What changed in this filing

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Item 4. Controls and Procedures

2021-08-04 compared with 2021-05-05 · 40 added, 41 removed, 90 unchanged (47% of the section changed)

Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended.

Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended.

Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Warning Concerning Forward-Looking Statements

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Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:

• The duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our tenants' and operators' businesses, including the ability of our tenants and senior living community residents to pay rent to us,

• The duration and severity of the COVID-19 pandemic and its impact on us and our tenants', managers' and operators' businesses, including the ability of our tenants and senior living community residents to pay rent to us,

• Our ability to pay distributions to our shareholders and to sustain the amount of such distributions,

• The ability of Five Star, the manager of our managed senior living communities, to minimize the negative impact from the COVID-19 pandemic on our senior living communities and to manage them profitably and increase our returns,

• The ability of our senior living community managers to minimize the negative impact from the COVID-19 pandemic on our senior living communities and to manage them profitably and increase our returns,

• Our belief that we are well positioned to weather the present disruptions facing the real estate industry and, in particular, the real estate healthcare industry, including the senior living industry,

• Our belief that the healthcare sector and many of our tenants and our manager provide essential services across the United States and the implication that our and our tenants' and managers' businesses will remain open to provide such essential services,

• Our ability to maintain and increase occupancy, revenues and NOI at our properties, or to limit their decline during the COVID-19 pandemic and economic downturn,

• Our expectation that we will transition 108 of our senior living communities that are currently being managed by Five Star to new operators by the end of 2021,

• Our belief that the healthcare sector and many of our tenants, managers and operators provide essential services across the United States and the implication that our and our tenants', managers' and operators' businesses will remain open to provide such essential services,

• Our expectations regarding the quality and future performance of the new third party managers of the 41 senior living communities we have recently transitioned from Five Star and the 35 senior living communities we expect to transition from Five Star in the near term,

• Our expectation that we will execute agreements to transition 32 of our senior living communities that are currently being managed by Five Star to new managers by the end of 2021,

• Whether the aging U.S.

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• Our ability to compete for tenancies and acquisitions effectively,

• The expectation that, other than in our SHOP segment, overall tenant retention levels may increase as a result of the COVID-19 pandemic,

• Our application for additional funds under the CARES Act Provider Relief Fund may be denied and we may not receive any additional funding,

• Our expectation that our redevelopment projects will be completed by the estimated completion dates,

• Our potential receipt of any additional funding under the CARES Act,

• Our expectation that our redevelopment projects will be completed on budget by the estimated completion dates,

• Our acquisitions and sales of properties,

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Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO attributable to common shareholders, Normalized FFO attributable to common shareholders, NOI, cash flows, liquidity and prospects include, but are not limited to:

• The impacts of the COVID-19 pandemic and its aftermath on us and our tenants' and operators' businesses,

• The impact of conditions in the economy and the capital markets on us and our tenants and operators,

• The impacts of the COVID-19 pandemic and its aftermath on us and our tenants', managers' and operators' businesses,

• The impact of conditions in the economy and the capital markets on us and our tenants, managers and operators,

• Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,

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• Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control.

• If the severity of the COVID-19 pandemic continues for an extended period or if business activity and the economy fail to sufficiently improve if and when the substantial adverse impacts of the COVID-19 pandemic abate, we may realize sustained losses and liquidity challenges.

Further, we may incur increased operating expenses, particularly at our senior living communities, for supplies and personnel to address the current COVID-19 pandemic and we may be prevented from accepting additional residents at certain of our senior living communities if we become restricted from doing so due to the COVID-19 pandemic.

In addition, under the current economic conditions, our tenants and operators may not be able to profitably operate their businesses at our properties, our tenants may become unable or unwilling to pay rent owed to us, or the manager of our senior living communities may be unable to generate our minimum returns for sustained periods.

• Under the current economic conditions, our tenants, managers and operators may not be able to profitably operate their businesses at our properties, our tenants may become unable or unwilling to pay rent owed to us, or the managers or operators of our senior living communities may be unable to generate our minimum returns for sustained periods as a result of the COVID-19 pandemic or otherwise.

Additionally, our ability to borrow under our credit facility is subject to us satisfying financial and other covenants, and if we default under our credit facility or other debt obligations due to the impacts of the COVID-19 pandemic or otherwise, we may be required to repay our outstanding borrowings and other debt.

