Washington, D.C. 20549
Healthcare Trust, Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitionthe definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Healthcare Trust, Inc. (the "Company," "we," "our"(“we,” “our” or "us"“us”) and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should"“may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
We have invested, and expect to continue investing, primarily in MOBs and seniors housing communities.properties, primarily structured as SHOPs. In addition, we may invest in facilities leased to hospitals, including rehabilitation hospitals including long-term acute care centers, surgery centers, inpatient rehabilitation facilities, special medical and diagnostic service providers, laboratories, research firms, pharmaceutical and medical supply manufacturers and health insurance firms. While we may invest in facilities across the healthcare continuum, our primary investment focus going forward is MOBs and seniors housing — operating properties ("SHOP").SHOPs. Our SHOP investments are held through a structure permitted under the provisionsREIT Investment Diversification and Empowerment Act of RIDEA (as defined below)2007 ("RIDEA"). We generally acquire a fee interest in any property we acquire (a "fee interest"“fee interest” is the absolute, legal possession and ownership of land, property, or rights), although we may also acquire a leasehold interest (a "leasehold interest"“leasehold interest” is a right to enjoy the exclusive possession and use of an asset or property for a stated definite period as created by a written lease). We have and may continue to acquire properties through a joint venture or the acquisition of substantially all of the interests of an entity which in turn owns the real property. We also may make preferred equity investments in an entity.
The following table lists the states where we had concentrations of properties where annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of December 31, 2017, 20162020, 2019 and 2015:2018:
There are a variety of types of MOBs: on campus, off campus, affiliated and non-affiliated. On campus MOBs are physically located on a hospital'shospital’s campus, often on land leased from the hospital. A hospital typically creates strong tenant demand which leads to high tenant retention. Off campus properties are located independent of a hospital'shospital’s location. Affiliated MOBs may be located on campus or off campus, but are affiliated with a hospital or health system. In some respects, affiliated MOBs are similar to on campus MOBs because the hospital relationship drives tenant demand and retention. Finally, non-affiliated MOBs are not affiliated with any hospital or health system, but may contain physician offices and other healthcare services. We favor affiliated MOBs versus non-affiliated MOBs because of the relationship and synergy with the sponsoring hospital or health system and buildings not affiliated with the hospital or health system but anchored or entirely occupied by a long-tenured physician practice.
The following table reflects the on campus, off campus, affiliated and non-affiliated MOB composition of our portfolio as of December 31, 2017:2020:
Assisted Living and Memory Care Facilities
Assisted living facilities ("ALFs") are licensed care facilities that provide personal care services, support and housing for those who need help with activities of daily living, such as bathing, eating and dressing, yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. ALFsAssisted living facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFsassisted living facilities may offer a separate facility that provides a higher level of care for residents requiring memory care as a result of Alzheimer'sAlzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations. As of December 31, 2017,2020, our seniors housing assetsproperties included approximately 2.3 thousand2,437 assisted living units and 1.2 thousand1,307 memory care units.
Independent Living Facilities
Independent living facilities are designed to meet the needs of seniors who choose to live in an environment surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with activities of daily living, however, in some of our facilities, residents have the option to contract for these services. As of December 31, 2017,2020, our seniors housing assetsproperties included 1.0 thousand967 independent living units. However, independent living facilities on their own are not treated as qualified health care properties eligible to be leased to a TRS.
Hospitals, Post-Acute Care, Skilled Nursing and Other Facilities
Our hospitals, post-acute care, skilled nursing and other facilities are leased to tenants that provide healthcare services. As of December 31, 2017,2020, we owned 2515 other healthcare-related assets, including hospitals, and post-acute care, skilled nursing, and other facilities. Hospitals can include general acute care hospitals, inpatient rehabilitation hospitals, long-term acute care hospitals and surgical and specialty hospitals. These facilities provide inpatient diagnosis and treatment, both medical and surgical, and provide a broad array of inpatient and outpatient services including surgery, rehabilitation therapy as well as diagnostic and treatment services. Post-acute facilities offer restorative, rehabilitative and custodial care for people not requiring the more extensive and complex treatment available at acute care hospitals. Ancillary revenues and revenues from sub-acute care services are derived from providing services beyond room and board and include occupational, physical, speech, respiratory and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy, as well as sales of pharmaceutical products and other services. Certain facilities provide some of the foregoing services on an outpatient basis. Our post-acute care services may be provided by SNFs. SNFs offer licensed therapy services, nutrition services, social services, activities, housekeeping and laundry services, medical services prescribed by physicians and rehabilitative services to residents in need of nursing care, but who do not require hospitalization. Inpatient rehabilitation services provided by our operators and tenants in these facilities are primarily paid for by private sources or through the Medicare and Medicaid programs.
Healthcare isImpact of COVID-19 Pandemic
Starting in early March 2020, we began to implement required and voluntary preventative actions at all our seniors housing properties in our SHOP segment, including restriction of visitation except in very limited and controlled circumstances, the single largest industrypractice of social distancing measures, increased infection control procedures and the immediate screening of individuals entering these facilities. Some of the additional steps we have taken to address the COVID-19 pandemic include, among other things, enhanced training for staff members, the implementation of telehealth to help residents remain safe while keeping appointments with important, but non-emergency, health providers, virtual tours for potential new residents, and agreements between some of our facilities and local lab partners to provide testing services. In the absence of visitors and outside vendors and in the United States based on Gross Domestic Product ("GDP"). Accordingobservance of other precautionary measures, our on-site team members and caregivers have stepped in to provide care for our residents in addition to required medical care. As with almost all senior housing providers, there have been cases of coronavirus infection among the National Health Expenditures Projections, 2017 - 2026 report by the Centers for Medicareresidents and Medicaid Services ("CMS"): (i) national health expenditures are projected to grow 5.3% in 2018 and at an average annual growth ratestaff of 5.6% for 2018 through 2026 and (ii) the healthcare industry is projected to increase from 18.2% of U.S. GDP in 2018 to 19.7% by 2026. This growth in expenditures is projected to lead to significant growth in healthcare employment. According to the U.S. Department of Labor's Bureau of Labor Statistics, the healthcare industry was one of the largest industries in the United States, providing approximately 19.7 million seasonally adjusted jobs as of December 31, 2017. According to the Bureau of Labor Statistics, employment of healthcare occupations (healthcare practitioners and technical occupations and healthcare support) is projected to grow 18% from 2016 to 2026, adding about 2.4 million new jobs. This growth is expected due to an aging population and the projected increase in the number of individuals who have access to health insurance. Weour seniors housing properties but we believe the continued growth in employment in the healthcare industry will lead to growth in demand for medical office buildings and other facilities that serve the healthcare industry.actions our SHOP segment has taken has limited those infections.
In addition, pursuant to the growth in national health expenditures and corresponding increases in employment in the healthcare sector, the nature of healthcare delivery continues to evolve due to the impact of government programs, regulatory changes and consumer preferences. We believe these changes have increased the need for capital among healthcare providers and increased incentives for these providers to develop more efficient real estate solutions in order to enhance the delivery of quality healthcare. In particular, we believe the following demographic factors and trends are creating an attractive environment in which to invest in healthcare properties.
Demographics
The aging of the U.S. population has a direct effect on the demand for healthcare as older persons generally utilize healthcare services at a rate well in excess of younger people. According to CMS, on a per capita basis, the 65-year and older segment of the population spends 100% more on healthcare than the 45 to 64-year-old segment and 160% more than the population average.
According toguidelines from the Centers for Disease Control and Prevention (the "CDC"(“CDC”), 6.6%health care personnel and residents of all adultslong-term care facilities, including SNFs and assisted living facilities are the highest priority group to receive COVID-19 vaccines. Since its initial classification of the highest priority group, the CDC has expanded the recommended pool of eligible vaccine recipients to include frontline essential workers and people aged 65 and over during the first quarter of 2017 needed help with personal care from another person. For both sexes combined, adults aged 8575 years and over (21.5%) were more than twice as likely as adults aged 75 to 84 (7.2%) to need help with personal care from other persons; adults aged 85 and over were slightly more than six times as likely as adults aged 65 to 74 (3.7%) to need help with personal care from other persons. Also, according toolder. While the CDC symptomsguidelines are only recommendations, most states have adopted similar guidelines or otherwise identified elderly individuals as a group that should receive the vaccines first. The COVID-19 stimulus bill (the “COVID-19 Stimulus”), which has been passed by Congress and signed into law by President Biden, provides, among other things, increased funding to improve vaccine distribution. Improvements in vaccine distribution could directly affect our operations by increasing the vaccination rate amongst personnel and residents of Alzheimer’s disease generally do not appear until after the age of 60 years old. Starting at age 65, the risk of developing the disease doubles every five years. As of 2016, approximately 11% of people 65 and older has Alzheimer’s disease, and approximately 32% of people 85 and older have the disease. It is the sixth leading cause of death among all adults and the fifth leading cause for those aged 65 or older. Up to 5.4 million Americans currently have Alzheimer’s disease and by 2060 the number is expected to more than double due to the aginglong-term care facilities, as members of the population.
We believehighest priority group. The extent to which the ongoing global COVID-19 pandemic, including the outbreaks that the aging population, improved chronic disease management, technological advanceshave occurred and healthcare reform will positively affect the demand for medical office buildingsmay occur in markets where we own properties, impacts our operations and seniors housing communities and other healthcare-related facilities and generate attractive investment opportunities. The first wavethose of Baby Boomers, the largest segment of the U.S. population, began turning 65 in 2011. According to the U.S. Census Bureau, the U.S. population over 65 will grow to 98 million in 2050, up from 47 million in 2015. This group will grow more rapidly than the overall population. Thus, its share of the population will increase to 23.5% in 2050, from 15% in 2015. Patients with diseases that were once life threatening are now being treated with specialized medical care and an arsenal of new pharmaceuticals. Advances in research, diagnostics, surgical procedures, pharmaceuticals and a focus on healthier lifestyles have led to people living longer. Finally, we believe that with the arrival of healthcare reform in the United States, we and our tenants and third-party operators, will experience a significant increase independ on future developments, including the demand for medical services.
Pursuing Accretivescope, severity and Opportunistic Investment Opportunities
Depending upon market conditions, we believe that new investments will be available in the future which will be accretive to our earnings and will generate attractive returns to our stockholders. We invest in medical office buildings, seniors housing and certain other healthcare real estate primarily through acquisitions, although we may also do so through development and joint venture partnerships. In determining whether to invest in a property, we focus on the following: (1) the experienceduration of the obligor's/partner's management team; (2)pandemic, the historicalwillingness of residents to remain in and projected financialenter our facilities and operational performanceremain able to pay for their stays, and the actions taken to contain COVID-19 or treat its impact, the effectiveness of the property; (3)vaccines and the creditwillingness of our healthcare personnel and residents to receive the vaccines and delays in distribution of the obligor/partner; (4) the security for any lease or loan; (5) the real estate attributesvaccines, among others, which are highly uncertain and cannot be predicted with confidence, but could be material.
The financial impact of the building, its ageCOVID-19 pandemic has been partially offset by funds received under the Coronavirus Aid, Relief, and location; (6)Economic Security Act (“CARES Act”). The Company received $3.6 million in these funds during the capital committedyear ended December 31, 2020, related to four of our SHOPs and considered the funds to be a grant contribution from the government. The full amounts received were recognized as a reduction of property byoperating expenses in our consolidated statement of operations for the obligor/partner; and (7)year ended December 31, 2020 to offset the operating fundamentals ofincurred COVID-19 expenses. Subsequent to December 31, 2020, we received an additional $5.1 million in funds through the applicable industry. We conduct market research and analysis for all potential investments.CARES Act. In addition, we review the value of all properties, the interest rates and covenant requirements of any facility-level debt to be assumed at the time of the acquisition and the anticipated sources of repayment of any existing debt that isCompany has applied for additional funds for other SHOP, assisted living or similar facilities. However, those applications have not to be assumed at the time of the acquisition.
We monitor our investments through a variety of methods determined by the type of property. Our proactive and comprehensive asset management process generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections, and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our Advisor's internal asset managers actively manage and monitor the medical office building portfolio with a comprehensive process including tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs, and market conditions among other things. In monitoring our portfolio, our Advisor's personnel use a proprietary database to collect and analyze property-specific data. Additionally, we conduct extensive research to ascertain industry trends.
As of February 28, 2018, we had $13.5 million in assets under two executed letters of intent. Pursuant to the terms of these letters of intent, our obligation to close upon these acquisitions is subject to certain conditions customary to closing, including the successful completion of due diligence and fully negotiated binding agreements.yet been approved. There can be no assurance that the program will be extended or any further amounts received under currently effective or potential future government programs.
A smaller part of our business may involve originating or acquiring loans secured by or related to the same types of properties in which we
will complete these acquisitions. We intend to use advances from our credit facilities to fund acquisitions (see Note 5 — Credit Facilitiesmay invest directly. Likewise, we may invest in commercial mortgage-backed securities (“CMBS”), securities of publicly-traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all of the accompanying notesassets consist of qualifying assets or real estate-related assets. As of December 31, 2020, we do not own any assets of this type. Organizational Structure
Substantially all of our business is conducted through Healthcare Trust Operating Partnership, L.P. (the “OP”), a Delaware limited partnership, and its wholly owned subsidiaries. Our Advisor manages our day-to-day business with the assistance of our property manager, Healthcare Trust Properties, LLC (the “Property Manager”) (the “Property Manager”). Our Advisor and Property Manager are under common control with AR Global Investments LLC (“AR Global”) and these related parties receive compensation and fees for providing services to us. We also reimburse these entities for certain expenses they incur in providing these services to us.Healthcare Trust Special Limited Partnership, LLC (the “Special Limited Partner”), which is also under common control with AR Global, also has an interest in us through ownership of interests in our OP.
We own our SHOPs through the consolidated financial statements for more informationRIDEA structure, pursuant to which, a REIT may lease “qualified healthcare properties” on our credit facilities). Additionally,an arm’s length basis to a TRS if the property is operated on March 5, 2018, we acquiredbehalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” We view this as a structure primarily to be used on properties that present attractive valuation entry points with long term growth prospects or drive growth by: (i) transitioning the Texas Children's Hospital Medical Office Building located in Houston Texas for $6.7 million.asset to a new third-party operator that can bring scale, operating efficiencies, or ancillary services; or (ii) investing capital to reposition the asset.
Maintaining a StrongFinancing Strategies and Flexible Capital StructurePolicies
We utilize a combination of debt and equity to fund our investment activity. Our debt and equity levels are determined by management in consultation with the Board. For short-term purposes, we may borrow from our revolving credit facility (our
“Revolving Credit Facility”) and our Fannie Mae Master Credit Facilities, which include a secured credit facility (the “KeyBank Facility”) with KeyBank together with a secured credit facility (the “Capital One Facility”) with Capital One Multifamily Finance, LLC, an affiliate of Capital One, National Association (the Capital One Facility and the KeyBank Facility are referred to herein individually as a “Fannie Mae Master Credit Facility” and together as the “Fannie Mae Master Credit Facilities”). Our senior secured credit facility (our “Credit Facility”) consists of two components, our Revolving Credit Facility and Fannie Credit Facilities. As of December 31, 2017, the Revolvingour term loan (our “Term Loan”). Our Credit Facility is secured by a pledged pool of the equity interests and related rights in wholly owned subsidiaries that directly own or lease thesethe eligible unencumbered real estate assets have been pledged forcomprising the benefitborrowing base thereunder. As of the lenders thereunder, andDecember 31, 2020, the Fannie Mae Master Credit Facilities are secured by mortgages on 1521 properties, in aggregate. Subsequent to December 31, 3017, we borrowed additional amounts under the Fannie Credit Facility secured by seven properties that had previously been pledged under a different mortgage loan, which was partially repaid with the proceeds from the additional borrowings under the Fannie Credit Facilities. We may seek and even replace current borrowings with longer-term capital such as senior secured or unsecured notes or other forms of long-term financing. We may invest in properties subject to existing mortgage indebtedness, which we assume as part of the acquisition. In addition, we may obtain financing secured by previously unencumbered properties in which we have invested or may refinance properties acquired on a leveraged basis. In our agreements with our lenders, we are subject to restrictions with respect to secured and unsecured indebtedness, including restrictions on permitted investments, distributions and maintenance of a maximum leverage ratio, among other things. As of December 31, 2017,2020, our securedtotal debt leverage ratio (total secured(net debt divided by total assets)gross asset value) was approximately 40.1%44.5%. Net debt totaled $1.2 billion, which represents gross debt ($1.2 billion) less cash and we hadcash equivalents ($72.4 million). Gross asset value totaled $2.6 billion, which represents total secured borrowingsreal estate investments, at cost ($2.6 billion) and assets held for sale at carrying value ($0.1 million), net of $950.2 million and no unsecured borrowings.gross market lease intangible liabilities ($22.1 million). Impairment charges are already reflected within gross asset value.
Tax Status
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of Internal Revenue Code of 1986, as amended (the "Code"“Code”), commencing with our taxable year ended December 31, 2013. Commencing with suchthat taxable year, we have been organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner, but can provide no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. In order toTo continue to qualify for taxation as a REIT, we must, among other things, distribute at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP)accounting principles generally accepted in the United States (“GAAP”)), determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to U.S. federal corporate income tax on thatthe portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as U.S. federal income and excise taxes on our undistributed income.
On December 22, 2017,Certain limitations are imposed on REITs with respect to the Tax Cutsownership and Jobs Act was signed into law by the U.S. President. We are not awareoperation of any provision in the final tax reform legislation or any pending tax legislation that would adversely affect our ability to operate as a REIT orseniors housing properties. Generally, to qualify as a REIT, for U.S. federal income tax purposes. However, new legislation, as well as new regulations, administrative interpretations,we cannot directly or court decisionsindirectly operate seniors housing properties. Instead, such facilities may be introduced, enacted,either leased to a third-party operator or promulgated from timeleased to time, that could change the tax laws or interpretationsa TRS and operated by a third party on behalf of the tax laws regarding qualification asTRS. Accordingly, we have formed a REIT, or the federal income tax consequences of that qualification, in a mannerTRS that is adversewholly owned by the OP to lease its SHOPs and the TRS has entered into management contracts with unaffiliated third-party operators to operate the facilities on its behalf.As of December 31, 2020, we owned 59 seniors housing properties, excluding two land parcels, which we lease to our qualification asTRS. The TRS is a REIT.wholly-owned subsidiary of the OP.
Competition
The market for MOBs, seniors housing and other healthcare-related real estate is highly competitive. We compete in all of our markets based on a number of factors that include location, rental rates, security, suitability of the property'sproperty’s design to prospective tenants'tenants’ needs and the manner in which the property is operated and marketed. In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire, tenants to occupy our properties and purchasers to buy our properties. These competitors include other REITs, private investment funds, specialty finance companies, institutional investors, pension funds and their advisors and other entities. There are also other REITs with asset acquisition objectives similar to ours, and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels.
Healthcare Regulation
Overview
The healthcare industry is one of the most regulated industries in the United States and is currently experiencing rapid regulatory change and uncertainty. The regulatory uncertainty and the potential impact on our tenants and operators could have an adverse material effect on their ability to satisfy their contractual obligations.
Our tenants and operators must comply with a wide range of complex federal, state, and local laws and regulations, and the healthcare industry, in general, is the subject to substantial regulationincreased enforcement and faces increased regulation particularly relating to fraud, wastepenalties in all areas. Fraud and abuse cost controlcontinues to be an enforcement priority at both the federal and healthcare management,state levels including, but not limited to, the Federal Anti-Kickback Statute, the Federal Physician Self-Referral Prohibition,Statute (commonly known as the “Stark Law”), the False Claims Act (“FCA”), the Civil Monetary Penalties Law (“CMPL”), and similara range of other federal and state laws. We may experienceregulations relating to waste, cost control, and healthcare management. The business and operations of our tenants and therefore our business could be materially impacted by, among other things, a significant expansion of applicable federal, state or local laws and regulations, previously enacted orcontinued judicial and legislative changes to the ACA, future attempts to reform healthcare, reform, new interpretations of existing laws and regulations, and changes or changes inincreased emphasis on certain enforcement priorities all of which could materially impactpriorities. Additionally, the businessongoing political and operations of our tenants and therefore our business, as detailed below. Additionally, as discussed in more detail below, recentlegal challenges to the Patient Protection and Affordable Care Act (the “Affordable Care Act” or “ACA”), including a tax reform bill signed into law repealing the penalty on individuals for failing to maintain health insurance and a recent lawsuit filed by twenty states challenging the constitutionality of the Affordable Care Act, make the leave its future status of the Affordable Care Act unknown. A shift towards less comprehensive health insurance coverage and increased consumer cost-sharing on health expenditures could have a material adverse effect on our tenants’ financial conditions and results of operations and, in turn, their ability to satisfy their contractual obligations.uncertain.
Our tenants and operators are subject to extensive federal, state, and local licensure laws, regulations and industry standards governingwhich govern business operations, the physical plant and structure, patient and employee health and safety, access to facilities, patient rights and- including privacy, price transparency, fewer restrictions on access to care - and security of health information. Our tenants’ and operators’ failure to comply with any of these laws could result in loss of licensure, denial of reimbursement, imposition of fines or other penalties, suspension or exclusion from the government sponsored Medicare and Medicaid programs, loss of accreditation or certification, reputational damage or closure of thea facility. In addition, efforts byboth government and private third-party payors such as thewill likely continue their efforts to drive down reimbursement. The Medicare and Medicaid programs have adopted a variety of initiatives which have been incorporated and expanded by private insurance carriers, including health maintenance organizations and other health plans, imposeto extract greater discounts and impose more stringent cost controls upon healthcare provider operations (throughoperations. Examples include, but are not limited to, changes in reimbursement rates and methodologies such as bundled payments, capitation payments, and discounted fee structures, the assumption by healthcare providers of all or a portion of the financial risk or otherwise).structures. Our tenants and operators may also face significant limits on the scope of services reimbursed and on reimbursement rates and fees, allfees. All of whichthese changes could impact theirour operators’ and tenants’ ability to pay rent or other obligations to us.
Licensure, Certification and Certificate of Need
Our tenants operate hospitals, assisted living facilities, skilled nursing facilities and other healthcare facilities that receive reimbursement for services from third-party payors, such asincluding the government-sponsoredgovernment sponsored Medicare and Medicaid programs and private insurance carriers. ParticipationTo participate in the Medicare and Medicaid programs, generally requires the operators of a healthcare facility to be licensedfacilities must comply with the regulations previously referenced, as well as with licensing, certification and, certifiedin some states, with certificate of need (“CON”) requirements. Licensing and becertification requirements also subject our tenants to compliance surveys. surveys and audits which are critical to the ongoing operations of the facilities.
In granting and renewing these licenses and certifications, the state regulatory agencies consider numerous factors relating to a facility’s operations, including, but not limited to, the plant and physical structure, admission and discharge standards, staffing, training, patient and consumer rights, medication guidelines and other rules. The failure ofIf an operator fails to maintain or renew any required license, certification or other regulatory approval, or to correct serious deficiencies identified in compliance surveys, the operator could prevent itbe prohibited from continuing operations at a facility.
A loss of licensure or certification, oras well as a change in participation status, could also adversely affect an operator'soperator’s ability to receive payments from the Medicare and Medicaid programs, which, in turn, could adversely affect itsthe operator’s ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of, its leases with us. In addition, if we have to replace an operator, we may experience difficulties in finding a replacement because our ability to replace the operator may be affected by federal and state laws governing changes in control and ownership.
Similarly, in order to receive Medicare and Medicaid reimbursement, our healthcare facilities must meet the applicable conditions of participation established by the U.S. Department of Health and Human Services ("HHS"(“HHS”)relating to the type of facility and its equipment, personnel and standard of medical care, as well as comply with other federal, state and local laws and regulations. Healthcare facilities undergo periodic on-site licensure surveys, which generally are limited if the facility is accredited by The Joint Commission (formerly the Joint Commission on Accreditation of Healthcare Organizations) or other recognized accreditation organizations. A loss of licensure or certification could adversely affect a facility'sfacility’s ability to receive payments from the Medicare and Medicaid programs, which, in turn, could adversely affect its ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with, the terms of itsthe operator’s or facility’s leases with us.
In certainsome states, skilled nursinghealthcare facilities and hospitals are also subject to various state certificate of need ("CON")CON laws requiring governmental approval prior to the development or expansion of healthcare facilities and services. The approval process in these states generally requires a facility to demonstrate the need for additional or expanded healthcare facilities or services. CONs, where applicable, arecan also sometimes necessary forbe conditions to regulatory approval of changes in ownership or control of licensed facilities, addition of beds, investment in major capital equipment, or introduction of new services, or termination of services previously approved through the CON process. process and other control or operational changes.
CON laws and regulations may restrict an operator'soperator’s ability to expand our properties and grow itsthe operator’s business in certain circumstances, which could have an adverse effect on the operator'soperator’s or tenant’s revenues and, in turn, itsnegatively impact their ability to make rental payments under, and otherwise comply with the terms of itstheir leases with us.
Fraud and Abuse Enforcement
Various federal and state laws and regulations are aimed at actions that may constitute fraud and abuse by healthcare entities and providers who participate in, receive payments fromsubmit or cause to be submitted claims for payment to, or make or receive referrals in connection with government-funded healthcare programs, including Medicare and Medicaid. The federal laws include, for example, the following:
•The Federal Anti-Kickback Statute (Section 1128B(b)(42 USC Section 1320a-7b(b) of the Social Security Act) which prohibits certain business practicesthe knowing and relationships, including thewillful solicitation, offer, payment receipt or solicitationacceptance of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind in return for: (i) referring an individual to induce a referralperson for the furnishing or arranging for the furnishing of any patientitem or service for which payment may be made in whole or in part under a federal health care program; or (ii) purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item covered byfor which payment may be made in whole or in party under a federal healthcare program, including Medicare and Medicaid;health care program;
•The Federal Physician Self-Referral Prohibition (Ethics in Patient Referral Act of 1989, commonly referred as the "Stark Law")Stark Law (42 USC Section 1395nn), which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family members) have ownership interests or certain other financial arrangements;arrangements, unless an exception applies, and prohibits the designated health services entity from submitting claims to Medicare for those services resulting from a prohibited referral;
•The False Claims Act ("FCA"), which prohibitsFCA (13 USC Sections 3729-3733) creates liability for any person fromwho submits a false claim to the government or causes another to submit a false claim to the government or knowingly presentingmakes a false record or fraudulent claims for paymentstatement to get a false claim paid by the federal government (includinggovernment. In what is known as reverse false claims, the MedicareFCA imposes liability where a person acts improperly to avoid having to pay money to the government. The FCA also creates liability for people who conspire to violate the FCA; and Medicaid programs); and
•The Civil Monetary Penalties Law, whichCMPL (42 USC 1320a-7a for healthcare) authorizes HHS to impose civil penalties administratively for fraudulent acts. The scope of the Office of the Inspector General’s authority to enforce the CMPL was increased in 2016.
Courts have interpreted thesethe fraud and abuse laws broadly. Sanctions for violating these federal laws include substantial criminal and civil penalties such as punitive sanctions, damage assessments, monetary penalties, imprisonment, denial of Medicare and Medicaid payments, and exclusion from the Medicare and Medicaid programs. These laws also impose an affirmative duty on operators to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs. Many states have adopted laws similar to, or more expansive than, the federal anti-fraudfraud and abuse laws andlaws. States have also adopted and are enforcing laws that increase the regulatory burden and potential liability of healthcare entities including, but not limited to, patient protections, such as minimum staffing levels, criminal background checks, andsanctions for employing excluded providers, restrictions on the use and disclosure of health information, and these state laws have their own penalties which may be in addition to federal penalties.
In the ordinary course of their business, the operators at our properties are regularly subject regularly to inquiries, audits and investigations and auditsconducted by federal and state agencies that oversee applicable laws and regulations. Increased funding for investigation and enforcement efforts, accompanied by an increased pressure to eliminate government waste, has led to a significant increase in the number of investigations and enforcement actions over the past several years.years, a trend which is not anticipated to decrease considerably. Significant enforcement activity has been the result of actions brought by regulators, who file complaints in the name of the United States (and, if applicable, particular states) under the FCA or equivalent state statutes. TheAlso, the qui tam and whistleblower provisions of the FCA allow private individuals to bring actions on behalf of the government alleging that the government was defrauded withdefrauded. Individuals have tremendous potential financial gain to private citizens who prevail.in bringing whistleblower claims as the statute provides that the individual will receive a portion of the money recouped. Additionally, violations of the FCA can result in treble damages.
Violations of federal or state law by an operator of our properties, or FCA actions against an operator of our properties could have a material adverse effect on the operator'soperator’s liquidity, financial condition or results of operations, whichoperations. Such a negative impact on an operator’s financial health could adversely affect its ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of, its leases and other agreements with us. Federal and state fraud and abuse laws may also restrict the terms of our rental agreements with our tenants.
Privacy and Security of Health Information
Various federal and state laws protect the privacy and security of health information. For example, the Health Insurance Portability and Accountability Act of 1996, its implementing regulations and related federal laws and regulations (commonly referred to as "HIPAA"“HIPAA”) protect the privacy and security of individually identifiable health information by limiting its use and disclosure. Many states have implemented similar laws to limit the use and disclosure of patient specific health information.
The federal government has increased its HIPAA enforcement efforts over the past few years, which has increased the number of audits and enforcement actions, some of which have resulted in significant penalties to healthcare providers. For example, in October 2018, Anthem, Inc. agreed, in addition to implementing various corrective measures, to pay a record $16 million to HHS’s Office for Civil Rights in settlement of HIPAA violations stemming from the largest healthcare data breach in United States history. Violations of federal and state privacy and security laws could have a material adverse effect on the operator’s financial condition or operations, which could adversely affect its ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of, its leases and other agreements with us.
Reimbursement
We and our tenants derive a large portion of our revenues from insurance payments with the remainder coming from Medicare and Medicaid reimbursement and private pay. The reimbursement methodologies for healthcare facilities are constantly changing and federal and state authorities may implement new or modified reimbursement methodologies that may negatively impact healthcare operations. For example, the Affordable Care ActACA enacted certain reductions in Medicare reimbursement rates for various healthcare providers, as well as certain other changes to Medicare payment methodologies. The Affordable Care Act, among other things, reduced the inflation-adjusted market based increase included in standard federal payment rates for inpatient and outpatient hospital services, long-term care hospitals and inpatient rehabilitation facilities. In addition, under the Affordable Care Act, long-term acute care hospitals and inpatient rehabilitation facilities are subject to a rate adjustment to the market basket increase to reflect improvements in productivity. Accordingly, current and future payments under federal and state healthcare programs may not be sufficient to sustain a facility’s operations, which could adversely affect its ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of, its leases and other agreements with us.
The Affordable Care ActACA has faced ongoing legal challenges, including litigation seeking to invalidate some or all of the law or the manner in which it has been interpreted. In December 2017, a tax reform bill passed by the House of Representatives and the Senate was signed into law by President Trump, which repeals the penalty on individuals for failing to maintain health insurance as required under the Affordable Care Act effective in 2019. Additionally, in February 2018, twenty states filed a lawsuit in the Northern District of Texas alleging that the Affordable Care Act is now unconstitutional because the penalty on individuals was repealed. President Trump has also stated his intention to make changes to the Medicaid Program. The uncertain status of the Affordable Care ActACA and federal health careof the state Medicaid programs, such as Medicaid affects, among other things, affect our ability to plan for the future.
Federal and state budget pressures also continue to escalate and, in an effort to address actual or potential budget shortfalls, Congress and many state legislatures may continue to enact reductions to Medicare and Medicaid expenditures through cuts in rates paid to providers or restrictions in eligibility and benefits.
In addition to legislative and executive actions relating to the scope of the ACA, increased enforcement will likely continue to impact the financial framework for healthcare operators and facilities. For example, CMS is focused on reducing what it considers to be payment errors by identifying, reporting, and implementing actions to reduce payment error vulnerabilities. In November 2020, CMS announced its successes in reducing the 2020 Medicare improper payment rate and specifically called out the successes of its actions to address improper payments in home health and SNF claims.
In addition, CMS is currently in the midst of transitioning Medicare from a traditional fee for service reimbursement model to a capitated system, which means medical providers are given a set fee per patient regardless of treatment required, and value-based and bundled payment approaches, in whichwhere the government pays a set amount for each beneficiary for a defined period of time, based on that person’s underlying medical needs, rather than based on the actual services provided. Providers and facilities are increasingly responsible to care for and be financially responsible for certain populations of patients under the population health models and this shift in patient management paradigm is creating and will continue to create unprecedented challenges for providers.
Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), permanently repealed the Sustainable Growth Rate formula, and provided for an annual rate increase of 0.5% for physicians through 2019, but imposed a six-year freeze on fee updates from 2020 through 2025. MACRA established a new payment framework, called the Quality Payment Program, which modified certain Medicare payments to “eligible clinicians,” including physicians, dentists, and other practitioners. MACRA represents a fundamental change in physician reimbursement. The result isimplications of MACRA continue to be uncertain and will depend on future regulatory activity and physician activity in the marketplace. MACRA reporting requirements and quality metrics may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to further consolidation of the industry. These and other shifts in payment and risk sharing within an outcome-based model are leading to, among other trends, increasing use of management tools to oversee individual providers and coordinate their services. ThisThe focus on utilization puts downward pressure on the number and expense of services provided.provided as payors are moving away from a fee for service model. The continued trend toward capitated, value-based, and bundled payment approaches has the potential to diminish the market for certain healthcare providers, particularly specialist physicians and providers of particular diagnostic technologies. This could adversely impact the medical properties that house these physicians and medical technology providers.
Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) establishedIn addition, on July 31, 2020, CMS announced a new payment framework, called the Quality Payment Program, which modified certainfinal rule that projects increased aggregate Medicare payments to “eligible clinicians,”SNF by 2.2 percent for fiscal year 2021. If payments under Medicare to our tenants do not continue or increase, our tenants may have difficulty making rent payments to us.
Under a program facilitated by the CMS known as the Skilled Nursing Facility Value-Based Purchasing Program, CMS began withholding 2% of SNF Medicare payments beginning October 1, 2018, to fund an incentive payment pool. CMS then redistributes 50-70% of the withheld payments back to high performing SNFs. The lowest ranked 40% of facilities receive payments that are less than what they otherwise would have received without the program. As a result, certain of our tenants could receive less in Medicare reimbursement payments, which could adversely affect their ability to make rent payments to us.
Effective October 1, 2019, CMS finalized a new case-mix classification system, the Patient-Driven Payment Model (“PDPM”). PDPM classifies SNF patients in Medicare Part A-covered stays into payment groups based on clinically relevant factors using diagnosis codes, rather than by the volume of services. This shifts the focus from the amount of care provided to
instead use the patient’s condition and resulting care needs to determine Medicare reimbursement. Future changes to payment rates or methodology under the PDPM system could reduce the reimbursement our tenants receive. For example, CMS has indicated that it is working toward a unified payment system for post-acute care services, including physicians, dentists,those provided by SNFs, home health agencies, and other practitioners. MACRA represents a fundamental change in physician reimbursement. The implications of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace. MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to further consolidation of the industry.long-term care providers.
Certain of our facilities are also subject to periodic pre- and post-payment reviews and other audits by governmental authorities, which could result in recoupments, denials, or delay of payments. RecoupmentAdditionally, the introduction and explosion of new stakeholders competing with traditional providers in the health market, including companies such as Amazon.com Inc., JPMorgan Chase & Co., Apple Inc., CVS Health Corporation, as well as telemedicine, telehealth and mhealth, are disrupting the heath industry and could lead to new trends in payment. All of the factors discussed-recoupment of past payments or denial or delay of future payments couldpayments-could adversely affect an operator’s ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of its leases and other agreements with us. Assisted and independent living services generally are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Most of the resident fee revenues generated by our SHOPs, therefore, are derived from private pay sources consisting of the income or assets of residents or their family members. The rates for these residents are set by the facilities based on local market conditions and operating costs.
We regularly assess the financial implications of reimbursement rule changes on our tenants, but we cannot assure you that current rules or future updates will not materially adversely affect our operators and tenants, which, in turn, could have a material adverse effect on their ability to pay rent and other obligations to us. See Item 1A. “Risk Factors -— Risks Related to the Healthcare Industry Risks -— Reductions or changes in reimbursement from third-party payors, including Medicare and Medicaid, or delays in receiving these reimbursements could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us” and “Risk Factors - Healthcare Industry Risks -“— A reduction in Medicare payment rates for skilled nursing facilities may have an adverse effect on the Medicare reimbursements received by certain of our tenants” included in Item 1A of this Annual Report on Form 10-K.tenants.”
Other Regulations
Our investments are subject to various federal, state and local laws, ordinances and regulations, including, among other things, the Americans with Disabilities Act of 1990, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental Regulations
As an owner of real property, we are subject to various federal, state and local laws and regulations regarding environmental, health and safety matters. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel, oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes, and in certain cases, the costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. Even with respect to properties that we do not operate or manage, we may be held primarily or jointly and severally liable for costs relating to the investigation and clean-up of any property from which there is or has been an actual or threatened release of a regulated material and any other affected properties, regardless of whether we knew of or caused the release. Such costs typically are not limited by law or regulation and could exceed the property'sproperty’s value. In addition, we may be liable for certain other costs, such as governmental fines and injuries to persons, property or natural resources, as a result of any such actual or threatened release.
Under the terms of our lease and management agreements, we generally have a right to indemnification by the tenants, operators and managers of our properties for any contamination caused by them. However, we cannot assure you that our tenants, operators and managers will have the financial capability or willingness to satisfy their respective indemnification obligations to us, and any such inability or unwillingness to do so may require us to satisfy the underlying environmental claims.
We did not make any material capital expenditures in connection with environmental, health, and safety laws, ordinances and regulations in 20172020 and do not expect that we will be required to make any such material capital expenditures during 2018.2021.
EmployeesHuman Capital Resources
We are an externally managed company and thus have no employees. Instead,We have retained the Advisor pursuant to a long-term advisory contract to manage our affairs on a day-to-day basis. We have also entered into agreements with our Property Manager to manage and lease our properties. The employees of ourthe Advisor, Property Manager, and othertheir respective affiliates of AR Global perform a full range of services for us, including acquisitions, property management, accounting, legal, asset management, transfer agent and investor relations and all general administrative services. We are dependentdepend on these affiliatesthe Advisor and the Property Manager for services that are essential to us, including asset acquisition decisions, property managementus. If the Advisor and other general and administrative responsibilities. In the event that any of these companiesProperty Manager were unable to provide these services to us, we would be required to provide suchthese services ourselves by hiringor obtain them from other sources.
Estimate of Net Asset Value
On April 3, 2020, we published a new estimate of per share asset value (“Estimated Per-Share NAV”) equal to $15.75 as of December 31, 2019. Our previous Estimated Per-Share NAV was equal to $17.50 as of December 31, 2018. Unlike the per
share amounts in this Annual Report on Form 10-K, the Estimated Per-Share NAV has not been retroactively adjusted to reflect the payment of dividends in the form of common stock and will not be adjusted for stock dividends paid or that may be paid in the future until the Board determines a new Estimated Per-Share NAV which is expected in early April 2021. Dividends paid in the form of additional shares of common stock will, all things equal, cause the value of each share of common stock to decline because the number of shares outstanding will increase when dividends paid in stock are issued; however, each stockholder will receive the same number of new shares, the total value of our own workforcecommon stockholder’s investment, all things equal, will not change assuming no sales or obtainingother transfers. We intend to publish Estimated Per-Share NAV periodically at the discretion of board of directors (the “Board”), provided that such services from an unrelated partyestimates will be made at potentially higher costs.least once annually.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those filings with the SEC. We also filed a registration statement on Form S-11 (File No. 333-184677) (the "Registration Statement") in connection with our IPOSecurities and a registration statement on Form S-3 (File No. 333-197802) for additional shares to be issued under the DRIP with the SEC.Exchange Commission (“SEC”). You may read and copy any materials we file with the SEC at the SEC's Public Reference RoomSEC’s Internet address located at 100 F Street, NE, Washington, D.C. 20549 or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that. The website contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from theour website maintained for us and our affiliates at www.healthcaretrustinc.com or www.ar-global.com.. Access to these filings is free of charge. We are not incorporating our website or any information from these websites into this Annual Report on Form 10-K.
Item 1A. Risk Factors
Set forth below are the risk factors that we believe are material to our investors.investors and a summary thereof. The occurrence of any of the risks discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations and ability to pay dividends and they may also impact other distributions and the value of an investment in our common and preferred stock.
Summary Risk Factors
•Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market in general.
•Our property portfolio has a high concentration of properties located in Pennsylvania and Florida.Our properties may be adversely affected by economic cycles and risks inherent to those states.
•Our Credit Facility restricts us from paying cash distributions on or repurchasing our common stock until at least the fiscal quarter ending June 30, 2021, and there can be no assurance we will be able to resume paying distributions on our common stock, and at what rate, or continue paying dividends on our 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”) at the current rate.
•Our Credit Facility restricts our ability to use cash that would otherwise be available to us, and there can be no assurance our available liquidity will be sufficient to meet our capital needs.
•We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic, including negative impacts on our tenants and operators and their respective businesses.
•No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
•In owning properties we may experience, among other things, unforeseen costs associated with complying with laws and regulations and other costs, potential difficulties selling properties and potential damages or losses resulting from climate change.
•We focus on acquiring and owning a diversified portfolio of healthcare-related assets located in the United States and are subject to risks inherent in concentrating investments in the healthcare industry.
•The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of tenants to make lease payments to us.
•We depend on tenants for our rental revenue and, accordingly, our rental revenue is dependent upon the success and economic viability of our tenants. If a tenant or lease guarantor declares bankruptcy or becomes insolvent, we may be unable to collect balances due under relevant leases.
•We assume additional operational risks and are subject to additional regulation and liability because we depend on eligible independent contractors to manage some of our facilities.
•We have substantial indebtedness and may be unable to repay, refinance, restructure or extend our indebtedness as it becomes due. Increases in interest rates could increase the amount of our debt payments.We may incur additional indebtedness in the future.
•We depend on the Advisor and Property Manager to provide us with executive officers, key personnel and all services required for us to conduct our operations.
•All of our executive officers face conflicts of interest, such as conflicts created by the terms of our agreements with the Advisor and compensation payable thereunder, conflicts allocating investment opportunities to us, and conflicts in allocating their time and attention to our matters. Conflicts that arise may not be resolved in our favor and could result in actions that are adverse to us.
•We have long-term agreements with our Advisor and its affiliates that may be terminated only in limited circumstances and may require us to pay a termination fee in some cases.
•Estimated Per-Share NAV may not accurately reflect the value of our assets and may not represent what a stockholder may receive on a sale of the shares, what they may receive upon a liquidation of our assets and distribution of the net proceeds or what a third party may pay to acquire us.
•The stockholder rights plan adopted by our board of directors, our classified board and other aspects of our corporate structure and Maryland law may discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
•Restrictions on share ownership contained in our charter may inhibit market activity in shares of our stock and restrict our business combination opportunities.
•We may fail to continue to qualify as a REIT.
Risks Related to Our Properties and Operations
We have incurred net losses
Our property portfolio has a high concentration of properties located in two states. Our properties may be adversely affected by economic cycles and risks inherent to those states.
The following two states represented 10% or more of our consolidated annualized rental income on a U.S. GAAPstraight-line basis for the yearsfiscal year ended December 31, 2017, 20162020:
| | | | | | | | |
State | | Percentage of Straight-Line Rental Income |
Florida (1) | | 20.6% |
Pennsylvania | | 10.4% |
(1) During the fourth quarter of 2020, we completed the sale of our skilled nursing facility (“SNF”) in Lutz, Florida and 2015.we expect to sell the recently completed development project in Jupiter, Florida, in late March or second quarter 2021. In addition, in August 2020 we entered into an agreement to sell our skilled nursing facility in Wellington, Florida, which is expected to close later in 2021.
We
Any adverse situation that disproportionately affects the states listed above may have incurred net losses attributable to stockholdersa magnified adverse effect on a U.S. GAAP basis for the years ended December 31, 2017, 2016, and 2015 of $42.5 million, $20.9 million and $41.7 million, respectively. Our losses can be attributed, in part, to acquisition related expenses and depreciation and amortization. Weour portfolio. Real estate markets are subject to all of the business risks and uncertainties associated with any business, including the risk that the value of a stockholder's investment could decline substantially. We were incorporated on October 15, 2012. As of December 31, 2017, we owned 185 properties. We cannot assure you that,economic downturns, as they have been in the future,past, and we cannot predict how economic conditions will be profitableimpact this market in both the short and long-term. Declines in the economy or that we will realize growtha decline in the real estate market in these states could hurt our financial performance and the value of our assets.properties. Factors that may negatively affect economic conditions include:
•business layoffs or downsizing;
•industry slowdowns;
•relocations of businesses;
•climate change;
•changing demographics;
•increased telecommuting and use of alternative workplaces;
•infrastructure quality;
•any oversupply of, or reduced demand for, real estate;
•concessions or reduced rental rates under new leases for properties where tenants defaulted;
•increased insurance premiums;
•state budgets and payment to providers under Medicaid or other state healthcare programs; and
•changes in reimbursement for healthcare services from commercial insurers.
We dependmay be unable to enter into contracts for and complete property acquisitions on advantageous terms or our property acquisitions may not perform as we expect.
One of our goals is to grow through acquiring additional properties, and pursuing this investment objective exposes us to numerous risks, including:
•competition from other real estate investors with significant capital resources;
•we may acquire properties that are not accretive;
•we may not successfully manage and lease the properties we acquire to meet our expectations or market conditions may result in future vacancies and lower-than expected rental rates;
•we expect to finance future acquisitions primarily with additional borrowings under our Revolving Credit Facility, and there can be no assurance as to how much borrowing capacity will be available for this purpose
•we may be unable to obtain property-level debt financing or raise equity required to fund acquisitions from other sources on favorable terms, or at all;
•we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
•agreements for the acquisition of properties are typically subject to customary conditions to closing that may or may not be completed, and we may spend significant time and money on potential acquisitions that we do not consummate;
•the process of acquiring or pursuing the acquisition of a new property may divert the attention of our management team from our existing business operations; and
•we may acquire properties without recourse, or with only limited recourse, for liabilities, whether known or unknown.
We rely upon our Advisor and our Property Manager to provide us with executive officers and key personnel and our operating performance may be impacted by any adverse changes in the financial health or reputation of our Advisor.
We have no employees. Personnel and services that we require are provided to us under contracts with our Advisor and Property Manager. We depend on our Advisor and our Property Manager to manage our operations and acquire and manage our portfolio of real estate assets. Our Advisor makes all decisions with respect to the management of our company, subject to the supervision of, and any guidelines establishedprofessionals employed by the Board.
Our success depends to a significant degree upon the contributions of our executive officers and other key personnelaffiliates of our Advisor and our Property Manager. Competition for such skilled personnel is intense, and we cannot assure youto identify suitable investments, but there can be no assurance that our Advisor will be successful in attractingdoing so on financially attractive terms or that our objectives will be achieved
We have not paid our distributions on our common stock in cash since 2020, and retaining such skilled personnel capablethere can be no assurance we will pay distributions on our common stock in cash in the future.
All distributions or dividends on our common stock are paid in the needsdiscretion of our business.board of directors. In August 2020, our board approved a change in our common stock distribution policy, pursuant to which, unless later revised, any future distributions authorized by our board on our shares of common stock, if and when declared, will be paid on a quarterly basis in arrears in shares of our common stock valued at the Estimated Per-Share NAV in effect on the applicable date. We cannot guarantee that all, or any particular one of these key personnel,issued a stock dividends on our common stock in October 2020 and January 2021 but there is no assurance we will continue to provide servicesdo so. The Estimated Per-Share NAV has not been adjusted to us or our Advisor, andreflect the loss of any of these key personnel could cause our operating results to suffer. Further,stock dividends we have paid and will not and do not intend to separately maintain key person life insurance on any of our Advisor’s key personnel. Our Advisor and our Property Manager depend upon the fees and other compensationbe adjusted for stock dividends paid or that they receive from us in connection with the management of our business and sale of our properties to conduct their operations.
On March 8, 2017, the creditor trust established in connection with the bankruptcy of RCS Capital Corp. (“RCAP”), which prior to its bankruptcy filing was under common control with the Advisor, filed suit against AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Mr. Weil). The suit alleges, among other things, certain breaches of duties to RCAP. We are not namedmay be paid in the suit, nor are there allegations related to the services the Advisor provides to us. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the court issued an opinion partially granting the defendant’s motion. The Advisor has informed us that it believes the suit is without merit and intends to defend against it vigorously.
Any adverse changesfuture until our board determines a new Estimated Per-Share NAV. Dividends paid in the financial conditionform of or our relationship with, our Advisor or Property Manager, including any change resulting from an adverse outcome in any litigation, could hinder their ability to successfully manage our operations and our portfolioadditional shares of investments. Additionally, changes in ownership or management practices, the occurrence of adverse events affecting our Advisor or its affiliates or other companies advised by our Advisor and its affiliates could create adverse publicity and adversely affect us and our relationship with lenders, tenants or counterparties.
Our common stock is not traded on a national securities exchange, and we only repurchasewill, all things equal, cause the value of each share of common stock to decline because the number of shares under our SRPoutstanding will increase when dividends paid in stock are issued; however, because each common stockholder will receive the eventsame number of death or disability of a stockholder. Our stockholders may have to hold theirnew shares, for an indefinite period of time, and stockholders who sell their shares to us under our SRP may receive less than the price they paid for the shares.
There is not active trading market for our shares. Our SRP includes numerous restrictions that limit a stockholder’s ability to sell shares to us, including that we only repurchase shares in the event of death or disability of a stockholder. Moreover, the total value of repurchases pursuantour common stockholders' investment, all things equal, will not change assuming no sales or other transfers. We will not be able to pay cash distributions on our SRPcommon stock until we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million (giving effect to the aggregate amount of distributions projected to be paid by us during the quarter in which we have elected to commence paying cash distributions on common stock) and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. As of December 31, 2020, our ratio of consolidated total indebtedness to
consolidated total asset value for these purposes was 61.7%.Thus, our ability to make future cash distributions on our common stock will depend on our future cash flows and indebtedness and may further depend on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all. Further, if we do not pay dividends on our Series A Preferred Stock, any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof, and, whenever dividends on the Series A Preferred Stock are in arrears, whether or not authorized or declared, for six or more quarterly periods, holders of Series A Preferred Stock will have the right to elect two additional directors to serve on our board.
We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across many sectors and areas of the global economy and financial markets, leading to significant adverse impacts on economic activity as well as significant volatility and downward pressure in financial markets. The impact of the COVID-19 pandemic has evolved rapidly. In many states and cities where our properties are located, measures including “shelter-in-place” or “stay-at-home” orders issued by local, state and federal authorities and social distancing measures have resulted in closure and limitations on the operations of many businesses and organizations. Our tenants must interact with their patients and residents. Concern regarding the transmission of COVID-19 has impacted these interactions and has, and will likely continue to impact, the willingness of persons to has and may continue to live in or use facilities at our properties, and impact the revenues generated by our tenants which may further impact the ability of our tenants to pay their rent obligations to us when due.
The COVID-19 pandemic has triggered a slowdown in economic activity. Our ability to lease space and negotiate and maintain favorable rents and the results of operations at our SHOPs could also continue to be negatively impacted by a prolonged recession in the U.S. economy as could the rates charged to residents at our SHOPs. Moreover, the demand for leasing space at our MOB properties could decline further negatively impacting occupancy percentage, revenue and net income. Additionally, downturns or stagnation the U.S. housing market as a result of an economic downturn could adversely affect the ability, or perceived ability, of seniors to afford the resident fees and services at our seniors housing properties.
Starting in March 2020, the COVID-19 pandemic and measures to prevent its spread began to affect us in a number of ways. In our SHOP portfolio, occupancy trended lower as government policies and implementation of infection control best practices materially limited or closed communities to new resident move-ins which has affected and could continue to affect our ability to fill vacancies. We have also continued to experience lower inquiry volumes and reduced in-person tours during the pandemic. SHOP occupancy declined from 84.1% as of March 31, 2020, to 75.4% as of December 31, 2020. We could also incur more significant re-leasing costs and the re-leasing process with respect to both anticipated and unanticipated vacancies could take longer. In addition, starting in mid-March 2020, operating costs began to rise materially including for services, labor and personal protective equipment and other supplies, as our operators took actions to protect residents and caregivers. At our SHOP facilities, we bear these cost increases. These trends accelerated during the second, third and fourth quarters of 2020 and into the beginning of the first quarter of 2021 as the surge of new COVID-19 cases that started in late 2020 crested, and may continue to impact us in the future and have a material adverse effect on our revenues and income in the other quarters thereafter.
COVID-19 has proven to be particularly harmful to seniors and persons with other pre-existing health conditions. The pandemic raises the risk of an elevated level of resident illness and move-outs at our SHOPs, which has also adversely impacted occupancy and revenues as well as increase costs and could continue to do so. There have been some incidences of COVID-19 among the residents and staff at certain of our SHOPs. Further incidences, or the perception of that outbreaks may occur, could materially and adversely affect our revenues and net income, as well as cause significant reputational harm to us and our
tenants, managers and operators. Due to the contagious nature of COVID-19, residents at our SHOPSs may determine to leave the community and the workforce at these facilities may similarly shrink. The operators may be required, or may otherwise determine that it would be prudent, to impose a quarantine of an indeterminate duration. During any quarantine, new residents would not be permitted to move in and the risk of infection and death for their residents or members of the workforce could increase. We may also be required to incur additional costs to identify, contain and remedy the direct or indirect impacts of the COVID-19 pandemic, including costs related to implementing quarantines and vaccinations.Moreover, if seniors housing properties across the U.S. continue to experience high levels of residents infected with COVID-19 and related deaths, and news accounts emphasize these experiences, seniors may increasingly delay or forego moving into seniors housing properties. These trends could be realized across the senior living industry and not discriminate among owners and operators that have higher or lower levels of residents experiencing COVID-19 infections and related deaths. As a result, our operating results from our SHOPs, and the value of these properties, may be materially adversely affected.
Within our MOB portfolio, many physician practices temporarily discontinued nonessential surgeries and procedures due to “shelter-in-place” and other health and safety measures, which has negatively impacted their cash flows. Even now that prohibitions against performing elective procedures are generally no longer in place concern regarding the transmission of COVID-19 has impacted, and will likely continue to impact, the willingness of persons to seek medical care at healthcare facilities for non-urgent issues. Further, the COVID-19 pandemic might adversely impact the business of our MOB tenants by causing a decline in the number of patients seeking treatment, by disrupting or delaying production and delivery of medical supplies such as necessary pharmaceuticals (including due to a diversion of resources and priorities toward the treatment of COVID-19) or by causing staffing shortages, which would disrupt property operations. The complete or partial closures of, or other operational issues at, one or more of our properties resulting from government action or directives may intensify the risk of rent deferrals or non-payment of contractual obligations by our tenants or operators.
Further, certain of our tenants or our third-party operators may not be eligible for or may not be successful in securing stimulus funds under government stimulus programs which may impact their ability to pay their obligations including any obligations to us. We received $3.6 million under a government program during the year ended December 31, 2020 related to four of our properties. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act. There can be no assurance that we will be able to qualify for, or receive, funds under this or any other governmental program established in response to COVID-19.
As a result of these and other factors, tenants or operators that experience deteriorating financial conditions as a result of the outbreak of COVID-19 have been, or may, in the future be, unwilling or unable to pay us in full or on a timely basis due to bankruptcy, lack of liquidity, lack of funding, operational failures, or for other reasons. We reported cash collections of nearly 100% for the MOB and triple-net leased healthcare facilities segments, respectively, for the year ended December 31, 2020 as of February 15, 2021. However, the impact of the COVID-19 pandemic on our tenants and operators and thus our ability to collect rents in future periods cannot be determined as present and the amount of proceeds received from issuances of common stock pursuant to the DRIP and repurchases in any fiscal semester are further limited to 2.5% of the average number of shares outstandingcash rent collected during the previous fiscal year, subject to the authority of the Board to identify another source of funds for repurchases under the SRP. The Board may also reject any request for repurchase of shares at its discretion or amend, suspend or terminate our SRP upon notice. Therefore, requests for repurchase under the SRP2020 may not be accepted. Repurchasesindicative of any future period. In addition, there is no assurance that we will be able to collect the cash rent that is due in the future months including the deferred 2020 rent amounts due in 2021 under the SRPdeferral agreements we have entered into with our tenants.
The impact on our tenants and operators in our SHOP segment cannot be determined at present. We may face defaults and additional requests for rent deferrals or abatements or other allowances particularly if our tenants continue to experience financial distress and increased operating costs or if healthcare facilities and SHOPs continue to experience downward pressures on occupancy and increased costs. Furthermore, if we declare any tenants in default for non-payment of rent or other potential breaches of their leases with us, we might not be able to recover and may experience delays and additional costs in enforcing our rights as landlord to recover amounts due to us. Our ability to recover amounts under the terms of our leases may also be restricted or delayed as a result of any federal, state or local restrictions on tenant evictions for failure to make contractual rent payments, which may result in higher reserves for bad debt. If any of our tenants, any guarantor of a tenant’s lease obligations or an operator, files for bankruptcy, we could be further adversely affected due to loss of revenue and a decline in income produced by the property or properties operated by the third-party operator.
