CNL HEALTHCARE PROPERTIES, INC. Overview
CNL Healthcare Properties, Inc. is aMaryland corporation that elected to be taxed as a REIT forU.S. federal income tax purposes. We have and intend to continue to be organized and operate in a manner that allows us to remain qualified as a REIT for federal income tax purposes. The terms "us," "we," "our," "Company" and "CNL Healthcare Properties " includeCNL Healthcare Properties, Inc. and each of its subsidiaries. The discussion of our financial condition and results of operations for the year endedDecember 31, 2020 included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed onMarch 23, 2022 is incorporated by reference herein. Substantially all of our assets are held by, and all operations are conducted, either directly or indirectly, through: (1) theOperating Partnership in which we are the sole limited partner and our wholly owned subsidiary,CHP GP, LLC , is the sole general partner; (2) a wholly owned TRS,CHP TRS Holding, Inc. ; (3) property owner subsidiaries and lender subsidiaries, which are single purpose entities; and (4) investments in joint ventures. We are externally managed and advised byCNL Healthcare Corp. (the "Advisor"). Our Advisor has responsibility for our day-to-day operations, serving as our consultant in connection with policy decisions to be made by our board of directors, and for identifying, recommending and executing on Possible Strategic Alternatives (as described below under "Possible Strategic Alternatives"), and dispositions on our behalf pursuant to an advisory agreement. InMay 2022 , we extended the advisory agreement with the Advisor throughJune 2023 . For additional information on our Advisor, its affiliates or other related parties, as well as the fees and reimbursements we pay, see Item 8. "Financial Statements and Supplementary Data-Note 12. Related Party Arrangements." As ofDecember 31, 2022 , our seniors housing investment portfolio consisted of interests in 70 properties, consisting of a geographically diversified portfolio of 69 seniors housing communities and one vacant land parcel. The types of seniors housing properties that we own include independent and assisted living facilities, continuing care retirement communities and Alzheimer's/memory care facilities. Five of our 69 seniors housing properties were previously owned through an unconsolidated joint venture and became wholly-owned effectiveJanuary 1, 2022 .
Market Conditions
During the last half of 2021, we began to experience the operational impacts of a challenging labor market. Labor costs increased at an accelerated rate during the last half of 2021 due to increases throughout all wage classifications within our communities and an increased focus on attracting and retaining staff at our communities. The "great resignation" resulted in an increase in the number of vacant positions at our communities and COVID-19 staff infections contributed to staff absences due to quarantine requirements underCDC guidelines. These factors led to an increase in the usage of temporary agency labor which led to incremental, measurable labor costs beginning in the middle of 2021. Since the beginning of 2022, our intensified focus of hiring and filling some of the vacant staff roles, as well as a decline in absences from lower COVID staff infections and more relaxedCDC quarantine requirements, have resulted in ongoing reductions in our reliance on temporary agency labor. However, historically low unemployment rates, wage pressures, overtime pay and some continued reliance on temporary agency labor resulted in high labor costs that impacted net operating income ("NOI") margins during 2022 and could continue to impact margins in 2023. In addition, during the last half of 2021, we began to experience the impact of higher inflation levels in the form of higher food costs and virtually all other operating expenses. This contributed to property NOI margin compressions during 2022 in our managed seniors housing communities. We anticipate that operating expenses will continue to remain at elevated levels which could result in continued operating margin compressions during 2023. Macro-economic and geopolitical events around the globe have contributed to volatile credit markets. As part of its effort to reduce the rising levels of inflation, theFederal Reserve enacted several interest rate increases during 2022 and additional rate increases are expected to continue into 2023. The interest rate increases to date and any further interest rate increases will contribute to higher interest expense on our unhedged variable rate debt. We have interest rate caps in place for interest rate protection on a portion of our variable rate debt and continue to monitor opportunities to further protect the remaining unhedged variable rate debt. 45
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COVID-19
Since the onset of the coronavirus ("COVID-19") pandemic in March 2020 and
throughout 2021, we operated our communities through the disruptions and
uncertainties of the pandemic, including disruptions from new variants of the
virus. Average occupancy declined from the second half of March 2020 through
February 2021 , and since March 2021 , we have experienced marginal occupancy
gains, initially attributed to the availability of vaccines and lifted or
relaxed regulatory move-in restrictions. The positive marginal occupancy gains
continued through 2022 and have resulted in increases in resident fees and
revenues. We anticipate continued marginal occupancy improvements in 2023.
As of December 31, 2022 , our 69 seniors housing communities were located
throughout the United States in 26 states. Of our 69 senior housing communities,
we owned 15 properties leased to two separate third party tenants under
triple-net leases ("NNN"), and the remaining 54 properties were managed through
third party operators. During 2020, we provided assistance to the tenant of two
properties under NNN leases with $0.9 million in rent relief and in December
2021 , we provided another $1.4 million in rent relief, each in the form of rent
deferral agreements. We did not grant any rent concessions as part of any rent
deferral provided to this tenant and through February 2022 , we had deferred an
aggregate of $2.3 million in rents under these rent deferral agreements. We
began collecting amounts deferred in January 2023 in accordance with the
installment schedule under the rent deferral agreements and as of March 8, 2023 ,
had collected 100% of all amounts due in accordance with the terms of the
tenant's lease agreements and deferral agreements. As of March 8, 2023 , we had
collected 100% of all rental amounts due from our other tenant of 13 properties
under NNN leases in accordance with their lease agreements.
Since March 13, 2020 , there have been a number of federal, state and local
government initiatives to manage the spread of the virus and its impact on the
economy, financial markets and continuity of businesses of all sizes and
industries. On March 27, 2020 , the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") was signed into law which provided, among other
things, for the establishment of a Provider Relief Fund under the direction of
the Department of Health and Human Services ("HHS"). During the years ended
December 31, 2022 and 2021, we received or recognized provider relief funds
under the CARES Act, which are deemed governmental grants provided that the
recipient attests to and complies with certain terms and conditions, and we
recorded approximately $4.3 million and $0.5 million , respectively, as other
income in the accompanying consolidated statements of operations as all
conditions of the grant had been met.
Possible Strategic Alternatives
In 2017, we began evaluating possible strategic alternatives to provide liquidity to our stockholders. InApril 2018 , our board of directors formed a special committee consisting solely of our independent directors ("Special Committee") to consider possible strategic alternatives, including, but not limited to (i) the listing of our or one of our subsidiaries' common stock on a national securities exchange; (ii) an orderly disposition of our assets or one or more of our asset classes and the distribution of the net sale proceeds thereof to our stockholders; and (iii) a potential business combination or other transaction with a third-party or parties that provides our stockholders with cash and/or securities of a publicly traded company (collectively, among other options, "Possible Strategic Alternatives"). Since 2018, the Special Committee has engagedKeyBanc Capital Markets Inc. to act as its financial advisor in connection with exploring our Possible Strategic Alternatives. In connection with our consideration of the Possible Strategic Alternatives, our board of directors suspended both our Reinvestment Plan and our Redemption Plan effectiveJuly 11, 2018 . In addition, as part of executing on Possible Strategic Alternatives, our board of directors committed to a plan to sell 70 properties which included medical office buildings, post-acute care facilities and acute care hospitals across the US, collectively (the "MOB/Healthcare Portfolio") plus several skilled nursing facilities. ThroughDecember 31, 2021 , we sold 69 properties, received net sales proceeds of approximately$1.4497 billion and used the net sales proceeds to: (1) repay indebtedness secured by the properties; (2) strategically rebalance other corporate borrowings; (3) make a special cash distribution inMay 2019 of approximately$347.9 million (or$2.00 per share) to our stockholders and (4) retained net sales proceeds for other corporate purposes, because we were focused on maintaining balance sheet strength and liquidity during COVID-19 to enhance financial flexibility. InApril 2022 , we sold the last property, theHurst Specialty Hospital , to an unrelated third party and received net sales proceeds of approximately$8.3 million . 46
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During the COVID-19 pandemic, we shifted our focus away from the pursuit of larger strategic alternatives to provide further liquidity to our stockholders due to the market and industry disruptions in the seniors housing sector from COVID-19. However, our Special Committee continued working and continues to work with our financial advisor to carefully study market data. We remain fully committed to our readiness, active study and pursuit of additional strategic opportunities to provide incremental liquidity to our stockholders as the economic and transactional environments permit.
