Item 1A. Risk Factors
Item 1A. Risk Factors
The following risk factor adds and modifies the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 25, 2021.
The COVID-19 pandemic has adversely impacted, and likely will continue to adversely impact our business, results of operations, cash flow, liquidity, and stock price, and such impacts may be material.
The pandemic, including the response efforts of federal, state, and local government authorities, businesses, individuals and us, has adversely impacted our business, results of operations, cash flow, and liquidity, and we expect this to continue through at least 2022. We cannot predict with reasonable certainty the impacts that COVID-19, and variants thereof, ultimately will have on our business, results of operations, cash flow, liquidity, and stock price, and such impacts may be material and persist for some time. Further, our response efforts may continue to delay or negatively impact our strategic initiatives, including plans for future growth.
Due to the average age and prevalence of chronic medical conditions among our residents and patients, they generally are at disproportionately higher risk of hospitalization and adverse outcomes if they contract COVID-19. Upon confirmation of positive COVID-19 exposure at a community, we take actions intended to minimize further exposure, including associates’ adhering to personal protection protocols, isolating residents or finding placement in an alternate care setting to best address their care needs, and in some cases, restricting visitors and new resident admissions as necessary to comply with regulatory requirements or at the direction of state or local health authorities.
Seeking to prevent the introduction of COVID-19 into our communities, and to help control further exposure to infections within communities, in March 2020 we began restricting visitors at all our communities to essential healthcare personnel and certain compassionate care situations, screening associates and permitted visitors, suspending group outings, modifying
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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. These restrictions were in place across our portfolio for the three months ended June 30, 2020. We began easing restrictions on a community-by-community basis in July 2020 where regulatory requirements and guidance allowed. In July 2020, we completed baseline testing at all of our communities, and we have continued testing residents and associates at many of our communities. Further testing, whether undertaken proactively, as a result of regulatory requirements, or at the direction of state or local health authorities, may result in significant additional expense, additional temporary restrictions on move-ins at affected communities, continued need for isolating positive residents, increased use of personal protective equipment (“PPE”) by our associates, and increased employee-related costs.
The pandemic, including the related restrictions at our communities, significantly disrupted demand for senior living communities and the sales process, which typically includes in-person prospective resident visits within communities. During the third quarter of 2020, we returned to using in-person prospective resident visits for a majority of our communities; however, restrictions on move-ins escalated throughout the fourth quarter of 2020 due to the resurgence of the virus. At the end of the second, third, and fourth quarters of 2020, 86%, 98%, and 89% of our communities, respectively, were accepting new move-ins. As of July 31, 2021, all of our communities were open for visitors, new resident move-ins, and prospective residents. During the three months ended September 30, 2021, several of our communities experienced restrictions on visitors, new resident move-ins, and prospective residents, with a peak of such restrictions occurring in mid-September 2021. As of October 31, 2021, substantially all of our communities were open for visitors, new resident move-ins, and prospective residents. We may revert to more restrictive measures at our communities, including restrictions on visitors and move-ins, if the pandemic worsens, as necessary to comply with regulatory requirements, or the direction of state or local health authorities.
We believe potential residents and their families have been more cautious, or temporarily delayed their decision, regarding moving into senior living communities during the pandemic, including during the rise of the Delta variant, and such caution may persist for some time. In addition, expanded use of telemedicine and home healthcare by seniors, for which regulatory barriers have been relaxed during the pandemic, may result in less demand for our services. We cannot predict with reasonable certainty whether or when our occupancy will return to pre-COVID-19 levels or the extent to which the pandemic’s effect on occupancy may adversely affect the amount of resident fees we are able to collect from our residents.
The pandemic, including the related restrictions at our communities, began to adversely impact our 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. Our consolidated senior housing portfolio’s weighted average occupancy declined in each month of the pandemic through February 2021, from 82.7% in March 2020 to 69.4% in February 2021. Beginning in March 2021, we have achieved eight consecutive months of weighted average consolidated senior housing occupancy growth on a sequential basis. During the three months ended September 30, 2021, we believe the nationwide spread of the Delta variant caused some moderation in our sequential monthly occupancy growth rate. The extent to which our financial and operating results in the current and future periods may be affected by COVID-19, including the Delta variant, will largely depend on future developments, which are highly uncertain and cannot be accurately predicted at this time.
