Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Strategic Plan
On April 9, 2021, we announced a new strategic plan, or the Strategic Plan. For more information on the Strategic Plan and the progress we have made in regards to the Reposition, Evolve and Diversify phases of the Strategic Plan during the year ended December 31, 2021, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 1, 10 and 19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Following the completion of the Reposition phase of the Strategic Plan, we continue to manage 120 senior living communities for DHC, representing 17,899 living units and approximately 73.2% of our residential management fees for the year ended December 31, 2021, and we continue to own 20 senior living communities with 2,100 living units.
Presented below is a summary of the units owned and managed by us as of December 31, 2021 following the completion of the Reposition phase of the Strategic Plan:
Total Units (1)
Independent living
Assisted living
Memory care
Total
(1) The units operated as of December 31, 2021 include 20 Five Star senior living communities that are owned by us and 120 Five Star senior living communities managed by us for DHC and excludes 107 Five Star senior living communities with approximately 7,400 living units that we previously managed for DHC that were transitioned to new operators during the year ended December 31, 2021 and one senior living community with approximately 100 living units that was closed in February 2022.
Presented below is a summary of the communities, units, average occupancy, month end occupancy, revenues and residential management fees for the Five Star senior living communities we manage for DHC, as of and for the year ended December 31, 2021 after the completion of the Reposition phase of the Strategic Plan (dollars in thousands):
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As of and for the Year Ended December 31, 2021
Communities
Units
Average Occupancy
Month End Occupancy
Community Revenues (1)
Management Fees (2)(3)
Independent and assisted living communities (4)
Total
(1) Represents the revenues of the Five Star senior living communities we managed for DHC. Managed senior living communities' revenues do not represent our revenues, and are included to provide supplemental information regarding the operating results of the Five Star senior living communities from which we earn residential management fees.
(2) Excludes residential management fees of $1,865, for the year ended December 31, 2021, for the 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 2021 and are to be repositioned.
(3) Excludes residential management fees of $10,828, for the year ended December 31, 2021, for the 107 senior living communities with approximately 7,400 living units that were transitioned to new operators during the year ended December 31, 2021, and one senior living community with approximately 100 living units that was closed in February 2022.
(4) Excludes one CCRC with approximately 100 living units that we closed in February 2022.
Presented below is a summary of the Ageility rehabilitation clinics we operated as of and for the year ended December 31, 2021 and the number of clinics to be operated after the implementation of the Reposition phase of the Strategic Plan (dollars in thousands):
As of and for the
Year Ended December 31, 2021
Retained
Number of Clinics
Total Revenue (3)
Average Revenue per Clinic
Adjusted EBITDA Margin
Number of Clinics
Total Revenue (1)(3)
Average Revenue per Clinic
Adjusted EBITDA Margin
Inpatient Clinics in Transitioned Communities
Outpatient Clinics in DHC Communities
Outpatient Clinics in Transitioned Communities (2)
Total Clinics at DHC Communities
Outpatient Clinics at AlerisLife Owned Communities
Outpatient Clinics at Other Communities (4)
Total Clinics
n/m - not meaningful because the revenues include revenue earned from 37 inpatient clinics, but, at December 31, 2021, there were only ten inpatient clinics.
(1) Excludes revenue of $11,233 for the year ended December 31, 2021 for 27 Ageility inpatient rehabilitation clinics that were closed throughout the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics which are expected to be closed commencing in August 2022 as part of the Strategic Plan. Excludes revenue of $1,717 for the year ended December 31, 2021 for 17 Ageility outpatient rehabilitation clinics that were closed in December 2021 in Five Star senior living communities that were transitioned in 2021 or closed in February 2022.
(2) As part of the Strategic Plan, 107 Five Star senior living communities managed for DHC were transitioned to new operators in 2021 and one senior living community was closed in February 2022. These transitioned communities had 45 Ageility outpatient rehabilitation clinics. As of December 31, 2021 we continue to operate 28 of these clinics. The remaining 17 clinics were closed in December 2021 in senior living communities that were transitioned to new operators in 2021 or closed in February 2022.
(3) Total Ageility revenue excludes home healthcare services, which are part of the lifestyle services segment.
(4) Other communities includes outpatient rehabilitation clinics at senior living communities not owned or managed by us.
We currently expect to continue to diversify revenue through growth of our lifestyle service offerings, including opening new outpatient rehabilitation clinics and expanding our fitness and other home-based service offerings within and outside of Five Star senior living communities. Fitness offerings started as an extension of Ageility's outpatient rehabilitation services and, while representing only 4.9% of segment revenues for the year ended December 31, 2021, fitness revenues increased to $3.3 million, or by 38.1% when compared to the same period in 2020 when it represented 2.9% of segment revenue. Since January 1, 2020, Ageility has opened 32 net new outpatient rehabilitation clinics, 17 of which were opened in 2020, and 15 of which were opened during the year ended December 31, 2021 (exclusive of the 17 outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were transitioned to new operators in 2021 or closed in February 2022).
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General Industry Trends
We believe that, in the United States, the current primary market for services to older adults is focused on individuals age 75 and older. As a result of medical advances, adults are living longer and expanding their options as to where they choose to reside as they age. The aging of the Baby Boomers and their increasing life expectancy are leading to a fundamental demographic shift. The U.S. age profile shows a 17.8% rise in the 75+ demographic in the last ten years. This is expected to rise even more significantly by 2030 (as evidenced by the aging boomers in the 65-74 age category) (2) .
Due to these demographic trends, service providers are evolving to serve the growing number of older adults and we expect the demand for these services to increase in future years regardless of where the older adults may reside. Recently, the senior living industry has been materially adversely impacted by the novel coronavirus SARS-CoV-2, or COVID-19, and the resulting pandemic, or the Pandemic, and its economic impact. As we continuously evaluate market opportunities related to older adults, we are cognizant of the demographic trends and projections that indicate that the age 65 and older demographic will represent the largest growth population in the United States over the next decade and beyond. We believe that increased longevity, coupled with evolving consumer preferences, will heighten demand for physical and recreational activities, as well as lifestyle-enhancing services, as older adults seek quality of life, ongoing engagement and sustained independence.
COVID-19 Pandemic
The Pandemic has significantly disrupted and may continue to significantly disrupt the United States economy, our business and the senior living industry as a whole. The World Health Organization declared COVID-19 a pandemic in March 2020. From March 2020 through February 18, 2022, there have been approximately 77.5 million reported cases of COVID-19 in the United States and approximately 0.9 million related deaths, which have disproportionately impacted older adults.
The U.S. economy has been growing as the Pandemic conditions have significantly improved in the United States from their low points. Commercial activities have been increasingly returning to pre-Pandemic practices and operations as a result and because of recent and expected future government spending on relief from the Pandemic, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the Pandemic on commercial activities, including risks that may arise from (i) mutations or related strains of the virus, that may develop from time to time, (ii) the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and (iii) the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens' ability to otherwise achieve immunity to the virus. For further information and risks relating to the Pandemic on us and our business, see Part I, Item 1, "Business—COVID Pandemic" and Part I, Item 1A, "Risk Factors", of this Annual Report on Form 10-K.
