COVID-19 Pandemic

6 Months Ended

Jun. 30, 2020

The United States broadly continues to experience the COVID-19 pandemic, which has significantly disrupted, and likely will continue to significantly disrupt for some period, the nation’s economy, the senior living industry, and the Company’s business. Although a significant portion of the Company’s corporate support associates began working from home in March 2020, the Company continues to serve and care for seniors through the pandemic. Due to the average age and prevalence of chronic medical conditions among the Company’s residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19.

Due to the pandemic, in March 2020 the Company began restricting visitors at all its communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying communal dining and programming to comply with social distancing guidelines and, in most cases, implementing in-room only dining and activities programming, requesting that residents refrain from leaving the community unless medically necessary, and

requiring new residents and residents returning from a hospital or nursing home to isolate in their apartment for fourteen days. Upon confirmation of positive COVID-19 exposure at a community, the Company follows government guidance regarding minimizing further exposure, including associates’ adhering to personal protection protocols, restricting new resident admissions, and in some cases isolating residents. These restrictions were in place across the Company’s portfolio for the three months ended June 30, 2020.

The pandemic and response efforts of senior living communities have significantly disrupted demand for senior living communities and the sales process. The Company cannot predict with reasonable certainty whether or when demand for senior living communities will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on demand may adversely affect the amount of resident fees the Company is able to collect from its residents.

The pandemic and the Company’s response efforts began to adversely impact the Company’s occupancy and resident fee revenue significantly during March 2020, as new resident leads, visits (including virtual visits), and move-in activity declined significantly compared to typical levels. Further deterioration of the Company's resident fee revenue will result from lower move-in activity and the resident attrition inherent in its business, which may increase due to the impacts of COVID-19. The Company’s home health average daily census also began to decrease in March 2020 due to lower occupancy in its communities and fewer elective medical procedures and hospital discharges.

Facility operating expense for the three and six months ended June 30, 2020 includes $60.6 million and $70.6 million, respectively, of incremental direct costs to prepare for and respond to the pandemic, including costs for acquisition of additional personal protective equipment ("PPE"), medical equipment, and cleaning and disposable food service supplies, enhanced cleaning and environmental sanitation costs, increased labor expense, increased workers compensation and health plan expense, increased insurance premiums and retentions, consulting and professional services costs, and costs for COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. The Company is not able to reasonably predict the total amount of costs it will incur related to the pandemic, and such costs are likely to be substantial. As described further in Note 6, the Company also recorded non-cash impairment charges in its operating results of $10.3 million and $87.0 million for the three and six months ended June 30, 2020, respectively, for its operating lease right-of-use assets and property, plant and equipment and leasehold intangibles, primarily due to the COVID-19 pandemic and lower than expected operating performance at communities for which assets were impaired.

The Company has taken, and continues to take, actions to enhance and preserve its liquidity in response to the pandemic. The Company drew $166.4 million on its revolving credit facility in March 2020, and suspended repurchases under the Company’s existing share repurchase program. During the three months ended June 30, 2020, the Company accepted $33.5 million of cash for grants under the Public Health and Social Services Emergency Fund (the “Emergency Fund”) and $85.0 million of accelerated/advanced Medicare payments, and the Company deferred $26.5 million of the employer portion of social security payroll taxes. Each of these programs were created or expanded under the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), as described below. The Company also has delayed or canceled a number of elective capital expenditure projects resulting in an approximate $50 million reduction to its pre-pandemic full-year 2020 capital expenditure plans. On July 26, 2020, the Company entered into definitive agreements with Ventas, Inc. ("Ventas") to restructure its 120 community triple-net master lease arrangements as further described in Note 17. Pursuant to the multi-part transaction, among other things, the Company paid a $119.2 million one-time cash payment to Ventas, reduced its initial annual minimum rent under the amended and restated master lease to $100 million effective July 1, 2020, and removed the prior requirements that the Company satisfy financial covenants and that the Company maintain a security deposit with Ventas. The annual minimum rent under the amended and restated master lease reflects a reduction of approximately $86 million over the next twelve months.

As of June 30, 2020, the Company’s total liquidity was $600.2 million, consisting of $452.4 million of unrestricted cash and cash equivalents, $109.9 million of marketable securities, and $37.9 million of additional availability on its revolving credit facility. As of June 30, 2020, $166.4 million of borrowings were outstanding on the revolving credit facility. The Company continues to seek opportunities to enhance and preserve its liquidity, including through reducing expenses and elective capital expenditures, continuing to evaluate its financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic.

During March 2020, the Company completed its financing plans in the regular course of business, including closing three non-recourse mortgage debt financing transactions totaling $208.5 million with the proceeds used to refinance the majority of the Company’s 2020 maturities and to partially fund the Company’s acquisitions of 26 communities completed during the three months ended March 31, 2020. As of June 30, 2020, the Company’s remaining 2020 and 2021 maturities (after giving effect to the multi-part transaction with Ventas on July 26, 2020) are $36.4 million and $254.1 million, respectively, which are primarily non-recourse mortgage debt maturities.

As described further in Note 10, availability under the Company’s revolving credit facility will vary from time to time based on borrowing base calculations related to the appraised value and performance of the communities securing the credit facility and the Company's consolidated fixed charge coverage ratio. To the extent the outstanding borrowings on the credit facility exceed future borrowing base calculations, the Company would be required to repay the difference to restore the outstanding balance to the new borrowing base. Due primarily to the impacts of the COVID-19 pandemic, and based upon the Company’s current estimate of cash flows, the Company has determined that it is probable that it will not satisfy the minimum consolidated fixed charge coverage ratio covenant under the credit facility for one or more quarterly determination dates in the first half of 2021 without further action on the Company’s part. Failure to satisfy the minimum ratio would result in the availability under the revolving credit facility being reduced to zero and the Company being required to repay the $166.4 million of borrowings outstanding on the revolving credit facility.