Compared to our pre-pandemic expectations for fiscal 2020, we estimate that the pandemic resulted in $76.4 million and $303.4 million of lost resident fee revenue for the three and nine months ended September 30, 2021, respectively. Estimated lost resident fee revenue includes $76.4 million and $252.4 million in our consolidated senior housing portfolio for the three and nine months ended September 30, 2021, respectively, and $51.0 million in our Health Care Services segment for the nine months ended September 30, 2021. On a cumulative basis through September 30, 2021, we estimate that the pandemic has resulted in approximately $584.5 million of lost resident fee revenue, including $480.9 million in our consolidated senior housing portfolio. Further deterioration of our resident fee revenue may result from lower move-in activity and the resident attrition inherent in our business, which may increase due to the impacts of COVID-19.
For the three and nine months ended September 30, 2021, we recognized $7.2 million and $44.3 million, respectively, of facility operating expense for incremental direct costs to respond to the pandemic, including costs for: acquisition of PPE, medical equipment, and cleaning and disposable food service supplies; enhanced cleaning and environmental sanitation; increased employee-related costs, including labor, workers compensation, and health plan expense; increased expense for general liability claims; and COVID-19 testing of residents and associates where not otherwise covered by government payor or third-party insurance sources. On a cumulative basis through September 30, 2021, we have incurred $169.8 million of pandemic related facility operating expense since the beginning of fiscal 2020. We are not able to reasonably predict the total amount of costs we will incur related to the pandemic, and such costs may continue to be substantial. We have taken, and may take in future periods, significant impairment charges related to COVID-19 due to lower than expected operating performance at communities with impaired assets. For the year ended December 31, 2020, we recorded $105.6 million of non-cash
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impairment charges in our operating results for our 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 with impaired assets. For the three and nine months ended September 30, 2021, we recorded $0.6 million and $13.4 million, respectively, of such non-cash impairment charges.
We continue to seek opportunities to enhance and preserve our liquidity, including through maintaining expense discipline, continuing to evaluate our financing structure and the state of debt markets, and seeking further government-sponsored financial relief related to the COVID-19 pandemic. There is no assurance that debt financing will continue to be available on terms consistent with our expectations or at all, or that our efforts will be successful in seeking further government-sponsored financial relief or regarding the amount of, or conditions required to qualify for, any such relief. Grants received from the Provider Relief Fund 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 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. We cannot provide assurance that additional restrictions on the permissible uses or terms and conditions of the grants will not be imposed by HHS. The program requires us to report to HHS on our use of the grants, and our reporting is subject to audit. Additionally, there can be no assurance that we will qualify for, or receive, future grants in the amount we expect or at all or the timing of any such grants.
The pandemic has also caused substantial volatility in the market prices and trading volumes in the equity markets, including our stock. Our stock price and trading volume may continue to be subject to wide fluctuations as a result of the pandemic, and may decline in the future.
The ultimate impacts of COVID-19 on our business, results of operations, cash flow, liquidity, and stock price will depend on many factors, some of which cannot be foreseen, including the duration, severity, and breadth of the pandemic and any resurgence or variants of the disease, including the Delta variant; the impact of COVID-19 on the nation’s economy and debt and equity markets and the local economies in our markets; the development, availability, utilization, and efficacy 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 our 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 our ability to adapt our sales and marketing efforts to meet that demand; the impact of COVID-19 on our residents’ and their families’ ability to afford our resident fees, including due to changes in unemployment rates, consumer confidence, housing markets, and equity markets caused by COVID-19; changes in the acuity levels of our new residents; the disproportionate impact of COVID-19 on seniors generally and those residing in our communities; the duration and costs of our response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, and other expenses; potentially greater associate attrition and use of contract labor due to our associate vaccine mandate; the impact of COVID-19 on our ability to complete financings and refinancings of various assets or other transactions or to generate sufficient cash flow to cover required debt, interest, and lease payments and to satisfy financial and other covenants in our debt and lease documents; increased regulatory requirements, including unfunded, mandatory testing; increased enforcement actions resulting from COVID-19; government action that may limit our collection or discharge efforts for delinquent accounts; and the frequency and magnitude of legal actions and liability claims that may arise due to COVID-19 or our response efforts.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.