Seniors Housing Portfolio
Our remaining investment focus is in seniors housing communities. We have invested in or developed the following types of seniors housing properties:
Independent Living Facilities. Independent living facilities are age-restricted, multi-family rental or ownership (condominium) housing with central dining facilities that provide residents, as part of a monthly fee, meals and other services such as housekeeping, linen service, transportation, social and recreational activities. Assisted Living Facilities. Assisted living facilities are usually state-regulated rental properties that provide the same services as independent living facilities, but also provide, in a majority of the units, supportive care from trained employees to residents who are unable to live independently and require assistance with activities of daily living. The additional services may include assistance with bathing, dressing, eating, and administering medications.
Portfolio Overview
As of
We believe demographic trends and compelling supply and demand indicators present a strong case for an investment focus on seniors housing real estate and real estate-related assets. Our seniors housing investment portfolio is geographically diversified with properties in 26 states. The map below shows our seniors housing investment portfolio across geographic regions as ofMarch 8, 2023 : [[Image Removed: chth-20221231_g1.jpg]] 47
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The following table summarizes our seniors housing investment portfolio by
investment structure as of
Amount of Percentage
Number of Investments of Total
Type of Investment Investments (in millions) Investments
Consolidated investments:
Seniors housing leased (1) 15 $ 311.0 17.8 %
Seniors housing managed (2) 54 1,427.6 82.1
Vacant land 1 1.1 0.1
70 $ 1,739.7 100.0 %
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FOOTNOTES:
(1)Properties that are leased to third-party tenants for which we report rental income and related revenues.
(2)Properties that are leased to TRS entities and managed pursuant to third-party management contracts (i.e. RIDEA structure) where we report resident fees and services, and the corresponding property operating expenses.
Portfolio Evaluation
While we are not directly impacted by the performance of the underlying properties leased to third-party tenants, we believe that the financial and operational performance of our tenants provides an indication about the stability of our tenants and their ability to pay rent. To the extent that our tenants, managers or joint venture partners experience operating difficulties and become unable to generate sufficient cash to make rent payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Our tenants and managers are generally contractually required to provide this information to us in accordance with their respective lease, management and/or joint venture agreements. Therefore, in order to mitigate the aforementioned risk, we monitor our investments through a variety of methods determined by the type of property. We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor credit quality by (1) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (2) direct interaction with onsite property managers, (3) monitoring news and rating agency reports regarding our tenants (or their parent companies) and their underlying businesses, (4) monitoring the timeliness of rent collections and (5) monitoring lease coverage. When evaluating the performance of our seniors housing portfolio, management reviews property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits. Management also reviews occupancy levels and monthly revenue per occupied unit, which we define as total revenue divided by average number of occupied units. Similarly, when evaluating the performance of our third-party operators, management reviews monthly financial statements, property-level operating performance versus budgeted expectations, conducts periodic operational review calls with operators and conducts periodic property inspections or site visits. All of the aforementioned operating and statistical metrics assist us in determining the ability of our properties or operators to achieve market rental rates, to assess the overall performance of our diversified healthcare portfolio, and to review compliance with leases, debt, licensure, real estate taxes, and other collateral.
Significant Tenants and Operators
Our real estate portfolio of 69 seniors housing properties is operated by a mix of national or regional operators and the following represents the significant tenants and operators that lease or manage 10% or more of our rentable space as ofMarch 8, 2023 , excluding the vacant land parcel: Rentable Percentage Lease Number of Square Feet of Rentable Expiration Tenants Properties (in thousands) Square Feet Year TSMM Management, LLC 13 1,261 77.5 % 2025 Wellmore, LLC 2 366 22.5 2031-2032 15 1,627 100.0 % 48
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Rentable Percentage Operator
Number of Square Feet of Rentable Expiration
Operators Properties (in thousands) Square Feet Year
Integrated Senior Living, LLC 7 1,948 30.8 % 2023-2024
Prestige Senior Living, LLC 13 895 14.2 2023-2024
Morningstar Senior Management, LLC 4 834 13.2 2023
Other operators (1) 30 2,645 41.8 2023-2029
54 6,322 100.0 %
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FOOTNOTE:
(1)Comprised of various operators each of which comprise less than 10% of our consolidated rentable square footage.
Tenant Lease Expirations
As ofDecember 31, 2022 , we owned 15 seniors housing properties that were leased to third party tenants under triple-net operating leases. During the year endedDecember 31, 2022 , our rental income from continuing operations represented approximately 8.3% of our total revenues from continuing operations. Under the terms of our triple-net lease agreements, each tenant is responsible for payment of property taxes, general liability insurance, utilities, repairs and maintenance, including structural and roof expenses. Each tenant is expected to pay real estate taxes directly to the taxing authorities. However, if the tenant does not pay the real estate taxes, we are liable. We work with our tenants in advance of the lease expirations or renewal period options in order for us to maintain a balanced lease rollover schedule and high occupancy levels, as well as to enhance the value of our properties through extended lease terms. Certain amendments or modifications to the terms of existing leases could require lender approval.
The following table lists, on an aggregate basis, scheduled expirations for the next 10 years and thereafter on our consolidated seniors housing portfolio, assuming that none of the tenants exercise any of their renewal options (in thousands, except for number of properties and percentages):
Percentage
Expiring Expiring of Expiring
Number of Leased Annualized Annual
Year of Expiration (1) Properties Square Feet Base Rents (2) Base Rents
2023 - - $ - - %
2024 - - - -
2025 13 1,261 17,941 68.1
2026 - - - -
2027 - - - -
2028 - - - -
2029 - - - -
2030 - - - -
2031 1 137 3,602 13.7
2032 1 229 4,793 18.2
Thereafter - - - -
Total 15 1,627 $ 26,336 100.0 %
Weighted Average Remaining Lease Term: (3) 4.7 years
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FOOTNOTES:
(1)Represents current lease expiration and does not take into consideration lease renewals available under existing leases at the option of the tenants.
(2)Represents the current base rent, excluding tenant reimbursements and the impact of future rent increases included in leases, multiplied by 12 and included in the year of expiration.
(3)Weighted average remaining lease term is the average remaining term weighted by annualized current base rents.
