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 three months endedMarch 31, 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 severity and duration of the COVID-19 pandemic;
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actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact;
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the impact of the COVID-19 pandemic and health and safety measures taken to slow its spread;
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a worsening economic environment in the
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risks associated with the Company's investment strategy, including its concentration in the healthcare sector;
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the illiquidity of an investment in the Company's stock;
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liquidation at less than the subscription price of the Company's stock;
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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;
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risks associated with real estate markets, including declining real estate values;
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risks associated with reliance on the Company's advisor and its affiliates, including conflicts of interest;
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the Company's failure to obtain, renew or extend necessary financing or to access the debt or equity markets;
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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;
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failure to successfully manage growth or integrate acquired properties and operations;
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the Company's inability to make necessary improvements to properties on a timely or cost-efficient basis;
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competition for properties and/or tenants;
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defaults on or non-renewal of leases by tenants;
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failure to lease properties on favorable terms or at all;
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the impact of current and future environmental, zoning and other governmental regulations affecting the Company's properties;
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the impact of changes in accounting rules;
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inaccuracies of the Company's accounting estimates;
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unknown liabilities of acquired properties or liabilities caused by property managers or operators;
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material adverse actions or omissions by any joint venture partners;
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consequences of the Company's net operating losses;
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increases in operating costs and other expenses;
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uninsured losses or losses in excess of the Company's insurance coverage;
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the impact of outstanding and/or potential litigation;
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risks associated with the Company's tax structuring;
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failure to qualify for and maintain the Company's qualification as a REIT for federal income tax purposes; and
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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 second quarter of 2022 or thereafter. 17
-------------------------------------------------------------------------------- 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 ofMarch 31, 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 .
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 ofMarch 31, 2022 , our seniors housing investment portfolio consisted of interests in 73 properties, consisting of a geographically diversified portfolio of 71 seniors housing communities, theHurst Specialty Hospital (held for sale and sold inApril 2022 ) 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 71 seniors housing properties were previously owned through an unconsolidated joint venture and became wholly-owned effectiveJanuary 1, 2022 .
Inflation
Prior to 2021, inflation had been low and had a minimal impact on our operating performance; however, inflation significantly increased starting in the last half of 2021, continued through the date of this filing and is expected to continue to be elevated or increase further. The impact of rising inflation has surfaced in the form of higher food costs and other operating expenses, which contributed and continues to contribute to margin compressions in our managed seniors housing communities. We anticipate incurring increases in operating expenses which will result in continued operating margin compressions during the year endingDecember 31, 2022 . 18 --------------------------------------------------------------------------------
COVID-19
InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") as a pandemic around the globe. Since the onset of the pandemic we have operated and continue to operate our communities through the disruptions and uncertainties of the pandemic, including disruptions from new variants of the virus. Average occupancy began to decline at the onset of the pandemic starting in the second half ofMarch 2020 and trended lower throughFebruary 2021 . We began to experience small occupancy gains each month starting inMarch 2021 as vaccines became available and regulatory move-in restrictions were lifted or relaxed. As monthly marginal occupancy gains continued, the rate of occupancy recovery was impacted by the arrival of the Delta and Omicron strands of the coronavirus. The spike in positive COVID-19 cases from the Omicron variant inJanuary 2022 resulted in regulatory move-in restrictions at some of our communities and coupled with the seasonally cold temperatures, impacted the rate of move-ins and occupancy increases during the three months endedMarch 31, 2022 . Starting inFebruary 2022 , we experienced a decline in positive COVID-19 cases in our communities and benefitted from relaxed COVID-19 restrictions by local authorities which contributed to an increase in tours and move-ins at our communities. Absent the arrival of a new variant of the virus, we anticipate continued marginal occupancy improvements each month during the year endingDecember 31, 2022 . As ofMarch 31, 2022 , our 71 seniors housing communities were located throughoutthe United States in 26 states, and had a population of nearly 7,000 residents and approximately 4,700 community-level staff. As ofMay 11, 2022 , as reported by our senior housing operators, we had 48 active, confirmed COVID-19 positive cases among our residents and staff members in seven of our communities located in five states. The number of confirmed cases in our senior housing communities has and will continue to fluctuate based on the