CNL HEALTHCARE PROPERTIES, INC. Caution Concerning Forward-Looking Statements
Statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q for the quarter and nine months endedSeptember 30, 2022 that are not statements of historical or current fact may constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management's current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company's business and its performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as "believes," "expects," "anticipates," "intends," "estimates," "plans," "continues," "may," "will," "seeks," "should," and "could" and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated net asset value per share of the Company's common stock, and/or other matters. The Company's forward-looking statements are not guarantees of future performance. While the Company's management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company's forward-looking statements are based on management's current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company's ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors.
Important factors that could cause the Company's actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to government regulation, economic, strategic, political and social conditions and the following:
•the duration of recovery to occupancy from the COVID-19 pandemic;
•a worsening economic environment in the
•risks associated with the Company's investment strategy, including its concentration in the seniors housing sector;
•the illiquidity of an investment in the Company's stock;
•liquidation at less than the subscription price of the Company's stock;
•the impact of regulations requiring periodic valuation of the Company on a per share basis, including the uncertainties inherent in such valuations and that the amount that a stockholder would ultimately realize upon liquidation may vary significantly from the Company's estimated net asset value;
•risks associated with real estate markets, including declining real estate values;
•risks associated with reliance on the Company's advisor and its affiliates, including conflicts of interest;
•the Company's failure to obtain, renew or extend necessary financing or to access the debt or equity markets;
•the use of debt to finance the Company's business activities, including refinancing and interest rate risk and the Company's failure to comply with debt covenants;
•failure to successfully manage growth or integrate acquired properties and operations;
•the Company's inability to make necessary improvements to properties on a timely or cost-efficient basis;
•competition for properties and/or tenants;
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--------------------------------------------------------------------------------•defaults on or non-renewal of leases by tenants;
•failure to lease properties on favorable terms or at all;
•the impact of current and future environmental, zoning and other governmental regulations affecting the Company's properties;
•the impact of changes in accounting rules;
•inaccuracies of the Company's accounting estimates;
•unknown liabilities of acquired properties or liabilities caused by property managers or operators;
•material adverse actions or omissions by any joint venture partners;
•consequences of the Company's net operating losses;
•increases in operating costs and other expenses;
•uninsured losses or losses in excess of the Company's insurance coverage;
•the impact of outstanding and/or potential litigation;
•risks associated with the Company's tax structuring;
•failure to qualify for and maintain the Company's qualification as a REIT for federal income tax purposes; and
•the Company's inability to protect its intellectual property and the value of its brand.
Given these uncertainties, the Company cautions you not to place undue reliance on forward-looking information.
For further information regarding risks and uncertainties associated with the Company's business and other important factors that could cause the Company's actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described in the Company's reports filed from time to time with theSEC , including, but not limited to, the Company's quarterly reports on Form 10-Q and the Company's annual reports on Form 10-K, copies of which may be obtained from the Company's website at www.cnlhealthcareproperties.com. One of the most significant factors is the ongoing and potential impact of the current outbreak of the COVID-19 pandemic on the economy and the broader financial markets, which may have a significant negative impact on the Company's financial condition, results of operations and cash flows. The Company is unable to predict whether the continuing effects of the COVID-19 pandemic will trigger a further economic slowdown or a recession and to what extent the Company will experience disruptions related to the COVID-19 pandemic in the third quarter of 2022 or thereafter. All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.
Introduction
The following discussion is based on the condensed consolidated financial statements as ofSeptember 30, 2022 (unaudited) andDecember 31, 2021 . Amounts as ofDecember 31, 2021 included in the unaudited condensed consolidated balance sheets have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated balance sheets and the notes thereto, as well as the audited consolidated financial statements, notes and management's discussion and analysis included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 18 --------------------------------------------------------------------------------
Overview
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. For additional information on our Advisor, its affiliates or other related parties, as well as the fees and reimbursements we pay, see Note 9. "Related Party Arrangements." As ofSeptember 30, 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, we expect that historically low unemployment rates, wage pressures, overtime pay and some continued reliance on temporary agency labor will result in high labor costs that will continue to impact net operating income ("NOI") margins during the rest of 2022. During 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 has contributed and continues to contribute to property NOI margin compressions in our managed seniors housing communities. We anticipate that operating expenses will continue to increase which will result in continued operating margin compressions during the remainder of 2022. Macro-economic and geo political 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.