Further, although we have taken steps to enhance our ability to maintain sufficient liquidity, unanticipated events, such as emergencies in addition to, or as an expansion of, the current impacts of the COVID-19 pandemic, may require us to expend amounts not currently planned,

• This Quarterly Report on Form 10-Q states that, at the conclusion of the vaccination clinics at our SHOP communities, over 96% of residents had received a vaccine;

however, this information includes residents that may have received only one of two required vaccine doses, and further, even though vaccinations have been administered, the senior living industry may not recover to pre-pandemic levels for an extended period of time or at all if market preferences and practices result in older adults utilizing less services of the type offered at our communities,

• Five Star, the manager of our managed senior living communities, has experienced significant operating and financial challenges, resulting from a number of factors, some of which are beyond Five Star's control, and which challenges directly impact our operating results from our managed senior living communities, including, but not limited to:

• The impacts of the COVID-19 pandemic,

• Increases in Five Star's labor costs or in costs Five Star pays for goods and services,

• Competition within the senior living industry,

• Seniors delaying or forgoing moving into senior living communities or purchasing healthcare services that Five Star provides,

• The impact of changes in the economy and the capital markets on Five Star and its residents and other customers,

• This Quarterly Report on Form 10-Q states that vaccination clinics at senior living communities in our SHOP segment have been completed;

however, even though vaccinations have been administered, the senior living industry may not recover to pre-pandemic levels for an extended period of time or at all if market preferences and practices result in older adults utilizing less services of the type offered at our communities,

• Five Star has experienced, and our other senior living community managers may experience, operating and financial challenges resulting from a number of factors, some of which are beyond Five Star's or any such other manager's control, and which challenges impact our operating results from our managed senior living communities, including, but not limited to:

• The impact of conditions in the economy and the capital markets on Five Star and our other senior living community managers and their residents, clients and other customers,

• Competition within the senior living and other health and wellness related services businesses,

• Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services from Five Star and our other senior living community managers,

• Increases in Five Star's and our other senior living community managers' labor costs or in costs Five Star or any such other manager pays for goods and services,

• Increases in tort and insurance liability costs,

• Five Star's and our other senior living community managers' operating and debt leverage,

• Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations,

• Increases in compliance costs,

• Continued efforts by third party payers to reduce healthcare costs,

• Increases in tort and insurance liability costs, and

• Five Star's exposure to litigation and regulatory and government proceedings due to the nature of its business.

• Although our Board of Trustees and Five Star’s board of directors, including our Independent Trustees and Five Star’s independent directors, have agreed in principal to the terms of the recently announced amendments to our management arrangements with Five Star described herein, definitive documentation for these amendments has not been entered into;

therefore, the timing and terms thereof may be delayed or may change,

• We may be unable to identify new operators for the 108 senior living communities to be transitioned from Five Star to other third party operators that we believe are sufficiently qualified or we may be unable to reach agreement with any such operators on management terms before year end 2021 or at all, and any agreement we may reach with any such operators may not be on the terms we currently expect or desire, and may not be equal to or more favorable to us than the terms of our current management arrangements with Five Star,

• Delays or nonpayment of government payments to Five Star or any of our other senior living community managers,

• Compliance with, and changes to, federal, state and local laws and regulations that could affect Five Star's and our other senior living community managers' services or impose requirements, costs and administrative burdens that may reduce Five Star's and such other managers' ability to profitably operate their businesses,

• Five Star's and our other senior living community managers' exposure to litigation and regulatory and government proceedings due to the nature of their businesses, including adverse determinations resulting from government reviews, audits and investigations and unanticipated costs to comply with legislative or regulatory developments, and

• Ongoing healthcare reform efforts, including continued efforts by third-party payers to reduce costs,

• We have not executed any new management agreement for the 32 remaining senior living communities to be transitioned from Five Star to other third party managers, and we may be unable to identify new managers for those communities that we believe are sufficiently qualified or we may be unable to reach agreement with any such managers on management terms before year end 2021 or at all, and any agreement we may reach with any such managers may not be on the terms we currently expect or desire, and may not be equal to or more favorable to us than the terms of our current management arrangements with Five Star, and further, transitions may not be successful and such managers may not be able to manage our senior living communities profitably or increase our returns,

• We own a significant number of Five Star common shares and we expect to own these shares for the foreseeable future.

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Our distribution rate may be set and reset from time to time by our Board of Trustees.

Our Board of Trustees will consider many factors when setting or resetting our distribution rate, including our historical and projected net income, Normalized FFO, our then current and expected needs and availability of cash to pay our obligations, distributions which we may be required to pay to satisfy our REIT distribution requirements, limitations in the agreements governing our debt and other factors deemed relevant by our Board of Trustees in its discretion.

Our Board of Trustees will consider many factors when setting or resetting our distribution rate, including our historical and projected net income, Normalized FFO, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our expected needs for and availability of cash to pay our obligations and other factors deemed relevant by our Board of Trustees in its discretion.

Further, our projected cash available for distribution may change and may vary from our expectations.

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• Subject to limitations on acquisitions in agreements governing our debt, we plan to selectively sell certain properties from time to time to fund future acquisitions, and to strategically update, rebalance and reposition our investment portfolio, which we refer to as our capital recycling program.