On September 10, 2021, the Biden Administration announced that the U.S. Department of Health and Human Services, or HHS, through the Health Resources and Services Administration, or HRSA, is making $25.5 billion in new funding available for health care providers affected by the COVID-19 pandemic. This funding includes $8.5 billion in American Rescue Plan, or ARP, resources for providers who serve rural Medicaid, Children's Health Insurance Program, or CHIP, or Medicare patients, and an additional $17.0 billion for Provider Relief Fund, or PRF, Phase 4 for a broad range of providers who can document revenue loss and expenses associated with the Pandemic.
Vaccinations. On December 11, 2020 and December 18, 2020, the FDA issued EUAs to Pfizer Inc. / BioNTech SE and Moderna, Inc., respectively, for vaccines for the prevention of COVID-19. The CDC's Advisory Committee on Immunization Practices placed long-term care facility residents and healthcare personnel in "Phase 1a," the highest priority group to receive COVID-19 vaccines, which included residents and team members at our SNFs, memory care units and assisted living communities. States subsequently prioritized all categories of older adults, which included our independent living facilities . In order to protect the health and safety of our residents, team members and clients, we coordinated multiple vaccination clinics throughout 2021 for our residents and team members in all service lines of business at no cost to those individuals. We expect that widespread vaccination for COVID-19 amongst our residents and team members will decrease the incidence of COVID-19 in our senior living communities and decrease our costs for PPE and COVID-19 testing.
(2) Source: Bureau of labor statistics, 2021.
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The Centers for Medicare & Medicaid Services, or CMS, is taking action to require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action builds on the vaccination requirement for nursing facilities previously announced by CMS on September 9, 2021, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care. These requirements will apply to approximately 50,000 providers and cover a majority of health care workers across the country. Some facilities and states have begun to adopt hospital staff or health care sector vaccination mandates. This action will create a consistent standard across the country, while giving patients assurance of the vaccination status of those delivering care.
As previously announced, all team members who work in or visit our communities or Ageility clinics as part of their responsibilities were required to be fully vaccinated against COVID-19 by September 1, 2021. As of September 30, 2021, we were in compliance with this requirement.
Protective Measures for Residents and Team Members. Our customers are part of a population that has been disproportionately affected by the Pandemic. Our team members who work in our communities and/or clinics may be at a higher risk of contracting or spreading COVID-19 due to the nature of their work environment when caring for our residents and clients. Our highest priority is maintaining the health and well-being of our residents, clients and team members. As a result, we continue to monitor, evaluate and adjust our plans to address the impact to our business. We have, among other steps:
• facilitated multiple COVID-19 vaccination clinics, including boosters, for residents and team members at our senior living communities and Ageility clinics, and encouraged our residents and team members at our senior living communities and Ageility clinics to receive a COVID-19 vaccination as soon as it became available at their community;
• restricted access to our senior living communities to essential visitors and team members, and only reopened communities when it was determined safe to do so in accordance with applicable federal, state and local regulations and guidelines, and our internal criteria;
• reopened our rehabilitation clinics for in-person services when it was determined safe to do so and in accordance with federal, state and local regulations and guidelines;
• reopened our corporate office, when it was safe to do so, in accordance with federal, state and local regulations and guidelines;
• enhanced infectious disease prevention and control policies, procedures and protocols at all properties;
• created a cross-functional team to implement proactive protection for residents in our senior living communities and clients in our rehabilitation clinics as well as team members;
• provided additional and enhanced training to team members at all levels of the organization;
• worked with vendors to provide adequate supplies and PPE to our senior living communities and rehabilitation clinics;
• identified residents needs for higher level of care and worked with them and their family members to ensure their safety during the Pandemic; and
• effectively transitioned to virtual sales and marketing activities and thoughtfully proceeded with resident move-ins, when appropriate.
In addition, we have taken actions to safeguard and support our team members, residents, clients and senior living communities including:
• provided meals to team members to limit their outside exposure during shifts;
• provided COVID-19 emergency leave to team members, including paid leave to team members if they were exposed to, or tested positive for, COVID-19 and offered flexible work schedules;
• recognized and rewarded team members with bonuses in addition to our total rewards package;
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• provided corporate team members with appropriate information technology, including laptop computers, smart phones, computer applications, information technology security applications and technical support, to work remotely during mandatory work-from-home orders directed by local and state governments;
• promoted access to mental health services and other benefits to support residents' and team members' mental and physical well-being as well as complementary counseling and support services for residents;
• hosted virtual all-hands meetings to communicate our policies, procedures and guidelines related to COVID-19 response, vaccination safety and availability and re-opening efforts and to ensure team members are supported with assistance and guidance;
• implemented new virtual group activities for residents that allow for engagement while maintaining social distancing;
• expanded effective communication channels to residents, their families and team members;
• provided devices and connectivity options for residents' interactions with family members, virtual programming opportunities and distance learning; and
• focused on learning and development opportunities for team members.
We continue to monitor regulations and guidance from federal, state and local governments and agencies and will adapt and update our policies and procedures to continue to prioritize the health and safety of our residents, clients and team members.
Occupancy. As a result of the Pandemic, we experienced declines in average occupancy at our owned and leased senior living communities from 76.4% for the year ended December 31, 2020 to 69.5% for the year ended December 31, 2021. Consistent with occupancy declines experienced within our owned and leased portfolio, the senior living communities we manage on behalf of DHC also experienced average occupancy declines from 77.2% for the year ended December 31, 2020 to 71.0% for the year ended December 31, 2021. At February 18, 2022, all of our senior living communities were accepting new residents in all service lines of business (independent living, assisted living or memory care). We expect that the impact of the widespread administration of vaccinations for COVID-19 among our residents and team members will decrease the incidence of COVID-19 in our senior living communities and, as of February 18, 2022 there were less than 75 confirmed cases among our over 15,700 residents. With the reduction of confirmed cases, we have been able to significantly reduce and in some cases eliminate restrictions at our senior living communities, which has enabled us to shift our efforts to new admissions and resident programs. Despite the continued distribution of the COVID-19 vaccine, as a result of the ongoing effects of the Pandemic, there is a possibility of continued or increased occupancy in the near term, due to possible surge of COVID variant viruses, current residents leaving our senior living communities, restrictions on new residents moving into and/or touring our senior living communities and the possibility that older adults will or moving into senior living communities because of perceived safety issues associated with the Pandemic. Our revenues are largely dependent on occupancy at our senior living communities and any in occupancy impacts our revenues, unless we are to offset those revenues with increased rates we charge our residents and clients or other sources of increased revenues.
Expenses. We have also incurred and may continue to incur significant costs to address the Pandemic, which principally include costs associated with PPE, testing supplies, professional services costs, agreements with laboratories to provide COVID-19 testing to our residents and team members that were not otherwise covered by government payer or third-party insurance sources and disposable food supplies as well as increased sanitation and janitorial supplies and increased labor costs. Our labor costs have also increased as a result of rising health insurance costs caused by the Pandemic and by team members pursuing elective procedures they deferred or were not able to obtain during 2020 during the Pandemic. Although COVID-19 vaccinations have been made available to residents and team members at our senior living communities, we expect the increased costs associated with the Pandemic to continue for the reasonably foreseeable future. We incur these costs for our owned senior living communities, rehabilitation and wellness services clinics and corporate and regional operations. Although DHC is responsible for these costs at the senior living communities we manage for DHC, increases in these costs would reduce EBITDA realized at these communities and, hence, negatively impact our ability to earn, and the amount of, any incentive fees, as well as possibly impact other aspects of our management arrangements. The Pandemic has also disrupted the global supply chain, including many of our medical and technological suppliers, due to factory and reduced manufacturing output. We believe that our current supplies and supplies we currently have on order should be sufficient to support our needs for the reasonably foreseeable future. We have undertaken efforts to mitigate potential future impacts on the supply chain by increasing our stock of materials to meet our expected increased needs for the reasonably foreseeable future and by identifying and
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engaging alternative suppliers. We continue to be alert to the potential for disruptions that could arise from the Pandemic and remain in close contact with our suppliers.