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 each month, 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. Absent the arrival of a new variant of the virus, we anticipate
continued marginal occupancy improvements.
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As of September 30, 2022 , our 69 seniors housing communities were located
throughout the United States in 26 states, and had a population of nearly 7,000
residents and approximately 4,700 community-level staff. 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. In December 2021 , we provided a second
round of rent relief in the form of a $1.4 million rent deferral agreement with
a tenant that leases two properties under NNN leases. We did not grant any rent
concessions as part of any rent deferral provided to this tenant. As of
November 9, 2022 , we had deferred $1.4 million in rents under the second rent
deferral agreement and had collected all other amounts due in accordance with
the terms of the tenant's lease agreements. As of November 9, 2022 , we had
collected 100% of all rental amounts due under the lease agreements related to
13 seniors housing properties leased to our other tenant under NNN leases.
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 nine months
ended September 30, 2022 and 2021, we received 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 $3.9 million and $0.4 million , respectively, as other income in
the accompanying condensed 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. InMarch 2022 , we entered into a purchase and sale agreement for the last property in our MOB/Healthcare Portfolio, theHurst Specialty Hospital , with an unrelated third party and inApril 2022 , sold it and received net sales proceeds of approximately$8.3 million . During the year endedDecember 31, 2020 , 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 and pursue potential options to determine suitable liquidity alternatives that are in the best interests of all of our stockholders.
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.
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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 ofNovember 9, 2022 : [[Image Removed: chth-20220930_g1.jpg]]
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 %
_____________
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.
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--------------------------------------------------------------------------------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 represent the significant tenants and operators that lease or manage 10% or more of our rentable space as ofNovember 9, 2022 , 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 % 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 % _________________ FOOTNOTE:
(1)Comprised of various operators each of which comprise less than 10% of our consolidated rentable square footage.
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--------------------------------------------------------------------------------Tenant Lease Expirations
As ofSeptember 30, 2022 , we owned 15 seniors housing properties that were leased to third party tenants under triple-net operating leases. During the nine months endedSeptember 30, 2022 , our rental income from continuing operations represented approximately 8.4% 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 remainder of 2022, each of the next nine 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
2022 - - $ - - %
2023 - - - -
2024 - - - -
2025 13 1,261 17,864 68.0
2026 - - - -
2027 - - - -
2028 - - - -
2029 - - - -
2030 - - - -
2031 1 137 3,602 13.7
Thereafter 1 229 4,793 18.3
Total 15 1,627 $ 26,259 100.0 %
Weighted Average Remaining Lease Term: (3) 5.0 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.
Liquidity and Capital Resources
General
Our ongoing primary source of capital includes proceeds from operating cash
flows. Our primary use of capital includes 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.
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Despite the marginal increases in occupancy beginning in March 2021 as described
above in "COVID-19", we began to experience and we continue to experience higher
than anticipated compression in property level NOI margins due to increases in
operating expenses. Labor costs increased due to increased wages in a tight
labor market and due to increases in usage of temporary agency personnel to fill
vacancies. The impact of rising inflation levels surfaced in the form of higher
food costs and other operating expenses, which also contributed to margin
compressions. We implemented and continue to implement rate increases at our
properties as part of ongoing resident lease renewals in 2022 which resulted and
will result in an increase in revenues. Rental rate increases contributed
favorably to operating margins, however, increased labor costs and operating
expenses will result in downward pressure on the rate of operating margin
recovery during the remainder of 2022.
As of September 30, 2022 , we had approximately $211.7 million of liquidity
(consisting of $94.7 million cash on hand and $117.0 million 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 the rise in 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.
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 in January 2021 .
