What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-27 compared with 2021-07-28 · 241 added, 174 removed, 1090 unchanged (28% of the section changed)

19 unchanged sentences

Our operating subsidiaries, each of which strives to be the operation of choice in the community it serves, provide a broad spectrum of skilled nursing, senior living and other ancillary services.

As of June 30, 2021, we offered skilled nursing, senior living and rehabilitative care services through 240 skilled nursing and senior living facilities.

As of September 30, 2021, we offered skilled nursing, senior living and rehabilitative care services through 242 skilled nursing and senior living facilities.

Of the 242 facilities, we operated 177 facilities under long-term lease arrangements, and have options to purchase 11 of those 177 facilities.

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Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of June 30, 2021:

The following table summarizes our affiliated facilities and operational skilled nursing beds and senior living units by ownership status as of September 30, 2021:

Owned and Operated Leased (with a Purchase Option) Leased (without a Purchase Option) Total for Facilities Operated

13 unchanged sentences

Coronavirus Update — We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive steps designed to protect the health and safety of our residents and employees and to maintain business continuity.

As the vaccines became more accessible in all 50 states, we began to see a significant decline in COVID-19 cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff.

As the vaccines became accessible in all 50 states, we began to see a significant decline in COVID-19 cases in our affiliated operations as we worked diligently to vaccinate all of our willing residents and staff.

Our primary focus throughout the COVID-19 pandemic has remained ensuring the health and safety of our patients, residents, employees, and their respective families.

We continue to implement measures necessary to provide the safest possible environment within our sites of service, taking into consideration the vulnerable nature of our patients and the unique exposure risks of our staff.

As the vaccine distribution commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and continued throughout the second quarter of 2021.

As the vaccine distribution commenced and infection rates began to decline, our occupancy rates started to recover in the first quarter of 2021 and continued throughout the second and third quarter of 2021.

The improvements in occupancy were due to our operations developing innovative approaches to confront the occupancy declines, including strategic partnerships with upstream and downstream continuum partners and increasing clinical competencies to treat high-acuity patients, including those that are COVID-19 positive.

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Even with COVID-19 demands waning, the partnerships developed during the pandemic will continue to benefit us into the future.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facility occupancy rebounded by 2.1% and 3.0%, respectively, during the second quarter of 2021 compared to the fourth quarter of 2020, and 1.7% and 1.5%, respectively, compared to the first quarter of 2021.

As a result of our local, one operation at a time approach, our Same Facilities and Transitioning Facilities occupancy rebounded by 2.6% and 5.1%, respectively, during the third quarter of 2021 compared to the fourth quarter of 2020, and 0.5% and 2.0%, respectively, compared to the second quarter of 2021.

By strengthening existing partnerships, creating new partnerships and most importantly, demonstrating clinical capabilities and favorable outcomes, our census has continued to stabilize.

We believe our operations are primed to rebuild occupancies and continue to gain additional market share as a result of relationships with acute care providers and other health care partners.

During the three and six months ended June 30, 2021, we received approximately $2.4 million and $11.5 million, respectively, in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

The nationwide spread of the Delta variant has caused some moderation in our recent occupancy growth rate as many states and areas in which our communities are located are experiencing new COVID-19 caseloads.

Our monthly occupancy for Same Facilities and Transitioning Facilities grew 17 basis points from August to September after growth had accelerated sequentially in the prior five months to 324 basis points from January to June.

The Company expects sequential monthly occupancy to again grow for October 2021, but at a slightly more moderated rate.

During the three and nine months ended September 30, 2021, we received approximately $0.1 million and $11.6 million, respectively, in provider relief fund distributions (Provider Relief Fund) from the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act) from the federal government.

To date, we have returned all Provider Relief Funds that we received.

Further, in March 2021, we repaid the remaining $102.0 million of Medicare Accelerated and Advance Payment Program funds.

During the three and six months ended June 30, 2021, we received an additional $16.8 million and $32.4 million, respectively, in state relief funding and recognized $16.7 million and $33.2 million, respectively, as revenue, of which $5.8 million and $6.5 million were classified as unapplied state funding included in our liabilities as of June 30, 2021 and December 31, 2020, respectively.

On September 10, 2021, HHS made an additional round of $17 billion in Provider Relief Fund available to support healthcare-related expenses or lost revenue attributable to COVID-19.

We have not received any funding related to the additional round of Provider Relief Fund distributions.

During the three and nine months ended September 30, 2021, we received an additional $17.8 million and $50.3 million, respectively, in state relief funding and recognized $19.2 million and $52.4 million, respectively, as revenue, of which $4.4 million and $6.5 million were classified as unapplied state funding included in our liabilities as of September 30, 2021 and December 31, 2020, respectively.

See Note 3, COVID-19 Update in the Notes to the Condensed Consolidated Financial Statements.

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Consistent with previous hurdles, our local leaders are adjusting their operation to meet the clinical and financial challenges, including utilizing the expertise of our Service Center resources to implement best practices.

Department of Housing and Urban Development (HUD) Mortgage Loans — During nine months ended September 30, 2021, three of our subsidiaries entered into the Department of Housing and Urban Development (HUD) mortgage loans in the aggregate amount of $31.4 million.

The mortgage loans are insured with HUD, which subjects these subsidiaries to HUD oversight and periodic inspections.

Loan proceeds were used to fund acquisitions, to renovate and upgrade existing and future facilities, to cover working capital needs and for other business purposes.

Common Stock Repurchase Program — On October 21, 2021, the Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $20.0 million of our common stock under the program for a period of approximately 12 months that starts on October 29, 2021.

Facility Information

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of June 30, 2021:

The following table sets forth the location of our operated and owned facilities by type as well as the number of beds and units located at operated and owned facilities as of September 30, 2021:

TX CA AZ UT CO WA ID NE IA SC WI NV KS Total

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Owned Senior living units 439 — 315 — 355 — — 262 — — — — 74 1,445

Number of owned and not operated facilities

Senior living properties 6 2 1 — — — 2 1 — — 19 — — 31

(1) Campuses represent facilities that offer both skilled nursing and senior living services.

During the six months ended June 30, 2021, we expanded our operations through a combination of long-term leases and a real estate purchase with the addition of twelve stand-alone skilled nursing operations.

During the nine months ended September 30, 2021, we expanded our operations through a combination of long-term leases and a real estate purchase with the addition of fourteen stand-alone skilled nursing operations.

Of these additions, one is related to a purchase of owned property, further expanding our real estate portfolio.

These new operations added a total of 1,504 operational skilled nursing beds operated by our affiliated operating subsidiaries.

Subsequent to September 30, 2021, we expanded its operations through long-term leases with the addition of three stand-alone skilled nursing operations.

These new operations added 328 operational skilled nursing beds to be operated by our affiliated operating subsidiaries.

For further discussion of our acquisitions, see Note 8, Operation Expansions in the Notes to the Condensed Consolidated Financial Statements .

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The following table summarizes our overall skilled mix from our skilled nursing services for the periods indicated as a percentage of our total skilled nursing routine revenue and as a percentage of total skilled nursing patient days:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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The following table summarizes our overall occupancy statistics for skilled nursing operations for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Occupancy for skilled services:

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The following table sets forth our total service revenue by payor source generated by our skilled services and our "Other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

Skilled Services Other (1)

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Total service revenue $ 642,075 $ 570,282 $ 22,522 $ 25,059 $ 664,597 $ 595,341

Three Months Ended June 30,

Three Months Ended September 30,

Skilled Services Other (1)

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(2) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

Six Months Ended June 30,

Nine Months Ended September 30,

Skilled Services Other (1)

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Total service revenue $ 1,855,993 $ 1,685,263 $ 66,489 $ 77,108 $ 1,922,482 $ 1,762,371

Six Months Ended June 30,

Nine Months Ended September 30,

Skilled Services Other (1)

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(2) Medicaid payor includes revenue for senior living operations and revenue related to FMAP.