Results of Operations. We have experienced negative impacts on our operating results and on the operating results for those communities we manage for DHC as a result of the Pandemic and we expect those negative impacts to continue for the reasonably foreseeable future. We expect that widespread vaccination at our senior living communities will decrease the incidence of COVID-19 at those communities and will eventually decrease our costs and the negative impacts of the Pandemic on our operating results and the operating results for those communities we manage for DHC. Despite the approval and increasing availability of several COVID-19 vaccines, going forward, the amounts and type of revenue, expense and cash flow impacts resulting from the Pandemic will be dependent on a number of additional factors, including: the speed, depth, geographic reach and duration of the spread of the disease; the distribution, availability and effectiveness of therapeutic treatments and testing for COVID-19 to our residents, clients and team members; the legal, regulatory and administrative developments that occur, including the availability of governmental financial and regulatory relief to businesses; our infectious disease control and prevention efforts; the duration and severity of the economic in response to the Pandemic; and consumer confidence and the demand for our communities and services.
Additionally, we expect that other direct and indirect impacts of the Pandemic, softness in the U.S. housing market, higher unemployment, lower levels of consumer confidence, stock market volatility and/or changes in demographics will adversely affect the ability of older adults and their families to afford our services.
Senior Living Development. For the past few years prior to the Pandemic, increased access to capital and continued low-interest rates appear to have encouraged increased senior living development, particularly in areas where existing senior living communities have historically experienced high occupancy. This has resulted in a significant increase in new senior living community inventory entering the market in recent years, increasing competitive pressures on us, particularly in certain of our geographic markets. Although new development had been slowing prior to the onset of the Pandemic, and the impact of the Pandemic may further impact new development, we expect that new inventory will enter the market in the near term due to the increased development of senior living communities in the past several years. That increase will continue to have a competitive effect on our business for at least the next few years; these challenges may be intensified as a result of the Pandemic and its impact on the senior living community industry.
Labor Market. In connection with the Pandemic, we incurred increased labor costs as a result of increased overtime pay for team members, increased costs associated with team member engagement and retention programs, such as meals for certain of our team members and bonuses to team members at our senior living communities and rehabilitation clinics, increased use of temporary staffing and increased health insurance and workers' compensation costs. In addition, we increased the rates paid to community based team members during 2021 in order to be competitive with the increasing rates in the market for these front line team members. We also increased staffing needs at the communities we operated, for which we continue to use temporary staffing through our arrangements with staffing agencies to accommodate staffing shortages due to a tight labor market in addition to quarantine protocols of our current staff that may have contracted or been potentially exposed to COVID-19. The market for skilled front line workers within and outside of the senior living industry continues to be very competitive, and the current demand for those workers remains strong.
2021 Operations
We primarily earn revenue by providing housing and services to residents of Five Star's senior living communities that we own or lease, in addition to managing senior living communities for DHC, and by providing our residents, clients and others, with lifestyle services inclusive of rehabilitation clinics at our senior living communities, as well as at outpatient rehabilitation clinics located separately from our senior living communities. Effective January 1, 2020, pursuant to the restructuring of our business arrangements with DHC, 166 of our formerly leased senior living communities from DHC were converted to managed communities. In 2021, as part of the Strategic Plan, we transitioned 107 senior living communities that we previously managed for DHC to new operators and we closed one senior living community in February 2022. For further information on the Strategic Plan, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 1, 10 and 19 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. We bill all private pay residents in advance for the housing and services to be provided in the following month.
Our expenses primarily were:
• residential wages and benefits, including wages and wage-related expenses, such as health insurance, workers’ compensation insurance and other benefits for our team members working at our owned senior living communities;
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• other residential operating expenses, including utilities, housekeeping, dietary, maintenance, insurance and community-level administrative costs at our owned senior living communities;
• lifestyle services expenses, including wages and wage-related expenses, such as health insurance and other benefits for our team members working at our rehabilitation clinics, as well as other operating expenses such as insurance, supplies and other administrative costs;
• costs incurred on behalf of managed senior living communities, including wages and benefits for staff and other operating expenses related to the senior living communities that we manage for DHC, which are reimbursed to us by DHC, including from revenues we receive from the applicable managed communities, pursuant to our management agreements with DHC. For more information about our management arrangements with DHC, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
• general and administrative expenses, principally comprised of wages and wage-related expenses for headquarters and divisional and regional staff as well as investments in technology used in supporting our residential and lifestyle services business lines and professional service fees and other administrative costs;
• rent expense attributable to the four senior living communities we leased from PEAK through September 30, 2021. For more information about our lease arrangements with PEAK, see “Properties—Our Leases and Management Agreements with DHC” in Part I, Item 2 of this Annual Report on Form 10-K and Note 11 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K;
• depreciation and amortization expense as we incur depreciation expense on buildings and furniture and equipment that we own and amortization expense on our finance lease right-of-use assets; and
• interest and other expense, primarily including interest on outstanding debt and amortization of deferred financing costs.
Expansion Activities
During 2021 and 2020, we opened 15 and 17 net new outpatient rehabilitation clinics, respectively, exclusive of the closure of 17 outpatient rehabilitation clinics in December 2021 in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022.
We currently expect that our expansion activities will be focused on entering into additional long-term management agreements for senior living communities and growing lifestyle services, rather than from the acquisition or leasing of additional senior living communities, although we may from time to time acquire or lease additional senior living communities.
Investment Activities
During 2021 and 2020, we received gross proceeds of $4.9 million and $10.4 million, respectively, in connection with the sale of equity and debt investments through our offshore captive insurance company, and recorded net realized gains of $0.2 million and $0.4 million, respectively.
During 2021 and 2020, we purchased certain debt and equity investments through our offshore captive insurance company for $3.2 million and $5.8 million, respectively.
2020 Restructuring of our Business Arrangements with DHC
Effective as of January 1, 2020 we restructured our business arrangements with DHC.
For more information regarding the restructuring transactions, our management agreements and other transactions with DHC, see “Business—Our Growth Strategy” in Part I, Item 1 of this Annual Report on Form 10-K, Notes 1, 10 and 15 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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Credit Facilities
We had a $65.0 million Credit Facility with a syndicate of lenders that was available for us to use for general business purposes, of which $10.8 million was available for borrowing as of December 31, 2021.