Sources of Liquidity and Capital Resources
Proceeds from Sale of Real Estate - Continuing Operations
During the nine months endedSeptember 30, 2022 , we closed on the sale of theHurst Specialty Hospital and theFieldstone Properties , and received aggregate net sales proceeds of approximately$36.7 million . One of theFieldstone Properties was indirectly owned through a consolidated joint venture and we used a portion of the net sales proceeds from the sale of the property owned by the consolidated joint venture to pay distributions to our co-venture partner in accordance with the terms of the joint venture agreement, as described below. During the nine months endedSeptember 30, 2021 , we did not sell any properties from continuing operations.
Proceeds from Sale of Real Estate - Discontinued Operations
As part of executing under our Possible Strategic Alternatives, during the nine months endedSeptember 30, 2021 , we closed on the sale of one acute care property and received net sales proceeds of approximately$7.4 million . During the nine months endedSeptember 30, 2022 , we did not sell any properties classified as discontinued operations.
Borrowings
During the nine months endedSeptember 30, 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. There were no borrowings during the nine months endedSeptember 30, 2021 . InSeptember 2021 , we entered into the 2021 Term Loan Facility which provided for an additional$150.0 million of borrowing capacity, subject to borrowing base availability, under our Revolving Credit Facility. See "Liquidity and Capital Resources - Uses of Liquidity and Capital Resources - Debt Repayments" below for additional information regarding debt repayments during the nine months endedSeptember 30, 2022 . 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 and inflationary pressures on other operating expenses and an increased interest rate environment. 24 --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities - Continuing Operations
Cash flows from operating activities for the nine months endedSeptember 30, 2022 and 2021 were approximately$34.4 million and$32.9 million , respectively. The change in cash flows from operating activities for the nine months endedSeptember 30, 2022 as compared to the same period in 2021 was primarily the result of the following:
•$3.9 million received in provider relief funds under the CARES Act;
•lower interest payments due to refinancing of secured indebtedness with our
unsecured Credit Facilities in
•a decline in asset management fees to the Advisor due to the 2022 property sales and lowering the AUM fee inMay 2021 from 1% per annum to 0.8% per annum as part of the annual Advisory agreement renewal; partially offset by •a decline in property NOI, related to our seniors housing properties due to higher labor costs during a tight labor market and increased operating expenses from rising levels of inflation as well as due to the sale of theFieldstone Properties inAugust 2022 . Lease Renewals and Extensions
We entered into new leases covering five of our properties that expired in
Tenant Financial Difficulties
The tenant of the Hurst Specialty property had experienced financial difficulties and during the nine months endedSeptember 30, 2021 , we collected$1.6 million in rental amounts and we paid approximately$0.2 million in real estate taxes which were not reimbursed by the tenant. We did not collect any rental income and we did not pay any real estate taxes during the nine months endedSeptember 30, 2022 . We sold ourHurst Specialty Hospital inApril 2022 .
Uses of Liquidity and Capital Resources
Purchase 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 who wanted to sell its 25% interest in the joint venture, for approximately$3.3 million and we currently own a 100% controlling interest in the Windsor Manor Joint Venture.