In addition to the service revenue above, our rental revenue derived from triple-net lease arrangements with third parties is $3,927 and $7,904, respectively, for the three and six months ended June 30, 2021 and $3,620 and $7,282, respectively, for the three and six months ended June 30, 2020.

In addition to the service revenue above, our rental revenue derived from triple-net lease arrangements with third parties is $3.9 million and $11.8 million, respectively, for the three and nine months ended September 30, 2021 and $3.9 million and $11.2 million, respectively, for the three and nine months ended September 30, 2020.

Skilled Services

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We generate rental revenue primarily by leasing post-acute care properties we acquired to healthcare operators under triple-net lease arrangements, whereby the tenant is solely responsible for the costs related to the property, including property taxes, insurance, and maintenance and repair costs, subject to certain exceptions.

As of June 30, 2021, our real estate portfolio was comprised of 95 real estate properties.

As of September 30, 2021, our real estate portfolio was comprised of 95 real estate properties.

Of these properties, 65 are leased to affiliated skilled nursing facilities wholly-owned and managed by us, 31 are leased to senior living operations wholly-owned and managed by Pennant and our Service Center property, which is leased to our Service Center and numerous third parties for commercial office space.

Of the 31 real estate operations leased to Pennant, two senior living operations are located on the same real estate properties as skilled nursing facilities that the Company owns and operates.

During the three and six months ended June 30, 2021, we generated rental revenues of $16.0 million and $31.9 million, of which $12.1 million and $24.0 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

During the three and nine months ended September 30, 2021, we generated rental revenues of $16.3 million and $48.2 million, of which $12.3 million and $36.3 million, respectively, was derived from affiliated wholly-owned healthcare operators, and therefore eliminated in consolidation.

Within our senior living operations, we generate revenue primarily from private pay sources, with a portion earned from Medicaid payors or through other state-specific programs.

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Healthcare is an area of extensive and frequent regulatory change.

Changes in the law or new interpretations of existing laws may have a significant impact on our revenue, costs and the way we operate our business.

Our subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies.

In addition, our provider subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians, and workplace protection for healthcare staff.

Such laws include the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law and state corporate practice of medicine statutes.

Governmental and other authorities periodically inspect our skilled nursing facilities, senior living facilities and outpatient rehabilitation agencies to verify that we continue to comply with the applicable regulations and standards.

Changes in the law or new interpretations of existing laws may have a significant impact on revenue, costs and business operations.

Our independent, operating subsidiaries that provide healthcare services are subject to federal, state and local laws relating to, among other things, licensure, delivery, quality and adequacy of care, physical plant requirements, life safety, personnel and operating policies.

In addition, these same subsidiaries are subject to federal and state laws that govern billing and reimbursement, relationships with vendors and business relationships with physicians, and workplace protection for healthcare staff.

Such laws include the Anti-Kickback Statue, the federal False Claims Act (FCA), the Stark Law, the Health Care Emergency Temporary Standard, and state corporate practice of medicine statutes.

We must pass these inspections to remain licensed under state laws and to comply with our Medicare and Medicaid provider agreements.

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These statements of deficiency may require us to take corrective action to regain and maintain compliance.

In some cases, federal or state regulators may impose other remedies including imposition of civil monetary penalties, temporary payment bans, loss of certification as a provider in Medicare or Medicaid program, or revocation of a state operating license.

In some cases, federal or state regulators may impose other remedies including imposition of civil monetary penalties, temporary payment bans, loss of certification as a provider in the Medicare or Medicaid program, or revocation of a state operating license.

We believe that the regulatory environment surrounding the healthcare industry subjects providers to intense scrutiny.

In the ordinary course of business, providers are subject to inquiries, investigations and audits by federal and state agencies related to compliance with participation and payment rules under government payment programs.

These inquiries may originate from the HHS Office of the Inspector General (OIG) audits, state Medicaid agencies, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies.

In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil monetary penalties that extend over long periods of time and date back to incidents long before surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs.

We vigorously contest each such matter when appropriate;

These inquiries may originate from the HHS Office of the Inspector General (OIG), state Medicaid agencies, local and state ombudsman offices and CMS Recovery Audit Contractors, among other agencies.

In response to the inquiries, investigations and audits, the federal and state governments continue to impose citations for regulatory deficiencies and other regulatory penalties, including demands for refund of overpayments, expanded civil monetary penalties that extend over long periods of time and date back to incidents prior to surveyor visits, Medicare and Medicaid payment bans and terminations from the Medicare and Medicaid programs.

We vigorously contest each such regulatory outcome when appropriate;

however, there are significant legal and other expenses involved that consume our financial and personnel resources.

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HHS also waived requirements specific to skilled nursing facilities pursuant to its authority under Section 1812(f) of the Social Security Act (Section 1812(f) Waiver, and together with the Section 1135 Waivers, the Emergency Waivers).

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency, CMS ended several Emergency Waivers that were no longer needed effective May 10, 2021.

While many of the Emergency Waivers are expected to last throughout the duration of the COVID-19 public health emergency, CMS ended several Emergency Waivers effective May 10, 2021.

Examples of requirements that were waived due to the COVID-19 emergency declaration include the following:

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In addition, CMS is re-prioritizing scheduled program audits and contract-level Risk Adjustment Data Validation audits for Medicare Advantage (MA) organizations, Part D sponsors, Medicare-Medicaid Plans, and Programs of All-Inclusive Care for the Elderly organizations.

Re-prioritizing these audit activities will allow providers, CMS and organizations to focus on patient care.

Re-prioritizing these audit activities allows providers, CMS and organizations to focus on patient care.

In July 2020, CMS updated their COVID-19 Provider Burden Relief Frequently Asked Questions (FAQs) related to claim audit waivers for multiple services.

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Under the Emergency Waivers, CMS is also allowing skilled nursing facilities to provide a skill-in-place program for Medicare beneficiaries who are residents of the skilled nursing facilities that meet the skill-in-place criteria, foregoing the usual three-day qualifying hospital stay.

As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B programs.

This waiver remains valid for the duration of the COVID-19 public health emergency.

As patients qualify for skill-in-place for Medicare Part A stays, we could see a decrease in long-term care Medicare Part B programs.

On August 24, 2020, CMS released a Medicaid Informational Bulletin providing guidance to states on flexibilities that are available to increase reimbursement for nursing facilities implementing specific infection control practices.

Resuming visitation and resident rights — CMS has issued guidance to facilities throughout the public health emergency regarding patients’ rights to visitors.

While the CMS guidance issued in March 2020 directed that facilities severely restrict visitation, through the course of the Pandemic, CMS has subsequently provided guidance that broadens visitation.

Testing requirements — Beginning in April 2020, authorities in several states in which we operate began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities.

This came after the CDC stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes.

On September 8, 2021, CMS clarified that CMS’ waivers do not waive or change other requirements for SNF coverage under Medicare, including the SNF level of care criteria, which is unchanged by the public health emergency.

CMS used this transmittal to further clarify that CMS will review and take action in connection with SNF admissions that do not satisfy SNF level of care criteria that existed prior to the public health emergency and the institution of CMS’ blanket waivers.

Resuming visitation and resident rights — CMS has issued guidance to facilities throughout the public health emergency regarding patients’ rights to visitation.

While the CMS guidance issued in March 2020 directed that facilities severely restrict visitation, CMS has subsequently provided guidance through the course of the pandemic (and last updated in September 2020) that broadens visitation.

Testing requirements — Beginning in April 2020, authorities in several states in which our independent operating subsidiaries are located began to mandate widespread COVID-19 testing at all nursing home and long-term care facilities.

This came after the Centers for Disease Control and Prevention (CDC) stated that older adults are at a higher risk for serious illness from the coronavirus and issued updated testing guidelines for nursing homes.