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Operator Expirations
As ofDecember 31, 2022 , we had 54 seniors housing properties managed by third-party operators. All of our management agreements have been in place for multiple years and many include auto-renewal clauses ranging from one to five years, which are effective unless a notice of termination is provided by either party. We work with our operators in advance of management agreement expirations or renewal period options in order for us to maintain a balanced operator rollover schedule, which provides us flexibility to execute on possible strategic alternatives, minimize potential early termination fees and align with the broader industry. The management agreements of 38 of our managed seniors housing properties were scheduled to expire within one year or less as ofDecember 31, 2022 , all of which are scheduled to be renewed under the renewal provisions of the agreements.
Liquidity and Capital Resources
General
Our ongoing primary source of capital is proceeds from operating cash flows. Our primary uses of capital include the payment of distributions, payment of operating expenses, funding capital improvements to existing properties and payment of debt service. Generally, we expect to meet short-term working capital needs from our cash flows from operations. Our ongoing sources and uses of capital have been and will continue to be impacted by the rate of occupancy recovery from the COVID-19 pandemic, and by rising interest rates and rising inflation levels. As necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures or to cover periodic shortfalls between distributions paid and cash flows from operating activities. Despite the marginal increases in occupancy beginning inMarch 2021 as described above in "COVID-19", we began to experience and during 2022 continued to experience compression in property level NOI margins due to increases in operating expenses. Labor costs increased due to increased wages in a tight labor market. The "great resignation" resulted in an increase in the number of vacant positions at our communities, which led to increased reliance on temporary agency personnel to temporarily fill vacancies. Since the beginning of 2022, our intensified focus of hiring and filling some of the vacant staff roles, as well as a decline in absences from lower COVID staff infections and more relaxedCDC quarantine requirements, resulted in ongoing reductions in our reliance on temporary agency labor. Rising inflation levels surfaced in the form of higher food costs and other operating expenses, which also contributed to margin compressions. We implemented rate increases at our properties as part of ongoing resident lease renewals in 2022 which resulted in an increase in revenues. Rental rate increases during 2022 contributed favorably to operating margins, however, increased labor costs and operating expenses resulted in downward pressure on the rate of operating margin recovery during 2022. We expect that increases in occupancy and some moderate rate increases will increase revenue streams during 2023. However, even though we anticipate less reliance on agency labor and anticipate lower inflation levels, we anticipate that labor costs and operating expenses will continue at elevated levels throughout 2023 and could impact the rate of margin recovery in 2023. As ofDecember 31, 2022 , we had approximately$210.9 million of liquidity (consisting of$69.5 million cash on hand,$24.4 million invested in short term securities and$117.0 million in undrawn availability under the Revolving Credit Facility). We remain focused on maintaining liquidity and financial flexibility and continue to monitor developments as we continue to recover from the disruptions in occupancy from COVID-19, continue to navigate through rising labor costs during a tight labor market, increased operating expenses from current inflation levels and the increase in interest costs from a rising interest rate environment. The extent of the continued impact of COVID-19, a tight labor market, inflation, the volatility in the credit markets and a rising interest rate environment on our financial condition, results of operations and cash flows is uncertain and cannot be predicted at the current time as it depends on the timing and speed of economic recovery. We have pledged certain of our properties in connection with our borrowings and may continue to strategically leverage our real estate and use debt financing as a means of providing additional funds for the payment of distributions to stockholders, working capital and for other corporate purposes. Our ability to increase our borrowings could be adversely affected by credit market conditions, inflation and rising interest rates, which could result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate. We may also be negatively impacted by rising interest rates on our unhedged variable rate debt or the timing of when we seek to refinance existing debt. As part of our variable debt hedging strategy, we have purchased interest rate caps for interest rate protection. We continue to monitor the credit markets and continue to evaluate the need and the timing for additional interest rate protection in the form of interest rate swaps or caps on unhedged variable rate debt or variable rate debt with interest rate protection scheduled to mature. 50
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Our cash flows from operating and investing activities as described within "Sources of Liquidity and Capital Resources" and "Uses of Liquidity and Capital Resources" represent cash flows from continuing operations and exclude the results of one property that was classified as discontinued operations, which was sold inJanuary 2021 .
Sources of Liquidity and Capital Resources
Proceeds from Sale of Real Estate - Continuing Operations
During the year endedDecember 31, 2022 , we closed on the sale of theHurst Specialty Hospital , the last of the 70 properties for which we had committed to a plan to sell and received net sales proceeds of approximately$8.3 million . Additionally, our co-venture partner exercised its option to purchase the Fieldstone at Pear Orchard property (a seniors housing property owned through a consolidated joint venture) and also provided an unsolicited offer to purchase the FieldstoneMemory Care property, an adjacent property (collectively, the "Fieldstone Properties "). We completed the sale of theFieldstone Properties and received net sales proceeds of approximately$28.4 million . We used approximately$2.0 million of the net sales proceeds from the sale of the Fieldstone at Pear Orchard property to pay distributions to our co-venture partner in accordance with the terms of the joint venture agreement, as described below. We retained the remaining net sales proceeds from theHurst Specialty Hospital and theFieldstone Properties to maintain a strong balance sheet and liquidity. We did not sell any properties from continuing operations during the year endedDecember 31, 2021 .
Proceeds from Sale of Real Estate - Discontinued Operations
As part of executing under our Possible Strategic Alternatives, during the year endedDecember 31, 2021 , we closed on the sale of one acute care property and received net sales proceeds of approximately$7.4 million . We did not sell any properties from discontinued operations during the year endedDecember 31, 2022 .
Borrowings
During the year endedDecember 31, 2022 , we borrowed$45.0 million from our Revolving Credit Facility to refinance approximately$44.5 million of secured indebtedness in advance of itsSeptember 2022 maturity and paid fees of approximately$0.3 million to unrelated third parties. InFebruary 2023 , we purchased a short-term interest rate cap with a notional value of$420.0 million and a strike of 3.5%, to hedge the majority of our Credit Facilities. The interest rate cap matures onAugust 15, 2023 . InSeptember 2021 , we entered into a new term loan agreement which provided for an additional$150 million senior unsecured term loan facility (the "2021 Term Loan Facility") to complement and become part of our existing Credit Facilities. The 2021 Term Loan Facility has an initial term that is co-terminus with the Credit Facilities, maturingMay 15, 2024 , subject to one 12-month extension, and throughSeptember 2022 , bore interest based on 30-day LIBOR plus a spread that varies with the Company's leverage ratio. The 2021 Term Loan Facility is pre-payable at any time in whole or part without fees or penalties, has a borrowing availability calculation that is subject to a similar borrowing base calculation as the Credit Facilities and contains similar affirmative, negative and financial covenants as the covenants in the Credit Facilities. We paid fees totaling approximately$0.9 million to unrelated third parties and a refinancing fee to the Advisor of approximately$1.5 million . See Item 8. "Financial Statements and Supplementary Data-Note 12. Related Party Arrangements" for additional information regarding the refinancing fee. InOctober 2021 , we borrowed$238.0 million , which consisted of$88 million drawn on our unsecured Revolving Credit Facility and$150.0 million available under the unsecured 2021 Term Loan Facility to refinance approximately$238.0 million of secured indebtedness in advance of itsJanuary 2022 maturity. See "Liquidity and Capital Resources - Uses of Liquidity and Capital Resources - Debt Repayments" below for additional information regarding debt repayments during the years endedDecember 31, 2022 and 2021. We may borrow money to fund enhancements to our portfolio, as well as to cover periodic shortfalls between distributions paid and cash flows from operating activities to the extent impacted by compressed property NOI margins from rising labor costs, inflationary pressures on other operating expenses and an increased interest rate environment. 51
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Net Cash Provided by Operating Activities - Continuing Operations
Cash flows from operating activities for the years endedDecember 31, 2022 and 2021 were approximately$43.8 million and$46.4 million , respectively. The change in cash flows from operating activities for the year endedDecember 31, 2022 as compared to the same period in 2021 was primarily the result of the following: •a decline in NOI, primarily due to reduced rent related to new leases which commencedFebruary 2022 at five seniors housing properties, increased operating expenses at our managed properties primarily driven by inflation and labor shortages, and the sale of three properties during 2022, which was partially offset by the consolidation of theWindsor Manor properties;
•higher interest expense due to the rising interest rate environment; and
•unfavorable changes in assets and liabilities; partially offset by
•$4.3 million received in provider relief funds under the CARES Act.