duration, scope and depth of the COVID-19 pandemic, including new variants of the virus and vaccination rates, as well as the timing and extent of imposing/ceasing vaccine or mask mandates, or stay at home and other social distancing restrictions from state and local governmental agencies. Of our 71 senior housing communities, we owned 15 properties (leased to two separate third party tenants under triple-net leases ("NNN"), and the remaining 56 properties were managed through third party operators. InDecember 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 ofMay 11, 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 ofMay 11, 2022 , 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. SinceMarch 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. OnMarch 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 aProvider Relief Fund under the direction of theDepartment of Health and Human Services ("HHS"). During the three months endedMarch 31, 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$0.1 million , as other income as all conditions of the provider relief funds had been met. We submitted our application for Phase 4 of provider relief funds under the CARES Act inSeptember 2021 and as ofMay 11, 2022 , are awaiting specific guidance from HHS on how Phase 4 relief will be distributed. We believe we are taking appropriate actions to manage through the COVID-19 pandemic. Although more normalized activities have resumed, at this time we cannot predict the full extent of the impacts of the COVID-19 pandemic on our operations, and the COVID-19 pandemic may continue to have an adverse impact on our financial condition, results of operations and cash flows. 19 --------------------------------------------------------------------------------
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$1,449.7 million 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 ($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$8.4 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 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. 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 residentswho 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 ofMarch 31, 2022 , our healthcare investment portfolio consisted of interests in 73 properties, comprising 71 seniors housing communities, theHurst Specialty Hospital (held for sale and sold inApril 2022 ) and one vacant land parcel. 20 -------------------------------------------------------------------------------- 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 ofMay 11, 2022 : [[Image Removed: img262440787_0.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 17.6 %
Seniors housing managed (2) 56 1,454.3 82.3 %
Seniors housing unimproved land 1 1.1 0.1 %
72 $ 1,766.4 100.0 %
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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.
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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 71 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 ofMay 11, 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 30.4 % 2022-2024 Prestige Senior Living, LLC 13 895 13.9 % 2023-2024 Morningstar Senior Management, LLC 4 834 13.0 % 2023 Other operators (1) 32 2,740 42.7 % 2022-2029 56 6,417 100.0 % _________________ FOOTNOTE: (1)
Comprised of various operators each of which comprise less than 10% of our consolidated rentable square footage.
Tenant Lease Expirations
As ofMarch 31, 2022 , we owned 15 seniors housing properties and one acute care property that were leased to third party tenants under triple-net operating leases. During the three months endedMarch 31, 2022 , our rental income from continuing operations represented approximately 8.7% 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. Refer to "Liquidity and Capital Resources - Tenant Financial Difficulties" below for information on real estate taxes paid relating to theHurst Specialty Hospital . 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. 22 -------------------------------------------------------------------------------- The following table lists, on an aggregate basis, scheduled expirations for the remainder of 2022 (excluding theHurst Specialty Hospital property which was sold inApril 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 20,609 71.7 % 2026 - - - - 2027 - - - - 2028 - - - - 2029 - - - - 2030 - - - - 2031 1 137 3,497 12.1 % Thereafter 1 229 4,653 16.2 % Total 15 1,627$ 28,759 100.0 % Weighted Average Remaining Lease Term: (3) 5.2 years _________________ 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 bumps 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 COVID-19 pandemic, 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 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 agency temporary 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 have begun implementing rate increases at our properties effective with renewals in 2022 which will result in an increase in revenues. We anticipate that the rental rate increases will contribute favorably to operating margins. However, we anticipate incurring increases in labor costs and operating expenses which will result in continued operating margin compressions during the year endingDecember 31, 2022 . 23 -------------------------------------------------------------------------------- As ofMarch 31, 2022 , we had approximately$83.5 million of liquidity (consisting of$51.5 million cash on hand and$32.0 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 deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19 and impacts on operating expenses from the rise in inflation levels. The extent of the continued impact of COVID-19 on our financial condition, results of operations and cash flows is uncertain and cannot be predicted at the current time as it depends on several factors beyond our control including, but not limited to (i) changes in the severity and duration of the outbreak caused by new variants of the virus, (ii) the effectiveness of and acceptance of vaccines, (iii) the pandemic's impact on theU.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic and (v) the timing and speed of economic recovery. In addition, we continue to monitor the volatility in the credit markets and the rising interest rate environment and anticipate that the increased levels of inflation and the rising interest rate environment will negatively impact to our financial condition, results of operations and cash flows during the year endingDecember 31, 2022 . 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. In addition, we continue to evaluate the need for additional interest rate protection in the form of interest rate swaps or caps on unhedged variable rate debt. 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 - Discontinued Operations
As part of executing under our Possible Strategic Alternatives, during the three months endedMarch 31, 2021 , we closed on the sale of one acute care property and received net sales proceeds of approximately$7.4 million . During the three months endedMarch 31, 2022 , we did not sell any properties classified as discontinued operations.