In addition to the impacts on us, our tenants and operators described above, the COVID-19 pandemic has also impacted us in other ways and enhanced certain risks that could have a significant adverse effect on our business, financial condition and results of operations and our ability to pay distributions (including dividends on our Series A Preferred Stock) and other distributions to our stockholders including:
•difficulty accessing debt and equity capital on favorable terms, or at all, if global financial markets become disrupted or unstable or credit conditions deteriorate;
•disruption and instability in financial markets or deteriorations in credit and financing conditions could have an impact on the overall amount of capital being invested in real estate and could result in price or value decreases for real estate assets, which could negatively impact the value of our assets and may result in future acquisitions generating lower overall economic returns;
•the volatility in stock markets caused by the COVID-19 pandemic and its effects on the trading price of our Series A Preferred Stock and the value of our common stock and which could dilute our stockholders’ interest in us if we sell additional equity securities at prices less than the prices our stockholders paid for their shares;
•limiting the number of properties we may seek to acquire due to capital availability;
•that planned dispositions may not occur within the expected timeframe or at all because of buyer terminations or withdrawals related to the pandemic, capital constraints or other factors relating to the pandemic, including closing conditions that are dependent on the occurrence of events linked to the pandemic;
•following an amendment to our Credit Facility in August 2020 as part of our efforts to continue addressing the adverse impacts of the COVID-19 pandemic, until at least the fiscal quarter ending June 30, 2021, our Credit Facility restricts us from paying cash distributions on, or repurchasing, shares of our common stock, and we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the revolving portion of the Credit Facility;
•our ability to maintain sufficient availability under our Credit Facility to fund the purchase of properties and meet other capital requirements which may be adversely affected to the extent the decreases in cash rent collected from our tenants and income from our operators cause a decrease in availability of future borrowings under our Credit Facility;
•if we are unable to comply with financial covenants and other obligations under our Credit Facility and other debt agreements we could default under those agreements which could potentially result in an acceleration of our indebtedness and foreclosure on our properties and could otherwise negatively impact our liquidity;
•we have recognized impairment charges on our assets;
•one or more counterparties to our derivative financial instruments could default on their obligations to us increasing the risk that we may not realize the benefits of utilizing these instruments;
•we may be required to record reserves on previously accrued amounts in cases where it is subsequently concluded that collection is not probable
•tenants and operators may be subject to lawsuits related to COVID-19 outbreaks that may occur at our properties and insurance coverage may not be sufficient to cover any potential losses further straining their financial condition;
•difficulty in repositioning properties where we or our tenants or operators have terminated or do not renew the leases or management agreements with another tenant or operator may be exacerbated by the COVID-19 pandemic, as new operators or tenants may not be willing to take on the increased exposure, especially while active cases are occurring;
•difficulties completing capital improvements at our properties on a timely basis, on budget or at all, could affect the value of our properties;
•difficulty insuring business continuity in the event our Advisor’s continuity of operations plan is not effective or is improperly implemented or deployed during a disruption;
•increased operating risks resulting from changes to our Advisor’s operations and remote work arrangements, including the potential effects on our financial reporting systems and internal controls and procedures, cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events;
•increased operating risks resulting from changes to operations of our third-party operators, including their personnel, which may adversely impact the service provided by our third-party operators with respect to our SHOPs; and
•complying with REIT requirements during a period of reduced cash flow could cause us to liquidate otherwise attractive investments or borrow funds on unfavorable conditions.
The extent to which the COVID-19 pandemic, or a future pandemic, impacts our operations and those of our third-party operators will depend on future developments, including the scope, severity and duration of the pandemic, one or more resurgences of the virus which could result in further government restrictions, the efficacy of available vaccines or other remedies developed, the efficacy of on-going efforts to distribute and administer available vaccines, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others, which are highly uncertain and cannot be predicted with confidence but could be material. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic, but a prolonged or resurgent outbreak as well as related mitigation efforts could continue to have a material impact on our revenues and could materially and adversely affect our business, results of operations and financial condition. Moreover, many risk factors set forth in this Annual Report on Form 10-K should be interpreted as heightened risks as a result of the COVID-19 pandemic.
If a tenant or lease guarantor declares bankruptcy or becomes insolvent, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could become insolvent or be subject to a bankruptcy proceeding pursuant to Title 11 of the United States Code.For example, during 2019, a guarantor of certain of the lease obligations of prior tenants (collectively, the “LaSalle Tenant”) at four triple-net leased properties in Texas (collectively, the “LaSalle Properties”) filed for chapter 11 bankruptcy.As of December 31, 2020, the prior tenants at the LaSalle Properties remain in default of the forbearance agreement and owes us $12.7 million of rent, property taxes, late fees, and interest receivable thereunder. We have the entire receivable balance, including any monetary damages, and related income from the LaSalle Properties fully reserved as of December 31, 2020 and 2019. A bankruptcy filing of our tenants or any guarantor of a tenant’s lease obligations would result in a stay of all efforts by us to collect pre-bankruptcy debts from these entities or their assets, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be required to be paid currently. If a lease is assumed by the tenant, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would only have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid as of the date of the bankruptcy filing (post-bankruptcy rent would be payable in full).This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums.A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for dividends and other distributions to our stockholders.In the event of a bankruptcy, there is no assurance that the debtor in possession or the bankruptcy trustee will assume the lease.
A sale-leaseback transaction may be recharacterized in a tenant’s bankruptcy proceeding.
We may enter into sale-leaseback transactions, where we purchase a property and then lease the same property back to the seller, who becomes our tenant as part of the transaction. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, and either type of recharacterization could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If this plan were confirmed by the bankruptcy court, we would be bound by the new terms. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow.
Our results of operations have been, and may continue to be, adversely impacted by our inability to collect rent from tenants.
Tenants at certain properties in our triple-net leased healthcare facilities segment have been in default under their leases to us, and our results of operations have been adversely impacted by our inability to collect rent from these tenants. There can be no assurance that we will be basedable to collect rent from these or other tenants in the future. Further, we incurred $2.7 million of bad debt expense, including straight-line rent write-offs, related to tenants in default under their leases to us during the year ended December 31, 2020. These amounts primarily relate to former tenants at two of our properties in Florida (collectively the “NuVista Tenant” and the “LaSalle Tenant”).
Further, even if we replace tenants in default to us in a manner that will allow us to transition the properties leased to those tenants to our SHOP segment, there can be no assurance this strategy will be successful and we may be more exposed to changes in property operating expenses. There also can be no assurance that we will be able to replace these tenants on Estimated Per Share NAVa timely basis, or at all, and our results of operations may therefore continue to be adversely impacted by bad debt expenses related to our inability to collect rent from defaulting tenants. Transitions will also increase our exposure to risks associated with operating in this structure.
Our tenants or operators that experience deteriorating financial conditions as a result of the outbreak of COVID-19 have been, or may, in the future be, unwilling or unable to pay us in full or on a timely basis due to bankruptcy, lack of liquidity, lack of funding, operational failures, or for other reasons. There is no assurance we will continue to collect at the current rates. The impact of the COVID-19 pandemic on our tenants and operators and thus our ability to collect rents in future periods cannot be determined as present and the amount of cash rent collected during 2020 may not be indicative of any future period. In addition, there is no assurance that we will be able to collect the cash rent that is due in the future months including the deferred 2020 rent amounts due in 2021 under the deferral agreements we have entered into with our tenants.
Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market.
Our operating results and the value of our properties are subject to risks, including:
•changes in national and market-specific economic conditions;
•changes in supply of or demand for competing properties in the relevant market area;
•changes in interest rates and availability of financing on favorable terms;
•changes in tax, real estate, environmental and zoning laws;
•periods of high interest rates and tight money supply; and
•the possibility that one or more of our tenants will not pay their rental obligations
Properties may have vacancies for a significant period of time.
A property may have vacancies either due to the continued default of tenants under their leases or the expiration of leases.If vacancies continue for a long period of time, our revenues and net income will be adversely impacted.In addition, the value of a property depends principally upon the value of the cash flow generated by the properties.Prolonged vacancies reduce our cash flow.
We obtain only limited warranties when we purchase a property and therefore have only limited recourse if our due diligence did not identify any issues that lower the value of our property.
We have acquired and may continue to acquire properties in “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose.In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing.The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of rental income from that property if a situation or loss occurs after the fact for which we have limited or no remedy.
Our properties and tenants may be unable to compete successfully.
The properties we have acquired and will acquire may face competition from nearby hospitals, senior housing properties and other medical office buildings and medical facilities that provide comparable services. Some of those competing facilities are owned by governmental agencies and supported by tax revenues, and others are owned by nonprofit corporations and may be atsupported to a large extent by endowments and charitable contributions. These types of support are not available to our properties. Similarly, our tenants face competition from other medical practices in nearby hospitals and other medical facilities. Additionally, the introduction and explosion of new stakeholders competing with traditional providers in the healthcare market, including companies such as telemedicine, telehealth and mhealth, are disrupting the healthcare industry. Our tenants’ failure to compete successfully with these other practices and providers could adversely affect their ability to make rental payments, which could adversely affect our rental revenues.
Further, from time to time and for reasons beyond our control, referral sources, including physicians and managed care organizations, may change their lists of hospitals or physicians to which they refer patients. This could adversely affect the ability of our tenants to make rental payments.
We may be unable to secure funds for future tenant improvements or capital needs.
To attract new replacement tenants, or in some cases to secure renewal of a lease, we may expend substantial discountfunds for tenant improvements and refurbishments.In addition, we are typically responsible for any major structural repairs, such as repairs to the price the stockholder paid for the shares.
foundation, exterior walls and rooftops, even if our leases with tenants may require tenants to pay routine property maintenance costs.If we throughneed additional capital in the future to improve or maintain our Advisor, are unableproperties or for any other reason, we may have to find further suitable investments, thenobtain financing from sources beyond our cash flow from operations, such as borrowings, property sales or future equity offerings to fund these capital requirements.These sources of funding may not be available on attractive terms or at all.If we cannot procure additional funding for capital improvements, we may not be able to achievelease or re-lease space on attractive terms, if at all.
We have acquired or financed, and may continue to acquire or finance, properties with lock-out provisions which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions, such as the provisions contained in certain mortgage loans we have entered into, could materially restrict our ability to sell or otherwise dispose of properties or refinance indebtedness, including by requiring the payment of a yield maintenance premium in connection with the required prepayment of principal upon a sale, disposition, or refinancing.Lock-out provisions may also prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.Lock-out provisions could also impair our ability to take other actions during the lock-out period that may otherwise be in the best interests of our stockholders.In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control.
Rising expenses could reduce cash flow.
The properties that we own or may acquire are subject to operating risks, any or all of which may negatively affect us.If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses.Properties may be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses.We may not be able to negotiate leases on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, in which event we may have to pay those costs.If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs.
Damage from catastrophic weather and other natural events and climate change could result in losses to us.
Certain of our properties are located in areas that may experience catastrophic weather and other natural events from time to time, including hurricanes or other severe weather, flooding, fires, snow or ice storms, windstorms or, earthquakes.These adverse weather and natural events could cause substantial damages or losses to our properties which could exceed our insurance coverage.In the event of a loss in excess of insured limits, we could lose our capital invested in the affected property, as well as anticipated future revenue from that property.We could also continue to be obligated to repay any mortgage indebtedness or other obligations related to the property.
To the extent that significant changes in the climate occur, we may experience extreme weather and changes in precipitation and temperature and rising sea levels, all of which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions.The impact of climate change may be material in nature, including destruction of our properties, or occur for lengthy periods of time.
In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties or to protect them from the consequence of climate change.
We may suffer uninsured losses relating to real property or have to pay expensive premiums for insurance coverage.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the costs of defense.Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property.Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism.The Terrorism Risk Insurance Act of 2002 (the “TRIA”), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2027, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration.In the event that the TRIA is not renewed or replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses.If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any uninsured loss.In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property.Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in less cash flow.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans.Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance indebtedness secured by our properties could be impaired.In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.We may not have adequate, or any, coverage for the losses.
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate our business and our profitability.
We own properties in densely populated areas that are susceptible to terrorist attack.Because our properties are generally open to the public, they are exposed to a number of incidents that may take place within their premises and that are beyond our
control or ability to prevent, which may harm our tenants, operators or visitors.If an act of terror, a mass shooting or other violence were to occur, we may lose tenants or be forced to close one or more of our properties for some time.If any of these incidents were to occur, the relevant property could face material damage to its image and the revenue generated therefrom.In addition, we may be exposed to civil liability and be required to indemnify the victims, and our insurance premiums could rise, any of which could adversely affect us.
In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business and the value of our properties.More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide financial markets and economy, including demand for properties and availability of financing.Increased economic volatility could adversely affect our tenants’ abilities to conduct their operations profitably or our ability to borrow money or issue capital stock at acceptable prices.
Real estate-related taxes may increase and these increases may not be passed on to tenants.
From time to time our property taxes increase as property values or assessment rates change or for other reasons.An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property.There is no assurance that leases will be negotiated on a basis that passes such taxes on to the tenant.
Properties may be subject to restrictions on their use that affect our ability to operate a property.
Some of our properties are contiguous to other parcels of real property, comprising part of the same commercial center.In connection with such properties, there are significant covenants, conditions and restrictions restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties.Moreover, the operation and management of the contiguous properties may impact such properties.Compliance with covenants, conditions and restrictions may adversely affect our operating costs and reduce the amount of cash flow that we generate.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We have acquired and developed, and may in the future acquire and develop, properties upon which we will construct improvements.In connection with our development activities, we are subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities or community groups and our builder or partner’s ability to build in conformity with plans, specifications, budgeted costs, and timetables.Performance also may be affected or delayed by conditions beyond our control. For example, we experienced substantial delays and incurred significant additional costs associated with our development property in Jupiter, Florida and would be exposed to the risks in connection with any other properties we develop. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction.If a builder or development partner fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance, but there can be no assurance any legal action would be successful.These and other factors can result in increased costs of a project or loss of our investment.In addition, we will be subject to normal lease-up risks relating to newly constructed projects.We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property.If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
We compete with third parties in acquiring properties and other investments and attracting credit worthy tenants.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, private investment funds, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do.These entities may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.In addition, the number of entities and the amount of funds competing for suitable investments may increase.Increased demand for assets will likely increase acquisition prices.
We also compete with other comparable properties for tenants, which impacts our ability to rent space and the amount of rent charged.We could be adversely affected if additional competitive properties are built in locations near our properties, causing increased competition for creditworthy tenants.This could result in decreased cash flow from our properties and may require us to make capital improvements to properties that we would not have otherwise made, further impacting property cash flows.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
We are subject to various federal, state and local laws and regulations that (a) regulate certain activities and operations that may have environmental or health and safety effects, such as the management, generation, release or disposal of regulated materials, substances or wastes, (b) impose liability for the costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site, or other releases of hazardous materials or regulated substances, and (c) regulate workplace safety. Compliance with these laws and regulations could increase our operational costs.Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position and cash flows.Under various federal, state and local environmental laws (including those of foreign jurisdictions), a current or previous owner or operator of currently or formerly owned, leased or operated real property may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. The costs of removing or remediating could be substantial.These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles could be used to impose liability for release of, and exposure to, hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.Some molds may produce airborne toxins or irritants.Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project. Accordingly, we may incur significant costs to defend against claims of liability, to comply with environmental regulatory requirements, to remediate any contaminated property, or to pay personal injury claims.
Moreover, environmental laws also may impose liens on property or other restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or our Property Manager and its assignees from operating such properties.Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures.Future laws, ordinances or regulations or the discovery of currently unknown conditions or non-compliances may impose material liability under environmental laws.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
In some instances, we may sell our properties by providing financing to purchasers.If we do so, we will bear the risk that the purchaser may default on its debt, requiring us to seek remedies, a process which may be time-consuming and costly.Further, the borrower may have defenses that could limit or eliminate our remedies.In addition, even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of.In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
We assume additional operational risks and are subject to additional regulation and liability because we depend on eligible independent contractors to manage some of our facilities.
In our SHOP segment, we invest in SHOPs using the RIDEA structure which permits REITs such as us to lease certain types of healthcare facilities that we own or partially own to a TRS, provided that our TRS hires an independent qualifying management company to operate the facility.Under this structure, the independent qualifying management company, which we also refer to as an operator, receives a management fee from our TRS for operating the facility as an independent contractor.As the owner of the facility, we assume most of the operational risk because we lease our facility to our own partially- or wholly-owned subsidiary rather than a third-party operator.We are therefore responsible for any operating deficits incurred by the facility. As of December 31, 2020, we had seven eligible independent contractors operating 59 SHOPs (not including two land parcels).Some of these properties were recently transitioned from our triple-net leased facilities segment to our SHOP segment.We may in the future, transition other triple-net leased facilities, which may or may not be experiencing declining performance, to third-party managed facilities under this structure, in connection with which they would also transition from our triple-net leased healthcare facilities segment to our SHOP segment.There can be no assurance these transitions will improve performance of the properties, and they will also increase our exposure to risks associated with operating in this structure.
The income we generate from SHOPs is subject to a number of operational risks including fluctuations in occupancy levels and resident fee levels, increases in the cost of food, materials, energy, labor (as a result of unionization or otherwise) or other services, rent control regulations, national and regional economic conditions, the imposition of new or increased taxes, capital
expenditure requirements, professional and general liability claims, and the availability and cost of professional and general liability insurance. As noted herein, we have experienced declines in occupancy at our SHOPs during 2020 that may continue in 2021. Although we have various rights as the property owner under our management agreements, we rely on the personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment of our operators to set appropriate resident fees, provide accurate property-level financial results for our properties in a timely manner and to otherwise operate our SHOPs in compliance with the terms of our management agreements and all applicable laws and regulations.We also depend on our operators to attract and retain skilled management personnel who are responsible for the day-to-day operations of our SHOPs.A shortage of nurses or other trained personnel or general inflationary pressures may force the operator to enhance pay and benefit packages to compete effectively for personnel, but it may not be able to offset these added costs by increasing the rates charged to residents.Any increase in labor costs and other property operating expenses, any failure to attract and retain qualified personnel, or significant changes in the operator’s senior management or equity ownership could adversely affect the income we receive from our SHOPs.
The operator, which is our TRS when we use this type of lease structure, of a healthcare facility is generally required to be the holder of the applicable healthcare license.Any delay in obtaining the license, or failure to obtain one at all, could result in a delay or an inability to collect a significant portion of our revenue on the applicable property.Furthermore, this licensing requirement subjects us (through our ownership interest in our TRS) to various regulatory laws, including those described herein.Most states regulate and inspect healthcare facility operations, patient care, construction and the safety of the physical environment.If one or more of our healthcare real estate facilities fails to comply with applicable laws, our TRS, if it holds the healthcare license and is the entity enrolled in government health care programs, would be subject to penalties including loss or suspension of license, certification or accreditation, exclusion from government healthcare programs (i.e., Medicare, Medicaid), administrative sanctions, civil monetary penalties, and in certain instances, criminal penalties.Additionally, when we receive individually identifiable health information relating to residents of our TRS-operated healthcare facilities, we are subject to federal and state data privacy and confidentiality laws and rules, and could be subject to liability in the event of an audit, complaint, or data breach.Furthermore, to the extent our TRS holds the healthcare license, it could have exposure to professional liability claims arising out of an alleged breach of the applicable standard of care rules.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We have made investments in certain assets through joint ventures and may continue to enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) in the future.In such event, we may not be in a position to exercise sole decision-making authority regarding the joint venture.Investments in joint ventures may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions.Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.These investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture.Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers or directors from focusing their time and effort on our business.Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk.In addition, we may in certain circumstances be liable for the actions of our co-venturers.
We may incur costs associated with complying with the Americans with Disabilities Act.
Our properties are subject to the Americans with Disabilities Act of 1990 (the “Disabilities Act”).Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons.The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities.The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages.A determination that our properties do not comply with the Disabilities Act could result in liability for both governmental fines and damages.If we are required to make unanticipated major modifications to any of our properties to comply with the Disabilities Act which are determined not to be the responsibility of our tenants, we could incur unanticipated expenses that could have an adverse impact upon our cash flow.
Net leases may not result in fair market lease rates over time.
Some of our rental income is generated by net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances.Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years.Moreover, inflation could erode the value of long-term leases that do not contain indexed escalation provisions.
We may be unable to renew leases or re-lease space as leases expire.
We may be unable to renew expiring leases on terms and conditions that are as, or more, favorable as the terms and conditions of the expiring leases.In addition, vacancies may occur at one or more of our properties due to a default by a tenant on its lease or expiration of a lease.Healthcare facilities in general and MOBs in particular tend to be specifically suited for the particular needs of their tenants and major renovations and expenditures may be required in order for us to re-lease vacant space.Vacancies may reduce the value of a property as a result of reduced cash flow generated by the property.
Our properties have been and may continue to be subject to impairment charges.
We periodically evaluate our real estate investments for impairment indicators.The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure.For example, the early termination of, or default under, a lease by a major tenant may lead to an impairment charge.If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property.Impairment charges also indicate a potential permanent adverse change in the fundamental operating characteristics of the impaired property.There is no assurance that these adverse changes will be reversed in the future and the decline in the impaired property’s value could be permanent.We have incurred impairment charges, which have an immediate direct impact on our earnings, including $36.4 million, during the year ended December 31, 2020.There can be no assurance that we will not take additional charges in the future.Any future impairment could have a material adverse effect on our results in the period in which the charge is taken.
Our real estate investments are relatively illiquid, and therefore we may not be able to dispose of properties when we desire to do so or on favorable terms.
Investments in real properties are relatively illiquid.We may not be able to quickly alter our portfolio or generate capital by selling properties.The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control.If we need or desire to sell a property or properties, we cannot predict whether we will be able to do so at a price or on the terms and conditions acceptable to us.We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.Further, we may be required to invest monies to correct defects or to make improvements before a property can be sold.We can make no assurance that we will have funds available to correct these defects or to make these improvements.Moreover, in acquiring a property or incurring debt securing a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property.These types of provisions restrict our ability to sell a property.
In addition, applicable provisions of the Code impose restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies.Thus, we may be unable to realize our investment objectives by selling or pay distributions, which wouldotherwise disposing of a property, or refinancing debt secured by the property, at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy.
Risks Related to the Healthcare Industry
Our real estate investments are concentrated in healthcare-related facilities, and we may be negatively impacted by adverse trends in the healthcare industry.
We own and seek to acquire a diversified portfolio of healthcare-related assets including MOBs, SHOPs and other healthcare-related facilities. We are subject to risks inherent in concentrating investments in real estate and, in particular, healthcare-related assets. A downturn in the commercial real estate industry generally could significantly adversely affect the value of an investmentour properties. A downturn in the healthcare industry could particularly negatively affect our shares.
Ourlessees’ ability to achievemake lease payments to us and our investment objectives andability to pay dividends and other distributions to our stockholders. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or if our portfolio did not include a concentration in healthcare-related assets.
Furthermore, the healthcare industry currently is dependent uponexperiencing rapid regulatory changes and uncertainty; changes in the demand for and methods of delivering healthcare services; changes in third-party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; expansion of insurance providers into patient care; continuing pressure by private and governmental payors to reduce payments to providers of services; and increased scrutiny of billing, referral and other practices by federal and state authorities. These factors may adversely affect the economic performance of some or all of our Advisortenants and, in acquiringturn, our investments, selecting tenants forrevenues and cash flows.
Certain of our properties may not have efficient alternative uses, so the loss of a tenant may cause us to not be able to find a replacement or cause us to spend considerable capital to adapt the property to an alternative use.
Some of our properties and securing independent financing arrangements. Our Advisorthe properties we will seek to acquire are healthcare-related assets that may only be suitable for similar healthcare-related tenants. If we or our tenants terminate the leases for these properties or our tenants lose their regulatory authority to operate such properties, we may not be successfulable to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses.
The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in obtaining furtherthe inability of our tenants to make rent payments to us.
The healthcare industry is heavily regulated by federal, state and local governmental bodies. Our tenants generally are subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, relationships with physicians and other referral sources, and the privacy and security of patient health information. Changes in these laws and regulations could negatively affect the ability of our tenants to make lease payments to us. In some states, healthcare facilities are subject to various state CON laws requiring governmental approval prior to the development or expansion of healthcare facilities and services. The approval process in these states generally requires a facility to demonstrate the need for additional or expanded healthcare facilities or services. CONs, where applicable, can also be conditions to regulatory approval of changes in ownership or control of licensed facilities, addition of beds, investment in major capital equipment, introduction of new services, termination of services previously approved through the CON process and other control or operational changes. Many of our medical facilities and their tenants may require a license or CON to operate. Failure to obtain a license or CON, or loss of a required license or CON, would prevent a facility from operating in the manner intended by the tenant and may restrict an operator’s ability to expand properties and grow the operator’s business in certain circumstances, which could have an adverse effect on the operator’s or tenant’s revenues, and in turn, negatively impact their ability to make rental payments under, and otherwise comply with the terms of their leases with us. State CON laws are not uniform throughout the United States and are subject to change. We cannot predict the impact of state CON laws on our improvement of medical facilities or the operations of our tenants. In addition, state CON laws often materially impact the ability of competitors to enter into the marketplace of our facilities. The repeal of CON laws could allow competitors to freely operate in previously closed markets. This could negatively affect the ability of our tenants’ to make rental payments to us. In limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and require new CON authorization to re-institute operations.
Furthermore, uncertainty surrounding the implementation of the Affordable Care Act may adversely affect our operators. As the primary vehicle for comprehensive healthcare reform in the United States, the Affordable Care Act was designed to reduce the number of individuals in the United States without health insurance and change the ways in which healthcare is organized, delivered and reimbursed. The Affordable Care Act has faced ongoing legal challenges, including litigation seeking to invalidate some or all of the law or the manner in which it has been interpreted. The legal challenges and legislative initiatives to roll back the Affordable Care Act continues and the outcomes are uncertain. On March 2, 2020, the Supreme Court granted a petition of certiorari and heard arguments in November 2020. If an injunction or a final judgment is made which declares the Affordable Care Act unconstitutional, states may not have to comply with its requirements, which could impact health insurance coverage for individuals. The regulatory uncertainty and the potential impact on our tenants and operators could have an adverse material effect on their ability to satisfy their contractual obligations. Further, we are unable to predict the scope of future federal, state and local regulations and legislation, including Medicare and Medicaid statutes and regulations or judicial decisions, or the intensity of enforcement efforts with respect to such regulations and legislation, and any changes in the regulatory or judicial framework may have a material adverse effect on our tenants, which, in turn, could have a material adverse effect on us.
The expansion in health insurance coverage under the Affordable Care Act is likely going to continue to erode in 2020 as cuts in advertising and outreach during the marketplace open-enrollment periods, shorter open enrollment periods, and other changes have left many Americans uncertain about their ability to access and be eligible for coverage. Additionally, the repeal of the individual mandate penalty included in the TCJA, recent actions to increase the availability of insurance policies that do not include Affordable Care Act minimum benefit standards, and support for Medicaid work requirements will likely impact the market. Accordingly, current and future payments under federal and state healthcare programs may not be sufficient to sustain a facility’s operations, which could adversely affect its ability to satisfy its contractual obligations, including making rental payments under, and otherwise complying with the terms of, the facility’s leases and other agreements with us.
The Affordable Care Act includes program integrity provisions that both create new authorities and expand existing authorities for federal and state governments to address fraud, waste and abuse in federal health programs. In addition, the Affordable Care Act expands reporting requirements and responsibilities related to facility ownership and management, patient safety and care quality. In the ordinary course of their businesses, our operators may be regularly subjected to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. If they do not comply with the additional reporting requirements and responsibilities, the ability of our operators’ to participate in federal health programs may be adversely affected. Moreover, there may be other aspects of the comprehensive healthcare reform legislation for which regulations have not yet been adopted, which, depending on how they are implemented, could materially and adversely affect our operators.
The Affordable Care Act also requires the reporting and return of overpayments. Healthcare providers that fail to report and return an overpayment could face potential liability under the FCA and the CMPL and exclusion from federal healthcare programs. Accordingly, if our operators fail to comply with the Affordable Care Act’s requirements, they may be subject to significant monetary penalties and excluded from participation in Medicare and Medicaid, which could materially and adversely affect their ability to pay rent and satisfy other financial obligations to us.
Reductions or changes in reimbursement from third-party payors, including Medicare and Medicaid, or delays in receiving these reimbursements, could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us.
Our tenants may receive payments from the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs have intensified in recent years and will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. The Medicare and Medicaid programs have adopted a variety of initiatives which have been incorporated and expanded by private insurance carriers, including health maintenance organizations and other health plans, to extract greater discounts and impose more stringent cost controls upon healthcare provider operations. Examples include, but are not limited to, changes in reimbursement rates and methodologies, such as bundled payments, capitation payments and discounted fee structures. As a result, our tenants and operators may face significant limits on the reimbursed and on reimbursement rates and fees. All of these changes could impact the ability our operators and tenants’ ability to pay rent or other obligations to us. In addition, operators and tenants in certain states have experienced delays; some of which are, have been, and may be late in receiving reimbursements, which have adversely affected their ability to make rent payments to us.Further, failure of any of our operators or tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government-sponsored payment programs.
The healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. Coverage expansions under the Affordable Care Act through the Medicaid expansion and health insurance exchanges may be scaled back or eliminated in the future due to ongoing legal challenges and the future status of the Affordable Care Act is unknown. We cannot ensure that of our operators or tenants who currently depend on governmental or private payer reimbursement will be adequately reimbursed for the services they provide.
Any slowdown in the United States economy can negatively affect state budgets, thereby putting pressure on states to decrease spending on state programs including Medicaid. The need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in state Medicaid programs due to unemployment and declines in family incomes. Historically, some states have attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. Potential reductions to Medicaid program spending in response to state budgetary pressures could negatively impact the ability of our tenants and operators to successfully operate their businesses.
Our tenants and operators may continue to experience a shift in payor mix away from fee-for-service payors, resulting in an increase in the percentage of revenues attributable to managed care payors, and general industry trends that include pressures to control healthcare costs. In addition, some of our tenants may be subject to value-based purchasing programs, which base reimbursement on the quality and efficiency of care provided by facilities and require the public reporting of quality data and preventable adverse events to receive full reimbursement. Pressures to control healthcare costs and a shift away from traditional health insurance reimbursement to managed care plans have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans, such as health maintenance organizations and preferred provider organizations. Medicare Access and CHIP Reauthorization Act (“MACRA”) has also established a new payment framework, which modified certain Medicare payments to eligible clinicians, representing a fundamental change to physician reimbursement. These changes could have a material adverse effect on the financial condition of some or all of our tenants in our properties. The financial impact on our tenants and operators could restrict their ability to make rent payments to us.
Required regulatory approvals can delay or prohibit transfers of our healthcare facilities.
Transfers of healthcare facilities to successor tenants or operators are typically subject to regulatory approvals or ratifications, including, but not limited to, change of ownership approvals, zoning approvals, and Medicare and Medicaid provider arrangements that are either not required, or enjoy reduced requirements, in connection with transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the
regulatory approval process of any federal, state or local government agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. If we are unable to find a suitable investments on financially attractivereplacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which could expose us to successor liability, require us to indemnify subsequent operators to whom we transfer the operating rights and licenses, or require us to spend substantial time and funds to preserve the value of the property and adapt the facility to other use. Furthermore, transitioning to a new tenant or operator could cause disruptions at the operations of the properties and, if there is a delay in the new tenant or operator obtaining its Medicare license, delays in our ability to receive reimbursements from Medicare.
A reduction in Medicare payment rates for skilled nursing facilities may have an adverse effect on the Medicare reimbursements received by certain of our tenants.
Several government initiatives have resulted in reductions in funding of the Medicare and Medicaid programs and additional changes in reimbursement regulations by the Centers for Medicare & Medicaid Services (“CMS”), contributing to enhanced pressure to contain healthcare costs and additional operational requirements, which has impacted the ability of our tenants’ and operators’ ability to make rent payments to us. The Medicare and Medicaid programs have adopted a variety of initiatives which have been incorporated and expanded by private insurance carriers, including health maintenance organizations and other health plans, to extract greater discounts and impose more stringent cost controls upon healthcare provider operations. As a result, our tenants and operators may face reductions in reimbursement rates and fees. Operators in certain states have experienced delays in receiving reimbursements, which has adversely affected their ability to make rent payments to us. Similar delays, or reductions in reimbursements, may continue to impose financial and operational challenges for our tenants and operators, which may affect their ability to make contractual payments to us.
There have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. We may own and acquire skilled nursing facility assets that rely on revenue from Medicaid or Medicare. Our tenants have and may experience limited increases or reductions in Medicare payments and aspects of certain of these government initiatives, such as further reductions in funding of the Medicare and Medicaid programs, additional changes in reimbursement regulations by CMS, enhanced pressure to contain healthcare costs by Medicare, Medicaid and other payors, and additional operational requirements may adversely affect their ability to make rental payments. For example, CMS is focused on reducing what it considers to be payment errors by identifying, reporting, and implementing actions to reduce payment error vulnerabilities.
In addition, CMS is currently in the midst of transitioning Medicare from traditional fee for service reimbursement models to a capitated system, which means medical providers are given a set fee per patient regardless of treatment required, and value-based and bundled payment approaches, where the government pays a set amount for each beneficiary for a defined period of time, based on that person’s underlying medical needs, rather than based on the actual services provided. Providers and facilities are increasing responsible to care for and be financially responsible for certain populations of patients under the population health models and this shift in patient management paradigm is creating and will continue to create unprecedented challenges for providers and impact their ability to pay rent to us.
Certain of our facilities may be subject to pre- and post-payment reviews and audits by governmental authorities, which could result in recoupments, denials or delay of payments and could adversely affect the profitability of our tenants.
Certain of our facilities may be subject to periodic pre- and post-payment reviews and audits by governmental authorities. If the review or audit shows a facility is not in compliance with federal and state requirements, previous payments to the facility may be recouped and future payments may be denied or delayed. Recoupments, denials or delay of payments could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us.
Events that adversely affect the ability of seniors and their families to afford daily resident fees at our SHOPs could cause our occupancy rates and resident fee revenues to decline.
Assisted and independent living services generally are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Most of the resident fee revenues generated by our SHOPs, therefore, are derived from private pay sources consisting of the income or assets of residents or their family members. The rates for these residents are set by the facilities based on local market conditions and operating costs. In light of the significant expense associated with building new properties and staffing and other costs of providing services, typically only seniors with income or assets that meet or exceed the comparable region median can afford the daily resident and care fees at our SHOPs. A weak economy, depressed housing market or changes in demographics could adversely affect their continued ability to do so. If the operators of our SHOPs are unable to attract and retain seniors that have sufficient income, assets or other resources to pay the fees associated with assisted and independent living services, the occupancy rates, resident fee revenues and results of operations of our SHOPs could decline.
Residents in our SHOPs may terminate leases.
State regulations generally require assisted living communities to have a written lease agreement with each resident that permits the resident to terminate his or her lease for any reason on reasonable notice, unlike typical apartment lease agreements that have initial terms of one year or longer. Due to these lease termination rights and the advanced age of the residents, the resident turnover rate in our SHOPs may be difficult to predict. A large number of resident lease agreements may terminate at or around the same time, and the affected units may remain unoccupied.
Some tenants of our healthcare-related assets must comply with fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from or are in a position to make referrals in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs.
Our lease arrangements with certain tenants may also be subject to these fraud and abuse laws. These laws include the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of any item or service reimbursed by Medicare or Medicaid; the Federal Physician Self-Referral Prohibition (commonly referred to as the “Stark Law”), which, subject to specific exceptions, restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare or Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship; the FCA, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs; and the CMPL, which authorizes the U.S. Department of Health and Human Services to impose monetary penalties for certain fraudulent acts.
Each of these laws includes substantial criminal or civil penalties for violations that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid payments or exclusion from the Medicare and Medicaid programs. Certain laws, such as the FCA, allow for individuals to bring whistleblower actions on behalf of the government for violations thereof. Individuals have tremendous potential financial gain in bringing whistleblower claims as the FCA statute provides that the individual will receive a portion of the money recouped. Additionally, violations of the FCA can result in treble damages. Significant enforcement activity has been the result of actions brought by these individuals. Additionally, certain states in which the facilities are located also have similar fraud and abuse laws. Federal and state adoption and enforcement of such laws increase the regulatory burden and costs, and potential liability, of healthcare providers. Investigation by a federal or state governmental body for violation of fraud and abuse laws, and these state laws have their own penalties which may be in additional to federal penalties.
Investigation by a federal or state governmental body for violation of fraud and abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize that tenant’s business, its reputation, and its ability to operate or to make rent payments. Increased funding for investigation and enforcement efforts, accompanied by an increased pressure to eliminate government waste, has led to a significant increase in the number of investigations and enforcement actions over the past several years, a trend which is not anticipated to decrease considerably.
Tenants of our healthcare-related assets may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us.
As is typical in the healthcare industry, certain types of tenants of our healthcare-related assets may often become subject to claims that their services have resulted in patient injury or other adverse effects. The insurance coverage maintained by these tenants may not cover all claims made against them or continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims or litigation may not, in certain cases, be available to these tenants due to state law prohibitions or limitations of availability. As a result, these types of tenants operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. Recently, there has been an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance may not available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on a tenant’s financial condition. If a tenant is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable government enforcement action, the tenant could be exposed to substantial additional liabilities, which may affect the tenant’s business, operations and ability to pay rent to us.
We may experience adverse effects as a result of potential financial and operational challenges faced by the operators of any seniors housing facilities and skilled nursing facilities we own or acquire.
Operators of any seniors housing facilities and skilled nursing facilities may face operational challenges from potentially reduced revenue streams and increased demands on their existing financial resources. The resources of our skilled nursing operators’ likely are primarily derived from governmentally funded reimbursement programs, such as Medicare and Medicaid. Accordingly, our facility operators are subject to the potential negative effects of decreased reimbursement rates or other changes in reimbursement policy or programs offered through such reimbursement programs. Their revenue may also be adversely affected as a result of falling occupancy rates or slow lease-ups for assisted and independent living facilities due to various factors, including the ongoing COVID-19 pandemic and its effects and turmoil in the capital debt and real estate markets. In addition, our facility operators may incur additional demands on their existing financial resources as a result of increases in seniors housing facility operator liability, insurance premiums and other operational expenses. The economic deterioration of an operator could cause such operator to file for bankruptcy protection. The bankruptcy or insolvency of an operator may adversely affect the income produced by the property or properties it makes investments onoperates.
The performance and economic condition of our behalf,operators may be negatively affected if they fail to comply with various complex federal and state laws that govern a wide array of referrals, relationships and licensure requirements in the senior healthcare industry. The violation of any of these laws or regulations by a seniors housing facility operator may result in the imposition of fines or other penalties that could jeopardize that operator’s ability to make payment obligations to us or to continue operating its facility. In addition, legislative proposals are commonly being introduced or proposed in federal and state legislatures that could affect major changes in the seniors housing sector, either nationally or at the state level. Any such legislation could materially impact our objectives will be achieved.operators in an adverse fashion.
We may change our targeted investments without stockholder consent.
We have acquired and expect to continue to acquire a diversified portfolio of healthcare-related assets including MOBs, seniors housing communitiesSHOPs and other healthcare-related facilities. WeHowever, the board may make adjustments tochange our target portfolio based on real estate market conditions and investment opportunities, and wepolicies in its sole discretion. We may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, initially anticipated. A change in our targeted investments or investment guidelines may increaseanticipated by among other things, increasing our exposure to interest rate risk, default risk and real estate market fluctuations.
We have not generated, and in the future may not generate, operating cash flows sufficient to fund all of the distributions we pay to our stockholders, and, as such, we may be forced to fund distributions from other sources, including borrowings, which may not be available on favorable terms, or at all.
We have historically not generated sufficient cash flow from operations to fund distributions. In March 2017, we decreased the rate at which we pay distributions from an annual rate of $1.70 per share to $1.45 per share, and in February 2018 we decreased this rate further to $0.85 per share. If we do not generate sufficient cash flows from our operations to fund distributions, we may have to further reduce or suspend distributions. We have funded a portion of our distributions from, among other things, DRIP proceeds, borrowings and proceeds from the sale of real estate investments. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to continue to use DRIP proceeds. Borrowings required to fund distributions may not be available at favorable rates, or at all, and could restrict the amount we can borrow for investments and other purposes. Likewise, the proceeds from any property sale may not be available to fund distributions. Distributions paid from sources other than our cash flows from operations also reduce the funds available for other needs such as property acquisitions, capital expenditures and other real estate-related investments.
We may not have sufficient cash from operations to make a distribution required to maintain our REIT status, which may materially adversely affect an investment in our common stock. Moreover, the Board may change our distribution policy, in its sole discretion, at any time.
Further, paying distributions from sources other than operating cash flow is not sustainable particularly where limited by the terms of instruments governing borrowings. For example, our Revolving Credit Facility imposes limitations on our ability to pay distributions to stockholders and repurchase shares of common stock. Distributions to stockholders are limited, with certain exceptions, to a percentage of Modified FFO (as defined in the Revolving Credit Facility, (which is different from MFFO as discussed in this Annual Report on Form 10-K) during the applicable period as follows: (i) for the six months ending March 31, 2018, 130% of Modified FFO; (ii) for the nine months ending June 30, 2018, 120% of Modified FFO; (iii) for the twelve months ending September 30, 2018, 115% of Modified FFO; and (iv) for the twelve months ending December 31, 2018 and for each period of four fiscal quarters ending after that period, 110% of Modified FFO. This covenant was amended twice during 2017 to permit us to pay a certain level of distributions, but there is no assurance that our lenders will agree to future amendments if needed, or if Modified FFO is not sufficient.
If we internalize our management functions, we would be required to pay a transition fee and would not have the right to retain our management or personnel. We may be unable to obtain key personnel, and our ability to achieve our investment objectives could be delayed or hindered.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, after February 2019, under the terms of our advisory agreement we would be required to pay a transition fee to our Advisor.Advisor upon termination of the advisory agreement in connection with an internalization that could be up to 4.5 times the compensation paid to our Advisor in the previous year, plus expenses. We also would not have any right to retain our executive officers or other personnel of our Advisor who currently manage our day-to-day operations. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. SuchThese deficiencies could cause us to incur additional costs, and our management'smanagement’s attention could be diverted from most effectively managing our investments, which could result in litigation and resulting associated costs in connection with the internalization transaction.
We may be unableterminate our advisory agreement in only limited circumstances, which may require payment of a termination fee.
We have limited rights to terminate our advisory agreement.
On February 17, 2017, we entered into a Second Amended and Restated Advisory Agreement with our Advisor. The initial term of our advisory agreement has aexpires on February 16, 2027, but is automatically renewed upon expiration for consecutive ten-year term andterms unless notice of termination is provided by either party 365 days in advance of the expiration of the term. Further, we may terminate the agreement only be terminated under limited circumstances. ThisIn the event of a termination in connection with a change in control of us, we would be required to pay a termination fee that could be up to four times the compensation paid to our Advisor in the previous year, plus expenses. The limited termination rights will make it difficult for us to renegotiate the terms of ourthe advisory agreement or replace our Advisor even if the terms of ourthe advisory agreement are no longer consistent with the terms generally available to externally managedexternally-managed REITs for similar services.
Our rightsbusiness and the rights of our stockholders to recover claims against our officers, directors and Advisor are limited, which could reduce stockholders' and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, officers and Advisor and our Advisor's affiliates and permits us to indemnify our employees and agents.
Although our charter does not allow us to indemnify or hold harmless an indemnitee to a greater extent than permitted under Maryland law, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases which would decrease the cash otherwise available for distribution to stockholders.
Our businessoperations could suffer if our Advisor or any other party that provides us with services essential to our operations experiences system failures or cyber-incidentscyber incidents or a deficiency in cybersecurity.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for theThe internal information technology networks and related systems of our Advisor and other parties that provide us with services essential to our operations (including our tenant-operatorstenant operators and other third-party operators of our healthcare facilities), these systems are vulnerable to damage from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by these disruptions.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity or availability
As reliance on technology has increased, so have the risks posed to those systems. Our Advisor and other parties that provide us with services essential to our operations must continuously monitor and develop their networks and information technology to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses, and social engineering, such as phishing. Our Advisor is continuously working, including with the aid of third-party service providers, to install new, and to upgrade existing, network and information technology systems, ofto create processes for risk assessment, testing, prioritization, remediation, risk acceptance, and reporting, and to provide awareness training around phishing, malware and other cyber risks to ensure that our Advisor and other parties that provide us with services essential to our operations. In addition, the risk of a cyber-incident, including by computer hackers, foreign governmentsoperations are protected against cyber risks and cyber terrorists, has generally increased as the number, intensitysecurity breaches and sophistication of attempted attacksthat we are also therefore so protected. However, these upgrades, processes, new technology and intrusionstraining may not be sufficient to protect us from around the world have increased.all risks. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques and technologies used in such attempted attacks and intrusions evolve and generally are not recognized until launched against a target,target. In some cases, attempted attacks and in some casesintrusions are designed not to be detected and, in fact, may not be detected.
The remediation costs and lost revenues experienced by a victimsubject of a cyber-incidentan intentional cyberattack or other event which results in unauthorized third-party access to systems to disrupt operations, corrupt data or steal confidential information may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. In addition,Additionally, any failure to adequately protect against unauthorized or unlawful processing of personal data, or to take appropriate action in cases of infringement may result in significant penalties under privacy law.
Furthermore, a security breach or other significant disruption involving the information technology networks and related systems of our Advisor or any other party that provides us with services essential to our operations could:
•result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
•affect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
•result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information (including information about our tenant operators and other third-party operators of our healthcare facilities, as well as the patients or residents at those facilities), which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
•result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
•require significant management attention and resources to remedy any damages that result;
•subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
•adversely impact our reputation among our tenants, operators and investors generally.
Although our Advisor and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by our Advisor and other parties that provide us with services essential to our operations could, in turn, have an adverse impact on us.
We depend on our Advisor and Property Manager to provide us with executive officers, key personnel and all services required for us to conduct our operations and our operating performance may be impacted by any adverse changes in the financial health or reputation of our Advisor.
We have no employees. Personnel and services that we require are provided to us under contracts with our Advisor and its affiliates including our Property Manager. We depend on our Advisor and our Property Manager to manage our operations and acquire and manage certain of our real estate assets. Our Advisor makes all decisions with respect to the management of our company, subject to the supervision of, and any guidelines established by, the board.
Thus, our success depends to a significant degree upon the contributions of our executive officers and other key personnel of our Advisor and its affiliates, including Edward M. Weil, Jr., our chief executive officer. In February 2021 Katie P. Kurtz, resigned as our chief financial officer, treasurer and secretary effective April 9, 2021 and our board of directors unanimously elected Jason Doyle as assistant secretary, effective immediately, and as chief financial officer and secretary, effective upon Ms. Kurtz’s resignation. Neither our Advisor nor any of its affiliates has an employment agreement with these key personnel and we cannot guarantee that all, or any particular one, of these individuals will remain employed by our Advisor or one of its affiliates and otherwise available to continue to perform services for us. Further, we do not maintain key person life insurance on any person. We believe that our success depends, in large part, upon the ability of our Advisor to hire, retain or contract for services of highly skilled managerial, operational and marketing personnel. Competition for skilled personnel is intense, and there can be no assurance that our Advisor will be successful in attracting and retaining skilled personnel. If our Advisor loses
or is unable to obtain the services of key personnel, our Advisor’s ability to manage our business and implement our investment strategies could be delayed or hindered.
Any adverse changes in the financial condition or financial health of, or our relationship with, our Advisor or Property Manager, including any change resulting from an adverse outcome in any litigation could hinder their ability to successfully manage our operations and our portfolio of investments. Additionally, changes in ownership or management practices, the occurrence of adverse events affecting our Advisor or its affiliates or other companies advised by our Advisor or its affiliates could create adverse publicity and adversely affect us and our relationship with lenders, tenants, operators or counterparties.
We may in the future acquire or originate real estate debt or invest in real estate-related securities issued by real estate market participants, which would expose us to additional risks.
We may in the future acquire or originate first mortgage debt loans, mezzanine loans, preferred equity or securitized loans, CMBS, preferred equity and other higher-yielding structured debt and equity investments. Doing so would expose us not only to the risks and uncertainties we are currently exposed to through our direct investments in real estate but also to additional risks and uncertainties attendant to investing in and holding these types of investments, such as:
•risk of defaults by borrowers in paying debt service on outstanding indebtedness and to other impairments of our loans and investments;
•increased competition from entities engaged in mortgage lending and, or investing in our target assets;
•deterioration in the performance of properties securing our investments may cause deterioration in the performance of our investments and, potentially, principal losses to us;
•fluctuations in interest rates and credit spreads could reduce our ability to generate income on our loans and other investments;
•difficulty in redeploying the proceeds from repayments of our existing loans and investments;
•the illiquidity of certain of these investments;
•lack of control over certain of our loans and investments;
•the potential need to foreclose on certain of the loans we originate or acquire, which could result in losses;
•additional risks, including the risks of the securitization process, posed by investments in CMBS and other similar structured finance investments, as well as those we structure, sponsor or arrange; use of leverage may create a mismatch with the duration and interest rate of the investments that we financing;
•risks related to the operating performance or trading price volatility of any publicly-traded and private companies primarily engaged in real estate businesses we invest in; and
•the need to structure, select and more closely monitor our investments such that we continue to maintain our qualification as a REIT and our exemption from registration under the Investment Company Act of 1940, as amended.
Risks Related to our Indebtedness
Our level of indebtedness may increase our business risks.
As of December 31, 2020, we had total outstanding indebtedness of $1.2 billion. We may incur additional indebtedness in the future for various purposes. The amount of our indebtedness could have material adverse consequences for us, including:
•hindering our ability to adjust to changing market, industry or economic conditions;
•limiting our ability to access the capital markets to raise additional equity or debt on favorable terms or at all, whether to refinance maturing debt, to fund acquisitions, to fund dividends and other distributions or for other corporate purposes;
•limiting the amount of free cash flow available for future operations, acquisitions, dividends and other distributions, stock repurchases or other uses; and
•making us more vulnerable to economic or industry downturns, including interest rate increases.
In most instances, we acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge the underlying property as security for that debt to obtain funds to acquire additional real properties or for other corporate purposes. We may also borrow if we need funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, especially if we acquire the property when it is being developed or under construction, we may use additional borrowings to fund the shortfall. Using debt increases the risk of loss because defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price per shareequal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In this event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. In those cases, we will be responsible to the lender for repaying the debt if it is not paid by the entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
Our Credit Facility contains various covenants that may restrict our ability to take certain actions and may restrict our ability to use our cash and make investments.
Our Credit Facility contains various covenants that may restrict our ability to take certain actions for example, may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares issuedof our common stock) on our common stock until no earlier than the fiscal quarter ending June 30, 2021. We may, however, pay dividends on the Series A Preferred Stock, or any other preferred stock we may issue and any cash distributions necessary to maintain our status as a REIT. The restrictions on paying cash distributions will no longer apply starting in the quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter, we have a combination of cash, cash equivalents and availability for future borrowings under the DRIPRevolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. There can be no assurance as to if, or when, we will be able to satisfy these conditions. Moreover, we will only be permitted to pay cash distributions if the repurchase priceaggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after we make the election and begin paying distributions.
Covenants in the Credit Facility which restrict payment of distributions to a threshold based on Modified FFO, require maintenance of a minimum ratio of consolidated total indebtedness to consolidated total asset value and a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges did not apply for the fiscal quarter ended June 30, 2020. In addition, the lenders waived any defaults or event of defaults under those covenants that may have occurred during the fiscal quarter ended June 30, 2020 as well as any additional default or event of default resulting therefrom prior to August 10, 2020. There can be no assurance our shareslenders will consent to any amendments or waivers that may become necessary to comply with our Credit Facility in the future.
Covenants in our Credit Facility also require us to maintain a combination of cash, cash equivalents and availability for future borrowings under our share repurchase programRevolving Credit Facility totaling at least $50.0 million. As of December 31, 2020, we had $72.4 million of cash and cash equivalents, and $48.3 million was available for future borrowings under our Revolving Credit Facility. Following the amendment in August 2020, our Credit Facility also restricts our sources of liquidity. Pursuant to an amendment to our Credit Facility in August 2020, certain restrictions and conditions will no longer apply starting in a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is based on our Estimated Per-Share NAV, which is based upon subjective judgments, assumptions and opinions aboutless than 62.5% (the “Commencement Quarter”). Until the first day of the Commencement Quarter, we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Even if we are ultimately able to reborrow amounts generated by capital events that are required to be used to prepay the Revolving Credit Facility, there still can be no assurance as to the additional amount we will be able to generate from capital events and may not reflect the amount thattherefore availability under our stockholders might receive for their shares in a market transaction.
We intendCredit Facility giving effect to publish an updated Estimated Per-Share NAVany required prepayment. Unencumbered real estate investments, at cost as of December 31, 2017 shortly following the filing of this Annual Report on Form 10-K. Our Advisor has engaged an independent valuer to perform appraisals of2020 was $231.5 million, although our recently completed development property in Jupiter, Florida - representing $53.2 million in real estate assets in accordance with valuation guidelines established byinvestments, at cost is currently subject to a PSA. There can be no assurance as to the Board. As with any methodology used to estimate value, the valuation methodologies that will be used by any independent valuer to value our properties involve subjective judgments concerning factors such as comparable sales, rental and operating expense data, capitalization or discount rate, and projectionsamount of future rent and expenses.
Under our valuation guidelines, our independent valuer estimates the market value of our principal real estate and real estate-related assets, and our Advisor determines the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuer. Our Advisor reviews the valuation provided by the independent valuer for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer's conclusions. The Board reviews the appraisals and valuations and makes a final determination of the Estimated Per-Share NAV. Although the valuations of our real estate assets by the independent valuer are reviewed by our Advisor and approved by the Board, neither our Advisor nor the Board will independently verify the appraised value of our properties and valuations do not necessarily represent the price at whichliquidity we would be able to sell an asset. Asgenerate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility or pledging them as security for a result, the appraised valuenew mortgage loan. Two of a particularour assets, our recently completed development property may be greater or less than its potential realizable value, which would causein Jupiter, Florida and our Estimated Per-Share NAVskilled nursing facility in Wellington, Florida are under PSA to be greatersold, for an aggregate contract purchase price of $98.0 million, but these dispositions are subject to conditions. Due to the persistence of the COVID-19 pandemic and other factors beyond our control, there can be no assurance that we will be able to meet these conditions and that these dispositions will be completed on their contemplated terms, or less thanat all. With respect to the potential realizable value
our skilled nursing facility in Wellington, Florida to be sold for $33.0 million, closing may not occur unless, among other conditions, certain occupancy and revenue levels have been maintained at each property for a period of time. In addition, any capital-raising transaction, to the extent we are able to access the debt or equity capital markets (which is not assured) could be on terms that would not be favorable to us or our stockholders, including high interest rates, in the case of debt, and substantial dilution, in the case of issuing equity or convertible debt securities. This includes any capital we may raise under our “Preferred Stock Equity Line” with B. Riley Principal Capital, LLC (“B. Riley”), pursuant to which we have right from time to time to sell up to an aggregate $15 million of shares of our common stock.
Because they are based on Estimated Per-Share NAV, the price at which our shares may be sold under the DRIP and the price at which our shares may be repurchased by us pursuantSeries A Preferred Stock to the SRP may not reflect the price that our stockholders would receive for their shares in a market transaction, the proceeds that would be received upon our liquidation or the price that a third party would pay to acquire us.
Because Estimated Per-Share NAV is only determined annually, it may differ significantly from our actual per-share net asset value at any given time.
Valuations of Estimated Per-Share NAV are made at least once annually. In connection with any valuation, the Board estimate of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with the annual valuation.
Because valuations only occur annually, Estimated Per-Share NAV cannot take into account any material events that occur after the Estimated Per-Share NAV has been calculated for that year. Material events could include the appraised value of our properties substantially changing actual property operating results differing from what we originally budgeted or distributions to shareholders exceeding cash flow generated by us. Any such material event could cause a change in the Estimated Per-Share NAV that would not be reflectedB. Riley until the next valuation. Also, to the extent we pay distributions in excess of our cash flows provided by operations, this could result in a decrease to our Estimated Per-Share NAV. As a result, the Estimated Per-Share NAV is not guaranteed to accurately reflect the value of the shares at any given time, and our Estimated Per-Share NAV may differ significantly from our actual per-share net asset value at any given time.
Our pending sale of eight skilled nursing facility assets may not be completed on its current terms or at all, which may have a material adverse effect on our business, financial condition and results of operation.
In January 2017, we entered into a purchase and sale agreement to sell the Missouri SNF Properties to affiliates of the tenant-operators of the facilities for $42 million. Pursuant to their rights under the initial purchase and sale agreement, the contract purchasers had seven options to adjourn the closing date for the sale through December 31, 2018, with each adjournment conditioned2023, on the purchasers’ deposit of additional earnest money.