On January 27, 2022, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. Upon entering into the Loan, our Credit Facility was terminated. For more information about the Loan, see “Business—Financing Sources” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For more information regarding our Credit Facility and our irrevocable standby letters of credit, see Note 9 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Disposition Activities
In 2021, as part of the Strategic Plan, we transitioned the management of 107 senior living communities that we previously managed for DHC to new operators. In addition, we closed one senior living community in February 2022. For the years ended December 31, 2021 and 2020, we recognized $10.8 million and $17.4 million, respectively, of residential management fees for these transitioned or closed communities.
In connection with the Strategic Plan, we closed 27 of the 37 inpatient rehabilitation clinics. An additional ten inpatient rehabilitation clinics are expected to be closed commencing in August 2022 as part of the transition.
In 2020, DHC sold nine senior living communities that we previously managed located in California, Mississippi, Nebraska and Wisconsin. Upon completion of these sales, our management agreements with DHC for these communities were terminated. In addition, DHC, in November 2020, closed seven senior living communities and one building in one senior living community that we previously managed. For the year ended December 31, 2020, we recognized $2.7 million of residential management fees related to the sold and closed communities.
During 2021 and 2020, we closed 22 and six outpatient rehabilitation clinics, respectively, primarily as a result of being located in senior living communities that we managed on behalf of DHC that were transitioned to a new operator, sold or closed.
Results of Operations
We operate in two reportable segments: (1) residential (formerly known as senior living) and (2) lifestyle services (formerly known as rehabilitation and wellness services). In the residential segment, we manage for others and operate, respectively, primarily independent living communities and assisted living communities and an active adult community that are subject to centralized oversight and provide housing and services to older adults. Included in the results of the assisted living communities are memory care living units. In the lifestyle services segment, we provide a comprehensive suite of rehabilitation and wellness services, including physical, occupational, speech and other specialized therapy services, in inpatient and outpatient clinics as well as home health and fitness services.
For the year ended December 31, 2021, we recognized $12.7 million of residential management fees related to the senior living communities and units that we previously managed for DHC, which have been transitioned to other operators or were closed pursuant to the Strategic Plan. For the year ended December 31, 2021, we recognized lifestyle services revenue of $11.2 million related to the inpatient rehabilitation clinics that have been or will be closed pursuant to the Strategic Plan. The information in the Key Statistical Data table below includes those communities, units and clinics in the results reported.
All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional and general liability and certain automobile insurance programs.
Key Statistical Data For the Years Ended December 31, 2021 and 2020.
The following tables present a summary of our operations for the years ended December 31, 2021 and 2020 (dollars and visits in thousands, except RevPAR and RevPOR) :
Year ended December 31,
Increase/(Decrease)
Amount
Percent
REVENUES
Lifestyle services
Residential
Residential management fees
Total management and operating revenues
Reimbursed community-level costs incurred on behalf of managed communities
Other reimbursed expenses
Total revenues
Other operating income
OPERATING EXPENSES
Lifestyle services expenses
Residential wages and benefits
Other residential operating expenses
Community-level costs incurred on behalf of managed communities
General and administrative
Restructuring expenses
Depreciation and amortization
Total operating expenses
Operating (loss) income
Interest, dividend and other income
Interest and other expense
Unrealized gain on equity investments
Realized gain on sale of debt and equity investments
Loss on termination of leases
Loss before income taxes and equity in losses of an investee
Provision for income taxes
Equity in losses of an investee
Net loss
Owned and leased communities:
Number of communities (end of period)
Number of living units (end of period)
Month end occupancy at December 31,
300 bps
Average occupancy
(690) bps
RevPAR (2)
RevPOR (3)
Managed communities:
Number of communities (end of period)
Number of living units (end of period)
Month end occupancy at December 31,
400 bps
Average occupancy
(620) bps
RevPAR (2)
RevPOR (3)
Lifestyle services:
Average revenue per outpatient clinic
Number of visits at outpatient clinics
Number of inpatient clinics (end of period)
Number of outpatient clinics (end of period)
Total clinics
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n/m - not meaningful
(1) The summary of operations includes (i) 107 senior living communities managed for DHC with approximately 7,400 units that were transitioned to new operators during the year ended December 31, 2021 and one senior living community with approximately 100 units that we manage for DHC that was closed in February 2022, (ii) 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 2021 and are in the process of being repositioned that we will continue to manage for DHC, (iii) 27 Ageility inpatient rehabilitation clinics that were closed during the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed commencing in August 2022 as part of the Strategic Plan and (iv) 17 Ageility outpatient rehabilitation clinics, that were closed in December 2021 in senior livings communities that were transitioned to a new operator in 2021 or closed in February 2022. In addition, the summary of operations includes four leased communities with approximately 200 living units where the lease was terminated on September 30, 2021.
(2) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
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Comparable Communities and Clinics
Comparable communities and clinics (senior living communities and rehabilitation clinics that we have continually operated or managed since January 1, 2020, excluding those communities, units and clinics that have been transitioned to new operators or have been closed per the Strategic Plan as well as all four former leased communities, the lease for which was terminated on September 30, 2021) (dollars in thousands, except RevPOR and RevPAR):
Year Ended December 31,
Increase/(Decrease)
Amount
Percent
REVENUES
Lifestyle services
Residential
Residential management fees
Other operating income
OPERATING EXPENSES
Lifestyle services expenses
Residential wages and benefits
Other residential operating expenses
Owned communities:
Number of communities (end of period)
Number of living units (end of period) (1)
Month end occupancy at December 31,
250 bps
Average occupancy
(680) bps
RevPAR (2)
RevPOR (3)
Managed communities:
Number of communities (end of period)
Number of living units (end of period) (1)
Month end occupancy at December 31,
100 bps
Average occupancy
(740) bps
RevPAR (2)
RevPOR (3)
Lifestyle services:
Average revenue per outpatient clinic
Number of visits at outpatient clinics
Number of inpatient clinics (end of period)
Number of outpatient clinics (end of period)
Total clinics
n/m - not meaningful
(1) Includes only living units categorized as in service. As a result, the number of living units may change from period to period for reasons other than the acquisition or disposition of senior living communities.
(2) RevPAR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of available units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
(3) RevPOR is defined by us as resident fee revenues for the corresponding portfolio for the period divided by the average number of occupied units for the period, divided by the number of months in the period. Amounts for the years ended December 31, 2021 and 2020 exclude income received by senior living communities under the Provider Relief Fund of the CARES Act.
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(4) The years ended December 31, 2021 and 2020 include data for 20 owned senior living communities, 120 managed senior living communities and 165 outpatient rehabilitation clinics that we have continuously owned or managed since January 1, 2020. Per the Strategic Plan the summary of operations for comparable communities and clinics excludes (i) 107 senior living communities managed for DHC with approximately 7,400 units that were transitioned to new operators in the year ended December 31, 2021 and one senior living community managed for DHC with approximately 100 units that was closed during February of 2022, (ii) 1,532 SNF units in 27 CCRCs that were closed during the year ended December 31, 2021 and are in the process of being repositioned that we will continue to manage for DHC, (iii) 27 Ageility inpatient rehabilitation clinics that were closed during the year ended December 31, 2021 and an additional ten Ageility inpatient rehabilitation clinics that are expected to be closed commencing in August 2022 as part of the Strategic Plan and (iv) 17 Ageility outpatient rehabilitation clinics that were closed in December 2021 in senior living communities that were transitioned to a new operator in 2021 or closed in February 2022. In addition, the comparable communities also excludes all four leased communities with approximately 200 living units where the lease was on September 30, 2021.