Based upon the Company’s current liquidity and estimated cash flows, the Company has estimated that it would be unable to repay a portion of the 2021 maturities and the borrowings outstanding on the revolving credit facility as they become due without refinancing these maturities or obtaining additional financing proceeds. The Company has continued efforts on its plan to refinance the assets currently securing the credit facility and to refinance the substantial majority of the remaining 2020 and 2021 maturities with non-recourse mortgage debt. The Company currently anticipates that it is probable that such refinancings will be completed and the proceeds of such refinancings, together with cash on hand, will be sufficient to repay the $166.4 million balance on its revolving credit facility and terminate the facility without payment of a premium or penalty and to pay the Company’s contractual obligations as they come due over the next twelve months. However, there is no assurance that debt financing will continue to be available on terms consistent with the Company’s expectations or at all, in which case the Company would expect to take other mitigating actions prior to the maturity dates.

In response to the pandemic, on March 27, 2020, the President signed the CARES Act into law, which was amended and expanded by the Paycheck Protection Program and Health Care Enhancement Act signed into law on April 24, 2020. The legislation provides liquidity and financial relief to certain businesses, among other things. The impacts to the Company of certain provisions of the CARES Act are summarized below.

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During the three months ended June 30, 2020, the Company accepted $33.5 million of cash for grants from the Emergency Fund, which was expanded by the CARES Act to provide grants or other funding mechanisms to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. Approximately $28.8 million of the grants were made available pursuant to the Emergency Fund's general distribution, with grant amounts based primarily on the Company's relative share of aggregate 2019 Medicare fee-for-service reimbursements and generally related to home health, hospice, outpatient therapy, and skilled nursing care provided through the Company's Health Care Services and CCRCs segments. Approximately $4.7 million of the grants were made available pursuant to the Emergency Fund's targeted allocation for certified skilled nursing facilities, with amounts determined using a per-facility and per-bed model. During July 2020, the Company applied for additional grants pursuant to the Emergency Fund's Medicaid and CHIP allocation. The amount of such grants are expected to be based on 2% of a portion of the Company's 2018 gross revenues from patient care.

The grants are subject to the terms and conditions of the program, including that such funds may only be used to prevent, prepare for, and respond to COVID-19 and will reimburse only for healthcare related expenses or lost revenues that are attributable to COVID-19. During the three months ended June 30, 2020, the Company recognized $26.4 million of the grants as other operating income based upon the Company’s estimates of its satisfaction of the conditions of the grants during such period. As of June 30, 2020, $7.1 million of unrecognized grants were included in refundable fees and deferred revenue within the Company's condensed consolidated balance sheets. The $33.5 million of grants accepted from the Emergency Fund during the six months ended June 30, 2020 has been presented within net cash provided by (used in) operating activities within the Company’s condensed consolidated statement of cash flows.

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During three months ended June 30, 2020, the Company received $85.0 million under the Accelerated and Advance Payment Program administered by CMS, which was temporarily expanded by the CARES Act. Under the program, the Company requested acceleration/advancement of 100% of its Medicare payment amount for a three-month period. Recoupment of accelerated/advanced payments are required to begin 120 days after their issuance through offsets of new Medicare claims, and all accelerated/advanced payments are due 210 days following their issuance. Such amount has been presented within net cash provided by operating activities within the Company’s condensed consolidated statement of cash flows.

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Under the CARES Act, the Company has elected to defer payment of the employer portion of social security payroll taxes incurred from March 27, 2020 to December 31, 2020. One-half of such deferral amount will become due on each of December 31, 2021 and December 31, 2022. As of June 30, 2020, the Company has deferred payment of $26.5 million of payroll taxes and presented such amount within other liabilities within the Company's condensed consolidated balance sheets.


•	The CARES Act temporarily suspended the 2% Medicare sequestration for the period May 1, 2020 to December 31, 2020, which primarily benefits the Company’s Health Care Services segment.

The Company cannot predict with reasonable certainty the impacts that COVID-19 ultimately will have on its business, results of operations, cash flow, and liquidity, and the Company’s response efforts may continue to delay or negatively impact its strategic initiatives, including plans for future growth. The ultimate impacts of COVID-19 will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth of the pandemic and any resurgence of the disease; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in the Company’s markets; the development and availability of COVID-19 testing, therapeutic agents, and vaccines and the prioritization of such resources among businesses and demographic groups; government financial and regulatory relief efforts that may become available to business and individuals, including the Company's ability to qualify for and satisfy the terms and conditions of financial relief; perceptions regarding the safety of senior living communities during and after the pandemic; changes in demand for senior living communities and the Company’s ability to adapt its sales and marketing efforts to meet that demand; the impact of COVID-19 on the Company’s residents’ and their families’ ability to afford its resident fees, including due to changes in unemployment rates, consumer confidence, and equity markets caused by COVID-19; changes in the acuity levels of the Company’s new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in the Company’s communities; the duration and costs of the Company’s response efforts, including increased equipment, supplies, labor, litigation, testing, and other expenses; the impact of COVID-19 on the Company’s ability to complete financings, refinancings, or other transactions (including dispositions) or to generate sufficient cash flow to cover required interest and lease payments and to satisfy financial and other covenants in the Company’s debt and lease documents; increased regulatory requirements, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19, including those that may limit the Company’s collection efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or the Company’s response efforts.