Net Cash Provided by Operating Activities - Continuing Operations
Cash flows from operating activities for the three months endedMarch 31, 2022 and 2021 were approximately$8.2 million and$12.6 million , respectively. The change in cash flows from operating activities for the three months endedMarch 31, 2022 as compared to the same period in 2021 was primarily the result of the following:
•
a decline in property net operating income ("NOI") margins, related to our seniors housing properties due to the COVID-19 pandemic and higher operating expenses from rising levels of inflation; and
•
unfavorable changes in operating assets and liabilities across periods; partially offset by
•
lower interest payments resulting from lower weighted average cost of debt due to the refinancing of secured indebtedness with our unsecured Credit Facilities inOctober 2021 ; and
•
a decline in asset management fees to the Advisor lowering the AUM fee in
Lease Renewals and Extensions
We entered into new leases covering five of our properties that expired in
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--------------------------------------------------------------------------------Tenant Financial Difficulties
The tenant of ourHurst Specialty Hospital continued to experience financial difficulties during 2021 and during the three months endedMarch 31, 2022 . We recorded rental income on a cash basis for this tenant during these periods because we assessed that collectability of lease payments was not probable. During the three months endedMarch 31, 2021 , we collected rental amounts of approximately$0.5 million from the tenant. We did not collect rental income from the tenant during the three months endedMarch 31, 2022 . Additionally, we paid real estate taxes related to theHurst Specialty Hospital of approximately$0.2 million during each of the three months endedMarch 31, 2022 and 2021, which were not reimbursed by the tenant. We sold theHurst 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 partnerwho 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
Debt Repayments
During the three months ended
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 ofMarch 31, 2022 (in thousands) and reflects the$18 million of indebtedness relating to the Windsor Manor Joint Venture in which we own a 100% controlling interest effective as ofJanuary 1, 2022 : 2022$ 45,652 2023 112,054 2024 452,887 2025 - 2026 - Thereafter -$ 610,593 As ofMarch 31, 2022 , we had approximately$83.5 million of liquidity (consisting of$51.5 million of cash on hand and$32.0 million available under the Revolving Credit Facility) and were well positioned to manage our near-term debt maturities. We have$45.7 million of scheduled principal payments coming due during the year endingDecember 31, 2022 , which includes$44.7 million relating to secured debt collateralized by five properties that matures inSeptember 2022 . We have begun exploring several repayment or refinancing options, including adding the five properties to the borrowing base of our unsecured Credit Facilities and using the increased availability to repay the$45 million or refinancing the facility with another lending institution as a secured debt facility. 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. 25 -------------------------------------------------------------------------------- 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 ofMarch 31, 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 ofMarch 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. As ofMarch 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 ("Other
Sources"), a component of which could include borrowings, whether collateralized
by our properties or unsecured, or net sales proceeds from the sale of real
estate.