Year Ended December 31, 2021, Compared to Year Ended December 31, 2020
The following is a discussion of our operating results for the year ended December 31, 2021, compared to the year ended December 31, 2020.
Lifestyle services revenue. The decrease in lifestyle services revenues is primarily due to a decrease in inpatient rehabilitation clinic revenues of $14.5 million and outpatient rehabilitation clinic revenues of $0.2 million. The reduction of inpatient rehabilitation clinic revenue is primarily associated with the closure of 27 inpatient rehabilitation clinics during the year ended December 31, 2021 in accordance with the Strategic Plan. Our fitness services continued to expand during the year and partially offset the declines from our inpatient rehabilitation clinic closures with an increase in revenue of $0.9 million, a 38.1% increase over the prior year. Fitness services revenue in the year ended December 31, 2021 represented 4.9% of total lifestyle services revenue, an increase from 2.9% in the prior year. We also realized the full year impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021, and five net new outpatient rehabilitation clinics opened during the three months ended September 30, 2021. There was a decrease in lifestyle services revenues at our comparable clinics due to decreased revenue per visit in 2021.
Residential revenues. The decrease in residential revenues are primarily due to the decline in average occupancy from 76.4% for the year ended December 31, 2020 to 69.5% for the year ended December 31, 2021 caused by the Pandemic as move-out rates exceeded move-in rates. The decline in demand was due to the marketplace reluctance to relocate to senior living communities during the Pandemic. In addition, the decrease in residential revenue is due to the termination of a lease for four communities on September 30, 2021, the discontinuation of these four communities resulted in a decrease in revenue of $1.9 million. In addition, one of our leased communities was out of service due to a fire on April 4, 2021, which resulted in a decline in revenue attributable to that community of $0.8 million. The decrease in residential revenues at our comparable communities are primarily due to the decline in average occupancy from 76.7% for the year ended December 31, 2020 to 69.9% for the year ended December 31, 2021 caused by the Pandemic.
Residential management fees. The decrease in residential management fees is due to declines in gross revenues at the senior living communities we manage, primarily caused by a decrease in occupancy rates caused by the ongoing impacts of the Pandemic and the transitioning of the management of approximately 7,400 living units to new operators and the closure of approximately 1,500 SNF units in the year ended December 31, 2021. The ongoing impacts of the Pandemic resulted in a decline in average occupancy at our managed communities from 77.2% for the year ended December 31, 2020 to 71.0% for the year ended December 31, 2021. The transitioning of the management of approximately 7,400 living units to new operators resulted in a decrease in residential management fees of $5.3 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The closure of approximately 1,500 SNF units resulted in a decrease in residential management fees of $3.6 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. In addition, revenue declines were impacted by the nine senior living communities sold and seven senior living communities closed by DHC in 2020 that we previously managed, which reduced residential management fees by $2.7 million from the year ended December 31, 2020. The decrease in residential management fees at our comparable senior living communities was primarily due to the in gross revenues at the senior living communities we manage caused by Pandemic related in average occupancy in the 2021 period, partially offset by an increase in residential construction management fees we earn on construction projects we manage.
Reimbursed community-level costs incurred on behalf of managed communities. The decrease in reimbursed community-level costs incurred on behalf of managed communities was primarily due to the transitioning of the management of approximately 7,400 living units to new operators in the year ended December 31, 2021 and the closure of approximately 1,500 SNF units in the year ended December 31, 2021 as well as nine senior living communities sold and seven senior living communities closed in 2020. Additionally, there was an overall reduction in community-level costs incurred at the senior living communities we continue to manage as other operating expenses such as wages and dietary costs were impacted by continued
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occupancy declines due to the Pandemic. These reductions were offset, in part, by increases in repairs and maintenance, marketing, resident activities and health insurance.
Other reimbursed expenses. Other reimbursed expenses represent reimbursements that arise from certain centralized services we provide pursuant to our management agreements with DHC. The increase in other reimbursed expenses was due to reimbursements related to restructuring expenses in the year ended December 31, 2021 of $13.3 million which was partially offset by a decrease in expenses that are reimbursable.
Other operating income. Other operating income represents funds received and recognized under the Provider Relief Fund of the CARES Act General Fund Distribution. The increase in other operating income for the year ended December 31, 2021 was due to the increase in Cares Act funds received.
Lifestyle services expenses. The decrease in lifestyle services expenses is primarily due to the closure of 27 inpatient rehabilitation clinics throughout the year ended December 31, 2021 in accordance with the Strategic Plan. This was partially offset by the growth of fitness services, home health visits and other expanded outpatient services as well as an increase in wages in outpatient rehabilitation clinics due to current market conditions. We also realized the full year impact of 17 net new outpatient rehabilitation clinics opened during the year ended December 31, 2020 and the partial period impact of eight net new outpatient rehabilitation clinics opened during the three months ended March 31, 2021, three net new outpatient rehabilitation clinics opened during the three months ended June 30, 2021, and five net outpatient rehabilitation clinics opened during the three months ended September 30, 2021. The decrease in lifestyle services expenses at our comparable clinics was consistent with the decrease in lifestyle services revenue for comparable clinics during the year ended December 31, 2021.
Residential wages and benefits. The decrease in residential wages and benefits is primarily due to decreased costs in the current year for medical insurance and workers compensation costs as well as the termination of a lease for four communities on September 30, 2021, which resulted in a decrease in senior living wages and benefits of $1.1 million. This was partially offset by an increase in labor costs due to market conditions. The decrease in residential living wages and benefits at our comparable communities is primarily due to decreased costs in 2021 for medical insurance and workers compensation costs.
Other residential operating expenses. Other residential operating expenses are comprised of utilities, housekeeping, dietary, repairs and maintenance, insurance and other community-level costs. The increase in other residential operating expenses is primarily due to increased self-insurance obligations and increased costs related to COVID-19 testing supplies, disposable food supplies, infectious disease prevention cleaning, sanitation and labor as a result of the on-going response to the COVID-19 pandemic. In addition, in 2021, we recognized a $0.9 million long lived asset impairment related to a community that was damaged by a fire. The increase in other residential operating expenses at our comparable communities is primarily due to costs associated with our self-insurance obligations as well as increases in repairs and maintenance costs to reinvest in our communities and marketing efforts to meet lead volume demand.
General and administrative. The slight decrease in general and administrative expenses was primarily attributable to lower corporate wages and benefits due to reduced corporate headcount of approximately 30% in connection with the Strategic Plan and lower expenses for services performed by RMR LLC due to a decrease in revenues to which those fees are related to. This was partially offset by an increase in marketing expenses and professional fees as we focused on growth of our core business to rebound from the Pandemic as well as investments in shared services infrastructure as part of the Evolve phase of our Strategic Plan.
Restructuring expenses. The increase was primarily due to severance and retention costs related to the Strategic Plan to align our organization following completion of our Reposition phase of our Strategic Plan, of which $13.3 million was reimbursed by DHC and included in other reimbursed expenses.
Depreciation and amortization. The increase in depreciation and amortization is primarily due to amortization expense incurred on our equipment finance lease, which was entered into during the fourth quarter of 2020.