Some of these states were also publicly reporting COVID-19 outbreaks in facilities.

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On April 27, 2021, CMS again issued revised parameters for testing, specifying that the requirement for routine testing of staff applies only to those staff members that are unvaccinated - fully vaccinated staff do not have to be routinely tested.

On September 9, 2021, the Biden-Harris administration (the Administration) announced a forthcoming interim final rule that would require all workers in Medicare and Medicaid participating health facilities to be fully vaccinated and the text of this interim final rule is expected in the fourth quarter of 2021.

The routine testing requirements are in addition to obligations to screen staff each shift, residents daily, and all persons entering the facility for signs and symptoms of COVID-19.

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In the event of a COVID-19 outbreak in the facility, all staff and residents must be tested at regular intervals until repeat testing identifies no new cases of COVID-19 infection among staff or residents for a 14-day period.

In addition to CMS's testing mandates, some states have imposed their own testing requirements for residents and staff or are enforcing testing mandates under existing or expanded workplace safety regulations.

Additional guidance may be issued in connection with the forthcoming interim final rules regarding mandatory worker vaccinations expected by CMS for Medicare and Medicaid-participating facilities, which may also contain provisions affecting the testing and vaccination of residents.

In addition to CMS' testing mandates, some states have imposed their own testing requirements for residents and staff or are enforcing testing mandates under existing or expanded workplace safety regulations.

In addition to expected interim final rules mandating vaccinations for health facility workers by CMS and vaccinations or testing by the U.S.

Department of Labor’s Occupational Safety and Health Administration (OSHA).

Several states where our independent operating facilities are located have issued vaccine mandates that apply to facility employees.

California, the most populous state, issued an order on August 5, 2021, requiring workers in nursing homes and other health facilities to receive at least one vaccine dose by September 30, 2021.

On August 20, 2021, the State of Washington’s governor issued a proclamation requiring workers in long-term care facilities and healthcare settings—including employees, contractors, and volunteers—to be fully vaccinated against COVID-19 by October 2021.

On August 30, 2021, the Colorado Board of Health approved a COVID-19 vaccine requirement for employees, contractors, and other individuals working in certain health care facilities including nursing homes and assisted living facilities, mandating that these workers fully vaccinated by October 2021.

None of these state mandates allow for regular COVID-19 testing as an alternative to vaccination.

Non-compliance with state or federal mandates may result in imposition of fines or other administrative action.

Reporting requirements — Effective May 8, 2020, CMS published an interim final rule requiring skilled nursing facilities to report information related to COVID-19 cases among facility residents and staff directly to the CDC National Health Safety Network no less than weekly, which is made publicly available on a dedicated website.

the reported information is made publicly available on a dedicated website.

In addition, skilled nursing facilities are required to inform residents, their families and representatives of confirmed or suspected COVID-19 cases in their facilities.

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Facilities are also required to provide residents and staff with vaccine education and offer vaccines, when available, to residents and staff.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 reporting requirements.

We do not believe these reporting requirements will have a material impact on our Condensed Consolidated Financial Statements.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related requirements.

Effective June 11, 2021, HHS revised the Post-Payment Notice of Reporting Requirements which are applicable to recipients of Provider Relief Funds.

The revised requirements provide additional information on the data elements that recipients are required to report as part of the post-payment reporting process, as well as the timing of such reporting.

We do not believe these reporting requirements will have a material impact on our Condensed Consolidated Financial Statements.

Effective August 23, 2021, CMS published an interim final rule incorporating comments on its May 21, 2021 interim final rule.

This updated interim final rule expands on the interim final rule effective May 21, 2021, continuing the obligation for long-term care and intermediate care facilities to report COVID-19 vaccination data for both residents and staff to the CDC National Healthcare Safety Network.

This new interim final rule requires facilities to develop policies and procedures to ensure the availability of the COVID-19 vaccine to residents and staff, and to educate residents and staff concerning the benefits, risks, and potential side effects associated with the vaccine.

This interim final rule also addresses responses to vaccination refusal by residents and staff in compliance with EEOC guidance.

CMS may initiate enforcement activities and assess civil monetary penalties for not meeting any of these COVID-19 related reporting requirements under this interim final rule.

We do not believe these COVID-19 related requirements will have a material impact on our Condensed Consolidated Financial Statements.

Survey Activity and Enforcement — On March 20, 2020, CMS announced the initiation of focused infection control surveys intended to assess long-term care facility compliance with infection control requirements in connection with the COVID-19 pandemic.

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Vaccine distribution is now widespread in all 50 states.

On August 18, 2021, the Administration announced that CMS is developing an emergency regulation requiring all workers within Medicare and Medicaid-participating nursing homes to be vaccinated against COVID-19 as a condition of participation in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, announcing that CMS is developing new regulations requiring workers within all Medicare and Medicaid-certified facilities to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Administration indicated that the interim final rule was expected to be issued in the fourth quarter of 2021.

Additionally, and separately, on September 9, 2021, the Administration announced that the U.S.

Department of Labor’s Occupational Safety and Health Administration (OSHA) would introduce a rule requiring employers with more than 100 employees to mandate that its employees be fully vaccinated against COVID-19 or submit to weekly testing for the virus.

The Administration likewise indicated that the interim final rule for this regulation was expected to be issued in the fourth quarter of 2021.

On August 23, 2021, the FDA approved the licensure of the Comirnaty vaccine, also known as the Pfizer-BioNTech vaccine.

On September 22, 2021, the FDA amended the EUA for the Pfizer-BioNTech vaccine to allow for use of a single booster dose to individuals meeting certain criteria.

On September 24, 2021, the Centers for Disease Control and Prevention recommended that the Pfizer-BioNTech booster dose be administrated to eligible residents and workers in long-term care facilities.

On October 20, 2021, the FDA amended the EUA for the Moderna and Johnson & Johnson vaccines to allow for use of a single booster to individuals meeting certain criteria.

On October 21, 2021, the CDC recommended that the Moderna and Johnson & Johnson vaccine dose be administrated to eligible residents and workers in long-term care facilities.

The FDA's amendment also allowed for the use of booster doses from manufacturers other than the one used in the primary vaccine series.

Medicare presently accounts for approximately 28.9% of our skilled nursing services revenue year-to-date, being our second-largest payor.

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Skilled nursing facilities that do not meet the SNF QRP requirements for a program year will receive a notice of non-compliance.

On July 29, 2021, CMS issued a final rule for the SNF QRP that adopted two new reporting measures and updated the specifications for another measure.

Starting with the FY 2023 SNF QRP, SNFs are required for the first time to report the SNF Healthcare-Associated Infections (HAI) measure, which tracks the number of infections requiring hospitalization following a medical intervention, and the COVID-19 Vaccination Coverage among Healthcare Personnel (HCP) measure, which tracks vaccination of staff in order to assess whether SNFs are taking steps to limit the spread of COVID-19.

The Transfer of Healthcare (TOH) information data SNFs must report, which is included in the Patient-Post-Acute Care measurement, will be changed to exclude SNF patients discharged to their homes under the care of either a home health service or hospice.

The elimination of this information will change how the TOH is used in calculating Patient-Post-Acute Care measurement, and may have an impact on our quality ratings and reimbursement from Medicare and Medicaid on a prospective basis.

Beginning in March 2020, due to the COVID-19 pandemic, CMS issued a temporary suspension of SNF QRP reporting requirements effective until June 30, 2020.

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This estimated increase is attributable to a 2.2% market basket increase factor.

On April 8, 2021, CMS issued a proposed rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the proposed rule, which would become effective October 1, 2021, the aggregate net market basket rate is expected to increase by 1.3%, for fiscal year 2022.

This estimated increase is attributable to a 2.3% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.2% point reduction for multifactor productivity adjustment.

