This Quarterly Report and certain information incorporated herein by reference contain forward-looking statements and information within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management's plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company's future filings with the
SEC, in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "seek," "plan," "project," "continue," "predict," "will," and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company's current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made. All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future. The Company's actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company's critical accounting policies and risks and uncertainties related to, but not limited to, the operating results of the Company's tenants, the overall industry environment, the Company's financial condition, and the impact of the COVID-19 pandemic on the Company's business. These and other risks and uncertainties are described in more detail in the Annual Report and in Part II, Item 1A "Risk Factors" of this Quarterly Report, as well as other reports that the Company files with the SEC. Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company's views as of any subsequent date. The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with the SECthat discuss factors germane to the Company's business.
Regional Health Properties, Inc., a Georgiacorporation (" Regional Health" or "Regional" and, together with its subsidiaries, the "Company" or "we"), is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living. The Company's business primarily consists of leasing and subleasing healthcare facilities, referred to as Skilled Nursing Facilities (SNF) and Assisted Living Facilities (ALF), to third-party tenants, which in turn operate the facilities. The operators of the Company's facilities provide a range of healthcare services to their patients and residents, including skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term and short-stay patients and residents. While the Company is a self-managed real estate investment company that invests primarily in real estate purposed for long-term care and senior living, the Company, when business conditions require, may undertake portfolio stabilization measures, such as operating a previously leased facility as demonstrated by the following transactions.
Following the termination of Wellington’s lease in
34 -------------------------------------------------------------------------------- The term of the Lumber City Management Agreement commenced on
May 1, 2022and continues for a term of 6 months thereafter; the term may be extended upon a mutual agreement by both parties. Under the Lumber City Management Agreement, Lumber City Operations agreed to pay Peach Health: (i) for months 1 through 6 of the term, a management fee of $22,000per month; and (ii) for months 7 and after of the term, a management fee equal to 5% of net revenue. The Lumber City Management Agreement is subject to earlier termination as provided therein. The Lumber City Management Agreement also includes customary representations, covenants, termination provisions and indemnification obligations. Also in May 2022, the Company entered into an Operations Transfer and Surrender Agreement by and between LaGrange Operations, LLC, a subsidiary of the Company ("LaGrange Operations") and C.R. of LaGrange, LLC. Effective May 1, 2022, LaGrange Operations became the Department approved and licensed operator of the LaGrange Facility. LaGrange Operations also entered into a Management Agreement with Peach Health, dated as of April 29, 2022, providing for Peach Health'smanagement and day-to-day operation of the LaGrange Facility. The term of the LaGrange Management Agreement commenced on May 1, 2022and continues for a term of 6 months thereafter; the term may be extended upon a mutual agreement by both parties. Under the LaGrange Management Agreement, LaGrange Operations agreed to pay Peach Health: (i) for months 1 through 6 of the term, a management fee of $25,000per month; and (ii) for months 7 and after of the term, a management fee equal to 5% of net revenue. The LaGrange Management Agreement is subject to earlier termination as provided therein. The LaGrange Management Agreement also includes customary representations, covenants, termination provisions and indemnification obligations. In April 2022, our wholly-owned subsidiary Meadowood Operations became the Department approved and licensed operator of the Meadowood Facility. Meadowood Operations also entered into a Management Agreement ("the Management Agreement") with Cavalier Senior Living Operations, LLC("Cavalier"), overall management and day-to-day operation of the Meadowood Facility. Under the Meadowood Management Agreement, Meadowood Operations agreed to pay Cavalier: (i) a management fee of $12,000while the probationary license is active; and (ii) a start-up fee of $12,000. Upon termination of the probationary period by regulatory authorities, the parties will negotiate a monthly management fee for ongoing management and oversight of the Facility. The term of the Meadowood Management Agreement commenced on April 15, 2022, and continues for a term of two years thereafter, and shall continue in full force and effect for succeeding annual terms until such time as either party provides written notice of termination to the other