Interest, dividend and other income. The decrease in interest, dividend and other income is primarily due to decreased amounts of interest earned primarily on our debt and equity investments due to declines in interest rates during 2021.
Interest and other expense. Interest and other expense consists primarily of deferred financing fees and commitment fees related to our Credit Facility, interest on our finance leases and our mortgage note .
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Unrealized gain on equity investments. Unrealized gain on equity investments represents adjustments made to our investments in equity securities to record amounts at fair value.
Realized gain on sale of debt and equity investments. Realized gain on sale of debt and equity investments represents our realized gains and losses on investments.
Loss on termination of leases. Loss on termination of leases for the year ended December 31, 2021 represents a $3.3 million loss on the lease termination for four communities. These costs include a $3.1 million lease termination fee, the write off of the remaining net assets at the communities including property and equipment and the remaining right of use assets, less the remaining recorded lease liability and the remaining obligations under the insurance deductible for a fire that occurred at one of the four leased communities. Loss on termination of leases in the year ended December 31, 2020 represents the excess of the fair value of the share issuances of $97.9 million compared to the consideration of $75.0 million paid by DHC.
Provision for income taxes. For the years ended December 31, 2021 and 2020, we recognized a provision for income taxes of $0.2 million and $0.7 million, respectively. The provision for income taxes for the year ended December 31, 2021 represents state income taxes, including current period expenses and utilization of a deferred tax credit. The provision for income taxes for the year ended December 31, 2020 represents state income taxes, including current period expenses and the addition of a state valuation allowance, partially offset by a federal benefit for alternative minimum tax, or AMT, credits. For additional information regarding our taxes, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Concentration of Risk - Revenues
For the year ended December 31, 2021, 26.4% of our management and operating revenues was comprised of residential management fees from senior living communities we managed for DHC. DHC is the sole source of our residential management fees. We expect to continue to be dependent on revenues from the management of senior living communities owned by DHC for the foreseeable future. In the year ended December 31, 2021, as part of the Strategic Plan, we transitioned 107 senior living communities we managed for DHC to new operators and we closed one senior living community that we manage on behalf of DHC in February 2022. After the transitions and closure, we will continue to manage 120 senior living communities for DHC. Failure of DHC to continue to own these senior living communities in the future, or DHC's termination of a significant number of the management agreements, could significantly impact our business. For additional information about our management arrangements with DHC, see "restructuring transactions with DHC“ included in Part I, Item I, Properties—Our Leases and Management Agreements with DHC” included in Part I, Item 2, and “—Liquidity and Capital Resources—Related Person Transactions” included in Part II, Item 7, of this Annual Report on Form 10-K and Notes 1 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Medicare and Medicaid programs provide operating revenues for certain of our former SNF units and our lifestyle services. We derived approximately 4.6% and 3.6% of our consolidated revenues from these government-funded programs during the years ended December 31, 2021 and 2020, respectively. Revenues from Medicare programs totaled $41.5 million and $40.5 million during the years ended December 31, 2021 and 2020, respectively. Revenues from Medicaid programs totaled $1.2 million and $1.4 million during the years ended December 31, 2021 and 2020, respectively. Following the repositioning of our residential services, the concentration of revenues derived from Medicare and Medicaid will principally be earned in connection with our lifestyle services.
We cannot currently predict the type or magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes and the impact on us or DHC of the possible failure of these programs to increase rates to match increasing expenses, but they may be adverse and material to our operations and to our future financial results of operations as well as those of DHC. Similarly, we are unable to predict the impact on us of the insurance changes, payment changes and healthcare delivery systems changes contained in and to be developed pursuant to the ACA. If the changes implemented under the ACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs or the costs borne by DHC of providing required services to residents, our future financial results could be materially and adversely affected. Finally, to the extent the ACA is repealed, replaced or modified, additional regulatory risks may arise. Depending upon what aspects of the ACA are repealed, replaced or modified, our future financial results could be adversely and materially affected.
For more information regarding government regulation and its possible impact on us and our business, revenues and operations, see “Business—Government Regulation and Reimbursement” in Part I, Item 1 of this Annual Report on Form 10-K.
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Liquidity and Capital Resources
We require cash to fund our operating expenses, to make capital expenditures and to service our debt obligations. As of December 31, 2021, we had $67.0 million of unrestricted cash and cash equivalents. As of December 31, 2021, our restricted cash and cash equivalents included $22.9 million of bank term deposits in our captive insurance company. On January 27, 2022, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. For more information about the Loan, see “Business—Financing Sources” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
As of December 31, 2021 and December 31, 2020, we had current assets of $186.8 million and $262.3 million, respectively, and current liabilities of $140.9 million and $177.9 million, respectively.
On January 1, 2020, in connection with the restructuring of our business arrangements with DHC, we issued 10,268,158 of our common shares to DHC and an aggregate of 16,118,849 of our common shares to DHC’s shareholders of record as of December 13, 2019. DHC provided to us $75.0 million by assuming certain of our working capital liabilities and through cash payments as consideration for the share issuances.
The following table presents selected data on our continuing operations from our consolidated statement of cash flows for the periods presented (dollars in thousands):
Year Ended December 31,
Net cash provided by (used in):
$ Change
% Change
Operating Activities
Investing Activities
Financing Activities
(Decrease) increase in cash and cash equivalents and restricted cash and cash equivalents
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
Cash and cash equivalents and restricted cash and cash equivalents at end of period
n/m - not meaningful
Operating Activities
The decrease in cash flows provided by operating activities for the year ended December 31, 2021 compared to the same period in 2020 is primarily due to payment of $27.6 million of deferred employer payroll taxes and an increase in net loss of $22.3 million, partially offset by $22.2 million of deferred employer payroll taxes reimbursed by DHC.
Investing Activities
Cash flows used in investing activities for the year ended December 31, 2021, increased as compared to the same period in 2020 primarily due to increased investments of property and equipment of $4.0 million for owned communities and shared services infrastructure as part of the Evolve phase of the Strategic Plan and a decrease in proceeds from the sale of property and equipment to DHC of $2.7 million.
Financing Activities
The increase in net cash used in financing activities for the year ended December 31, 2021, compared to the same period in 2020 is primarily due to repayments of finance lease principal in the current period partially offset by costs incurred in 2020 related to the issuance of common stock in the prior year.
Capital Expenditures
During the year ended December 31, 2021, we invested $13.2 million primarily in our owned senior living communities and rehabilitation services clinics as well as shared services infrastructure as part of the Evolve phase of the Strategic Plan. During the year ended December 31, 2020, we invested $4.5 million primarily in our owned and leased senior living communities and rehabilitation services clinics. DHC funds the capital expenditures at the senior living communities we manage for DHC pursuant to our management agreements with DHC.
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Pandemic Liquidity Impact
Our liquidity and capital funding requirements depend on numerous factors, including our operating results, our capital expenditures to the extent not funded by DHC pursuant to our management agreements with DHC, general economic conditions and the cost of capital. Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our strategy or to maintain appropriate capital spending levels. We believe we have adequate financial resources from our existing cash flows from operations, together with unrestricted cash on hand and amounts available under our Loan, to support our business for at least the next twelve months.