On July 29, 2021, CMS issued a final rule for fiscal year 2022 that updates the Medicare payment rates and the quality programs for skilled nursing facilities.

Under the final rule, effective October 1, 2021, the aggregate net market basket rate increased by 1.2% for fiscal year 2022, compared to fiscal year 2021.

This increase is attributable to a 2.7% market basket increase factor with a 0.8% point reduction for forecast error adjustment and a 0.7% point reduction for multifactor productivity adjustment.

On April 12, 2021, CMS revealed its intent to recalibrate PDPM’s parity adjustment up to 5.0% based on the prior year aggregate spending under the new model.

The reimbursement change, if proposed and finalized, could adversely impact our reimbursement rates.

On July 29, 2021, CMS’ final rule for fiscal year 2022 did not include this parity adjustment and indicated that this PDPM parity adjustment would be revisited in CMS’ proposed rule for the 2023 fiscal year.

The reimbursement change, if proposed and finalized in a future fiscal year, could adversely impact our reimbursement rates.

Sequestration of Medicare Rates

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These proposed changes would impact the SNF-VBP rate adjustment.

On July 29, 2021, CMS published its final rule for the fiscal year 2022 program in the Federal Register, adopting the proposed changes for measuring the performance period and amending the data to be reported to CMS, which impacted the SNF-VBP rate adjustment.

Part B Rehabilitation Requirements

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The threshold is the same for OT services.

Under CMS’ proposed physician fee schedule for 2022 published on July 13, 2021, CMS proposes an expiration of the 3.75% increase in payment amounts made in the 2021 coverage fiscal year and reduction of the conversion factor by 3.89%.

This may reduce the PT and SLP combined threshold for 2022 and affect our revenue derived from Medicare Part B.

A final rule setting the 2022 physician fee schedule is expected in the fourth quarter of 2021.

Consistent with CMS’ “Patients over Paperwork” initiative, the agency has also been moving toward eliminating burdensome claims-based functional reporting requirements for Part B therapy services.

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These code edits were previously implemented on October 1, 2020 and required additional documentation and claim modifier coding burden when procedure codes representing many PT or OT evaluation codes or treatment codes performed under a PT, OT, or SLP plan of care was billed on the same date.

This additional burden is no longer required.

This additional coding burden has been removed.

On November 1, 2019, CMS issued the calendar year 2020 Physician Fee Schedule (PFS) Final Rule establishing that therapy assistant claim modifiers will be required starting in calendar year 2020.

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On July 13, 2021, CMS issued the calendar year 2022 PFS proposed rule, which proposes to implement the portion of the BBA requiring the use of new modifiers to allow CMS to identify and make payments at 85% of the otherwise applicable Part B payment amount for PT and OT services furnished in whole or in part by PT and OT assistants.

Other changes in the proposed rule, including reducing the conversion factor by 3.89%, will have the effect of lowering the reimbursement rate for Part B therapy services specific to our industry by approximately 2%, if implemented.

Other changes in the proposed rule, including reducing the conversion factor by 3.89%, will have the effect of lowering the reimbursement rate for Part B therapy services if implemented.

The comment period for this proposed rule closed on September 13, 2021, and CMS’ final rule containing the 2022 physician fee schedule is anticipated in the fourth quarter of 2021.

The Multiple Procedure Payment Reduction (MPPR) continues at a 50% reduction, which is applied to therapy procedures by reducing payments for practice expense of the second and subsequent procedures when services provided beyond one unit of one procedure are provided on the same day.

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These services have been used to provide some services to community-based outpatients from our skilled nursing facilities that are eligible through local rules to provide community-based outpatient services.

Under the calendar year 2022 PFS proposed rule, these telehealth services would continue to be included on the Medicare telehealth services list until the end of calendar year 2023.

Pursuant to the Emergency Waivers, CMS allowed for the facility to bill an originating site fee to CMS for telehealth services provided to Medicare Part B beneficiary residents of the facility when the services are provided by a physician from an alternate location, effective March 6, 2020 through the end of the public health emergency, which is currently in effect through October 18, 2021.

Under the calendar year 2022 PFS proposed rule, these certain telehealth services would continue to be included on the Medicare telehealth services list until the end of calendar year 2023.

The PFS Final Rule also increased the frequency limitation on nursing facility telehealth visits from once every 30 days to once every fourteen days.

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The recent Congressional elections in the United States and policies implemented by the former Presidential administration have resulted in significant changes in legislation, regulation, implementation of Medicare, Medicaid, and government policy.

The recent 2020 Presidential and Congressional elections may significantly alter the current regulatory framework and impact our business and the health care industry.

The 2020 Presidential and Congressional elections may significantly alter the current regulatory framework and impact our business and the health care industry.

We continually monitor these developments so we can respond to the changing regulatory environment impacting our business.

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and that the facility expressly inform the resident or his/her representative of the right not to sign the agreement as a condition of admission.

Congress has routinely introduced, but not passed, legislation addressing the issue of arbitration agreements used by LTC facilities.

While legislative action is possible in the future, federal and state regulations remain our primary source of authority over the use of pre-dispute binding arbitration agreements.

As discussed under the “Coronavirus” heading above, on August 18, 2021, the Administration announced that CMS is developing an emergency regulation requiring all workers within all Medicare and Medicaid-participating nursing homes to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Administration expanded the scope of this forthcoming emergency regulation on September 9, 2021, requiring workers within all Medicare and Medicaid-certified facilities to be fully vaccinated against COVID-19 as a condition of participating in the Medicare and Medicaid programs.

The Interim Final Rule is expected to be issued in the fourth quarter of 2021.

Civil and Criminal Fraud and Abuse Laws and Enforcement

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and (iii) modifications to put more emphasis on registered nurse (RN) staffing, including a set rating for nursing homes that report four or more days in the quarter with no RN on site.

In 2020, in response to the COVID-19 pandemic, a temporary freeze of Skilled Nursing Facilities Quality Reporting Program data, Staffing Data, and Health Inspection data on the Nursing Home Compare website to account for the suspended reporting and inspection obligations due to the COVID-19 pandemic.

CMS predicted that the 2019 changes would result in 47% of all nursing centers to lose stars in their "Quality" ratings, 33% to lose stars in their "Staffing" ratings and some 36% to lose stars in their "Overall" ratings.

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Since the standards for performance are more difficult to achieve, the number of our 4 and 5 Star facilities could be reduced.

Additionally, in April of 2019, CMS announced a new framework for informing CMS’s work related to the safety and quality in America’s nursing homes.

Additionally, in April of 2019, CMS announced a new framework for informing CMS’ work related to the safety and quality in America’s nursing homes.

The approach includes the following pillars:

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In February 2020, CMS announced that part of its Enhancing Enforcement efforts would include improved oversight of state survey agencies (SSA) and revisions to the State Performance Standards System, which is the program used to access SSA performance.

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

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

In 2020, in response to the COVID-19 pandemic, a temporary freeze was placed on Skilled Nursing Facilities Quality Reporting Program data, Staffing data, and Health Inspection data on the Nursing Home Compare website to account for the suspended reporting and inspection obligations due to the COVID-19 pandemic.

The information reported to CMS and used in these quality calculations changed over the period of 2020.

Beginning in August of 2020, responding to the COVID-19 pandemic, CMS announced a new, targeted inspection plan to focus on urgent patient safety threats and infection control, therefore causing a shift in the number of nursing homes inspected and how the inspections are conducted.

As this change would disrupt the inspections and data collection CMS and state surveyors conducted as part of the Nursing Home Five Star Quality Rating System, results of these inspections conducted on or after March 4, 2020 initially were not used to calculate a nursing home’s health inspection star ratings.

By December of 2020, CMS and state surveyors had resumed inspections of nursing homes to include inspection data, including surveys that occurred on March 4, 2020 and afterward, in its star rankings calculated for January 2021.

CMS resumed calculating nursing homes' health inspection ratings on January 27, 2021.