party at least 90 days prior to the termination date. The Meadowood Management Agreement is subject to earlier termination as provided therein. If the Meadowood Management Agreement is terminated due to a sale of the Facility, then Meadowood Operations will pay an incentive fee to Cavalier equal to 1% of the purchase price, including any debt assumption. The Meadowood Management Agreement also includes customary representations, covenants, termination provisions and indemnification obligations. Risks and Uncertainties The portfolio stabilization measures discussed above expose the Company directly to all the risks our tenants face as discussed in this "Risk and Uncertainties" section and "Risks Related to Our Business and Industry - Our portfolio stabilization measures expose the Company to the various risks facing our tenants in Part I, Item 1,.A, "Risk Factors" in the Annual Report. On March 11, 2020, the World Health Organizationdeclared the outbreak of the respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, also known as COVID-19, a global pandemic. The COVID-19 pandemic has led governments and other authorities in the United Statesto impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines, and shelter-in-place orders. The COVID-19 pandemic and the measures to protect its spread adversely affected our business during the three months ended June 30, 2022, and we expect it will continue to adversely affect our business in the near future and beyond, for a variety of reasons, including those discussed below and elsewhere in this Quarterly Report. As of August 13, 2022, the Company is aware that each of our facilities has previously reported one or more positive cases of COVID-19 among the residents and/or operator employee populations. Many of our operators have reported incurring significant cost increases as a result of the COVID-19 pandemic. We believe these increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment, testing equipment, processes and supplies. In terms of occupancy levels, many of our operators have reported experiencing declines, in part due to the elimination or suspension of elective hospital procedures, fewer discharges from hospitals to SNFs, and higher hospital re-admittances from SNFs. 35 -------------------------------------------------------------------------------- The COVID-19 pandemic may also lead to temporary closures of nursing facilities operated by our tenants, this affecting our tenants' ability to make their rental payments to us pursuant to their respective lease agreements. In addition, our tenants' operations could be further disrupted if any of their employees, or the employees of their vendors, have, or are suspected of having, COVID-19. This could cause, and in some cases has already caused, our tenants or their vendors to experience staffing shortages, and this could potentially require our tenants and their vendors to close parts of or entire facilities, distribution centers, or other buildings to disinfect any affected areas. We could also be adversely affected if government authorities impose upon our tenants, or their vendors, certain restrictions due to the COVID-19 pandemic. These restrictions may be in the form of mandatory closures, requested voluntary closures, bans on new admissions, restricted operations, or restrictions on the importation of necessary equipment or supplies which may adversely affect our tenants' operations and their ability to make rental payments to us moving forward. In addition, family members may elect to keep nursing facility residents at home during the COVID-19 pandemic, thus reducing our tenants' revenue. Currently, a number of our tenants have stopped admitting new patients due to concerns over COVID-19 infections, resulting in decreased revenues. The COVID-19 pandemic and related public health measures implemented by governments worldwide have had severe global macroeconomic impacts and have resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets. As a result of the COVID-19 pandemic, our tenants may face lawsuits for alleged negligence associated with their responses to the emergency. The costs associated with defending, settling, or paying damages from such claims could negatively impact our tenants' operating budgets and affect their ability to meet their obligations under our leases. Further, we may be subject to increased lawsuits arising out of our alleged actions or the alleged actions of our tenants for which they have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such pending or future litigation could materially adversely affect us. The Company is not aware of any such lawsuits against our tenants. If our tenants are unable to make rental payments to us pursuant to their lease obligations, whether due to the tenants' decrease in revenues or otherwise, then, in some cases, we may be forced to either attempt to replace the tenants or restructure the tenants' long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place. While the Company has received approximately 73% of its anticipated fixed monthly rental receipts from tenants for the three months ended June 30, 2022, there are a number of uncertainties the Company faces as it considers the potential impact of COVID-19 on its business, including the length of census disruption, elevated COVID-19 operating costs related to personal protection equipment, cleaning supplies, virus