In addition, to reduce our leverage, we have sold properties and other assets and have identified additional properties to sell.

In addition, to reduce our leverage, we have sold properties and other assets.

We cannot be sure we will sell any of these properties or what the terms or timing of any such sales may be.

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• Rents that we can charge at our properties may decline upon renewals or expirations because of changing market conditions or otherwise,

• Although we have obtained a waiver from compliance with certain financial covenants under our credit agreement through June 30, 2022, if our operating results and financial condition are further significantly and adversely impacted by current economic conditions or otherwise, we may fail to comply with the terms of the waiver and other requirements under our credit agreement, and we may also fail to satisfy certain financial requirements under the

agreements governing our public debt.

For example, we expect that our ratio of consolidated income available for debt service to debt service could fall below the 1.5x requirement under our credit agreement and our public debt covenants in 2021, and we cannot be certain how long this ratio would remain below 1.5x.

We are currently fully drawn under our revolving credit facility and will be prohibited from incurring additional debt under our revolving credit facility or otherwise as a result of any non-compliance with the requirements of our credit agreement or the agreements governing our public debt, and we could also be required to repay our outstanding debt as a result of such non-compliance.

We may therefore experience future liquidity constraints, as we will be prohibited from incurring additional debt under our credit agreement or otherwise for failure to comply with the requirements of our credit agreement or the agreements governing our public debt, and we will be limited to our cash on hand or be forced to raise additional sources of capital or take other measures to maintain adequate liquidity,

• Although we have obtained a waiver from compliance with certain financial covenants under our credit agreement through June 2022, if our operating results and financial condition are further significantly and adversely impacted by current economic conditions or otherwise, we may fail to comply with the terms of the waiver and other requirements under our credit agreement, and we may also fail to satisfy certain financial requirements under the agreements governing our public debt.

For example, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our credit agreement and our public debt covenants as of June 30, 2021, and we cannot be certain how long this ratio will remain below 1.5x.

We are prohibited from incurring additional debt while this ratio is below 1.5x, but are not required to repay outstanding debt as a result of failure to comply with this financial requirement.

We are currently fully drawn under our revolving credit facility and could also be required to

repay our outstanding debt in the event of non-compliance with certain other requirements of our credit agreement or the agreements governing our public debt.

We may therefore experience future liquidity constraints, as we are prohibited from incurring additional debt under our credit agreement or otherwise for failure to comply with the requirements of our credit agreement and the agreements governing our public debt, and we will be limited to our cash on hand or be forced to raise additional sources of capital or take other measures to maintain adequate liquidity,

• Actual costs under our revolving credit facility or other floating rate debt will be higher than the stated rates because of fees and expenses associated with such debt,

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• The premiums used to determine the interest rate payable on our revolving credit facility and the facility fee payable on our revolving credit facility are based on our credit ratings, which are subject to change,

• For the three months ended March 31, 2021, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources.

• For the three months ended June 30, 2021, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources.

This may imply that we will maintain or increase the percentage of our NOI generated from private resources at our senior living communities.

However, our residents and patients may become unable to fund our charges with private resources and we may be required or may elect for business reasons to accept or pursue revenues from government sources, which could result in an increased part of our NOI and revenue being generated from government payments and our becoming more dependent on government payments,

• Circumstances that adversely affect the ability of seniors or their families to pay for our manager's and other operators' services, such as economic downturns, weak housing market conditions, higher levels of unemployment among our residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the profitability of our senior living communities,

• Circumstances that adversely affect the ability of seniors or their families to pay for our managers' or operators' services, such as economic downturns, weak housing market conditions, higher levels of unemployment among our residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the profitability of our senior living communities,

• It is difficult to accurately estimate tenant space preparation costs.

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Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, new legislation or regulations affecting our business or the businesses of our tenants or operators, changes in our tenants' or operators' revenues or costs, worsening or lack of improvement of Five Star's financial condition or changes in our other tenants' financial conditions, deficiencies in operations by a tenant or manager of one or more of our senior living communities, changed Medicare or Medicaid rates, acts of terrorism, pandemics, natural disasters or changes in capital markets or the economy generally.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, new legislation or regulations affecting our business or the businesses of our tenants, managers or operators, changes in our tenants', managers' or operators' revenues or costs, worsening or lack of improvement of Five Star's financial condition or changes in our other tenants', managers' or operators' financial conditions, deficiencies in operations by a tenant, manager or operator of one or more of our senior living communities, changed Medicare or Medicaid rates, acts of terrorism, pandemics, natural disasters or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements.

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Other Information

Risk Factors.

There have been no material changes to risk factors from those we previously disclosed in our Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 4. Controls and Procedures