Lease Renewals and Extensions
We entered into new leases covering five of our properties that expired in
Tenant Financial Difficulties
The tenant of theHurst Specialty Hospital had experienced financial difficulties. During the year endedDecember 31, 2021 , we collected approximately$2.2 million in rental amounts from the tenant and we paid approximately$0.2 million in real estate taxes which were not reimbursed by the tenant. We did not collect any rental amounts and we did not pay any real estate taxes during the year endedDecember 31, 2022 . We sold theHurst Specialty Hospital inApril 2022 . Refer to "Results of Operations - Impairment Provision" for further discussion on the impairment recorded related to this property during the year endedDecember 31, 2021 .
Distributions from Unconsolidated Entities
As ofDecember 31, 2021 , we had an investment in five unconsolidated properties through a 75% interest in an unconsolidated joint venture (the "Windsor Manor Joint Venture"). Pursuant to the joint venture agreement, we were entitled to receive quarterly preferred cash distributions to the extent there was cash available to distribute. These distributions were generally received within 45 days after each quarter end. For the year endedDecember 31, 2021 , we received approximately$0.7 million of operating distributions from our investment in these unconsolidated entities. EffectiveJanuary 1, 2022 , we acquired the remaining 25% interest in the Windsor Manor Joint Venture for approximately$3.3 million and currently own a 100% interest in the Windsor Manor Joint Venture. EffectiveJanuary 1, 2022 we began consolidating the revenues and expenses of the five properties in the Windsor Manor Joint Venture and ceased recording distributions from unconsolidated joint ventures.
Amended and Restated Expense Support Agreement
We have entered into an amended and restated expense support agreement with our
Advisor (the "Amended and Restated Expense Support Agreement"). Pursuant to the
Amended and Restated Expense Support Agreement, our Advisor agreed to provide
expense support through forgoing the payment of fees in cash and acceptance of
restricted forfeitable stock for services in an amount equal to the positive
excess, if any, of (a) Aggregate Stockholder Cash Distributions declared for the
applicable year, over (b) our aggregate modified funds from operations over the
same period (as defined in the Amended and Restated Expense Support Agreement).
Under the terms of the Amended and Restated Expense Support Agreement with our
Advisor, for each quarter within a calendar expense support year, we will record
a proportional estimate of the cumulative year-to-date period based on an
estimate of expense support amounts for the calendar expense support year.
Moreover, in exchange for services rendered and in consideration of the expense
support provided under the expense support agreement, we will issue, within 90
days following the determination date, a number of shares of forfeitable
restricted common stock ("Restricted Stock") equal to the quotient of the
expense support amounts provided by our Advisor for the preceding calendar year
divided by our then-current NAV per share of common stock. The terms of the
Amended and Restated Expense Support Agreement automatically renew for
consecutive one-year periods, subject to the right of our Advisor to terminate
upon 30 days' written notice. We did not recognize any expense support for the
years ended December 31, 2022 or 2021. See Item 8. "Financial Statements and
Supplementary Data - Note 12. Related Party Arrangements" for additional
information.
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Uses of Liquidity and Capital Resources
Acquisition of Joint Venture Interest
As ofDecember 31, 2021 , we indirectly owned five properties through a 75% interest in the Windsor Manor Joint Venture, an unconsolidated equity method investment. EffectiveJanuary 1, 2022 , we acquired the remaining 25% interest from our joint venture partner for approximately$3.3 million and we currently own a 100% controlling interest in the Windsor Manor Joint Venture.
Capital Expenditures
We paid approximately$17.8 million and$14.2 million in capital expenditures during the years endedDecember 31, 2022 and 2021, respectively. We have increased our investment in capital improvements to maintain and improve our properties.
Purchase of
During the year endedDecember 31, 2022 , we used approximately$24.2 million of available cash to purchase held-to-maturity securities to enhance the yield earned on cash on hand. We did not purchase held-to-maturity securities during the year endedDecember 31, 2021 .
Debt Repayments
During the year endedDecember 31, 2022 , we repaid approximately$46.3 million of indebtedness, which included$1.8 million of scheduled repayments on our mortgages and other notes payable and theJune 2022 refinance of approximately$44.5 million of secured indebtedness, consisting of debt collateralized by five properties. We refinanced the debt maturity, added the five properties to the borrowing base of our unsecured Credit Facilities and used$45.0 million from amounts available under the unsecured Revolving Credit Facility to repay our secured indebtedness. InSeptember 2022 , we amended the agreements of our Credit Facilities to transition the benchmark rate from LIBOR to SOFR. During the year endedDecember 31, 2021 , we paid approximately$247.8 million , which included$9.8 million of scheduled repayments on our mortgages and other notes payable and theOctober 2021 refinance of approximately$238.0 million of secured indebtedness, consisting of debt collateralized by 22 properties, in advance of its scheduled maturity ofJanuary 2022 . We added the 22 properties to the borrowing base of our unsecured Credit Facilities and used$88 million from amounts available under the unsecured Revolving Credit Facility and$150 million available under the new unsecured 2021 Term Loan to repay our secured indebtedness. On an ongoing basis, we monitor our debt maturities, engage in dialogue with third-party lenders about various financing scenarios and analyze our overall portfolio borrowings in advance of scheduled maturity dates of the debt obligations to determine the optimal borrowing strategy. 53
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The following table provides details of the Company's indebtedness as of
As of December 31,
2022 2021
Mortgages payable and other notes payable:
Fixed rate debt(1) $ 44,082 $ 89,766
Variable rate debt(1)(2)(3) 17,859 -
Premium(4) 17 59
Loan costs, net (185) (425)Total mortgages and other notes payable, net 61,773 89,400 Credit facilities: Revolving Credit Facility(6)(7)
133,000 88,000
Term Loan Facility(5)(6)(7) 265,000 265,000
2021 Term Loan Facility(5)(6)(7) 150,000 150,000
Loan costs, net related to Term Loan Facilities (1,900) (3,272)
Total credit facilities, net 546,100 499,728
Total indebtedness, net $ 607,873 $ 589,128
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FOOTNOTES:
(1)As of December 31, 2022 and 2021, our mortgages and other notes payable were
collateralized by seven properties, with a total carrying value of approximately
$92.7 million and $135.4 million , respectively.