testing and increased overtime due to staff illness. On November 5, 2021, the CMS published COVID-19 Health Care Staff Vaccination requirements that most Medicare- and Medicaid-certified providers and suppliers must meet in order to participate in the Medicare and Medicaid programs. This emergency regulation was effective immediately and requires employees at Medicare and Medicaid-participating facilities and employers with more than 100 employees to be vaccinated. Some states have also issued their own orders to employers and healthcare providers that may or may not align with federal directives. The legality of both federal and state vaccine mandates will likely be decided by the courts. Until pending laws and regulations related to vaccine mandates are both finalized and adjudicated, our tenants will continue to manage in different ways, from mandating vaccines for all employees to waiting to see how the issue is ultimately resolved. The mandates, as presently written, may cause disruption to tenants' operations if employees refuse vaccination and are terminated, and our tenants are not able to replace them in a timely manner or experience increased costs to do so. 36 -------------------------------------------------------------------------------- To help offset these costs as well as occupancy declines, various relief programs have been enacted by federal and state governments, which have provided, and we expect will continue to provide, some payments to our tenants, subject to the programs' respective terms and conditions. In 2020 U.S. Congressenacted a series of economic stimulus and relief measures through the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act") and the Consolidated Appropriations Act, 2021 ("CAA"). In total, the CARES Act, the PPPHCE Act, and the CAA authorized $178 billionin funding to be distributed to healthcare providers through the Public Health and Social Services Emergency Fund(" Provider Relief Fund"). These funds are intended to reimburse eligible providers for healthcare-related expenses or lost revenues attributable to COVID-19. Recipients are not required to repay Provider Relief Fundpayments as long as they attest to and comply with certain terms and conditions, including reporting requirements, limitations on balance billing, and not using Provider Relief Fundpayments to reimburse expenses or losses that other sources have reimbursed or are obligated to reimburse. In early November 2021, the HHS closed the application portal for its Phase 4 allocation of approximately $17 billionof Provider Relief Funds and an allocation of approximately $8.5 billionin American Rescue Plan ("ARP") resources for providers serving patients living in rural areas. On December 16, 2021, HRSA began distributing Phase 4 general distribution payments, and on November 23, 2021, it began distributing ARP rural payments. We expect that our tenants pursued additional funding from these allocations and will pursue any future funding that may become available, though there can be no assurance that our tenants will qualify for, or receive, any Phase 4 or American Rescue Plan, or any future, funding. The CARES Act and related legislation include other provisions offering financial relief. This includes Medicare and Medicaid payment adjustments and an expansion of the Medicare Accelerated and Advance Payment Program, which made available accelerated payment of Medicare funds in order to increase cash flow to providers. These payments are loans that providers must repay. Additionally, the CMS suspended Medicare sequestration payment adjustments from May 1, 2020, through December 31, 2021, which would have otherwise reduced payments to Medicare providers by 2 percent, but also extended sequestration through 2030. In addition to offering economic relief to individuals and businesses, the CARES Act and related legislation include provisions intended to expand coverage of COVID-19 testing and preventative services, address healthcare workforce needs, ease restrictions on telehealth services during the crisis, and ease other legal and regulatory burdens on healthcare providers. Due to recent enactment of the CARES Act, the PPPHCE Act, and the CAA. There is still a high degree of uncertainty surrounding the implementation of the Cares Act, the PPPHCE Act and the CAA and the public health emergency continues to evolve. To the extent government support is not sufficient or timely to offset these impacts, or to the extent these trends continue or accelerate and are not offset by additional government relief that is sufficient or timely, the operating results of our operators are likely to be adversely affected, and some may be unwilling or unable to pay their contractual obligations to us in full or on a timely basis, as has occurred with three of our prior operators. We also do not know the number of facilities that will ultimately experience widespread, high-cost outbreaks of COVID-19. While we have requested reporting case numbers from our operators and the CMS has required additional reporting by operators, we may not receive accurate information on the number of cases, which could result in a delay in reporting. We expect to see continued increased clinical protocols for infection control within facilities and increased monitoring of employees, guests and other individuals entering facilities; however, we do not yet know if future reimbursement