On November 13, 2017, we received copies of notices, each dated November 1, 2017, from the Missouri Department of Healthterms and Senior Services, Division of Regulation and Licensure, Section for Long-Term Care Regulation ("DHSS"), addressed to two of the eight tenants of the Missouri SNF Properties, stating that such tenants’ licenses to operate the facilities will be null and void on December 1, 2017. The notices provided the tenants the right to file an administrative appeal of the license revocations within fifteen days after the date of the mailing of the notices.
On November 15, 2017, the tenants filed with the Administrative Hearing Commission of the State of Missouri (the “Commission”) a complaint appealing the decision by the DHSS to revoke the tenants’ operating licenses and a motion to stay the revocation. On November 22, 2017, the subject tenants and the DHSS entered into an Agreement for Entry of Stay Order With Conditions and the Commission granted the motion for stay subject to the conditions set forth in the aforementioned Agreement, pending an evidentiary hearingpurchase agreement for the Preferred Stock Equity Line. Our ability to require purchaser under the Preferred Stock Equity Line to purchase shares of our Series A Preferred Stock and obtain funds when requested is limited by the terms and conditions of the preferred stock purchase agreement. There is no guarantee that we will receive all or formal settlement. any portion of the $15.0 million that is available to us under the Preferred Stock Equity Line.
On November 13, 2017, we received copiesThe availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of notices, each dated November 1, 2017,the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the decreases income from our operators that have resulted from the DHSS addressedeffects of the COVID-19 pandemic and may persist for some time. Our ability to increase the amount of cash we generate from property operations depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties on favorable terms and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on favorable terms and conditions, if at all, particularly if we do not have a source of capital available that will allow us to do so. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective. Because shares of common stock are only offered and sold pursuant to the sixour distribution reinvestment plan (“DRIP”) in connection with the reinvestment of the eight tenants of the Missouri SNF Properties, stating that the applications for regular license for the applicable Missouri SNF Properties were denied and, further, that such tenants would no longer be authorized to operate the applicable Missouri SNF Properties upon expiration of the then current operating permits on November 30, 2017. The applicable tenants subsequently filed a petition for injunctive reliefdistributions paid in cash, participants in the Circuit CourtDRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in stock instead of Cole County, Missouri (the “Circuit Court”). On November 27, 2017,cash, so this source of capital will not be available unless and until we are able to resume paying cash distributions on our common stock. There is also no assurance that participation in the subject tenantsDRIP will be maintained at current or higher levels if the DRIP becomes a source of capital in the future.
Other financing arrangements have restrictive covenants.
Other financing arrangements contain provisions that affect or restrict our policies regarding dividends and other distributions and our operations, require us to satisfy financial coverage ratios, and may restrict our ability to, among other things, incur additional indebtedness, make certain investments, replace our Advisor, discontinue insurance coverage, merge with another company, and create, incur or assume liens. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Changes in the DHSS entered into an Agreement for Issuance of Regular Licenses With Conditions. On November 28, 2017, the Circuit Court granted the subject tenants’ petition, enjoined the DHSS from denying the tenants’ applications for regular licensesdebt markets could have a material adverse impact on our earnings and required the DHSS to issue regular licenses with expiration dates no earlier than May 28, 2018, pending a hearing on the merits before the Commission or formal settlement, andfinancial condition.
The commercial real estate debt markets are subject to volatility, resulting in, from time to time, the aforementioned Agreement.
In December 2017, we entered intotightening of underwriting standards by lenders and credit rating agencies and reductions in the availability of financing. For example, the COVID-19 pandemic has adversely affected credit and capital market conditions resulting in volatility and a second amendmenttightening of credit standards from time to the Missouri SNF PSA (the "Second Amendment to the Missouri SNF PSA"), in which we agreed to reduce the contract purchase price from $42.0 million to $40.0 million and finance $7.5 million of the reduced contract purchase price. Pursuant to the Second Amendment to the Missouri SNF PSA, the closing date was amended to occur on or before the sixtieth day following the date on which all of the tenants have received a permanent license to operate the Missouri SNF Properties, but in no event later than September 30, 2018. The tenants have not yet received permanent licenses to operate. The tenants’ failure to obtain permanent licenses could adversely affect the purchaser’stime. This may impact our ability to obtain financingaccess capital on favorable terms, in a timely manner, or at all, which could make obtaining funding for our capital needs more challenging or expensive.
If our overall cost of borrowings increases, either due to consummateincreases in the index rates or due to increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns. Disruption or tightening of credit standards in the debt markets, may negatively impact our ability to borrow monies to finance the purchase of, or other activities related to, our real estate assets may be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, our ability to purchase properties and meet other capital requirements may be limited, and the Properties. Ifreturn on the purchasers failproperties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to close byrefinance maturing indebtedness.
Furthermore, the September 30, 2018 outside closing date, our sole remedy understate of the purchase and sale agreement will be to terminatedebt markets could have an impact on the purchase and sale agreement and receive the earnest money in theoverall amount of $1.4 million. Further, ifcapital being invested in real estate, which may result in price or value decreases of real estate assets and could negatively impact the tenants failvalue of our assets.
Increases in mortgage rates may make it difficult for us to obtain permanent licenses,finance or refinance indebtedness secured by our properties.
We have incurred, and may continue to incur, mortgage debt. We run the risk of being unable to refinance our mortgage loans when they come due or we otherwise desire to do so on favorable terms, or at all. If interest rates are higher when the indebtedness is refinanced, we may not be able to fulfill their rentalrefinance indebtedness secured by the properties and we may be required to obtain equity to repay the mortgage or to increase the collateral for the loan.
Increasing interest rates could increase the amount of our debt payments and we may be adversely affected by uncertainty surrounding the LIBOR.
We have incurred, and may continue to incur, variable-rate debt. Increases in interest rates on our variable-rate debt would increase our interest cost.
If we need to repay existing debt during periods of rising interest rates, we may need to sell one or more of our investments in properties even though we would not otherwise choose to do so.
We have mortgages, credit facilities and derivative agreements that have terms that are based on the London Interbank Offered Rate (“LIBOR”). As of December 31, 2020, we have nine designated interest rate swaps with a notional amount of $578.5 million, which effectively fixes a portion of our variable-rate debt. In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in derivatives and other financial contracts. On March 5, 2021, the Financial Conduct Authority confirmed a partial extension of this deadline, announcing that it will cease the publication of the one-week and two-month USD LIBOR settings immediately following December 31, 2021. The remaining USD LIBOR settings will continue to be published through June 30, 2023. We are not able to predict when there will be sufficient liquidity in the SOFR market. We are monitoring and evaluating the risks related to changes in LIBOR availability, which include potential changes in interest paid on debt and amounts received and paid on interest rate swaps. In addition, the value of debt or derivative instruments tied to LIBOR will also be impacted as LIBOR is limited and discontinued and contracts must be transitioned to a new alternative rate. In some instances, transitioning to an alternative rate may require negotiation with lenders and other counterparties and could present challenges. Certain of our agreements that have terms that are based on LIBOR have alternative rates already contained in the agreements while others do not. We anticipate that we will either utilize the alternative rates contained in the agreements or negotiate a replacement reference rate for LIBOR with the lenders and derivative counterparties. The consequences of these developments cannot be entirely predicted and could include an increase in the cost of our variable rate debt.
The consequences of these developments cannot be entirely predicted and could include an increase in the cost of our variable rate indebtedness. While we expect LIBOR to be available in substantially its current form until at least the end of 2021, it is possible that LIBOR will become unavailable prior to that time. This could occur, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate would be accelerated or magnified. Any of these events, as well as the other uncertainty surrounding the transition to LIBOR, could adversely affect us.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We have and may continue to enter into hedging transactions to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or own real estate assets. To the extent that we use derivative financial instruments in connection with these risks, we will be exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, their leases with us. the derivative contract.
Risks Related to Conflicts of Interest
Our Advisor faces conflicts of interest relating to the purchase and leasing of properties and these conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We rely on our Advisor and its executive officers and other key real estate professionals at our Advisor and our Property Manager to identify suitable investment opportunities for us. Several of the other key real estate professionals of our Advisorthese individuals are also theexecutive officers or key real estate professionals at AR Global and its other public programs.entities advised by affiliates of AR Global. Many investment opportunities that are suitable for us may also be suitable for other programs sponsoredentities advised by affiliates of AR Global. We do not have any agreements with any of these entities that govern the allocation of investment opportunities. Thus, the executive officers and real estate professionals at our Advisor could direct attractive investment opportunities to other entities advised by affiliates of AR Global.
We and other entities advised by affiliates of AR Global also rely on these executive officers and other key real estate professionals to supervise the property management and leasing of properties. These individuals, as well as AR Global, as an entity are not prohibited from engaging, directly or indirectly, byin any business or from possessing interests in other businesses and ventures, including businesses and ventures involved in the parentacquisition, development, ownership, leasing or sale of our sponsor.real estate investments.
In addition, we may acquire properties in geographic areas where other entities advised by affiliates of AR Global-sponsoredGlobal own properties. Also,properties, and if we may acquire properties from, or sell properties to, other entities advised by affiliates of AR Global-sponsored programs.Global. If one of the other entities advised by affiliates of AR Global-sponsored programsGlobal attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant.
Our Advisor faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense.
We may enter into joint ventures with other entities advised by affiliates of AR Global-sponsored programsGlobal for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which entities advised by affiliates of AR Global-sponsored programGlobal should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Due to the role of our Advisor and its affiliates, agreements and transactions between the co-venturers with respect to any joint venture will not have the benefit of arm's-lengtharm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturerco‑venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture.
Our Advisor, and AR Global and their officers and employees and certain of our executive officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, and SponsorAR Global and their officers and employees and certain of our executive officers and other key personnel and their respective affiliates are key personnel, general partners, sponsors, managers, owners and advisors of other real estate investment programs, including entities advised by affiliates of AR Global-sponsored REITs,Global, some of which have investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Some REITs will have concurrent or overlapping operational, disposition and liquidation phases as us, which may cause conflicts of interest to arise with respect to, among other things, locating and acquiring properties, entering into leases and disposing of properties. Because these personsentities and individuals have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
All of our executive officers, some of our directors and the key real estate and other professionals assembled by our Advisor and our Property Manager face conflicts of interest related to their positions or interests in affiliates ofentities related to AR Global, which could hinder our ability to implement our business strategy.
All of our executive officers, some of our directors and the key real estate and other professionals assembled by our Advisor and Property Manager are also executive officers, directors, managers, key professionals or holders of a direct or indirect interests in our Advisor, and our Property Manager or other AR Global-affiliated entities. Through AR Global’s affiliates, some of these persons work on behalf of programs sponsored directly or indirectlyentities advised by the parentaffiliates of AR Global. In addition, all of our Sponsor.executive officers and some of our directors serve in similar capacities for other entities advised by affiliates of our Advisor. As a result, they have loyaltiesduties to each of these entities, which loyaltiesduties could conflict with the fiduciary duties they owe to us and could result in action or inaction detrimental to our business. Conflicts with our business and interests are most likely to arise from (a) allocation of investments and management time and services between us and the other entities,entities; (b) compensation to our Advisor or Property Manager (c) our purchase of properties from, or sale of properties to, entities sponsoredadvised by affiliates of our Advisor, (c)Advisor; and (d) investments with entities sponsoredadvised by affiliates of our Advisor, (d) compensationAdvisor. Conflicts of interest may hinder our ability to implement our Advisorbusiness strategy, and, (e) our relationship with our Advisor and our Property Manager. Ifif we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.strategy.
TheOur Advisor faces conflicts of interest inherent inrelating to the incentive fee structure of the compensation it may receive.
Under our arrangementsadvisory agreement, the Advisor is entitled to substantial minimum compensation regardless of performance as well as incentive compensation. The variable base management fee payable to the Advisor under the advisory agreement increases proportionately with the cumulative net proceeds of any equity (including convertible equity and certain convertible debt but excluding proceeds from the DRIP) raised by us. In addition, the limited partnership agreement of our OP requires it to pay a subordinated incentive listing distribution to the “Special Limited Partner,” an affiliate of our Advisor, and its affiliates could result in actions that are not necessarily inconnection with a listing or other liquidity event, such as the long-term best interestssale of all or substantially all of our stockholders, including required paymentsassets, or if we terminate the advisory agreement, even for poor performance by our Advisor.
Under our advisory agreement and the limited partnership agreement of our operating partnership, Healthcare Trust Operating Partnership, LP (the "OP"), (the "Partnership Agreement"), the“cause.” The Special Limited Partner and its affiliates areis also entitled to fees, distributions and other amountsparticipate in the distribution of net sales proceeds. These arrangements, coupled with the fact that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests. However, because ourthe Advisor does not maintain a significant equity interest in us, and is entitled to receive substantial minimum compensation regardless of performance, its interests may not be wholly aligned with those of our stockholders. Inresult in the Advisor taking actions or recommending investments that regard, our Advisor could be motivated to recommendare riskier or more speculative investmentsthan an advisor with a more significant investment in order for us to generate the specified levels of performancemight take or sales proceeds that would entitle it or the Special Limited Partner to fees.recommend. In addition, these fees reduce the advisory agreement providescash available for payment of incentive compensation based on exceeding certain Core Earnings (as defined in the advisory agreement) thresholds in any period. Losses in one period do not affect these incentive compensation thresholds in subsequent periods. As a result, our Advisor could be motivated to recommend riskier or more speculative investments in order to increase Core Earnings and thus its fees. In addition, the Special Limited Partner and its affiliates’ entitlement to fees and distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor and its affiliates, including the Special Limited Partner, to compensation relating to those sales, even if continued ownership of those investments might be in our best long-term interest. In addition, our advisory agreement, property management agreement and other agreements with our Advisor and its affiliates include covenants and conditions that are subject to interpretation and could result in disagreements.
Moreover, the Partnership Agreement requires our OP to pay a performance-based termination distribution to the Special Limited Partner or its assignees if we terminate the advisory agreement, even for poor performance by our Advisor. This distribution is also payable in connection with the listing of our shares for trading on a national securities exchange or and in respect of the Special Limited Partners participation in net sales proceeds. However, the Special Limited Partner is not entitled to receive any part of this distribution that has already been paid under other circumstances. To avoid paying this distribution, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. Similarly, because this distribution would still be due even if we terminate the advisory agreement for poor performance, our Advisor may be incentivized to focus its resources and attention on other matters or otherwise fail to use its best efforts on our behalf.
In addition, the requirement to pay the distribution to the Special Limited Partner or its assignees at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the distribution to the Special Limited Partner or its assignees. Moreover, our Advisor will have the right to terminate the advisory agreement upon a change of control of us and thereby trigger the payment of the termination distribution, which could have the effect of delaying, deferring or preventing the change of control. In addition, our Advisor will be entitled to an annual subordinated performance fee such that for any year in which investors receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on the capital contributed by investors, our Advisor is entitled to 15.0% of the amount in excess of such 6.0% per annum return, provided that the amount paid to our Advisor does not exceed 10.0% of the aggregate return for such year, and that the amount, while accruing annually in each year the 6.0% return is attained, will not actually be paid to our Advisor unless investors receive a return of capital contributions, which could encourage our Advisor to recommend riskier or more speculative investments.other
corporate purposes.
Risks Related to our Corporate Structure
Our common stock is not traded on a national securities exchange, and our SRP, which provides for repurchases only in the event of death or disability of a stockholder, is suspended. Stockholders may have to hold their shares for an indefinite period of time.
Our common stock is not listed on a national securities exchange and there is otherwise no active trading market for the shares and our SRP is suspended. Even if not suspended, our SRP includes numerous restrictions that limit a stockholder’s ability to sell shares of common stock to us, including limiting repurchases only to stockholders that have died or become disabled, limiting the total value of repurchases pursuant to our SRP to the amount of proceeds received from issuances of common stock pursuant to the DRIP and limiting repurchases in any fiscal semester to 2.5% of the average number of shares outstanding during the previous fiscal year. These limits are subject to the authority of the board to identify another source of funds for repurchases under the SRP. The board may also reject any request for repurchase of shares at its discretion or amend, suspend or terminate our SRP upon notice in its discretion. Shares that are repurchased will be repurchased at a price equal to the applicable Estimated Per-Share NAV and may be at a substantial discount to the price the stockholder paid for the shares. We are also restricted from making any share repurchases until the Commencement Quarter and, after that, to the extent they would be aggregated with dividends and other distributions to our stockholders under the covenant in our Credit Facility.
The Estimated Per-Share NAV of our common stock is based upon subjective judgments, assumptions and opinions about future events, and may not reflect the amount that our stockholders might receive for their shares.
We intend to publish an updated Estimated Per-Share NAV as of December 31, 2020 shortly after filing this Annual Report on Form 10-K. Our Advisor has engaged an independent valuer to perform appraisals of our real estate assets in accordance with valuation guidelines established by the board. As with any methodology used to estimate value, the valuation methodologies that will be used by any independent valuer to value our properties involve subjective judgments concerning factors such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses.
Under our valuation guidelines, our independent valuer estimates the market value of our principal real estate and real estate-related assets, and our Advisor makes a recommendation as to the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuer. Our Advisor reviews the valuation provided by the independent valuer for consistency with our valuation guidelines and the reasonableness of the independent valuer’s conclusions. The independent directors of the board oversee and review the appraisals and valuations and make a final determination of the Estimated Per-Share NAV. The independent directors of the board rely on our Advisor’s input, including its view of the estimate and the appraisals performed by the independent valuer, but the independent directors of the board may, in their discretion, consider other factors. Although the valuations of our real estate assets by the independent valuer are reviewed by our Advisor and approved by the independent directors of the board, neither our Advisor nor the independent directors of the board will independently verify the appraised value of our properties and valuations do not necessarily represent the price at which we would be able to sell any asset. As a result, the appraised value of a particular property may be greater or less than its potential realizable value, which would cause our estimated per-share NAV to be greater or less than the potential realizable value of our assets.
The price at which shares of our common stock may be sold under the DRIP and the price at which shares of our common stock may be repurchased by us pursuant to the SRP are based on Estimated Per-Share NAV and may not reflect the price that our stockholders would receive for their shares in a market transaction, the proceeds that would be received upon our liquidation or the price that a third-party would pay to acquire us.
Because Estimated Per-Share NAV is only determined annually, it may differ significantly from our actual per‑share net asset value at any given time.
Our board estimates the per-share net asset value of our common stock only on an annual basis. In connection with any valuation, the board estimate of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties. Because the process of making this estimate is conducted annually, this process may not account for material events that occur after the estimate has been completed for that year. Material events could include the appraised value of our properties substantially changing actual property operating results differing from what we originally budgeted or dividends and other distributions to stockholders exceeding cash flow generated by us. Any such material event could cause a change in the Estimated Per-Share NAV that would not be reflected until the next valuation. Also, dividends and other distributions in excess of our cash flows provided by operations could decrease our Estimated Per-Share NAV. Estimated Per-Share NAV will not be adjusted for stock dividends paid or that may be paid in the future until the board determines a new Estimated Per-Share NAV. Dividends paid in the form of additional shares of common stock will, all things equal, cause the value of each share of common stock to decline because the number of shares outstanding will increase when dividends paid in stock are issued; however, each common stockholder will receive the same number of new shares, the total value of our common stockholders’ investment, all things equal, will not change assuming no sales or other transfers. As a result, the Estimated Per-Share NAV may not reflect the value of shares of our common stock at any given time, and our estimated per-share NAV may differ significantly from our actual per-share net asset value at any given time.
The trading price of our Series A Preferred Stock may fluctuate significantly.
The trading price of our Series A Preferred Stock may be volatile and subject to significant price and volume fluctuations in response to market and other factors, and is impacted by a number of factors, many of which are outside our control. Among the factors that could affect the trading price are:
•our financial condition and performance;
•our ability to grow through property acquisitions, the terms and pace of any acquisitions we may make and the availability and terms of financing for those acquisitions;
•the financial condition of our tenants, including tenant bankruptcies or defaults;
•actual or anticipated quarterly fluctuations in our operating results and financial condition;
•the amount and frequency of our payment of dividends and other distributions;
•additional sales of equity securities, including Series A Preferred Stock, common stock or any other equity interests, or the perception that additional sales may occur;
•the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, and fixed income debt securities;
•our reputation and the reputation of AR Global and its affiliates or other entities advised by AR Global and its affiliates;
•uncertainty and volatility in the equity and credit markets;
•fluctuations in interest rates and exchange rates;
•changes in revenue or earnings estimates, if any, or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;
•failure to meet analyst revenue or earnings estimates;
•strategic actions by us or our competitors, such as acquisitions or restructurings;
•the extent of investment in our Series A Preferred Stock by institutional investors;
•the extent of short-selling of our Series A Preferred Stock;
•general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies;
•failure to maintain our REIT status;
•changes in tax laws;
•domestic and international economic factors unrelated to our performance; and
•all other risk factors addressed elsewhere in this Annual Report on Form 10-K.
Moreover, although shares of Series A Preferred Stock are listed on The Nasdaq Global Market, there can be no assurance that the trading volume for shares will provide sufficient liquidity for holders to sell their shares at the time of their choosing or that the trading price for shares will equal or exceed the price paid for the shares. Because the shares of Series A Preferred Stock carry a fixed dividend rate, the trading price in the secondary market will be influenced by changes in interest rates and will tend to move inversely to changes in interest rates. In particular, an increase in market interest rates may result in higher yields on other financial instruments and may lead purchasers of shares of Series A Preferred Stock to demand a higher yield on their purchase price, which could adversely affect the market price of those shares.
The limit on the number of shares a person may own may discourage a takeoverthird-party from acquiring us in a manner that could otherwisemight result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted (prospectively or retroactively) by the Board,board, no person may own more than 9.8% in value of the aggregate of our outstanding shares of our capital stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our capital stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Our charter permitsThe terms of our Series A Preferred Stock, and the Board to authorize the issuanceterms of other preferred stock with terms thatwe may subordinate the rights of common stockholders orissue, may discourage a thirdthird- party from acquiring us in a manner that might result in a premium price to stockholders.
The change of control conversion and redemption features of the Series A Preferred Stock may make it more difficult for a party to acquire us or discourage a party from seeking to acquire us. Upon the occurrence of a change of control, holders of Series A Preferred Stock will, under certain circumstances, have the right to convert some of or all their shares of Series A Preferred Stock into shares of our stockholders.common stock (or equivalent value of alternative consideration) and under these circumstances we will also have a change of control redemption right to redeem shares of Series A Preferred Stock. Upon exercise of this conversion right, the holders will be limited to a maximum number of shares of our common stock pursuant to a predetermined ratio. These features of the Series A Preferred Stock may have the effect of discouraging a third-party from seeking to acquire us or of delaying, deferring or preventing a change of control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests. We may also issue other classes or series of preferred stock that could also have the same effect.
We may issue additional equity securities in the future.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter permitsauthorizes us to issue up to 350,000,000 shares of stock, consisting of 300,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2020, we had the Boardfollowing stock issued
and outstanding: (i) 93,775,746 shares of common stock; and (ii) 1,610,000 shares of Series A Preferred Stock. Subject to authorize the approval rights of holders of our Series A Preferred Stock regarding authorization or issuance of upequity securities ranking senior to 350.0 million sharesthe Series A Preferred Stock, the board, without approval of stock. In addition, the Board, without any action by our common stockholders, may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock, or the number of authorized shares of any class or series of stock that we have authority to issue. The Boardor may classify or reclassify any unissued common stock or preferred stockshares into other classes or series of stock without obtaining stockholder approval and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any suchthe stock. Thus,
All of our authorized but unissued shares of stock may be issued in the Board could authorizediscretion of the board. The issuance of preferredadditional shares of our common stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation overdilute the rightsinterests of the holders of our common stock, and any issuance of shares of preferred stock senior to our common stock, such as our Series A Preferred Stock, or any incurrence of additional indebtedness, could affect our ability to pay distributions on our common stock. The issuance of additional shares of preferred stock ranking equal or senior to our Series A Preferred Stock, including preferred stock convertible into shares of our common stock, could dilute the interests of the holders of common stock, Series A Preferred Stock and any issuance of shares of preferred stock senior to our Series A Preferred Stock or incurrence of additional indebtedness could affect our ability to pay dividends on, redeem or pay the liquidation preference on our Series A Preferred Stock. These issuances could also adversely affect our Estimated Per-Share NAV or the trading price of our Series A Preferred Stock.
We may issue shares in public or private offerings in the future, including shares of our common stock issued as awards to our officers, directors and other eligible persons, pursuant to the advisory agreement in payment of fees thereunder and pursuant to the DRIP. We may also issue OP Units to sellers of properties we acquire which, subject to satisfying certain requirements, would give the holder of OP Units the option to redeem OP Units for shares of our common stock or cash at our option. We also may issue securities that are convertible into shares of our common stock.
Because our decision to issue equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. The issuance of additional equity securities could adversely affect stockholders.
We have a classified board, which may discourage a third-party from acquiring us in a manner that might result in a premium price to our stockholders.
The board is divided into three classes of directors. At each annual meeting, directors of one class are elected to serve until the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify. The classification of our directors may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provideresult in a premium price for holders of our common stock.stockholders.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit the ability of stockholdersdiscourage a third-party from acquiring us in a manner that might result in a premium price to exit the investment.our stockholders.
Under Maryland law, "business combinations"“business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
•any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation'scorporation’s outstanding voting stock; or
•an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of, directly or indirectly, 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
•80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
•two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation'scorporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by
the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, the Boardboard has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor. As a result, our Advisor and any affiliate of our Advisor may be able to enter into business combinations with us that may not be in the best interests of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
We have a staggered board, whichOur bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may discourage a takeover that could otherwise result in a premium price tobe initiated by our stockholders.
In accordance withOur bylaws provide that, unless we consent to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Northern Division, is the sole and exclusive forum for (a) any derivative action or proceeding brought on our charter, the Boardbehalf, other than actions arising under federal securities laws; (b) any Internal Corporate Claim, as such term is divided into three staggered classes of directors. At each annual meeting, directors of one class elected to serve for a term of three years, until the annual meeting of stockholders helddefined in the third year following the yearMaryland General Corporation (the “MGCL”), or any successor provision thereof, including, without limitation, (i) any action asserting a claim of their election and until their successors are duly elected and qualify. The staggered termsbreach of any duty owed by any of our directors, may have the effect of delaying, deferringofficers or preventingother employees to us or to our stockholders or (ii) any action asserting a change in control ofclaim against us including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holdersany of our common stock.directors, officers or other employees arising pursuant to any provision of the MGCL, our charter or our bylaws; or (c) any other action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine. Our bylaws also provide that unless we consent in writing, none of the foregoing actions, claims or proceedings may be brought in any court sitting outside the State of Maryland and the federal district courts are, to the fullest extent permitted by law, the sole and exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable. Alternatively, if a court were to find these provisions of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving these matters in other jurisdictions.
Maryland law limits the ability of a third partythird-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeoverthird-party from acquiring us in a manner that could otherwisemight result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that holders of “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the stockholders by the affirmative vote of at least stockholders entitled to cast two-thirds of all the votes entitled to be cast on the matter. Sharesmatter, excluding all shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter.corporation. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares.
The control share acquisition statuteMaryland Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
We are an “emerging growth company” under the federal securities laws and are currently subject to reduced public company reporting requirements.
We are an “emerging growth company” under the federal securities laws and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We will remain an “emerging growth company” until December 31, 2018, the last day of the fiscal year in which the fifth anniversary of the commencement of our initial public offering will occur, or, if earlier, the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, (“PCAOB”) that require mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor must provide additional information about the audit and the issuer’s financial statements, (3) comply with new audit rules adopted by the PCAOB after April 5, 2012 (unless the SEC determines otherwise), (4) provide certain disclosures relating to executive compensation generally required for larger public companies or (5) hold stockholder advisory votes on executive compensation. We have generally taken advantage of these exemptions to the extent they are applicable to us.
Additionally, an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we have elected to “opt out” of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. Our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
If our stockholders do not agree with the decisions of the Board,board, our stockholders only have limited control over changes in our policies and operations and may not be able to change our policies and operations.
The Boardboard determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and dividends and other distributions. The Boardboard may amend or revise these and other policies without a vote of the stockholders except to the extent that the policies are set forth in our charter. Under Maryland General Corporation Law and our charter, our common stockholders have a right to vote only on the following:
•the election or removal of directors;
•amendment of our charter, except that the Boardboard may amend our charter without stockholder approval to (a) increase or decrease the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have the authority to issue, (b) effect certain reverse stock splits, and (c) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock;
•our liquidation or dissolution;
•certain reorganizations of our company, as provided in our charter;company; and
•certain mergers, consolidations or sales or other dispositions of all or substantially all our assets as provided in our charter.
All other matters are subject to the discretion of the Board.board. Holders of our Series A Preferred Stock have extremely limited voting rights.
The Boardstockholder rights plan adopted by our board of directors may changediscourage a third-party from acquiring us in a manner that might result in a premium price to our investment policies withoutstockholders.
In May 2020, our board of directors adopted a stockholder approval, which could alterrights plan that will expire in May 2023 or sooner under certain circumstances. In connection with the naturerights plan, in December 2020, we paid a dividend of one common share purchase right for each share of our common stock outstanding as authorized by our board in its discretion. If a stockholder's investment.
The Boardperson or entity, together with its affiliates and associates, acquires beneficial ownership of 2.0% or more of our then outstanding common stock, subject to certain exceptions, each right would entitle its holder (other than the acquirer, its affiliates and associates) to purchase additional shares of our common stock at a substantial discount to the then current per share estimated net asset value. In addition, under certain circumstances, we may change our investment policies over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies,exchange the methods for their implementation, and our other objectives, policies and procedures may be alteredrights (other than rights beneficially owned by the Boardacquirer, its affiliates and associates), in whole or in part, for shares of common stock on a one-for-one basis. The stockholder rights plan could make it more difficult for a third-party to acquire the Company or a large block of our common stock without the approval of our stockholders. Asboard or directors, which may discourage a result, the nature of a stockholder's investment could change without his or her consent.
Stockholders will suffer dilution if we issue additional shares, which could adversely affect the value of our shares.
Our existing stockholders do not have preemptive rights to any shares issued bythird-party from acquiring us in the future. Our charter currently authorizes us to issue 350.0 million shares of stock, of which 300.0 million shares are classified as common stock and 50.0 million shares are classified as preferred stock. The Board may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Stockholders will suffer dilution (both economic and percentage interest) of their equity investment in us, (a) from the sale of additional shares in the future, including those issued pursuant to the DRIP; (b) if we sell securitiesa manner that are convertible into shares of our common stock; (c) if we issue shares to our Advisor as payment of fees under our advisory agreement and other agreements; or (d) if we issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our OP. In addition, the Partnership Agreement contains provisions that would allow, under certain circumstances, other entities, including other AR Global-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of our OP. Because the limited partnership interests may, in the discretion of the Board, be exchanged for shares of our common stock, any merger, exchange or conversion between our OP and another entity ultimately couldmight result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.
Payment of feespremium price to our Advisor and its affiliates reduces cash available for investment and distributions to stockholders.
Our Advisor and its affiliates perform various services for us and are paid fees for these services which are substantial. Payment of these fees reduces the amount of cash available for investment in properties or distribution to stockholders.
We depend on our OP and its subsidiaries for cash flow and we are structurally subordinated in right of payment to the obligations of our OP and its subsidiaries, which could adversely affect, among other things, our ability to make distributions to stockholders.subsidiaries.
Our only significant assets are and will be the general and limited partnership interests in our OP. We conduct, and intend to conduct,continue conducting, all of our business operations through our OP. Accordingly, our only source of cash to pay our obligations will beOP, and, accordingly, we rely on distributions from our OP and its subsidiaries of their net earnings andto provide cash flows.to pay our obligations. There is no assurance that our opOP or its subsidiaries will be able to, or be permitted to, makepay distributions to us that will enable us to makepay dividends and other distributions to our stockholders from cash flows from operations.and meet our other obligations. Each of our op’sOP’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from suchthese entities. In addition, stockholder'sany claims we may have will be structurally subordinated to all existing and future liabilities and obligations of our OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our OP and its subsidiaries will be ableavailable to satisfy stockholders'the claims of our creditors or to pay dividends and other distributions to our stockholders only after all the liabilities and obligations of us and our OP and its subsidiaries have been paid in full.
We indemnify our officers, directors, our Advisor and its affiliates against claims or liability they may become subject to due to their service to us, and our rights and the rights of our stockholders to recover claims against our officers, directors, our Advisor and its affiliates are limited.
General Risks RelatedMaryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to Investmentsbe in Real Estate
Our operating resultsthe corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be affected by economicliable to us or our stockholders for monetary damages and regulatory changes that have an adverse impact on the real estate marketpermits us to indemnify our directors and officersfrom liability and advance certain expenses to them in general,connection with claims or liability they may become subject to due to their service to us, and we cannot assureare not restricted from indemnifying our stockholders that we will be profitableAdvisor or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws;
periods of high interest rates and tight money supply; and
changes in tenants' ability to pay their rental obligations due to unfavorable market conditions affecting business operations.
These and other risks may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
Our property portfolio has a high concentration of properties located in four states. Our properties may be adversely affected by economic cycles and risks inherent to those states.
The following four states represented 10% or more of our consolidated annualized rental incomeits affiliates on a straight-line basis for the fiscal year ended December 31, 2017:
|
| | |
State | | Percentage of Straight-Line Rental Income |
Florida | | 17.5% |
Georgia | | 10.7% |
Michigan | | 11.6% |
Pennsylvania | | 10.8% |
Any adverse situation that disproportionately affects the states listed above maysimilar basis. We have a magnified adverse effect onentered into indemnification agreements consistent with Maryland law and our portfolio. Real estate markets are subject to economic downturns, as they have been in the past,charter with our directors and we cannot predict how economic conditions will impact this market in both the shortofficers, certain former directors and long term. Declines in the economy or a decline in the real estate market in these states could hurtofficers, our financial performanceAdvisor and the value of our properties. Factors that may negatively affect economic conditions in these states include:
business layoffs or downsizing;
industry slowdowns;
relocations of businesses;
climate change;
changing demographics;
increased telecommutingAR Global. We and use of alternative work places;
infrastructure quality;
any oversupply of, or reduced demand for, real estate;
concessions or reduced rental rates under new leases for properties where tenants defaulted;
increased insurance premiums;
state budgets and payment to providers under Medicaid or other state healthcare programs; and
changes in reimbursement for healthcare services from commercial insurers.
If a tenant declares bankruptcy, we may be unable to collect balances due under the relevant lease, which could adversely affect our financial condition and ability to make distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments, which could adversely affect our financial condition and ability to pay distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.
If a sale-leaseback transaction is re-characterized in a tenant's bankruptcy proceeding,have more limited rights against our financial conditiondirectors, officers, employees and ability to make distributions toagents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce the recovery of our stockholders could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
If we enter into sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a "true lease" for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, the IRS may challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or "income tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year.
Properties that have vacancies for a significant period of time could be difficult to sell.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, properties' market values depend principally upon the value of the cash flow generated by the properties. Prolonged vacancies reduce this cash flow which would likely, therefore, reduce the value of the affected property.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of the applicable property.
The seller of a property often sells such property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of rental income from that property if a situation or loss occurs after the fact for which we have limited or no remedy.
We may be unable to secure funds for future tenant improvements or capital needs.
To attract new replacement tenants, or in some cases secure renewal of a lease, we may expend substantial funds for tenant improvements and refurbishments. In addition, we are typically responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops, even if our leases with tenants may require tenants to pay routine property maintenance costs. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, we may not be able to lease or re-lease space on attractive terms, if at all.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets.
Some of our leases may not contain rental increases over time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property or the value estimated from time to time as part of the NAV process.
We have acquired or financed, and may continue to acquire or finance, properties with lock-out provisions which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions, such as the provisions contained in certain mortgage loans we have entered into, could materially restrict us from selling or otherwise disposing of or refinancing properties, including by requiring the payment of a yield maintenance premium in connection with the required prepayment of principal upon a sale or disposition. Lock-out provisions may also prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could also impair our ability to take other actions during the lock-out period that may otherwise be in the best interests of our stockholders. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control. Payment of yield maintenance premiums in connection with dispositions or refinancings could adversely affect our results of operations and cash available for distributions.
Rising expenses could reduce cash flow.
Any properties that we own or acquire are or will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. We may also experience increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. Leases may not be negotiated on a triple-net basis or on a basis requiring the tenants to pay all or some of such expenses, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs.
Damage from catastrophic weather and other natural events and climate change could result in losses to us.
Certain of our properties are located in areas that may experience catastrophic weather and other natural events from time to time, including hurricanes or other severe weather, flooding fires, snow or ice storms, windstorms or, earthquakes. These adverse weather and natural events could cause substantial damages or losses to our properties which could exceed our insurance coverage. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected property, as well as anticipated future revenue from that property. We could also continue to be obligated to repay any mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect our business and our financial condition and results of operations.
To the extent that significant changes in the climate occur, we may experience extreme weather and changes in precipitation and temperature and rising sea levels, all of which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.
In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties or to protect them from the consequence of climate change.
We may suffer uninsured losses relating to real property or have to pay expensive premiums for insurance coverage.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insurerecovery against liability claims and provide for the costs of defense. Similarly, we may not have adequate coverage against the risk of direct physical damage or to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property. Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism,
earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The Terrorism Risk Insurance Act of 2002 (the “TRIA”), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event that the TRIA is not renewed or replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate and our business.
We may acquire real estate assets located in areas throughout the United States, Canada and Mexico in major metropolitan areas as well as densely populated sub-markets that are susceptible to terrorist attack. In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business. More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide financial markets and economy.
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
From time to time our property taxes increase as property values or assessment rates change or for other reasons. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that leases will be negotiated on a basis that passes such taxes on to the tenant.
Properties may be subject to restrictions on their use that affect our ability to operate a property, which may adversely affect our operating costs.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions ("CC&Rs") restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We have acquired and developed, and may in the future acquire and develop, properties upon which we will construct improvements. In connection with our development activities, we are subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups and our builder or partner's ability to build in conformity with plans, specifications, budgeted costs, and timetables. In connection with our acquisition of a property in Jupiter, Florida, we have been financing the development of a senior housing and skilled nursing facility and have invested approximately $72.0 million in connection with the development of this property (which is in addition to the amounts invested to purchase the property) as of December 31, 2017 in accordance with our obligations under our arrangements with Palm Health Partners, LLC ("Palm") the developer of the facility pursuant to a Development Agreement between one of our subsidiaries and Palm. Completion of this development has been delayed at least 12 months beyond our scheduled completion date. To the extent we fund additional monies for the completion of the development, Palm is responsible for reimbursing us for any amounts so funded. Entities related to Palm are, however, in default to us under leases and there can be no assurance that Palm will so reimburse us for these amounts (See Risk Factor Our properties and tenants may be unable to compete successfully.below).Palm is responsible for completing the development and obtaining a final certificate of occupancy for the facility (the "CO"). Until the CO is obtained we will not receive income from the property. There is no assurance as to when and if Palm will comply with its obligations or timely obtain the CO. If a builder or development partner fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance, but there can be no assurance any legal action would be successful.
Performance also may be affected or delayed by conditions beyond the entity’s control. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
We may invest in unimproved real property. For purposes of this paragraph, "unimproved real property" does not include properties acquired for the purpose of producing rental or other operating income, properties under development or construction, and properties under contract for development or in planning for development within one year. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. If we invest in unimproved property other than property we intend to develop, a stockholder's investment in our shares will be subject to the risks associated with investments in unimproved real property.
We compete with third parties in acquiring properties and other investments and attracting credit worthy tenants.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them.
We also compete with other comparable properties for tenants, which impacts our ability to rent space and the amount of rent charged. We could be adversely affected if additional competitive properties are built in locations near our properties, causing increased competition for creditworthy tenants. This could result in decreased cash flow from our properties and may require us to make capital improvements to properties that we would not have otherwise made, further impacting property cash flows.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
We are subject to various federal, state and local laws and regulations that (a) regulate certain activities and operations that may have environmental or health and safety effects, such as the management, generation, release or disposal of regulated materials, substances or wastes, (b) impose liability for the costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site, or other releases of hazardous materials or regulated substances, and (c) regulate workplace safety. Compliance with these laws and regulations could increase our operational costs. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position and cash flows. Under various federal, state and local environmental laws (including those of foreign jurisdictions), a current or previous owner or operator of currently or formerly owned, leased or operated real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project.
Accordingly, we may incur significant costs to defend against claims of liability, to comply with environmental regulatory requirements, to remediate any contaminated property, or to pay personal injury claims.
Moreover, environmental laws also may impose liens on property or other restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or our Property Manager and its assignees from operating such properties. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations or the discovery of currently unknown conditions or non-compliances may impose material liability under environmental laws.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
If we decide to sell any of our properties, in some instances we may sell our properties by providing financing to purchasers. If we do so, we will bear the risk that the purchaser may default on its debt, requiring us to seek remedies, a process which may be time-consuming and costly. Further, the borrower may have defenses that could limit or eliminate our remedies. In addition, even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We have investments in certain assets through joint ventures and may continue to enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we may not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in certain circumstances be liable for the actions ofsome cases. Subject to conditions and exceptions, we also indemnify our co-venturers.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
Our properties areAdvisor and will be subject to the Americans with Disabilities Act of 1990 (the "Disabilities Act"). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act's requirements could require removal of access barriers and could resultits affiliates from losses arising in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. There is no assurance that we will be able to acquire properties or allocate the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions paid to our stockholders.
Net leases may not result in fair market lease rates over time.
Some of our rental income is generated by net leases, which generally provide the tenant greater discretion in using the leased property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years.
We may be unable to renew leases or re-lease space as leases expire.
We may be unable to renew expiring leases on terms and conditions that are as, or more, favorable as the terms and conditions of the expiring leases. In addition, vacancies may occur at one or more of our properties due to a default by a tenant on its lease or expiration of a lease. Healthcare facilities in general and MOBs in particular tend to be specifically suited for the particular needsperformance of their tenants and major renovations and expenditures may be required in order for us to re-lease vacant space. Vacancies may reduce the value of a property as a result of reduced cash flow generated by the property.
Our properties may be subject to impairment charges.
We periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a major tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property. Impairment charges also indicate a potential permanent adverse change in the fundamental operating characteristics of the impaired property. There is no assurance that these adverse changes will be reversed in the future and the decline in the impaired property's value could be permanent.
Our real estate investments are relatively illiquid, and therefore we may not be able to dispose of properties when appropriate or on favorable terms.
Investments in real properties are relatively illiquid. We may not be able to quickly alter our portfolio or generate capital by selling properties. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. If we need or desire to sell a property or properties, we cannot predict whether we will be able to do so at a price or on the terms and conditions acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Further, we may be required to invest monies to correct defects or to make improvements before a property can be sold. We can make no assurance that we will have funds available to correct these defects or to make these improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
In addition, applicable provisions of the Code impose restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies. Thus, we may be unable to realize our investment objectives by selling or otherwise disposing of or refinancing a property at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy.
Potential changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant, and the obligation does not appear on the tenant’s balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant’s balance sheet in comparison to direct ownership. The Financial Accounting Standards Board (the "FASB") and the International Accounting Standards Board (the "IASB") conducted a joint project to reevaluate lease accounting. In June 2013, the FASB and the IASB jointly finalized exposure drafts of a proposed accounting model that would significantly change lease accounting. In March 2014, the FASB and the IASB deliberated aspects of the joint project, including the lessee and lessor accounting models, lease term, and exemptions and simplifications. The final standards were released in February 2016 and will become effective for us in 2019. We are currently evaluating the impact of this new guidance. Changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how the real estate leasing business is conducted. For example, if the accounting standards regarding the financial statement classification of operating leases are revised, then companies may be less willing to enter into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated. This in turn could cause a delay in investing our offering proceeds and make it more difficult for us to enter into leases on terms we find favorable.
Healthcare Industry Risks
Our real estate investments are concentrated in MOBs, seniors housing communities and other healthcare-related facilities, making us more vulnerable economically than if our investments were less focused on healthcare-related assets.
We own and seek to acquire a diversified portfolio of healthcare-related assets including MOBs, seniors housing communities and other healthcare-related facilities. We are subject to risks inherent in concentrating investments in real estate and, in particular, healthcare-related assets. A downturn in the commercial real estate industry generally could significantly adversely affect the value of our properties. A downturn in the healthcare industry could particularly negatively affect our lessees' ability to make lease payments to us and our ability to make distributions to our stockholders. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or if our portfolio did not include a concentration in healthcare-related assets.
Certain of our properties may not have efficient alternative uses, so the loss of a tenant may cause us to not be able to find a replacement or cause us to spend considerable capital to adapt the property to an alternative use.
Some of our properties and the properties we will seek to acquire are healthcare-related assets that may only be suitable for similar healthcare-related tenants. If we or our tenants terminate the leases for these properties or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses.
Our properties and tenants may be unable to compete successfully.
The properties we have acquired and will acquire may face competition from nearby hospitals and other medical facilities that provide comparable services. Some of those competing facilities are owned by governmental agencies and supported by tax revenues, and others are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions. These types of support are not available to our properties. Similarly, our tenants face competition from other medical practices in nearby hospitals and other medical facilities. Our tenants' failure to compete successfully with these other practices could adversely affect their ability to make rental payments, which could adversely affect our rental revenues. For example, Chatsworth at Wellington Green, LLC (“Wellington Tenant”), a tenant at one of our properties located at 10330 NuVista Ave., Wellington, FL 33414 (the “Wellington Property”), and Hillsborough Extended Care, LLC (“Lutz Tenant”), a tenant at one of our properties located at 19091 North Dale Mabry Highway, Lutz, FL 33548 (the “Lutz Property”), each related parties to Palm, has failed to pay rental obligations in amounts aggregating in excess of $4.3 million as of December 31, 2017. With respect to the Wellington Property, we are taking steps necessary and prudent to resolve this dispute without litigation but there can be no assurance these steps will be successful, that litigation will not be necessary or that NuVista will otherwise become current on its obligations. With respect to the Lutz Property, we have terminated Lutz Tenant and as of January 1, 2018 operations of the Lutz Property have been transferred to a new operator. This is not our only dispute with Palm or parties related thereto. See “-Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.”
Further, from time to time and for reasons beyond our control, referral sources, including physicians and managed care organizations, may change their lists of hospitals or physicians to which they refer patients. This could adversely affect our tenants' ability to make rental payments, which could adversely affect our rental revenues.
Reductions or changes in reimbursement from third-party payors, including Medicare and Medicaid, or delays in receiving these reimbursements, could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us.
Sources of revenue for our tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs have intensified in recent years and will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. Operators in certain states have experienced delays; some of which are, have been, and may be late in receiving reimbursements, which have adversely affected their ability to make rent payments to us. In addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government-sponsored payment programs.
The healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. Coverage expansionsduties under the Affordable Care Act through the Medicaid expansionadvisory agreement and health insurance exchanges may be scaled back or eliminated in the future because the Affordable Care Act has faced ongoing legal challenges and the future status of the Affordable Care Act is unknown. In December 2017, a tax reform bill passed by the House of Representatives and the Senate was signed into law by President Trump, which repeals the penalty on individuals for failinghave agreed to maintain health insurance as required under the Affordable Care Act effective in 2019. Therefore, starting in 2019, individuals may cancel their health insurance because there will be no penalty for failingadvance certain expenses to maintain such insurance. Additionally, in February 2018, twenty states filed a lawsuit in the Northern District of Texas alleging that the Affordable Care Act is now unconstitutional because the penalty on individuals was repealed. If the Affordable Care Act is declared unconstitutional, states may not have to comply with its requirements, which could impact health insurance coverage for individuals. President Trump has also stated his intention to make changes to the Medicaid program. We cannot ensure that our tenants who currently depend on governmental or private payer reimbursement will be adequately reimbursed for the services they provide. The uncertain status of the Affordable Care Act and federal health care programs and the impact it may have on our tenants affects our ability to plan.
Our tenants may continue to experience a shift in payor mix away from fee-for-service payors, resulting in an increase in the percentage of revenues attributable to managed care payors, and general industry trends that include pressures to control healthcare costs. In addition, some of our tenants may be subject to value-based purchasing programs, which base reimbursement on the quality and efficiency of care provided by facilities and require the public reporting of quality data and preventable adverse events to receive full reimbursement. Pressures to control healthcare costs and a shift away from traditional health insurance reimbursement to managed care plans have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans, such as health maintenance organizations and preferred provider organizations. MACRA has also established a new payment framework, which will modify certain Medicare payments to eligible clinicians, representing a fundamental change to physician reimbursement. These changes could have a material adverse effect on the financial condition of some or all of our tenants in our properties. The financial impact on our tenants could restrict their ability to make rent payments to us.
A reduction in Medicare payment rates for skilled nursing facilities may have an adverse effect on the Medicare reimbursements received by certain of our tenants.
Several government initiatives have resulted in reductions in funding of the Medicare and Medicaid programs and additional changes in reimbursement regulations by the Centers for Medicare & Medicaid Services ("CMS"), contributing to enhanced pressure to contain healthcare costs and additional operational requirements, which has impacted our tenants' ability to make rent payments to us. Operators in certain states have experienced delays in receiving reimbursements, which has adversely affect their ability to make rent payments to us.
On April 16, 2015, President Obama signed MACRA into law, which among other things, permanently repealed the Sustainable Growth Rate formula ("SGR"), which threatened physician reimbursement under Medicare, and provided for an annual rate increase of 0.5% for physicians through 2019. The law also provides for a 1% update on the market basket increase for skilled nursing facilities for fiscal year 2018. MACRA established a new payment framework, called the Quality Payment Program, which modified certain Medicare payments to “eligible clinicians,” including physicians, dentists, and other practitioners. MACRA represents a fundamental change in physician reimbursement. A final rule updating certain Quality Payment Program regulations was published on November 16, 2017 and became effective on January 1, 2018. The implications of MACRA are uncertain and will depend on future regulatory activity and physician activity in the marketplace. MACRA may encourage physicians to move from smaller practices to larger physician groups or hospital employment, leading to further industry consolidation.
In addition, on July 30, 2017, CMS announced a final rule that projects increased aggregate Medicare payments to skilled nursing facilities by approximately $370 million, or 1.0%, for fiscal year 2018. If these rate increases and payments under Medicare to our tenants do not continue or increase, our tenants may have difficulty making rent payments to us.
In addition, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. We may own and acquire skilled nursing facility assets that rely on revenue from Medicaid or Medicare. Our tenants have and may experience limited increases or reductions in Medicare payments and aspects of certain of these government initiatives, such as further reductions in funding of the Medicare and Medicaid programs, additional changes in reimbursement regulations by CMS, enhanced pressure to contain healthcare costs by Medicare, Medicaid and other payors, and additional operational requirements may adversely affect their ability to make rental payments.
Certain of our facilities may be subject to pre- and post-payment reviews and audits by governmental authorities, which could result in recoupments, denials or delay of payments and could adversely affect the profitability of our tenants.
Certain of our facilities may be subject to periodic pre- and post-payment reviews and audits by governmental authorities. If the review or audit shows a facility is not in compliance with federal and state requirements, previous payments to the facility may be recouped and future payments may be denied or delayed. Recoupments, denials or delay of payments could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us.
Events that adversely affect the ability of seniors and their families to afford daily resident fees at our seniors housing communities could cause our occupancy rates and resident fee revenues to decline.
Assisted and independent living services generally are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Substantially all of the resident fee revenues generated by our senior living operations, therefore, are derived from private pay sources consisting of the income or assets of residents or their family members. The rates for such residents are set by the facilities based on local market conditions and operating costs. In light of the significant expense associated with building new properties and staffing and other costs of providing services, typically only seniors with income or assets that meet or exceed the comparable region median can afford the daily resident and care fees at our seniors housing communities, and a weak economy, depressed housing market or changes in demographics could adversely affect their continued ability to do so. If the managers of our seniors housing communities are unable to attract and retain seniors that have sufficient income, assets or other resources to pay the fees associated with assisted and independent living services, the occupancy rates, resident fee revenues and results of operations of our senior living operations could decline.
The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of our tenants to make rent payments to us.
The healthcare industry is heavily regulated by federal, state and local governmental bodies. The tenants in medical facilities we acquire generally are subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, relationships with physicians and other referral sources, and the privacy and security of patient health information. Changes in these laws and regulations could negatively affect the ability of our tenants to make lease payments to us and our ability to make distributions to our stockholders. Many of our medical facilities and their tenants may require a license or CON to operate. Failure to obtain a license or CON, or loss of a required license or CON, would prevent a facility from operating in the manner intended by the tenant. These events could materially adversely affect our tenants' ability to make rent payments to us. State and local laws also may regulate expansion, including the addition of new beds or services or acquisition of medical equipment, and the construction of medical facilities, by requiring a CON or other similar approval. State CON laws are not uniform throughout the United States and are subject to change. We cannot predict the impact of state CON laws on our improvement of medical facilities or the operations of our tenants. In addition, state CON laws often materially impact the ability of competitors to enter into the marketplace of our facilities. The repeal of CON laws could allow competitors to freely operate in previously closed markets. This could negatively affect our tenants' abilities to make current payments to us. In limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and require new CON authorization to re-institute operations.
Furthermore, uncertainty surrounding the implementation of the Affordable Care Act may adversely affect our operators. As the primary vehicle for comprehensive healthcare reform in the United States, the Affordable Care Act was designed to reduce the number of individuals in the United States without health insurance and change the ways in which healthcare is organized, delivered and reimbursed. The Affordable Care Act has faced ongoing legal challenges, including litigation seeking to invalidate some or all of the law or the manner in which it has been interpreted. In December 2017, a tax reform bill passed by the House of Representatives and the Senate was signed into law by President Trump, which repeals the penalty on individuals for failing to maintain health insurance as required under the Affordable Care Act effective in 2019. Therefore, starting in 2019, individuals may cancel their health insurance because there will be no penalty for failing to maintain such insurance. Additionally, in February 2018, twenty states filed a lawsuit in the Northern District of Texas alleging that the Affordable Care Act is now unconstitutional because the penalty on individuals was repealed. If the Affordable Care Act is declared unconstitutional, states may not have to comply with its requirements, which could impact health insurance coverage for individuals. We are unable to predict the scope of future federal, state and local regulations and legislation, including Medicare and Medicaid statutes and regulations, or the intensity of enforcement efforts with respect to such regulations and legislation, and any changes in the regulatory framework may have a material adverse effect on our tenants, which, in turn, could have a material adverse effect on us.
The Affordable Care Act includes program integrity provisions that both create new authorities and expand existing authorities for federal and state governments to address fraud, waste and abuse in federal health programs. In addition, the Affordable Care Act expands reporting requirements and responsibilities related to facility ownership and management, patient safety and care quality. In the ordinary course of their businesses, our operators may be regularly subjected to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. If they do not comply with the additional reporting requirements and responsibilities, our operators' ability to participate in federal health programs may be adversely affected. Moreover, there may be other aspects of the comprehensive healthcare reform legislation for which regulations have not yet been adopted, which, depending on how they are implemented, could materially and adversely affect our operators, and therefore our business, financial condition, results of operations and ability to pay distributions to our stockholders.
The Affordable Care Act also requires the reporting and return of overpayments. On February 11, 2016, CMS published a final rule that requires Medicare Parts A and B health care providers and suppliers to report and return overpayments by the later of the date that is 60 days after the date an overpayment was identified, or the due date of any corresponding cost report, if applicable. Healthcare providers that fail to report and return an overpayment could face potential liability under the FCA and the Civil Monetary Penalties law and exclusion from federal healthcare programs. Accordingly, if our operators fail to comply with the Affordable Care Act’s requirements, they may be subject to significant monetary penalties and excluded from participation in Medicare and Medicaid, which could materially and adversely affect their ability to pay rent and satisfy other financial obligations to us.
Residents in our seniors housing communities may terminate leases.
State regulations generally require assisted living communities to have a written lease agreement with each resident that permits the resident to terminate his or her lease for any reason on reasonable notice, unlike typical apartment lease agreements that have initial terms of one year or longer. Due to these lease termination rights and the advanced age of the residents, the resident turnover rate in our seniors housing communities may be difficult to predict. A large number of resident lease agreements may terminate at or around the same time, and the affected units may remain unoccupied.
Some tenants of our healthcare-related assets are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant's ability to make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from or are in a position to make referralsthem in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs.
Our lease arrangements with certain tenantsclaims or liability they may also be subject to these fraud and abuse laws. These laws include the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of any item or service reimbursed by Medicare or Medicaid; the Federal Physician Self-Referral Prohibition, which, subject to specific exceptions, restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare or Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship; the FCA, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs; and the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human Services to impose monetary penalties for certain fraudulent acts.