We are closely monitoring the effect of the Pandemic on our liquidity. We currently expect to use cash on hand and cash flows from operations as well as our Loan to fund our future operations and capital expenditures, to the extent not funded or reimbursed by DHC pursuant to our management agreements with DHC, and fixed debt obligations, as well as investments in diversifying our service offerings to diversify our revenue sources. DHC funds the operating and capital expenses for the senior living communities we manage for DHC. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be certain that we will be able to successfully carry out this intention, particularly because of the uncertainty surrounding the duration and severity of the current economic impact resulting from the Pandemic. A long, protracted and extensive decline in economic conditions or adverse market conditions in the senior living industry may cause a decline in financing availability and increased costs for financings.
Insurance
Increases over time in the cost of insurance, especially professional and general liability insurance, workers’ compensation and employee health insurance, have had an adverse impact upon our results of operations. We self-insure a large portion of these costs. We also self-insure for auto insurance. Our costs have increased as a result of the higher costs that we incur to settle claims and to purchase insurance for claims in excess of the self-insured amounts, some of which related to the senior living communities we manage on behalf of DHC and are reimbursed to us by DHC pursuant to our management agreements with DHC. Further, our health insurance and workers compensation costs have increased as a result of the Pandemic, as well as team members now pursuing elective procedures that had been deferred or they were not able to obtain during the Pandemic. These increased costs may continue in the future. We also have purchased property insurance coverage under DHC's policy with unrelated third party insurance providers. On April 4, 2021, one of the communities that we leased had a fire which caused extensive damage and the residents of the community to be relocated. We had insurance on this community with a deductible of $1.0 million. Insurance proceeds received for property damages to the previously leased community caused by the fire were subsequently transferred to PEAK.
For more information about our existing insurance see “Business—Insurance” in Part I, Item 1 of this Annual Report on Form 10-K and Notes 2 and 16 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. For more information about our purchased property insurance coverage under DHC's policy, see Note 15 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
At December 31, 2021, we had two irrevocable standby letters of credit outstanding, totaling $26.9 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $22.9 million of cash equivalents and $4.6 million of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At December 31, 2021, the cash equivalents collateralizing this letter of credit were classified as short-term restricted cash and cash equivalents in our consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term restricted debt and equity investments in our consolidated balance sheets. The remaining one irrevocable standby letters of credit outstanding at December 31, 2021, totaling $0.1 million, which was issued under the Credit Facility, secure certain of our other obligations. This letter of credit was terminated when we replaced the Credit Facility with the Loan.
Debt Financings and Covenants
We had a $65.0 million Credit Facility that was available for general business purposes. The Loan that we obtained on January 27, 2022 replaced the Credit Facility which was scheduled to expire on June 12, 2022. No borrowings were outstanding under the Credit Facility at the time we entered into the Credit Agreement. We were required to pay interest on borrowings under our Credit Facility at a rate of LIBOR plus a premium of 250 basis points per annum; or at a base rate, as defined in the credit agreement, plus 150 basis points per annum. The annual interest rate options as of December 31, 2021 were 2.60% and
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4.75%, respectively. We were also required to pay a quarterly commitment fee of 0.35% per annum on the unused portion of the available capacity under our Credit Facility. No principal repayment was due until maturity.
Our Credit Facility was secured by 11 senior living communities we own with a combined 1,237 living units owned by certain of our subsidiaries that guarantee our obligations under our Credit Facility. Our Credit Facility was also secured by these senior living communities' accounts receivable and related collateral. The amount of available borrowings under our Credit Facility was subject to our having qualified collateral, which was primarily based on the value and operating performance of the communities securing our obligations under our Credit Facility. Our Credit Facility provided for acceleration of payment of all amounts outstanding under our Credit Facility upon the occurrence and continuation of certain events of default, including a change of control of us, as defined in our credit agreement. Our credit agreement contained financial and other covenants, including those that restrict our ability to pay dividends or make other distributions to our shareholders in certain circumstances.
At December 31, 2021, we had two irrevocable standby letters of credit outstanding, totaling $26.9 million. One of these letters of credit in the amount of $26.9 million, which secures our workers' compensation insurance program, is collateralized by approximately $22.9 million of cash equivalents and $4.6 million of debt and equity investments. This letter of credit expires in June 2022 and is automatically extended for one-year terms unless notice of nonrenewal is provided prior to the end of the applicable term. At December 31, 2021, the cash equivalents collateralizing this letter of credit are classified as short-term restricted cash and cash equivalents in our consolidated balance sheets, and the debt and equity investments collateralizing this letter of credit are classified as short-term restricted debt and equity investments in our consolidated balance sheets. The remaining one irrevocable standby letters of credit outstanding at December 31, 2021, totaling $0.1 million, which were issued under the Credit Facility, secured certain of our other obligations. This letter of credit was terminated when we replaced the Credit Facility with the Loan.
On January 27, 2022, certain of our subsidiaries entered into the Credit Agreement with MidCap. Under the terms of the Credit Agreement, we closed on a $95.0 million Loan, $63.0 million of which was funded upon effectiveness of the Credit Agreement, including approximately $3.2 million in closing costs. The remaining proceeds include $12.0 million for capital improvements and an opportunity for another $20.0 million that is available to us upon achieving certain financial thresholds. Certain subsidiaries of the Company are borrowers under the Credit Agreement and the Company and one of its subsidiaries provided a payment guarantee of up to $40.0 million of the obligations under the Credit Agreement as well as standard non-recourse carve-outs. The guaranty is evidenced by the Guaranty Agreement, made by the Company and one of its subsidiaries in favor of MidCap. Pursuant to the Guaranty Agreement, the Company's subsidiary granted MidCap a security interest on all of the assets of the subsidiary. The Guaranty Agreement requires the Company and its subsidiary to comply with various covenants, including restricting the Company's ability to make distributions to shareholders. The Loan is secured by real estate mortgages on 14 senior living communities owned by the borrowers, the borrowers' assets and certain related collateral. The maturity date of the Loan is January 27, 2025. Subject to the payment of an extension fee and meeting certain other conditions the Company may elect to extend the stated maturity date of the Loan for two one-year periods. We are required to pay interest on outstanding amounts at base rate of SOFR (subject to a minimum base rate of 50 basis points) plus 450 basis points. The Credit Agreement requires interest only payments for the first two years and requires customary mandatory prepayment of the Loan on account of certain events of . Voluntary prepayments made within 18 months of the date of the Loan will be subject to a prepayment fee, but the Loan may thereafter be voluntarily prepaid without premium or . The Company will be required to pay an exit fee upon any prepayment of the Loan, which would be in addition to any prepayment fee that may be payable. The Loan provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of , including a change of control of the Company, as defined in the Credit Agreement. The Credit Agreement also contains a number of financial and other covenants including covenants that restrict the borrowers' ability to incur indebtedness or to pay or make distributions under certain circumstances and requires the Company to maintain certain financial ratios. The Credit Agreement also contains certain customary representations and warranties and reporting obligations. For more information about the Term Loan, see Notes 9 and 20 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We also have a mortgage note as of December 31, 2021, that we assumed in connection with a previous acquisition of a senior living community. Payments of principal and interest are due monthly under this mortgage debt until maturity in September 2032. The annual interest rate on this mortgage debt was 6.20% as of December 31, 2021.
