additional borrowings or cash flow from the operations of the senior housing properties. We may also provide corresponding loans or advances to our tenant which would increase the rent payable to us. For further information regarding capital expenditures related to our triple net lease property, see "Contractual Obligations" below and "Note 15 - Commitments and Contingencies" to our consolidated financial statements. 31 --------------------------------------------------------------------------------
Cash Flows
The following table provides a summary of our cash flows:
Increase
Six Months Ended June 30, (Decrease)
(dollars in thousands) 2021 2020 Amount
Net cash provided by (used in)
Operating activities $ 15,270 $ 14,633 $ 637
Investing activities (7,650) 369,879 (377,529)
Financing activities (19,589) (329,223) 309,634
Net increase (decrease) in cash, cash equivalents
and restricted cash (11,969) 55,289 (67,258)
Cash, cash equivalents and restricted cash,
beginning of period 53,795 63,829 (10,034)
Cash, cash equivalents and restricted cash, end of
period $ 41,826 $ 119,118 $ (77,292) Operating activities
Net cash provided by operating activities was$15.3 million and$14.6 million for the six months endedJune 30, 2021 and 2020, respectively. The period-over-period increase of$0.6 million was primarily due to a decrease in interest expense as a result of lower average debt balance in conjunction with lower effective interest rates as a result of debt repayments in conjunction with the AL/MC Portfolio Disposition, lower interest rate on the newly refinanced debt and a decrease in LIBOR for the comparative periods.
Investing activities
Net cash used in investing activities was$7.7 million and net cash provided by investing activities was$369.9 million for the six months endedJune 30, 2021 and 2020, respectively. The period-over-period decrease of$377.5 million was due to net proceeds received inFebruary 2020 from the AL/MC Portfolio Disposition of$375.0 million .
Financing activities
Net cash used in financing activities was$19.6 million and$329.2 million for the six months endedJune 30, 2021 and 2020, respectively. The period-over-period increase of$309.6 million was primarily due to repayments of debt in conjunction with the AL/MC Portfolio Disposition, debt refinancings of$576.1 million offset by proceeds from the 2020 Freddie Financing of$270.0 million .
REIT Compliance Requirements
We are organized and conduct our operations to qualify as a REIT forU.S. federal income tax purposes.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains. We intend to pay dividends greater than all of our REIT taxable income to holders of our common stock in 2021, if, and to the extent, authorized by our board of directors. We note that a portion of this requirement may be able to be met in future years with partial stock dividends, rather than cash distributions, subject to limitations. We expect that our operating cash flows will exceed REIT taxable income due to depreciation and other non-cash deductions in computing REIT taxable income. However, before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our obligations. If we do not have sufficient liquid assets to enable us to satisfy the 90% distribution requirement, or if we decide to retain cash, we may sell assets, or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Income Tax
We are organized and conduct our operations to qualify as a REIT under the
requirements of the Code. Currently, certain of our activities are conducted
through our TRS and therefore are subject to federal and state income taxes at
regular corporate tax rates.
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--------------------------------------------------------------------------------OFF-BALANCE SHEET ARRANGEMENTS
As ofJune 30, 2021 , we do not have any off-balance sheet arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, special purpose or variable interest entities established to facilitate off-balance sheet arrangements. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
CONTRACTUAL OBLIGATIONS
As ofJune 30, 2021 , we had the following material contractual obligations, including estimates of interest payments on our floating rate debt (dollars in thousands): Period from July 1, 2021 to December 31, 2021 2022 (D) 2023 2024 2025 Thereafter Total Principal payments (A)$ 5,443 $ 24,542 $ 25,116 $ 30,530 $ 27,159 $ 28,497 $ 141,287 Balloon payments (A) - 42,206 - 3,500 1,077,820 230,346 1,353,872 Subtotal 5,443 66,748 25,116 34,030 1,104,979 258,843 1,495,159 Redeemable preferred stock 20,000 - - - - - 20,000 Interest & redeemable preferred stock dividend (A)(B) 22,413 43,328 42,161 41,397 34,484 23,266 207,049 Leases 322 515 472 240 8 305 1,862 Total obligations (C)$ 48,178 $ 110,591 $ 67,749 $ 75,667 $ 1,139,471 $ 282,414 $ 1,724,070 (A)Estimated principal, balloon, and interest payments on floating rate debt are calculated using LIBOR rates in effect atJune 30, 2021 and may not be indicative of actual payments. Actual payments may vary significantly due to LIBOR fluctuations. See "Note 8 - Debt, Net" to the consolidated financial statements for further information about interest rates. (B)Includes$0.3 million paid inJuly 2021 for dividends accrued up to, but excluding, the redemption date on the Series A redeemable preferred stock. (C)Total obligations include an estimate of interest payments on floating rate debt, see Note A above. (D)The Company has two 1-year extension options to defer the balloon payment; the second extension requires the payment of a nominal extension fee. In addition to our contractual obligations, we are a party to property management agreements with property managers. See "Note 15 - Commitments and Contingencies" to the consolidated financial statements for information related to our capital improvement and repair commitments.