(2)In connection with the acquisition of the 25% interest in the Windsor Manor
Joint Venture, we consolidated the net assets of the joint venture effective
January 1, 2022 , including the debt associated with the properties, at fair
value. The debt collateralized by the five Windsor Manor properties accrues
interest at a rate of 2.50% plus 30-day LIBOR and matures in February 2024 . The
30-day LIBOR was approximately 4.39% as of December 31, 2022 .
(3)As of December 31, 2022 , we had interest rate protection through an interest
rate cap with a notional amount of $15.0 million . Refer to Item 8. "Financial
Statements and Supplementary Data - Note 13. Derivative Financial Instruments"
for additional information.
(4)Premium is reflective of recording mortgage note payables assumed at fair value on the respective acquisition dates.
(5)As ofDecember 31, 2021 and during the year endedDecember 31, 2022 , we had interest rate protection through interest rate caps with notional amounts of$355.0 million . The interest rate caps expired onDecember 31, 2022 . Refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risks" and Item 8. "Financial Statements and Supplementary Data - Note 13. Derivative Financial Instruments" for additional information. (6)As ofDecember 31, 2022 and 2021, we had undrawn availability under the applicable revolving credit facility of approximately$117.0 million and$14.1 million , respectively, based on the value of the properties in the unencumbered pool of assets supporting the loan. (7)Term SOFR (as defined by the agreements governing our Credit Facilities) was approximately 4.46% as ofDecember 31, 2022 . The 30-day LIBOR was approximately 0.10% as ofDecember 31, 2021 . 54
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As ofDecember 31, 2022 , we had approximately$210.9 million of liquidity (consisting of$69.5 million of cash on hand,$24.4 million invested in short term securities and$117.0 million available under the Revolving Credit Facility) and we believe we are well positioned to manage our near-term debt maturities. We had$133.0 million outstanding under our Revolving Credit Facility that was scheduled to mature inMay 2023 , with a one-year extension option. InJanuary 2023 , we exercised our one-year extension option which extended the maturity date toMay 2024 .
The following is a schedule of future principal payments for our total indebtedness for the next five years and thereafter, in the aggregate, and reflects the extension of the maturity date of our Revolving Credit Facility (in thousands):
2023$ 24,054 2024 585,887 2025 - 2026 - 2027 - Thereafter -$ 609,941 As ofDecember 31, 2022 , we had$24.1 million of scheduled principal payments coming due during the year endingDecember 31, 2023 , which included a mortgage loan maturing inJune 2023 of$22.7 million . We repaid this loan inMarch 2023 before its scheduled maturity using cash on hand, to reduce interest expense in 2023. The aggregate amount of long-term financing is not expected to exceed 60% of our gross asset values (as defined in our Credit Facilities) on an annual basis. As ofDecember 31, 2022 and 2021, we had aggregate debt leverage ratios of approximately 31.9% and 31.8%, respectively, of the aggregate carrying value of our assets. Generally, the loan agreements for our mortgage loans contain customary financial covenants and ratios; including (but not limited to) the following: debt service coverage ratio, minimum occupancy levels, limitations on incurrence of additional indebtedness, etc. The loan agreements also contain customary performance criteria and remedies for the lenders. As ofDecember 31, 2022 , we were in compliance with all financial covenants related to our mortgage loans. The Credit Facilities contain affirmative, negative, and financial covenants which are customary for loans of this type, including (but not limited to): (i) maximum leverage, (ii) minimum fixed charge coverage ratio, (iii) minimum consolidated net worth, (iv) restrictions on payments of cash distributions except if required by REIT requirements, (v) maximum secured indebtedness, (vi) maximum secured recourse debt, (vii) minimum unsecured interest coverage, (viii) maximum unsecured indebtedness ratio and (ix) limitations on certain types of investments and with respect to the pool of properties supporting borrowings under the Credit Facilities, minimum weighted average occupancy, and remaining lease terms, as well as property type, MSA, operator, and asset value concentration limits. The limitations on distributions generally include a limitation on the extent of allowable distributions, which are not to exceed the greater of 95% of adjusted FFO (as defined per the Credit Facilities) and the minimum amount of distributions required to maintain the Company's REIT status. As ofDecember 31, 2022 , we were in compliance with all financial covenants related to our Credit Facilities.
Distributions
In order to qualify as a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our taxable income. We may make distributions in the form of cash or other property, including distributions of our own securities. While we generally expect to pay distributions from cash flows provided by operating activities, we have and may continue to cover periodic shortfalls between distributions paid and cash flows from operating activities with proceeds from other sources such as from cash flows provided by financing activities, a component of which could include borrowings, whether collateralized by our properties or unsecured, or net sales proceeds from the sale of real estate. InMarch 2022 , our board of directors reduced our quarterly distributions to$0.0256 per share effective with the first quarter 2022 distribution. The decrease in the quarterly distribution rate was the result of various factors including, without limitation, the continued COVID-19 impact on industry performance, inflation rates and volatility in the credit markets. Our management team and our board of directors will continue to monitor our results of operations and operating cash flows, as well as our strategic alternatives process and make no assurances regarding future quarterly cash distributions. 55
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The following table presents total cash distributions declared, distributions reinvested and cash distributions per share on a quarterly basis for the years endedDecember 31, 2022 and 2021 (in thousands, except per share data): Cash Flows Cash Total Cash Provided by Distributions Distributions Operating Periods per Share Declared (1) Activities (2) 2022 Quarters First$ 0.02560 $ 4,453 $ 8,236 Second 0.02560 4,453 15,840 Third 0.02560 4,454 10,318 Fourth 0.02560 4,454 9,452 Total$ 0.10240 $ 17,814 $ 43,846 2021 Quarters First$ 0.05120 $ 8,907 $ 12,633 Second 0.05120 8,906 11,560 Third 0.05120 8,907 8,719 Fourth 0.05120 8,907 13,450 Total$ 0.20480 $ 35,627 $ 46,362 _______________ FOOTNOTES: (1)For the years endedDecember 31, 2022 and 2021, our net loss attributable to common stockholders was approximately$(1.5) million and$(22.9) million , respectively, while cash distributions declared for each of the periods were approximately$17.8 million and$35.6 million , respectively. For the years endedDecember 31, 2022 and 2021, 100% of regular cash distributions declared to stockholders were considered to be funded with cash provided by operating activities as calculated on a quarterly basis for GAAP purposes. (2)Amounts herein include cash flows from discontinued operations. Cash flows from operating activities calculated in accordance with GAAP are not necessarily indicative of the amount of cash available to pay distributions and as such our board of directors uses other measures such as FFO and MFFO in order to evaluate the level of distributions.
Distributions to Noncontrolling Interests
During the year endedDecember 31, 2022 , our consolidated joint ventures paid distributions of approximately$2.2 million to co-venture partners, which included$2.0 million representing the pro rata share of net sales proceeds from the sale of one of theFieldstone Properties owned by one of the consolidated joint ventures, and the balance represented their pro rata share of operating cash flows. During the year endedDecember 31, 2021 , our consolidated joint ventures paid distributions of approximately$0.2 million to co-venture partners, representing their pro rata share of operating cash flows.