Each of these laws includes substantial criminal or civil penalties for violations that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid payments and/or exclusion from the Medicare and Medicaid programs. Certain laws, such as the FCA, allow for individuals to bring whistleblower actions on behalf of the government for violations thereof. Additionally, violations of the FCA can result in treble damages. Significant enforcement activity has been the result of actions brought by these individuals. Additionally, states in which the facilities are located may have similar fraud and abuse laws. Investigation by a federal or state governmental body for violation of fraud and abuse laws, and these state laws have their own penalties which may be in additional to federal penalties.
Investigation by a federal or state governmental body for violation of fraud and abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize that tenant's business and its ability to operate or to make rent payments.
Adverse trends in healthcare provider operations may negatively affect our ability to lease space at our facilities at attractive or growing rates and lease revenues.
The healthcare industry currently is experiencing changes in the demand for and methods of delivering healthcare services; changes in third party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; and increased scrutiny of billing, referral and other practices by federal and state authorities. These factors may adversely affect the economic performance of some or all of our tenants and, in turn, our company and revenues.
Tenants of our healthcare-related assets may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us.
As is typical in the healthcare industry, certain types of tenants of our healthcare-related assets may often become subject to claims that their services have resulted in patient injury or other adverse effects. Many of these tenants may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage maintained by these tenants may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims or litigation may not, in certain cases, be available to these tenants due to state law prohibitions or limitations of availability. As a result, these types of tenants operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. Recently, there has been an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance may not available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on a tenant's financial condition. If a tenant is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable government enforcement action, the tenant could be exposed to substantial additional liabilities, which may affect the tenant's business, operations and ability to pay rentservice to us.
We may experience adverse effects as a result of potential financial and operational challenges faced by the operators of any seniors housing facilities and skilled nursing facilities we own or acquire.
Operators of any seniors housing facilities and skilled nursing facilities may face operational challenges from potentially reduced revenue streams and increased demands on their existing financial resources. Our skilled nursing operators' revenues likely are primarily derived from governmentally funded reimbursement programs, such as Medicare and Medicaid. Accordingly, our facility operators will be subject to the potential negative effects of decreased reimbursement rates or other changes in reimbursement policy or programs offered through such reimbursement programs. Our operators' revenue may also be adversely affected as a result of falling occupancy rates or slow lease-ups for assisted and independent living facilities due to the recent turmoil in the capital debt and real estate markets. In addition, our facility operators may incur additional demands on their existing financial resources as a result of increases in seniors housing facility operator liability, insurance premiums and other operational expenses. The economic deterioration of an operator could cause such operator to file for bankruptcy protection. The bankruptcy or insolvency of an operator may adversely affect the income produced by the property or properties it operates. Our financial position could be weakened and our ability to make distributions could be limited if any of our seniors housing facility operators were unable to meet their financial obligations to us.
Our operators' performance and economic condition may be negatively affected if they fail to comply with various complex federal and state laws that govern a wide array of referrals, relationships and licensure requirements in the senior healthcare industry. The violation of any of these laws or regulations by a seniors housing facility operator may result in the imposition of fines or other penalties that could jeopardize that operator's ability to make payment obligations to us or to continue operating its facility. In addition, legislative proposals are commonly being introduced or proposed in federal and state legislatures that could affect major changes in the seniors housing sector, either nationally or at the state level. It is impossible to say with any certainty whether this proposed legislation will be adopted or, if adopted, what effect such legislation would have on our facility operators and our seniors housing operations.
Risks Associated with Debt Financing and Investments
We have broad authority to incur debt.
As of December 31, 2017, we had total outstanding indebtedness of $950.2 million, including $239.7 million outstanding under our Revolving Credit Facility, $295.2 million outstanding under our Fannie Credit Facilities and $415.4 million in mortgage indebtedness. We may incur additional indebtedness. We expect that in most instances, we will continue to acquire real properties by using either existing financing or borrowing new funds. In addition, we may continue to incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may also borrow if we need funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
There is no limit on the amount we may borrow against any single improved property. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments and could cause restrictive covenants to become applicable from time to time.
We may experience a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, especially if we acquire the property when it is being developed or under construction. Using leverage increases the risk of loss because defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders' investment. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In this event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. If we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
The debt markets may be volatile.
Volatility or disruption in debt markets could result in lenders increasing the cost for debt financing or limiting the availability of debt financing. If the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns. If debt markets experience volatility or disruptions, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted.
If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.
In addition, the state of the debt markets could have an impact on the overall amount of capital available to invest in real estate which may result in price or value decreases of real estate assets. This could negatively impact the value of our assets after the time we acquire them.
We may not be able to refinance our indebtedness.
Mortgage debt on properties increases the risk that we will be unable to refinance the properties when the loans come due or that we will be able to refinance on favorable terms. If interest rates are higher than the rates on the expiring debt, we may not be able to refinance the debt or our interest expense could increase.
Our Revolving Credit Facility and other financing arrangements have restrictive covenants relating to our operations and distributions.
Our Revolving Credit Facility and other financing arrangements contain provisions that affect or restrict our distribution and operating policies, require us to satisfy financial coverage ratios, and may restrict our ability to, among other things, incur additional indebtedness, make certain investments, replace the Advisor, discontinue insurance coverage, merge with another company, and create, incur or assume liens. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We have incurred, and may continue to incur, variable-rate debt. Increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. If we refinance long-term debt at increased interest rates it may reduce the cash we have available to make distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We may enter into hedging transactions to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or own real estate assets. To the extent that we use derivative financial instruments in connection with these risks, we will be exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract.
U.S. Federal Income Tax Risks
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.tax.
We elected and qualified to be taxed as a REIT, commencing with our taxable year ended December 31, 2013 and intend to operate in a manner that would allow us to continue to qualify as a REIT.REIT for U.S. federal income tax purposes. However, we may terminate our REIT qualification inadvertently, or if the Board determines that not qualifying as a REITdoing so is in our best interests, or inadvertently.interests. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. TheWe have structured and intend to continue structuring our activities in a manner designed to satisfy all the requirements to qualify as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to qualify or remain qualified as a REIT is not binding on the IRSInternal Revenue Service (the “IRS”) and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be
successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also requires usdepends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at the corporate rate. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributionsamounts paid to stockholders that are treated as dividends for U.S. federal income tax purposes would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we qualify as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are "dealer"“dealer” properties sold by a REIT and that do not meet a safe harbor available under the Code (a "prohibited transaction"“prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gaingains we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of ourthe OP or at the level of the other companies through which we indirectly own our assets, such as taxable REIT subsidiaries,any TRSs, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes.tax. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.flow.
To qualify as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce anour stockholders’ overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we paymake with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. It is possible thatAlthough we might not always be ableintend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT.REIT, it is possible that we might not always be able to do so.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
We will use commercially reasonable efforts to structure any sale-leaseback transaction we enter into so that the lease will be characterized as a “true lease” for U.S. federal income tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, the IRS may challenge this characterization. In the event that any sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to the property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to continue to satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on an investment in our shares.tax.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT and provided we do not meet a safe harbor available under the Code, we will be subject to a 100% penalty tax on the net income recognized onfrom the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including ourthe OP, but generally excluding taxable REIT subsidiaries,TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiaryTRS (but such taxable REIT subsidiary wouldTRS will incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or indirectly through any subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including ourthe OP, but generally excluding taxable REIT subsidiaries,TRSs, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our taxable REIT subsidiariesTRSs are subject to corporate-level taxes and our dealings with our taxable REIT subsidiariesTRSs may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries.TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary.TRS. A corporation of which a taxable REIT subsidiaryTRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary.TRS. Overall, no more than 20% (25% for our taxable years beginning prior to January 1, 2018) of the gross value of a REIT'sREIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries.TRSs. A taxable REIT subsidiaryTRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. We may lease some of our "qualifiedseniors housing properties that are qualified health care properties"properties to one or more taxable REIT subsidiariesTRSs which, in turn, contract with independent third-party management companies to operate such "qualifiedthose “qualified health care properties"properties” on behalf of such taxable REIT subsidiaries. Wethose TRSs. In addition, we may use taxable REIT subsidiariesone or more TRSs generally for other activities as well, such as to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will beTRS is subject to applicable U.S. federal, state, local and foreign income tax on its taxable income.income, as well as limitations on the deductibility of its interest expenses. In addition, the rules, which are applicable to us as a REIT, also imposeCode imposes a 100% excise tax on certain transactions between a taxable REIT subsidiaryTRS and its parent REIT that are not conducted on an arm's-lengtharm’s-length basis.
If our leases to our taxable REIT subsidiaries are not respected as true leases for U.S. federal income tax purposes, we likely would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our OP by our taxable REIT subsidiaries pursuant to the lease of our “qualified healthcare properties” will constitute a substantial portion of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we may fail to qualify as a REIT.
If our OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of our OP as a partnership or a disregarded entity for U.S. federal income tax purposes. However, ifIf the IRS were to successfully challenge the status of ourthe OP as a partnership or disregarded entity for suchU.S. federal income tax purposes, itthe OP would be taxable as a corporation. In such event, this would reduce the amount of distributions that the OP could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate levelcorporate-level tax on our income. This substantially would reduce our cash available to pay dividends and other distributions and the yield onto our stockholders' investment.stockholders. In addition, if any of the partnerships or limited liability companies through which ourthe OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, itthe partnership or limited liability company would be subject to taxation as a corporation, thereby reducing distributions to the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
If our "qualified“qualified health care properties"properties” are not properly leased to a taxable REIT subsidiaryTRS or the managers of such "qualifiedthose “qualified health care properties"properties” do not qualify as "eligible“eligible independent contractors,"” we could fail to qualify as a REIT.
In general, under the REIT rules, we cannot directly operate any "qualifiedof our seniors housing properties that are “qualified health care properties"properties” and can only indirectly participate in the operation of "qualifiedqualified health care properties"properties on an after-tax basis through leases of suchby leasing those properties to independent health care facility operators or our taxable REIT subsidiaries.to TRSs. A "qualifiedqualified health care property" includesproperty is any real property, and(and any personal property incident to suchthat real property,property), which is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility,facilities, congregate care facility, qualified continuing care facility, or other licensed
facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of suchthose services whichthat is eligible for participation in the Medicare program with respect to suchthat facility. RentFurthermore, rent paid by a lessee of a qualified health care property that is a "related“related party tenant"tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. A taxable REIT subsidiaryHowever, a TRS that leases "qualifiedqualified health care properties"properties from us will not be treated as a "related“related party tenant"tenant” with respect to our "qualified“qualified health care properties"properties” that are managed by an independent management company, so long as the independent management company qualifies as an "eligible“eligible independent contractor."”
Each of the management companies that enters into a management contract with our taxable REIT subsidiaries must qualify as an "eligibleAn “eligible independent contractor" under the REIT rules in order for the rent paid to us by our taxable REIT subsidiaries to be qualifying income for purposes of the REIT gross income tests. An "eligible independent contractor"contractor” is an independent contractor that, at the time such contractor enters into a management or other agreement with a taxable REIT subsidiaryTRS to operate a "qualified“qualified health care property,"” is actively engaged in the trade or business of operating "qualified“qualified health care properties"properties” for any person not related as defined in the Code, to us or the taxable REIT subsidiary.TRS. Among other requirements in order to qualify as an independent contractor, a manager must not own, directly or applying attribution provisions of the Code, more than 35% of the shares of our outstanding shares of stock (by value), and no person or group of persons can own more than 35% of the shares of our outstanding sharesstock and 35% of the ownership interests of the manager (taking into account only owners of more than 5% of our shares and, with respect to ownership interest in such managers that are publicly traded, only holders of more than 5% of such ownership interests). The ownership attribution rules that apply for purposes of the 35% thresholds are complex. There can be no assurance that the levels of ownership of our stockshares by our managers and their owners will not be exceeded.
Our investments in certain debt instruments may cause us to recognize incomeIf our leases with TRSs are not respected as true leases for U.S. federal income tax purposes, even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, (c) distribute amounts thatlikely would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loanfail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real estate asset would adversely affectproperty.” Rent paid by TRSs to the OP pursuant to the lease of our ability“qualified healthcare properties” will constitute a substantial portion of our gross income. For that rent to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying“rents from real estate asset producing qualifying incomeproperty” for purposes of the REIT asset andgross income tests, the loanleases must be secured by real property or an interest in real property. We may acquire mezzanine loans that arerespected as true leases for U.S. federal income tax purposes and not directly secured by real property or an interest in real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property or an interest in real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifyingservice contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests,tax purposes, we may be disqualifiedfail to qualify as a REIT.
We may choose to make distributions in shares of our owncommon stock, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash dividends stockholdersportion of distributions they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions with respect to our common stock that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received.
Accordingly, U.S. stockholders receiving a distribution of shares of our sharescommon stock may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock thatshares it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market pricevalue of our stockthe shares at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition,Because there is no established trading market for shares of our shares, thuscommon stock, stockholders may not be able to sell shares of our common stock in order to pay taxes owed on dividend income.
The taxation of distributions to our stockholders can be complex; however, distributions to stockholders that we make to our stockholdersare treated as dividends for U.S. federal income tax purposes generally will be taxable as ordinary income, which may reduce our stockholdersstockholders’ after-tax anticipated return from an investment in us.
DistributionsAmounts that we makepay to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be treated as dividends for U.S. federal income tax purposes and will be taxable as ordinary income. For tax years beginning after December 31, 2017, noncorporateNoncorporate stockholders are entitled to a 20% deduction with respect to these ordinary REIT dividends which would, if allowed in full, result in a maximum effective federal income tax rate on themthese ordinary REIT dividends of 29.6% (or 33.4% including the 3.8% surtax on net investment income). ; however, the 20% deduction will end after December 31, 2025.
However, a portion of the amounts that we pay to our distributionsstockholders generally may (1)(a) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that the extent the distributionsthey are attributable to net capital gain recognized by us, (2)(b) be designated by us as qualified dividend income, taxable at capital gains rates, generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries,TRSs, or (3)(c) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the tax basis of a stockholder'sstockholder’s investment in shares of our common stock. DistributionsAmounts paid to our stockholders that exceed our current and accumulated earnings and profits and a stockholder’s tax basis in shares of our common stock generally will be taxable as capital gain.
Our stockholders may have tax liability on distributions that they elect to reinvest in shares of our common stock, but they would not receive the cash from such distributions to pay such tax liability.
Stockholders who participate in the DRIP will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amountdistributions reinvested in shares of our common stock to the extent the amount reinvested wasdistributions were not a tax-free return of capital. In addition, our stockholders arewill be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of thedistributions reinvested in shares of our common stock received.pursuant to the DRIP.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
TheCurrently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%.23.8%, including the 3.8% surtax on net investment income. Dividends payable by REITs, however, generally are not eligible for this reduced rate.rate and, as described above, through December 31, 2025, will be subject to an effective rate of 33.4%, including the 3.8% surtax on net investment income. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocksstock of non-REIT corporations that pay dividends, which could adversely affect the value of the sharesstock of REITs, including shares of our common stock. Tax rates could be changed in future legislation.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, or in certain cases to hedge previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly identified under applicable Treasury Regulations, does not constitute "gross income"“gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary.TRS. This could increase the cost of our hedging activities because our taxable REIT subsidiariesthe TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiaryTRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
the TRS.
Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.
To qualifymaintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than securities that qualify for the 75% asset test and securities of one or more taxablequalified REIT subsidiaries government securities and qualified real estate assets)TRSs) generally cannot include more thanexceed 10% of the outstanding voting securities of any one issuer, or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more thanissuer, or 5% of the value of our assets (other than securities of one or more taxable REIT subsidiaries, government securities and qualified real estate assets) can consist of the securities ofas to any one issuer, no more than 25% of the value of our assets may be securities, excluding government securities, stock issued by our qualified REIT subsidiaries, and other securities that qualify as real estate assets, andissuer. In addition, no more than 20% of the value of our total assets may consist of stock or securities of one or more taxableTRSs and no more than 25% of our assets may consist of publicly offered REIT subsidiaries.debt instruments that do not otherwise qualify under the 75% asset test. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect
The ability of the Board to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that the Board may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interestinterests to continue to qualify as a REIT. While we intend to maintain our qualification as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to corporate-level U.S. federal income tax on our taxable income (as well as any applicable state and local corporate tax) and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the return earned on an investment invalue of our shares.stock.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability.
In recent years, numerous legislative, judicialliability, reduce our operating flexibility, and administrative changes have been made inreduce the provisionsvalue of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes
Changes to the tax laws are likely to continue tomay occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in shares of our sharesstock or on the market value or the resale potential of our assets.
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) makes substantial changes Our stockholders are urged to the Code. Among those changes are a significant permanent reduction in the generally applicable corporateconsult with an independent tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various currently allowed deductions (including additional limitations on the deductibility of business interest), and preferential taxation of income (including REIT dividends) derived by non-corporate taxpayers from “pass-through” entities. The TCJA also imposes certain additional limitations on the deduction of net operating losses, which may in the future cause us to make distributions that will be taxable to our stockholders to the extent of our current or accumulated earnings and profits in order to comply with the annual REIT distribution requirements. The effect of these, and the many other, changes made in the TCJA is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets. Furthermore, many of the provisions of the TCJA will require guidance through the issuance of U.S. Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposedadvisor with respect to the TCJA, the timingstatus of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of which cannot be predicted and may be adverse to us or our stockholders.stock.
Although REITs generally receive better tax treatment than entities taxed as regularnon-REIT “C corporations,” it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a non-REIT “C corporation.” As a result, our charter provides the Board with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation,non-REIT “C corporation”, without the vote of our stockholders. The Board has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in theour best interest of us and our stockholders.
interests.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in shares of our stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of ourthe issued and outstanding shares of our stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of our stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of our stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of our stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by the Board, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of our outstanding shares of our stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of ourthe outstanding shares of our stock. The Board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if the Board determines that it is no longer in our best interestinterests to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interestinterests of the stockholders.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on dividends and other distributions received from us and upon the disposition of shares of our shares.stock.
Subject to certain exceptions, distributions received from usamounts paid to non-U.S. stockholders will be treated as dividends of ordinaryfor U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributionsdividends are treated as "effectively connected"“effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), capitalCapital gain distributions attributable to sales or exchanges of "U.S.“U.S. real property interests" ("USRPIs"interests” (“USRPIs”), generally will be taxed to a non-U.S. stockholder (other than a qualified“qualified foreign pension plan,fund”, certain entities wholly owned by a qualified“qualified foreign pension planfund” and certain foreign publicly tradedpublicly-traded entities) as if such gain were effectively connected with a U.S. trade or business. However, a capital gain dividenddistribution will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United StatesU.S. and (b) the non-U.S. stockholder does not own more than 10% of theany class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be "regularly traded" on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of shares of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common. Shares of our stock will not constitute a USRPI so long as we are a "domestically-controlled“domestically-controlled qualified investment entity."” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT'sREIT’s stock is held directly or indirectly by non-U.S. stockholders. There isWe believe, but there can be no assurance, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges shares of our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) the shares are of a class of our common stock that is "regularly“regularly traded,"” as defined by applicable Treasury Regulations,regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of the outstanding shares of our common stock of that class at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be "regularly traded" on an established market.
Potential characterization of dividends and other distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a "pension-held“pension-held REIT,"” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold shares of our common stock, or (c) a holder of commonshares of our stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of commonshares of our stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
The following table presents certain additional information about the properties we owned as of December 31, 2017:2020:
|
| | | | | | | | | | | | | |
Portfolio | | Number of Properties | | Rentable Square Feet | | Percent Leased (1) | | Weighted Average Remaining Lease Term (2) | | Gross Asset Value (4) |
| | | | | | | | | | (In thousands) |
Medical Office Buildings | | 99 | | 3,641,566 |
| | 92.9% | | 5.5 | | $ | 998,659 |
|
Triple-Net Leased Healthcare Facilities (3): | | | | | | | | | | |
Seniors Housing — Triple Net Leased | | 9 | | 229,318 |
| | 81.9% | | 12.8 | | 78,086 |
|
Hospitals | | 4 | | 428,620 |
| | 88.8% | | 8.6 | | 87,115 |
|
Post Acute / Skilled Nursing | | 18 | | 777,071 |
| | 100.0% | | 11.2 | | 200,388 |
|
Total Triple-Net Leased Healthcare Facilities | | 31 | | 1,435,009 |
| | 93.8% | | 11.1 | | 365,589 |
|
Seniors Housing — Operating Properties | | 52 | | 3,970,415 |
| | 88.1% | | N/A | | 1,055,125 |
|
Land | | 2 | | N/A |
| | N/A | | N/A | | 3,665 |
|
Construction in Progress | | 1 | | N/A |
| | N/A | | N/A | | 82,007 |
|
Portfolio, December 31, 2017 | | 185 | | 9,046,990 |
| |
| | | | $ | 2,505,045 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio | | Number of Properties | | Rentable Square Feet | | Percent Leased (1) | | Weighted Average Remaining Lease Term (2) | | Gross Asset Value (3) |
| | | | | | | | | | (In thousands) |
Medical Office Buildings | | 117 | | 3,911,937 | | | 91.6% | | 4.9 | | $ | 1,087,266 | |
Triple-Net Leased Healthcare Facilities: | | | | | | | | | | |
| | | | | | | | | | |
Hospitals | | 6 | | 514,962 | | | 90.7% | | 6.2 | | 133,580 | |
Post-Acute / Skilled Nursing (4) | | 8 | | 354,016 | | | 100.0% | | 6.8 | | 86,574 | |
Total Triple-Net Leased Healthcare Facilities | | 14 | | 868,978 | | | 94.5% | (6) | 6.5 | | 220,154 | |
Seniors Housing — Operating Properties(4)(7) | | 59 | | 4,367,124 | | | 75.1% | (5) | N/A | | 1,229,288 | |
Jupiter Property — Recently Developed | | 1 | | 235,445 | | | 10.0% | (6) | 9.9 | | 59,330 | |
Land | | 2 | | N/A | | N/A | | N/A | | 3,665 | |
Total Portfolio | | 193 | | 9,383,484 | | | | | | | $ | 2,599,703 | |
_______________
| |
(1) | Inclusive of leases signed but not yet commenced as of December 31, 2017. |
| |
(2) | Based on annualized rental income calculated on a straight-line basis. |
| |
(3) | Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties. |
| |
(4) | Gross Asset Value represents the total real estate investments, at cost, assets held for sale at carrying value, net of gross market lease intangible liabilities. |
(1)Inclusive of leases signed but not yet commenced as of December 31, 2020.
(2)Weighted-average remaining lease term in years is calculated based on square feet as of December 31, 2020.
(3)Gross asset value represents total real estate investments, at cost ($2.6 billion total as of December 31, 2020) and assets held for sale at carrying value ($0.1 million total as of December 31, 2020), net of gross market lease intangible liabilities ($22.1 million total as of December 31, 2020). Impairment charges are already reflected within gross asset value.
(4)Four properties were transitioned from Post-Acute / Skilled Nursing within our triple-net leased healthcare facilities segment to our SHOP segment during the period from January 1, 2020 through December 31, 2020 (the “Transition Properties”). The Transition Properties are presented within the SHOP segment as of December 31, 2020. See Results of Operations for more information on these properties.
(5)Weighted by unit count as of December 31, 2020.
(6)Our development property in Jupiter, Florida was substantially completed in the fourth quarter of 2019. See Note 3 — Real Estate Investments - “Development Property” to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Although a portion of the property has been leased as of December 31, 2020, the property is separately shown and excluded from combined occupancy numbers. Occupancy in the triple-net leased healthcare facilities segment would have been 76.5% had the development property been included. This property is expected to be sold in late March or second quarter of 2021. (7)One skilled nursing facility in Wellington, Florida is expected to be sold in 2021. Subsequent to December 31, 2020, four MI SHOPs were transferred to their buyer pursuant to their sale in November, 2020. See Note 18— Subsequent Events for more information. N/A Not applicable.
The following table details the geographic distribution, by state, of our portfolio as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
State | | Number of Properties | | Annualized Rental Income (1) | | Annualized Rental Income as a Percentage of the Total Portfolio | | Rentable Square Feet | | Percentage of Portfolio Rentable Square Feet |
| | | | (In thousands) | | | | | | |
Alabama | | 1 | | $ | 159 | | | — | % | | 5,564 | | | 0.1 | % |
| | | | | | | | | | |
Arizona | | 14 | | 8,289 | | | 2.6 | % | | 509,642 | | | 5.4 | % |
Arkansas | | 3 | | 13,655 | | | 4.2 | % | | 248,783 | | | 2.7 | % |
California | | 8 | | 16,532 | | | 5.1 | % | | 446,723 | | | 4.8 | % |
Colorado | | 2 | | 1,477 | | | 0.5 | % | | 59,366 | | | 0.6 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Florida | | 23 | | 66,601 | | | 20.6 | % | | 1,439,315 | | | 15.3 | % |
Georgia | | 15 | | 29,104 | | | 9.0 | % | | 792,191 | | | 8.4 | % |
| | | | | | | | | | |
Idaho | | 1 | | 3,104 | | | 1.0 | % | | 55,846 | | | 0.6 | % |
Illinois | | 21 | | 25,504 | | | 7.9 | % | | 857,836 | | | 9.1 | % |
Indiana | | 5 | | 3,613 | | | 1.1 | % | | 163,035 | | | 1.7 | % |
Iowa | | 14 | | 31,842 | | | 9.8 | % | | 585,667 | | | 6.2 | % |
Kansas | | 1 | | 4,286 | | | 1.3 | % | | 49,360 | | | 0.5 | % |
Kentucky | | 2 | | 3,218 | | | 1.0 | % | | 92,875 | | | 1.0 | % |
Louisiana | | 1 | | 621 | | | 0.2 | % | | 17,830 | | | 0.2 | % |
| | | | | | | | | | |
Maryland | | 1 | | 944 | | | 0.3 | % | | 36,260 | | | 0.4 | % |
Massachusetts | | 3 | | 890 | | | 0.3 | % | | 36,563 | | | 0.4 | % |
Michigan | | 14 | | 22,885 | | | 7.1 | % | | 504,362 | | | 5.4 | % |
Minnesota | | 1 | | 1,096 | | | 0.3 | % | | 36,375 | | | 0.4 | % |
Mississippi | | 3 | | 1,644 | | | 0.5 | % | | 73,859 | | | 0.8 | % |
Missouri | | 2 | | 7,151 | | | 2.2 | % | | 96,016 | | | 1.0 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Nevada | | 2 | | 3,260 | | | 1.0 | % | | 86,342 | | | 0.9 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
North Carolina | | 2 | | 743 | | | 0.2 | % | | 68,122 | | | 0.7 | % |
| | | | | | | | | | |
Ohio | | 3 | | 1,190 | | | 0.4 | % | | 69,882 | | | 0.7 | % |
| | | | | | | | | | |
Oregon | | 2 | | 9,011 | | | 2.8 | % | | 267,748 | | | 2.9 | % |
Pennsylvania | | 16 | | 33,535 | | | 10.4 | % | | 1,429,414 | | | 15.2 | % |
| | | | | | | | | | |
| | | | | | | | | | |
South Carolina | | 2 | | 983 | | | 0.3 | % | | 52,527 | | | 0.6 | % |
| | | | | | | | | | |
Tennessee | | 3 | | 3,397 | | | 1.0 | % | | 177,489 | | | 1.9 | % |
Texas | | 11 | | 12,871 | | | 4.0 | % | | 464,101 | | | 4.9 | % |
| | | | | | | | | | |
| | | | | | | | | | |
Virginia | | 3 | | 4,236 | | | 1.1 | % | | 234,090 | | | 2.5 | % |
Washington | | 1 | | 2,024 | | | 0.6 | % | | 52,900 | | | 0.6 | % |
| | | | | | | | | | |
Wisconsin | | 13 | | 10,028 | | | 3.1 | % | | 373,401 | | | 4.0 | % |
| | | | | | | | | | |
Total | | 193 | | $ | 323,893 | | | 100 | % | | 9,383,484 | | | 100 | % |
__________
(1) Annualized rental income on a straight-line basis for the leases in place in the property portfolio as of December 31, 2020, which includes tenant concessions such as free rent, as applicable, as well as annualized gross revenue from our SHOPs for the fourth quarter of 2020.
|
| | | | | | | | | | | | | | | |
State | | Number of Buildings | | Annualized Rental Income(1) | | Annualized Rental Income as a Percentage of the Total Portfolio | | Rentable Square Feet | | Percentage of Portfolio Rentable Square Feet |
| | | | (In thousands) | | | | | | |
Alabama | | 1 | | $ | 159 |
| | — | % | | 5,564 |
| | 0.1 | % |
Arizona | | 14 | | 10,000 |
| | 3.1 | % | | 500,734 |
| | 5.5 | % |
Arkansas | | 3 | | 15,493 |
| | 4.8 | % | | 248,783 |
| | 2.8 | % |
California | | 7 | | 13,211 |
| | 4.1 | % | | 366,031 |
| | 4.0 | % |
Colorado | | 2 | | 1,441 |
| | 0.4 | % | | 59,483 |
| | 0.7 | % |
Florida | | 18 | | 56,341 |
| | 17.5 | % | | 1,151,813 |
| | 12.7 | % |
Georgia | | 15 | | 34,577 |
| | 10.7 | % | | 821,265 |
| | 9.1 | % |
Idaho | | 1 | | 2,731 |
| | 0.8 | % | | 55,846 |
| | 0.6 | % |
Illinois | | 17 | | 12,870 |
| | 4.0 | % | | 641,836 |
| | 7.1 | % |
Indiana | | 5 | | 3,660 |
| | 1.1 | % | | 163,035 |
| | 1.8 | % |
Iowa | | 14 | | 29,845 |
| | 9.3 | % | | 585,667 |
| | 6.5 | % |
Kansas | | 1 | | 4,485 |
| | 1.4 | % | | 49,360 |
| | 0.5 | % |
Kentucky | | 2 | | 2,754 |
| | 0.9 | % | | 92,875 |
| | 1.0 | % |
Louisiana | | 1 | | 631 |
| | 0.2 | % | | 17,830 |
| | 0.2 | % |
Maryland | | 1 | | 940 |
| | 0.3 | % | | 36,260 |
| | 0.4 | % |
Michigan | | 18 | | 37,215 |
| | 11.6 | % | | 663,040 |
| | 7.3 | % |
Minnesota | | 1 | | 1,096 |
| | 0.3 | % | | 36,375 |
| | 0.4 | % |
Mississippi | | 3 | | 1,316 |
| | 0.4 | % | | 73,859 |
| | 0.8 | % |
Missouri | | 11 | | 13,538 |
| | 4.2 | % | | 360,178 |
| | 4.0 | % |
New York | | 6 | | 4,813 |
| | 1.5 | % | | 245,861 |
| | 2.7 | % |
North Carolina | | 2 | | 1,159 |
| | 0.4 | % | | 68,122 |
| | 0.8 | % |
Ohio | | 2 | | 824 |
| | 0.3 | % | | 49,994 |
| | 0.6 | % |
Oregon | | 3 | | 10,536 |
| | 3.3 | % | | 288,774 |
| | 3.2 | % |
Pennsylvania | | 10 | | 34,665 |
| | 10.8 | % | | 1,303,717 |
| | 14.4 | % |
South Carolina | | 2 | | 948 |
| | 0.3 | % | | 52,527 |
| | 0.6 | % |
Tennessee | | 3 | | 3,223 |
| | 1.0 | % | | 175,652 |
| | 1.9 | % |
Texas | | 10 | | 11,824 |
| | 3.7 | % | | 442,030 |
| | 4.9 | % |
Virginia | | 3 | | 4,705 |
| | 1.5 | % | | 234,090 |
| | 2.6 | % |
Washington | | 1 | | 1,855 |
| | 0.6 | % | | 52,900 |
| | 0.6 | % |
Wisconsin | | 8 | | 4,958 |
| | 1.5 | % | | 203,489 |
| | 2.2 | % |
Total | | 185 | | $ | 321,813 |
| | 100.0 | % | | 9,046,990 |
| | 100.0 | % |
| |
(1) | Annualized rental income for the leases in place in the property portfolio as of December 31, 2017 on a straight-line basis, which includes tenant concessions such as free rent, as applicable, as well as annualized revenue from our seniors housing — operating properties. |
Future Minimum Lease Payments
The following table presents future minimum base rental cash payments due to us (excluding the SHOP segment) over the next ten years and thereafter as of December 31, 2017.2020. The SHOP segment is excluded as the leases of units with residents are generally for annual periods or month to month. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to performance thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
| | (In thousands) | | Future Minimum Base Rent Payments | (In thousands) | | Future Minimum Base Rent Payments |
2018 | | $ | 93,064 |
| |
2019 | | 89,753 |
| |
2020 | | 84,681 |
| |
2021 | | 79,190 |
| 2021 | | $ | 94,144 | |
2022 | | 72,700 |
| 2022 | | 87,762 | |
2023 | | 62,460 |
| 2023 | | 75,205 | |
2024 | | 59,149 |
| 2024 | | 68,210 | |
2025 | | 53,812 |
| 2025 | | 58,757 | |
2026 | | 50,386 |
| 2026 | | 51,909 | |
2027 | | 38,793 |
| 2027 | | 36,276 | |
2028 | | 2028 | | 22,468 | |
2029 | | 2029 | | 16,994 | |
2030 | | 2030 | | 14,172 | |
Thereafter | | 76,364 |
| Thereafter | | 23,823 | |
| | $ | 760,352 |
| | $ | 549,720 | |
Future Lease Expirations Table
The following is a summary of lease expirations for the next ten years at the properties we owned (excluding the SHOP segment) as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year of Expiration | | Number of Leases Expiring | | Annualized Rental Income (1) | | Annualized Rental Income as a Percentage of the Total Portfolio | | Leased Rentable Square Feet | | Percent of Portfolio Rentable Square Feet Expiring |
| | | | (In thousands) | | | | | | |
2021 | | 79 | | $ | 8,943 | | | 10.6% | | 403.111 | | | 10.0% |
2022 | | 76 | | 14,889 | | | 17.6% | | 610.95 | | | 15.2% |
2023 | | 63 | | 7,352 | | | 8.7% | | 309.079 | | | 7.7% |
2024 | | 89 | | 11,294 | | | 13.3% | | 536.423 | | | 13.3% |
2025 | | 43 | | 5,741 | | | 6.8% | | 229.614 | | | 5.7% |
2026 | | 44 | | 14,484 | | | 17.1% | | 867.029 | | | 21.4% |
2027 | | 61 | | 12,071 | | | 14.2% | | 654.836 | | | 16.3% |
2028 | | 17 | | 5,121 | | | 6.0% | | 205.147 | | | 5.1% |
2029 | | 11 | | 2,365 | | | 2.8% | | 100.513 | | | 2.5% |
2030 | | 16 | | 2,499 | | | 2.9% | | 111.269 | | | 2.8% |
Total | | 499 | | $ | 84,759 | | | 100.0% | | 4,027.971 | | | 100.0% |
|
| | | | | | | | | | | | | |
Year of Expiration | | Number of Leases Expiring | | Annualized Rental Income(1) | | Annualized Rental Income as a Percentage of the Total Portfolio(2) | | Leased Rentable Square Feet | | Percent of Portfolio Rentable Square Feet Expiring(2) |
| | | | (In thousands) | | | | | | |
2018 | | 99 | | $ | 8,430 |
| | 8.0% | | 388,426 |
| | 8.1% |
2019 | | 52 | | 6,527 |
| | 6.2% | | 287,302 |
| | 6.0% |
2020 | | 68 | | 8,160 |
| | 7.7% | | 378,824 |
| | 7.9% |
2021 | | 54 | | 8,355 |
| | 7.9% | | 359,618 |
| | 7.5% |
2022 | | 52 | | 13,147 |
| | 12.4% | | 541,828 |
| | 11.4% |
2023 | | 26 | | 4,099 |
| | 3.9% | | 162,584 |
| | 3.4% |
2024 | | 54 | | 7,923 |
| | 7.5% | | 377,677 |
| | 7.9% |
2025 | | 13 | | 1,826 |
| | 1.7% | | 86,445 |
| | 1.8% |
2026 | | 10 | | 11,329 |
| | 10.7% | | 704,283 |
| | 14.8% |
2027 | | 29 | | 9,361 |
| | 8.9% | | 464,239 |
| | 9.7% |
Total | | 457 | | $ | 79,157 |
| | 74.9% | | 3,751,226 |
| | 78.5% |
_____________ | |
(1) | Annualized rental income for the leases in place in the property portfolio as of December 31, 2017, excluding seniors housing — operating properties, on a straight-line basis, which includes tenant concessions such as free rent, as applicable. |
| |
(2) | Excludes seniors housing — operating properties. |
(1) Annualized rental income on a straight-line basis for the leases in place in the property portfolio as of December 31, 2020, excluding SHOPs, which includes tenant concessions such as free rent, as applicable.
Tenant Concentration
As of December 31, 2017,2020, we did not have any tenants (including for this purpose, all affiliates of such tenants) whose annualized rental income on a straight-line basis represented 10% or more of total annualized rental income for the portfolio on a straight-line basis.
basis for our portfolio.
Significant Portfolio Properties
As of December 31, 2017,2020, the rentable square feet or annualized straight-line rental income on a straight-line basis of one property represented 5% or more of our total portfolio'sportfolio’s rentable square feet or annualized rental income on a straight-line rental income:basis:
Wellington at Hershey'sHershey’s Mill - West Chester, PA
In December 2014, we purchased Wellington at Hershey'sHershey’s Mill, a seniors housing communityproperty located in West Chester, Pennsylvania. Wellington at Hershey'sHershey’s Mill, which is leased to our TRS and operated and managed on our behalf by an independenta third-party manager,operator in our SHOP segment, contains 491,710 rentable square feet and consists of 193 units dedicated to independent living patients, 64 units dedicated to assisted living patients and 36 units for patients requiring skilled nursing services. As of December 31, 2020, this property represented 5.2% of our total rentable square feet and 5.3% of our total annualized rental income on a straight-line basis.
Property Financings
Our mortgage notes payableSee Note 4 — Mortgage Notes Payable, Net and Note 5 — Credit Facilities to our consolidated financial statements in this Annual Report on Form 10-K for property financings as of December 31, 20172020 and 2016 consist of the following:2019. |
| | | | | | | | | | | | | | | | | |
Portfolio | | Encumbered Properties (1) | | Outstanding Loan Amount as of December 31, | | Effective Interest Rate | | Interest Rate | | Maturity |
| | 2017 | | 2016 | | | |
| | | | (In thousands) | | (In thousands) | | | | | | |
Medical Center of New Windsor - New Windsor, NY | | — | | $ | — |
| | $ | 8,602 |
| | — | % | | Fixed | | Sep. 2017 |
Plank Medical Center - Clifton Park, NY | | — | | — |
| | 3,414 |
| | — | % | | Fixed | | Sep. 2017 |
Countryside Medical Arts - Safety Harbor, FL | | 1 | | 5,773 |
| | 5,904 |
| | 4.98 | % | | Variable | (2) | Apr. 2019 |
St. Andrews Medical Park - Venice, FL | | 3 | | 6,381 |
| | 6,526 |
| | 4.98 | % | | Variable | (2) | Apr. 2019 |
Slingerlands Crossing Phase I - Bethlehem, NY | | — | | — |
| | 6,589 |
| | — | % | | Fixed | | Sep. 2017 |
Slingerlands Crossing Phase II - Bethlehem, NY | | — | | — |
| | 7,671 |
| | — | % | | Fixed | | Sep. 2017 |
Benedictine Cancer Center - Kingston, NY | | — | | — |
| | 6,719 |
| | — | % | | Fixed | | Sep. 2017 |
Aurora Healthcare Center Portfolio - WI | | — | | — |
| | 30,858 |
| | — | % | | Fixed | | Jan. 2018 |
Palm Valley Medical Plaza - Goodyear, AZ | | 1 | | 3,327 |
| | 3,428 |
| | 4.15 | % | | Fixed | | Jun. 2023 |
Medical Center V - Peoria, AZ | | 1 | | 3,066 |
| | 3,151 |
| | 4.75 | % | | Fixed | | Sep. 2023 |
Courtyard Fountains - Gresham, OR | | 1 | | 24,372 |
| | 24,820 |
| | 3.87 | % | | Fixed | (3) | Jan. 2020 |
Fox Ridge Bryant - Bryant, AR | | 1 | | 7,565 |
| | 7,698 |
| | 3.98 | % | | Fixed | | May 2047 |
Fox Ridge Chenal - Little Rock, AR | | 1 | | 17,270 |
| | 17,540 |
| | 3.98 | % | | Fixed | | May 2049 |
Fox Ridge North Little Rock - North Little Rock, AR | | 1 | | 10,716 |
| | 10,884 |
| | 3.98 | % | | Fixed | | May 2049 |
Philip Professional Center - Lawrenceville, GA | | 2 | | 4,895 |
| | — |
| | 4.00 | % | | Fixed | | Oct. 2019 |
MOB Loan | | 32 | | 250,000 |
| | — |
| | 4.44 | % | | Fixed | (4) | June 2022 |
Bridge Loan | | 23 | | 82,000 |
| | — |
| | 4.13 | % | | Variable | | Dec. 2019 |
Gross mortgage notes payable | | 67 | | 415,365 |
| | 143,804 |
| | 4.31 | % | (5) | | | |
Deferred financing costs, net of accumulated amortization | | | | (7,625 | ) | | (1,516 | ) | | | | | | |
Mortgage premiums and discounts, net | | | | (1,110 | ) | | 466 |
| | | | | | |
Mortgage notes payable, net | | | | $ | 406,630 |
| | $ | 142,754 |
| | | | | | |
_______________
(1) Does not include eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility. The equity interests and related rights in our wholly owned subsidiaries that directly own or lease these real estate assets have been pledged for the benefit of the lenders thereunder. See Note 5 - Credit Facilities for further details.(2) Fixed interest rate through May 10, 2017. Interest rate changes to variable rate starting in June 2017.
(3) Interest only payments through July 1, 2016. Principal and interest payments began in August 2016.
(4) Variable rate loan which is fixed as a result of entering into interest rate swap agreements.Note 7 - Derivatives and Hedging Activities.(5) Calculated on a weighted average basis for all mortgages outstanding as of December 31, 2017.
Item 3. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
No established public market currently exists for our shares of common stock. Until our shares are listed on a national exchange, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase requirements.
Our charter prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by the Board. Consequently, there is the risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.
On March 30, 2017 the Board determinedApril 3, 2020, we published an Estimated Per-Share NAV of $21.45equal to $15.75 as of December 31, 2016.2019. We intend to publish an Estimated Per-Share NAV as of December 31, 20172020 shortly following theafter filing of this Annual Report on Form 10-K for the year ended December 31, 2017.2020.
Consistent with our valuation guidelines, the Advisorwe engaged Duff & Phelps, LLC (“Duff & Phelps”), an independent third-party real estate advisory firm, to perform appraisals of our real estate assets as of December 31, 2019 and provide a valuation range for each real estate asset, as well as other tangible assets with a defined and quantifiable future value.asset. In addition, Duff & Phelps was engaged to review, and incorporate in its report the Company’sour market value estimate regarding other assets, liabilities, and liabilitiesthe liquidation value of our outstanding shares of Series A Preferred Stock as of the valuation date.December 31, 2019.
Duff & Phelps has extensive experience estimating the fair value of commercial real estate. The methodsmethod used by Duff & Phelps to appraise our real estate assets in the report furnished to the Advisor and the Board by Duff & Phelps (the "Duff“Duff & Phelps Real Estate Appraisal Report"Report”) complycomplies with the Institute of Portfolio Alternatives (formerly known as the Investment Program AssociationAssociation) Practice Guideline 2013-01 titled "Valuations“Valuations of Publicly Registered Non-Listed REITs,"” issued April 29, 2013. TheAlso, Duff & Phelps advised that the scope of work performed by Duff & Phelps was conducted in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. Other than its engagement to perform appraisals as described above and its engagements to provide certain purchase price allocation and other real estate valuation services, Duff & Phelps does not have any direct interests in any transaction with us.
Potential conflicts of interest between Duff & Phelps, on one hand and us or the Advisor, on the other hand, may arise as a result of (1) the impact of the findings of Duff & Phelps in relation to our real estate assets, or the assets of real estate investment programs sponsored by affiliates of the Advisor, on the value of ownership interests owned by, or incentive compensation payable to, our directors, officers or affiliates and those of the Advisor, or (2) Duff & Phelps performing valuation services for other programs sponsored by affiliates of our sponsor.the Advisor, as well as other services for us.
Duff & Phelps performed a full valuation of our real estate assets utilizing an income capitalization approach consisting of the IncomeDirect Capitalization Method or the Discounted Cash Flow Method and Sales Comparisoncertain other approaches, as described further below, thatincluding the acquisition price, disposition price, and sales comparison approach. These approaches are commonly used in the commercial real estate industry.
The Estimated Per-Share NAV is comprised of (i) the sum of (A) the estimated value of our real estate assets and (B) the estimated value of our other assets, minus (ii) the sum of (C) the estimated value of our debt and other liabilities, and (D) the estimate of the aggregate incentive fees, participations and limited partnership interests held by or allocable to the Advisor, our management or any of their respective affiliates based on our aggregate net asset value based on Estimated Per-Share NAV and payable in our hypothetical liquidation as of December 31, 2016,2019 (which was zero),divided by (ii)(iii) our number of shares of common sharesstock outstanding on a fully-diluted basis as of December 31, 2016,2019, which was 86,774,897.92,762,662 (this amount is not adjusted for dividends paid in the form of additional shares of common stock). Common shares outstanding on a fully-diluted basis is defined as the sum of shares of common stock, including vested and unvested restricted shares of common stock, (“restricted shares”) and OP Units outstanding, while excluding Class B units.
The Estimated Per-Share NAV does not represent: (i) the amount at whichprice that our shares wouldmay trade for on a national securities exchange or a third party may pay for us, (ii) the amount a stockholder would obtain if he or she tried to sell his or her shares of common stock, or (iii) the amount stockholdersa stockholder would receiverealize in per share distributions if we liquidatedsold all of our assets and distributed the proceeds after payingsettled all of our expenses and liabilities or (iv) the price per sharein a third party would pay to acquire us. With respect to the Estimated Per-Share NAV, we can giveplan of liquidation. Further, there is no assurance that the methodology used to establish the Estimated Per-Share NAV would be acceptable to the Financial Industry Regulatory Authority for use on customer account statements, or that the Estimated Per-Share NAV will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Code with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.
The Estimated Per-Share NAV as of December 31, 20162019 of $21.45,$15.75, a value within the range determined by Duff & Phelps, was unanimously adopted by the independent directors of the Board, who comprise a majority of the Board, with Mr. Weil abstaining, on March 30, 2017.31, 2020. The independent directors of the Board based itstheir determination on the Advisor’s recommendation, which was based on the Advisor’s review of the Duff & Phelps Real Estate Appraisal Report and on the Advisor’s own analysis, estimates and calculations and the fundamentals of the real estate assets. The reviewAs part of their determination to approve an Estimated Per-Share NAV, the independent directors considered the fundamentals of the real estate assets included a review ofincluding geographic location, stabilization and credit quality of tenants, age of the property, remaining or anticipated lease duration and renewal probability, as well as the other factors described herein.tenants. The Board is ultimately and solely responsible for the Estimated Per-Share NAV. Estimated Per-
SharePer-Share NAV was determined at a moment in time and will likely change over time as a result of changes to the value of individual assets as well as changes and developments in the real estate and capital markets, including changes in interest rates. Nevertheless,As such, stockholders should not rely on the Estimated Per-Share NAV in making a decision to buy or sell shares of common stock pursuant to our common stock.DRIP or our SRP, respectively.
In connection with the independent directors of the Board’s determination of Estimated Per-Share NAV, the Advisor concluded that, in a hypothetical liquidation at such Estimated Per-Share NAV, it would not be entitled to any incentive fees or performance-based restricted partnership units of our operating partnership designated as "Class“Class B Units."” The Advisor determined the Estimated Per-Share NAV in a manner consistent with the definition of fair value under GAAP set forth in FASB’s Topic ASC 820, Fair Value Measurements and Disclosures.
Holders
As of February 28, 2018March 23, 2021 we had 90.7 million95,040,732 shares of common stock outstanding held by a total of 44,901 stockholders.44,089 stockholders of record.
Dividends and Other Distributions
We elected and qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2013. As a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard for the deduction for dividends paid and excluding net capital gains,gains.
The amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for dividends and other distribution, financial condition, provisions in our Credit Facility or other agreements that may restrict our ability to pay dividends and other distributions, capital expenditure requirements, as applicable, and annual dividends and other distribution requirements needed to maintain our status as a REIT under the Code. Under our Credit Facility, we will not be able to pay cash distributions on our common stock until we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million (giving effect to the aggregate amount of distributions projected to be paid by us during the quarter in which we have elected to commence paying cash distributions on common stock) and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. As of December 31, 2020, our ratio of consolidated total indebtedness to consolidated total asset value for these purposes was 61.7%. Thus, our ability to make future cash distributions on our common stock will depend on our future cash flows and indebtedness and may further depend on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all. The Board may reduce the amount of dividends or other distributions paid or suspend dividends or other distribution payments at any time prior to declaration. Therefore, dividends and other distribution payments are not assured. Any accrued and unpaid dividends payable with respect to our Series A Preferred Stock must be paid upon redemption of those shares. For further information on provisions in our Credit Facility that restrict the payment of dividends and other distributions, see Note 5 — Credit Facility, Net to our consolidated financial statements included in this Annual Report on Form 10-K and Item 1A “Risk Factors. - We have not paid our distributions on our common stock in cash since 2020, and there can be no assurance we will pay distributions on our common stock in cash in the future.” The following table details the tax treatment of the dividends and other distributions paid during the years ended December 31, 2020, 2019 and 2018, respectively, retroactively adjusted for the effects of the stock dividends:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Return of capital(1) | | 100 | % | | $ | 0.42 | | | 100 | % | | $ | 0.83 | | | 100 | % | | $ | 0.92 | |
Capital gain dividend income | | — | % | | — | | | — | % | | — | | | — | % | | — | |
Ordinary dividend income | | — | % | | — | | | — | % | | — | | | — | % | | — | |
Total | | 100.0 | % | | $ | 0.42 | | | 100.0 | % | | $ | 0.83 | | | 100.0 | % | | $ | 0.92 | |
________
(1) Amount for December 31, 2020 represents actual cash distributions paid to common shareholders during the year ended 2020, but excludes the stock dividends which do not represent taxable dividends to our shareholders for U.S. federal income tax purposes.
Distributions to Common Stockholders
From March 1, 2018 until June 30, 2020, we generally paid distributions on our common stock on a monthly basis at a rate equivalent of $0.85 per annum, per share of common stock. Distributions were generally paid by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
On August 13, 2020, the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the continued COVID-19 pandemic and to comply with an amendment to the Credit Facility. Under the new policy, distributions authorized by the Board on our shares of common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at our estimated per share net asset value of common stock in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. On October 1, 2020 and January 4, 2021, we declared a dividend payable entirely in stock equal to 0.01349 shares of our common stock on each share of our outstanding common stock. This amount was based on our prior cash distribution rate of $0.85 per share per annum. The Board may further change our common stock distribution policy at any time, further reduce the amount of distributions paid or suspend distribution payments at any time, and therefore distribution payments are not assured.
Dividends to Series A Preferred Stockholders
Dividends on our Series A Preferred Stock accrue in an amount equal to $1.84 per share each year ($0.46 per share per quarter) to Series A Preferred Stockholders, which is equivalent to 7.375% per annum on the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us.
Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In order to provide common stockholders with interim liquidity, the Board has adopted the SRP, which enables our common stockholders to sell their shares back to us after they have been held for at least one year, subject to significant conditions and limitations. For additional information on the SRP, see Note 8 — Stockholders’ Equity to our consolidated financial statements included in this Annual Report on Form 10-K. In light of the amendment to the Credit Facility on August 10, 2020 which provides that we may not repurchase shares of our common stock until the Commencement Quarter, the Board suspended repurchases under the SRP effective August 14, 2020. The Board has also rejected all repurchase requests made during the period from January 1, 2020 until the effectiveness of the suspension of the SRP. No further repurchase requests under the SRP may be made unless and until the SRP is reactivated.
The following table summarizes our SRP activity for the periods presented. The cost of the repurchased common shares did not exceed DRIP proceeds during the periods presented. We funded common share repurchases from proceeds received from common stock issued under the DRIP. Repurchases are currently consummated using the most recently published Estimated Per-Share NAV at the time of the repurchase.
| | | | | | | | | | | | | | |
| | Number of Common Shares Repurchased | | Average Price per Share |
| | | | |
Cumulative repurchases as of December 31, 2019 | | 4,391,519 | | | $ | 20.95 | |
Year ended December 31, 2020 (1) | | 505,101 | | | 17.50 | |
Cumulative repurchases as of December 31, 2020 | | 4,896,620 | | | 20.60 | |
________
(1) Consists of 505,101 shares of common stock repurchased on February 26, 2020 with respect to requests received during the period commencing July 1, 2019 up to and including December 31, 2019 for $8.8 million at an average price per share of $17.50.
Item 6. Selected Financial Data.
The following selected financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance sheet data (In thousands) | | December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Total real estate investments, at cost | | $ | 2,621,723 | | | $ | 2,481,067 | | | $ | 2,553,079 | | | $ | 2,486,052 | | | $ | 2,355,262 | |
Total assets | | 2,286,895 | | | 2,325,303 | | | 2,377,446 | | | 2,371,861 | | | 2,193,705 | |
Mortgage notes payable, net | | 542,698 | | | 528,284 | | | 462,839 | | | 406,630 | | | 142,754 | |
Credit facilities | | 674,551 | | | 605,269 | | | 602,622 | | | 534,869 | | | 481,500 | |
Total liabilities | | 1,325,523 | | | 1,218,559 | | | 1,136,512 | | | 1,015,802 | | | 689,379 | |
Total equity | | 961,372 | | | 1,106,744 | | | 1,240,934 | | | 1,356,059 | | | 1,504,326 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating data (In thousands, except for share and per share data) | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Revenue from tenants | | $ | 381,612 | | | $ | 374,914 | | | $ | 362,406 | | | $ | 311,173 | | | $ | 302,566 | |
Total operating expenses | | (406,714) | | | (415,492) | | | (365,512) | | | (323,827) | | | (307,203) | |
Gain (loss) on dispositions of real estate investments | | 5,230 | | | 8,790 | | | (70) | | | 438 | | | 1,330 | |
Operating loss | | (19,872) | | | (31,788) | | | (3,176) | | | (12,216) | | | (3,307) | |
Total other expenses | | (51,577) | | | (56,120) | | | (49,605) | | | (29,849) | | | (19,747) | |
Loss before income taxes | | (71,449) | | | (87,908) | | | (52,781) | | | (42,065) | | | (23,054) | |
Income tax (expense) benefit | | (4,061) | | | (399) | | | (197) | | | (647) | | | 2,084 | |
Net loss | | (75,510) | | | (88,307) | | | (52,978) | | | (42,712) | | | (20,970) | |
Net (income) loss attributable to non-controlling interests | | (303) | | | 393 | | | 216 | | | 164 | | | 96 | |
Allocation for preferred stock | | (2,968) | | | (173) | | | — | | | — | | | — | |
Net loss attributable to common stockholders | | $ | (78,781) | | | $ | (88,087) | | | $ | (52,762) | | | $ | (42,548) | | | $ | (20,874) | |
Other data: | | | | | | | | | | |
Cash flows provided by operations | | $ | 41,807 | | | $ | 47,404 | | | $ | 54,151 | | | $ | 63,967 | | | $ | 78,725 | |
Cash flows used in investing activities | | (82,491) | | | (46,249) | | | (115,063) | | | (194,409) | | | (19,092) | |
Cash flows provided by (used in) financing activities | | 19,431 | | | 19,086 | | | 49,682 | | | 199,843 | | | (55,567) | |
Per share data: | | | | | | | | | | |
Distributions declared in cash per common share (1) (2) | | $ | 0.42 | | | $ | 0.83 | | | $ | 0.92 | | | $ | 1.47 | | | $ | 1.66 | |
Preferred stock dividends declared per share | | $ | 1.84 | | | $ | 0.11 | | | $ | — | | | $ | — | | | $ | — | |
Net loss per share attributable to common stockholders - Basic and Diluted (1) | | $ | (0.83) | | | $ | (0.93) | | | $ | (0.56) | | | $ | (0.46) | | | $ | (0.23) | |
Weighted-average number of common shares outstanding: | | | | | | | | | | |
Weighted-average shares outstanding - Basic and Diluted (1) | | 94,639,833 | | | 94,433,640 | | | 93,593,719 | | | 92,241,201 | | | 90,265,698 | |
______
(1) Retroactively adjusted for the effects of the stock dividends.
(2) In addition to the distributions declared in cash, distributions declared on common stock were paid in the form of additional shares of common stock equivalent to $0.42 per share for the year ended December 31, 2020 based on our most recent Estimated Per-Share NAV as of December 31, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K for a description of these risks and uncertainties.
Overview
We are an externally managed REIT that focuses on acquiring and managing a diversified portfolio of healthcare-related real estate focused on MOBs, NNN properties, and SHOPs. As of December 31, 2020, we owned 193 properties located in 31 states and comprised of 9.4 million rentable square feet.