NON-GAAP FINANCIAL MEASURES
A non-GAAP financial measure is a measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are not excluded from or included in the most directly comparable GAAP measure. We consider certain non-GAAP financial measures to be useful supplemental measures of our operating performance for management and investors. GAAP accounting for real estate assets assumes that the value of real estate assets diminishes predictably over time, even though real estate values historically have risen or fallen with market conditions. As a result, many industry investors look to non-GAAP financial measures for supplemental information about real estate companies. You should not consider non-GAAP measures as alternatives to GAAP net (loss) income, which is an indicator of our financial performance, or as alternatives to GAAP cash flow from operating activities, which is a liquidity measure. Additionally, non-GAAP measures are not intended to be a measure of our ability to satisfy our debt and other cash requirements. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP measures in conjunction with GAAP net (loss) income, cash flow from operating activities, investing activities and financing activities, as presented in our consolidated financial statements, and other financial data included elsewhere in this report. Moreover, the comparability of non-GAAP financial measures across companies may be limited as a result of differences in the manner in which real estate companies calculate such measures.
Below is a description of the non-GAAP financial measures used by our management and reconciliations of these measures to the most directly comparable GAAP measures.
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--------------------------------------------------------------------------------Funds From Operations, Normalized Funds From Operations and Adjusted Funds from Operations
We use Funds From Operations ("FFO") and Normalized FFO as supplemental measures
of our operating performance. We use the National Association of Real Estate
Investment Trusts ("NAREIT") definition of FFO. NAREIT defines FFO as GAAP net
income (loss) attributable to common stockholders, which includes loss from
discontinued operations, excluding gains (losses) from sales of depreciable real
estate assets and impairment charges of depreciable real estate, plus real
estate depreciation and amortization, and after adjustments for unconsolidated
entities and joint ventures to reflect FFO on the same basis. FFO does not
account for debt principal payments and is not intended as a measure of a REIT's
ability to satisfy such payments or any other cash requirements.
Normalized FFO, as defined below, measures the financial performance of our
portfolio of assets excluding items that, although incidental to, are not
reflective of the day-to-day operating performance of our portfolio of assets.
We believe that Normalized FFO is useful because it facilitates the evaluation
of our portfolio's operating performance (i) between periods on a consistent
basis and (ii) to the operating performance of other real estate companies.
However, comparability may be limited because our calculation of Normalized FFO
may differ significantly from that of other companies or because of features of
our business that are not present in other companies.
We define Normalized FFO as FFO excluding the following income and expense
items, as applicable: (a) acquisition, transaction and integration related
expenses; (b) the write off of unamortized discounts, premiums, deferred
financing costs, or additional costs, make whole payments and penalties or
premiums incurred as the result of early repayment of debt (collectively "Gain
(loss) on extinguishment of debt"); (c) incentive compensation to affiliate
recognized as a result of sales of real estate; (d) the remeasurement of
deferred tax assets; (e) valuation allowance on deferred tax assets, net; (f)
termination fee to affiliate; (g) gain on lease termination; (h) compensation
expense related to transition awards; (i) litigation proceeds; and (j) other
items that we believe are not indicative of operating performance, generally
reported as "Other expense (income)" in our Consolidated Statements of
Operations.
We also use Adjusted FFO ("AFFO") as a supplemental measure of our operating
performance. We believe AFFO is useful because it facilitates the evaluation of
(i) the current economic return on our portfolio of assets between periods on a
consistent basis and (ii) our portfolio versus those of other real estate
companies that report AFFO. However, comparability may be limited because our
calculation of AFFO may differ significantly from that of other companies, or
because of features of our business that are not present in other companies.