rates in combination with the various relief programs that have been made available will be sufficient to cover the increased costs of enhanced infection control and monitoring. The extent of the COVID-19 pandemic's effect on our and our operators' operational and financial performance will depend on future developments, including the ultimate duration, spread and intensity of the outbreak, which may depend on factors such as the implementation of vaccines and effective treatments for COVID-19, government funds and other support for the senior care sector and the efficacy of other policies and measures that may mitigate the impact of the pandemic, all of which are uncertain and difficult to predict. Due to these uncertainties, we are unable at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, financial condition and cash flows could be material. On June 16, 2020, the U.S. House of RepresentativesSelect Subcommittee on the Coronavirus Crises announced the launch of an investigation into the COVID-19 response of nursing homes and the use of federal funds by nursing homes during the pandemic. The Select Subcommittee continued to be active throughout the remainder of 2020 and 2021. In March 2021, the Oversight Subcommittee of the House Ways and Means Committeeheld a hearing on examining the impact of private equity in the U.S.health care system, including the impact on quality of care provided within the skilled nursing industry. These investigations and hearings could result in legislation imposing additional requirements on our tenant operators. 37
The following table provides summary information on the number of facilities and licensed beds/units associated with the
Owned Leased Owned Leased Managed For Leased to Third Parties Subleased to Third Parties Managed by Third Parties Managed by Third Parties Third Parties Total Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units Facilities Beds/Units State
Alabama1 124 - - 1 161 - - - - 2 285 Georgia3 395 5 526 - - 3 358 - - 11 1,279 North Carolina1 106 - - - - - - - - 1 106 South Carolina2 180 - - - - - - - - 2 180 Total 11 1,111 6 625 1 161 3 358 3 332 24 2,587 Facility Type Skilled Nursing 10 1,016 6 625 - - 3 358 2 249 21 2,248 Assisted Living 1 95 - - 1 161 - - - - 2 256 Independent Living - - - - - - - - 1 83 1 83 Total 11 1,111 6 625 1 161 3 358 3 332 24 2,587 The following table provides summary information regarding the number of facilities and related licensed beds/units by operator affiliation as of June 30, 2022: Operator Affiliation Number of Facilities (1) Beds / Units C.R. Management ? ? 3 393 Aspire 5 405 Peach Health Group³ 3 266 Symmetry Healthcare 2 180 Beacon Health Management? 1 126 Vero Health Management 1 106 Cavalier Senior Living 1 161 Empire² 1 208 Subtotal 17 1,845 Regional Health Managed 3 332 Regional Health Operated ³ ? ? ? ? 4 410 Total 24 2,587 (1) Represents the number of facilities leased or subleased to separate tenants, of which each tenant is an affiliate of the entity named in the table above. (2) Effective January 1, 2021, the Company entered into the PS Sublease with an affiliate of Empire for the Powder Springs Facility. (3) Effective January 1, 2021, Regional began operating the Tara Facility and entered into a Management Agreement with Vero Healthunder which Vero Healthprovided management consulting services for the Tara Facility. Effective October 1, 2021, Peach Healthwill provide management consulting services for the Tara Facility. (4) In April 2022, the Company entered into an Operations Transfer and Surrender Agreement by and between Meadowood Operations, LLCand C.R. of Meadowood, LLC. (5) In May 2022, the Company entered into an Operations Transfer and Surrender Agreement by and between LaGrange Operations, LLCand C.R. of LaGrange, LLC. (6) In May 2022, the Company entered into an Operations Transfer and Surrender Agreement by and between Lumber City Operations, LLCand LC SNF, LLC("LC SNF"). (7) In July 2022, the Company entered into an Operations Transfer and Surrender Agreement by and between Thomasville Operations, LLCand C.R. of Thomasville, LLC. 38
-------------------------------------------------------------------------------- For a more detailed discussion of the above information, see Note 6 - Leases to the consolidated financial statements included in Part I, Item 1 herein. Additionally, see "Portfolio of Healthcare Investments" included in Part I, Item 1 "Business" in the Annual Report.
Portfolio occupancy rate
The following table provides summary information on facility-level occupancy rates in our portfolio for the periods indicated:
For the Twelve Months Ended September 30, December 31, March 31, June 30, Operating Metric (1) 2021 2021 2022 2022 Occupancy (%) 66.7 % 65.1 % 65.1 % 66.7 % (1)
Excludes three facilities managed in
The following table provides summary information regarding our lease expirations for the years indicated as of
Licensed Beds Annual
Amount ($) Number of Facilities Count Percent '000's Percent (%) 2023 1 50 2.8 % 313 2.4 % 2024 1 126 6.9 % 1,006 7.8 % 2025 2 269 14.8 % 2,294 17.7 % 2026 0 - 0.0 % - 0.0 % 2027 5 608 33.4 % 3,408 26.4 % 2028 4 355 19.5 % 2,933 22.7 % 2029 1 106 5.8 % 557 4.3 % Thereafter 3 304 16.7 % 2,416 18.7 % Total 17 1,818 100.0 % 12,926 100.0 % (1) Straight-line rent. (2)
See Note 6 to the consolidated financial statements included in Part I, Item 1 hereof for an analysis of lease terminations.
