What changed in this filing

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Item 1A. Risk Factors

2020-08-05 compared with 2020-05-11 · 32 added, 23 removed, 678 unchanged (8% of the section changed)

3 unchanged sentences

The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health safety measures, as well as reported adverse impacts on healthcare resources, facilities and providers.

In March, the outbreak has been declared to be a pandemic by the World Health Organization, and the Health and Human Services Secretary has declared a public health emergency in the United States in response to the outbreak.

Additionally, the Centers for Disease Control and Prevention (CDC) has stated that older adults are at a higher risk for serious illness from the coronavirus.

The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, additional or modified government actions, new information which may emerge concerning the severity of the virus and the actions taken to contain the virus or treat its impact, among others.

In March, the outbreak was declared a pandemic by the World Health Organization, and the Health and Human Services Secretary declared a public health emergency in the United States in response to the outbreak.

Additionally, the CDC has stated that older adults are at a higher risk for serious illness from the coronavirus.

The extent to which COVID-19 will continue impacting our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, additional or modified government actions, new information which may emerge concerning the severity of the virus and the actions taken to contain the virus or treat its impact, among others.

In response to COVID-19, federal, state and local regulators have both implemented new regulations and waived existing regulations in an effort to promote efficient care delivery to decrease the spread of COVID-19.

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Additionally, most of the accommodations are limited in duration to the COVID-19 public health emergency, thus there may be significant operational change requirements on short notice.

Also, the reinstatement of waived state and federal regulations may not occur simultaneously, requiring heightened monitoring to ensure compliance.

To date, regulatory changes have impacted a number of operational areas in our business, including the following:

5 unchanged sentences

quality reporting;

insurance premiums.

and insurance premiums.

Specific factors from the COVID-19 pandemic that could have an adverse effect on our business, financial condition, liquidity, results of operations and prospects, include:

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• general decline in all hospital procedures, including temporary cessation of elective procedures at acute-care hospitals to prepare for an increase of COVID-19 cases and critical care life threatening patients affecting lower census;

• increased costs and staffing requirements related to additional protocols implemented in connection with CDC and related isolation procedures;

• increased costs and staffing requirements related to additional protocols implemented in connection with CDC and related isolation procedures, including obligations to test patients and staff for COVID-19;

• departure of nurses and other skilled personnel, such as Certified Nurse Assistants, social workers and speech, physical and occupational therapists due to their own COVID-19-related illness or concern regarding their exposure to illness at our facilities, which could lead to staffing shortages or reliance on less experienced personnel, including in states where standard licensing credentials may be amended or waived to assist with staffing shortages;

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• potential repayments of relief funds received as changes in federal guidelines are published;

• negatively impacting our patients' ability or willingness to pay for healthcare services and our third party's ability or willingness to pay rents.

• negative impacts on our patients' ability or willingness to pay for healthcare services and our third parties' ability or willingness to pay rents.

The extent and duration of the impact of the COVID-19 pandemic on our stock price is uncertain, our stock price may be more volatile, and our ability to raise capital could be impaired.

Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicare.

We derived 26.4% and 24.8% of our revenue from the Medicare programs for the three months ended March 31, 2020 and 2019, respectively.

We derived 29.9% and 28.2% of our revenue from the Medicare programs for the three and six months ended June 30, 2020, respectively and 24.1% and 24.4% for the three and six months ended June 30, 2019, respectively.

In addition, many other payors may use published Medicare rates as a basis for reimbursements.

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Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins.

For example, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013.

Subsequent actions by Congress extended sequestration through 2023.

For example, see Item 1., Government Regulation, Sequestration of Medicare Rates.

Additionally, Medicare payments can be delayed or declined due to determinations that certain costs are not reimbursable or reasonable because either adequate or additional documentation was not provided or because certain services were not covered or considered medically necessary.

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A significant portion of reimbursement for skilled nursing services comes from Medicaid.

In fact, Medicaid is our largest source of revenue, accounting for 44.1% of our revenue for the three months ended March 31, 2020 and 45.6% in the same period in 2019.

In fact, Medicaid is our largest source of revenue, accounting for 44.9% and 44.5% of our revenue for the three and six months ended June 30, 2020, respectively and 46.2% and 45.9% for the three and six months ended June 30, 2019, respectively.

Medicaid is a state-administered program financed by both state funds and matching federal funds.

47 unchanged sentences

• Sought to address potential fraud and abuse in federal healthcare programs by, among other things, (i) implementing screenings and enhanced oversight periods for new providers and suppliers, (ii) providing enhanced penalties for submitting false claims, (iii) providing funding for enhanced anti-fraud activities, and (iv) providing the federal government with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud.

• Gave authority to United States Department of Health and Human Services (HHS) to establish, test and evaluate alternative payment methodologies for Medicare services, many of which have been developed, focusing on incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

• Gave authority to U.S.

Department of Health and Human Services (HHS) to establish, test and evaluate alternative payment methodologies for Medicare services, many of which have been developed, focusing on incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode of care centered around a hospitalization.

• Working to improve the healthcare delivery system through incentives to enhance quality, improve beneficiary outcomes and increase value of care, with one of these key delivery system reforms being the encouragement of ACOs to facilitate coordination and cooperation among providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs.

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Sustained failure to demonstrate improvement towards meeting all claim filing and documentation requirements could ultimately lead to Medicare decertification.

As of March 31, 2020, we had six operating subsidiaries that had reviews scheduled, on appeal, or in a dispute resolution process, both pre- and post-payment.