In addition, beginning on July 29, 2020, data used to calculate staffing measures in the Five Star Quality ratings system for the first and second quarters of 2020 was frozen based upon the waiver of the requirement for facilities to submit staffing data through the PBJ system.

This waiver ended in June 2020 for the third and fourth quarters of 2020, and staffing data was reflected in the Five Star ratings January 2021.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality Rating System is CMS’s decision to make submission of the minimum data set assessment data optional for the fourth quarter of 2019 and excepted for the first and second quarters of 2020.

Similarly, although staff reporting requirements were waived for the first and second quarters of 2020, this waiver ended on June 25, 2020.

Thereafter, nursing homes were required to report staffing data to CMS, which was incorporated into CMS’ Five Star Quality rating for those nursing homes beginning in January 2021.

The January 2021 calculation of Five Star Quality ratings for nursing homes reflected nursing home-provided quarterly updates of most quality measures for the period beginning June 2019 and ending June 2020 due to interruptions in data collection.

The quality measures that are specific to SNFs but not included in CMS’ Five Star Quality ratings for January 2021 were the measures for percentages of new or worsening pressure injuries, and the rate of residents who successfully return to home from a SNF.

These measures may be included in future Five Star Quality ratings and the delay may not reveal improvements in previously low-rated facilities, or declines in performance within highly rated facilities.

Another impact of the COVID-19 pandemic to the Nursing Home Five-Star Quality Rating System is CMS’ decision to make submission of the minimum data set assessment data optional for the fourth quarter of 2019 and excepted for the first and second quarters of 2020.

Due to the gap in reported data, CMS did not include the two quality measures that are based on the minimum data set assessment-based data in its quality measure ratings in January 2021.

On August 10, 2021, the Nursing Home Improvement and Accountability Act of 2021 (Nursing Home Improvement Act) was introduced in the U.S.

Senate and is intended to update federal nursing home policy to improve quality of care and oversight.

The proposed legislation reduces SNF payments by two percentage points beginning in fiscal year 2025 for inaccurate submission of certain data, provides federal funding of $50 million to carry out data validation tasks for SNF data and provides federal funding of $250 million to ensure accuracy of information on cost reports.

The Nursing Home Improvement Act also proposes to establish nurse staffing requirements, including the requirement for the use of a 24-hour registered professional nurse and other provisions intended to increase transparency and accuracy of reported data regarding nursing activities, improve accountability and enhance quality of care.

If passed in its current form, however, this bill would provide participating states with a temporary enhanced federal Medicaid match to fund improvements in nursing home workforce and care.

This match would last six years and states would be responsible for showing CMS that Medicaid reimbursement increases were used to increase worker wages and yield new training resources and opportunities for nursing home staff.

As of September 30, 2021, no action has been taken on this bill since its introduction to the Senate on August 10, 2021.

Monitoring Compliance in Our Facilities

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Americans with Disabilities Act

Our facilities must also comply with the American with Disabilities Act (ADA), and similar state and local laws to the extent that such facilities are "public accommodations" as defined in those laws.

Our facilities must also comply with the Americans with Disabilities Act (ADA), and similar state and local laws to the extent that such facilities are "public accommodations" as defined in those laws.

The obligation to comply with the ADA and other similar laws is an ongoing obligation, and we continue to assess our facilities and make appropriate modifications.

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Our results serve as a strong indicator that our strategy is working and our transformation is underway.

As vaccines continue to become more readily available and COVID-19 cases are declining in the communities we serve, we began to see a recovery in our census during the first quarter of 2021 and our improved occupancy levels continued into the second quarter of 2021.

As a result, we continue to experience healthy growth and achieve record revenue and net income.

Our total revenue for the quarter increased $53.8 million, or 9.2% while our diluted GAAP earning per share grew by 19.2%, from $0.73 to $0.87, compared to the second quarter in 2020.

As vaccines become available and COVID-19 cases are declining in the communities we serve, we began to see a recovery in our census during the first quarter of 2021 and our improved occupancy levels continued into the second and third quarter of 2021.

As a result, we continue to experience healthy growth in both revenue and operational earnings.

Our total revenue for the quarter increased $69.3 million, or 11.6% while our diluted GAAP earning per share grew by 7.8%, from $0.77 to $0.83, compared to the third quarter in 2020.

Revenue from our skilled services collectively increased by 12.6%.

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We have also strengthened our collection process and identified non-clinical areas where we can manage spending.

These operational fundamentals coupled with the reduction of interest expense due to the deferral of payroll tax payments and cash generated from strong performance resulted in strong financial success in the quarter.

These operational fundamentals have continued to drive our overall success.

The following table sets forth details of operating results for our revenue, expenses and earnings, and their respective components, as a percentage of total revenue for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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Interest expense (0.2) (0.3) (0.3) (0.4)

Interest and other income 0.2 0.2 0.1 0.2

Other income (expense), net — 0.1 0.1 0.1

Other expense, net (0.2) (0.2) (0.2) (0.3)

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7.1 % 7.2 % 7.5 % 7.0 %

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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We define (in accordance with the definition used by NAREIT) FFO to mean net income attributable to common stockholders (NICS), computed in accordance with U.S.

GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable real estate assets and including depreciation and amortization related to real estate to earnings.

GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable real estate assets and including depreciation and amortization related to real estate earnings.

VALUATION MEASURE:

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The table below reconciles net income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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EBITDA $ 79,184 $ 68,573 $ 233,382 $ 207,333

Stock-based compensation expense 4,633 3,528 8,687 6,763

Stock-based compensation 5,082 4,173 13,769 10,936

Results related to operations not at full capacity(a) — 81 584 620

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(b) Costs incurred to acquire operations which are not capitalizable.

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated:

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

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Income before provision for income taxes $ 64,857

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

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Segment income (loss) 84,747 8,474 (36,289) — 56,932

Loss from sale of real estate and impairment charges (2,753)

Income before provision for income taxes $ 54,179

Our total revenue increased $53.8 million, or 9.2%, compared to the three months ended June 30, 2020.

The increase in revenue was primarily driven by an increase in our skilled mix days and revenue per patient day from our skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $27.9 million during the three months ended June 30, 2021, when compared to the same period in 2020.

In addition, we recorded $16.7 million of state relief revenue in the second quarter of 2021 compared to $12.4 million in the same period in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

Our total revenue increased $69.3 million, or 11.6%, compared to the three months ended September 30, 2020.

The increase in revenue was primarily driven by an increase in our patient days and occupancy from our skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $37.6 million during the three months ended September 30, 2021, when compared to the same period in 2020.

In addition, we recorded $19.2 million of state relief revenue in the third quarter of 2021 compared to $11.7 million in the same period in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services

The following table presents the skilled services revenue and key performance metrics by category during the three months ended June 30, 2021 and 2020:

Three Months Ended June 30,

The following table presents the skilled services revenue and key performance metrics by category during the three months ended September 30, 2021 and 2020:

Three Months Ended September 30,

2021 2020 Change % Change

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Skilled mix by nursing revenue 50.7 % 53.9 % (3.2) %

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 Change % Change

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Skilled mix by nursing revenue 52.8 % 55.2 % (2.4) %

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 Change % Change

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Skilled mix by nursing revenue 46.0 % 48.8 % (2.8) %

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 Change % Change

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Revenue and expenses related to skilled nursing and senior living services have been allocated and recorded in the respective operating segment.

In the second quarter of 2021, we converted a campus into a skilled nursing facility.

In the first half of 2021, we converted two campuses into two skilled nursing facilities.

(1) Same Facility results represent all facilities purchased prior to January 1, 2018.

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.

Skilled services revenue increased $56.2 million, or 10.1%, compared to the three months ended June 30, 2020.