The following table sets forth, for the periods indicated, an unaudited statement of operations items and the amounts and percentages of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein. Three Months Ended June 30, Six Months Ended June 30, Percent Percent (Amounts in 000's) 2022 2021 Change (*) 2022 2021 Change (*) Revenues: Patient care revenues
$ 4,570 $ 2,44586.9 % $ 6,881 $ 5,13534.0 % Rental revenues 3,261 3,763 (13.3 )% 7,326 7,844 (6.6 )% Management fees 255 247 3.2 % 519 495 4.8 % Other revenues 7 13 (46.2 )% 14 75 (81.3 )% Total revenues 8,093 6,468 25.1 % 14,740 13,549 8.8 %
Patient care expense 4,222 2,255 87.2 % 6,564 4,457 NM Facility rent expense 1,634 1,639 -0.3 % 3,274 3,279 -0.2 % Cost of management fees 144 150 (4.0 )% 319 315 1.3 % Depreciation and amortization 606 652 (7.1 )% 1,219 1,302 (6.4 )% General and administrative expenses 921 952 (3.3 )% 2,054 1,995 3.0 % Doubtful accounts expense 466 37 1159.5 % 2,227 77 NM Other operating expenses 629 297 111.8 % 968 536 80.6 % Total expenses 8,622 5,982 44.1 % 16,625 11,961 39.0 % (Loss) income from operations (529 ) 486 NM (1,885 ) 1,588 NM Other expense: Interest expense, net 639 666 (4.1 )% 1,291 1,353 (4.6 )% Other expense, net 157 323 (51.4 )% 1,076 717 NM Total other expense, net 796 989 (19.5 )% 2,367 2,070 14.3 % Net loss
$ (1,325 ) $ (503 )NM $ (4,252 ) $ (482 )782.2 % * Not meaningful ("NM").
Three months completed
Patient care revenues-Patient care revenues for the Healthcare Services segment, as a result of the Company operating the Tara, Meadowood, Lumber City and LaGrange Facilities, were
$4.6 millionfor the three months ended June 30, 2022, compared to $2.4 millionfor the same period in 2021. The 87% increase is primarily due to the addition of three new facilities. Rental revenues-Rental revenue for our Real Estate Services segment decreased by approximately $0.5 millionto $3.3 millionfor the three months ended June 30, 2022, compared with $3.8 millionfor the same period in 2021. The 13.3% decrease is due to less rent collected as the company is now operating three additional facilities. Patient care expense-Patient care expense was $4.2 millionfor the three months ended June 30, 2022compared with $2.3 millionfor the same period in 2021. The current period expense increase of $2.0 millionwas due primarily to the additional facilities we are operating. Facility rent expense-Facility rent of $1.63 millionremained approximately the same for the three months ended June 30, 2022and 2021 since rent expense is recognized on a straight-line basis. Depreciation and amortization-Depreciation and amortization was $0.6 millionfor the three months ended June 30, 2022, compared to $0.7 millionfor the same period in 2021. A greater amount of fully depreciated equipment and computer related assets in the current year was the primary driver of the decrease.
General and administrative expenses – General and administrative expenses remained relatively stable at
Three Months Ended June 30, Percent (Amounts in 000's) 2022 2021 Change (*) General and administrative expenses: Real Estate Services
$ 679 $ 830(18.2 )% Healthcare Services 242 122 98.4 % Total $ 921 $ 952(3.3 )% Doubtful accounts expense- The current period expense is due to a $0.5 millionprovision for doubtful accounts recorded for the impairment of straight-line rent associated with the lease terminations. Other operating expenses - Other operating expenses increased by approximately $0.3 million, to $0.6 millionfor the three months ended June 30, 2022, compared with $0.3 millionfor the same period in 2021. The increase was due to professional and legal services related to business transition transactions. Three Months Ended June 30, Percent (Amounts in 000's) 2022 2021 Change (*) Other operating expenses: Real Estate Services $ 337 $ 29315.0 % Healthcare Services 292 4 NM Total $ 629 $ 297111.8 % * Not meaningful ("NM") Other expense, net- Other expense, net decreased by approximately $0.1 million, to $0.2 million, for the three months ended June 30, 2022. These expenses are related to professional and legal services incurred for evaluation and assistance with possible opportunities that improve the Company's capital structure.