Capital Expenditures
We paid approximately$12.3 million and$8.3 million in capital expenditures during the nine months endedSeptember 30, 2022 and 2021, respectively. We have increased our investment in capital improvements to maintain and improve our properties. Debt Repayments During the nine months endedSeptember 30, 2022 , we paid approximately$45.9 million , which included$1.4 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 added the five properties to the borrowing base of our unsecured Credit Facilities and used$45.0 million from amounts available under the 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 nine months endedSeptember 30, 2021 , we paid approximately$8.4 million of scheduled repayments on our mortgages and other notes payable. 25 -------------------------------------------------------------------------------- The following is a schedule of future principal payments for our total indebtedness for the remainder of 2022, each of the next four years and thereafter, in the aggregate, as ofSeptember 30, 2022 (in thousands) and reflects the$18 million of indebtedness relating to the Windsor Manor Joint Venture in which we own a 100% controlling interest effective as ofJanuary 1, 2022 : 2022$ 358 2023 157,054 2024 452,887 2025 - 2026 - Thereafter -$ 610,299 As ofSeptember 30, 2022 , we had approximately$211.7 million of liquidity (consisting of$94.7 million cash on hand and$117.0 million available under the Revolving Credit Facility) and were well positioned to manage our near-term debt maturities. We have$0.4 million of scheduled payments coming due during the rest of 2022 and inMay 2023 , the$133 million outstanding under our Revolving Credit Facility will become due. We plan to exercise the one-year extension option which will extend the maturity date toMay 2024 . We also have a mortgage note of approximately$22.6 million maturing inJune 2023 , collateralized by one property. Options for this maturing debt include but are not limited to, refinancing the facility with the existing lender or another lending institution as a secured loan facility, liquidating the property to satisfy the obligation, or adding the property to our existing Credit Facilities and repaying the balance with a draw on the Revolving Credit Facility. We have begun discussions with several lenders about repayment or refinancing options upon maturity. 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. 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 ofSeptember 30, 2022 andDecember 31, 2021 , we had aggregate debt leverage ratios of approximately 32.0% 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 ofSeptember 30, 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 ofSeptember 30, 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.
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In March 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.
The following table presents total cash distributions declared, distributions
reinvested and cash distributions per share on a quarterly basis for the nine
months ended September 30, 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 (3) $ 0.02560 $ 4,453 $ 8,236
Second 0.02560 4,453 15,840
Third 0.02560 4,454 10,318
Total $ 0.07680 $ 13,360 $ 34,394
2021 Quarters
First $ 0.05120 $ 8,907 $ 12,633
Second 0.05120 8,906 11,560
Third 0.05120 8,907 8,719
Total $ 0.15360 $ 26,720 $ 32,912
_________________
FOOTNOTES:
(1)For the nine months ended September 30, 2022 and 2021, our net income (loss)
attributable to common stockholders was approximately $4.6 million and $(2.1)
million , respectively, while total cash distributions declared were
approximately $13.4 million and $26.7 million , respectively. For each of the
nine months ended September 30, 2022 and 2021, 100% of 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.
(3)In
Distributions to Noncontrolling Interests
During the nine months endedSeptember 30, 2022 , our consolidated joint ventures paid distributions of approximately$2.1 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 nine months endedSeptember 30, 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 lower occupancy from the COVID-19 pandemic, rising
labor costs, rising inflation levels 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 II, Item 1A" of this report and the "Risk Factors" section
of our Annual Report.
The following discussion and analysis should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the notes
thereto.
27
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Quarter and nine months ended
As ofSeptember 30, 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 ofSeptember 30, 2021 . Investment count as of September 30, 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$6.7 million and$20.2 million and for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$7.7 million and$22.5 million for the quarter and nine months endedSeptember 30, 2021 , respectively. The decrease in revenue during the quarter and nine months endedSeptember 30, 2022 as compared to the quarter and nine months endedSeptember 30, 2021 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 . Rental income and related revenues will be lower going forward, as compared to the previous period, due to the reduced rents relating to the five seniors housing properties and the sale of theHurst Specialty Hospital . Resident Fees and Services. Resident fees and services income was approximately$74.8 million and$220.9 