Results of Operations
Except for the impact of elevated labor costs, inflation and a rising interest rate environment, we are not aware of other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the operation of properties, other than those referred to in the risk factors identified in "Part I, Item 1A" of this report.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
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Fiscal year ended
As ofDecember 31, 2022 , excluding our vacant land and including the five properties consolidated from the Windsor Manor Joint Venture effectiveJanuary 1, 2022 , we owned 69 consolidated operating investment properties and owned 67 properties as ofDecember 31, 2021 . Investment count as of December 31, Consolidated operating investment types: 2022 2021 Seniors housing leased 15 15 Seniors housing managed 54 51 Acute care leased - 1 69 67 Rental Income and Related Revenues. Rental income and related revenues were approximately$26.9 million and$30.1 million for the years endedDecember 31, 2022 and 2021, respectively. The decrease in revenue during the year endedDecember 31, 2022 , was primarily due to reduced rent related to new leases inFebruary 2022 at five seniors housing properties, as well as the sale of theHurst Specialty Hospital inApril 2022 . Resident Fees and Services. Resident fees and services income was approximately$295.8 million and$265.3 million for the years endedDecember 31, 2022 and 2021, respectively. The increase in revenue during the year endedDecember 31, 2022 , was primarily due to an increase in average occupancy and increases in rates charged to our residents. Average occupancy was lower during the year endedDecember 31, 2021 , due to move-in restrictions, intensified screening and other measures enacted at our communities to address the spread of COVID-19. The increase in resident fees and services was also partially due to the acquisition of the remaining 25% interest in the Windsor Manor Joint Venture and the subsequent consolidation of theWindsor Manor revenues from five properties effectiveJanuary 1, 2022 . Refer to Item 8. "Financial Statements and Supplemental Data - Note 4. Acquisition" for additional information. The increase was partially offset by the sale of theFieldstone Properties inAugust 2022 . Property Operating Expenses. Property operating expenses were approximately$226.8 million and$197.6 million for the years endedDecember 31, 2022 and 2021, respectively. Property operating expenses increased during the year endedDecember 31, 2022 , primarily due to an increase in average occupancy as well as the consolidation of ourWindsor Manor expenses, as described above. In addition, property expenses were higher due to increased labor costs driven by higher wages and usage of agency labor in a tight labor market and an increase in operating expenses due to inflation. The increase in property operating expense was partially offset by the sale of theFieldstone Properties inAugust 2022 . General and Administrative Expenses. General and administrative expenses were approximately$10.2 million and$9.1 million for the years endedDecember 31, 2022 and 2021, respectively. General and administrative expenses were comprised primarily of personnel expenses of affiliates of our Advisor, directors' and officers' insurance, franchise taxes, sales taxes, accounting and legal fees, and board of director fees. Asset Management Fees. We incurred asset management fees of approximately$14.1 million and$15.7 million for the years endedDecember 31, 2022 and 2021, respectively. Asset management fees are paid to our Advisor for the management of our real estate assets, including our pro rata share of investments in unconsolidated entities, loans and other permitted investments. Asset management fees decreased during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , as a result of a reduction in our asset management fee from 1.0% per annum to 0.80% per annum of average invested assets, which became effective inMarch 2021 , and due to the sale of three properties in 2022. Property Management Fees. We incurred property management fees payable to our third-party property managers of approximately$14.7 million and$13.0 million for the years endedDecember 31, 2022 and 2021, respectively. The property management fees are based on a percentage of revenues under the property management agreement and the increase across periods is reflective of the increase in average occupancy and resident fees and service revenues over the same period as described above. 57
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Impairment Provision. As described above in "Liquidity and Capital Resources - Tenant Financial Difficulties," inMarch 2022 we entered into a purchase and sale agreement for theHurst Specialty Hospital with an unrelated third party for a gross sales price of$8.5 million . In conjunction therewith, we determined that the carrying value of this property was not recoverable and during the year endedDecember 31, 2021 , we recorded an impairment provision of approximately$9.8 million to write-down the value of ourHurst Specialty Hospital to its estimated sales proceeds expected from the sale of theHurst Specialty Hospital . There was no impairment provision recorded during the year endedDecember 31, 2022 . Depreciation and Amortization. Depreciation and amortization expenses were approximately$54.2 million and$50.4 million for the years endedDecember 31, 2022 and 2021, respectively. Depreciation and amortization expenses are comprised of depreciation and amortization of the buildings, equipment, land improvements and in-place leases related to our real estate portfolio. The increase during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is primarily due to investing approximately$17.8 million in capital improvements to maintain and improve our properties subsequent toDecember 31, 2021 , and to a lesser extent, due to the consolidation of theWindsor Manor assets effectiveJanuary 1, 2022 . Gain on Sale of Real Estate. Gain on the sale of real estate of theFieldstone Properties was approximately$6.3 million during the year endedDecember 31, 2022 . One of theFieldstone Properties was indirectly owned through a consolidated joint venture. Of the aggregate gain on the sale of real estate for the year endedDecember 31, 2022 , approximately$5.4 million was allocable to common stockholders and the balance was allocable to noncontrolling interests. We did not sell any properties from continuing operations during the year endedDecember 31, 2021 . Interest and Other Income. Interest and other income was approximately$4.7 million and$0.7 million for the years endedDecember 31, 2022 and 2021, respectively. Other income includes approximately$4.3 million and$0.5 million during the years endedDecember 31, 2022 and 2021, respectively, in CARES Act provider relief funds recorded as conditions of the grant were met. See "COVID-19" above and Item 8. "Financial Statements and Supplemental Data - Note 2. Summary of Significant Accounting Policies - Government Grant Income" for additional information. Interest Expense and Loan Cost Amortization. Interest expense and loan cost amortization were approximately$21.8 million and$19.7 million for the years endedDecember 31, 2022 and 2021, respectively. The increase in interest expense and loan cost amortization for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is primarily due to the rising interest rate environment. During the year endedDecember 31, 2022 , we were able to partially mitigate the full impact from the rise in interest rates due to the interest rate caps in place throughout 2022 as part of our overall variable debt hedging strategy. Gain on Change of Control of a Joint Venture. As described below in Item 8. "Financial Statements and Supplemental Data - Note 4. Acquisition," during the year endedDecember 31, 2022 , we recognized a gain of approximately$8.4 million as part of acquiring the remaining 25% interest in the Windsor Manor Joint Venture from our joint venture partner, resulting in us owning a 100% controlling interest in the Windsor Manor Joint Venture and derecognizing our equity method investment in the Windsor Manor Joint Venture. We did not record such gains during the year endedDecember 31, 2021 . Income Tax Expense. We incurred income tax expense of approximately$0.5 million and$4.2 million for the years endedDecember 31, 2022 and 2021, respectively. The decrease in income tax expense during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is primarily attributable to the tax effect of the valuation allowance on current year results and the increase in our valuation allowance against deferred tax assets in the prior year. Net income attributable to noncontrolling interests. Net income attributable to non-controlling interests was approximately$1.0 million and$16,000 for the years endedDecember 31, 2022 and 2021, respectively. The increase in net income attributable to noncontrolling interests during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to the sale of one of theFieldstone Properties by one of our consolidated joint ventures inAugust 2022 , which resulted in a gain on sale of real estate of approximately$0.9 million attributable to noncontrolling interests. 58
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Net Operating Income