Patient care revenues-Patient care revenues for the Healthcare Services segment, as a result of the Company operating the Tara, Meadowood, Lumber City and LaGrange Facilities, were
$6.9 millionfor the six months ended June 30, 2022, compared to $5.1 millionin for the same period in 2021. The 34% increase is primarily due to the additional facilities being operated by the Company . Rental revenues-Rental revenue for our Real Estate Services segment was $7.3 millionfor the six months ended June 30, 2021, compared with $7.8 millionfor the same period in 2021. The decrease is due to less rent collected as the company is now operating the facilities. Patient care expense-Patient care expense was $6.6 millionfor the six months ended June 30, 2022compared with $4.5 millionfor the same period in 2021. The current period expense increase was due primarily to the additional facilities we are operating.
Rental charge for premises-Rent for the premises of
Depreciation and amortization-Depreciation and amortization was
$1.2 millionfor the six months ended June 30, 2022, compared to $1.3 millionfor the same period in 2021. A greater amount of fully depreciated equipment and computer related assets in the current year was the primary driver of the decrease. General and administrative expenses- General and administrative expenses were relatively flat at $2.0 millionfor the six months ended June 30, 2022compared with $2.0 millionfor the same period in 2021. 41 --------------------------------------------------------------------------------
Six Months Ended June 30, Percent (Amounts in 000's) 2022 2021 Change (*) General and administrative expenses: Real Estate Services
$ 1,685 $ 1,736(2.9 )% Healthcare Services 369 259 42.5 % Total $ 2,054 $ 1,9953.0 % Doubtful accounts expense- The current period expense is due to a $2.2 millionprovision for doubtful accounts recorded for non-payment of rent attributable to the conversion of tenant operator to owner operator facilities and the impairment of straight-line rent associated with the lease terminations. Other operating expenses - Other operating expenses increased by approximately $.5 million, to $1.0 millionfor the six months ended June 30, 2022, compared with $0.5 millionfor the same period in 2021. The increase was due to professional and legal services related to business transition transactions. Six Months Ended June 30, Percent (Amounts in 000's) 2022 2021 Change (*) Other operating expenses: Real Estate Services $ 636 $ 53219.5 % Healthcare Services 332 4 NM Total $ 968 $ 53680.6 % * Not meaningful ("NM") Other expense, net- Other expense, net increased by approximately $0.4 million, to $1.1 million, for the six months ended June 30, 2022. These expenses relate to professional and legal services incurred for evaluation and assistance with possible opportunities that improve the Company's capital structure.
Cash and capital resources
The Company intends to pursue measures to grow its operations, streamline its cost infrastructure and otherwise increase liquidity, including: (i) refinancing or repaying debt to reduce interest costs and mandatory principal repayments, with such repayment to be funded through potentially expanding borrowing arrangements with certain lenders; (ii) increasing future lease revenue through acquisitions and investments in existing properties; (iii) modifying the terms of existing leases; (iv) replacing certain tenants
whodefault on their lease payment terms; and (v) reducing other and general and administrative expenses. Management anticipates access to several sources of liquidity, including cash on hand, cash flows from operations, and debt refinancing during the twelve months following the date of this filing. At June 30, 2022, the Company had $2.6 millionin unrestricted cash, including a Medicaid overpayment of $1.5 millionreceived on September 30, 2021, which the Company expects to repay in the near future. During the six months ended June 30, 2022, the Company's cash flow from operations was negative $2.8 millionprimarily due to unpaid rent payments and working capital needs for the facilities we operate. Management anticipates collecting a portion of the past due rent after the filing date and is currently negotiating various methods to collect the remaining unpaid rent. Cash flow from operations in the future will be subject to the operating performance of Peach Healthunder the new management agreements as well as continued uncertainty of the COVID-19 pandemic and its impact on the Company's business, financial condition and results of operations.