CMS has suspended all Targeted Probe and Educate program activity due to the State of Emergency.

Accordingly, as of June 30, 2020, none of our independent operating subsidiaries had Reviews scheduled, on appeal, or are in a dispute resolution process, both pre- and post-payment.

Once the suspension period is lifted, the previously in-progress reviews could start again.

We anticipate that these Reviews will reconvene and could increase in frequency in the future.

Additionally, both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies and, in particular, skilled nursing facilities.

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Changes in the acuity level of patients we attract, as well as our payor mix among Medicaid, Medicare, private payors and managed care companies, significantly affect our profitability because we generally receive higher reimbursement rates for high acuity patients and because the payors reimburse us at different rates.

For the three months ended March 31, 2020 and 2019, 70.5% and 70.4% of our revenue was provided by government payors that reimburse us at predetermined rates, respectively.

For the three and six months ended June 30, 2020, 74.8% and 72.7% of our revenue was provided by government payors that reimburse us at predetermined rates, respectively.

If our labor or other operating costs increase, we will be unable to recover such increased costs from government payors.

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We have in the past been subject to class action litigation involving claims of violations of various regulatory requirements.

While we have been able to settle these claims without a material ongoing adverse effect on our business, future claims could be brought that may materially affect our business, financial condition and results of operations.

While we have been able to settle these claims without an ongoing material adverse effect on our business, future claims could be brought that may materially affect our business, financial condition and results of operations.

Other claims and suits, including class actions, continue to be filed against us and other companies in our industry.

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If we are unable to accomplish any of these objectives at the operating subsidiaries we acquire, we will not realize the anticipated benefits and we may experience lower than anticipated profits, or even losses.

During the three months ended March 31, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone senior living operation.

During the six months ended June 30, 2020, we expanded our operations through a combination of long-term leases and real estate purchases, with the addition of three stand-alone skilled nursing operations and one stand-alone senior living operation.

This growth has placed and will continue to place significant demands on our current management resources.

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CMS estimated the April 24, 2019 changes would cause 47 percent of all nursing centers to lose stars in their "Quality" ratings, with 33 percent to lose stars in their "Staffing" ratings, and some 36 percent to lose stars in their "Overall" ratings.

In responding to the COVID-19 pandemics, CMS announced a new, targeted inspection plan to focus inspections on urgent patient safety threats and infection control, therefore causing a great shift in the number of nursing homes inspected and how the inspections are conducted.

As this change would disrupt the inspection domain of the Nursing Home Five Star Quality Rating System, results of inspection conducted on or after March 4, 2020 will not be used to calculate a nursing home’s health inspection star ratings.

In addition, on June 25, 2020, CMS announced that beginning July 29, 2020, data used to calculate measures in the Five Star Quality rating system will be based on the data collection period ending December 31, 2019 so as to exclude data from resident assessments that are impacted by the waiver associated with the public health emergency.

CMS continues to increase quality measure thresholds, making it more difficult to achieve upward ratings.

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Because we lease the majority of our affiliated facilities, we could experience risks associated with leased property, including risks relating to lease termination, lease extensions and special charges, which could adversely affect our business, financial position or results of operations.

As of March 31, 2020, we leased 163 of our 225 affiliated facilities.

As of June 30, 2020, we leased 163 of our 225 affiliated facilities.

Most of our leases are triple-net leases, which means that, in addition to rent, we are required to pay for the costs related to the property (including property taxes, insurance, and maintenance and repair costs).

10 unchanged sentences

We maintain the Credit Facility with a lending consortium arranged by Truist with a revolving line of credit of up to $350.0 million in aggregate principal amount.

As of March 31, 2020, our operating subsidiaries had $230.0 million outstanding under our Credit Facility.

As of June 30, 2020, our operating subsidiaries had $30.0 million outstanding under our Credit Facility.

Nineteen of our subsidiaries are under mortgage loans insured with Department of Housing and Urban Development (HUD) for an aggregate amount of $115.0 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

The terms of the mortgage loans range from 25- to 35-years.

We also had an outstanding promissory note of approximately $4.2 million as of March 31, 2020 issued in connection with various acquisitions.

The term of the note is 12 years.

We also had outstanding promissory notes of approximately $4.6 million as of June 30, 2020.

The term of the note is 12 years and 10 months.

Because these mortgage loans are insured with HUD, our borrower subsidiaries under these loans are subject to HUD oversight and periodic inspections.

In addition, we had $1.7 billion of future operating lease obligations as of March 31, 2020.

In addition, we had $1.7 billion of future operating lease obligations as of June 30, 2020.

We intend to continue financing our operating subsidiaries through mortgage financing, long-term operating leases and other types of financing, including borrowings under our lines of credit and future credit facilities we may obtain.

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In addition, any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes.

This could materially and adversely effect our results of operations, cash flows, and liquidity.

This could materially and adversely affect our results of operations, cash flows, and liquidity.

We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks.

1 unchanged sentence

We may not be able to pay or maintain dividends and the failure to do so would adversely affect our stock price.

Our ability to pay and maintain cash dividends is based on many factors, including our ability to make and finance acquisitions, our ability to negotiate favorable lease and other contractual terms, anticipated operating cost levels, the level of

demand for our beds, the rates we charge and actual results that may vary substantially from estimates.

Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain dividends.

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Any delay or prevention of a change of control transaction or changes in our Board of Directors could cause the market price of our common stock to decline.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

DEFAULTS UPON SENIOR SECURITIES

MINE SAFETY DISCLOSURES

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 1A. Risk Factors