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$66.4 million and$197.1 million for the quarter and nine months endedSeptember 30, 2021 , respectively. The increase in revenue during the quarter and nine months endedSeptember 30, 2022 as compared to the quarter and nine months endedSeptember 30, 2021 was primarily due to an increase in average occupancy and increases in rates charged to our residents. Average occupancy was lower during the quarter and nine months endedSeptember 30, 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 effective January 1, 2022. Refer to 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$57.3 million and$169.1 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$49.5 million and$144.7 million for the quarter and nine months endedSeptember 30, 2021 , respectively. Property operating expenses increased during the quarter and nine months endedSeptember 30, 2022 as compared to the quarter and nine months endedSeptember 30, 2021 , primarily 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. In addition, property operating expense were higher during the quarter and nine months endedSeptember 30, 2022 as compared to the quarter and nine months endedSeptember 30, 2022 due to an increase in average occupancy as well as the consolidation of ourWindsor Manor expenses, as described above, and were partially offset by the sale of theFieldstone Properties inAugust 2022 . General and Administrative Expenses. General and administrative expenses were approximately$2.7 million and$7.8 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$2.2 million and$6.7 million for the quarter and nine months endedSeptember 30, 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$3.5 million and$10.6 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$3.6 million and$12.2 million for the quarter and nine months endedSeptember 30, 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 quarter and nine months endedSeptember 30, 2022 , as compared to the quarter and nine months endedSeptember 30, 2021 , as a result of the sale of three properties in 2022. Asset management fees also decreased for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , due to a reduction in our asset management fee from 1.0% per annum to 0.80% per annum of average invested assets, which became effective inMay 2021 . 28 -------------------------------------------------------------------------------- Property Management Fees. We incurred property management fees payable to our third-party property managers of approximately$3.7 million and$11.0 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$3.2 million and$9.4 million for the quarter and nine months endedSeptember 30, 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 revenue over the same period as described above. Depreciation and Amortization. Depreciation and amortization expenses were approximately$13.2 million and$40.8 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$12.6 million and$37.6 million for the quarter and nine months endedSeptember 30, 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 is primarily due to investing approximately$18.1 million in capital improvements to maintain and improve our properties subsequent toSeptember 30, 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 quarter and nine months endedSeptember 30, 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 nine months endedSeptember 30, 2022 , approximately$5.4 million was allocable to common stockholders. We did not sell any properties during the quarter and nine months endedSeptember 30, 2021 . Interest and Other Income. Interest and other income were approximately$0.1 million and$4.1 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$25 thousand and$0.4 million for the quarter and nine months endedSeptember 30, 2021 , respectively. Other income includes approximately$3.9 million and$0.4 million during the nine months endedSeptember 30, 2022 and 2021, respectively, in CARES Act provider relief funds recorded as conditions of the grant were met. Refer to 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$6.1 million and$14.7 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$5.2 million and$15.8 million for the quarter and nine months endedSeptember 30, 2021 , respectively. The increase in interest expense and loan cost amortization for the quarter endedSeptember 30, 2022 is primarily due to the rising interest rate environment. The decrease in interest expense and loan cost amortization during the nine months endedSeptember 30, 2022 was primarily due to refinancing approximately$238.0 million of secured indebtedness inOctober 2021 with proceeds from our unsecured Credit Facilities, partially offset by the increase in variable interest rates year over year. During the quarter and nine months endedSeptember 30, 2022 , we were able to partially mitigate the full impact from the rise in interest rates due to the interest rate caps in place as part of our overall variable debt hedging strategy. Gain on Change of Control of a Joint Venture. As described above in Note 4. "Acquisition," nine months endedSeptember 30, 2022 , we recognized a gain of approximately$8.4 million as part of acquiring the remaining 25% interest in the Windsor Manor Joint Venture from our joint venture partner, resulting in us owning a 100% controlling interest in the Windsor Manor Joint Venture and derecognizing our equity method investment in the Windsor Manor