against a gross claim of
During the three months ended
June 30, 2022, the Company recognized approximately $0.5 millionof variable rent for the Powder Springs Facility and, as of the date of filing this Quarterly Report, has collected all of such variable rent replacing approximately $0.5 millionof cash rent previously anticipated from the Wellington Tenant. The Tara Facility operations performance during the three months ended June 30, 2022has been insufficient to cover any of the rent the Company is obligated to pay under its lease. 42 -------------------------------------------------------------------------------- As of June 30, 2022, the Company had $52.9 millionin indebtedness, net of $1.3 milliondeferred financing, and unamortized discounts. The Company anticipates net principal repayments of approximately $2.5 millionduring the next twelve-month period, approximately $1.7 millionof routine debt service amortization, $0.7 millionof current maturities of other debt (related to insurance financing for the Tara, Meadowood, Lumber City and LaGrange Facility operations), and a $0.1 millionpayment of bond debt. In September 2021, the Company and the Exchange Bank of Alabamaexecuted a $5.1 millionPromissory Note with a 3.95% annual fixed interest rate and maturity date of October 10, 2026. The Coosa Credit Facility refinanced $5.1 millionprime + 1.5% variable interest rate debt owed to Metro City Bankwith a maturity date of January 31, 2036. The Coosa Credit Facility is secured by the assets of Coosa, which includes the Coosa Facility and the assets of Meadowood which includes the Meadowood Facility. The Company incurred approximately $0.1 millionin new deferred financing fees and expensed approximately $0.1 milliondeferred financing fees associated with the Coosa MCB Loan.
Modification of the debt
In conjunction with the
September 30, 2021Coosa Facility refinance, the Company and the Exchange Bank of Alabamaexecuted the Meadowood Credit Facility that extended the maturity date on $3.5 millionMeadowood Credit Facility, as amended, in current senior debt secured by the assets of Coosaand the assets of Meadowood, other mortgage indebtedness from May 1, 2022to October 1, 2026. Additionally on August 17, 2021, the Company extended the maturity date on approximately $0.5 millionother debt from August 25, 2021to August 25, 2023(known as the "KeyBank Exit Notes"). For further information, see Note 8 - Notes Payable and Other Debt to the consolidated financial statements included in Part I, Item 1 herein. The Company is current with all of its Notes payable and other debt as described in Note 8 - Notes Payable and Other Debt. The Company has benefited from various, now expired, stimulus measures made available to it through the CARES Act enacted by Congressin response to the COVID-19 pandemic, which allowed for, among other things: (i) a deferral of debt service payments on USDAloans to maturity, (ii) an allowance for debt service payments to be made out of replacement reserve accounts for HUD loans, and (iii) debt service payments to be made by the SBA on all SBA loans. In early 2020, the Company began on-going efforts to investigate alternatives to retire or refinance our outstanding debt of Series A Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, exchange offers, tender offers, or otherwise. Costs associated with these efforts have been expensed as incurred in Other expense, net and were $0.9 millionand $0.2 millionfor the three months ended June 30, 2022and June 30, 2022, respectively. In February 2022, the Company commenced an offer to exchange (the "Exchange Offer") any and all of its outstanding 10.875% Series A Cumulative Redeemable Preferred Shares for newly issued shares of the Company's 12.5% Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred Stock"). The Exchange Offer was extended until July 25, 2022unless earlier terminated by the Company. See Note 13, Subsequent Events. The Exchange Offer is the culmination of on-going efforts to investigate alternatives to retire or refinance our outstanding Series A Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, exchange offers, tender offers, or otherwise.
Suspension of Series A Preferred Share Dividends
June 8, 2018, the Board indefinitely suspended quarterly dividend payments on the Series A Preferred Stock. As of June 30, 2022, as a result of the suspension of the dividend payment on the Series A Preferred Stock commencing with the fourth quarter 2017 dividend period, the Company has $41.3 millionof undeclared preferred stock dividends in arrears. The Board believes that the dividend suspension will provide the Company with additional funds to meet, in part, its ongoing liquidity needs. As the Company has failed to pay cash dividends on the outstanding Series A Preferred Stock in full for more than four dividend periods, the annual dividend rate on the Series A Preferred Stock for the fifth and future missed dividend periods increased to 12.875%, which is equivalent to $3.20per share each year, commencing on the first day after the missed fourth quarterly payment ( October 1, 2018) and continuing until the second consecutive dividend payment date following such time as the Company has paid all accumulated and unpaid dividends on the Series A Preferred Stock in full in cash.