Of the $56.2 million increase, Medicaid custodial revenue increased $24.7 million, or 11.1%, Medicaid skilled revenue increased $6.4 million, or 17.5%, and managed care revenue increased by $30.6 million, or 37.2%.

This is partially offset by the decreases in Medicare revenue of $5.0 million , or 2.9%, and private and other revenue of $0.5 million, or 1.3%.

The increase in revenue was primarily driven by strong performance across our skilled services operations.

The negative impact of COVID-19 on our census started in March 2020 and continues in 2021.

Our consolidated occupancy decreased by 0.7%, which includes operations acquired at lower occupancy compared to the same period in the prior year.

The impact of the decline in occupancy was offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $24.5 million, or 5.2% due to higher patient acuity, skilled days and total patient days.

Our skilled days increased by 4.7%, which resulted in an increase in skilled mix revenue of $9.7 million .

Managed care skilled days increased by 33.9% coupled with an increase from our revenue daily rate of 1.8%, resulting in an increase in Managed Care revenue of $23.4 million.

Medicaid custodial and private patient census days decreased due to COVID-19.

This was offset by an increase in our Medicaid daily rate of 5.2% as a result of our successful participation in the quality improvement programs and the supplemental programs in various states.

Revenue generated by our Transitioning Facilities increased $5.3 million , or 6.3% , primarily due to an increase in our skilled mix days compared to the three months ended June 30, 2020, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

The acuity gains were partially offset by the decline in occupancy of non-skilled patient days.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $26.5 million compared to the three months ended June 30, 2020 .

We acquired fifteen operations between July 1, 2020 and June 30, 2021 across five states.

Skilled services revenue increased $71.8 million, or 12.6%, compared to the three months ended September 30, 2020.

Of the $71.8 million increase, the primary changes were from an increase in Medicaid custodial revenue of $44.2 million, or 20.2%, and an increase in managed care revenue $27.3 million, or 31.1%.

This is partially offset by the decreases in Medicare revenue of $12.6 million , or 6.6%.

The increase in revenue was primarily driven by strong performance across our skilled services operations as our census continued to recover in the third quarter of 2021.

Our consolidated occupancy increased by 2.8%, which includes operations acquired at lower occupancy compared to the same period in the prior year.

As COVID-19 cases declined from the previous year, there has been a shift in Medicare patients to long-term care patients, resulting to a decline in skilled mix days and skilled mix revenue.

Revenue in our Same Facilities increased $26.9 million, or 5.6% due to increased occupancy and total patient days.

Our diligent efforts to strengthen our partnership with various managed care organizations, hospitals and the local communities we operate in, increased our occupancy by 2.8% to 74.4%.

Managed care skilled days increased by 25.0%, resulting in an increase in Managed Care revenue of $18.3 million.

Skilled days and Medicare census days decreased due to the shift of high acuity patients to long-term patients and the return of long-term patients to the facilities as COVID-19 cases decreased from prior year.

Revenue generated by our Transitioning Facilities increased $8.4 million , or 9.8% , primarily due to improved occupancy growth of 4.4% to 70.4% and increase in our total patient days compared to the three months ended September 30, 2020, demonstrating our ability to transition these healthcare operations toward higher acuity patients.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $36.5 million compared to the three months ended September 30, 2020 .

We acquired sixteen operations between October 1, 2020 and September 30, 2021 across four states.

In the future, if we acquire additional turnaround or start-up operations, we expect to see lower occupancy rates and skilled mix, and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

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The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

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(1) These rates exclude additional FMAP we recognized and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.2% and 5.0%, respectively, compared to the three months ended June 30, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020 coupled with our continued shift towards higher acuity patients.

Included in revenue for the three months ended June 30, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.5% and 5.4%, respectively, compared to the three months ended September 30, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020.

Included in revenue for the three months ended September 30, 2021 and 2020 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Our average Medicaid rates increased 1.3% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

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Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Three Months Ended June 30,

Three Months Ended September 30,

Same Facility Transitioning Acquisitions Total

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The following table sets forth total cost of services for our Skilled services segment for the periods indicated (dollars in thousands):

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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Cost of services related to our Skilled services segment increased $57.6 million, or 13.1%, primarily due to additional costs related to new acquisitions, which accounted for $29.3 million of the increase to cost of services.

Cost of services as a percentage of revenue decreased to 77.0% from 77.4%, a decrease of 0.4%.

We experienced a decrease in cost associated with operational improvements.

Cost of services as a percentage of revenue increased to 77.2% from 76.8%, an increase of 0.4%.

The increase is mainly due to higher staffing expenses.

Real Estate Segment

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2021 2020 $ %

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Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $1.0 million, or 6.8%, to $16.0 million, compared to the three months ended June 30, 2020.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $0.7 million, or 4.7%, to $16.3 million, compared to the three months ended September 30, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $1.3 million, or 10.5% to $13.7 million, compared to the three months ended June 30, 2020.

The increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense.

Our FFO increased $0.9 million, or 6.5% to $13.8 million, compared to the three months ended September 30, 2020.

The increase in FFO is primarily related to the increase in rental revenue.

All Other Service Revenue

Our other revenue decreased by $2.7 million, or 11.0%, to $21.7 million, compared to the three months ended June 30, 2020.

Our other revenue decreased by $2.5 million, or 10.1%, to $22.5 million, compared to the three months ended September 30, 2020.

Other revenue for 2021 includes senior living revenue of $12.3 million and revenue from other ancillary services of $10.2 million.

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Depreciation and amortization decreased 0.2%, to 2.1%, as a percentage of revenue.

Other expense, net — Other expense, net as a percentage of revenue decreased by 0.1%, to 0.1%.

Other expense, net — Other expense, net as a percentage of revenue remained flat.

Other expense primarily includes interest expense related to debt.

Provision for income taxes — Our effective tax rate was 21.4% for the three months ended June 30, 2021, compared to 25.0% for the same period in 2020.

Provision for income taxes — Our effective tax rate was 25.5% for the three months ended September 30, 2021, compared to 20.1% for the same period in 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

The 2021 reporting period had a larger excess tax benefit from stock-based compensation compared to 2020.

The higher effective tax rate reflects a decrease in tax benefit from stock-based payment awards.

See Note 14, Income Taxes , in the Notes to the Condensed Consolidated Financial Statements for further discussion.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

The following table sets forth details of operating results for our revenue and earnings, and their respective components, by our reportable segment for the periods indicated:

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Skilled services Real estate All Other Eliminations Consolidated

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(1) Gain from sale of real estate includes gains or losses from the sale of real estate, insurance recoveries and impairment charges from operations.

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Skilled services Real estate All Other Eliminations Consolidated

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Segment income (loss) 243,640 22,593 (101,252) — 164,981

Loss from sale of real estate and impairment charges (2,753)

Income before provision for income taxes $ 162,228

Our total revenue increased $91.5 million, or 7.8%, compared to the six months ended June 30, 2020.

Our total revenue increased $160.8 million, or 9.1%, compared to the nine months ended September 30, 2020.

The increase in revenue was primarily driven by an increase in our skilled service segment and the increase in skilled mix days and revenue per patient day from our skilled services operations, along with the impact of acquisitions.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $46.9 million during the six months ended June 30, 2021, when compared to the same period in 2020.

In addition, we recorded $33.2 million of state relief revenue during the first half of 2021 compared to $13.1 million in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

Total revenue from operations acquired on or subsequent to January 1, 2020 increased our consolidated revenue by $84.6 million during the nine months ended September 30, 2021, when compared to the same period in 2020.

In addition, we recorded $52.4 million of state relief revenue during the nine months ended in 2021 compared to $24.8 million in 2020, which correlated directly to the additional COVID-19 related expenses incurred.

All state relief revenue is included in Medicaid revenue.