Joint Venture. We did not record such gains during the quarter and nine months endedSeptember 30, 2021 . Income Tax (Expense) Benefit. We incurred income tax (expense) benefit of approximately$(0.1) million and$(0.2) million during the quarter and nine months endedSeptember 30, 2022 , respectively, and$1.5 million and$3.9 million during the quarter and nine months endedSeptember 30, 2021 , respectively. The increase in income tax expense during the quarter and nine months endedSeptember 30, 2022 , as compared to the quarter and nine months endedSeptember 30, 2021 , is primarily attributable to the increase in valuation allowance against the Company's deferred tax assets. Net income (loss) attributable to noncontrolling interests. Net income (loss) attributable to noncontrolling interests was approximately$0.9 million and$1.0 million for the quarter and nine months endedSeptember 30, 2022 , respectively, as compared to approximately$21 thousand and$(12) thousand for the quarter and nine months endedSeptember 30, 2021 . The increase in net income attributable to noncontrolling interests during the quarter and nine months endedSeptember 30, 2022 , as compared to the quarter and nine months endedSeptember 30, 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. 29 --------------------------------------------------------------------------------
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 quarter and nine months endedSeptember 30, 2022 and 2021 (in thousands) and the amount invested in properties as ofSeptember 30, 2022 and 2021 (in millions), excluding one property classified as discontinued operations: Quarter Ended Nine Months Ended September 30, Change September 30, Change 2022 2021 $ % 2022 2021 $ % Net income (loss)$ 1,262 $ (512) $ 5,614 $ (2,098) Adjusted to exclude: General and administrative expenses 2,730 2,229 7,802 6,747 Asset management fees 3,496 3,575 10,598 12,158 Depreciation and amortization 13,232 12,641 40,765 37,585 Gain on sale of real estate (6,282) - (6,282) - Other expenses (income) 6,006 5,047 2,238 14,961 Income tax expense (benefit) 71 (1,502) 221 (3,861) Loss from discontinued operations - - - 10 NOI$ 20,515 $ 21,478 $ (963) (4.5) %$ 60,956 $ 65,502 $ (4,546) (6.9) % Less: Non-same-store NOI 400 609 1,311 984 Same-store NOI$ 20,115 $ 20,869 $ (754) (3.6) %$ 59,645 $ 64,518 $ (4,873) (7.6) % Invested in operating properties, end of period (in millions)$ 1,739 $ 1,768 $ 1,739 $ 1,768 Overall, our same-store NOI for the quarter and nine months endedSeptember 30, 2022 decreased by approximately$0.8 million and$4.9 million , respectively, as compared to the quarter and nine months endedSeptember 30, 2021 . Same store NOI was negatively impacted by increased property operating expenses as a result of increased labor costs in a tight labor market and increased operating costs from rising inflation levels. 30
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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. 31 -------------------------------------------------------------------------------- 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. 32 -------------------------------------------------------------------------------- The following table presents a reconciliation of net income to FFO and MFFO for the quarter and nine months endedSeptember 30, 2022 and 2021 (in thousands, except per share data): Quarter Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net income (loss) attributable to common stockholders$ 322 $ (533) $ 4,626 $ (2,086) Adjustments: Depreciation and amortization 13,232 12,641 40,765 37,585 Gain on sale of real estate(1) (6,282) - (6,282) - Gain on change of control of a joint venture(2) - - (8,376) - FFO adjustments attributable to noncontrolling interests 902 (45) 833 (142) FFO adjustments from unconsolidated entities(3) - 167 - 463 FFO attributable to common stockholders 8,174 12,230 31,566 35,820 Straight-line rent adjustments(4) 264 310 784 1,039 Amortization of premium for debt investments (10) (10) (31) (31) Realized loss on extinguishment of debt(5) - - 28 - MFFO adjustments attributable to noncontrolling interests 22 4 12 (3) MFFO attributable to common stockholders$ 8,450 $ 12,534 $ 32,359 $ 36,825 Weighted average number of shares of common stock outstanding (basic and diluted) 173,960 173,960 173,960 173,960
Net income (loss) per share (basic and diluted) $ - $
- $ 0.03 $ (0.01)
FFO per share (basic and diluted) $ 0.05 $ 0.07 $ 0.18 $ 0.21
MFFO per share (basic and diluted) $ 0.05 $ 0.07 $ 0.19 $ 0.21
________________
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. Effective January 1, 2022 , we owned a 100%
controlling interest in the Windsor Manor Joint Venture.
(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 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.
Related Party Transactions
See Item 1. "Condensed Consolidated Financial Information" and our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a summary of our related party transactions.
Critical Accounting Policies and Estimates
See Item 1. "Condensed Consolidated Financial Information" and our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a summary of our critical accounting policies and estimates. 33 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
See Item 1. "Condensed Consolidated Financial Information" for a summary of the impact of recent accounting pronouncements.
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