Substantially all of our business is conducted through the OP, a Delaware limited partnership, and its wholly owned subsidiaries. Our Advisor manages our day-to-day business with the assistance of our Property Manager. Our Advisor and Property Manager are under common control with AR Global and these related parties receive compensation and fees for providing services to us. We also reimburse these entities for certain expenses they incur in providing these services to us. The Special Limited Partner, which is also under common control with AR Global, also has an interest in us through ownership of interests in our OP.
We have declared quarterly dividends entirely in shares of our common stock equal to 0.01349 shares of our common stock on each share of our outstanding common stock on October 1, 2020 and January 4, 2021. These stock dividends were issued on October 15, 2020 and January 15, 2021 to holders of record of our common stock at the close of business on October 8, 2020 and January 11, 2021, respectively. Dividends payable entirely in shares of our common stock are treated in a fashion similar to a stock split for accounting purposes specifically related to per-share calculations for the current and prior periods. The aggregate impact of these stock dividends was an increase of 0.02716 shares, cumulatively, for every one share of common stock. No additional shares, except for the dividends paid in the form of additional shares of common stock, were issued during the three months ended December 31, 2020. Additionally, other references to weighted-average shares outstanding and per-share amounts have been retroactively adjusted for the stock dividends and are noted as such throughout the accompanying financial statements and footnotes.
On April 3, 2020, we published a new Estimated Per-Share NAV equal to $15.75 as of December 31, 2019. Our previous Estimated Per-Share NAV was equal to $17.50 as of December 31, 2018. Unlike the per share amounts in this Annual Report on Form 10-K, the Estimated Per-Share NAV has not been retroactively adjusted to reflect the payment of dividends in the form of common stock and will not be adjusted for stock dividends paid or that may be paid in the future until the Board determines a new Estimated Per-Share NAV. Dividends paid in the form of additional shares of common stock will, all things equal, cause the value of each share of common stock to decline because the number of shares outstanding will increase when dividends paid in stock are issued; however, each stockholder will receive the same number of new shares, the total value of our common stockholder’s investment, all things equal, will not change assuming no sales or other transfers. We intend to publish Estimated Per-Share NAV periodically at the discretion of the Board, provided that such estimates will be made at least once annually.
Management Update on the Impacts of the COVID-19 Pandemic
The economic uncertainty created by the COVID-19 global pandemic has created several risks and uncertainties that may impact our business, including our future results of operations and our liquidity. A pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global pandemic of COVID-19 affecting states or regions in which we or our tenants operate could have material and adverse effects on our business, financial condition, results of operations and cash flows. The ultimate impact on our results of operations, our liquidity and the ability of our tenants to continue to pay us rent will depend on numerous factors including the overall length and severity of the COVID-19 pandemic. Management is unable to predict the nature and scope of any of these factors. These factors include the following, among others:
•The negative impacts of the COVID-19 pandemic has caused and may continue to cause certain of our tenants to be unable to make rent payments to us timely, or at all. However, we have taken proactive steps with regard to rent collections to mitigate the impact on our business (see “—Management Actions” below).
•There may be a decline in the demand for tenants to lease real estate, as well as a negative impact on rental rates. As of December 31, 2020, our MOB segment had an occupancy of 91.6% with a weighted-average remaining lease term of 4.9 years, (based on annualized straight-line rent as of December 31, 2020) and our triple-net leased healthcare facilities segment had an occupancy of 94.5% with a weighted average remaining lease term of 6.5 years (based on annualized straight-line rent as of December 31, 2020) and our SHOP segment had an occupancy of 75.1%. During the year ended December 31, 2020, we experienced a decline in occupancy and an increase in costs at our SHOP portfolio, however, we received grants under the CARES Act of $3.6 million that helped offset the COVID-19 related operating
costs. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act. For additional information on our SHOP portfolio, see the “Management Actions - Seniors Housing Properties” section below.
•Capital market volatility and a tightening of credit standards could negatively impact our ability to obtain debt financing. We do not have any significant debt principal repayments due until 2024.
•The volatility in the financial market could negatively impact our ability to raise capital through equity offerings, which as a result, could impact our decisions as to when and if we will seek additional equity funding.
•The negative impact of the pandemic on our results of operations and cash flows could impact our ability to comply with covenants in our senior “Credit Facility” and the amount available for future borrowings thereunder.
•The potential negative impact on the health of personnel of our Advisor and operators of our SHOP facilities, particularly if a significant number of the Advisor’s employees or operator’s employees are impacted, could result in a deterioration in our ability to ensure business continuity.
For additional information on the risks and uncertainties associated with the COVID-19 pandemic, please see Item 1A. “Risk Factors — We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic” included in this Annual Report on Form 10-K for the year ended December 31, 2020. The Advisor has responded to the challenges resulting from the COVID-19 pandemic. Beginning in early March, the Advisor took proactive steps to prepare for and actively mitigate the inevitable disruption COVID-19 would cause, such as enacting safety measures, both required or recommended by local and federal authorities, including remote working policies, cooperation with localized closure or curfew directives, and social distancing measures at all of our properties. Additionally, there has been no material adverse impact on our financial reporting systems or internal controls and procedures and the Advisor’s ability to perform services for us. In light of the current COVID-19 pandemic, we are supplementing the historical discussion of our results of operations for the year ended December 31, 2020 with a current update on the measures we have taken to mitigate the negative impacts of the pandemic on our business and future results of operations.
Management’s Actions
Rent Collections
We have taken several steps to mitigate the impact of the pandemic on our business. For rent collections, we have been in direct contact with our tenants and operators since the crisis began, cultivating open dialogue and deepening the fundamental relationships that we have carefully developed through prior transactions and historic operations. Based on this approach and the overall financial strength and creditworthiness of our tenants, we believe that we have had positive results in our cash rent collections during this pandemic.
We have collected approximately 100% of the original cash rent due for the fourth quarter of 2020 in our MOB segment and 100% in our triple-net leased healthcare facilities segment. Cash rental payments for our 59 SHOPs is primarily paid for by the residents through private payer insurance or directly, and to a lesser extent, by government reimbursement programs such as Medicaid and Medicare. These cash rental payments are subject to timing differences, therefore we have not provided the amount of second, third or fourth quarter 2020 cash rent collected for our SHOP segment.
Rent collections in January and February 2021 were materially consistent with the fourth quarter 2020, and we expect this trend to continue. We have also granted rent concessions which serve to reduce revenue in our SHOP segment. The impact of the COVID-19 pandemic on our tenants and operators thus our ability to collect rents in future periods cannot be determined at present.
Seniors Housing Properties
In early March 2020, we implemented preventative actions at all our seniors housing properties in our SHOP segment, including restrictions on visitation except in very limited and controlled circumstances, social distancing measures, and the screening of all persons entering these facilities. Some of the additional steps we have taken to address the COVID-19 pandemic include, enhanced training for staff members, the implementation of Telehealth to help residents be safe while keeping appointments with important, but non-emergency, health providers, virtual tours for potential new residents, and agreements between some of our facilities and local lab partners to provide testing services.
Starting in March 2020, the COVID-19 pandemic and measures to prevent its spread began to affect us in a number of ways. In our SHOP portfolio, occupancy has trended lower since the second half of March 2020 as government policies and implementation of infection control best practices and prospective residents’ concerns about communal-setting COVID-19 spread and prospective residents’ concerns about communal-setting COVID-19 spread limited resident move-ins. These and other impacts of the COVID-19 pandemic have affected and could continue to affect our ability to fill vacancies. We have also continued to experience lower inquiry volumes and reduced in-person tours during the pandemic. SHOP occupancy has continued to decline from 84.1% as of March 31, 2020, to 79.5% as of June 30, 2020, to 77.9%, as of September 30, 2020 and 75.1% as of December 31, 2020. The declines in revenue we experienced during the fourth quarter were primarily attributable
to this decline in occupancy which also represented a decline from December 31, 2019, when SHOP occupancy was 85.7%. In addition, starting in mid-March, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators took appropriate actions to protect residents and caregivers. At our SHOP facilities, we bear these cost increases. These trends accelerated during the second, third and fourth quarters of 2020 and into the beginning of the first quarter of 2021 as the surge of new COVID-19 cases that started in late 2020 crested, and may continue to impact us in the and have a material adverse effect on our revenues and income in the other quarters thereafter. We believe that, as infections decline and more vaccinations are administered during 2021, our occupancy will stop declining, and may start to increase, but there can be no assurance as to when or if we will be able to approach pre-pandemic levels of occupancy.
The pandemic raises the risk of an elevated level of resident exposure to illness and restrictions on move-ins at our SHOPs, which has and could also continue to adversely impact occupancy and revenues as well as increase costs. We believe that the actions we have taken help reduce the incidences of COVID-19 at our properties, but there can be no assurance in this regard. There have been some incidences of COVID-19 among the residents and staff at certain of our seniors housing properties. Further incidences, or the perception that outbreaks may occur, could materially and adversely affect our revenues and income, as well as cause reputational harm to us and our tenants, managers and operators.
The extent to which the ongoing global COVID-19 pandemic, including the outbreaks that have occurred and may occur in markets where we own properties, impacts our operations and those of our tenants and third-party operators, will continue to depend on future developments, including the scope, severity and duration of the pandemic, and the actions taken to contain the COVID-19 or treat its impact, among others, which are highly uncertain and cannot be predicted with confidence, but could be material.
On March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and it provides funding to Medicare providers in order to provide financial relief during the COVID-19 pandemic. Funds provided under the program were to be used for the preparation, prevention, and medical response to COVID-19, and were designated to reimburse providers for healthcare related expenses and lost revenues attributable to COVID-19. As of December 31, 2020 we received $3.6 million in these funds related to four of our SHOPs and we considered the funds to be a grant contribution from the government. The full amount was recognized as a reduction of property operating expenses in our consolidated statement of operations for the year ended December 31, 2020 to offset the incurred COVID-19 expenses. Subsequent to December 31, 2020, we received an additional $5.1 million in CARES Act funding which will reduce property operating expenses incurred due to COVID-19 during the first quarter of 2021. There can be no assurance that the program will be extended or any further amounts received under currently effective or potential future government programs.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Impacts of the COVID-19 Pandemic
As discussed above we have taken a proactive approach to achieve mutually agreeable solutions with its tenants and in some cases, in the second, third and fourth quarters of 2020, we executed lease amendments providing for deferral of rent.
For accounting purposes, in accordance with ASC 842: Leases, normally a company would be required to assess a lease modification to determine if the lease modification should be treated as a separate lease and if not, modification accounting would be applied which would require a company to reassess the classification of the lease (including leases for which the prior classification under ASC 840 was retained as part of the election to apply the package of practical expedients allowed upon the adoption of ASC 842, which doesn’t apply to leases subsequently modified). However, in light of the COVID-19 pandemic in which many leases are being modified, the FASB and SEC have provided relief that allows companies to make a policy election as to whether they treat COVID-19 related lease amendments as a provision included in the pre-concession arrangement, and therefore, not a lease modification, or to treat the lease amendment as a modification. In order to be considered COVID-19 related, cash flows must be substantially the same or less than those prior to the concession. For COVID-19 relief qualified changes, there are two methods to potentially account for such rent deferrals or abatements under the relief, (1) as if the changes were originally contemplated in the lease contract or (2) as if the deferred payments are variable lease payments contained in the lease contract.
For all other lease changes that did not qualify for FASB relief, we would be required to apply modification accounting including assessing classification under ASC 842. Some, but not all of our lease modifications qualify for the FASB relief. In accordance with the relief provisions, instead of treating these qualifying leases as modifications, we elected to treat the modifications as if previously contained in the lease and recast rents receivable prospectively (if necessary). Under that
accounting, for modifications that were deferrals only, there would be no impact on overall rental revenue and for any abatement amounts that reduced total rent to be received, the impact would be recognized ratably over the remaining life of the lease. For leases not qualifying for this relief, we applied modification accounting and determined that there were no changes in the current classification of its leases impacted by negotiations with its tenants.
Revenue Recognition
Our revenues, which are derived primarily from lease contracts, include rent received from tenants in MOBs and triple-net leased healthcare facilities. As of December 31, 2020 and 2019, these leases had a weighted average remaining lease term of 4.9 years and 6.5 years, respectively. Rent from tenants in our MOB and triple-net leased healthcare facilities operating segments (as discussed below) is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable for, and include in revenue from tenants on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease modification is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Under ASC 842, we have elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For comparative purposes, we have also elected to reflect prior revenue and reimbursements reported under ASC 842 also on a single line. For expenses paid directly by the tenant, under both ASC 842 and 840, we have reflected them on a net basis.
Our revenues also include resident services and fee income primarily related to rent derived from lease contracts with residents in the Company’s SHOPs held using a structure permitted by RIDEA and to fees for ancillary services performed for SHOP residents, which are generally variable in nature. Rental income from residents in our SHOP segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed.
We defer the revenue related to lease payments received from tenants and residents in advance of their due dates. Pursuant to certain of our lease agreements, tenants are required to reimburse us for certain property operating expenses related to non-SHOP assets (recorded in revenue from tenants), in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.
Under ASC 842, we have elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For expenses paid directly by the tenant, under both ASC 842 and 840, we have reflected them on a net basis.
We continually review receivables related to rent and unbilled rents receivable and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Under leasing standards, we are required to assess, based on credit risk only, if it is probable that we will collect virtually all of the lease payments at lease commencement date and it must continue to reassess collectability periodically thereafter based on new facts and circumstances affecting the credit risk of the tenant. Partial reserves, or the ability to assume partial recovery are no longer permitted. If we determine that it is probable it will collect virtually all of the lease payments (rent and common area maintenance), the lease will continue to be accounted for on an accrual basis (i.e. straight-line). However, if we determine it is not probable that we will collect virtually all of the lease payments, the lease will be accounted for on a cash basis and a full reserve would be recorded on previously accrued amounts in cases where it was subsequently concluded that collection was not probable. Cost recoveries from tenants are included in operating revenue from tenants beginning on January 1, 2019, in accordance with accounting rules adopted after that date, on the accompanying consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable.
Under ASC 842, which was adopted effective on January 1, 2019, uncollectable amounts are reflected as reductions in revenue. Under ASC 840, we recorded such amounts as bad debt expense as part of property operating expenses. During the years ended December 31, 2020, 2019 and 2018 such amounts were $2.7 million, $6.5 million and $14.8 million, respectively, which include bad debt expense related to the NuVista and LaSalle Tenants (see Note 3 — Real Estate Investment, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
At the time an asset is acquired, we evaluate the inputs, processes and outputs of the asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets. See the “Purchase Price Allocation” section below for a discussion of the initial accounting for investments in real estate.
Disposal of real estate investments that represent a strategic shift in operations that will have a major effect on our operations and financial results are required to be presented as discontinued operations in the consolidated statements of operations. No properties were presented as discontinued operations during the years ended December 31, 2020, 2019 or 2018. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale, most significantly that the sale is probable within one year. We evaluate probability of sale based on specific facts including whether a sales agreement is in place and the buyer has made significant non-refundable deposits. Properties are no longer depreciated when they are classified as held for sale. There were $0.1 million and $70.8 million in real estate investments held for sale as of December 31, 2020 and 2019, respectively (see Note 3 — Real Estate Investments, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). All of our leases as lessor prior to the adoption of new lease accounting rules on January 1, 2019, were accounted for as operating leases and they continue to be accounted for as operating leases under the transition guidance. We evaluate new leases originated after the adoption date (by us or by a predecessor lessor/owner) pursuant to the new guidance where a lease for some or all of a building is classified by a lessor as a sales-type lease if the significant risks and rewards of ownership reside with the tenant. This situation is met if, among other things, there is an automatic transfer of title during the lease, a bargain purchase option, the non-cancelable lease term is for more than major part of remaining economic useful life of the asset (e.g., equal to or greater than 75%), if the present value of the minimum lease payments represents substantially all (e.g., equal to or greater than 90%) of the leased property’s fair value at lease inception, or if the asset so specialized in nature that it provides no alternative use to the lessor (and therefore would not provide any future value to the lessor) after the lease term. Further, such new leases would be evaluated to consider whether they would be failed sale-leaseback transactions and accounted for as financing transactions by the lessor. For the three-year period ended December 31, 2020, we have no leases as a lessor that would be considered as sales-type leases or financings under sale-leaseback rules.
We are also the lessee under certain land leases which were previously classified prior to adoption of lease accounting and will continue to be classified as operating leases under transition elections unless subsequently modified. These leases are reflected on the balance sheet and the rent expense is reflected on a straight-line basis over the lease term.
We generally determine the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion.
Purchase Price Allocation
In both a business combination and an asset acquisition, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements on an as if vacant basis. Intangible assets may include the value of in-place leases and above-and below-market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the years ended December 31, 2020, 2019 and 2018 were accounted for as asset acquisitions.
For acquired properties with leases classified as operating leases, we allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed, based on their respective fair values. In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize various estimates, processes and information to determine the as-if vacant property value. We estimate fair value using data from appraisals, comparable sales, discounted cash flow analysis and other methods. Fair value estimates are also made using significant assumptions such as capitalization rates, fair market lease rates and land values per square foot.
Identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. We also estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. We did not record any intangible asset amounts related to customer relationships during the years ended December 31, 2020 and 2019.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment exists, due to the inability to recover the carrying value of a property, we would recognize an impairment loss in the consolidated statement of operations and comprehensive (loss) to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss recorded would equal the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, 7 to 10 years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion. The value of certain other intangibles such as certificates of need in certain jurisdictions are amortized over the expected period of benefit (generally the life of the related building).
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The value of customer relationship intangibles, if any, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Above-and Below-Market Lease Amortization
Capitalized above-market lease values are amortized as a reduction of revenue from tenants over the remaining terms of the respective leases and the capitalized below-market lease values are amortized as an increase to revenue from tenants over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
Equity-Based Compensation
The Company has a stock-based incentive award program for its directors, which is accounted for under the guidance of share based payments. The cost of services received in exchange for these stock awards is measured at the grant date fair value of the award and the expense for such awards is included in general and administrative expenses and is recognized over the service period (i.e., vesting) required or when the requirements for exercise of the award have been met.
CARES Act Grants
On March 27, 2020, Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and it provides funding to Medicare providers in order to provide financial relief during the COVID-19 pandemic. Funds provided under the program were to be used for the preparation, prevention, and medical response to COVID-19, and were designated to reimburse providers for healthcare related expenses and lost revenues attributable to COVID-19. We received $3.6 million in these funds during the year ended December 31, 2020, related to four of our SHOPs and we considered the funds to be a grant contribution from the government. The full amounts received were recognized as a reduction of property operating expenses in our consolidated statement of operations for the year ended December 31, 2020 to offset the incurred COVID-19 expenses. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act which will reduce property operating expenses incurred due to COVID-19 during the first quarter of 2021. There can be no assurance that the program will be extended or any further amounts received.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to the consolidated financial statements included in this Annual Report on Form 10-K for further discussion. Results of Operations
We operate in three reportable business segments for management and internal financial reporting purposes: MOBs, triple-net leased healthcare facilities, and SHOPs. In our MOB operating segment, we own, manage and lease single and multi-tenant MOBs where tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. In our triple-net leased healthcare facilities operating segment, we own, manage and lease seniors housing properties, hospitals, post-acute care and skilled nursing facilities throughout the United States under long-term triple-net leases, and tenants are generally directly responsible for all operating costs of the respective properties.Our Property Manager or third party managers manage our MOBs and our triple-net leased healthcare facilities. In our SHOP segment, we invest in seniors housing properties using the RIDEA structure. As of December 31, 2020, we had seven eligible independent contractors operating 59 SHOPs (not including two land parcels). All of our properties across all three business segments are located throughout the United States.
Same Store Properties
Information based on Same Store, Acquisitions and Dispositions (as each are defined below) allows us to evaluate the performance of our portfolio based on a consistent population of properties owned for the entire period of time covered. As of December 31, 2020, we owned 193 properties. There were 175 properties (our “Same Store” properties) owned for the entire years ended December 31, 2020 and 2019, including two vacant land parcels and one development property that was substantially completed in the fourth quarter of 2019. Since January 1, 2019 and through December 31, 2020, we acquired 18 properties (our “Acquisitions”) and disposed of 16 properties (our “Dispositions”). As described in more detail under “Results of Operations— Comparison of the Years Ended December 31, 2020 and 2019 — Transition Properties” below, our Same Store properties include four Transition Properties that were transitioned from Senior Housing - Triple Net Leased to our SHOP segment effective July 1, 2020, and another Transition Property which transitioned from our Triple Net Leased segment effective April 1, 2019. These five Transition Properties were owned for the entirety of 2019 and 2020 and merely moved between segments. We retroactively adjusted our Same Store reporting for those segments to include the Transition Properties as part of the Same Store reporting in our SHOP segment and excluded them from the Same Store reporting in our triple-net leased healthcare facilities segment (each segment as so retroactively adjusted, the “Segment Same Store”). See Note 3— Real Estate Investments, Net to our consolidated financial statements included in this Annual Report on Form 10-K for further information about the Transition Properties and the transition. The following table presents a roll-forward of our properties owned from January 1, 2019 to December 31, 2020:
| | | | | |
| Number of Properties |
| |
| |
| |
Number of properties, December 31, 2018 | 191 | |
Acquisition activity during the year ended December 31, 2019 | 9 | |
Disposition activity during the year ended December 31, 2019 | (7) | |
Number of properties, December 31, 2019 | 193 | |
Acquisition activity during the year ended December 31, 2020 | 9 |
Disposition activity during the year ended December 31, 2020 | (9) | |
Number of properties, December 31, 2020 | 193 | |
| |
Number of Same Store Properties (1) | 175 | |
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(1) Includes the acquisition of a land parcel adjacent to an existing property which is not considered an Acquisition.
In addition to the comparative period-over-period discussions below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s responses.
Below is a discussion of our results of operations for the years ended December 31, 2020 and2019. Please see the “Results of Operations” section located in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of our results of operations for the year ended December 31, 2019 and 2018. Comparison of the Years Ended December 31, 2020 and 2019
Net loss attributable to common stockholders was $78.8 million and $88.1 million for the years ended December 31, 2020 and 2019, respectively. The following table shows our results of operations for the years ended December 31, 2020 and 2019 and the year to year change by line item of the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | % |
Revenue from tenants | | $ | 381,612 | | | $ | 374,914 | | | $ | 6,698 | | | 1.8 | % |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Property operating and maintenance | | 243,548 | | | 234,185 | | | 9,363 | | | 4.0 | % |
Impairment charges | | 36,446 | | | 55,969 | | | (19,523) | | | (34.9) | % |
Operating fees to related parties | | 23,922 | | | 23,414 | | | 508 | | | 2.2 | % |
Acquisition and transaction related | | 173 | | | 362 | | | (189) | | | (52.2) | % |
General and administrative | | 21,572 | | | 20,530 | | | 1,042 | | | 5.1 | % |
Depreciation and amortization | | 81,053 | | | 81,032 | | | 21 | | | — | % |
Total expenses | | 406,714 | | | 415,492 | | | (8,778) | | | (2.1) | % |
Operating loss before gain (loss) on sale of real estate investments | | (25,102) | | | (40,578) | | | 15,476 | | | 38.1 | % |
Gain on sale of real estate investments | | 5,230 | | | 8,790 | | | (3,560) | | | NM |
Operating loss | | (19,872) | | | (31,788) | | | 11,916 | | | 37.5 | % |
Other income (expense): | | | | | | | | |
Interest expense | | (51,519) | | | (56,059) | | | 4,540 | | | 8.1 | % |
Interest and other income | | 44 | | | 7 | | | 37 | | | 528.6 | % |
Loss on non-designated derivatives | | (102) | | | (68) | | | (34) | | | (50.0) | % |
Total other expenses | | (51,577) | | | (56,120) | | | 4,543 | | | 8.1 | % |
Loss before income taxes | | (71,449) | | | (87,908) | | | 16,459 | | | 18.7 | % |
Income tax expense | | (4,061) | | | (399) | | | (3,662) | | | NM |
Net loss | | (75,510) | | | (88,307) | | | 12,797 | | | 14.5 | % |
Net income attributable to non-controlling interests | | (303) | | | 393 | | | (696) | | | (177.1) | % |
Allocation for preferred stock | | (2,968) | | | (173) | | | (2,795) | | | NM |
Net loss attributable to common stockholders | | $ | (78,781) | | | $ | (88,087) | | | $ | 9,306 | | | 10.6 | % |
| | | | | | | | |
__________
NM — Not Meaningful
Transition Properties
Some of our properties move between our operating segments, for example if they are converted from being triple-net leased to third parties in our triple-net leased healthcare facilities segment to being leased to our TRS and operated and managed on our behalf by a third-party operator in our SHOP segment. When transfers between segments occur, we reclassify the operating results of the transferred properties to their current segment for both the current and all historical periods in order to present a consistent group of property results. See Note 3 — Real Estate Investments, Net - “Impairments” and “Held for Use Assets” and Note 15 — Segment Reporting to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Over the last three years, we have had properties transfer between operating segments. Upon such transfers the Company retroactively restates the historical operating results for the segment for all periods presented in that filing and, thereafter, the Company will restate other later prior periods when they are subsequently reported in later filings for comparative purposes. As a result, the Company provides transition disclosure adjustments only for properties that have transitioned since the prior numbers were previously reported. The Company had the following: (i) 2020 Transition Properties – the four LaSalle Properties (Effective July 1, 2020, reporting for the quarter ended September 30, 2020) – (ii) 2019 Transition Property – the Wellington Property (Effective in April, 2019, reporting for the quarter ended June 30, 2019). Collectively, these are referred generically as the “Transition Properties.”
During the year ended December 31, 2020, as shown in more detail in the table below, the Transition Properties contributed approximately $(0.1) million of net operating income (“NOI”). The results of operations of the Transition Properties are included in Segment Same Store with respect to the SHOP segment. The bad debt expense relating to the Transition Properties is included as a reduction to revenue from tenants on the consolidated statement of operations.
The previously reported Same Store results had already been retroactively adjusted to reflect the impact of Transition Properties during the applicable periods and require no further adjustments thereto.
The following table presents by segment Same Store properties’ NOI before and after adjusting for the 2020 Transition Properties as described above, to arrive at “Segment Same Store” results. Our MOB segment was not affected by the Transition Properties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Increase (Decrease) |
(Dollar amounts in thousands) | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store |
NNN Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 35,452 | | $ | (19,841) | | $ | 15,611 | | | $ | 32,509 | | $ | (17,945) | | $ | 14,564 | | | $ | 2,943 | | $ | (1,896) | | $ | 1,047 | |
Less: Property operating and maintenance | | 21,853 | | (19,892) | | 1,961 | | | 18,180 | | (15,870) | | 2,310 | | | 3,673 | | (4,022) | | (349) | |
NOI | | $ | 13,599 | | $ | 51 | | $ | 13,650 | | | $ | 14,329 | | $ | (2,075) | | $ | 12,254 | | | $ | (730) | | $ | 2,126 | | $ | 1,396 | |
| | | | | | | | | | | | |
SHOP Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 198,864 | | $ | 19,841 | | $ | 218,705 | | | $ | 209,579 | | $ | 17,945 | | $ | 227,524 | | | $ | (10,715) | | $ | 1,896 | | $ | (8,819) | |
Less: Property operating and maintenance | | 154,022 | | 19,892 | | 173,914 | | | 154,351 | | 15,870 | | 170,221 | | | (329) | | 4,022 | | 3,693 | |
NOI | | $ | 44,842 | | $ | (51) | | $ | 44,791 | | | $ | 55,228 | | $ | 2,075 | | $ | 57,303 | | | $ | (10,386) | | $ | (2,126) | | $ | (12,512) | |
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other financial statement amounts included in net income (loss) attributable to common stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures included in this Annual Report on Form 10-K for additional disclosure and a reconciliation to our net income (loss) attributable to common stockholders.
Segment Results — Medical Office Buildings
The following table presents the components of NOI and the period to period change within our MOB segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store(1) | | Acquisitions(2) | | Dispositions(3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 95,500 | | $ | 93,651 | | $ | 1,849 | | | $ | 8,341 | | $ | 5,372 | | $ | 2,969 | | | $ | 372 | | $ | 1,356 | | $ | (984) | | | $ | 104,213 | | $ | 100,379 | | $ | 3,834 | |
Less: Property operating and maintenance | | 28,380 | | 29,218 | | (838) | | | 2,436 | | 1,986 | | 450 | | | 35 | | 609 | | (574) | | | 30,851 | | 31,813 | | (962) | |
NOI | | $ | 67,120 | | $ | 64,433 | | $ | 2,687 | | | $ | 5,905 | | $ | 3,386 | | $ | 2,519 | | | $ | 337 | | $ | 747 | | $ | (410) | | | $ | 73,362 | | $ | 68,566 | | $ | 4,796 | |
_______________
(1) Our MOB segment included 104 Same Store properties.
(2) Our MOB segment included 13 Acquisition properties.
(3) Our MOB segment included seven Disposition properties.
(4) Our MOB segment consisted of 117 properties.
NM — Not Meaningful
Revenue from tenants is primarily related to contractual rent received from tenants in our MOBs. It also includes operating expense reimbursements which generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent.
Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, and unaffiliated third party property management fees.
During the year ended December 31, 2020, the MOB segment contributed a $4.8 million increase in NOI as compared to the year ended December 31, 2019. Of our 18 Acquisitions, during the period from January 1, 2019 through December 31, 2020, 13 were MOBs which contributed a $2.5 million increase in NOI, and our Disposition properties contributed a $0.4 million decrease in NOI, while NOI from our Same Store properties contributed a $2.7 million increase in NOI as compared to the year ended December 31, 2019.
Segment Results — Triple Net Leased Healthcare Facilities
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | |
Less: Property operating and maintenance | | 1,961 | | 2,310 | | (349) | | | — | | — | | — | | | — | | — | | — | | | 1,961 | | 2,310 | | (349) | |
NOI | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | |
_________
(1) Our triple-net leased healthcare facilities segment included 15 Same Store properties.
(2) Our triple-net leased healthcare facilities segment did not have any Acquisitions properties.
(3) Our triple-net leased healthcare facilities segment did not have any Dispositions properties.
(4) Our triple-net leased healthcare facilities segment included 15 properties.
NM - Not Meaningful
Revenue from tenants for our triple-net leased healthcare facilities generally consist of fixed rental amounts (which may be subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms. These revenues are contractual rent received from tenants that does not vary based on the underlying operating performance of the properties. In addition, revenue from tenants also includes operating expense reimbursements in our triple-net leased healthcare facilities segment, which generally include reimbursement for property operating expenses that we pay on behalf of tenants in this segment. However, pursuant to many of our lease agreements in this segment, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance expense should typically include minimal activity in our triple-net leased healthcare facilities segment except for real estate taxes and insurance. Real estate taxes are typically paid directly by the tenants; however, they may be paid by us and reimbursed by the tenants.
During the year ended December 31, 2020, revenue from tenants in our triple-net leased healthcare facilities segment increased $1.0 million as compared to the year ended December 31, 2019. Property operating and maintenance expenses decreased $0.3 million during the year ended December 31, 2020 and December 31, 2019, respectively, primarily related to lower property taxes and operating expenses.
Segment Results — Seniors Housing Operating Properties
The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ |
Revenue from tenants | | $ | 218,705 | | | $ | 227,524 | | | $ | (8,819) | | | $ | 18,534 | | | $ | 2,052 | | | $ | 16,482 | | | $ | 24,549 | | | $ | 30,395 | | | $ | (5,846) | | | $ | 261,788 | | | $ | 259,971 | | | $ | 1,817 | |
Less: Property operating and maintenance | | 173,914 | | | 170,221 | | | 3,693 | | | 15,330 | | | 1,760 | | | 13,570 | | | 21,492 | | | 28,081 | | | (6,589) | | | 210,736 | | | 200,062 | | | 10,674 | |
NOI | | $ | 44,791 | | | $ | 57,303 | | | $ | (12,512) | | | $ | 3,204 | | | $ | 292 | | | $ | 2,912 | | | $ | 3,057 | | | $ | 2,314 | | | $ | 743 | | | $ | 51,052 | | | $ | 59,909 | | | $ | (8,857) | |
__________
(1) Our SHOP segment included 56 Same Store properties, including two land parcels.
(2) Our SHOP segment included five Acquisitions properties.
(3) Our SHOP segment included nine Dispositions properties.
(4) Our SHOP segment included 61 properties, including two land parcels.
NM — Not Meaningful
Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance expenses relates to the costs associated with staffing to provide care for the residents in our SHOPs, as well as food, marketing, real estate taxes, management fees paid to our third party operators, and costs associated with maintaining the physical site
During the year ended December 31, 2020, revenue from tenants increased by $1.8 million in our SHOP segment as compared to the year ended December 31, 2019 which was primarily driven by an increase in revenue of $16.5 million due to our Acquisition properties, offset by decreases of $5.8 million due to our Disposition properties and $8.8 million due to our Same Store properties, which includes our Transition Properties.
Revenues declined in our Same Store SHOPs primarily due to a decrease in occupancy as a result of the impact of COVID-19 as discussed above. SHOP occupancy has declined from 84.1% as of March 31, 2020 to 79.5% as of June 30, 2020, to 77.9% as of September 30, 2020 and 75.1% as of December 31, 2020. This decline in occupancy trend is also represented in a decline from December 31, 2019, when SHOP occupancy was 85.7%. Regulatory and government-imposed restrictions and infectious disease protocols have hindered, and continue to hinder, our ability to accommodate and conduct in-person tours, process and attract new move-ins at our SHOPs and these and other impacts of the COVID-19 pandemic have affected, and could continue to affect, our ability to fill vacancies.
In addition, we also generated a portion of our SHOP revenue from skilled nursing facilities (which include ancillary revenue from non-residents) at four of our Same Store SHOPs. This revenue declined $2.1 million from $15.4 million during the year ended December 31, 2019 to $13.3 million during the year ended December 31, 2020 as a result of us limiting the services we offer at our skilled nursing facilities, during the COVID-19 pandemic, to protect our residents and on-site staff. We also offered COVID-related rent concessions of $0.4 million for the year ended December 31, 2020. These revenue decreases were partially offset by $1.3 million in COVID-19 surcharges we began billing residents for Personal Protective Equipment (“PPE”) during the quarter ended September 30, 2020, and less bad debt expense of $3.1 million relating to the LaSalle tenant, as described further below.
During the year ended December 31, 2020, property operating and maintenance expenses increased $10.7 million in our SHOP segment as compared to the year ended December 31, 2019, primarily due to an increase of $13.6 million due to our SHOP Acquisition properties and an increase of $3.7 million in our Same Store properties, which includes our Transition Properties. These increases were partially offset by a decrease in property operating and maintenance expenses from our Dispositions of $6.6 million.
The total increase in Same Store operating costs mainly related to costs incurred from the ongoing COVID-19 pandemic which totaled $7.6 million for the year ended December 31, 2020, which was partially offset by $3.6 million of funds received through the CARES Act. The full amount of the CARES Act funds was recognized as a reduction to our Same Store property operating expenses in the table above for the year ended December 31, 2020. As a result we experienced an increase in Same Store operating costs of $3.7 million year over year. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act which will be recognized as a reduction to our Same Store property operating expenses in the quarter ending March 31, 2021. There can be no assurance that the program will be extended or any further amounts received. See the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response.
The LaSalle Properties
On July 1, 2020, we transitioned the LaSalle Properties from our triple-net leased healthcare facilities segment to our SHOP segment, and the LaSalle Properties are now leased to our TRS and operated and managed on our behalf by a third-party operator. Beginning with our reporting for the period ended December 31, 2020 these properties are part of the “Transition Properties” and the resultant change has been applied retrospectively to historical periods.
As of December 31, 2020, the prior tenants at the LaSalle Properties remain in default of a forbearance agreement as described in more detail under “Note 3 — Real Estate Investment, Net - The LaSalle Tenant” and owe us $12.7 million of rent, property taxes, late fees, and interest receivable thereunder. We have the entire receivable balance, including any monetary damages, and related income from the LaSalle Properties fully reserved as of December 31, 2020 and 2019. We incurred bad debt expense, including straight-line rent write-offs of $0.4 million and $3.5 million, related to the LaSalle Properties during the years ended December 31, 2020 and 2019, respectively, which is included as a reduction in revenue from tenants on the consolidated statement of operations.
Now that the transition is complete, we have gained more control over the operations of the LaSalle Properties, and we believe this will allow us to improve performance and the cash flows generated by the LaSalle Properties. There can be no assurance, however, that completing this transition will result in us achieving our operational objectives.
Other Results of Operations
Impairment Charges
We incurred $36.4 million of impairment charges for the year ended December 31, 2020. We recorded $19.6 million of impairment charges related to the 11 Michigan SHOPs, which was recognized after an amendment to the PSA for the sale of these properties in April 2020 which reduced the number of properties under consideration as well as the contract purchase price. We recorded $16.9 million of impairment charges related to the two Florida properties in Jupiter and Wellington as a result of our marketing efforts during the COVID-19 pandemic which concluded with a PSA in August 2020, for which the contract purchase was less than the carrying values of the properties, as well as expected closing costs that were not previously anticipated, which reduced the net amount expected to be realized on the sale of properties.
We incurred $56.0 million of impairment charges for the year ended December 31, 2019. During the fourth quarter of 2019, we began to evaluate the properties in Lutz, Florida, Wellington, Florida and our recently completed development property in Jupiter, Florida for potential sale. As a result, we concluded these held for use assets were impaired and recognized impairment charges in the aggregate of $33.3 million. The other impairment charges for 2019 relate to the 14 Michigan SHOPs that were under contract to be sold.
See Note 3 — Real Estate Investments to our consolidated financial statements in this Annual Report on Form 10-K for additional information on impairment charges. Operating Fees to Related Parties
Operating fees to related parties increased $0.5 million to $23.9 million for the year ended December 31, 2020 from $23.4 million for the year ended December 31, 2019.
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. The fixed portion of the base management fee we pay for asset management services is equal to $1.6 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth per month of 1.25% of the cumulative net proceeds of any equity the we raise. Asset management fees increased $0.5 million to $20.0 million for the year ended December 31, 2020, due to the increase in the variable portion of the base management fee related to the issuance and sale of Series A Preferred Stock in December 2019.
Property management fees increased $0.3 million to $4.2 million, inclusive of $0.3 million of leasing commissions paid, during the year ended December 31, 2020 from $3.9 million during the year ended December 31, 2019. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed.
SeeNote 9 — Related Party Transactions and Arrangements to our consolidated financial statements found in this Annual Report on Form 10-K which provides detail on our fees and expense reimbursements. Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses were $0.2 million for the year ended December 31, 2020 and $0.4 million for the year ended December 31, 2019. The expenses in both periods primarily related to indirect costs associated with potential acquisitions.
General and Administrative Expenses
General and administrative expenses increased $1.0 million to $21.6 million for the year ended December 31, 2020 compared to $20.5 million for the year ended December 31, 2019, which includes a $0.8 million increase in expense reimbursements to related parties. The increase in expense reimbursements to related parties was primarily due to $2.2 million of severance payments and related to legal costs incurred by the Advisor relating to the termination in 2018 of our former chief executive officer, partially offset by a $1.2 million reduction in expenses as a result of revisions to previously accrued bonuses to reflect the ultimate amount paid (see Note 9 – Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K). Depreciation and Amortization Expenses
Depreciation and amortization expense increased marginally to $81.1 million for the year ended December 31, 2020 from $81.0 million for the year ended December 31, 2019.
Gain on Sale of Real Estate Investments
During the year ended December 31, 2020, we disposed of nine properties. The properties were sold for an aggregate contract price of $40.4 million, which resulted in an aggregate gain on sale of $5.2 million. See Note 3 — Real Estate Investments, Net to our consolidated financial statements in this Annual Report on Form 10-K for additional information.
Interest Expense
Interest expense decreased by $4.6 million to $51.5 million for the year ended December 31, 2020 from $56.1 million for the year ended December 31, 2019. The decrease in interest expense resulted from lower interest rates, partially offset by the increase on average outstanding debt in 2020 compared to 2019, as well as $3.0 million of interest expense recorded in the year ended December 31, 2019 resulting from the write off of unamortized deferred financing costs from the refinancing of a $250.0 million mortgage loan originally entered into in 2017. As of December 31, 2020 our outstanding debt obligations were $1.2 billion at a weighted average interest rate of 3.58% per year. As of December 31, 2019, we had total borrowings of $1.1 billion, at a weighted average interest rate of 4.03% per year.
Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings among other factors.
Interest and Other Income
Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. Interest and other income was approximately $44,000 for the year ended December 31, 2020. Interest and other income was approximately $7,000 for the year ended December 31, 2019.
Loss on Non-Designated Derivatives
Loss on non-designated derivative instruments for the years ended December 31, 2020 and 2019 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. Loss on derivative instruments for the years ended December 31, 2020, 2019 and 2018 were $0.1 million, $0.1 million and $0.2 million, respectively.
Income Tax Benefit (Expense)
We recorded income tax expense of $4.1 million and $0.4 million for the years ended December 31, 2020 and 2019, respectively, related to deferred tax assets generated by temporary differences and current period net operating income associated with our TRS. During the year ended December 31, 2020, we recorded a $4.6 million valuation allowance against our deferred tax asset. Income taxes generally relate to our SHOPs, which are leased by our TRS.
Because of our TRS recent operating history of losses and the on-going impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, we are not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets; thus we have recorded a 100% valuation allowance as of December 31, 2020 of $4.6 million. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statements of comprehensive income (loss). As of December 31, 2020, our consolidated TRS had net operating loss carryforwards for federal income tax purposes of approximately $14 million at December 31, 2020 (of which $7.6 million were incurred prior to January 1, 2018). For losses incurred prior to January 1, 2018, if unused, these will begin to expire in 2035. For net operating losses incurred subsequent to December 31, 2017, there is no expiration date.
Net Income/Loss Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was approximately $0.3 million and net loss to non-controlling interests was $0.4 million for the years ended December 31, 2020 and 2019, respectively. These amounts represent the portion of our net loss that is related to the OP Units and non-controlling interest holders in our subsidiaries that own certain properties.
Cash Flows from Operating Activities
During the year ended December 31, 2020, net cash provided by operating activities was $41.8 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $45.8 million (net loss of $75.5 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges). In addition, cash provided by operating activities was impacted by an increase in accounts payable and accrued expenses of $4.6 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $0.1 million and a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $2.4 million.
During the year ended December 31, 2019, net cash provided by operating activities was $47.4 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $56.8 million (net loss of $88.3 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-
designated derivatives and impairment charges) and an increase in accounts payable and accrued expenses of $2.6 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $9.7 million and a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $3.8 million.
Cash Flows from Investing Activities
Net cash used in investing activities during the year ended December 31, 2020 was $82.5 million. The cash used in investing activities included $95.0 million for the acquisition of nine properties and $21.9 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $34.4 million.
Net cash used in investing activities during the year ended December 31, 2019 was $46.2 million. The cash used in investing activities included $92.0 million for the acquisition of nine properties and to fund the cost of our ongoing development property in Jupiter, Florida during the period and $16.7 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $62.5 million.
Cash Flows from Financing Activities
Net cash provided by financing activities of $19.4 million during the year ended December 31, 2020 included proceeds of $95.0 million from our Revolving Credit Facility. These cash inflows were partially offset by distributions to stockholders of $31.4 million, common stock repurchases of $10.5 million, payments for deferred financing costs of $2.2 million, the buyout of a non-controlling interest of $0.6 million and dividends paid to preferred stockholders $2.4 million.
Net cash provided by financing activities of $19.1 million during the year ended December 31, 2019 related to proceeds of $225.6 million from our Revolving Credit Facility, $150.0 million from our Term Loan, $136.5 million from the Multi-Property CMBS Loan and $37.6 million of net proceeds from the issuance of Series A Preferred Stock. These cash inflows were partially offset by payments on our Revolving Credit Facility of $368.3 million, mortgage principal repayments of $67.8 million, distributions to stockholders of $51.4 million, common stock repurchases of $21.1 million, payments for deferred financing costs of $19.5 million, and distributions to non-controlling interest holders of $0.3 million.
Liquidity and Capital Resources
The negative impacts of the COVID-19 pandemic has caused and may continue to cause certain of our tenants to be unable to make rent payments to us timely, or at all, which has, and could continue to have, an adverse effect on the amount of cash we receive from our operations. In addition to the discussion below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response.
As of December 31, 2020, we had $72.4 million of cash and cash equivalents. Our ability to use this cash on hand is restricted. Under our Credit Facility, as amended on August 2020, we are required to maintain a combination of cash, cash equivalents and availability for future borrowings under our revolving credit facility under our Credit Facility (our “Revolving Credit Facility”) totaling at least $50.0 million. As of December 31, 2020, $48.3 million was available for future borrowings under our Revolving Credit Facility. Pursuant to an amendment to our Credit Facility in August 2020, certain other restrictions and conditions described below will no longer apply starting in the “Commencement Quarter” which is a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. As of December 31, 2020, our ratio of consolidated total indebtedness to consolidated total asset value for these purposes was 61.7%. The Commencement Quarter may be no earlier than the fiscal quarter ending June 30, 2021. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We, for example, may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of our common stock) on our common stock until the Commencement Quarter. Moreover, beginning in the Commencement Quarter, we may only pay cash distributions provided that the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter.
Following the amendment in August 2020, our Credit Facility also restricts our sources of liquidity. Until the first day of the Commencement Quarter, we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. The availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the decreases in cash rent collected from our tenants and income from our operators that have resulted from the effects of the COVID-19 pandemic and may persist for some time. See “Item 1A. Risk Factors. Our Credit Facility restricts our ability to use cash
that would otherwise be available to us, and there can be no assurance our available liquidity will be sufficient to meet our capital needs.”
We expect to fund our future short-term operating liquidity requirements, including dividends to holders of Series A Preferred Stock, through a combination of current cash on hand, net cash provided by our property operations and proceeds from the Revolving Credit Facility. Our principal demands for cash are for acquisitions, capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), and dividends to holders of our Series A Preferred Stock. We closely monitor our current and anticipated liquidity position relative to our current and anticipated demands for cash and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as the on-going impact of COVID-19 on our tenants and operators and our ability to complete our pending dispositions on their contemplated terms, or at all.
Preferred Stock Equity Line with B. Riley Principal Capital, LLC
On September 15, 2020, we entered into a preferred stock purchase agreement and registration rights agreement with B. Riley Principal Capital, LLC (“B. Riley”), pursuant to which we have the right from time to time to sell up to an aggregate of $15 million of shares of our Series A Preferred Stock to B. Riley until December 31, 2023, on the terms and subject to the conditions set forth in the purchase agreement. This arrangement is also referred to as the “Preferred Stock Equity Line.” We control the timing and amount of any sales to B. Riley under the Preferred Stock Equity Line, and B. Riley is obligated to make purchases of up to 3,500 shares of Series A Preferred Stock each time (as may be increased by mutual agreement by the parties) in accordance with the purchase agreement, upon certain terms and conditions being met. We did not sell any shares under the Preferred Stock Equity Line during the year ended December 31, 2020.
Financings
As of December 31, 2020, our total debt leverage ratio (net debt divided by gross asset value) was approximately 44.5%. Net debt totaled $1.2 billion, which represents gross debt ($1.2 billion) less cash and cash equivalents ($72.4 million). Gross asset value totaled $2.6 billion, which represents total real estate investments, at cost ($2.6 billion) and assets held for sale at carrying value ($0.1 million), net of gross market lease intangible liabilities ($22.1 million). Impairment charges are already reflected within gross asset value.
As of December 31, 2020, we had total gross borrowings of $1.2 billion, at a weighted average interest rate of 3.6%. As of December 31, 2019, we had total gross borrowings of $1.1 billion at a weighted average interest rate of 4.0%. As of December 31, 2020, the carrying value of our real estate investments, at cost was $2.6 billion, with $0.9 billion of this amount pledged as collateral for mortgage notes payable, $0.6 billion of this amount pledged to secure advances under the Fannie Mae Master Credit Facilities and $0.9 billion of this amount comprising the borrowing base of the Credit Facility. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the Credit Facility, which would impact availability thereunder.
We expect to utilize proceeds from our Credit Facility to fund future property acquisitions, as well as, subject to the terms of our Credit Facility, other sources of funds that may be available to us. These actions may require us to add some or all of our unencumbered properties as security for that debt or add them to the borrowing base under our Credit Facility. Unencumbered real estate investments, at cost as of December 31, 2020 was $0.2 billion. There can be no assurance as to the amount of liquidity we would be able to generate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility. Pursuant to the Credit Facility, any resulting net proceeds from these dispositions prior to the Commencement Quarter must be used to prepay amounts outstanding under the Revolving Credit Facility.
Mortgage Notes Payable
As of December 31, 2020, we had $550.4 million in gross mortgage notes payable outstanding. During the first quarter of 2020, we assumed one mortgage for $13.9 million in connection with one of our SHOP acquisitions.
Credit Facility
Our Credit Facility consists of two components, the Revolving Credit Facility and our Term Loan. The Revolving Credit Facility is interest-only and matures on March 13, 2023, subject to one one-year extension at our option. Our Term Loan is interest-only and matures on March 13, 2024. Loans under our Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty, subject to customary breakage costs. Any amounts repaid under our Term Loan may not be re-borrowed.
In March 2020, we borrowed an additional $95.0 million under the Revolving Credit Facility a portion of which was used for general corporate purposes. Subsequently, we have not borrowed additional amount under the Revolving Credit Facility.
In the fourth quarter of 2020, we repaid $4.4 million of the Revolving Credit Facility from the proceeds of the Michigan SHOP disposition and $17.6 million from the disposition of the skilled nursing facility in Lutz, Florida. These amounts represented all the cash proceeds from these dispositions.
The total commitments under the Credit Facility are $630.0 million including $480.0 million under the Revolving Credit Facility. The Credit Facility includes an uncommitted “accordion feature” that may be used to increase the commitments under either component of the Credit Facility by up to an additional $370.0 million to a total of $1.0 billion. As of December 31, 2020, $323.7 million was outstanding under the Credit Facility and the unused borrowing availability under the Credit Facility was $48.3 million. The amount available for future borrowings under the Credit Facility is based on either the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, or a minimum debt service coverage ratio with respect to the borrowing base. Both of these amounts are calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and, therefore, availability under our Credit Facility has been adversely affected by the decreases in cash rent collected from our tenants and income from our operators due to the effects of the COVID-19 pandemic, and may continue to be adversely affected.
As of December 31, 2020, $150.0 million was outstanding under our Term Loan, and $173.7 million was outstanding under the Revolving Credit Facility. The equity interests and related rights in our wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The applicable margin used to determine the interest rate under both the Term Loan and Revolving Credit Facility components of the Credit Facility varies based on our leverage. As of December 31, 2020, the Revolving Credit Facility and the Term Loan had an effective interest rate per annum equal to 3.21% and 4.95%, respectively. The Credit Facility prohibits us from exceeding a maximum ratio of consolidated total indebtedness to consolidated total asset value, and requires us to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges on a quarterly basis and a minimum consolidated tangible net worth. As of December 31, 2020, we were in compliance with the financial covenants under the Credit Facility. Based upon our current expectations, we believe our operating results during the next 12 months will allow us to comply with these covenants. Please see “Item 1A. Risk Factors. Risks Related to our Indebtedness.”
Fannie Mae Master Credit Facilities
As of December 31, 2020, $355.2 million was outstanding under the Fannie Mae Master Credit Facilities. We may request future advances under the Fannie Mae Master Credit Facilities by adding eligible properties to the collateral pool or by borrowing-up against the increased value of the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. Future advances based on the increased value of the collateral pool may only occur until November 2021 and not more than once annually for each of the Fannie Mae Master Credit Facilities. Borrowings under the Fannie Mae Master Credit facilities bear annual interest at a rate that varies on a monthly basis and is equal to the sum of the current LIBOR for one month U.S. dollar-denominated deposits and 2.62%, with a combined floor of 2.62%. The Fannie Mae Master Credit Facilities mature on November 1, 2026.
Capital Expenditures
During the year ended December 31, 2020, our capital expenditures were $21.9 million, of which approximately $4.6 million related our MOB segment, $4.0 million related to our NNN segment and $12.8 million related to our SHOP segment. All other capital expenditures were typical in nature for the other properties in our portfolio. We anticipate this rate of capital expenditures will be similar for the MOB, NNN and SHOP segments throughout 2021, however, the recent economic uncertainty created by the COVID-19 global pandemic will continue to impact our decisions on the amount and timing of future capital expenditures. Our capital expenditures in 2021 were funded using cash on hand, and we also expect to fund future capital expenditures using cash on hand.
Acquisitions — Year Ended December 31, 2020
During the year ended December 31, 2020, we completed the acquisitions of two multi-tenant MOBs, three single tenant MOBs and four SHOP for an aggregate contract purchase price of $109.6 million. The acquisition of one multi-tenant MOB for a contract purchase price of $5.7 million, was completed during the three months ended December 31, 2020. The properties acquired during the year ended December 31, 2020 are located in Illinois, Pennsylvania, Ohio and Florida and comprise approximately 340,783 square feet and were funded with proceeds from financings (including amounts borrowed under our Credit Facility), the assumption of the $13.9 million mortgage in an acquisition, and cash on hand.
Acquisitions — Subsequent to December 31, 2020 and Pending Transactions
We acquired one property subsequent to December 31, 2020 for $6.6 million. We have signed two PSAs to acquire two MOBs located in Ohio and Oklahoma for an aggregate contract purchase price of approximately $10.1 million. We anticipate using cash on hand to fund the consideration required to complete these acquisitions. The PSAs are subject to conditions and there can be no
assurance we will complete any of these acquisitions, or any future acquisitions or other investments, on a timely basis or on acceptable terms and conditions, if at all.
Acquisition of Non-Controlling Interest
In November 2020, we purchased all of the outstanding membership interests in the joint venture that owns the UnityPoint Clinics in Muscatine, Iowa and Moline, Illinois for approximately $0.6 million, funded with cash on hand. Following this transaction, the properties were wholly owned by us and added to the borrowing base under our Credit Facility.
Dispositions — Year Ended December 31, 2020
During the year ended December 31, 2020, we sold nine properties (one MOB, seven SHOPs and one skilled nursing facility in Lutz Florida) for an aggregate contract price of $40.4 million, which resulted in an aggregate gain on sale of $5.2 million. Eight of these properties (seven SHOPs in Michigan and one skilled nursing facility in Lutz Florida) were sold in the fourth quarter of 2020 and had an aggregate purchase price of $31.8 million, which resulted in an aggregate gain on sale of $2.9 million There were no mortgages on these properties, however the property in Lutz, Florida was part of the borrowing base under the Credit Facility, as well as four Michigan properties, and one of the Michigan properties was part of the Capital One Fannie Mae Credit Facility.
Which respect to the sale of the Michigan SHOPs, in November 2020, we received payment of the full $11.8 million sales price for all 11 of the Michigan SHOPs, less $0.8 million held in escrow, and transferred seven of the properties to the buyer. The remaining four properties were transferred to the buyer at a second closing in January 2021 when the $0.8 million held in escrow was released to the buyer. Of the properties transferred at the initial closing, four were part of the borrowing base under the Credit Facility, one was part of the collateral pool under the Fannie Mae Master Credit Facility with Capital One and two were unencumbered. Of the properties transferred at the second closing, three were part of the borrowing base under the Credit Facility until the initial closing and one was unencumbered. At the initial closing, $4.2 million of the net proceeds was used to repay amounts outstanding under the Fannie Mae Master Credit Facility with Capital One, $4.4 million of the net proceeds were used to repay amounts outstanding under the Revolving Credit Facility, with the remainder used for closing costs. Following the sale of the SHOP in Lutz, Florida, all $17.6 million of the net proceeds were used to repay amounts outstanding under the Credit Facility.
Dispositions — Subsequent to December 31, 2020
Subsequent to December 31, 2020, we did not dispose of any properties.
We have entered into two definitive PSAs to sell the property in Jupiter Florida for $65.0 million and a skilled nursing facility in Wellington, Florida for $33.0 million. The sales of these assets are subject to conditions, and, due to the persistence of the COVID-19 pandemic and other factors beyond our control, there can be no assurance that we will be able to meet these conditions and that these dispositions will be completed on their contemplated terms, or at all. With respect to the skilled nursing facility in Wellington, Florida, closing may not occur unless, among other conditions, certain occupancy and revenue levels have been maintained at the property for a period of time. The property in Jupiter, Florida is not currently encumbered by any mortgage debt or part of the borrowing base under our Credit Facility. The skilled nursing facility in Wellington Florida is part of the borrowing base under our Credit Facility. Pursuant to the terms of the amendment to our Credit Facility in August 2020, the net cash proceeds from any completed dispositions must be used to prepay amounts outstanding under the Revolving Credit Facility and will therefore not be available to us for any other purpose. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Share Repurchase Program
Our Board has adopted the SRP, which enables our common stockholders to sell their shares of common stock to us under limited circumstances. At the time a common stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash. There are limits on the number of shares we may repurchase under this program during any calendar year. We are only authorized to repurchase shares using the proceeds secured from our DRIP in any given period, although the Board has the power, in its sole discretion, to determine the number of shares repurchased during any period as well as the amount of funds to be used for that purpose.