Skilled Services Segment

The following table presents the skilled services revenue and key performance metrics by category during the six months ended June 30, 2021 and 2020:

Six Months Ended June 30,

The following table presents the skilled services revenue and key performance metrics by category during the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30,

2021 2020 Change % Change

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Skilled mix by nursing revenue 52.5 % 51.8 % 0.7 %

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 Change % Change

8 unchanged sentences

Skilled mix by nursing revenue 54.2 % 53.4 % 0.8 %

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 Change % Change

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Skilled mix by nursing revenue 47.8 % 44.1 % 3.7 %

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 Change % Change

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(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2020.

S killed services revenue increased $98.9 million, or 8.9%, compared to the six months ended June 30, 2020.

Of the $98.9 million increase, Managed care revenue increased $37.0 million, or 20.1%, Medicare revenue increased $29.7 million, or 9.0%, Medicaid custodial revenue increased $31.5 million , or 7.1% and Medicaid skilled revenue increased $10.3 million , or 14.3%.

This is partially offset by the decrease in private and other revenue of $9.6 million , or 11.4%.

S killed services revenue increased $170.7 million, or 10.1%, compared to the nine months ended September 30, 2020.

Of the $170.7 million increase, the primary changes were from increases in managed care revenue of $64.2 million, or 23.6%, Medicare revenue of $17.1 million, or 3.3%, and Medicaid custodial revenue of $75.8 million , or 11.4%.

The increase in revenue was primarily driven by strong performance across our skilled services operations.

The negative impact of COVID-19 on our census started in March 2020 and continues in 2021.

The impact of COVID-19 on our census started in March 2020 and continued into the first quarter of 2021.

Census began to recover in the second quarter of 2021.

Our consolidated occupancy decreased by 2.0%, which includes operations acquired at lower occupancy, compared to the same period in the prior year.

The impact of the decline in occupancy was offset by the increase in skilled mix days due to a shift toward high acuity patients.

Revenue in our Same Facilities increased $39.4 million, or 4.2% due to greater patient acuity and skilled days, even while occupancy declined by 4.0%, due to COVID-19.

Revenue in our Same Facilities increased $66.3 million, or 4.7% due to higher patient acuity and skilled days, offset by the decrease in occupancy of 1.8%, which primarily declined in the three months ended March 31, 2021 and has increased in the three months ended June 30, 2021 and September 30, 2021.

The decline in our occupancy is mainly in our non-skilled patient days, which was offset by the shift toward high acuity patients.

Total revenue for Same Facilities included $26.8 million and $11.0 million of Medicaid revenue related to state relief funding for the six months ended June 30, 2021 and 2020, respectively.

The revenue increase was driven by higher skilled mix from managed care coupled with higher Medicare revenue, all of which was partially offset by Medicaid and private revenue decrease.

Revenue generated by our Transitioning Facilities increased $15.3 million, or 9.4%, primarily due to increases in our daily rate and skilled mix days compared to the six months ended June 30, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

Total revenue for Same Facilities included $41.5 million and $20.4 million of Medicaid revenue related to state relief funding for the nine months ended September 30, 2021 and 2020, respectively.

Managed care revenue increased by $45.4 million or 19.2%, driven by increases in managed care days as our partnership with various managed care organizations, hospitals and the local communities strengthened.

Revenue generated by our Transitioning Facilities increased $23.7 million, or 9.5%, primarily due to increases in our daily rate and skilled mix days compared to the nine months ended September 30, 2020 , demonstrating our ability to transition these healthcare operations that were acquired two and three years ago.

In addition, we experienced a shift toward higher acuity patients, as demonstrated by increased census in all skilled payors .

Our skilled days increased by 13.3% , coupled with an increase from our skilled mix revenue daily rate of 1.5%.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $44.3 million compared to the six months ended June 30, 2020.

We acquired fifteen operations between July 1, 2020 and June 30, 2021 across five states.

Skilled services revenue generated by facilities purchased on or subsequent to January 1, 2020 (Recently Acquired Facilities) increased by approximately $80.8 million compared to the nine months ended September 30, 2020.

We acquired sixteen operations between October 1, 2020 and September 30, 2021 across four states.

In the future, if we acquire additional facilities that are underperforming and need to be turned around or invest in start-up operations, we expect to see lower occupancy rates and skilled mix and these metrics are expected to vary from period to period based upon the maturity of the facilities within our portfolio.

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The following table reflects the change in skilled nursing average daily revenue rates by payor source, excluding services that are not covered by the daily rate (1) :

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

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(1) These rates exclude additional FMAP we recognized and include sequestration reversal of 2%.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.8% and 6.4%, respectively, compared to the six months ended June 30, 2020.

Our Medicare daily rates at Same Facilities and Transitioning Facilities increased by 3.7% and 6.0%, respectively, compared to the nine months ended September 30, 2020.

The increase is attributable to the 2.2% net market basket increase that became effective in October 2020 coupled with our continued shift towards higher acuity patients.

Included in revenue for the six months ended June 30, 2021 is the result of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Included in revenue for the nine months ended September 30, 2021 is nine months impact of the temporary suspension of the 2% Medicare sequestration, which started on May 1, 2020 and was extended through December 31, 2021.

Revenue for the nine months ended September 30, 2020 included five months of impact from the temporary suspension of the 2% Medicare sequestration.

Our average Medicaid rates increased 5.2% due to state reimbursement increases and our participation in supplemental Medicaid payment programs and quality improvement programs in various states.

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The following tables set forth our percentage of skilled nursing patient revenue and days by payor source:

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Revenue:

Percentage of Skilled Nursing Revenue:

Medicare 26.3 % 28.5 % 27.2 % 29.1 % 23.9 % 21.6 % 26.3 % 28.6 %

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Total skilled nursing 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Six Months Ended June 30,

Nine Months Ended September 30,

Same Facility Transitioning Acquisitions Total

2021 2020 2021 2020 2021 2020 2021 2020

Percentage of Skilled

Nursing Days:

Percentage of Skilled Nursing Days:

Medicare 13.8 % 14.9 % 13.4 % 14.0 % 11.1 % 11.2 % 13.6 % 14.7 %

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The following table sets forth total cost of services for our skilled services segment for the periods indicated (dollars in thousands):

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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Cost of services related to our skilled services segment increased $131.2 million, or 10.1%, due primarily to additional costs at new acquisitions, which accounted for $63.4 million of the increase.

Cost of services as a percentage of revenue decreased to 77.0% from 77.3%, a decrease of 0.3%.

We experienced a decrease in cost associated with operational improvements.

Cost of services as a percentage of revenue remained consistent at 77.1%.

Real Estate Segment

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2021 2020 $ %

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Rental revenue.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.0 million, or 6.5% to $31.9 million, compared to the six months ended June 30, 2020.

Our rental revenue, including revenue generated from our affiliated facilities, increased by $2.7 million, or 5.9% to $48.2 million, compared to the nine months ended September 30, 2020.

The increase in revenue is primarily attributable to acquisitions and CPI increases.

Our FFO increased $4.0 million, or 17.1% to $27.2 million, compared to the six months ended June 30, 2020.

Our FFO increased $4.8 million, or 13.3% to $41.0 million, compared to the nine months ended September 30, 2020.

The increase in FFO is primarily related to the increase in rental revenue and the decrease in interest expense.

All Other Service Revenue

Our other revenue decreased by $8.1 million, or 15.5% to $44.0 million, compared to the six months ended June 30, 2020.

Our other revenue decreased by $10.6 million, or 13.8% to $66.5 million, compared to the nine months ended September 30, 2020.

Other revenue for 2021 includes senior living revenue of $36.1 million and revenue from other ancillary services of $30.4 million.

The decrease in other revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary services.

The decrease in revenue is due to the impact of COVID-19, which negatively impacted services in our other ancillary services.

Consolidated Financial Expenses

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Other expense, net as a percentage of revenue decreased by 0.1%, to 0.2%.

Other expense primarily includes interest expense related to borrowings under our Credit Facility.