We define AFFO as Normalized FFO excluding the impact of the following: (a)
straight-line rental revenue; (b) amortization of above / below market lease
intangibles; (c) amortization of deferred financing costs; (d) amortization of
premium or discount on mortgage notes payable; (e) amortization of deferred
community fees and other, which includes the net change in deferred community
fees and other rent discounts or incentives; and (f) amortization of
equity-based compensation expense.
The following table sets forth a reconciliation of net income (loss) attributable to common stockholders to FFO, Normalized FFO and Adjusted FFO; adjustments below include amounts related to properties classified as discontinued operations:
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2021 2020 2021 2020
Net income (loss) attributable to common
stockholders $ (13,268) $
(3,257)
Depreciation and amortization 15,586 16,782 31,475 34,318 Gain on sale of real estate - - - (19,992) FFO 2,318 13,525 10,600 16,308 Acquisition, transaction and integration expense 5,607 19 6,000 1,189 Loss on extinguishment of debt - - - 9,486 Compensation expense related to transition awards 301 295 626 685 Other expense (income) (A) 205 461 820 167 Normalized FFO 8,431 14,300 18,046 27,835 Straight line rental revenue (67) (108) (162) (242) Amortization of equity-based compensation expense 2,013 1,428 3,773 2,533 Amortization of deferred financing costs 894 872 1,851 1,778 Amortization of deferred community fees and other 4 (432) (693) (1,745) Adjusted FFO$ 11,275 $ 16,060 $ 22,815 $ 30,159
(A) Primarily includes insurance recoveries and casualty related charges.
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--------------------------------------------------------------------------------Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA") facilitates an assessment of the operating performance of
our existing portfolio of assets on an unleveraged basis by eliminating the
impact of our capital structure and tax position. We define Adjusted EBITDA as
net income (loss) attributable to common stockholders, which includes loss from
discontinued operations, before interest, taxes, depreciation and amortization
(including non-cash equity-based compensation expense), excluding deemed
dividends on redeemable preferred stock, gain or loss on sale of real estate,
impairment of real estate held for sale, acquisition, transaction and
integration expense, loss on extinguishment of debt, compensation expense
related to transition awards, incentive compensation on sale of real estate,
termination fee to affiliate, gain on lease termination, litigation proceeds,
and other expense.
The following table sets forth a reconciliation of net income (loss) attributable to common stockholders to Adjusted EBITDA; adjustments below include amounts related to properties classified as discontinued operations:
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2021 2020 2021 2020
Net income (loss) attributable to common
stockholders $ (13,268) $ (3,257) $ (20,875) $ 1,982
Depreciation and amortization 15,586 16,782 31,475 34,318
Deemed dividend on redeemable preferred stock 299 599 595 1,197
Gain on sale of real estate - - - (19,992)
Acquisition, transaction and integration
expense 5,607 19 6,000 1,189
Loss on extinguishment of debt - - - 9,486
Compensation expense related to transition
awards 301 295 626 685
Other expense (income) (A) 205 461 820 167
Amortization of equity-based compensation
expense 2,013 1,428 3,773 2,533
Interest expense 14,350 15,281 28,703 33,861
Income tax expense 33 23 67 82
Adjusted EBITDA $ 25,126 $ 31,631 $ 51,184 $ 65,508 (A) Primarily includes insurance recoveries and casualty related charges.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of operations is based upon our historical financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Our estimates are based on information available to management at the time of preparation of the financial statements, including the result of historical analysis, our understanding and experience of our operations, our knowledge of the industry and market-participant data available to us. Actual results have historically been in line with management's estimates and judgments used in applying each of the accounting policies described below, and management periodically re-evaluates accounting estimates and assumptions. Actual results could differ from these estimates and materially impact our consolidated financial statements. However, we do not expect our assessments and assumptions below to materially change in the future. Other than critical accounting policies mentioned in "Note 2 - Summary of Significant Accounting Policies" of our consolidated financial statements, there were no material changes to our critical accounting policies disclosed in our Form 10-K for the year endedDecember 31, 2020 .
RECENT ACCOUNTING PRONOUNCEMENTS
See "Note 2 - Summary of Significant Accounting Policies" of our consolidated financial statements for information about recent accounting pronouncements.
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