Under the currently effective amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of our common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Additionally, pursuant to the SRP, the repurchase price per share equals 100% of the Estimated Per-Share NAV in effect on the last day of the fiscal semester, or the six-month period ending June 30 or December 31.
The amendment to the Credit Facility on August 10, 2020 provides that we may not repurchase shares of our common stock until the Commencement Quarter. In light of this amendment, the Board suspended repurchases under the SRP effective August 14, 2020. The Board has also rejected all repurchase requests made during the period from January 1, 2020 until the effectiveness of the suspension of the SRP. No further repurchase requests under the SRP may be made unless and until the SRP is reactivated. Prior to the Commencement Quarter, we may not repurchase shares of our common stock. Beginning in the Commencement Quarter, we will be permitted to repurchase up to $50.0 million of shares of our common stock (including amounts previously repurchased
during the term of the Revolving Credit Facility) if, after giving effect to the repurchases, we maintain cash and cash equivalents of at least $30.0 million and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 55.0%.
No assurances can be made as to when or if our SRP will be reactivated.
Non-GAAP Financial Measures
This section discusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations (“FFO”), Modified Funds from Operations (“MFFO”) and NOI. While NOI is a property-level measure, MFFO is based on our total performance as a company and therefore reflects the impact of other items not specifically associated with NOI such as, interest expense, general and administrative expenses and operating fees to related parties. Additionally, NOI as defined here, includes straight-line rent which is excluded from MFFO. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s definition.
We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and 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.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Institute of Portfolio Alternatives (“IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.
We calculate MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price
consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, 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, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses and capitalized interest.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 once our portfolio is stabilized. Our Modified FFO (as defined in our Credit Facility) is similar but not identical to MFFO as discussed in this Quarterly Report on Form 10-Q. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP 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 pay dividends and other distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, updates to the White Paper or the Practice Guideline may be published or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
Accounting Treatment of Rent Deferrals
All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information). As a result of relief granted by the FASB and SEC related to lease modification accounting, rental revenue used to calculate Net Income and NAREIT FFO has not been, and we do not expect it to be, significantly impacted by these types of deferrals. In addition, since we currently believe that these deferral amounts are collectable, we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these types of rent deferrals. For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 — Significant Accounting Polices to our consolidated financial statements included in the Annual Report on Form 10-K.
The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2020 | | 2019 | | 2018 |
Net loss attributable to common stockholders (in accordance with GAAP) | | $ | (78,781) | | | $ | (88,087) | | | $ | (52,762) | |
Depreciation and amortization (1) | | 79,643 | | | 79,744 | | | 82,226 | |
Impairment charges | | 36,446 | | | 55,969 | | | 20,655 | |
(Gain) loss on sale of real estate investment | | (5,230) | | | (8,790) | | | 70 | |
| | | | | | |
Adjustments for non-controlling interests (2) | | (526) | | | (595) | | | (484) | |
FFO (as defined by NAREIT) attributable to common stockholders | | 31,552 | | | 38,241 | | | 49,705 | |
Acquisition and transaction related | | 173 | | | 362 | | | 302 | |
(Accretion) amortization of market lease and other lease intangibles, net | | (80) | | | (4) | | | 255 | |
Straight-line rent adjustments | | (2,405) | | | (3,561) | | | (1,863) | |
Straight-line rent (rent deferral agreements) (3) | | 280 | | | — | | | — | |
Amortization of mortgage premiums and discounts, net | | 60 | | | (162) | | | (263) | |
Loss on non-designated derivatives | | 102 | | | 68 | | | 157 | |
Capitalized construction interest costs | | — | | | (2,756) | | | (3,198) | |
Deferred tax asset valuation allowance (4) | | 4,641 | | | — | | | — | |
Adjustments for non-controlling interests (2) | | (9) | | | 31 | | | 24 | |
MFFO attributable to common stockholders | | $ | 34,314 | | | $ | 32,219 | | | $ | 45,119 | |
________
(1) Net of non-real estate depreciation and amortization.
(2) Represents the portion of the adjustments allocable to non-controlling interests.
(3) Represents the amount of deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our consolidated balance sheet but are considered to be earned revenue attributed to the current period for purposes of MFFO as they are expected to be collected.
(4) This is a non-cash item and is added back as it is not considered a part of operating performance.
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay distributions.
The following table reflects the items deducted from or added to net loss attributable to common stockholders in our calculation of NOI for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 36,862 | | | $ | 2,492 | | | $ | (15,690) | | | $ | (102,445) | | | $ | (78,781) | |
Impairment charges | | 12,551 | | | — | | | 23,895 | | | — | | | 36,446 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,922 | | | 23,922 | |
Acquisition and transaction related | | — | | | — | | | — | | | 173 | | | 173 | |
General and administrative | | 95 | | | — | | | — | | | 21,477 | | | 21,572 | |
Depreciation and amortization | | 74,017 | | | 6,617 | | | 419 | | | — | | | 81,053 | |
Interest expense | | 2,036 | | | — | | | — | | | 49,483 | | | 51,519 | |
Interest and other income | | — | | | — | | | — | | | (44) | | | (44) | |
Loss on non-designated derivative instruments | | — | | | — | | — | | 102 | | | 102 | |
Loss on sale of real estate investments | | — | | | — | | | (5,230) | | | — | | | (5,230) | |
Income tax expense | | — | | | — | | | — | | | 4,061 | | | 4,061 | |
Net income attributable to non-controlling interests | | — | | | — | | | — | | | 303 | | | 303 | |
Allocation for preferred stock | | — | | | — | | | — | | | 2,968 | | | 2,968 | |
NOI | | $ | 125,561 | | | $ | 9,109 | | | $ | 3,394 | | | $ | — | | | $ | 138,064 | |
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of NOI for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 14,097 | | | $ | 1,552 | | | $ | (3,519) | | | $ | (100,217) | | | $ | (88,087) | |
Impairment charges | | 43,125 | | | — | | | 12,844 | | | — | | | 55,969 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,414 | | | 23,414 | |
Acquisition and transaction related | | 7 | | | 28 | | | — | | | 327 | | | 362 | |
General and administrative | | 93 | | | 11 | | | 11 | | | 20,415 | | | 20,530 | |
Depreciation and amortization | | 76,430 | | | 2,087 | | | 2,515 | | | — | | | 81,032 | |
Interest expense | | 213 | | | — | | | — | | | 55,846 | | | 56,059 | |
Interest and other income | | 2 | | | — | | | — | | | (9) | | | (7) | |
Loss on non-designated derivative instruments | | — | | | — | | | — | | | 68 | | | 68 | |
Gain on sale of real estate investments | | — | | | — | | | (8,790) | | | — | | | (8,790) | |
| | | | | | | | | | |
Income tax expense | | — | | | — | | | — | | | 399 | | | 399 | |
Net income (loss) attributable to non-controlling interests | | 23 | | | — | | | — | | | (416) | | | (393) | |
Allocation for preferred stock | | — | | | — | | | — | | | 173 | | | 173 | |
NOI | | $ | 133,990 | | | $ | 3,678 | | | $ | 3,061 | | | $ | — | | | $ | 140,729 | |
Refer to Note 15 — Segment Reporting to our consolidated financial statements found in this Annual Report on Form 10-K for a reconciliation of NOI to net loss attributable to stockholders by reportable segment. Dividends and Other Distributions
Dividends on our Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to Series A Preferred Stock holders, which is equivalent to 7.375% per annum on the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us.
From March 1, 2018 until June 20, 2020, we paid distributions to our common stockholders, at a rate equivalent to $0.85 per annum, per share of common stock. Distributions were payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
On June 29, 2020, the Board approved a change in our common stock distribution policy whereby we would no longer declare distributions based on daily record dates. Instead, any future distributions authorized by the Board on shares of our common stock were to be paid on a monthly basis in arrears based on a single record date during the applicable month.
As noted herein under our Credit Facility we may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of the Company’s common stock), subject to certain exceptions. These exceptions include paying cash dividends on the Series A Preferred Stock or any other preferred stock we may issue and paying any cash distributions necessary to maintain our status as a REIT. We may not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom. Beginning in the Commencement Quarter we will be able to pay cash distributions to holders of common stock, subject to the restrictions described below. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We may only pay cash distributions beginning in the Commencement Quarter and the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter. Until four full fiscal quarters have elapsed after the commencement of Commencement Quarter, the aggregate amount of permitted distributions and Modified FFO will be determined by using only the fiscal quarters that have elapsed from and after the Commencement Quarter and annualizing those amounts.
On August 13, 2020, the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the continued COVID-19 pandemic and to comply with an amendment to the Credit Facility described above. Under the new policy, distributions authorized by the Board on shares of our common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at the Estimated Per-Share NAV in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. On October 1, 2020 and January 4, 2021, we declared dividends payable in 0.01349 shares of our common stock on each share of our outstanding common stock. This amount was based on our prior cash distribution rate of $0.85 per share per annum. The stock dividends were paid on October 15, 2020 and January 15, 2021 to holders of record of our common stock at the close of business on October 8, 2020 and January 11, 2021. See “— Overview” for additional information on the impact of the stock dividends.
Subject to the restrictions in our Credit Facility, the amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Code.
The following table details the tax treatment of the distributions paid during the years ended December 31, 2017, 2016 and 2015, respectively:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Return of capital | | 99.7 | % | | $ | 1.50 |
| | 86.8 | % | | $ | 1.47 |
| | 97.9 | % | | $ | 1.66 |
|
Capital gain dividend income | | 0.3 | % | | 0.01 |
| | 0.5 | % | | 0.01 |
| | 0.3 | % | | 0.01 |
|
Ordinary dividend income | | — | % | | — |
| | 12.7 | % | | 0.22 |
| | 1.8 | % | | 0.03 |
|
Total | | 100.0 | % | | $ | 1.51 |
| | 100.0 | % | | $ | 1.70 |
| | 100.0 | % | | $ | 1.70 |
|
We have paid distributions on a monthly basis to stockholders of record each day of the prior month at a rate equal to $0.0046575343 per day (for the year 2016 only, $0.0046448087 per day per share of common stock to reflect that 2016 was a leap year), which is equivalent to $1.70 per annum, per share of common stock. In March 2017, the Board authorized a decrease in the rate at which we pay monthly distributions to stockholders, effective as of April 1, 2017, to $0.0039726027 per day, which is equivalent to $1.45 per annum, per share of common stock.
On February 20, 2018, the Board unanimously authorized a further change in the rate at which we pay monthly distributions to holders of the Company’s common stock, effective for record dates as of and after March 1, 2018, from $0.0039726027 per share per day, or $1.45 per share on an annualized basis, to $0.0023287671 per share per day, or $0.85 per share on an annualized basis.
Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The Board may reduce the amount of dividends or distributions paid or suspend dividend or distribution payments at any time and therefore dividend and distribution payments are not assured. Our Revolving Credit Facility imposes limitations on our abilityAny accrued and unpaid dividends payable with respect to pay distributions to stockholders. Distributions to stockholders are limited, with certain exceptions, to a percentagethe Series A Preferred Stock become part of Modified FFO as defined in the Revolving Credit Facility (which is different from MFFO as discussed in this Annual Report on Form 10-K) during the applicable period as follows: (i) for the six months ending March 31, 2018, 130%liquidation preference thereof.
The following table reflectsshows the sources for the payment of distributions declaredto common stockholders preferred stockholders, including distributions on unvested restricted shares and paid,OP Units, but excluding distributions related to units of limited partner interests in the OP ("OP Units") and Class B Units duringas these distributions are recorded as an expense in our consolidated statement of operations and comprehensive loss, for the yearsperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | March 31, 2020 | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | December 31, 2020 |
(In thousands) | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions |
Distributions: | | | | | | | | | | | | | | | | | | | | |
Distributions to common stockholders not reinvested in common stock issued under the DRIP | | $ | 13,225 | | | | | $ | 13,729 | | | | | $ | 4,400 | | | | | $ | — | | | | | $ | 31,354 | | | |
Distributions reinvested in common stock issued under the DRIP | | 6,322 | | | | | 6,267 | | | | | 2,015 | | | | | — | | | | | 14,604 | | | |
Dividends to preferred stockholders | | 173 | | | | | 742 | | | | | 742 | | | | | 742 | | | | | 2,399 | | | |
Distributions on OP Units | | 86 | | | | | 87 | | | | | 28 | | | | | — | | | | | 201 | | | |
Total distributions (1) | | $ | 19,806 | | | | | $ | 20,825 | | | | | $ | 7,185 | | | | | $ | 742 | | | | | $ | 48,558 | | | |
| | | | | | | | | | | | | | | | | | | | |
Source of distribution coverage: | | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (2) | | $ | 18,952 | | | 95.7 | % | | $ | 12,294 | | | 59.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 24 | | | 3.2 | % | | $ | 41,807 | | | 86.1 | % |
Proceeds received from common stock issued under the DRIP (2) | | 854 | | | 4.3 | % | | 6,267 | | | 30.1 | % | | — | | | — | % | | 718 | | | 96.8 | % | | 6,751 | | (3) | 13.9 | % |
Available cash on hand | | — | | | — | % | | 2,264 | | | 10.9 | % | | — | | | — | % | | — | | | — | % | | — | | (3) | — | % |
Total source of distribution coverage | | $ | 19,806 | | | 100.0 | % | | $ | 20,825 | | | 100.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 742 | | | 100.0 | % | | $ | 48,558 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (in accordance with GAAP) | | $ | 18,952 | | | | | $ | 12,294 | | | | | $ | 10,537 | | | | | $ | 24 | | | | | $ | 41,807 | | | |
Net loss attributable to stockholders (in accordance with GAAP) | | $ | (24,744) | | | | | $ | (22.811) | | | | | $ | (10,500) | | | | | $ | (43,514) | | | | | $ | (78,781) | | | |
_______
(1) Excludes distributions related to Class B Units and distributions to non-controlling interest holders other than those paid on our OP Units.The decrease in total distributions was due to the change in the timing of our distributions to common stockholders and the change to declaring distributions in common stock (as opposed to cash) beginning in October 2020 (see disclosure above).
(2) Assumes the use of available cash flows from operations before any other sources.
(3) Year-to-date total does not equal the sum of the quarters. Each quarter and year-to-date period is evaluated separately for purposes of this table.
For the year ended December 31, 2017 and 2016:
|
| | | | | | | | |
(In thousands) |
| Total Distributions Paid |
| Total Distributions Declared |
1st Quarter, 2017 |
| $ | 37,536 |
|
| $ | 37,583 |
|
2nd Quarter, 2017 |
| 34,538 |
|
| 32,298 |
|
3rd Quarter, 2017 |
| 32,759 |
|
| 32,843 |
|
4th Quarter, 2017 |
| 32,782 |
|
| 33,180 |
|
Total 2017 |
| $ | 137,615 |
|
| $ | 135,904 |
|
|
| | | | | | | | |
(In thousands) | | Total Distributions Paid | | Total Distributions Declared |
1st Quarter, 2016 | | $ | 36,630 |
| | $ | 36,633 |
|
2nd Quarter, 2016 | | 37,269 |
| | 36,978 |
|
3rd Quarter, 2016 | | 37,616 |
| | 37,732 |
|
4th Quarter, 2016 | | 37,547 |
| | 38,073 |
|
Total 2016 | | $ | 149,062 |
| | $ | 149,416 |
|
During the years ended December 31, 2017 and 2016, distributions paid to common stockholders totaled $137.6 million and $149.1 million, inclusive of $61.2 million and $73.6 million of distributions that2020, cash flows provided by operations were reinvested in shares issued under the DRIP, respectively. During the years ended December 31, 2017 and 2016, cash used to pay distributions was$41.8 million. We had not historically generated from netsufficient cash flow from operations to fund the payment of dividends and other distributions at the current rate prior to switching from paying cash dividends to stock dividends on our common stock. As shown in the table above, we funded distributions with cash flows provided by operations, proceeds received from common stock issued under our DRIP and available cash on hand, comprised of proceeds from financings and dispositions. Because shares of common stock are only offered and sold pursuant to the DRIP in connection with the reinvestment of distributions paid in cash, participants in the DRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in stock instead of cash.
Our ability to pay dividends on our Series A Preferred Stock and starting with the Commencement Quarter, other distributions and maintain compliance with the restrictions on the payment of distributions in our Credit Facility depends on our ability to increase the amount of cash we generate from property operations which in turn depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective.
We may still pay any cash distributions necessary to maintain its status as a REIT and may not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom under the Credit
Facility. The amendment provided that the covenants restricting payment of distributions to a threshold based on Modified FFO and requiring maintenance of a minimum ratio of consolidated total indebtedness to consolidated total asset value and a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges did not apply for the fiscal quarter ended June 30, 2020. In addition, the lenders waived any defaults or event of defaults under those covenants that may have occurred during the fiscal quarter ended June 30, 2020 as well as any additional default or event of default resulting therefrom prior to August 10, 2020. There can be no assurance our lenders will consent to any amendments or waivers that may become necessary to comply with our Credit Facility in the future.
Loan Obligations
The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities require interest only payments through November 2021 and principal and interest payments thereafter. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2020, we were in compliance with the financial and reporting covenants under our loan agreements.
Following the amendment to our Credit Facility in August 2020, until the first day of the Commencement Quarter, we must use all the net cash proceeds received from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the saleRevolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable, Revolving Credit Facility and Fannie Mae Master Credit Facilities and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of investment securities, proceeds receivedDecember 31, 2020. The minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of December 31, 2020, the outstanding mortgage notes payable and loans under the Revolving Credit Facility and Fannie Mae Master Credit Facilities had weighted-average effective interest rates of 3.9%, 3.2% and 2.6%, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, | | |
(In thousands) | | Total | | 2021 | | 2022 - 2023 | | 2024 -2025 | | Thereafter |
Principal on mortgage notes payable | | $ | 550,361 | | | $ | 1,191 | | | $ | 7,625 | | | $ | 2,237 | | | $ | 539,308 | |
Interest on mortgage notes payable | | 108,961 | | | 15,971 | | | 45,387 | | | 47,603 | | | — | |
Principal on Revolving Credit Facility | | 173,674 | | | — | | | — | | | 173,674 | | | — | |
Interest on Revolving Credit Facility | | 27,875 | | | 5,575 | | | 11,150 | | | 11,150 | | | — | |
Principal on Term Loan | | 150,000 | | | — | | | — | | | 150,000 | | | — | |
Interest on Term Loan | | 37,125 | | | 7,425 | | | 14,850 | | | 14,850 | | | — | |
Fannie Mae Master Credit Facilities | | 355,175 | | | 130 | | | 7,316 | | | 8,993 | | | 338,736 | |
Interest on Fannie Mae Master Credit Facilities | | 53,913 | | | 9,314 | | | 18,464 | | | 18,031 | | | 8,104 | |
Lease rental payments due (1) | | 39,944 | | | 747 | | | 1,540 | | | 1,560 | | | 36,097 | |
Total | | $ | 1,497,028 | | | $ | 40,353 | | | $ | 106,332 | | | $ | 428,098 | | | $ | 922,245 | |
_________
(1) Includes all payments due on both operating leases and direct financing leases. See Note 16 — Commitments and Contingencies to our consolidated financial statements included in this Form 10-K for additional information.
Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. Commencing with that taxable year, we have been organized and operated in a manner so that we qualify as a REIT under the Code. We intend to continue to operate in such a manner but can provide no assurances that we will operate in a manner so as to remain qualified for taxation as a REIT. To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and comply with a number of other organizational and operational requirements. If we continue to qualify as a REIT, we generally will not be subject to U.S. federal corporate income tax on the portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as U.S. federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the salevarious related party transactions, agreements and fees. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of real estate investmentsoperations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and financings.Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, our Credit Facility (which includes a Revolving Credit Facility and a Term Loan) and the Fannie Mae Master Credit Facilities, bear interest at fixed rates and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We will not hold or issue these derivative contracts for trading or speculative purposes. As of December 31, 2020, we had entered into six non-designated interest rate caps with a notional amount of approximately $359.3 million and nine designated interest rate swaps with a notional amount of $578.5 million. We do not have any foreign operations and thus we are generally not directly exposed to foreign currency fluctuations. Mortgage Notes Payable
As of December 31, 2020, all of our mortgages are either fixed-rate ($171.9 million) or variable-rate ($378.5 million), before consideration of interest rate swaps. Our mortgages had a gross aggregate carrying value of $550.4 million and a fair value of $549.6 million as of December 31, 2020.
Credit Facilities
Our Credit Facilities are variable-rate, before consideration of interest rate swaps, and are comprised of our Revolving Credit Facility, our Term Loan and our Fannie Mae Master Credit Facilities. Our Credit Facilities had a gross aggregate carrying amount of $678.8 million and a fair value of $673.6 million as of December 31, 2020.
Sensitivity Analysis - Interest Expense
Interest rate volatility associated with all of our variable-rate borrowings, which totaled $1.1 billion as of December 31, 2020, affects interest expense incurred and cash flow to the extent they are not fixed via interest rate swap. As noted above, we have nine designated interest rate swaps with a notional amount of $578.5 million, which effectively creates a fixed interest rate for a portion of our variable-rate debt. We also have six non-designated interest rate cap contracts, which are substantially out of the money and, therefore do not currently affect our near-term interest rate sensitivity. The sensitivity analysis related to the portion of our variable-rate debt that is not fixed via designated interest rate swaps assumes an immediate 100 basis point move in interest rates from their December 31, 2020 levels, with all other variables held constant. A 100 basis point increase and decrease in variable interest rates on the portion of our variable-rate debt that is not fixed via designated interest rate swaps would increase and decrease our interest expense by $4.8 million.
Sensitivity Analysis - Fair Value of Debt
Changes in market interest rates on our debt instruments impacts their fair value, even if it has no impact on interest due on them. For instance, if interest rates rise 100 basis points and the balances on our debt instruments remain constant, we expect the fair value of our obligations to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our debt assumes an immediate 100 basis point move in interest rates from their December 31, 2020 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our debt by $37.2 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our debt by $35.2 million. A 100 basis point increase in market interest rates would result in an increase in the fair value of our nine designated interest rate swaps by $28.5 million. A 100 basis point decrease in market interest rates would result in a decrease in the fair value of our nine designated interest rate swaps by $30.2 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 2020 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our Chief Executive Officer and Chief Financial Officer, carried out an evaluation, together with other members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2020 at a reasonable level of assurance.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on its assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. The effectiveness of our internal control over financial reporting has not been audited by our independent registered public accounting firm because we are a “non-accelerated filer” as defined under SEC rules.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2020, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office: 650 Fifth Avenue - 30th Floor, New York, NY 10019, Attention: Chief Financial Officer. Our Code of Business Conduct and Ethics is also publicly available on our website at www.healthcaretrustinc.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Based Compensation Plans
Restricted Share PlanResults of Operations
We have an employeeoperate in three reportable business segments for management and director incentive restrictedinternal financial reporting purposes: MOBs, triple-net leased healthcare facilities, and SHOPs. In our MOB operating segment, we own, manage and lease single and multi-tenant MOBs where tenants are required to pay their pro rata share plan (as amended from time to time, the "RSP"),of property operating expenses, which provides us with the ability to grant awards of restricted shares of common stock ("restricted shares") to our directors, officers and employees (if we ever have employees), employees of the Advisor and its affiliates, employees of entities that provide services to us, directors of the Advisor or of entities that provide services to us, certain consultants to us and the Advisor and its affiliates or to entities that provide services to us. The total number of shares of common stock that may be subject to awards grantedexpense exclusions and floors, in addition to base rent. In our triple-net leased healthcare facilities operating segment, we own, manage and lease seniors housing properties, hospitals, post-acute care and skilled nursing facilities throughout the United States under the RSP may not exceed 5.0% of our outstanding shares of common stock on a fully diluted basis at any timelong-term triple-net leases, and in any event will not exceed 3.4 million shares (as such number may be adjustedtenants are generally directly responsible for stock splits, stock dividends, combinations and similar events).
For restricted share awards granted as annual automatic awards prior to July 1, 2015, such awards would typically be forfeited with respect to the unvested shares upon the terminationall operating costs of the recipient's employmentrespective properties.Our Property Manager or other relationship with us. For restricted share awards granted as annual automatic awards on or after July 1, 2015, such awards provide for accelerated vesting ofthird party managers manage our MOBs and our triple-net leased healthcare facilities. In our SHOP segment, we invest in seniors housing properties using the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the Board. Restricted shares are, in general and in accordance with the terms of the applicable award agreement, subject to acceleration of vesting and forfeiture under certain circumstances related to termination of service (with or without cause) and changes of control. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.
Prior to August 2017, the RSP provided for an automatic grant of 1,333 restricted shares to each of the independent directors, without any further approval by the Board or our stockholders, on the date of his or her initial election to the Board and thereafter on the date of each annual stockholder meeting. The restricted shares awards granted as annual automatic awards prior to August 2017 were subject to vesting over a five-year period following the date of grant.
In August 2017, the Board amended the RSP to provide that the number of restricted shares comprising the automatic annual award to each of the independent directors would be equal to the quotient of $30,000 divided by the then-current NAV. These restricted shares vest annually over a five-year period in increments of 20.0% per annum beginning with the one-year anniversary of initial election to the Board and the date of the next annual meeting, respectively.
In September 2017, the Board subsequently amended and restated the RSP to eliminate the automatic annual awards and to make other revisions related to the implementation of a new independent director equity compensation program. As part of this new independent director equity compensation program, the Board approved a one-time grant of restricted share awards to the independent directors as follows: (i) 300,000 restricted shares to the non-executive chairman, with one-seventh of the shares vesting annually in equal increments over a seven-year period with initial vesting on August 4, 2018; and (ii) 25,000 restricted shares to each of the three other independent directors, with one-fifth of the shares vesting annually in equal increments over a five-year period with initial vesting on August 4, 2018. In connection with these one-time grants, the restricted shares awards granted as automatic annual awards in connection with our 2017 annual meeting of stockholders on July 21, 2017 were forfeited. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares.
RIDEA structure. As of December 31, 20172020, we had seven eligible independent contractors operating 59 SHOPs (not including two land parcels). All of our properties across all three business segments are located throughout the United States.
Same Store Properties
Information based on Same Store, Acquisitions and 2016, thereDispositions (as each are defined below) allows us to evaluate the performance of our portfolio based on a consistent population of properties owned for the entire period of time covered. As of December 31, 2020, we owned 193 properties. There were 382,510175 properties (our “Same Store” properties) owned for the entire years ended December 31, 2020 and 9,921 unvested restricted shares outstanding, respectively,2019, including two vacant land parcels and one development property that was substantially completed in the fourth quarter of 2019. Since January 1, 2019 and through December 31, 2020, we acquired 18 properties (our “Acquisitions”) and disposed of 16 properties (our “Dispositions”). As described in more detail under “Results of Operations— Comparison of the Years Ended December 31, 2020 and 2019 — Transition Properties” below, our Same Store properties include four Transition Properties that were transitioned from Senior Housing - Triple Net Leased to our SHOP segment effective July 1, 2020, and another Transition Property which transitioned from our Triple Net Leased segment effective April 1, 2019. These five Transition Properties were grantedowned for the entirety of 2019 and 2020 and merely moved between segments. We retroactively adjusted our Same Store reporting for those segments to independent directors pursuant include the Transition Properties as part of the Same Store reporting in our SHOP segment and excluded them from the Same Store reporting in our triple-net leased healthcare facilities segment (each segment as so retroactively adjusted, the “Segment Same Store”). See Note 3— Real Estate Investments, Net to our consolidated financial statements included in this Annual Report on Form 10-K for further information about the RSPTransition Properties and that had average issue pricesthe transition. The following table presents a roll-forward of $21.47 and $22.42 per share, respectively.our properties owned from January 1, 2019 to December 31, 2020:
|
| | | | | | | | | |
Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and RightsProperties |
| |
| Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
| |
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column) (a)properties, December 31, 2018 | 191 | |
Acquisition activity during the year ended December 31, 2019 | 9 | (a) | | (b) | | (c) |
Equity Compensation Plans approved by security holdersDisposition activity during the year ended December 31, 2019 | (7) | — |
| | — |
| | 2,996,677 |
|
Equity Compensation Plans not approved by security holdersNumber of properties, December 31, 2019 | 193 | — |
| | — |
| | — |
|
TotalAcquisition activity during the year ended December 31, 2020 | 9 |
Disposition activity during the year ended December 31, 2020 | —(9) |
|
Number of properties, December 31, 2020 | 193 | — |
|
|
Number of Same Store Properties (1) | 175 | 2,996,677 |
|
Sales(1) Includes the acquisition of Unregistered Securitiesa land parcel adjacent to an existing property which is not considered an Acquisition.
In addition to the comparative period-over-period discussions below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s responses.
Below is a discussion of our results of operations for the years ended December 31, 2020 and2019. Please see the “Results of Operations” section located in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of our results of operations for the year ended December 31, 2019 and 2018. Comparison of the Years Ended December 31, 2020 and 2019
Net loss attributable to common stockholders was $78.8 million and $88.1 million for the years ended December 31, 2020 and 2019, respectively. The following table shows our results of operations for the years ended December 31, 2020 and 2019 and the year to year change by line item of the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | % |
Revenue from tenants | | $ | 381,612 | | | $ | 374,914 | | | $ | 6,698 | | | 1.8 | % |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Property operating and maintenance | | 243,548 | | | 234,185 | | | 9,363 | | | 4.0 | % |
Impairment charges | | 36,446 | | | 55,969 | | | (19,523) | | | (34.9) | % |
Operating fees to related parties | | 23,922 | | | 23,414 | | | 508 | | | 2.2 | % |
Acquisition and transaction related | | 173 | | | 362 | | | (189) | | | (52.2) | % |
General and administrative | | 21,572 | | | 20,530 | | | 1,042 | | | 5.1 | % |
Depreciation and amortization | | 81,053 | | | 81,032 | | | 21 | | | — | % |
Total expenses | | 406,714 | | | 415,492 | | | (8,778) | | | (2.1) | % |
Operating loss before gain (loss) on sale of real estate investments | | (25,102) | | | (40,578) | | | 15,476 | | | 38.1 | % |
Gain on sale of real estate investments | | 5,230 | | | 8,790 | | | (3,560) | | | NM |
Operating loss | | (19,872) | | | (31,788) | | | 11,916 | | | 37.5 | % |
Other income (expense): | | | | | | | | |
Interest expense | | (51,519) | | | (56,059) | | | 4,540 | | | 8.1 | % |
Interest and other income | | 44 | | | 7 | | | 37 | | | 528.6 | % |
Loss on non-designated derivatives | | (102) | | | (68) | | | (34) | | | (50.0) | % |
Total other expenses | | (51,577) | | | (56,120) | | | 4,543 | | | 8.1 | % |
Loss before income taxes | | (71,449) | | | (87,908) | | | 16,459 | | | 18.7 | % |
Income tax expense | | (4,061) | | | (399) | | | (3,662) | | | NM |
Net loss | | (75,510) | | | (88,307) | | | 12,797 | | | 14.5 | % |
Net income attributable to non-controlling interests | | (303) | | | 393 | | | (696) | | | (177.1) | % |
Allocation for preferred stock | | (2,968) | | | (173) | | | (2,795) | | | NM |
Net loss attributable to common stockholders | | $ | (78,781) | | | $ | (88,087) | | | $ | 9,306 | | | 10.6 | % |
| | | | | | | | |
__________
NM — Not Meaningful
Transition Properties
Some of our properties move between our operating segments, for example if they are converted from being triple-net leased to third parties in our triple-net leased healthcare facilities segment to being leased to our TRS and operated and managed on our behalf by a third-party operator in our SHOP segment. When transfers between segments occur, we reclassify the operating results of the transferred properties to their current segment for both the current and all historical periods in order to present a consistent group of property results. See Note 3 — Real Estate Investments, Net - “Impairments” and “Held for Use Assets” and Note 15 — Segment Reporting to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Over the last three years, we have had properties transfer between operating segments. Upon such transfers the Company retroactively restates the historical operating results for the segment for all periods presented in that filing and, thereafter, the Company will restate other later prior periods when they are subsequently reported in later filings for comparative purposes. As a result, the Company provides transition disclosure adjustments only for properties that have transitioned since the prior numbers were previously reported. The Company had the following: (i) 2020 Transition Properties – the four LaSalle Properties (Effective July 1, 2020, reporting for the quarter ended September 30, 2020) – (ii) 2019 Transition Property – the Wellington Property (Effective in April, 2019, reporting for the quarter ended June 30, 2019). Collectively, these are referred generically as the “Transition Properties.”
During the year ended December 31, 2020, as shown in more detail in the table below, the Transition Properties contributed approximately $(0.1) million of net operating income (“NOI”). The results of operations of the Transition Properties are included in Segment Same Store with respect to the SHOP segment. The bad debt expense relating to the Transition Properties is included as a reduction to revenue from tenants on the consolidated statement of operations.
The previously reported Same Store results had already been retroactively adjusted to reflect the impact of Transition Properties during the applicable periods and require no further adjustments thereto.
The following table presents by segment Same Store properties’ NOI before and after adjusting for the 2020 Transition Properties as described above, to arrive at “Segment Same Store” results. Our MOB segment was not affected by the Transition Properties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Increase (Decrease) |
(Dollar amounts in thousands) | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store |
NNN Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 35,452 | | $ | (19,841) | | $ | 15,611 | | | $ | 32,509 | | $ | (17,945) | | $ | 14,564 | | | $ | 2,943 | | $ | (1,896) | | $ | 1,047 | |
Less: Property operating and maintenance | | 21,853 | | (19,892) | | 1,961 | | | 18,180 | | (15,870) | | 2,310 | | | 3,673 | | (4,022) | | (349) | |
NOI | | $ | 13,599 | | $ | 51 | | $ | 13,650 | | | $ | 14,329 | | $ | (2,075) | | $ | 12,254 | | | $ | (730) | | $ | 2,126 | | $ | 1,396 | |
| | | | | | | | | | | | |
SHOP Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 198,864 | | $ | 19,841 | | $ | 218,705 | | | $ | 209,579 | | $ | 17,945 | | $ | 227,524 | | | $ | (10,715) | | $ | 1,896 | | $ | (8,819) | |
Less: Property operating and maintenance | | 154,022 | | 19,892 | | 173,914 | | | 154,351 | | 15,870 | | 170,221 | | | (329) | | 4,022 | | 3,693 | |
NOI | | $ | 44,842 | | $ | (51) | | $ | 44,791 | | | $ | 55,228 | | $ | 2,075 | | $ | 57,303 | | | $ | (10,386) | | $ | (2,126) | | $ | (12,512) | |
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance expenses. NOI excludes all other financial statement amounts included in net income (loss) attributable to common stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures included in this Annual Report on Form 10-K for additional disclosure and a reconciliation to our net income (loss) attributable to common stockholders.
Segment Results — Medical Office Buildings
The following table presents the components of NOI and the period to period change within our MOB segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store(1) | | Acquisitions(2) | | Dispositions(3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 95,500 | | $ | 93,651 | | $ | 1,849 | | | $ | 8,341 | | $ | 5,372 | | $ | 2,969 | | | $ | 372 | | $ | 1,356 | | $ | (984) | | | $ | 104,213 | | $ | 100,379 | | $ | 3,834 | |
Less: Property operating and maintenance | | 28,380 | | 29,218 | | (838) | | | 2,436 | | 1,986 | | 450 | | | 35 | | 609 | | (574) | | | 30,851 | | 31,813 | | (962) | |
NOI | | $ | 67,120 | | $ | 64,433 | | $ | 2,687 | | | $ | 5,905 | | $ | 3,386 | | $ | 2,519 | | | $ | 337 | | $ | 747 | | $ | (410) | | | $ | 73,362 | | $ | 68,566 | | $ | 4,796 | |
_______________
(1) Our MOB segment included 104 Same Store properties.
(2) Our MOB segment included 13 Acquisition properties.
(3) Our MOB segment included seven Disposition properties.
(4) Our MOB segment consisted of 117 properties.
NM — Not Meaningful
Revenue from tenants is primarily related to contractual rent received from tenants in our MOBs. It also includes operating expense reimbursements which generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent.
Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, and unaffiliated third party property management fees.
During the year ended December 31, 2020, the MOB segment contributed a $4.8 million increase in NOI as compared to the year ended December 31, 2019. Of our 18 Acquisitions, during the period from January 1, 2019 through December 31, 2020, 13 were MOBs which contributed a $2.5 million increase in NOI, and our Disposition properties contributed a $0.4 million decrease in NOI, while NOI from our Same Store properties contributed a $2.7 million increase in NOI as compared to the year ended December 31, 2019.
Segment Results — Triple Net Leased Healthcare Facilities
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | |
Less: Property operating and maintenance | | 1,961 | | 2,310 | | (349) | | | — | | — | | — | | | — | | — | | — | | | 1,961 | | 2,310 | | (349) | |
NOI | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | |
_________
(1) Our triple-net leased healthcare facilities segment included 15 Same Store properties.
(2) Our triple-net leased healthcare facilities segment did not sellhave any equity securitiesAcquisitions properties.
(3) Our triple-net leased healthcare facilities segment did not have any Dispositions properties.
(4) Our triple-net leased healthcare facilities segment included 15 properties.
NM - Not Meaningful
Revenue from tenants for our triple-net leased healthcare facilities generally consist of fixed rental amounts (which may be subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms. These revenues are contractual rent received from tenants that weredoes not registered undervary based on the Securities Actunderlying operating performance of the properties. In addition, revenue from tenants also includes operating expense reimbursements in our triple-net leased healthcare facilities segment, which generally include reimbursement for property operating expenses that we pay on behalf of tenants in this segment. However, pursuant to many of our lease agreements in this segment, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance expense should typically include minimal activity in our triple-net leased healthcare facilities segment except for real estate taxes and insurance. Real estate taxes are typically paid directly by the tenants; however, they may be paid by us and reimbursed by the tenants.
During the year ended December 31, 2020, revenue from tenants in our triple-net leased healthcare facilities segment increased $1.0 million as compared to the year ended December 31, 2019. Property operating and maintenance expenses decreased $0.3 million during the year ended December 31, 2020 and December 31, 2019, respectively, primarily related to lower property taxes and operating expenses.
Segment Results — Seniors Housing Operating Properties
The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ |
Revenue from tenants | | $ | 218,705 | | | $ | 227,524 | | | $ | (8,819) | | | $ | 18,534 | | | $ | 2,052 | | | $ | 16,482 | | | $ | 24,549 | | | $ | 30,395 | | | $ | (5,846) | | | $ | 261,788 | | | $ | 259,971 | | | $ | 1,817 | |
Less: Property operating and maintenance | | 173,914 | | | 170,221 | | | 3,693 | | | 15,330 | | | 1,760 | | | 13,570 | | | 21,492 | | | 28,081 | | | (6,589) | | | 210,736 | | | 200,062 | | | 10,674 | |
NOI | | $ | 44,791 | | | $ | 57,303 | | | $ | (12,512) | | | $ | 3,204 | | | $ | 292 | | | $ | 2,912 | | | $ | 3,057 | | | $ | 2,314 | | | $ | 743 | | | $ | 51,052 | | | $ | 59,909 | | | $ | (8,857) | |
__________
(1) Our SHOP segment included 56 Same Store properties, including two land parcels.
(2) Our SHOP segment included five Acquisitions properties.
(3) Our SHOP segment included nine Dispositions properties.
(4) Our SHOP segment included 61 properties, including two land parcels.
NM — Not Meaningful
Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance expenses relates to the costs associated with staffing to provide care for the residents in our SHOPs, as well as food, marketing, real estate taxes, management fees paid to our third party operators, and costs associated with maintaining the physical site
During the year ended December 31, 2020, revenue from tenants increased by $1.8 million in our SHOP segment as compared to the year ended December 31, 2019 which was primarily driven by an increase in revenue of $16.5 million due to our Acquisition properties, offset by decreases of $5.8 million due to our Disposition properties and $8.8 million due to our Same Store properties, which includes our Transition Properties.
Revenues declined in our Same Store SHOPs primarily due to a decrease in occupancy as a result of the impact of COVID-19 as discussed above. SHOP occupancy has declined from 84.1% as of March 31, 2020 to 79.5% as of June 30, 2020, to 77.9% as of September 30, 2020 and 75.1% as of December 31, 2020. This decline in occupancy trend is also represented in a decline from December 31, 2019, when SHOP occupancy was 85.7%. Regulatory and government-imposed restrictions and infectious disease protocols have hindered, and continue to hinder, our ability to accommodate and conduct in-person tours, process and attract new move-ins at our SHOPs and these and other impacts of the COVID-19 pandemic have affected, and could continue to affect, our ability to fill vacancies.
In addition, we also generated a portion of our SHOP revenue from skilled nursing facilities (which include ancillary revenue from non-residents) at four of our Same Store SHOPs. This revenue declined $2.1 million from $15.4 million during the year ended December 31, 2019 to $13.3 million during the year ended December 31, 2020 as a result of us limiting the services we offer at our skilled nursing facilities, during the COVID-19 pandemic, to protect our residents and on-site staff. We also offered COVID-related rent concessions of $0.4 million for the year ended December 31, 2020. These revenue decreases were partially offset by $1.3 million in COVID-19 surcharges we began billing residents for Personal Protective Equipment (“PPE”) during the quarter ended September 30, 2020, and less bad debt expense of $3.1 million relating to the LaSalle tenant, as described further below.
During the year ended December 31, 2020, property operating and maintenance expenses increased $10.7 million in our SHOP segment as compared to the year ended December 31, 2019, primarily due to an increase of $13.6 million due to our SHOP Acquisition properties and an increase of $3.7 million in our Same Store properties, which includes our Transition Properties. These increases were partially offset by a decrease in property operating and maintenance expenses from our Dispositions of $6.6 million.
The total increase in Same Store operating costs mainly related to costs incurred from the ongoing COVID-19 pandemic which totaled $7.6 million for the year ended December 31, 2020, which was partially offset by $3.6 million of funds received through the CARES Act. The full amount of the CARES Act funds was recognized as a reduction to our Same Store property operating expenses in the table above for the year ended December 31, 2020. As a result we experienced an increase in Same Store operating costs of $3.7 million year over year. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act which will be recognized as a reduction to our Same Store property operating expenses in the quarter ending March 31, 2021. There can be no assurance that the program will be extended or any further amounts received. See the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response.
The LaSalle Properties
On July 1, 2020, we transitioned the LaSalle Properties from our triple-net leased healthcare facilities segment to our SHOP segment, and the LaSalle Properties are now leased to our TRS and operated and managed on our behalf by a third-party operator. Beginning with our reporting for the period ended December 31, 2020 these properties are part of the “Transition Properties” and the resultant change has been applied retrospectively to historical periods.
As of December 31, 2020, the prior tenants at the LaSalle Properties remain in default of a forbearance agreement as described in more detail under “Note 3 — Real Estate Investment, Net - The LaSalle Tenant” and owe us $12.7 million of rent, property taxes, late fees, and interest receivable thereunder. We have the entire receivable balance, including any monetary damages, and related income from the LaSalle Properties fully reserved as of December 31, 2020 and 2019. We incurred bad debt expense, including straight-line rent write-offs of $0.4 million and $3.5 million, related to the LaSalle Properties during the years ended December 31, 2020 and 2019, respectively, which is included as a reduction in revenue from tenants on the consolidated statement of operations.
Now that the transition is complete, we have gained more control over the operations of the LaSalle Properties, and we believe this will allow us to improve performance and the cash flows generated by the LaSalle Properties. There can be no assurance, however, that completing this transition will result in us achieving our operational objectives.
Other Results of Operations
Impairment Charges
We incurred $36.4 million of impairment charges for the year ended December 31, 2020. We recorded $19.6 million of impairment charges related to the 11 Michigan SHOPs, which was recognized after an amendment to the PSA for the sale of these properties in April 2020 which reduced the number of properties under consideration as well as the contract purchase price. We recorded $16.9 million of impairment charges related to the two Florida properties in Jupiter and Wellington as a result of our marketing efforts during the COVID-19 pandemic which concluded with a PSA in August 2020, for which the contract purchase was less than the carrying values of the properties, as well as expected closing costs that were not previously anticipated, which reduced the net amount expected to be realized on the sale of properties.
We incurred $56.0 million of impairment charges for the year ended December 31, 2019. During the fourth quarter of 2019, we began to evaluate the properties in Lutz, Florida, Wellington, Florida and our recently completed development property in Jupiter, Florida for potential sale. As a result, we concluded these held for use assets were impaired and recognized impairment charges in the aggregate of $33.3 million. The other impairment charges for 2019 relate to the 14 Michigan SHOPs that were under contract to be sold.
See Note 3 — Real Estate Investments to our consolidated financial statements in this Annual Report on Form 10-K for additional information on impairment charges. Operating Fees to Related Parties
Operating fees to related parties increased $0.5 million to $23.9 million for the year ended December 31, 2020 from $23.4 million for the year ended December 31, 2019.
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. The fixed portion of the base management fee we pay for asset management services is equal to $1.6 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth per month of 1.25% of the cumulative net proceeds of any equity the we raise. Asset management fees increased $0.5 million to $20.0 million for the year ended December 31, 2020, due to the increase in the variable portion of the base management fee related to the issuance and sale of Series A Preferred Stock in December 2019.
Property management fees increased $0.3 million to $4.2 million, inclusive of $0.3 million of leasing commissions paid, during the year ended December 31, 2020 from $3.9 million during the year ended December 31, 2019. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed.
SeeNote 9 — Related Party Transactions and Arrangements to our consolidated financial statements found in this Annual Report on Form 10-K which provides detail on our fees and expense reimbursements. Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses were $0.2 million for the year ended December 31, 2020 and $0.4 million for the year ended December 31, 2019. The expenses in both periods primarily related to indirect costs associated with potential acquisitions.
General and Administrative Expenses
General and administrative expenses increased $1.0 million to $21.6 million for the year ended December 31, 2020 compared to $20.5 million for the year ended December 31, 2019, which includes a $0.8 million increase in expense reimbursements to related parties. The increase in expense reimbursements to related parties was primarily due to $2.2 million of severance payments and related to legal costs incurred by the Advisor relating to the termination in 2018 of our former chief executive officer, partially offset by a $1.2 million reduction in expenses as a result of revisions to previously accrued bonuses to reflect the ultimate amount paid (see Note 9 – Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K). Depreciation and Amortization Expenses
Depreciation and amortization expense increased marginally to $81.1 million for the year ended December 31, 2020 from $81.0 million for the year ended December 31, 2019.
Gain on Sale of Real Estate Investments
During the year ended December 31, 2020, we disposed of nine properties. The properties were sold for an aggregate contract price of $40.4 million, which resulted in an aggregate gain on sale of $5.2 million. See Note 3 — Real Estate Investments, Net to our consolidated financial statements in this Annual Report on Form 10-K for additional information.
Interest Expense
Interest expense decreased by $4.6 million to $51.5 million for the year ended December 31, 2020 from $56.1 million for the year ended December 31, 2019. The decrease in interest expense resulted from lower interest rates, partially offset by the increase on average outstanding debt in 2020 compared to 2019, as well as $3.0 million of interest expense recorded in the year ended December 31, 2019 resulting from the write off of unamortized deferred financing costs from the refinancing of a $250.0 million mortgage loan originally entered into in 2017. As of December 31, 2020 our outstanding debt obligations were $1.2 billion at a weighted average interest rate of 3.58% per year. As of December 31, 2019, we had total borrowings of $1.1 billion, at a weighted average interest rate of 4.03% per year.
Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings among other factors.
Interest and Other Income
Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. Interest and other income was approximately $44,000 for the year ended December 31, 2020. Interest and other income was approximately $7,000 for the year ended December 31, 2019.
Loss on Non-Designated Derivatives
Loss on non-designated derivative instruments for the years ended December 31, 2020 and 2019 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. Loss on derivative instruments for the years ended December 31, 2020, 2019 and 2018 were $0.1 million, $0.1 million and $0.2 million, respectively.
Income Tax Benefit (Expense)
We recorded income tax expense of $4.1 million and $0.4 million for the years ended December 31, 2020 and 2019, respectively, related to deferred tax assets generated by temporary differences and current period net operating income associated with our TRS. During the year ended December 31, 2020, we recorded a $4.6 million valuation allowance against our deferred tax asset. Income taxes generally relate to our SHOPs, which are leased by our TRS.
Because of our TRS recent operating history of losses and the on-going impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, we are not able to conclude that it is more likely than not we will realize the future benefit of our deferred tax assets; thus we have recorded a 100% valuation allowance as of December 31, 2020 of $4.6 million. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statements of comprehensive income (loss). As of December 31, 2020, our consolidated TRS had net operating loss carryforwards for federal income tax purposes of approximately $14 million at December 31, 2020 (of which $7.6 million were incurred prior to January 1, 2018). For losses incurred prior to January 1, 2018, if unused, these will begin to expire in 2035. For net operating losses incurred subsequent to December 31, 2017, exceptthere is no expiration date.
Net Income/Loss Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was approximately $0.3 million and net loss to non-controlling interests was $0.4 million for the years ended December 31, 2020 and 2019, respectively. These amounts represent the portion of our net loss that is related to the OP Units and non-controlling interest holders in our subsidiaries that own certain properties.
Cash Flows from Operating Activities
During the year ended December 31, 2020, net cash provided by operating activities was $41.8 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $45.8 million (net loss of $75.5 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-designated derivatives and impairment charges). In addition, cash provided by operating activities was impacted by an increase in accounts payable and accrued expenses of $4.6 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $0.1 million and a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $2.4 million.
During the year ended December 31, 2019, net cash provided by operating activities was $47.4 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows include non-cash items of $56.8 million (net loss of $88.3 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, bad debt expense, equity-based compensation, gain on non-
designated derivatives and impairment charges) and an increase in accounts payable and accrued expenses of $2.6 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $9.7 million and a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $3.8 million.
Cash Flows from Investing Activities
Net cash used in investing activities during the year ended December 31, 2020 was $82.5 million. The cash used in investing activities included $95.0 million for the acquisition of nine properties and $21.9 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $34.4 million.
Net cash used in investing activities during the year ended December 31, 2019 was $46.2 million. The cash used in investing activities included $92.0 million for the acquisition of nine properties and to fund the cost of our ongoing development property in Jupiter, Florida during the period and $16.7 million in capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $62.5 million.
Cash Flows from Financing Activities
Net cash provided by financing activities of $19.4 million during the year ended December 31, 2020 included proceeds of $95.0 million from our Revolving Credit Facility. These cash inflows were partially offset by distributions to stockholders of $31.4 million, common stock repurchases of $10.5 million, payments for deferred financing costs of $2.2 million, the buyout of a non-controlling interest of $0.6 million and dividends paid to preferred stockholders $2.4 million.
Net cash provided by financing activities of $19.1 million during the year ended December 31, 2019 related to proceeds of $225.6 million from our Revolving Credit Facility, $150.0 million from our Term Loan, $136.5 million from the Multi-Property CMBS Loan and $37.6 million of net proceeds from the issuance of Series A Preferred Stock. These cash inflows were partially offset by payments on our Revolving Credit Facility of $368.3 million, mortgage principal repayments of $67.8 million, distributions to stockholders of $51.4 million, common stock repurchases of $21.1 million, payments for deferred financing costs of $19.5 million, and distributions to non-controlling interest holders of $0.3 million.
Liquidity and Capital Resources
The negative impacts of the COVID-19 pandemic has caused and may continue to cause certain of our tenants to be unable to make rent payments to us timely, or at all, which has, and could continue to have, an adverse effect on the amount of cash we receive from our operations. In addition to the discussion below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response.
As of December 31, 2020, we had $72.4 million of cash and cash equivalents. Our ability to use this cash on hand is restricted. Under our Credit Facility, as amended on August 2020, we are required to maintain a combination of cash, cash equivalents and availability for future borrowings under our revolving credit facility under our Credit Facility (our “Revolving Credit Facility”) totaling at least $50.0 million. As of December 31, 2020, $48.3 million was available for future borrowings under our Revolving Credit Facility. Pursuant to an amendment to our Credit Facility in August 2020, certain other restrictions and conditions described below will no longer apply starting in the “Commencement Quarter” which is a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. As of December 31, 2020, our ratio of consolidated total indebtedness to consolidated total asset value for these purposes was 61.7%. The Commencement Quarter may be no earlier than the fiscal quarter ending June 30, 2021. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We, for example, may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of our common stock) on our common stock until the Commencement Quarter. Moreover, beginning in the Commencement Quarter, we may only pay cash distributions provided that the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter.
Following the amendment in August 2020, our Credit Facility also restricts our sources of liquidity. Until the first day of the Commencement Quarter, we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. The availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the decreases in cash rent collected from our tenants and income from our operators that have resulted from the effects of the COVID-19 pandemic and may persist for some time. See “Item 1A. Risk Factors. Our Credit Facility restricts our ability to use cash
that would otherwise be available to us, and there can be no assurance our available liquidity will be sufficient to meet our capital needs.”
We expect to fund our future short-term operating liquidity requirements, including dividends to holders of Series A Preferred Stock, through a combination of current cash on hand, net cash provided by our property operations and proceeds from the Revolving Credit Facility. Our principal demands for cash are for acquisitions, capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), and dividends to holders of our Series A Preferred Stock. We closely monitor our current and anticipated liquidity position relative to our current and anticipated demands for cash and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as the on-going impact of COVID-19 on our tenants and operators and our ability to complete our pending dispositions on their contemplated terms, or at all.
Preferred Stock Equity Line with B. Riley Principal Capital, LLC
On September 15, 2020, we entered into a preferred stock purchase agreement and registration rights agreement with B. Riley Principal Capital, LLC (“B. Riley”), pursuant to which we have the right from time to time to sell up to an aggregate of $15 million of shares of our Series A Preferred Stock to B. Riley until December 31, 2023, on the terms and subject to the conditions set forth in the purchase agreement. This arrangement is also referred to as the “Preferred Stock Equity Line.” We control the timing and amount of any sales to B. Riley under the Preferred Stock Equity Line, and B. Riley is obligated to make purchases of up to 3,500 shares of Series A Preferred Stock each time (as may be increased by mutual agreement by the parties) in accordance with the purchase agreement, upon certain terms and conditions being met. We did not sell any shares under the Preferred Stock Equity Line during the year ended December 31, 2020.
Financings
As of December 31, 2020, our total debt leverage ratio (net debt divided by gross asset value) was approximately 44.5%. Net debt totaled $1.2 billion, which represents gross debt ($1.2 billion) less cash and cash equivalents ($72.4 million). Gross asset value totaled $2.6 billion, which represents total real estate investments, at cost ($2.6 billion) and assets held for sale at carrying value ($0.1 million), net of gross market lease intangible liabilities ($22.1 million). Impairment charges are already reflected within gross asset value.
As of December 31, 2020, we had total gross borrowings of $1.2 billion, at a weighted average interest rate of 3.6%. As of December 31, 2019, we had total gross borrowings of $1.1 billion at a weighted average interest rate of 4.0%. As of December 31, 2020, the carrying value of our real estate investments, at cost was $2.6 billion, with $0.9 billion of this amount pledged as collateral for mortgage notes payable, $0.6 billion of this amount pledged to secure advances under the Fannie Mae Master Credit Facilities and $0.9 billion of this amount comprising the borrowing base of the Credit Facility. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the Credit Facility, which informationwould impact availability thereunder.
We expect to utilize proceeds from our Credit Facility to fund future property acquisitions, as well as, subject to the terms of our Credit Facility, other sources of funds that may be available to us. These actions may require us to add some or all of our unencumbered properties as security for that debt or add them to the borrowing base under our Credit Facility. Unencumbered real estate investments, at cost as of December 31, 2020 was $0.2 billion. There can be no assurance as to the amount of liquidity we would be able to generate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility. Pursuant to the Credit Facility, any resulting net proceeds from these dispositions prior to the Commencement Quarter must be used to prepay amounts outstanding under the Revolving Credit Facility.
Mortgage Notes Payable
As of December 31, 2020, we had $550.4 million in gross mortgage notes payable outstanding. During the first quarter of 2020, we assumed one mortgage for $13.9 million in connection with one of our SHOP acquisitions.
Credit Facility
Our Credit Facility consists of two components, the Revolving Credit Facility and our Term Loan. The Revolving Credit Facility is interest-only and matures on March 13, 2023, subject to one one-year extension at our option. Our Term Loan is interest-only and matures on March 13, 2024. Loans under our Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty, subject to customary breakage costs. Any amounts repaid under our Term Loan may not be re-borrowed.
In March 2020, we borrowed an additional $95.0 million under the Revolving Credit Facility a portion of which was used for general corporate purposes. Subsequently, we have not borrowed additional amount under the Revolving Credit Facility.
In the fourth quarter of 2020, we repaid $4.4 million of the Revolving Credit Facility from the proceeds of the Michigan SHOP disposition and $17.6 million from the disposition of the skilled nursing facility in Lutz, Florida. These amounts represented all the cash proceeds from these dispositions.