We generally expect to meet future cash needs for general and administrative expenses, debt service and distributions from NOI. We define NOI, a non-GAAP measure, as total revenues less the property operating expenses and property management fees from managed properties. We use NOI as a key performance metric for internal monitoring and planning purposes, including the preparation of annual operating budgets and monthly operating reviews, as well as to facilitate analysis of future investment and business decisions. It does not represent cash flows from operating activities in accordance with GAAP and should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as an indication of our operating performance or to be an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity. We believe the presentation of this non-GAAP measure is important to the understanding of our operating results for the periods presented because it is an indicator of the return on property investment and provides a method of comparing property performance over time. In addition, we have aggregated NOI on a "same-store" basis only for comparable properties that we have owned during the entirety of all periods presented. Non-same-store NOI includes NOI from the acquisition of the remaining 25% interest in the Windsor Manor Joint Venture effectiveJanuary 1, 2022 and the subsequent transition of theWindsor Manor properties from unconsolidated to consolidated, as we did not consolidate those properties during the entirety of all periods presented. Non-same-store NOI also includes NOI from theHurst Specialty Hospital sold inApril 2022 and the twoFieldstone Properties sold inAugust 2022 , as we did not own these properties during the entirety of all periods presented. The chart below presents a reconciliation of our net income to NOI for the years endedDecember 31, 2022 and 2021 (in thousands) and the amount invested in properties as ofDecember 31, 2022 and 2021 (in millions), excluding one property classified as discontinued operations: Years Ended December 31, Change 2022 2021 $ % Net loss$ (412) $ (22,866) Adjusted to exclude: General and administrative expenses 10,209 9,116 Asset management fees 14,074 15,733 Impairment provision - 9,790 Depreciation and amortization 54,242 50,417 Gain on sale of real estate (6,282) - Other expenses, net of other income 8,742 18,505 Income tax expense 540 4,174 Loss from discontinued operations - 10 NOI$ 81,113 $ 84,879 $ (3,766) (4.4) % Less: Non-same-store NOI 3,198 3,582 Same-store NOI$ 77,915 $ 81,297 $ (3,382) (4.2) % Invested in operating properties, end of period$ 1,739 $ 1,768 Overall, our same-store NOI for the year endedDecember 31, 2022 decreased by approximately$3.4 million , as compared to the prior year. Same-store NOI was negatively impacted by reduced rents related to new leases which commenced inFebruary 2022 at five seniors housing properties, as well as increased property operating expenses resulting from higher labor costs in a tight labor market and rising inflation levels. 59
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Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts , ("NAREIT") promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards approved by theBoard of Governors of NAREIT. NAREIT defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, plus depreciation and amortization of real estate related assets, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT's policy described above. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value of the property. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss in its applicability in evaluating operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses for business combinations from a capitalization/depreciation model) to an expensed-as-incurred model that were put into effect in 2009, and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP and accounted for as operating expenses. Our management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA has standardized a measure known as modified funds from operations ("MFFO") which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we acquired our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. 60
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We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: MFFO, or the Practice Guideline, issued by the IPA inNovember 2010 . The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income or loss: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted from a GAAP accrual basis in order to reflect such payments on a cash basis of amounts expected to be received for such lease and rental payments); contingent purchase price consideration adjustments; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income or loss; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; and unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property. Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from our subscription proceeds and other financing sources and not from operations.
By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different non-listed REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way and as such comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (or loss) or income (or loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods. Neither theSEC , NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments we use to calculate FFO or MFFO. In the future, theSEC , NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO. 61
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The following table presents a reconciliation of net income to FFO and MFFO for the years endedDecember 31, 2022 , 2021 and 2020 (in thousands, except per share data): Year Ended December 31, 2022 2021 2020 Net (loss) income attributable to common stockholders$ (1,453) $ (22,882) $ 3,912 Adjustments: Depreciation and amortization: Continuing operations 54,242 50,417 51,817 Impairment provision: Continuing operations - 9,790 - Gain on sale of real estate: (1) Continuing operations (6,282) - (1,074) Gain on change of control of a joint venture: (2) Continuing operations (8,376) - - FFO adjustments attributable to noncontrolling interests: Continuing operations 821 (184) (192) FFO adjustments from unconsolidated entities (3) - 947 266 FFO attributable to common stockholders 38,952 38,088 54,729 Straight-line rent adjustments: (4) Continuing operations 1,209 1,231 1,697 Write-off of lease related costs: (5) Continuing operations - - 2,468 Discontinued operations - - 103 Amortization of premium for debt investments: Continuing operations (42) (42) (42) Realized loss on extinguishment of debt: (6) Continuing operations 28 43 35 Unrealized gain on investment in short term securities: (7) Continuing operations - - 11 MFFO adjustments attributable to noncontrolling interests: Continuing operations 12 1 9 MFFO attributable to common stockholders$ 40,159 $ 39,321 $ 59,010 Weighted average number of shares of common stock outstanding (basic and diluted) 173,960 173,960 173,960
Net (loss) income per share (basic and diluted)
(0.13)$ 0.02 FFO per share (basic and diluted)$ 0.22 $ 0.22 $ 0.31 MFFO per share (basic and diluted)$ 0.23 $ 0.23 $ 0.34 _______________ FOOTNOTES: (1)Management believes that adjusting for the gain on sale of real estate is appropriate because the adjustment is not reflective of our ongoing operating performance and, as a result, the adjustment better aligns results with management's analysis of operating performance. (2)Management believes that adjusting for the gain on change of control of a joint venture is appropriate because the adjustment is not reflective of our ongoing operating performance and, as a result, the adjustment better aligns results with management's analysis of operating performance. (3)This amount represents our share of the FFO or MFFO adjustments allowable under the NAREIT or IPA definitions, respectively, calculated using the HLBV method relating to our previously unconsolidated equity method investment in the Windsor Manor Joint Venture. EffectiveJanuary 1, 2022 , we owned a 100% controlling interest in Windsor Manor Joint Venture. 62
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(4)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income or expense recognition that is significantly different than underlying contract terms. By adjusting for these items (from a GAAP accrual basis in order to reflect such payments on a cash basis of amounts expected to be received for such lease and rental payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management's analysis of operating performance. (5)Management believes that adjusting for write-offs of lease related assets is appropriate because they are non-cash adjustments that may not be reflective of our ongoing operating performance and, as a result, the adjustments better align results with management's analysis of operating performance. In 2020, we recorded write-offs totaling approximately$2.6 million for deferred rent from prior GAAP straight-line adjustments, unamortized lease costs and lease related intangibles. (6)Management believes that adjusting for the realized loss on the extinguishment of debt, hedges or other derivatives is appropriate because the adjustments are not reflective of our ongoing operating performance and, as a result, the adjustments better align results with management's analysis of operating performance. (7)Management believes that adjusting for the unrealized gain on investment in short term securities is appropriate because the adjustment is not reflective of our ongoing operating performance and, as a result, the adjustments better align results with management's analysis of operating performance.
Related-Party Transactions
Our Advisor and its affiliates are entitled to reimbursement of certain costs
incurred on our behalf in connection with our organization, acquisitions,
dispositions and operating activities. To the extent that operating expenses
payable or reimbursable by us in any four consecutive fiscal quarters ("Expense
Year"), commencing with the Expense Year ending June 30, 2013 , exceed the
greater of 2% of average invested assets or 25% of net income, the Advisor shall
reimburse us, within 60 days after the end of the Expense Year, the amount by
which the total operating expenses paid or incurred by us exceed the greater of
the 2% or 25% threshold. Notwithstanding the above, we may reimburse the Advisor
for expenses in excess of this limitation if a majority of our independent
directors determines that such excess expenses are justified based on unusual
and non-recurring factors. For the Expense Year ended December 31, 2022 , the
Company did not incur operating expenses in excess of the limitation.