Compliance with covenants
Assessment of the company’s ability to continue its activity
Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the Company's current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the Company to meet its obligations as they come due arising within one year of the date of the issuance of the Company's consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the Company will be able to continue as a going concern. The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In applying applicable accounting guidance, management considered the Company's current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company's obligations due over the next twelve months, and the Company's recurring business operating expenses.
The Company concludes that it is probable that the Company will be able to meet its obligations arising from the date of issue of these consolidated financial statements within one year within the parameters established in the accounting guidelines.
For further information regarding the Company’s cash, see Note 2 – Cash and Note 8 – Notes payable and other debts, to the consolidated financial statements included in Part I, Item 1 herein.
The following table presents selected data from our consolidated statements of cash flows for the periods presented:
Six Months Ended
June 30, (Amounts in 000's) 2022
Net cash (used) from operating activities
Net cash used in investing activities (152 ) (74 ) Net cash used in financing activities (1,374 ) (1,206 ) Net change in cash and restricted cash (4,324 )
Cash and restricted cash at beginning of period 9,848
Cash and restricted cash, ending
$ 5,524 $ 8,599
Net cash used by operating activities - was approximately
$2.8 million. The negative cash flow from operating activities was primarily caused by nonpayment of rent from C-Ross and Symmetry, impairment of straight-line associated with the lease terminations and changes in working capital requirements for the facilities we operate.
Net cash used in investing activities – was approximately
Net cash used in financing activities-was approximately
$1.4 million. The cash was used to make routine payments totaling $0.8 millionfor our Senior debt obligations, $0.5 millionfor Other debt, and approximately $0.1 millionfor the payment of taxes due on the exercise of employee restricted share awards (net settlement option).
Net cash provided by operating activities-continuing operations for the six months ended
June 30, 2021was approximately $2.4 million, primarily due to changes in working capital, consisting of our collection of rent arrears from the Wellington Lease Termination and income from operations less noncash charges (primarily, depreciation and amortization and lease revenue in excess of cash rent received). The $1.7 millionincrease compared to the same period in the prior year primarily reflects the collection of $3.2 millionfrom the WellingtonLease Termination, off-set by payment of $1.0 millionof bed tax in arrears for the Powder Springs Facility, $0.1 millionof other collection expenses, approximately $0.2 millionadditional interest payments as result of the CARES ACT interest deferrals and additional net operating outflows of $0.2 million. Net cash used in investing activities-continuing operations for the six months ended June 30, 2021was approximately $0.1 million. This capital expenditure was for computer hardware, software and furniture and fixtures for the Tara Facility. 44
Net cash used in financing activities – continuing operations was approximately
Off-balance sheet arrangements
The Company subleased five facilities located in
Ohioto the Aspire Sublessees, formerly affiliated with MSTC Development Inc., pursuant to the Aspire Subleases, whereby the Aspire Sublessees took possession of, and commenced operating, the Aspire Facilities as subtenant. The Company agreed to indemnify Aspire against any and all liabilities imposed on them as arising from the former operator, capped at $8.0 million. The Company has assessed the fair value of the indemnity agreements as not material to the financial statements at June 30, 2022. For further information see Note 6 - Leases, to the consolidated financial statements included in Part I, Item 1 herein and also and Note 6 - Leases included in Part II, Item 8 of the Annual Report.
Critical accounting policies
We prepare our financial statements in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulation S-X. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, we review our judgments and estimates, including, but not limited to, those related to doubtful accounts, income taxes, stock compensation, intangible assets and loss contingencies. We base our estimates on historical experience, business knowledge and on various other assumptions that we believe to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change. For a discussion of our critical accounting policies, see Note 1 - Organization and Significant Accounting Policies to the consolidated financial statements included in Part I, Item 1 herein. 45
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