The total commitments under the Credit Facility are $630.0 million including $480.0 million under the Revolving Credit Facility. The Credit Facility includes an uncommitted “accordion feature” that may be used to increase the commitments under either component of the Credit Facility by up to an additional $370.0 million to a total of $1.0 billion. As of December 31, 2020, $323.7 million was outstanding under the Credit Facility and the unused borrowing availability under the Credit Facility was $48.3 million. The amount available for future borrowings under the Credit Facility is based on either the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, or a minimum debt service coverage ratio with respect to the borrowing base. Both of these amounts are calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and, therefore, availability under our Credit Facility has been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Purchases of Equity Securitiesadversely affected by the Issuerdecreases in cash rent collected from our tenants and Affiliated Purchasersincome from our operators due to the effects of the COVID-19 pandemic, and may continue to be adversely affected.
As of December 31, 2020, $150.0 million was outstanding under our Term Loan, and $173.7 million was outstanding under the Revolving Credit Facility. The equity interests and related rights in our wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The applicable margin used to determine the interest rate under both the Term Loan and Revolving Credit Facility components of the Credit Facility varies based on our leverage. As of December 31, 2020, the Revolving Credit Facility and the Term Loan had an effective interest rate per annum equal to 3.21% and 4.95%, respectively. The Credit Facility prohibits us from exceeding a maximum ratio of consolidated total indebtedness to consolidated total asset value, and requires us to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges on a quarterly basis and a minimum consolidated tangible net worth. As of December 31, 2020, we were in compliance with the financial covenants under the Credit Facility. Based upon our current expectations, we believe our operating results during the next 12 months will allow us to comply with these covenants. Please see “Item 1A. Risk Factors. Risks Related to our Indebtedness.”
Fannie Mae Master Credit Facilities
As of December 31, 2020, $355.2 million was outstanding under the Fannie Mae Master Credit Facilities. We may request future advances under the Fannie Mae Master Credit Facilities by adding eligible properties to the collateral pool or by borrowing-up against the increased value of the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. Future advances based on the increased value of the collateral pool may only occur until November 2021 and not more than once annually for each of the Fannie Mae Master Credit Facilities. Borrowings under the Fannie Mae Master Credit facilities bear annual interest at a rate that varies on a monthly basis and is equal to the sum of the current LIBOR for one month U.S. dollar-denominated deposits and 2.62%, with a combined floor of 2.62%. The Fannie Mae Master Credit Facilities mature on November 1, 2026.
Capital Expenditures
During the year ended December 31, 2020, our capital expenditures were $21.9 million, of which approximately $4.6 million related our MOB segment, $4.0 million related to our NNN segment and $12.8 million related to our SHOP segment. All other capital expenditures were typical in nature for the other properties in our portfolio. We anticipate this rate of capital expenditures will be similar for the MOB, NNN and SHOP segments throughout 2021, however, the recent economic uncertainty created by the COVID-19 global pandemic will continue to impact our decisions on the amount and timing of future capital expenditures. Our capital expenditures in 2021 were funded using cash on hand, and we also expect to fund future capital expenditures using cash on hand.
Acquisitions — Year Ended December 31, 2020
During the year ended December 31, 2020, we completed the acquisitions of two multi-tenant MOBs, three single tenant MOBs and four SHOP for an aggregate contract purchase price of $109.6 million. The acquisition of one multi-tenant MOB for a contract purchase price of $5.7 million, was completed during the three months ended December 31, 2020. The properties acquired during the year ended December 31, 2020 are located in Illinois, Pennsylvania, Ohio and Florida and comprise approximately 340,783 square feet and were funded with proceeds from financings (including amounts borrowed under our Credit Facility), the assumption of the $13.9 million mortgage in an acquisition, and cash on hand.
Acquisitions — Subsequent to December 31, 2020 and Pending Transactions
We acquired one property subsequent to December 31, 2020 for $6.6 million. We have signed two PSAs to acquire two MOBs located in Ohio and Oklahoma for an aggregate contract purchase price of approximately $10.1 million. We anticipate using cash on hand to fund the consideration required to complete these acquisitions. The PSAs are subject to conditions and there can be no
assurance we will complete any of these acquisitions, or any future acquisitions or other investments, on a timely basis or on acceptable terms and conditions, if at all.
Acquisition of Non-Controlling Interest
In orderNovember 2020, we purchased all of the outstanding membership interests in the joint venture that owns the UnityPoint Clinics in Muscatine, Iowa and Moline, Illinois for approximately $0.6 million, funded with cash on hand. Following this transaction, the properties were wholly owned by us and added to provide stockholdersthe borrowing base under our Credit Facility.
Dispositions — Year Ended December 31, 2020
During the year ended December 31, 2020, we sold nine properties (one MOB, seven SHOPs and one skilled nursing facility in Lutz Florida) for an aggregate contract price of $40.4 million, which resulted in an aggregate gain on sale of $5.2 million. Eight of these properties (seven SHOPs in Michigan and one skilled nursing facility in Lutz Florida) were sold in the fourth quarter of 2020 and had an aggregate purchase price of $31.8 million, which resulted in an aggregate gain on sale of $2.9 million There were no mortgages on these properties, however the property in Lutz, Florida was part of the borrowing base under the Credit Facility, as well as four Michigan properties, and one of the Michigan properties was part of the Capital One Fannie Mae Credit Facility.
Which respect to the sale of the Michigan SHOPs, in November 2020, we received payment of the full $11.8 million sales price for all 11 of the Michigan SHOPs, less $0.8 million held in escrow, and transferred seven of the properties to the buyer. The remaining four properties were transferred to the buyer at a second closing in January 2021 when the $0.8 million held in escrow was released to the buyer. Of the properties transferred at the initial closing, four were part of the borrowing base under the Credit Facility, one was part of the collateral pool under the Fannie Mae Master Credit Facility with interim liquidity,Capital One and two were unencumbered. Of the properties transferred at the second closing, three were part of the borrowing base under the Credit Facility until the initial closing and one was unencumbered. At the initial closing, $4.2 million of the net proceeds was used to repay amounts outstanding under the Fannie Mae Master Credit Facility with Capital One, $4.4 million of the net proceeds were used to repay amounts outstanding under the Revolving Credit Facility, with the remainder used for closing costs. Following the sale of the SHOP in Lutz, Florida, all $17.6 million of the net proceeds were used to repay amounts outstanding under the Credit Facility.
Dispositions — Subsequent to December 31, 2020
Subsequent to December 31, 2020, we did not dispose of any properties.
We have entered into two definitive PSAs to sell the property in Jupiter Florida for $65.0 million and a skilled nursing facility in Wellington, Florida for $33.0 million. The sales of these assets are subject to conditions, and, due to the persistence of the COVID-19 pandemic and other factors beyond our control, there can be no assurance that we will be able to meet these conditions and that these dispositions will be completed on their contemplated terms, or at all. With respect to the skilled nursing facility in Wellington, Florida, closing may not occur unless, among other conditions, certain occupancy and revenue levels have been maintained at the property for a period of time. The property in Jupiter, Florida is not currently encumbered by any mortgage debt or part of the borrowing base under our Credit Facility. The skilled nursing facility in Wellington Florida is part of the borrowing base under our Credit Facility. Pursuant to the terms of the amendment to our Credit Facility in August 2020, the net cash proceeds from any completed dispositions must be used to prepay amounts outstanding under the Revolving Credit Facility and will therefore not be available to us for any other purpose. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Share Repurchase Program
Our Board has adopted the SRP, which enables our common stockholders to sell their shares backof common stock to us after they have been held for at least one year,under limited circumstances. At the time a common stockholder requests a repurchase, we may, subject to significantcertain conditions, and limitations. Our Advisor, directors and affiliates are prohibited from receiving a fee on any share repurchases.
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders ofrepurchase the shares presented for repurchase for cash. There are not eligible to participate inlimits on the SRP.
Repurchasesnumber of shares ofwe may repurchase under this program during any calendar year. We are only authorized to repurchase shares using the proceeds secured from our common stock are atDRIP in any given period, although the Board has the power, in its sole discretion, of the Board. Until the SRP Amendment (described below), we limitedto determine the number of shares repurchased during any calendar year to 5% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, we were only authorized to repurchase shares in a given quarter up toperiod as well as the amount of proceeds we received from our DRIP infunds to be used for that same quarter.
On January 26, 2016, the Board approved and amended the SRP (the "SRP Amendment") to supersede and replace the existing SRP. Under the SRP Amendment, repurchases of shares of our common stock generally will be made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year (the "Prior Year Outstanding Shares"), with a maximum for any fiscal year of 5.0% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, we are only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds we receive from our DRIP in that same fiscal semester.
Unless the shares of our common stock are being repurchased in connection with a stockholder's death or disability a stockholder must have held the shares for at least one year prior to offering them for sale to us through the SRP. The purchase price for such shares repurchased under our SRP prior to the date we first determined Estimated Per-Share NAV (the "NAV pricing date"), except for repurchases in connection with a stockholder's death or disability, will be as follows (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock):
the lower of $23.13 and 92.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least one year;
the lower of $23.75 and 95.0% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least two years;
the lower of $24.38 and 97.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least three years; and
the lower of $25.00 and 100% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least four years.
No minimum holding period will apply to repurchase requests made following the death or qualifying disability of a stockholder. Shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equal to the price actually paid for the shares during our IPO until the NAV pricing date, and then at a purchase price equal to the then-current Estimated Per-Share NAV (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) on or after the NAV pricing date. The Board has the discretion to exempt shares purchased pursuant to our DRIP from the one-year holding requirement, if a stockholder sells back all of his or her shares. In addition, we may waive the holding period in the event of a stockholder's bankruptcy or other exigent circumstances.purpose.
Under the SRP Amendment, other than death and disability and beginning with the NAV pricing date, the price per share that we will pay to repurchase our shares will be equal to our Estimated Per-Share NAV multiplied by a percentage equal to (i) 92.5%, if the person seeking repurchase has held his or her shares for a period greater than one year and less than two years; (ii) 95%, if the person seeking repurchase has held his or her shares for a period greater than two years and less than three years; (iii) 97.5%, if the person seeking repurchase has held his or her shares for a period greater than three years and less than four years; or (iv) 100%, if the person seeking repurchase has held his or her shares for a period greater than four years. Subject to limited exceptions, stockholders who redeem their shares of our common stock within the first four months from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate Estimated Per-Share NAV of the shares of common stock received.
On June 28, 2016, the Board further amended our SRP (the "Second SRP Amendment") to provide for one twelve-month repurchase period for calendar year 2016 (the “2016 Repurchase Period”) instead of two semi-annual periods ending June 30 and December 31. The annual limit on repurchases under our SRP remained unchanged and continues to be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and is subject to the terms and limitations set forth in our SRP. Accordingly, the 2016 Repurchase Period is limited to a maximum of 5.0% of the Prior Year Outstanding Shares and continues to be subject to the terms and conditions set forth in our SRP, as amended. Following calendar year 2016, the repurchase periods will return to two semi-annual periods and applicable limitations set forth in our SRP. The Second SRP Amendment also provides, for calendar year 2016 only, that any amendments, suspensions or terminations of our SRP becomecurrently effective on the day following our public announcement of such amendments, suspension or termination. The Second SRP Amendment became effective on July 30, 2016 and only applies to repurchase periods in calendar year 2016.
On January 25, 2017, the Board further amended the Company’s SRP (the "Third SRP Amendment") changing the date on which any repurchases are to be made in respect of requests made during the calendar year 2016 to no later than March 15, 2017, rather than on or before the 31st day following December 31, 2016. All other terms of the SRP remain in effect, including that repurchases pursuant to the SRP are at the sole discretion of the Board.
On June 14, 2017, the Board approved and adopted an amended and restated SRP that superseded and replaced the existing SRP, effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of our common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisionsAdditionally, pursuant to the SRP, the repurchase price per share equals 100% of the amended and restated SRP remained consistent with the existing SRP.
Our Estimated Per-Share NAV is estimated at least annually, and thus,in effect on the repurchase price may fluctuate betweenlast day of the redemption request day andfiscal semester, or the date on which the Company pays redemption proceeds.
six-month period ending June 30 or December 31.
The following table summarizesamendment to the Credit Facility on August 10, 2020 provides that we may not repurchase shares of our SRP activity for the periods presented. The cost of the repurchased shares did not exceed DRIP proceeds during the periods presented. We funded share repurchases from proceeds received from common stock issueduntil the Commencement Quarter. In light of this amendment, the Board suspended repurchases under the DRIP.
|
| | | | | | | | | | | |
| | Number of Shares Repurchased | | Cost of Shares Repurchased | | Average Price per Share |
| | | | (In thousands) | | |
Period from October 15, 2012 (date of inception) to December 31, 2012 | | — |
| | $ | — |
| | $ | — |
|
Year ended December 31, 2013 | | 1,600 |
| | 40 |
| | 25.00 |
|
Year ended December 31, 2014 | | 72,431 |
| | 1,768 |
| | 24.41 |
|
Year ended December 31, 2015 | | 894,339 |
| | 21,161 |
| | 23.66 |
|
Year ended December 31, 2016 | | 6,660 |
| | 170 |
| | 24.36 |
|
Year ended December 31, 2017 | | 1,554,768 |
| | 33,599 |
| | 21.61 |
|
Cumulative repurchases as of December 31, 2017 (1) | | 2,529,798 |
| | 56,738 |
| | $ | 22.43 |
|
Proceeds received from shares issued under the DRIP | | | | 256,252 |
| | |
Excess | | | | $ | 199,514 |
| | |
_______________
(1) Includes 1,554,768 shares repurchased during the year ended December 31, 2017 for approximately $33.6 million at a weighted average price per share of $21.61. ExcludesSRP effective August 14, 2020. The Board has also rejected repurchases received during 2016 with respect to 2.3 million shares for $48.7 million at a weighted average price per share of $21.27 and 373,967 shares repurchased during January 2018 with respect to requests received following the death or qualifying disability of stockholders during the six months ended December 31, 2017 for approximately $8.0 million at a weighted average price per share of $21.45. In July 2017, following the effectiveness of the amendment and restatement of the SRP, the Board approved 100% of theall repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 20172020 until the effectiveness of the suspension of the SRP. No further repurchase requests under the SRP may be made unless and until the SRP is reactivated. Prior to September 30, 2017, which was equal to 267,723the Commencement Quarter, we may not repurchase shares repurchased for approximately $5.7 million at an average price per share of $21.47. No repurchases have been orour common stock. Beginning in the Commencement Quarter, we will be permitted to repurchase up to $50.0 million of shares of our common stock (including amounts previously repurchased
during the term of the Revolving Credit Facility) if, after giving effect to the repurchases, we maintain cash and cash equivalents of at least $30.0 million and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 55.0%.
No assurances can be made as to when or if our SRP will be reactivated.
Non-GAAP Financial Measures
This section discusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations (“FFO”), Modified Funds from Operations (“MFFO”) and NOI. While NOI is a property-level measure, MFFO is based on our total performance as a company and therefore reflects the impact of other items not specifically associated with respectNOI such as, interest expense, general and administrative expenses and operating fees to requests received during 2017related parties. Additionally, NOI as defined here, includes straight-line rent which is excluded from MFFO. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that arethe value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not valid requestslimited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the amendedsale of certain real estate assets, gains and restated SRP.losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s definition.
We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and 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.
UntilChanges in the SRP Amendment,accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Institute of Portfolio Alternatives (“IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we processed repurchasesbelieve that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.
We calculate MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price
consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, 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, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses and capitalized interest.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a quarterly basis. The following table summarizes repurchase requests pursuantgoing-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance once our portfolio is stabilized. Our Modified FFO (as defined in our Credit Facility) is similar but not identical to MFFO as discussed in this Quarterly Report on Form 10-Q. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP 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 pay dividends and other distributions to our SRP for each quarter during the year ended December 31, 2017:
|
| | | | | | | | | | | |
|
| Number of Shares Repurchased |
| Cost of Shares Repurchased |
| Average Price per Share |
|
|
|
| (In thousands) |
|
|
Quarter ended March 31, 2017 |
| 1,273,179 |
|
| $ | 27,518 |
|
| $ | 21.61 |
|
Quarter ended June 30, 2017 |
| 13,866 |
|
| 332 |
|
| 23.94 |
|
Quarter ended September 30, 2017 |
| 267,723 |
|
| 5,749 |
|
| 21.47 |
|
Quarter ended December 31, 2017 |
| — |
|
| — |
|
| — |
|
Year ended December 31, 2017 |
| 1,554,768 |
|
| $ | 33,599 |
|
| $ | 21.61 |
|
_______________
Item 6. Selected Financial Data.
The following selected financial data as ofstockholders. FFO and for the years December 31, 2017, 2016, 2015, 2014 and 2013MFFO should be readreviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the accompanying consolidated financial statementsperformance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and related notes theretoconsidered more prominently than the non-GAAP measures, FFO and "Item 7. Management'sMFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, updates to the White Paper or the Practice Guideline may be published or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
Accounting Treatment of Rent Deferrals
All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations" below:Operations for additional information). As a result of relief granted by the FASB and SEC related to lease modification accounting, rental revenue used to calculate Net Income and NAREIT FFO has not been, and we do not expect it to be, significantly impacted by these types of deferrals. In addition, since we currently believe that these deferral amounts are collectable, we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these types of rent deferrals. For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 — Significant Accounting Polices to our consolidated financial statements included in the Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
Balance sheet data (In thousands) | | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Total real estate investments, at cost | | $ | 2,486,052 |
| | $ | 2,355,262 |
| | $ | 2,341,271 |
| | $ | 1,662,697 |
| | $ | 46,286 |
|
Total assets | | 2,371,861 |
| | 2,193,705 |
| | 2,269,842 |
| | 1,856,482 |
| | 160,206 |
|
Mortgage notes payable, net | | 406,630 |
| | 142,754 |
| | 157,305 |
| | 64,558 |
| | — |
|
Credit facilities | | 534,869 |
| | 481,500 |
| | 430,000 |
| | — |
| | — |
|
Total liabilities | | 1,015,802 |
| | 689,379 |
| | 668,025 |
| | 124,305 |
| | 2,057 |
|
Total stockholders' equity | | 1,356,059 |
| | 1,504,326 |
| | 1,601,817 |
| | 1,732,177 |
| | 158,149 |
|
The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2020 | | 2019 | | 2018 |
Net loss attributable to common stockholders (in accordance with GAAP) | | $ | (78,781) | | | $ | (88,087) | | | $ | (52,762) | |
Depreciation and amortization (1) | | 79,643 | | | 79,744 | | | 82,226 | |
Impairment charges | | 36,446 | | | 55,969 | | | 20,655 | |
(Gain) loss on sale of real estate investment | | (5,230) | | | (8,790) | | | 70 | |
| | | | | | |
Adjustments for non-controlling interests (2) | | (526) | | | (595) | | | (484) | |
FFO (as defined by NAREIT) attributable to common stockholders | | 31,552 | | | 38,241 | | | 49,705 | |
Acquisition and transaction related | | 173 | | | 362 | | | 302 | |
(Accretion) amortization of market lease and other lease intangibles, net | | (80) | | | (4) | | | 255 | |
Straight-line rent adjustments | | (2,405) | | | (3,561) | | | (1,863) | |
Straight-line rent (rent deferral agreements) (3) | | 280 | | | — | | | — | |
Amortization of mortgage premiums and discounts, net | | 60 | | | (162) | | | (263) | |
Loss on non-designated derivatives | | 102 | | | 68 | | | 157 | |
Capitalized construction interest costs | | — | | | (2,756) | | | (3,198) | |
Deferred tax asset valuation allowance (4) | | 4,641 | | | — | | | — | |
Adjustments for non-controlling interests (2) | | (9) | | | 31 | | | 24 | |
MFFO attributable to common stockholders | | $ | 34,314 | | | $ | 32,219 | | | $ | 45,119 | |
________
(1) Net of non-real estate depreciation and amortization.
(2) Represents the portion of the adjustments allocable to non-controlling interests.
(3) Represents the amount of deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our consolidated balance sheet but are considered to be earned revenue attributed to the current period for purposes of MFFO as they are expected to be collected.
(4) This is a non-cash item and is added back as it is not considered a part of operating performance.
Net Operating Income
|
| | | | | | | | | | | | | | | | | | | | |
Operating data (In thousands, except for share and per share data) | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Total revenues | | $ | 311,173 |
| | $ | 302,566 |
| | $ | 247,490 |
| | $ | 58,439 |
| | $ | 1,817 |
|
Total operating expenses | | 323,827 |
| | 307,203 |
| | 283,100 |
| | 92,770 |
| | 2,033 |
|
Operating loss | | (12,654 | ) | | (4,637 | ) | | (35,610 | ) | | (34,331 | ) | | (216 | ) |
Total other expenses | | (29,411 | ) | | (18,417 | ) | | (9,328 | ) | | (2,816 | ) | | — |
|
Loss before income taxes | | (42,065 | ) | | (23,054 | ) | | (44,938 | ) | | (37,147 | ) | | (216 | ) |
Income tax benefit (expense) | | (647 | ) | | 2,084 |
| | 2,978 |
| | (565 | ) | | (5 | ) |
Net loss | | (42,712 | ) | | (20,970 | ) | | (41,960 | ) | | (37,712 | ) | | (221 | ) |
Net loss attributed to non-controlling interests | | 164 |
| | 96 |
| | 219 |
| | 34 |
| | — |
|
Net loss attributed to stockholders | | $ | (42,548 | ) | | $ | (20,874 | ) | | $ | (41,741 | ) | | $ | (37,678 | ) | | $ | (221 | ) |
Other data: | | | | | | | | | | |
Cash flows provided by (used in) operations | | $ | 63,967 |
| | $ | 78,725 |
| | $ | 68,680 |
| | $ | (4,687 | ) | | $ | (764 | ) |
Cash flows used in investing activities | | (194,409 | ) | | (19,092 | ) | | (556,834 | ) | | (1,531,134 | ) | | (46,484 | ) |
Cash flows provided by (used in) financing activities | | 199,843 |
| | (55,567 | ) | | 332,880 |
| | 1,608,383 |
| | 159,078 |
|
Per share data: | | | | | | | | | | |
Basic and diluted weighted-average shares outstanding | | 89,802,174 |
| | 87,878,907 |
| | 85,331,966 |
| | 51,234,729 |
| | 2,148,297 |
|
Basic and diluted net loss per share | | $ | (0.47 | ) | | $ | (0.24 | ) | | $ | (0.49 | ) | | $ | (0.74 | ) | | $ | (0.10 | ) |
Distributions declared per share | | $ | 1.51 |
| | $ | 1.70 |
| | $ | 1.70 |
| | $ | 1.70 |
| | $ | 1.03 |
|
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to revenue from tenants less property operating and maintenance. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
Item 7. Management's DiscussionNOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and Analysisis often incurred at the corporate level. In addition, depreciation and amortization, because of Financial Conditionhistorical cost accounting and Resultsuseful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of Operationsour operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to pay distributions.
The following discussion and analysis should be readtable reflects the items deducted from or added to net loss attributable to common stockholders in conjunction withour calculation of NOI for the accompanyingyear ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 36,862 | | | $ | 2,492 | | | $ | (15,690) | | | $ | (102,445) | | | $ | (78,781) | |
Impairment charges | | 12,551 | | | — | | | 23,895 | | | — | | | 36,446 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,922 | | | 23,922 | |
Acquisition and transaction related | | — | | | — | | | — | | | 173 | | | 173 | |
General and administrative | | 95 | | | — | | | — | | | 21,477 | | | 21,572 | |
Depreciation and amortization | | 74,017 | | | 6,617 | | | 419 | | | — | | | 81,053 | |
Interest expense | | 2,036 | | | — | | | — | | | 49,483 | | | 51,519 | |
Interest and other income | | — | | | — | | | — | | | (44) | | | (44) | |
Loss on non-designated derivative instruments | | — | | | — | | — | | 102 | | | 102 | |
Loss on sale of real estate investments | | — | | | — | | | (5,230) | | | — | | | (5,230) | |
Income tax expense | | — | | | — | | | — | | | 4,061 | | | 4,061 | |
Net income attributable to non-controlling interests | | — | | | — | | | — | | | 303 | | | 303 | |
Allocation for preferred stock | | — | | | — | | | — | | | 2,968 | | | 2,968 | |
NOI | | $ | 125,561 | | | $ | 9,109 | | | $ | 3,394 | | | $ | — | | | $ | 138,064 | |
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of NOI for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 14,097 | | | $ | 1,552 | | | $ | (3,519) | | | $ | (100,217) | | | $ | (88,087) | |
Impairment charges | | 43,125 | | | — | | | 12,844 | | | — | | | 55,969 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,414 | | | 23,414 | |
Acquisition and transaction related | | 7 | | | 28 | | | — | | | 327 | | | 362 | |
General and administrative | | 93 | | | 11 | | | 11 | | | 20,415 | | | 20,530 | |
Depreciation and amortization | | 76,430 | | | 2,087 | | | 2,515 | | | — | | | 81,032 | |
Interest expense | | 213 | | | — | | | — | | | 55,846 | | | 56,059 | |
Interest and other income | | 2 | | | — | | | — | | | (9) | | | (7) | |
Loss on non-designated derivative instruments | | — | | | — | | | — | | | 68 | | | 68 | |
Gain on sale of real estate investments | | — | | | — | | | (8,790) | | | — | | | (8,790) | |
| | | | | | | | | | |
Income tax expense | | — | | | — | | | — | | | 399 | | | 399 | |
Net income (loss) attributable to non-controlling interests | | 23 | | | — | | | — | | | (416) | | | (393) | |
Allocation for preferred stock | | — | | | — | | | — | | | 173 | | | 173 | |
NOI | | $ | 133,990 | | | $ | 3,678 | | | $ | 3,061 | | | $ | — | | | $ | 140,729 | |
Refer to Note 15 — Segment Reporting to our consolidated financial statements. The following information contains forward-looking statements which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewherefound in this Annual Report on Form 10-K for a descriptionreconciliation of NOI to net loss attributable to stockholders by reportable segment. Dividends and Other Distributions
Dividends on our Series A Preferred Stock accrue in an amount equal to $1.84375 per share each year ($0.460938 per share per quarter) to Series A Preferred Stock holders, which is equivalent to 7.375% per annum on the $25.00 liquidation preference per share of Series A Preferred Stock. Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a business day, the next succeeding business day to holders of record on the close of business on the record date set by our board of directors and declared by us.
From March 1, 2018 until June 20, 2020, we paid distributions to our common stockholders, at a rate equivalent to $0.85 per annum, per share of common stock. Distributions were payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
On June 29, 2020, the Board approved a change in our common stock distribution policy whereby we would no longer declare distributions based on daily record dates. Instead, any future distributions authorized by the Board on shares of our common stock were to be paid on a monthly basis in arrears based on a single record date during the applicable month.
As noted herein under our Credit Facility we may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of the Company’s common stock), subject to certain exceptions. These exceptions include paying cash dividends on the Series A Preferred Stock or any other preferred stock we may issue and paying any cash distributions necessary to maintain our status as a REIT. We may not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom. Beginning in the Commencement Quarter we will be able to pay cash distributions to holders of common stock, subject to the restrictions described below. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We may only pay cash distributions beginning in the Commencement Quarter and the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter. Until four full fiscal quarters have elapsed after the commencement of Commencement Quarter, the aggregate amount of permitted distributions and Modified FFO will be determined by using only the fiscal quarters that have elapsed from and after the Commencement Quarter and annualizing those amounts.
On August 13, 2020, the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the continued COVID-19 pandemic and to comply with an amendment to the Credit Facility described above. Under the new policy, distributions authorized by the Board on shares of our common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at the Estimated Per-Share NAV in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. On October 1, 2020 and January 4, 2021, we declared dividends payable in 0.01349 shares of our common stock on each share of our outstanding common stock. This amount was based on our prior cash distribution rate of $0.85 per share per annum. The stock dividends were paid on October 15, 2020 and January 15, 2021 to holders of record of our common stock at the close of business on October 8, 2020 and January 11, 2021. See “— Overview” for additional information on the impact of the stock dividends.
Subject to the restrictions in our Credit Facility, the amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Code. Distribution payments are dependent on the availability of funds. The Board may reduce the amount of dividends or distributions paid or suspend dividend or distribution payments at any time and therefore dividend and distribution payments are not assured. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.
The following table shows the sources for the payment of distributions to common stockholders preferred stockholders, including distributions on unvested restricted shares and OP Units, but excluding distributions related to Class B Units as these distributions are recorded as an expense in our consolidated statement of operations and comprehensive loss, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | March 31, 2020 | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | December 31, 2020 |
(In thousands) | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions |
Distributions: | | | | | | | | | | | | | | | | | | | | |
Distributions to common stockholders not reinvested in common stock issued under the DRIP | | $ | 13,225 | | | | | $ | 13,729 | | | | | $ | 4,400 | | | | | $ | — | | | | | $ | 31,354 | | | |
Distributions reinvested in common stock issued under the DRIP | | 6,322 | | | | | 6,267 | | | | | 2,015 | | | | | — | | | | | 14,604 | | | |
Dividends to preferred stockholders | | 173 | | | | | 742 | | | | | 742 | | | | | 742 | | | | | 2,399 | | | |
Distributions on OP Units | | 86 | | | | | 87 | | | | | 28 | | | | | — | | | | | 201 | | | |
Total distributions (1) | | $ | 19,806 | | | | | $ | 20,825 | | | | | $ | 7,185 | | | | | $ | 742 | | | | | $ | 48,558 | | | |
| | | | | | | | | | | | | | | | | | | | |
Source of distribution coverage: | | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (2) | | $ | 18,952 | | | 95.7 | % | | $ | 12,294 | | | 59.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 24 | | | 3.2 | % | | $ | 41,807 | | | 86.1 | % |
Proceeds received from common stock issued under the DRIP (2) | | 854 | | | 4.3 | % | | 6,267 | | | 30.1 | % | | — | | | — | % | | 718 | | | 96.8 | % | | 6,751 | | (3) | 13.9 | % |
Available cash on hand | | — | | | — | % | | 2,264 | | | 10.9 | % | | — | | | — | % | | — | | | — | % | | — | | (3) | — | % |
Total source of distribution coverage | | $ | 19,806 | | | 100.0 | % | | $ | 20,825 | | | 100.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 742 | | | 100.0 | % | | $ | 48,558 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (in accordance with GAAP) | | $ | 18,952 | | | | | $ | 12,294 | | | | | $ | 10,537 | | | | | $ | 24 | | | | | $ | 41,807 | | | |
Net loss attributable to stockholders (in accordance with GAAP) | | $ | (24,744) | | | | | $ | (22.811) | | | | | $ | (10,500) | | | | | $ | (43,514) | | | | | $ | (78,781) | | | |
_______
(1) Excludes distributions related to Class B Units and distributions to non-controlling interest holders other than those paid on our OP Units.The decrease in total distributions was due to the change in the timing of our distributions to common stockholders and the change to declaring distributions in common stock (as opposed to cash) beginning in October 2020 (see disclosure above).
(2) Assumes the use of available cash flows from operations before any other sources.
(3) Year-to-date total does not equal the sum of the quarters. Each quarter and year-to-date period is evaluated separately for purposes of this table.
For the year ended December 31, 2020, cash flows provided by operations were $41.8 million. We had not historically generated sufficient cash flow from operations to fund the payment of dividends and other distributions at the current rate prior to switching from paying cash dividends to stock dividends on our common stock. As shown in the table above, we funded distributions with cash flows provided by operations, proceeds received from common stock issued under our DRIP and available cash on hand, comprised of proceeds from financings and dispositions. Because shares of common stock are only offered and sold pursuant to the DRIP in connection with the reinvestment of distributions paid in cash, participants in the DRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in stock instead of cash.
Our ability to pay dividends on our Series A Preferred Stock and starting with the Commencement Quarter, other distributions and maintain compliance with the restrictions on the payment of distributions in our Credit Facility depends on our ability to increase the amount of cash we generate from property operations which in turn depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can be no assurance that we will complete acquisitions on a timely basis or on acceptable terms and conditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties.
Overviewuncertainties, many of which are beyond our control, and there can be no assurance we will be successful in achieving this objective.
We may still pay any cash distributions necessary to maintain its status as a REIT and may not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom under the Credit
Facility. The amendment provided that the covenants restricting payment of distributions to a threshold based on Modified FFO and requiring maintenance of a minimum ratio of consolidated total indebtedness to consolidated total asset value and a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges did not apply for the fiscal quarter ended June 30, 2020. In addition, the lenders waived any defaults or event of defaults under those covenants that may have occurred during the fiscal quarter ended June 30, 2020 as required by context, Healthcare Trust Operating Partnership, L.P. (the "OP") and its subsidiaries) invest in healthcare real estate, focusing on seniors housing and medical office buildings ("MOB"), locatedwell as any additional default or event of default resulting therefrom prior to August 10, 2020. There can be no assurance our lenders will consent to any amendments or waivers that may become necessary to comply with our Credit Facility in the United States for investment purposes.future.
Loan Obligations
The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities require interest only payments through November 2021 and principal and interest payments thereafter. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2017,2020, we owned 185 properties locatedwere in 30 statescompliance with the financial and comprisedreporting covenants under our loan agreements.
Following the amendment to our Credit Facility in August 2020, until the first day of 9.0 million rentable square feet.the Commencement Quarter, we must use all the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable, Revolving Credit Facility and Fannie Mae Master Credit Facilities and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of December 31, 2020. The minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of December 31, 2020, the outstanding mortgage notes payable and loans under the Revolving Credit Facility and Fannie Mae Master Credit Facilities had weighted-average effective interest rates of 3.9%, 3.2% and 2.6%, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, | | |
(In thousands) | | Total | | 2021 | | 2022 - 2023 | | 2024 -2025 | | Thereafter |
Principal on mortgage notes payable | | $ | 550,361 | | | $ | 1,191 | | | $ | 7,625 | | | $ | 2,237 | | | $ | 539,308 | |
Interest on mortgage notes payable | | 108,961 | | | 15,971 | | | 45,387 | | | 47,603 | | | — | |
Principal on Revolving Credit Facility | | 173,674 | | | — | | | — | | | 173,674 | | | — | |
Interest on Revolving Credit Facility | | 27,875 | | | 5,575 | | | 11,150 | | | 11,150 | | | — | |
Principal on Term Loan | | 150,000 | | | — | | | — | | | 150,000 | | | — | |
Interest on Term Loan | | 37,125 | | | 7,425 | | | 14,850 | | | 14,850 | | | — | |
Fannie Mae Master Credit Facilities | | 355,175 | | | 130 | | | 7,316 | | | 8,993 | | | 338,736 | |
Interest on Fannie Mae Master Credit Facilities | | 53,913 | | | 9,314 | | | 18,464 | | | 18,031 | | | 8,104 | |
Lease rental payments due (1) | | 39,944 | | | 747 | | | 1,540 | | | 1,560 | | | 36,097 | |
Total | | $ | 1,497,028 | | | $ | 40,353 | | | $ | 106,332 | | | $ | 428,098 | | | $ | 922,245 | |
_________
(1) Includes all payments due on both operating leases and direct financing leases. See Note 16 — Commitments and Contingencies to our consolidated financial statements included in this Form 10-K for additional information.
Election as a REIT
We were incorporated on October 15, 2012 as a Maryland corporation that elected and qualified to be taxed as a real estate investment trustREIT under Sections 856 through 860 of the Code, effective for U.S. federal income tax purposes ("REIT") beginning with our taxable year ended December 31, 2013. SubstantiallyCommencing with that taxable year, we have been organized and operated in a manner so that we qualify as a REIT under the Code. We intend to continue to operate in such a manner but can provide no assurances that we will operate in a manner so as to remain qualified for taxation as a REIT. To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and comply with a number of other organizational and operational requirements. If we continue to qualify as a REIT, we generally will not be subject to U.S. federal corporate income tax on the portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as U.S. federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, our Credit Facility (which includes a Revolving Credit Facility and a Term Loan) and the Fannie Mae Master Credit Facilities, bear interest at fixed rates and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We will not hold or issue these derivative contracts for trading or speculative purposes. As of December 31, 2020, we had entered into six non-designated interest rate caps with a notional amount of approximately $359.3 million and nine designated interest rate swaps with a notional amount of $578.5 million. We do not have any foreign operations and thus we are generally not directly exposed to foreign currency fluctuations.
Mortgage Notes Payable
As of December 31, 2020, all of our business is conducted through the OP.
On March 30, 2017, our boardmortgages are either fixed-rate ($171.9 million) or variable-rate ($378.5 million), before consideration of directors (“Board”) approvedinterest rate swaps. Our mortgages had a per share estimategross aggregate carrying value of net asset$550.4 million and a fair value (“Estimated Per-Share NAV”) equal to $21.45of $549.6 million as of December 31, 2016. We intend to publish an updated Estimated Per-Share NAV2020.
Credit Facilities
Our Credit Facilities are variable-rate, before consideration of interest rate swaps, and are comprised of our Revolving Credit Facility, our Term Loan and our Fannie Mae Master Credit Facilities. Our Credit Facilities had a gross aggregate carrying amount of $678.8 million and a fair value of $673.6 million as of December 31, 2017 shortly following2020.
Sensitivity Analysis - Interest Expense
Interest rate volatility associated with all of our variable-rate borrowings, which totaled $1.1 billion as of December 31, 2020, affects interest expense incurred and cash flow to the filingextent they are not fixed via interest rate swap. As noted above, we have nine designated interest rate swaps with a notional amount of $578.5 million, which effectively creates a fixed interest rate for a portion of our variable-rate debt. We also have six non-designated interest rate cap contracts, which are substantially out of the money and, therefore do not currently affect our near-term interest rate sensitivity. The sensitivity analysis related to the portion of our variable-rate debt that is not fixed via designated interest rate swaps assumes an immediate 100 basis point move in interest rates from their December 31, 2020 levels, with all other variables held constant. A 100 basis point increase and decrease in variable interest rates on the portion of our variable-rate debt that is not fixed via designated interest rate swaps would increase and decrease our interest expense by $4.8 million.
Sensitivity Analysis - Fair Value of Debt
Changes in market interest rates on our debt instruments impacts their fair value, even if it has no impact on interest due on them. For instance, if interest rates rise 100 basis points and the balances on our debt instruments remain constant, we expect the fair value of our obligations to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our debt assumes an immediate 100 basis point move in interest rates from their December 31, 2020 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our debt by $37.2 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our debt by $35.2 million. A 100 basis point increase in market interest rates would result in an increase in the fair value of our nine designated interest rate swaps by $28.5 million. A 100 basis point decrease in market interest rates would result in a decrease in the fair value of our nine designated interest rate swaps by $30.2 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 2020 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K10-K. Item 9. Changes in and thereafter, periodically at the discretionDisagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Board, providedSecurities Exchange Act of 1934, as amended (the “Exchange Act”), our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms, and that such estimates willinformation is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be made at least once annually. Pursuant tonoted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the DRIP, our stockholders can elect to reinvest distributions by purchasing shareseffectiveness of a system of controls.
Our Chief Executive Officer and Chief Financial Officer, carried out an evaluation, together with other members of our common stock atmanagement, of the then-current Estimated Per-Share NAV approved by the Board.
We have no employees. Healthcare Trust Advisors, LLC (the "Advisor") has been retained by us to manage our affairs on a day-to-day basis. We have retained Healthcare Trust Properties, LLC (the "Property Manager") to serve as our property manager. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parenteffectiveness of our sponsor, as a result of which they are related parties,disclosure controls and each have received or will receive compensation, feesprocedures (as defined in Rules 13a-15(e) and expense reimbursements for services related to managing of our business. The Advisor, Healthcare Trust Special Limited Partnership, LLC (the "Special Limited Partner") and Property Manager also have received or will receive compensation, fees and expense reimbursements from us related to the investment and management of our assets.
On December 22, 2017, we purchased all15d-15(e) of the membership interests in indirect subsidiaries of American Realty Capital Healthcare Trust III, Inc. (“HT III”) that own the 19 properties comprising substantially all of HT III’s assets (the “Asset Purchase”), pursuant to a purchase agreement (the “Purchase Agreement”), datedExchange Act) as of June 16, 2017. HT IIIthe end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2020 at a reasonable level of assurance.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is sponsoredresponsible for establishing and advised by an affiliate of our Advisor.
Significant Accounting Estimates and Critical Accounting Policies
Set forth belowmaintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a summaryprocess designed to provide reasonable assurance regarding the reliability of the significant accounting estimatesfinancial reporting and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly importantstatements for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our rental income is primarily related to rent received from tenants in our MOBs and triple-net leased healthcare facilities. Rent from tenants in our MOB and triple-net leased healthcare facilities operating segments is recordedexternal purposes in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require usof America.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to record a receivable,the maintenance of records that, in reasonable detail, accurately and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive iffairly reflect the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Resident servicestransactions and fee income primarily relates to rent from residents in our seniors housing — operating properties ("SHOP") held using a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 and to fees for ancillary services performed for residents in our SHOPs. Rental income from residentsdispositions of our SHOP operating segment is recognized as earned. Residents pay monthly rentassets; (ii) provide reasonable assurance that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed.
We defer the revenue related to lease payments received from tenants and residents in advance of their due dates.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in the allowance for uncollectible accounts on the consolidated balance sheets or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction coststransactions are recorded as an expense in the consolidated statementsnecessary to permit preparation of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below-market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests are recorded at their estimated fair values.
We generally determine the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease including any below-market fixed rate renewal options for below-market leases.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e. location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
In allocating the fair value to non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of the carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are accreted as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
If circumstances indicate that the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to our audited consolidated financial statements in thisaccordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on its assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. The effectiveness of our internal control over financial reporting has not been audited by our independent registered public accounting firm because we are a “non-accelerated filer” as defined under SEC rules.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2020, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office: 650 Fifth Avenue - 30th Floor, New York, NY 10019, Attention: Chief Financial Officer. Our Code of Business Conduct and Ethics is also publicly available on our website at www.healthcaretrustinc.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for further discussion.Issuance Under Equity Compensation Plans
Results of Operations
As of December 31, 2017, we operatedWe operate in three reportable business segments for management and internal financial reporting purposes: medical office buildings,MOBs, triple-net leased healthcare facilities, and seniors housing — operating properties.SHOPs. In our MOB operating segment, we own, manage and lease through our Property Manager or third party property managers, single and multi-tenant MOBs where tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. In our triple-net leased healthcare facilities operating segment, we own, manage and lease seniors housing communities,properties, hospitals, post-acute care and skilled nursing facilities throughout the United States under long-term triple-net leases, whichand tenants are generally directly responsible for all operating costs of the respective properties.properties.Our Property Manager or third party managers manage our MOBs and our triple-net leased healthcare facilities. In our SHOP operating segment, we invest in seniors housing communities under a structure permitted byproperties using the REIT Investment Diversification Empowerment Act of 2007 ("RIDEA"). Under RIDEA a REIT may lease qualified healthcare properties on an arm's length basis to a taxable REIT subsidiary ("TRS") if the property is operated on behalf of such subsidiary by an entity who qualifies as an eligible independent contractor.structure. As of December 31, 2017,2020, we had 11seven eligible independent contractors operating 52 SHOP properties.59 SHOPs (not including two land parcels). All of our properties across all three business segments are located throughout the United States.
Same Store Properties
Information based on Same Store, Acquisitions and Dispositions (as each are defined below) allows us to evaluate the performance of our portfolio based on a consistent population of properties owned for the entire period of time covered. As of December 31, 2020, we owned 193 properties. There were 175 properties (our “Same Store” properties) owned for the entire years ended December 31, 2020 and 2019, including two vacant land parcels and one development property that was substantially completed in the fourth quarter of 2019. Since January 1, 2019 and through December 31, 2020, we acquired 18 properties (our “Acquisitions”) and disposed of 16 properties (our “Dispositions”). As described in more detail under “Results of Operations— Comparison of the Years Ended December 31, 2020 and 2019 — Transition Properties” below, our Same Store properties include four Transition Properties that were transitioned from Senior Housing - Triple Net Leased to our SHOP segment effective July 1, 2020, and another Transition Property which transitioned from our Triple Net Leased segment effective April 1, 2019. These five Transition Properties were owned for the entirety of 2019 and 2020 and merely moved between segments. We retroactively adjusted our Same Store reporting for those segments to include the Transition Properties as part of the Same Store reporting in our SHOP segment and excluded them from the Same Store reporting in our triple-net leased healthcare facilities segment (each segment as so retroactively adjusted, the “Segment Same Store”). See Note 3— Real Estate Investments, Net to our consolidated financial statements included in this Annual Report on Form 10-K for further information about the Transition Properties and the transition. The following table presents a roll-forward of our properties owned from January 1, 2019 to December 31, 2020:
| | | | | |
| Number of Properties |
| |
| |
| |
Number of properties, December 31, 2018 | 191 | |
Acquisition activity during the year ended December 31, 2019 | 9 | |
Disposition activity during the year ended December 31, 2019 | (7) | |
Number of properties, December 31, 2019 | 193 | |
Acquisition activity during the year ended December 31, 2020 | 9 |
Disposition activity during the year ended December 31, 2020 | (9) | |
Number of properties, December 31, 2020 | 193 | |
| |
Number of Same Store Properties (1) | 175 | |
_______________
(1) Includes the acquisition of a land parcel adjacent to an existing property which is not considered an Acquisition.
In addition to the comparative period-over-period discussions below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s responses.
Below is a discussion of our results of operations for the years ended December 31, 2020 and2019. Please see the “Results of Operations” section located in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a comparison of our results of operations for the year ended December 31, 2019 and 2018. Comparison of the Years Ended December 31, 2020 and 2019
Net loss attributable to common stockholders was $78.8 million and $88.1 million for the years ended December 31, 2020 and 2019, respectively. The following table shows our results of operations for the years ended December 31, 2020 and 2019 and the year to year change by line item of the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | % |
Revenue from tenants | | $ | 381,612 | | | $ | 374,914 | | | $ | 6,698 | | | 1.8 | % |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Property operating and maintenance | | 243,548 | | | 234,185 | | | 9,363 | | | 4.0 | % |
Impairment charges | | 36,446 | | | 55,969 | | | (19,523) | | | (34.9) | % |
Operating fees to related parties | | 23,922 | | | 23,414 | | | 508 | | | 2.2 | % |
Acquisition and transaction related | | 173 | | | 362 | | | (189) | | | (52.2) | % |
General and administrative | | 21,572 | | | 20,530 | | | 1,042 | | | 5.1 | % |
Depreciation and amortization | | 81,053 | | | 81,032 | | | 21 | | | — | % |
Total expenses | | 406,714 | | | 415,492 | | | (8,778) | | | (2.1) | % |
Operating loss before gain (loss) on sale of real estate investments | | (25,102) | | | (40,578) | | | 15,476 | | | 38.1 | % |
Gain on sale of real estate investments | | 5,230 | | | 8,790 | | | (3,560) | | | NM |
Operating loss | | (19,872) | | | (31,788) | | | 11,916 | | | 37.5 | % |
Other income (expense): | | | | | | | | |
Interest expense | | (51,519) | | | (56,059) | | | 4,540 | | | 8.1 | % |
Interest and other income | | 44 | | | 7 | | | 37 | | | 528.6 | % |
Loss on non-designated derivatives | | (102) | | | (68) | | | (34) | | | (50.0) | % |
Total other expenses | | (51,577) | | | (56,120) | | | 4,543 | | | 8.1 | % |
Loss before income taxes | | (71,449) | | | (87,908) | | | 16,459 | | | 18.7 | % |
Income tax expense | | (4,061) | | | (399) | | | (3,662) | | | NM |
Net loss | | (75,510) | | | (88,307) | | | 12,797 | | | 14.5 | % |
Net income attributable to non-controlling interests | | (303) | | | 393 | | | (696) | | | (177.1) | % |
Allocation for preferred stock | | (2,968) | | | (173) | | | (2,795) | | | NM |
Net loss attributable to common stockholders | | $ | (78,781) | | | $ | (88,087) | | | $ | 9,306 | | | 10.6 | % |
| | | | | | | | |
__________
NM — Not Meaningful
Transition Properties
Some of our properties move between our operating segments, for example if they are converted from being triple-net leased to third parties in our triple-net leased healthcare facilities segment to being leased to our TRS and operated and managed on our behalf by a third-party operator in our SHOP segment. When transfers between segments occur, we reclassify the operating results of the transferred properties to their current segment for both the current and all historical periods in order to present a consistent group of property results. See Note 3 — Real Estate Investments, Net - “Impairments” and “Held for Use Assets” and Note 15 — Segment Reporting to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Over the last three years, we have had properties transfer between operating segments. Upon such transfers the Company retroactively restates the historical operating results for the segment for all periods presented in that filing and, thereafter, the Company will restate other later prior periods when they are subsequently reported in later filings for comparative purposes. As a result, the Company provides transition disclosure adjustments only for properties that have transitioned since the prior numbers were previously reported. The Company had the following: (i) 2020 Transition Properties – the four LaSalle Properties (Effective July 1, 2020, reporting for the quarter ended September 30, 2020) – (ii) 2019 Transition Property – the Wellington Property (Effective in April, 2019, reporting for the quarter ended June 30, 2019). Collectively, these are referred generically as the “Transition Properties.”
During the year ended December 31, 2020, as shown in more detail in the table below, the Transition Properties contributed approximately $(0.1) million of net operating income ("NOI"(“NOI”). The results of operations of the Transition Properties are included in Segment Same Store with respect to the SHOP segment. The bad debt expense relating to the Transition Properties is included as a reduction to revenue from tenants on the consolidated statement of operations.
The previously reported Same Store results had already been retroactively adjusted to reflect the impact of Transition Properties during the applicable periods and require no further adjustments thereto.
The following table presents by segment Same Store properties’ NOI before and after adjusting for the 2020 Transition Properties as described above, to arrive at “Segment Same Store” results. Our MOB segment was not affected by the Transition Properties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Increase (Decrease) |
(Dollar amounts in thousands) | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store | | Same Store Properties | Transition Property | Segment Same Store |
NNN Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 35,452 | | $ | (19,841) | | $ | 15,611 | | | $ | 32,509 | | $ | (17,945) | | $ | 14,564 | | | $ | 2,943 | | $ | (1,896) | | $ | 1,047 | |
Less: Property operating and maintenance | | 21,853 | | (19,892) | | 1,961 | | | 18,180 | | (15,870) | | 2,310 | | | 3,673 | | (4,022) | | (349) | |
NOI | | $ | 13,599 | | $ | 51 | | $ | 13,650 | | | $ | 14,329 | | $ | (2,075) | | $ | 12,254 | | | $ | (730) | | $ | 2,126 | | $ | 1,396 | |
| | | | | | | | | | | | |
SHOP Segment | | | | | | | | | | | | |
Revenue from tenants | | $ | 198,864 | | $ | 19,841 | | $ | 218,705 | | | $ | 209,579 | | $ | 17,945 | | $ | 227,524 | | | $ | (10,715) | | $ | 1,896 | | $ | (8,819) | |
Less: Property operating and maintenance | | 154,022 | | 19,892 | | 173,914 | | | 154,351 | | 15,870 | | 170,221 | | | (329) | | 4,022 | | 3,693 | |
NOI | | $ | 44,842 | | $ | (51) | | $ | 44,791 | | | $ | 55,228 | | $ | 2,075 | | $ | 57,303 | | | $ | (10,386) | | $ | (2,126) | | $ | (12,512) | |
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to total revenues, excluding contingent purchase price consideration,revenue from tenants less property operating and maintenance expense.expenses. NOI excludes all other financial statement amounts included in net income (loss). attributable to common stockholders. We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” included elsewhere in this Annual Report on Form 10-K for additional disclosures regarding NOIdisclosure and a reconciliation to our net income (loss) attributable to stockholders, as computed in accordance with GAAP.
As of December 31, 2017, we owned 185 properties. There were 162 properties (our "Same Store" properties) owned for the entire year ended December 31, 2017, including two vacant land parcels and one property under development. During the year ended December 31, 2017, we acquired twenty MOBs, one triple-net leased healthcare facility, and two SHOPs (our "Acquisitions"). We disposed of one MOB and two triple-net leased healthcare facilities during the year ended December 31, 2016 and one MOB during the year ended December 31, 2017 (four properties in total, our "Dispositions").
The following table presents a roll-forward of our properties owned from January 1, 2016 to December 31, 2017:
|
| | |
| Number of Properties |
Number of properties, January 1, 2016 | 166 |
|
Disposition activity during the year ended December 31, 2016 | (3 | ) |
Number of properties, December 31, 2016 | 163 |
|
Acquisition activity during the year ended December 31, 2017 | 23 |
|
Disposition activity during the year ended December 31, 2017 | (1 | ) |
Number of properties, December 31, 2017 | 185 |
|
| |
Number of Same Store Properties (1)
| 162 |
|
_______________(1) Includes 12 properties that were transitioned from our triple-net leased healthcare facilities segment to our SHOP segment during the year ended December 31, 2017. For purposes of the segment reporting below, these properties were treated as Acquisitions in the SHOP segment and Dispositions in the triple-net leased healthcare facilities segment. See below for further details on the transition of these properties.
On June 8, 2017, our TRS acquired 12 operating entities that leased twelve healthcare facilities included in our triple-net leased healthcare facilities segment. Concurrently with the acquisition of the 12 operating entities, we transitioned the management of the healthcare facilities to a third-party management company that manages other healthcare facilities in our SHOP segment. As a part of the transition, our subsidiary property companies executed leases with the acquired operating entities and the acquired operating entities executed management agreements with the management company under the RIDEA structure. As a part of the transition of operations, we now control the operating entities that hold the operating licenses for these healthcare facilities. The results of operations of these properties are included in the Dispositions under our triple-net leased healthcare facilities segment through June 7, 2017 and results of operations since June 8, 2017 are included in Acquisitions under our SHOP segment. We may in the future, through similar transactions, transition other triple-net leased facilities to third-party managed facilities under a structure permitted by RIDEA, in connection with which they would also transition from our triple-net leased healthcare facilities segment to our SHOP operating segment.
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
Net loss attributable to stockholders was $42.5 million and $20.9 million for the years ended December 31, 2017 and 2016, respectively. The following table shows our results of operations for the years ended December 31, 2017 and 2016 and the year to year change by line item of the consolidated statements of operations:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2017 | | 2016 | | $ | | % |
Revenues: | | | | | | | | |
Rental income | | $ | 95,152 |
| | $ | 103,375 |
| | $ | (8,223 | ) | | (8.0 | )% |
Operating expense reimbursements | | 16,605 |
| | 15,876 |
| | 729 |
| | 4.6 | % |
Resident services and fee income | | 199,416 |
| | 183,177 |
| | 16,239 |
| | 8.9 | % |
Contingent purchase price consideration | | — |
| | 138 |
| | (138 | ) | | (100.0 | )% |
Total revenues | | 311,173 |
| | 302,566 |
| | 8,607 |
| | 2.8 | % |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Property operating and maintenance | | 186,277 |
| | 172,077 |
| | 14,200 |
| | 8.3 | % |
Impairment charges | | 18,993 |
| | 389 |
| | 18,604 |
| | NM |
|
Operating fees to related parties | | 22,257 |
| | 20,583 |
| | 1,674 |
| | 8.1 | % |
Acquisition and transaction related | | 2,986 |
| | 3,163 |
| | (177 | ) | | (5.6 | )% |
General and administrative | | 15,673 |
| | 12,105 |
| | 3,568 |
| | 29.5 | % |
Depreciation and amortization | | 77,641 |
| | 98,886 |
| | (21,245 | ) | | (21.5 | )% |
Total expenses | | 323,827 |
| | 307,203 |
| | 16,624 |
| | 5.4 | % |
Operating loss | | (12,654 | ) | | (4,637 | ) | | (8,017 | ) | | NM |
|
Other income (expense): | | | | | | | | |
Interest expense | | (30,264 | ) | | (19,881 | ) | | (10,383 | ) | | (52.2 | )% |
Interest and other income | | 306 |
| | 47 |
| | 259 |
| | NM |
|
Gain (loss) on non-designated derivatives | | (198 | ) | | 31 |
| | (229 | ) | | NM |
|
Gain on sale of real estate investment | | 438 |
| | 1,330 |
| | (892 | ) | | (67.1 | )% |
Gain on asset acquisition | | 307 |
| | — |
| | 307 |
| | 100.0 | % |
Gain on sale of investment securities | | — |
| | 56 |
| | (56 | ) | | (100.0 | )% |
Total other expenses | | (29,411 | ) | | (18,417 | ) | | (10,994 | ) | | (59.7 | )% |
Loss before income taxes | | (42,065 | ) | | (23,054 | ) | | (19,011 | ) | | (82.5 | )% |
Income tax (expense) benefit | | (647 | ) | | 2,084 |
| | (2,731 | ) | | NM |
|
Net loss | | (42,712 | ) | | (20,970 | ) | | (21,742 | ) | | (103.7 | )% |
Net income attributable to non-controlling interests | | 164 |
| | 96 |
| | 68 |
| | 70.8 | % |
Net loss attributable to stockholders | | $ | (42,548 | ) | | $ | (20,874 | ) | | $ | (21,674 | ) | | (103.8 | )% |
_______________
NM — Not Meaningful
Segment Results
Information based on Same Store, Acquisition and Dispositions allows us to evaluate the performance of our portfolio based on a consistent population of properties.common stockholders.