In March 2022 , our board of directors reduced our quarterly distributions to
$0.0256 per share effective with the first quarter 2022 distribution (the "First
Quarter 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 represents total cash distributions declared, distributions
reinvested and cash distributions per share for the three months ended March 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(3) $ 0.02560 $ 4,453 $ 8,236
Total $ 0.02560 $ 4,453 $ 8,236
2021 Quarters
First $ 0.05120 $ 8,907 $ 12,633
Total $ 0.05120 $ 8,907 $ 12,633
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FOOTNOTES:
(1)
For the three months ended March 31, 2022 and 2021, our net income (loss)
attributable to common stockholders was approximately $4.3 million and $(2.1)
million , respectively, while cash distributions declared were approximately $4.5
million and $8.9 million , respectively. For each of the three months ended March
31, 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
26
--------------------------------------------------------------------------------Results of Operations
Except for the impact from the COVID-19 pandemic, volatility in the credit markets and rising levels of inflation, 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.
Three months ended
As ofMarch 31, 2022 , excluding our unimproved land and including the five properties consolidated from the Windsor Manor Joint Venture effectiveJanuary 1, 2022 , we owned 72 consolidated operating investment properties and owned 67 properties as ofMarch 31, 2021 . Investment count as of March
31,
Consolidated operating investment types: 2022 2021
Seniors housing leased 15 15
Seniors housing managed 56 51
Acute care leased 1 1
72 67
Rental Income and Related Revenues. Rental income and related revenues were
approximately $6.9 million for the three months ended March 31, 2022 , as
compared to approximately $7.3 million for the three months ended March 31,
2021 . The decrease in revenue during the three months ended March 31, 2022 as
compared to the three months ended March 31, 2021 was primarily due to
collecting $0.5 million during the three months ended March 31, 2021 from our
Hurst Specialty Hospital , whose tenant experienced financial difficulties and
for which we recorded rental income on a cash basis. No rental amounts were
collected during the three months ended March 31, 2022 . Rental income and
related revenues will be lower going forward, as compared to the previous
period, due to the sale of the Hurst Specialty Hospital in April 2022 .
Resident Fees and Services. Resident fees and services income was approximately
$71.7 million for the three months ended March 31, 2022 , as compared to
approximately $64.8 million for the three months ended March 31, 2021 . The
increase in revenue during the three months ended March 31, 2022 as compared to
the three months ended March 31, 2021 was primarily due to an increase in
average occupancy and increases in rates charged to our residents. Average
occupancy was lower during the three months ended March 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 the
Windsor Manor revenues effective January 1, 2022 . Refer to Note 4. "Acquisition"
for additional information.
Property Operating Expenses. Property operating expenses were approximately
$55.3 million for the three months ended March 31, 2022 , as compared to
approximately $47.9 million for the three months ended March 31, 2021 . Property
operating expenses increased during the three months ended March 31, 2022 as
compared to the three months ended March 31, 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 three months ended March 31,
2022 as compared to the three months ended March 31, 2020 due to an increase in
average occupancy as well as the consolidation of our Windsor Manor Joint
Venture expenses, as described above.
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--------------------------------------------------------------------------------
General and Administrative Expenses. General and administrative expenses were
approximately $2.6 million for the three months ended March 31, 2022 , as
compared to approximately $2.2 million for the three months ended March 31,
2021 . General and administrative expenses were comprised primarily of personnel
expenses of affiliates of our Advisor, directors' and officers' insurance,
franchise taxes, accounting and legal fees, and board of director fees.
Asset Management Fees. We incurred asset management fees of approximately $3.6
million for the three months ended March 31, 2022 , as compared to approximately
$4.5 million for the three months ended March 31, 2021 . 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 three months
ended March 31, 2022 as compared to the three months ended March 31, 2021 ,
primarily 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 in May 2021 .