As of December 31, 2021, we had no borrowings outstanding under our Credit Facility, $0.1 million in letters of credit issued under our Credit Facility, $10.8 million available for borrowing under our Credit Facility, and $6.8 million outstanding on the mortgage note. As of December 31, 2021, we believe we were in compliance with all applicable covenants under our debt agreements.
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For more information regarding our debt financings and covenants, see Notes 9 and 20 to our Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K.
Related Person Transactions
We have relationships and historical and continuing transactions with DHC, RMR LLC, ABP Trust and others related to them. For further information about these and other such relationships and related person transactions, see Notes 10, 14 and 15 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference and our other filings with the SEC, including our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2021. For further information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements”, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Seasonality
Revenues derived from our senior living and managed communities are subject to modest effects of seasonality, which we experience in certain regions more than others, due to weather patterns, geography and higher incidence and severity of flu and other illnesses during winter months. We do not expect these seasonal differences to cause material fluctuations in our revenues or operating cash flows. It is uncertain what the long-term survival, recurrence and resurgence of COVID-19 will be, including whether it will weaken, transform or otherwise become a common seasonal virus, which may change or amplify seasonal aspects and effects on our business.
Debt Investments
We routinely evaluate our available for sale debt investments to determine if they have been impaired. If the fair value of a debt investment is less than its book or carrying value, and we expect that situation to continue for more than a temporary period, we will record an “other than temporary impairment” loss in our consolidated statements of operations. We evaluate the fair value of our available for sale debt investments by reviewing each debt investment’s current market price, the ratings of the investment, the financial condition of the issuer, and our intent and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we presume a decline in value to be an “other than temporary impairment” if the quoted market price of the investment is below the investment’s cost basis for an extended period, which we typically define as greater than twelve months. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is temporary in nature, such as when the operating performance of the obligor is or if the market price of the investment is historically . Additionally, there may be instances in which are recognized even if the in value does not meet the criteria described above, such as if we plan to sell the investment in the near term and the fair value is below our cost basis. When we believe that a change in fair value of a debt investment is temporary, we record a corresponding credit or charge to other comprehensive income for any unrealized and . When we determine that in the fair value of a debt investment is an “other than temporary ”, we record a charge to earnings. We did not record an charge for the years ended December 31, 2021 or 2020 for our debt investments.
Compliance and Litigation Matters
As a result of our routine monitoring protocols that are a part of our compliance program related to our Medicare billing practices, we discovered potentially inadequate documentation at a SNF that we managed on behalf of DHC. This monitoring was not initiated in response to any specific complaint or allegation, but was monitoring of the type that we periodically undertake to test compliance with applicable Medicare billing rules. As a result of this discovery, we, along with DHC, made a voluntary disclosure of deficiencies to the Office of the Inspector General, or OIG, pursuant to the OIG’s Provider Self-Disclosure Protocol. We and DHC entered into a settlement agreement with the OIG effective January 5, 2021 and the settlement was paid by DHC. We and DHC did not admit any liability pursuant to this settlement. We recognized $0.1 million during the year ended December 31, 2020 as a reduction in residential management fees from DHC for the residential management fees that were previously paid to us with respect to the historical Medicare payments DHC received that it repaid pursuant to the settlement.
In July 2021, we became aware of a potential issue with respect to completion of a form at one of the SNFs we previously managed for DHC. As a result of this discovery, we have made a voluntary self-disclosure to HHS, the OIG, pursuant to the OIG's Provider Self-Disclosure Protocol. We submitted our initial disclosure to the OIG in January 2022 and we
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have recorded expenses for costs we incurred or expect to incur, including estimated OIG imposed penalties, as a result of this matter totaling $0.2 million to general and administrative expenses in our consolidated statements of operations for the year ended December 31, 2021, all of which is accrued and not paid at December 31, 2021.
For information regarding other litigation matters, see Note 13 to our consolidated financial statements, entitled "Commitments and Contingencies," to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Critical Accounting Policies
An understanding of our critical accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. The preparation of our financial statements requires our management to make certain critical accounting estimates and judgments that impact (1) revenue recognition, including contractual allowances, (2) long lived asset recoverability, (3) self-insurance reserves and (4) our judgments and estimates concerning our provision for income taxes or valuation allowance related to deferred tax assets. We consider them to be critical because of their significance to our financial statements and the possibility that future events may cause differences from current judgment or because the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to test their reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.
Revenue Recognition. Our revenue recognition policies involve judgments about Medicare and Medicaid rate calculations. These judgments are based principally upon our experience with these programs and our knowledge of current rules and regulations applicable to these programs. Our principal sources of revenue are lifestyle services revenue, residential management fees, residential revenues and reimbursed costs incurred pursuant to our management and pooling agreements.
We recognize revenues when services are provided, and these amounts are reported at their estimated net realizable amounts. Some Medicare and Medicaid revenues are subject to audit and retroactive adjustment and sometimes retroactive legislative changes. See “Revenue Recognition” in Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for a detailed discussion of our revenue recognition policies and our contractual allowances.
Long-Lived Asset Recoverability. We regularly evaluate our properties for indicators of impairment. Impairment indicators may include declining resident occupancy, weak or declining profitability from the property, decreasing cash flows, our decision to dispose of a property before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate or if future operations, market or industry factors differ from our expectations we may record an charge that is or to record a charge when we should have done so, or the amount of any such charges may be .
Self-Insurance Reserves. Determining reserves for casualty, liability, workers’ compensation and healthcare losses and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved. We regularly adjust these estimates to reflect changes in the foregoing factors, our actual claims experience, recommendations from our professional consultants, changes in market conditions and other factors; it is possible that such adjustments may be material.
Taxes. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits, if any, reflect our assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States. Significant judgments and estimates are required in determining our income tax expense and the realization of our deferred tax assets and liabilities.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our
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ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state and federal pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income or loss.
We established a valuation allowance against our deferred tax assets that we have determined to be not realizable. The decision to establish the valuation allowance includes our assessment of the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets. An important aspect of objective negative evidence evaluated includes the losses incurred by us in recent years. This objective negative evidence is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realization of our deferred tax assets. For these reasons, we have recorded a valuation allowance against the majority of our net deferred tax assets as of December 31, 2021 and 2020.
Judgments and Estimates . Some of our judgments and estimates are based upon published industry statistics and, in some cases, third-party professionals. Any misjudgments or incorrect estimates affecting our critical accounting policies could have a material effect on our financial statements.
In the future, we may need to revise the judgments, estimates and assessments we use to formulate our critical accounting policies to incorporate information which is not now known. We cannot predict the effect changes to the premises underlying our critical accounting policies may have on our future results of operations, although such changes could be material and adverse.
For further information on our critical accounting estimates and policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements, see Note 2, "Summary of Significant Accounting Policies", to the Consolidated Financial Statements in Item 15 of Part IV of this Annual Report on Form 10-K.
Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws, and regulations intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our senior living communities to increase. In the long-term, we believe any such increased costs will be passed through and paid by our residents and other customers in higher charges for our services. However, in the short-term, these increased costs, if material in amount, could materially and adversely affect our financial condition and results of operations.
Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather has had and may continue to have an adverse effect on certain senior living communities we operate. Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires may have an adverse effect on the senior living communities we operate. We mitigate these risks by procuring insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results. For more information on the impact of climate change, see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