See Item 8. "Financial Statements and Supplemental Data - Note 12. Related Party Arrangements" in the accompanying consolidated financial statements for additional information.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that management believes are
critical. We consider these policies critical because they involve difficult
management judgments and assumptions, require estimates about matters that are
inherently uncertain and because they are important for understanding and
evaluating our reported financial results. These judgments will affect the
reported amounts of assets and liabilities and our disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. With different
estimates or assumptions, materially different amounts could be reported in our
financial statements. Additionally, other companies may utilize different
estimates that may impact the comparability of our results of operations to
those of companies in similar businesses. Our most sensitive estimates will
involve the allocation of the purchase price of acquired properties and
evaluating our real estate-related investments for impairment. See Item 8.
"Financial Statements and Supplemental Data - Note 2. Summary of Significant
Accounting Policies" in the accompanying consolidated financial statements for
additional information.
Basis of Presentation and Consolidation. Our consolidated financial statements
will include our accounts, the accounts of our wholly owned subsidiaries or
subsidiaries for which we have a controlling interest, the accounts of variable
interest entities ("VIEs") in which we are the primary beneficiary, and the
accounts of other subsidiaries over which we have a controlling financial
interest. All material intercompany accounts and transactions will be eliminated
in consolidation.
In accordance with the guidance for the consolidation of a VIE, we are required
to identify entities for which control is achieved through means other than
voting rights and to determine the primary beneficiary of our VIEs. We
qualitatively assess whether we are the primary beneficiary of a VIE and
consider various factors including, but not limited to, the design of the
entity, its organizational structure including decision-making ability and
financial agreements, our ability and the rights of others to participate in
policy making decisions, as well as our ability to replace the VIE manager
and/or liquidate the entity.
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Use of Estimates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the disclosure of contingent liabilities. For example, significant assumptions are made in the analysis of real estate impairments, the valuation of contingent assets and liabilities, and the valuation of restricted common stock shares issued to the Advisor. Accordingly, actual results could differ from those estimates. Assets Held For Sale, net and Discontinued Operations. The Company determines to classify a property as held for sale once management has the authority to approve and commits to a plan to sell the property, the property is available for immediate sale, there is an active program to locate a buyer, the sale of the property is probable and the transfer of the property is expected to occur within one year. Upon the determination to classify a property as held for sale, the Company ceases recording further depreciation and amortization relating to the associated assets and those assets are measured at the lower of its carrying amount or fair value less disposition costs and are presented separately in the consolidated balance sheets for all periods presented. In addition, the Company classifies assets held for sale as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results. For any disposal(s) qualifying as discontinued operations, the Company allocates interest expense and loan cost amortization that directly relates to either: (1) expense on mortgages and other notes payable collateralized by properties classified as discontinued operations; or (2) expense on the Company's Credit Facilities, which is allocated based on the value of the properties that are classified as discontinued operations since these properties are included in the Credit Facilities' unencumbered pool of assets and the related indebtedness is required to be repaid upon sale of the properties. Impairment of Real Estate Assets. Real estate assets are reviewed on an ongoing basis to determine whether there are any impairment indicators. Management considers potential impairment indicators to primarily include (i) changes in a real estate asset's operating performance, such as a current period net operating loss combined with a history of net operating losses, or a projection or forecast that demonstrates continuing losses associated with the use of a real estate asset or (ii) a current expectation that, more likely than not, a real estate asset will be sold or otherwise disposed of significantly before the end of its previously estimated holding period. To assess if an asset group is potentially impaired, we compare the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the asset group over its remaining useful life, or our estimated holding period if shorter, to the net carrying value of the asset group. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In the event that the carrying value exceeds the undiscounted operating cash flows, we would recognize an impairment provision to adjust the carrying value of the asset group to the estimated fair value of the asset group. InMarch 2022 , we received an unsolicited offer and entered into a purchase and sale agreement for theHurst Specialty Hospital with an unrelated third party for a gross sales price of$8.5 million . In conjunction therewith, we determined that the carrying value of this property was not recoverable and during the year endedDecember 31, 2021 , we recorded an impairment provision of approximately$9.8 million to write-down the value of ourHurst Specialty Hospital to its estimated sales proceeds expected from the sale of theHurst Specialty Hospital . When impairment indicators are present for real estate indirectly owned, through an investment in a joint venture or other similar investment structure accounted for under the equity method, we will compare the estimated fair value of our investment to the carrying value. An impairment charge will be recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline. Income Taxes. To qualify as a REIT, we are subject to certain organizational and operational requirements, including a requirement to distribute to stockholders each year at least 90% of our annual REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject toU.S. federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject toU.S. federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless theIRS grants us relief under certain statutory provisions. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, andU.S. federal income and excise taxes on our undistributed income. 64
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We have and will continue to form subsidiaries which may elect to be taxed as a TRS forU.S. federal income tax purposes. Under the provisions of the Internal Revenue Code and applicable state laws, a TRS will be subject to tax on its taxable income from its operations. We will account for federal and state income taxes with respect to a TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities, the respective tax bases, operating losses and/or tax-credit carryforwards. Revenue Recognition. Rental income and related revenues for operating leases are recognized based on the assessment of collectability of lease payments. When collectability is probable at commencement of the lease, lease income is recognized on an accrual basis and includes rental income that is recorded on the straight-line basis over the term of the lease. Collectability is reassessed during the lease term. When collectability of lease payments is no longer probable, lease income is recorded on a cash basis and limited to the amount of lease payments collected. In addition, lease related costs (the deferred rent from prior GAAP straight-line adjustments, unamortized lease costs and other lease related intangibles) are written-off when the Company determines that these assets are no longer realizable. Rental income and related revenues recorded on an accrual basis include rental income that is recorded on the straight-line basis over the terms of the leases for new leases and the remaining terms of existing leases for those acquired as part of a property acquisition. The straight-line method records the periodic average amount of base rent earned over the term of a lease, taking into account contractual rent increases over the lease term. We record the difference between base rent revenues earned and amounts due per the respective lease agreements, as applicable, as an increase or decrease to deferred rent and lease incentives in the accompanying consolidated balance sheets.
Rental income and related revenues also includes tenant reimbursements that represent amounts tenants are required to reimburse us for expenses incurred on behalf of the tenants, in accordance with the terms of the leases and are recognized in the period in which the related reimbursable expenses are incurred, such as real estate taxes, common area maintenance, and similar items.
We account for our resident agreements as a single performance obligation under ASC 606 given our overall promise to provide a series of stand-ready goods and services to our residents each month. Resident fees and services are recorded in the period in which the goods are provided and the services are performed and generally consist of (1) monthly rent, which covers occupancy of the residents' unit as well as basic services, such as utilities, meals and certain housekeeping services, and (2) service level charges, such as assisted living care, memory care and ancillary services. Resident agreements are generally short-term in nature, billed monthly in advance and cancellable by the residents with a 30-day notice. Resident agreements may require the payment of upfront fees prior to moving into the community with any non-refundable portion of such fees being recorded as deferred revenue and amortized over the estimated resident stay.
Impact of Accounting Pronouncements
See Item 8. "Financial Statements and Supplemental Data - Note 2. Summary of Significant Accounting Policies" for additional information about the impact of accounting pronouncements.
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