Other expense primarily includes interest expense related to borrowings under mortgage debt.

As there was no outstanding debt under the Credit Facility, interest expense decreased.

Provision for income taxes.

Our effective tax rate was 21.0% for the six months ended June 30, 2021, compared to 24.2% for the same period in 2020.

Our effective tax rate was 22.5% for the nine months ended September 30, 2021, compared to 22.8% for the same period in 2020.

The effective tax rate for both periods is driven by the impact of excess tax benefits from stock-based compensation, partially offset by non-deductible expenses.

The 2021 reporting period had a larger excess tax benefit from stock-based compensation compared to 2020.

See Note 14, Income Taxes , in the Notes to the Condensed Consolidated Financial Statements for further discussion.

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Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt secured by our real property and our Credit Facility.

Our liquidity as of June 30, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

Our liquidity as of September 30, 2021 is impacted by cash generated from strong operational performance and the repayment of Medicare Accelerated and Advance Payment Program funds.

Historically, we have primarily financed the majority of our acquisitions through the financing of our operating subsidiaries through mortgages, our Credit Facility, and cash generated from operations.

Total capital expenditures for property and equipment were $33.8 million and $27.1 million for the six months ended June 30, 2021 and 2020, respectively.

Total capital expenditures for property and equipment were $50.1 million and $37.8 million for the nine months ended September 30, 2021 and 2020, respectively.

We currently have approximately $65.0 million budgeted for renovation projects for 2021.

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We may, in the future, seek to raise additional capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available on acceptable terms, on a timely basis, or at all.

Our cash and cash equivalents as of June 30, 2021 consisted of bank term deposits, money market funds and U.S.

Our cash and cash equivalents as of September 30, 2021 consisted of bank term deposits, money market funds and U.S.

Treasury bill related investments.

In addition, as of June 30, 2021, we held debt security investments of approximately $48.9 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of June 30, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

In addition, as of September 30, 2021, we held debt security investments of approximately $48.0 million, which were split between AA, A and BBB rated securities.

We believe our debt security investments that were in an unrealized loss position as of September 30, 2021 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

As mentioned above, our primary sources of cash is from our ongoing operations.

Our positive cash flows have supported our business and have allowed us to pay regular dividends to our stockholders.

We currently anticipate that existing cash and total investments as of June 30, 2021, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

We currently anticipate that existing cash and total investments as of September 30, 2021, along with projected operating cash flows and available financing, will support our normal business operations for the foreseeable future.

The following table presents selected data from our condensed consolidated statement of cash flows for the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by/(used in):

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Financing activities (78,562) (117,471)

Net (decrease)/increase in cash and cash equivalents (38,151) 142,563

Net increase in cash and cash equivalents 68,058 116,205

Cash and cash equivalents beginning of period 236,562 59,175

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Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities.

The $65.7 million decrease in cash provided by operating activities for the six months ended June 30, 2021 compared to the same period in 2020, w as primarily due to changes in working capital partially offset by higher net income.

Changes in working capital was driven by timing of accounts receivable collections, prepayment of income taxes, timing of prepaid expenses and other assets and accrued wages and related liabilities, which are partially offset by the timing of accounts payable payments.

The $77.7 million decrease in cash provided by operating activities for the nine months ended September 30, 2021 compared to the same period in 2020, w as primarily due to changes in working capital partially offset by higher net income.

Changes in working capital was driven by the deferred payment of the employer portion of social security taxes, which will be paid out in December 2021 and December 2022, timing of accounts receivable collections and payments of expenses.

Investing Activities

Investing cash flows consist primarily of capital expenditures, investment activities, insurance proceeds and cash used for acquisitions.

The $12.5 million increase in cash used in investing activities for the six months ended June 30, 2021 compared to the same period in 2020, was primarily due to an increase in cash used for acquisitions of $11.2 million, coupled with an increase in capital expenditures of $6.7 million, which is partially offset by an increase in cash from insurance proceeds of $6.7 million.

The $9.4 million increase in cash used in investing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to an increase in cash used for capital expenditures of $12.3 million, which is partially offset by an increase in cash from insurance proceeds of $6.7 million.

Financing Activities

Financing cash flows consist primarily of payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, repayment of the Medicare Accelerated and Advance Payment Program funds and sale of shares of common stock through employee equity incentive plans.

The $102.4 million increase in cash used in financing activities for the six months ended June 30, 2021 compared to the same period in 2020, was primarily due to the repayment of the Medicare Accelerated and Advance Payment Program funds of $102.0 million.

The $39.0 million decrease in cash used in financing activities for the nine months ended September 30, 2021, compared to the same period in 2020, was primarily due to the proceeds and repayment of the Medicare Accelerated and Advance Payment Program funds offset by repayment and proceeds from borrowings.

Credit Facility with a Lending Consortium Arranged by Truist

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Mortgage Loans and Promissory Notes

As of June 30, 2021, 19 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $112.9 million, which subjects these subsidiaries to HUD oversight and periodic inspections.

During September 30, 2021, three of our subsidiaries entered into HUD mortgage loans in the aggregate amount of $31.4 million.

As a result, 22 of our subsidiaries have mortgage loans insured with HUD for an aggregate amount of $143.8 million, as of September 30, 2021, which subjects these subsidiaries to HUD oversight and periodic inspections.

The mortgage loans bear effective interest rates range of 3.1% to 4.2%, including fixed interest rates range of 2.4% to 3.3% per annum.

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In addition to the HUD mortgage loans above, we have two promissory notes.

The notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the notes are 10 months and twelve years, respectively.

The notes bear fixed interest rates of 5.0% and 5.3% per annum and the term of the notes are ten months and 12 years, respectively.

The 12 year note, which was used for an acquisition, is secured by the real property comprising the facility and the rent, issues and profits thereof, as well as all personal property used in the operation of the facility.

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In the second quarter of 2021, the Company added four operations and extended the term for one of the Master Leases for an additional 15 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million to reflect the new lease obligation.

In the third quarter of 2021, we also added two operations and extended the term for one of the Master Leases for an additional 17 years.

As a result, the total lease liabilities and right-of-use assets increased by $54.7 million and $63.4 million, respectively, to reflect the new lease obligations.

We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which have initial lease terms ranging from five to 20 years and is subject to annual escalation equal to the percentage change in the Consumer Price Index with a stated cap percentage.

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We have fully cooperated with the U.S.

Department of Justice to promptly respond to the requests for information and have been advised that the U.S.

Department of Justice has declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

Department of Justice and promptly responded to its requests for information;

in April 2020, we were advised that the U.S.

Department of Justice declined to intervene in any subsequent action based on or related to the subject matter of this investigation.

We have historically derived a substantial portion of our revenue from the Medicare program.

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To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses.

We may not be successful in offsetting future cost increases.

There can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Recent Accounting Pronouncements

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The final rules also amended various aspects of Item 303, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” among others.

The final rules are effective for all registration statements, annual reports and quarterly reports filed on or after August 9, 2021, with early adoption permitted.

We are currently evaluating the impact of the disclosure changes in our annual and quarterly reports.

The final rules are effective for all registration statements and annual reports filed on or after August 9, 2021, with early adoption permitted.

We are currently evaluating the impact of the disclosure changes in our annual reports.

In July 2021, the FASB issued ASU 2021-05 “ Lessors—Certain Leases with Variable Lease Payments (Topic 842), ” which amends the lessor classification guidance to introduce additional criteria when classifying leases with variable lease payments that do not depend on a reference index or a rate.

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Off-Balance Sheet Arrangements

As of June 30, 2021, we had approximately $7.6 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit.

As of September 30, 2021, we had approximately $6.5 million on our Credit Facility of borrowing capacity pledged as collateral to secure outstanding letters of credit, which is a reduction of $1.0 million from the second quarter.

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 2. Management’s Discussion and Analysis