Property Management Fees. We incurred property management fees payable to our
third-party property managers of approximately $3.5 million for the three months
ended March 31, 2022 , as compared to approximately $3.1 million for the three
months ended March 31, 2021 . 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 $13.6 million for the three months ended March 31, 2022 , as
compared to approximately $12.6 million for the three months ended March 31,
2021 . 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 $15 million dollars in capital improvements to maintain and
improve our properties subsequent to March 31, 2021 , and to a lesser extent, due
to the consolidation of the Windsor Manor assets effective January 1, 2022 .
Interest Expense and Loan Cost Amortization. Interest expense and loan cost
amortization were approximately $3.9 million for the three months ended March
31, 2022 , as compared to approximately $5.3 million for the three months ended
March 31, 2021 . The decrease in interest expense and loan cost amortization was
primarily due to the reduction in weighted average cost of debt as a result of
refinancing approximately $238.0 million of secured indebtedness in October 2021
with proceeds from our unsecured Credit Facilities.
Gain on Change of Control of a Joint Venture. As described above in Note 4.
"Acquisition," during the three months ended March 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 three months ended March
31, 2021 .
Income Tax (Expense) Benefit. We incurred income tax (expense) benefit of
approximately $(0.1) million during the three months ended March 31, 2022 and
$1.3 million during the three months ended March 31, 2021 . The increase in
income tax expense during the three months ended March 31, 2022 , as compared to
the three months ended March 31, 2021 , is primarily attributable to the increase
in valuation allowance against the Company's deferred tax assets.
28
--------------------------------------------------------------------------------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 represents 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. The chart below presents a reconciliation of our net income to NOI for the three months endedMarch 31, 2022 and 2021 (in thousands) and the amount invested in properties as ofMarch 31, 2022 and 2021 (in millions), excluding one property classified as discontinued operations: Three Months Ended March 31, Change 2022 2021 $ % Net income (loss)$ 4,328 $ (2,172 )
Adjusted to exclude: General and administrative expenses 2,631 2,248 Asset management fees
3,579 4,469
Depreciation and amortization 13,642 12,637
Other (income) expenses (4,518 ) 5,302
Income tax expense (benefit) 85 (1,336 )
Loss from discontinued operations - 10
NOI $ 19,747 $ 21,158 $ (1,411 ) (6.7 )%
Less: Non-same-store NOI 400 -
Same-store NOI $ 19,347 $ 21,158 $ (1,811 ) (8.6 )%
Invested in operating properties,
end of period (in millions)
Overall, our same-store NOI for the three months endedMarch 31, 2022 decreased by approximately$1.8 million , as compared to the three months endedMarch 31, 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.
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. 29 -------------------------------------------------------------------------------- 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. 30 -------------------------------------------------------------------------------- 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. 31 -------------------------------------------------------------------------------- The following table presents a reconciliation of net income to FFO and MFFO for the three months endedMarch 31, 2022 and 2021 (in thousands, except per share data): Three Months EndedMarch 31, 2022 2021
Net income (loss) attributable to common stockholders
(2,147 ) Adjustments: Depreciation and amortization 13,642
12,637
Gain on change of control of a joint venture(1) (8,376 )
-
FFO adjustments attributable to noncontrolling interests (35 )
(48 )
FFO adjustments from unconsolidated entities(2) - 181
FFO attributable to common stockholders 9,534
10,623
Straight-line rent adjustments(3) 351
432
Amortization of premium for debt investments (10 ) (10 ) MFFO adjustments attributable to noncontrolling interests (9 ) (6 ) MFFO attributable to common stockholders$ 9,866 $
11,039
Weighted average number of shares of common
stock outstanding (basic and diluted) 173,960
173,960
Net (loss) income per share (basic and diluted)$ 0.02 $ (0.01 ) FFO per share (basic and diluted)$ 0.05 $
0.06
MFFO per share (basic and diluted)$ 0.06 $ 0.06 ________________ FOOTNOTES: (1) 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.
(2)
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 the Windsor Manor Joint Venture.
(3)
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.
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.
Recent Accounting Pronouncements
See Item 1. "Condensed Consolidated Financial Information" for a summary of the impact of recent accounting pronouncements.
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