Segment Results — Medical Office Buildings
Rental incomeThe following table presents the components of NOI and the period to period change within our MOB segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store(1) | | Acquisitions(2) | | Dispositions(3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 95,500 | | $ | 93,651 | | $ | 1,849 | | | $ | 8,341 | | $ | 5,372 | | $ | 2,969 | | | $ | 372 | | $ | 1,356 | | $ | (984) | | | $ | 104,213 | | $ | 100,379 | | $ | 3,834 | |
Less: Property operating and maintenance | | 28,380 | | 29,218 | | (838) | | | 2,436 | | 1,986 | | 450 | | | 35 | | 609 | | (574) | | | 30,851 | | 31,813 | | (962) | |
NOI | | $ | 67,120 | | $ | 64,433 | | $ | 2,687 | | | $ | 5,905 | | $ | 3,386 | | $ | 2,519 | | | $ | 337 | | $ | 747 | | $ | (410) | | | $ | 73,362 | | $ | 68,566 | | $ | 4,796 | |
_______________
(1) Our MOB segment included 104 Same Store properties.
(2) Our MOB segment included 13 Acquisition properties.
(3) Our MOB segment included seven Disposition properties.
(4) Our MOB segment consisted of 117 properties.
NM — Not Meaningful
Revenue from tenants is primarily related to contractual rent received from tenants in our MOBs. Generally,It also includes operating expense reimbursements which generally increase in proportion with the increase in property operating and maintenance expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating and maintenance expenses, which may be subject to expense exclusions and floors, in addition to base rent.
Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees.
During the year ended December 31, 2017, rental income, operating expense reimbursements and property operating and maintenance expense increased at2020, the Same Store propertiesMOB segment contributed a $4.8 million increase in our MOB segmentNOI as compared to the year ended December 31, 2016,2019. Of our 18 Acquisitions, during the period from January 1, 2019 through December 31, 2020, 13 were MOBs which was mainly attributable tocontributed a multi-tenant MOB located$2.5 million increase in ArizonaNOI, and another multi-tenant MOB locatedour Disposition properties contributed a $0.4 million decrease in Pennsylvania.
OurNOI, while NOI from our Same Store property operating and maintenance expenses increased $0.4properties contributed a $2.7 million duringincrease in NOI as compared to the year ended December 31, 2017 due to increased property operating and maintenance expenses that are reimbursable by our tenants.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our MOB segment for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store(1) | | Acquisitions(2) | | Dispositions(3) | | Segment Total(4) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 65,738 |
| | $ | 65,006 |
| | $ | 732 |
| | 1 | % | | $ | 1,616 |
| | $ | — |
| | $ | 1,616 |
| | NM | | $ | 36 |
| | $ | 988 |
| | $ | (952 | ) | | NM | | $ | 67,390 |
| | $ | 65,994 |
| | $ | 1,396 |
| | 2 | % |
Operating expense reimbursement | | 15,184 |
| | 14,706 |
| | 478 |
| | 3 | % | | 274 |
| | — |
| | 274 |
| | NM | | 2 |
| | 220 |
| | (218 | ) | | NM | | 15,460 |
| | 14,926 |
| | 534 |
| | 4 | % |
Contingent purchase price consideration | | — |
| | (91 | ) | | 91 |
| | — | % | | — |
| | — |
| | — |
| | NM | | — |
| | — |
| | — |
| | NM | | — |
| | (91 | ) | | 91 |
| | NM |
|
Total revenues | | 80,922 |
| | 79,621 |
| | 1,301 |
| | 2 | % | | 1,890 |
| | — |
| | 1,890 |
| | NM | | 38 |
| | 1,208 |
| | (1,170 | ) | | NM | | 82,850 |
| | 80,829 |
| | $ | 2,021 |
| | 3 | % |
Property operating and maintenance | | 23,775 |
| | 23,395 |
| | 380 |
| | 2 | % | | 325 |
| | — |
| | 325 |
| | NM | | 37 |
| | 419 |
| | (382 | ) | | NM | | 24,137 |
| | 23,814 |
| | 323 |
| | 1 | % |
NOI | | $ | 57,147 |
| | $ | 56,226 |
| | $ | 921 |
| | 2 | % | | $ | 1,565 |
| | $ | — |
| | $ | 1,565 |
| | NM | | $ | 1 |
| | $ | 789 |
| | $ | (788 | ) | | NM | | $ | 58,713 |
| | $ | 57,015 |
| | $ | 1,698 |
| | 3 | % |
_______________
| |
(1) | Our MOB segment included 79 Same Store properties. |
| |
(2) | Our MOB segment included 20 Acquisition properties, all of which were acquired during the year ended December 31, 2017. |
| |
(3) | Our MOB segment included 2 Disposition properties, one disposed in each of the years ending December 31, 2016 and 2017. |
| |
(4) | Our MOB segment included 101 properties, including 20 properties acquired and 2 sold. |
NM — Not Meaningful
The following table presents the number of Same Store MOBs, average occupancy and annualized straight line rental income per rented square foot for single- and multi-tenant MOBs in our MOB segment for the periods presented:
|
| | | | | | | | | | | | | | | | | |
| | Number of Same Store Properties | | Average Occupancy for the Years Ended December 31, | | Annualized Straight Line Rental Income Per Rented Square Foot as of December 31, |
Type of Same Store MOB | | | 2017 | | 2016 | | 2017 | | 2016 |
Single-tenant MOBs | | 27 |
| | 100.0 | % | | 100.0 | % | | $ | 21.55 |
| | $ | 21.55 |
|
Multi-tenant MOBs | | 52 |
| | 89.5 | % | | 82.6 | % | | 22.64 |
| | 22.64 |
|
Total/Weighted-Average | | 79 |
| | 87.7 | % | | 87.7 | % | | $ | 22.28 |
| | $ | 22.28 |
|
2019.Segment Results — Triple Net Leased Healthcare Facilities
Rental income is related to contractual rent received from tenants in our triple-net leased healthcare facilities. Operating expense reimbursements in our triple net leased healthcare facilities segment generally includes reimbursement for property operating expenses that we pay on behalf of tenants in this segment. Pursuant to many of our lease agreements in our triple net leased healthcare facilities, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance should typically include minimal activity in our triple-net leased healthcare facilities segment, as such expenses are typically paid directly by the tenants; however, real estate taxes and insurance may be included. Such expenses are normally reimbursed by the tenants in this segment. Bad debt expense is also reflected in our property operating and maintenance expenses.
During the year ended December 31, 2017, rental income in our Same Store triple-net leased healthcare facilities segment decreased $7.2 million as compared to the year ended 2016. This decrease mainly relates to the early termination of six triple-net healthcare facilities located in Illinois in October 2016, in which a receiver was appointed by a court to manage and conserve these properties in November 2016 (the "Receiver"). According to the receivership order, the Receiver is only obligated to pay rental payments in the event that they produce excess cash flow from operations. No such rents have been received from the Receiver.
Operating expense reimbursements during the year ended December 31, 2017 reflect adjustments to operating expense reimbursements related to real estate taxes, which was also reflected in our property operating and maintenance expenses.
Property operating and maintenance in our Same Store properties increased $3.6 million compared to the year ended December 31, 2016. The increase in property operating and maintenance expense is mainly due to bad debt expense recorded as a result of collection issues with several of our triple-net leased healthcare facility tenants. The financial and operational challenges faced by these tenants have had, and could continue to have, an impact on rent payments that we receive.
Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the years ended December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total(4) |
| | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) | | Year Ended December 31, | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ | | 2020 | 2019 | $ |
Revenue from tenants | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 15,611 | | $ | 14,564 | | $ | 1,047 | |
Less: Property operating and maintenance | | 1,961 | | 2,310 | | (349) | | | — | | — | | — | | | — | | — | | — | | | 1,961 | | 2,310 | | (349) | |
NOI | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 13,650 | | $ | 12,254 | | $ | 1,396 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total (4) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 22,506 |
| | $ | 29,695 |
| | $ | (7,189 | ) | | (24 | )% | | $ | 10 |
| | $ | — |
| | $ | 10 |
| | NM | | $ | 2,617 |
| | $ | 7,679 |
| | $ | (5,062 | ) | | (66 | )% | | $ | 25,133 |
| | $ | 37,374 |
| | $ | (12,241 | ) | | (33 | )% |
Operating expense reimbursements | | 1,147 |
| | 444 |
| | 703 |
| | NM |
| | — |
| | — |
| | — |
| | NM | | (1 | ) | | 505 |
| | (506 | ) | | NM |
| | 1,146 |
| | 949 |
| | 197 |
| | NM |
|
Total revenues | | 23,653 |
| | 30,139 |
| | (6,486 | ) | | (22 | )% | | 10 |
| | — |
| | 10 |
| | NM | | 2,616 |
| | 8,184 |
| | (5,568 | ) | | (68 | )% | | 26,279 |
| | 38,323 |
| | (12,044 | ) | | (31 | )% |
Property operating and maintenance | | 17,006 |
| | 13,440 |
| | 3,566 |
| | 27 | % | | 10 |
| | — |
| | 10 |
| | NM | | 2,928 |
| | 5,370 |
| | (2,442 | ) | | (45 | )% | | 19,944 |
| | 18,810 |
| | 1,134 |
| | 6 | % |
NOI | | $ | 6,647 |
| | $ | 16,699 |
| | $ | (10,052 | ) | | (60 | )% | | $ | — |
| | $ | — |
| | $ | — |
| | NM | | $ | (312 | ) | | $ | 2,814 |
| | $ | (3,126 | ) | | (111 | )% | | $ | 6,335 |
| | $ | 19,513 |
| | $ | (13,178 | ) | | (68 | )% |
________________________(1) Our triple-net leased healthcare facilities segment included 15 Same Store properties.
| |
(1) | Our triple net leased healthcare facilities segment included 31 Same Store properties. |
| |
(2) | Our triple net leased healthcare facilities segment included 1 Acquisition property. |
| |
(3) | Our triple-net leased healthcare facilities included 2 Dispositions in 2016 and 12 properties that are deemed Dispositions as they were transitioned to our SHOP operating segment during the year ended December 31, 2017. |
| |
(4) | Our triple net leased healthcare facilities segment included 46 properties, including 1 property acquired and 2 disposed. |
(2) Our triple-net leased healthcare facilities segment did not have any Acquisitions properties.
(3) Our triple-net leased healthcare facilities segment did not have any Dispositions properties.
(4) Our triple-net leased healthcare facilities segment included 15 properties.
NM - Not Meaningful
Revenue from tenants for our triple-net leased healthcare facilities generally consist of fixed rental amounts (which may be subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms. These revenues are contractual rent received from tenants that does not vary based on the underlying operating performance of the properties. In addition, revenue from tenants also includes operating expense reimbursements in our triple-net leased healthcare facilities segment, which generally include reimbursement for property operating expenses that we pay on behalf of tenants in this segment. However, pursuant to many of our lease agreements in this segment, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance expense should typically include minimal activity in our triple-net leased healthcare facilities segment except for real estate taxes and insurance. Real estate taxes are typically paid directly by the tenants; however, they may be paid by us and reimbursed by the tenants.
During the year ended December 31, 2020, revenue from tenants in our triple-net leased healthcare facilities segment increased $1.0 million as compared to the year ended December 31, 2019. Property operating and maintenance expenses decreased $0.3 million during the year ended December 31, 2020 and December 31, 2019, respectively, primarily related to lower property taxes and operating expenses.
Segment Results — Seniors Housing Operating Properties
Resident servicesThe following table presents the revenue and fee income isproperty operating and maintenance expense and the period to period change within our SHOP segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Same Store (1) | | Acquisitions (2) | | Dispositions (3) | | Segment Total |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ | | 2020 | | 2019 | | $ |
Revenue from tenants | | $ | 218,705 | | | $ | 227,524 | | | $ | (8,819) | | | $ | 18,534 | | | $ | 2,052 | | | $ | 16,482 | | | $ | 24,549 | | | $ | 30,395 | | | $ | (5,846) | | | $ | 261,788 | | | $ | 259,971 | | | $ | 1,817 | |
Less: Property operating and maintenance | | 173,914 | | | 170,221 | | | 3,693 | | | 15,330 | | | 1,760 | | | 13,570 | | | 21,492 | | | 28,081 | | | (6,589) | | | 210,736 | | | 200,062 | | | 10,674 | |
NOI | | $ | 44,791 | | | $ | 57,303 | | | $ | (12,512) | | | $ | 3,204 | | | $ | 292 | | | $ | 2,912 | | | $ | 3,057 | | | $ | 2,314 | | | $ | 743 | | | $ | 51,052 | | | $ | 59,909 | | | $ | (8,857) | |
__________
(1) Our SHOP segment included 56 Same Store properties, including two land parcels.
(2) Our SHOP segment included five Acquisitions properties.
(3) Our SHOP segment included nine Dispositions properties.
(4) Our SHOP segment included 61 properties, including two land parcels.
NM — Not Meaningful
Revenues from tenants within our SHOP segment are generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance expenses relates to the costs associated with our properties and professional fees, as well as costs relatedstaffing to caringprovide care for the residents in our SHOPs, includingas well as food, labor, marketing, real estate taxes, management fees paid to our third party operators, and other expenses.costs associated with maintaining the physical site
During the year ended December 31, 2017, resident services and fee income and property operating and maintenance expense2020, revenue from tenants increased at the Same Store propertiesby $1.8 million in our SHOP segment as compared to the year ended December 31, 2016. The2019 which was primarily driven by an increase in resident servicesrevenue of $16.5 million due to our Acquisition properties, offset by decreases of $5.8 million due to our Disposition properties and fee income was$8.8 million due to our Same Store properties, which includes our Transition Properties.
Revenues declined in our Same Store SHOPs primarily due to higher resident rental rates, which was partially offset by a decrease in occupancy levels comparedas a result of the impact of COVID-19 as discussed above. SHOP occupancy has declined from 84.1% as of March 31, 2020 to 79.5% as of June 30, 2020, to 77.9% as of September 30, 2020 and 75.1% as of December 31, 2020. This decline in occupancy trend is also represented in a decline from December 31, 2019, when SHOP occupancy was 85.7%. Regulatory and government-imposed restrictions and infectious disease protocols have hindered, and continue to hinder, our ability to accommodate and conduct in-person tours, process and attract new move-ins at our SHOPs and these and other impacts of the COVID-19 pandemic have affected, and could continue to affect, our ability to fill vacancies.
In addition, we also generated a portion of our SHOP revenue from skilled nursing facilities (which include ancillary revenue from non-residents) at four of our Same Store SHOPs. This revenue declined $2.1 million from $15.4 million during the year ended December 31, 2019 to $13.3 million during the year ended December 31, 2020 as a result of us limiting the services we offer at our skilled nursing facilities, during the COVID-19 pandemic, to protect our residents and on-site staff. We also offered COVID-related rent concessions of $0.4 million for the year ended December 31, 2020. These revenue decreases were partially offset by $1.3 million in COVID-19 surcharges we began billing residents for Personal Protective Equipment (“PPE”) during the quarter ended September 30, 2020, and less bad debt expense of $3.1 million relating to the prior year. The increase in property operating and maintenance expense primarily due to increases in labor and benefits cost.LaSalle tenant, as described further below.
During the year ended December 31, 2017, resident services and fee income and2020, property operating and maintenance expenseexpenses increased at$10.7 million in our SHOP segment Acquisitions as compared to the year ended December 31, 20162019, primarily due to an increase of $13.6 million due to our acquisitionSHOP Acquisition properties and an increase of twelve SHOPs on June 8, 2017.
The following table presents the revenue and$3.7 million in our Same Store properties, which includes our Transition Properties. These increases were partially offset by a decrease in property operating and maintenance expenseexpenses from our Dispositions of $6.6 million.
The total increase in Same Store operating costs mainly related to costs incurred from the ongoing COVID-19 pandemic which totaled $7.6 million for the year ended December 31, 2020, which was partially offset by $3.6 million of funds received through the CARES Act. The full amount of the CARES Act funds was recognized as a reduction to our Same Store property operating expenses in the table above for the year ended December 31, 2020. As a result we experienced an increase in Same Store operating costs of $3.7 million year over year. Subsequent to December 31, 2020, we received an additional $5.1 million in funding through the CARES Act which will be recognized as a reduction to our Same Store property operating expenses in the quarter ending March 31, 2021. There can be no assurance that the program will be extended or any further amounts received. See the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the periodCOVID-19 pandemic and management’s actions taken in response.
The LaSalle Properties
On July 1, 2020, we transitioned the LaSalle Properties from our triple-net leased healthcare facilities segment to period change within our SHOP segment, and the LaSalle Properties are now leased to our TRS and operated and managed on our behalf by a third-party operator. Beginning with our reporting for the period ended December 31, 2020 these properties are part of the “Transition Properties” and the resultant change has been applied retrospectively to historical periods.
As of December 31, 2020, the prior tenants at the LaSalle Properties remain in default of a forbearance agreement as described in more detail under “Note 3 — Real Estate Investment, Net - The LaSalle Tenant” and owe us $12.7 million of rent, property taxes, late fees, and interest receivable thereunder. We have the entire receivable balance, including any monetary damages, and related income from the LaSalle Properties fully reserved as of December 31, 2020 and 2019. We incurred bad debt expense, including straight-line rent write-offs of $0.4 million and $3.5 million, related to the LaSalle Properties during the years ended December 31, 20172020 and 2016:2019, respectively, which is included as a reduction in revenue from tenants on the consolidated statement of operations.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store (1) | | Acquisitions (2) | | Segment Total (3) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Resident services and fee income | | $ | 185,686 |
| | $ | 183,177 |
| | $ | 2,509 |
| | 1 | % | | $ | 13,730 |
| | $ | — |
| | $ | 13,730 |
| | NM | | $ | 199,416 |
| | $ | 183,177 |
| | $ | 16,239 |
| | 9 | % |
Contingent purchase price consideration | | — |
| | 138 |
| | (138 | ) | | NM |
| | — |
| | — |
| | — |
| | NM | | — |
| | 138 |
| | (138 | ) | | (100 | )% |
Rental income | | 2,629 |
| | 7 |
| | 2,622 |
| | NM |
| | — |
| | — |
| | — |
| | NM | | 2,629 |
| | 7 |
| | 2,622 |
| | NM |
|
Total revenues | | 188,315 |
| | 183,322 |
| | 4,993 |
| | 3 | % | | 13,730 |
| | — |
| | 13,730 |
| | NM | | 202,045 |
| | 183,322 |
| | 18,723 |
| | 10 | % |
Property operating and maintenance | | 129,579 |
| | 129,451 |
| | 128 |
| | — | % | | 12,618 |
| | — | | 12,618 |
| | NM | | 142,197 |
| | 129,451 |
| | 12,746 |
| | 10 | % |
NOI | | $ | 58,736 |
| | $ | 53,871 |
| | $ | 4,865 |
| | 9 | % | | $ | 1,112 |
| | $ | — |
| | $ | 1,112 |
| | NM | | $ | 59,848 |
| | $ | 53,871 |
| | $ | 5,977 |
| | 11 | % |
_______________
| |
(1) | Our SHOP segment included 38 Same Store properties. |
| |
(2) | Our SHOP segment included 14 Acquisition properties. |
| |
(3) | Our SHOP segment included 54 properties during the year ended December 31, 2017, including 52 operating properties and 2 land parcels. |
NM — Not MeaningfulNow that the transition is complete, we have gained more control over the operations of the LaSalle Properties, and we believe this will allow us to improve performance and the cash flows generated by the LaSalle Properties. There can be no assurance, however, that completing this transition will result in us achieving our operational objectives.
Other Results of Operations
Contingent Purchase Price Consideration
During the year ended December 31, 2016 we recognized $0.1 million in contingent purchase price consideration, which primarily related to releases from a holdback escrow for unit renovations at one of our SHOPs, partially offset by the settlement of certain property operating expenses related to vacancy escrow agreements at one acquisition which resulted in us making payments to the seller. We had no contingent purchase price consideration recognized during the year ended December 31, 2017.
Impairment on Sale of Real Estate InvestmentsCharges
We incurred $19.0$36.4 million of impairment charges for the year ended December 31, 2017. During 2017, there were six held2020. We recorded $19.6 million of impairment charges related to the 11 Michigan SHOPs, which was recognized after an amendment to the PSA for usethe sale of these properties forin April 2020 which we reconsideredreduced the projected cash flows for these properties. As a result, we evaluatednumber of properties under consideration as well as the impact on our abilitycontract purchase price. We recorded $16.9 million of impairment charges related to recover the carrying value of suchtwo Florida properties based on the expected cash flows over our intended holding period. We determined that the carrying value of six of the held for use properties exceeded their estimated fair valuesin Jupiter and Wellington as a result recognizedof our marketing efforts during the impairment charge. Impairment relatedCOVID-19 pandemic which concluded with a PSA in August 2020, for which the contract purchase was less than the carrying values of the properties, as well as expected closing costs that were not previously anticipated, which reduced the net amount expected to be realized on the sale of real estate investments duringproperties.
We incurred $56.0 million of impairment charges for the year ended December 31, 2016 related2019. During the fourth quarter of 2019, we began to two real estate investmentsevaluate the properties in Lutz, Florida, Wellington, Florida and our recently completed development property in Jupiter, Florida for potential sale. As a result, we concluded these held for sale with an accepted sales price less thanuse assets were impaired and recognized impairment charges in the carrying value. This resultedaggregate of $33.3 million. The other impairment charges for 2019 relate to the 14 Michigan SHOPs that were under contract to be sold.
See Note 3 — Real Estate Investments to our consolidated financial statements in anthis Annual Report on Form 10-K for additional information on impairment of $0.4 million during the period.charges. Operating Fees to Related Parties
Operating fees to related parties increased $1.7$0.5 million to $22.3$23.9 million for the year ended December 31, 20172020 from $20.6$23.4 million for the year ended December 31, 2016.2019.
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. Effective February 17, 2017,The fixed portion of the base management fee we pay a basefor asset management feeservices is equal to $1.6 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth per month of 1.25% of the cumulative net proceeds of any equity raised (excluding DRIP proceeds) subsequent to February 17, 2017. During the year ended December 31, 2016, our asset management fee was equal to a percentage of the lesser of (a) cost of assets and (b) fair value of assets.we raise. Asset management fees increased $0.5 million to $19.2$20.0 million for the year ended December 31, 2017 from $17.62020, due to the increase in the variable portion of the base management fee related to the issuance and sale of Series A Preferred Stock in December 2019.
Property management fees increased $0.3 million forto $4.2 million, inclusive of $0.3 million of leasing commissions paid, during the year ended December 31, 2016.
We incurred $3.12020 from $3.9 million and $3.0 million in property management fees during the yearsyear ended December 31, 2017 and December 31, 2016, respectively.2019. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed.
SeeNote 9 — Related Party Transactions and Arrangements to our consolidated financial statements found in this Annual Report on Form 10-K which provides detail on our fees and expense reimbursements.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired or sold during the period and the level of activity surrounding any contemplated transaction or strategic process. Acquisition and transaction related expenses of $3.0were $0.2 million for the year ended December 31, 2017. Acquisition2020 and transaction related expenses of approximately $3.2$0.4 million for the year ended December 31, 2016,2019. The expenses in both periods primarily related to the Board's evaluation of potential strategic alternatives andindirect costs associated with propertypotential acquisitions.
General and Administrative Expenses
General and administrative expenses increased $3.6$1.0 million to $15.7$21.6 million for the year ended December 31, 20172020 compared to $12.1$20.5 million for the year ended December 31, 2016,2019, which includes $8.1a $0.8 million and $5.1 million incurredincrease in expense reimbursements and distributions on partnership units of the OP designated as "Class B Units" ("Class B Units") to related parties. General and administrative expenses primarily relate to professional fees for audit, transfer agent and legal services as well as certain expenses reimbursedThe increase in expense reimbursements to related parties.parties was primarily due to $2.2 million of severance payments and related to legal costs incurred by the Advisor relating to the termination in 2018 of our former chief executive officer, partially offset by a $1.2 million reduction in expenses as a result of revisions to previously accrued bonuses to reflect the ultimate amount paid (see Note 9 – Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K). Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $21.3 millionincreased marginally to $77.6$81.1 million for the year ended December 31, 20172020 from $98.9$81.0 million for the year ended December 31, 2016. Same Store depreciation and amortization decreased $22.22019.
Gain on Sale of Real Estate Investments
During the year ended December 31, 2020, we disposed of nine properties. The properties were sold for an aggregate contract price of $40.4 million, which resulted in an aggregate gain on sale of which $15.5 million was related$5.2 million. See Note 3 — Real Estate Investments, Net to the Same Store SHOP portfolio. This change was primarily attributed to several intangible assets becoming fully amortizedour consolidated financial statements in late 2016 as well as lower depreciation base in 2017 due to the $19.0 million asset impairment discussed above.this Annual Report on Form 10-K for additional information.
Interest Expense
Interest expense increased $10.4decreased by $4.6 million to $30.3$51.5 million for the year ended December 31, 20172020 from $19.9$56.1 million for the year ended December 31, 2016.2019. The increasedecrease in interest expense is related to higher overallresulted from lower interest rates, partially offset by the increase on average outstanding debt including new borrowings underin 2020 compared to 2019, as well as $3.0 million of interest expense recorded in the Fannie Mae Facilities. Our increased outstanding debt also includesyear ended December 31, 2019 resulting from the write off of unamortized deferred financing costs from the refinancing of a multi-property$250.0 million mortgage loan with Capital One, National Association, along with certain other lenders, that was entered into June 30, 2017 for $250.0 million (the "MOB Loan") and an $82.0 million multi-property mortgage loan (the "Bridge Loan")originally entered into in 2017. As of December 2017.31, 2020 our outstanding debt obligations were $1.2 billion at a weighted average interest rate of 3.58% per year. As of December 31, 2019, we had total borrowings of $1.1 billion, at a weighted average interest rate of 4.03% per year.
Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.among other factors.
Interest and Other Income
Interest and other income increased to approximately $0.3 million for the year ended December 31, 2017 from approximately $47 thousand for the year ended December 31, 2016. Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. The increase resulted from the recognition of a prospective buyer's non-refundable deposit on an unconsummated sale of a vacant land parcel duringInterest and other income was approximately $44,000 for the year ended December 31, 2017.2020. Interest and other income was approximately $7,000 for the year ended December 31, 2019.
Loss on Non-Designated Derivative InstrumentsDerivatives
Loss on non-designated derivative instruments for the yearyears ended December 31, 20172020 and 2019 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. The 2017 loss of approximately $0.2 million reflects mark-to-market fair value adjustmentsLoss on derivative instruments for the interest rate caps, which have not been designated as cash flow hedges.
Gain on Sale of Real Estate Investment
Gain on Sale of Real Estate Investments decreased to $0.4 million for the yearyears ended December 31, 2017 from $1.3 million for the year ended December 31, 2016. Gain on sale of real estate investments for both years resulted from single disposition transactions. The gains resulted from sales of real estate in San Diego2020, 2019 and Santa Clara, California in the years ended 2017 and 2016, respectively.
Gain on Asset Acquisition
Gain on Asset Acquisition for the year ended December 31, 2017 of $0.3 million resulted from the transfer of operations of 12 operating entities on June 8, 2017. See Note 3 — Real Estate Investments for further details.Gain on Sale of Investment Securities
Gain on sale of investment securities for the year ended December 31, 2016 of2018 were $0.1 million, resulted from the sale of our investments in preferred stock with a cost basis of $1.1 million. We sold all of our investment securities in 2016$0.1 million and therefore, no longer have any investment securities as of December 31, 2017.
$0.2 million, respectively.
Income Tax Benefit/Benefit (Expense)
IncomeWe recorded income tax benefit expense of $(0.6)$4.1 million and income tax benefit of $2.1$0.4 million for the years ended December 31, 20172020 and December 31, 2016 primarily2019, respectively, related to changes in deferred tax assets or liabilities generated by temporary differences and current period net operating income associated with our TRS. During the year ended December 31, 2020, we recorded a $4.6 million valuation allowance against our deferred tax asset. Income taxes generally relate to our SHOPs, which are leased by our TRS.
On December 22, 2017,Because of our TRS recent operating history of losses and the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA includes many changeson-going impacts of the COVID-19 pandemic on the results of operations of our SHOP assets, we are not able to existingconclude that it is more likely than not we will realize the future benefit of our deferred tax law, including a reduction in the maximum federal corporate income tax rate from 35% to 21%. This reduction in rate became effective on January 1, 2018. Due to this reduction in rate,assets; thus we have reduced the valuerecorded a 100% valuation allowance as of December 31, 2020 of $4.6 million. If and when we believe it is more likely than not that we will recover our TRS’ deferred tax assets, which results in additionalwe will reverse the valuation allowance as an income tax expensebenefit in our consolidated statements of $2.0 million in the year endedcomprehensive income (loss). As of December 31, 2017.2020, our consolidated TRS had net operating loss carryforwards for federal income tax purposes of approximately $14 million at December 31, 2020 (of which $7.6 million were incurred prior to January 1, 2018). For losses incurred prior to January 1, 2018, if unused, these will begin to expire in 2035. For net operating losses incurred subsequent to December 31, 2017, there is no expiration date.
Net Income/Loss Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was approximately $0.2$0.3 million and approximately $0.1net loss to non-controlling interests was $0.4 million for the years ended December 31, 20172020 and 2016, respectively, which represents the portion or our net income that is related to limited partner interests in the OP ("OP Units") and non-controlling interest holders.
Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
Net loss attributable to stockholders was $20.9 million and $41.7 million for the years ended December 31, 2016 and 2015,2019, respectively. The following table shows our consolidated results of operations for the years ended December 31, 2016 and 2015 and the period to period change by line item of the consolidated statement of operations:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2016 | | 2015 | | $ | | % |
| | | | | | | | |
Revenues: | | | | | | | | |
Rental income | | $ | 103,375 |
| | $ | 93,218 |
| | $ | 10,157 |
| | 10.9 | % |
Operating expense reimbursements | | 15,876 |
| | 12,759 |
| | 3,117 |
| | 24.4 | % |
Resident services and fee income | | 183,177 |
| | 140,901 |
| | 42,276 |
| | 30.0 | % |
Contingent purchase price consideration | | 138 |
| | 612 |
| | (474 | ) | | (77.5 | )% |
Total revenues | | 302,566 |
| | 247,490 |
| | 55,076 |
| | 22.3 | % |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Property operating and maintenance | | 172,077 |
| | 125,573 |
| | 46,504 |
| | 37.0 | % |
Impairment charges | | 389 |
| | — |
| | 389 |
| | NM |
|
Operating fees to related parties | | 20,583 |
| | 12,191 |
| | 8,392 |
| | 68.8 | % |
Acquisition and transaction related | | 3,163 |
| | 14,679 |
| | (11,516 | ) | | (78.5 | )% |
General and administrative | | 12,105 |
| | 9,733 |
| | 2,372 |
| | 24.4 | % |
Depreciation and amortization | | 98,886 |
| | 120,924 |
| | (22,038 | ) | | (18.2 | )% |
Total expenses | | 307,203 |
| | 283,100 |
| | 24,103 |
| | 8.5 | % |
Operating loss | | (4,637 | ) | | (35,610 | ) | | 30,973 |
| | 87.0 | % |
Other income (expense): | | | | | | | | |
Interest expense | | (19,881 | ) | | (10,356 | ) | | (9,525 | ) | | (92.0 | )% |
Interest and other income | | 47 |
| | 582 |
| | (535 | ) | | (91.9 | )% |
Gain on non-designated derivative instruments | | 31 |
| | — |
| | 31 |
| | NM |
|
Gain on sale of real estate investment | | 1,330 |
| | — |
| | 1,330 |
| | NM |
|
Gain on sale of investment securities | | 56 |
| | 446 |
| | (390 | ) | | (87.4 | )% |
Total other expenses | | (18,417 | ) | | (9,328 | ) | | (9,089 | ) | | (97.4 | )% |
Loss before income taxes | | (23,054 | ) | | (44,938 | ) | | 21,884 |
| | 48.7 | % |
Income tax benefit | | 2,084 |
| | 2,978 |
| | (894 | ) | | (30.0 | )% |
Net loss | | (20,970 | ) | | (41,960 | ) | | 20,990 |
| | 50.0 | % |
Net income attributable to non-controlling interests | | 96 |
| | 219 |
| | (123 | ) | | (56.2 | )% |
Net loss attributable to stockholders | | $ | (20,874 | ) | | $ | (41,741 | ) | | $ | 20,867 |
| | 50.0 | % |
_______________
NM — Not Meaningful
Segment Results
On January 1, 2015, we owned 118 properties (our "Same Store" properties), including two vacant land parcels. We acquired 48 properties during the period from January 1, 2015 through December 31, 2016 (our "Acquisitions"), including one property under development. No properties were acquired during the year ended December 31, 2016. Information based on Same Store and Acquisitions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Our results of operations for the year ended December 31, 2016 as compared to the year ended December 31, 2015 reflect significant increases in most categories primarily due to our Acquisitions.
Segment Results — Medical Office Buildings
Rental income is primarily related to contractual rent received from tenants in our MOBs. Generally, operating expense reimbursements increase in proportion with the increase in property operating expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees.
During the year ended December 31, 2016, rental income, operating expense reimbursements and property operating and maintenance expense decreased at the Same Store properties in our MOB segment as compared to the year ended December 31, 2015, primarily due to a tenant lease termination in May 2015 at The Hospital at Craig Ranch located in McKinney, Texas.
During the year ended December 31, 2016, rental income, operating expense reimbursements and property operating and maintenance expense at our MOB segment Acquisitions increased significantly as compared to the year ended December 31, 2015 primarily due to our acquisition of 31 MOBs from January 1, 2015 through December 31, 2016.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our MOB segment for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store(1) | | Acquisitions(2) | | Segment Total(3) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 43,094 |
| | $ | 43,931 |
| | $ | (837 | ) | | (2 | )% | | $ | 22,900 |
| | $ | 12,234 |
| | $ | 10,666 |
| | 87 | % | | $ | 65,994 |
| | $ | 56,165 |
| | $ | 9,829 |
| | 18 | % |
Operating expense reimbursements | | 9,901 |
| | 10,546 |
| | (645 | ) | | (6 | )% | | 5,026 |
| | 2,065 |
| | 2,961 |
| | 143 | % | | 14,927 |
| | 12,611 |
| | 2,316 |
| | 18 | % |
Total revenues | | 52,995 |
| | 54,477 |
| | (1,482 | ) | | (3 | )% | | 27,926 |
| | 14,299 |
| | 13,627 |
| | 95 | % | | 80,921 |
| | 68,776 |
| | 12,145 |
| | 18 | % |
Property operating and maintenance | | 15,571 |
| | 16,734 |
| | (1,163 | ) | | (7 | )% | | 8,243 |
| | 3,600 |
| | 4,643 |
| | 129 | % | | 23,814 |
| | 20,334 |
| | 3,480 |
| | 17 | % |
NOI | | $ | 37,424 |
| | $ | 37,743 |
| | $ | (319 | ) | | (1 | )% | | $ | 19,683 |
| | $ | 10,699 |
| | $ | 8,984 |
| | 84 | % | | $ | 57,107 |
| | $ | 48,442 |
| | $ | 8,665 |
| | 18 | % |
_______________
| |
(1) | Our MOB segment included 50 Same Store properties. |
| |
(2) | Our MOB segment included 31 Acquisition properties, including one property sold during the year ended December 31, 2016. |
| |
(3) | Our MOB segment included 81 properties during the year ended December 31, 2016, including one property sold during the period. |
NM — Not Meaningful
The following table presents the number of Same Store MOBs, average occupancy and annualized straight line rental income per rented square foot for single- and multi-tenant MOBs in our MOB segment for the periods presented:
|
| | | | | | | | | | | | | | | | | |
| | Number of Same Store Properties | | Average Occupancy for the Years Ended December 31, | | Annualized Straight Line Rental Income Per Rented Square Foot as of December 31, |
Type of Same Store MOB | | | 2016 | | 2015 | | 2016 | | 2015 |
Single-tenant MOBs | | 16 |
| | 100.0 | % | | 100.0 | % | | $ | 21.55 |
| | $ | 21.53 |
|
Multi-tenant MOBs | | 34 |
| | 82.6 | % | | 87.5 | % | | 22.64 |
| | 22.76 |
|
Total/Weighted-Average | | 50 |
| | 87.7 | % | | 91.2 | % | | $ | 22.28 |
| | $ | 22.35 |
|
Segment Results — Triple Net Leased Healthcare Facilities
Rental income is primarily related to contractual rent received from tenants in our triple-net leased healthcare facilities. Operating expense reimbursements in our triple net leased healthcare facilities segment generally includes reimbursement for property operating expenses that we pay on behalf of tenants in this segment. Pursuant to many of our lease agreements in our triple net leased healthcare facilities, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance and bad debt expense. All of such expenses, except for bad debt expense, are generally reimbursed by the tenants in this segment.
During the year ended December 31, 2016, rental income decreased and operating expense reimbursements and property operating and maintenance expense increased at the Same Store properties in our triple net leased healthcare segment as compared to the year ended December 31, 2015. The decrease in rental income was primarily due to the sale of two properties from this segment during the year ended December 31, 2016 and the amendments to leases with two tenants that occupy 15 of our triple net leased healthcare facilities which provided reductions in monthly rentalThese amounts due (the "Rent Reduction Amendments").
Further, in November 2016, we removed one of the tenants that occupied six of the properties subject to the Rent Reduction Amendments and transitioned the operations of such properties to an independent third party operator (the "Transitional Operator") who will operate the properties on our behalf until we (i) identify and execute leases with new tenants or (ii) divest the properties. According to the terms of the operating agreement with the Transitional Operator, in the event the Transitional Operator produces excess cash flow from the operations of the properties, the Transitional Operator would provide such excess cash flow to us, in the form of rental payments, as was determined in the now terminated leases subject to the Rent Reduction Amendments. In an instance where the Transitional Operator provides excess cash flow that exceeds the monthly rental amounts due under the now terminated leases subject to the Rent Reduction Amendments, we would apply such excess amounts to outstanding rents of the previous tenant. Conversely, in the event that the Transitional Operator does not produce sufficient cash flows to operate the properties, we will fund such operating shortfalls to maintain the ongoing operations of the properties. In exchange for services provided, the Transitional Operator is entitled to a management fee based on a percentage of gross property revenues, as well as reimbursement for other approved administrative and ancillary expenses.
The increase in operating expense reimbursements is primarily due to higher property operating expenses at one property where we are reimbursed for property operating expenses that we pay on behalf of the tenant, as well as late fee revenue that was assessed to tenants with aged receivables. The increase in property operating and maintenance expense is primarily related to real estate taxes which remain unpaid by tenants in certain of our triple net leased healthcare facilities, the write-off of cash and straight-line rent receivables from a tenant at six of our skilled nursing facilities whose leases were terminated, the write-off of straight-line rent receivable for a tenant at 15 of our triple net leased seniors housing communities and an increase in bad debt reserve percentages to reflect our uncertainty of the collectability of rental payments from certain tenants within this segment during the year ended December 31, 2016.
During the year ended December 31, 2016, rental income increased and property operating and maintenance expense and operating expense reimbursements decreased at our triple net leased healthcare facilities segment Acquisitions as compared to the year ended December 31, 2015. The increase in rental income was primarily due to our acquisition of eight triple net leased healthcare facilities from January 1, 2015 through December 31, 2016, with the increase being partially offset by decreases due to tenant lease terminations in August 2015 at the Specialty Hospital portfolio located in Mesa and Sun City, Arizona (the "Specialty Hospital Terminations"). The decreases in property operating and maintenance expense and operating expense reimbursements were also due to the Specialty Hospital Terminations.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store (1) | | Acquisitions (2) | | Segment Total (3) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 31,358 |
| | $ | 34,007 |
| | $ | (2,649 | ) | | (8 | )% | | $ | 6,016 |
| | $ | 3,046 |
| | $ | 2,970 |
| | 98 | % | | $ | 37,374 |
| | $ | 37,053 |
| | $ | 321 |
| | 1 | % |
Operating expense reimbursements | | 949 |
| | 78 |
| | 871 |
| | NM |
| | — |
| | 70 |
| | (70 | ) | | NM |
| | 949 |
| | 148 |
| | 801 |
| | NM |
|
Total revenues | | 32,307 |
| | 34,085 |
| | (1,778 | ) | | (5 | )% | | 6,016 |
| | 3,116 |
| | 2,900 |
| | 93 | % | | 38,323 |
| | 37,201 |
| | 1,122 |
| | 3 | % |
Property operating and maintenance | | 18,242 |
| | 4,833 |
| | 13,409 |
| | 277 | % | | 570 |
| | 1,873 |
| | (1,303 | ) | | NM |
| | 18,812 |
| | 6,706 |
| | 12,106 |
| | 181 | % |
NOI | | $ | 14,065 |
| | $ | 29,252 |
| | $ | (15,187 | ) | | (52 | )% | | $ | 5,446 |
| | $ | 1,243 |
| | $ | 4,203 |
| | 338 | % | | $ | 19,511 |
| | $ | 30,495 |
| | $ | (10,984 | ) | | (36 | )% |
_______________
| |
(1) | Our triple net leased healthcare facilities segment included 36 Same Store properties, including two properties sold during the year ended December 31, 2016. |
| |
(2) | Our triple net leased healthcare facilities segment included 8 Acquisition properties. |
| |
(3) | Our triple net leased healthcare facilities segment included 44 properties during the year ended December 31, 2016, including two properties sold during the period. |
Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties.
Segment Results — Seniors Housing Operating Properties
Resident services and fee income is generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance relates to the costs associated with our properties and professional fees, as well as costs related to caring for the residents in our SHOPs, including food, labor, and marketing expenses.
During the year ended December 31, 2016, resident services and fee income and property operating and maintenance expense increased at the Same Store properties in our SHOP segment as compared to the year ended December 31, 2015. The increase in resident services and fee income was primarily due to higher resident rental rates, while the increase in property operating and maintenance expense primarily related to property taxes and higher costs to care for the residents of our SHOPs.
During the year ended December 31, 2016, resident services and fee income and property operating and maintenance expense increased at our SHOP segment Acquisitions as compared to the year ended December 31, 2015 primarily due to our acquisition of eight SHOPs from January 1, 2015 through December 31, 2016.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Same Store (1) | | Acquisitions (2) | | Segment Total (3) |
| | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) | | Year Ended December 31, | | Increase (Decrease) |
(Dollar amounts in thousands) | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % | | 2016 | | 2015 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Resident services and fee income | | $ | 137,722 |
| | $ | 132,932 |
| | $ | 4,790 |
| | 4 | % | | $ | 45,455 |
| | $ | 7,969 |
| | $ | 37,486 |
| | NM | | $ | 183,177 |
| | $ | 140,901 |
| | $ | 42,276 |
| | 30 | % |
Rental income | | 7 |
| | — |
| | 7 |
| | NM |
| | — |
| | — |
| | — |
| | NM | | 7 |
| | — |
| | 7 |
| | NM |
|
Total revenues | | 137,729 |
| | 132,932 |
| | 4,797 |
| | 4 | % | | 45,455 |
| | 7,969 |
| | 37,486 |
| | NM | | 183,184 |
| | 140,901 |
| | 42,283 |
| | 30 | % |
Property operating and maintenance | | 99,860 |
| | 93,325 |
| | 6,535 |
| | 7 | % | | 29,591 |
| | 5,208 |
| | 24,383 |
| | NM | | 129,451 |
| | 98,533 |
| | 30,918 |
| | 31 | % |
NOI | | $ | 37,869 |
| | $ | 39,607 |
| | $ | (1,738 | ) | | (4 | )% | | $ | 15,864 |
| | $ | 2,761 |
| | $ | 13,103 |
| | NM | | $ | 53,733 |
| | $ | 42,368 |
| | $ | 11,365 |
| | 27 | % |
_______________
| |
(1) | Our SHOP segment included 30 Same Store properties. |
| |
(2) | Our SHOP segment included 8 Acquisition properties. |
| |
(3) | Our SHOP segment included 38 properties during the year ended December 31, 2016. |
NM — Not Meaningful
Other Results of Operations
Contingent Purchase Price Consideration
During the years ended December 31, 2016 and 2015, we recognized $0.1 million and $0.6 million, respectively, which primarily related to contingent purchase price consideration in connection with holdback and other vacancy escrow arrangements associated with two acquisitions. Contingent purchase price consideration during the year ended December 31, 2016 related to releases from a holdback escrow for unit renovations at one of our SHOPs, partially offset by the settlement of certain property operating expenses related to vacancy escrow agreements at one acquisition which resulted in us making payments to the seller. Contingent purchase price consideration during the year ended December 31, 2015 related to releases from escrow under a vacancy escrow arrangement at two of our MOBs. Based on facts and circumstances that existed at the time of acquisition, we determined that it was not probable that we would recover certain amounts placed into escrow under vacancy escrow agreements. However, the vacant leasable space under the vacancy escrow agreements was not occupied as of the agreed upon dates, which resulted in the return of escrowed funds to us and the recognition of contingent purchase price consideration.
Impairment on Sale of Real Estate Investments
Impairment on sale of real estate investments for the year ended December 31, 2016 related to two real estate investments held for sale with an accepted sale price less than the carrying value. The aggregate sale price of two real estate investments located in Kansas City, Missouri was $8.8 million, which resulted in an impairment of $0.4 million during the period. We had no impairment of real estate investments during the year ended December 31, 2015.
Operating Fees to Related Parties
Operating fees to related parties increased $8.4 million to $20.6 million for the year ended December 31, 2016 from $12.2 million for the year ended December 31, 2015. We pay our Advisor and Property Manager for asset management and property management services, respectively.
Prior to April 1, 2015, asset management fees were paid by us causing the OP to issue restricted performance based Class B Units to the Advisor. On May 12, 2015, we entered into an amendment to our advisory agreement which, among other things, provided that, effective April 1, 2015, the asset management fee became payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor, and is expensed as incurred. We granted 128,871 Class B Units at an issue price of $22.50 per unit for asset management services rendered during the year ended December 31, 2015 in lieu of paying for these services in cash. The asset management fee is based a percentage of the lesser of (a) cost of assets and (b) fair value of assets. Asset management fees increased $6.7 million to $17.6 million for the year ended December 31, 2016 from $10.9 million for the year ended December 31, 2015. The increase in the asset management fee is due to the amendment to the advisory agreement as well as an increase in the cost of assets for the year ended December 31, 2016, which was primarily related to our Acquisitions and capital expenditures during the period from January 1, 2015 through December 31, 2016.
We incurred $3.0 million in property management fees during the year ended December 31, 2016, a $1.7 million increase from the $1.3 million in property management fees incurred during the year ended December 31, 2015. Property management fees increase in direct correlation with gross revenues. The Property Manager elected to waive a portion of property management fees for the year ended December 31, 2015. For the year ended December 31, 2015, we would have incurred additional property management fees of $1.2 million had these fees not been waived.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $3.2 million for the year ended December 31, 2016 primarily related to costs associated with a strategic review we conducted during the year ended December 31, 2016, costs associated with property acquisitions that will not be completed and costs associated with acquisitions consummated during the year ended December 31, 2015. Acquisition and transaction related expenses of $14.7 million for the year ended December 31, 2015 primarily related to our acquisition of 48 properties during the period. Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired during the period and the level of activity surrounding any contemplated transaction.
General and Administrative Expenses
General and administrative expenses increased $2.4 million to $12.1 million for the year ended December 31, 2016 from $9.7 million for the year ended December 31, 2015, including $5.1 million and $5.0 million, respectively, incurred from related parties. The increase was primarily driven by professional fees incurred to support our larger real estate portfolio.
Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $22.0 million to $98.9 million for the year ended December 31, 2016 from $120.9 million for the year ended December 31, 2015. Same Store depreciation and amortization decreased $43.0 million primarily due to the expiration of the estimated useful lives of in-place leases recorded at acquisition, partially offset by increases of $20.8 million in depreciation and amortization related to our Acquisitions and $0.2 million related to internally developed corporate software that was capitalized and put into service in April 2015.
Interest Expense
Interest expense increased $9.5 million to $19.9 million for the year ended December 31, 2016 from $10.4 million for the year ended December 31, 2015. Interest expense related to our mortgage notes payable increased $1.6 million related to our higher average mortgage notes payable balance of $150.7 million during the year ended of December 31, 2016, compared to the $96.6 million average balance during the year ended December 31, 2015, as well as the associated increases in amortization of deferred financing costs and accretion of mortgage discounts, partially offset by increased amortization of mortgage premiums.
We entered into the Revolving Credit Facility with available borrowings of $50.0 million in March 2014. In April 2014, June 2015 and July 2015 we entered into amendments which increased available borrowings to $200.0 million, $500.0 million and $565.0, million respectively. Interest expense related to the Revolving Credit Facility increased $7.5 million primarily as a result of higher amortization of deferred financing costs as a result of the amendments and increases to the Revolving Credit Facility, as well as higher interest payments due to an average outstanding balance on the Revolving Credit Facility of $449.4 million during the year ended December 31, 2016 compared to the $118.5 million average balance during the year ended December 31, 2015, partially offset by lower unused fees and interest expense arising from a write-off of deferred financing costs during the year ended December 31, 2015. There were no such write-offs during the year ended December 31, 2016.
We entered into the Fannie Credit Facilities and borrowed $60.0 million in October 2016. Interest expense related to the Fannie Credit Facilities of $0.4 million related to interest incurred on the outstanding balances and the amortization of deferred financing costs.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
Interest and Other Income
Interest and other income decreased $0.5 million to approximately $47,000 for the year ended December 31, 2016 from $0.6 million for the year ended December 31, 2015. Interest and other income includes income from investment securities and interest income earned on cash and cash equivalents held during the period. During the years ended December 31, 2016 and 2015, we sold all of our positions in preferred stock, common stock, real estate income funds and our investment in a senior note, which resulted in a decrease in dividend and interest income from our investment portfolio during the year ended December 31, 2016.
Gain on Non-Designated Derivative Instruments
Gain on non-designated derivative instruments for the year ended December 31, 2016 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with the Fannie Credit Facilities, which have floating interest rates. The gain of approximately $31,000 reflects mark-to-market fair value adjustments for the interest rate caps, which have not been designated as cash flow hedges.
Gain on Sale of Real Estate Investment
Gain on sale of real estate investment for the year ended December 31, 2016 related to the sale of a real estate investment located in Santa Rosa, California for $17.5 million, which resulted in a gain of $1.3 million during the period. We did not sell any of our real estate investments during the year ended December 31, 2015 and therefore had no gain on sale of real estate investment for such period.
Gain on Sale of Investment Securities
Gain on sale of investment securities for the year ended December 31, 2016 of $0.1 million resulted from selling our investments in preferred stock with a cost basis of $1.1 million. Gain on sale of investment securities for the year ended December 31, 2015 of $0.4 million resulted from our selling of certain of our investments in preferred stock, common stock and real estate income funds and our investment in a senior note with a cost basis of $18.8 million.
Income Tax Benefit/(Expense)
Income tax benefit of $2.1 million and $3.0 million for the years ended December 31, 2016 and 2015, respectively, related to deferred tax assets generated by current period net operating losses associated with our TRS. These deferred tax assets are partially offset by other income tax expenses incurred during the same period. Income taxes generally relate to our SHOPs, which are leased by our TRS.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests of $0.1 million and $0.2 million for the years ended December 31, 2016 and 2015, respectively, representsrepresent the portion of our net income or net loss that is related to the OP UnitUnits and non-controlling interest holders.holders in our subsidiaries that own certain properties.
Cash Flows Fromfrom Operating Activities
During the year ended December 31, 2017,2020, net cash provided by operating activities was $64.0$41.8 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows provided by operating activities during the year ended December 31, 2017 included a deduction of $3.0 million for acquisition and transaction related costs. Cash inflows related to a net loss adjusted forinclude non-cash items of $71.4$45.8 million (net loss of $42.7$75.5 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, equity based compensation, bad debt expense, equity-based compensation, gain on non-designated derivative instruments, gain on sale of investment securitiesderivatives and net gain on sales of real estate investments of $114.1 million),impairment charges). In addition, cash provided by operating activities was impacted by an increase of $0.5 million in deferred rent and a net increase in accounts payable and accrued expenses of $8.7$4.6 million primarily related to higher accrued professional fees, real estate and income taxes, and property operating expenses for our MOBs and SHOPs, as well as accrued related party expense reimbursementsprofessional and interest expense.legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $10.3$0.1 million due to rent, other receivables, prepaid real estate taxes and insurance and utility deposits, and a net increase of $6.2 million in unbilled receivables recorded in accordance with straight-line basis accounting.
accounting of $2.4 million.
During the year ended December 31, 2016,2019, net cash provided by operating activities was $79.4$47.4 million. The level of cash flows used in or provided by operating activities is affected by, among other things, the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows provided by operating activities during the year ended December 31, 2016 included a deduction of $3.2 million for acquisition and transaction related costs. Cash inflows related to a net loss adjusted forinclude non-cash items of $95.2$56.8 million (net loss of $21.0$88.3 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, equity based compensation, bad debt expense, equity-based compensation, gain on non-designated derivative instruments, gain on salenon-
designated derivatives and net gain on sales of real estate investments of $116.2 million), a $0.7 million decrease in restricted cash related to real estate taximpairment charges) and insurance escrows on mortgaged properties, an increase of $0.6 million in deferred rent and a net increase in accounts payable and accrued expenses of $0.5$2.6 million primarily related to higher accrued professional fees, real estate and income taxes, and property operating expenses for our MOBs and SHOPs, as well as accrued related party expense reimbursementsprofessional and interest expense.legal fees. These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $9.5$9.7 million due to rent, other receivables, prepaid real estate taxes and insurance and utility deposits, and a net increase of $8.2 million in unbilled receivables recorded in accordance with straight-line basis accounting.
During the year ended December 31, 2015, net cash provided by operating activities was $65.8 million. The level of cash flows used in or provided by operating activities is affected by the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows provided by operating activities during the year ended December 31, 2015 included $14.7 million of acquisition and transaction related costs. Cash inflows related to a net loss adjusted for non-cash items of $87.6 million (net loss of $42.0 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, equity based compensation, bad debt expense and gain on sale of investment securities of $129.5 million), an increase in accounts payable and accrued expenses of $5.2 million primarily related to accrued professional fees, real estate taxes and property operating expenses for our MOBs and SHOPs, as well as accrued related party property management fees and reimbursements and interest expense and an increase of $1.3 million in deferred rent. These cash inflows were partially offset by a net increase in prepaid and other assets of $12.9 million due to rent, other receivables, prepaid real estate taxes and insurance and utility deposits, as well as a net increase of $12.5 million in unbilled receivables recorded in accordance with straight-line basis accounting and a $2.9 million increase in restricted cash related to tenant deposits, real estate tax and insurance escrows on mortgaged properties.of $3.8 million.
Cash Flows Fromfrom Investing Activities
Net cash used in investing activities during the year ended December 31, 20172020 was $194.4$82.5 million. The cash used in investing activities included $188.9$95.0 million for investmentsthe acquisition of nine properties and $21.9 million in real estate, including the asset purchase from American Realty Capital Healthcare Trust III, Inc. (see Note 9 — Related Party Transactions and Arrangements), and to fund the ongoing development property in Jupiter, Florida, as well as $8.3 million of capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $0.8 million, proceeds from asset acquisitions of $0.9 million and proceeds from a deposit for a potential real estate sale of $1.1$34.4 million. Net cash used in investing activities during the year ended December 31, 20162019 was $19.1$46.2 million. The cash used in investing activities included $38.7$92.0 million for the acquisition of nine properties and to fund the cost of our ongoing development property in Jupiter, Florida as well as $7.5during the period and $16.7 million ofin capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $25.9 million, proceeds from the sale of investment securities of $1.1 million and proceeds from a deposit for a potential real estate sale of $0.1$62.5 million.
Net cash used in investing activities during the year ended December 31, 2015 was $556.8 million. The cash used in investing activities primarily included $570.1 million to acquire 48 properties. Net cash used in investing activities also included $6.9 million of capital expenditures and $0.1 million for the purchase of investment securities, partially offset by $19.3 million in proceeds from the sale of investment securities and $1.0 million in returned deposits from unconsummated real estate acquisitions.
Cash Flows Fromfrom Financing Activities
Net cash provided by financing activities of $199.8$19.4 million during the year ended December 31, 2017 related to the aggregate2020 included proceeds of $95.0 million from theour Revolving Credit Facility and Fannie Credit Facilities of $380.2 million, proceeds from mortgage notes payable of $336.9 million and contributions from non-controlling interest holders of $0.5 million.Facility. These cash inflows were partially offset by distributions to stockholders of $76.7 million, net of proceeds received pursuant to the DRIP of net of proceeds received pursuant to the DRIP of $61.2 million, repayments on the Revolving Credit Facility of $326.8$31.4 million, common stock repurchases of $33.6 million, mortgage principal repayments of $65.3$10.5 million, payments offor deferred financing costs of $14.4$2.2 million, distributions tothe buyout of a non-controlling interest holders of $0.6 million and payments for non-designated derivative instruments of approximately $0.2 million.
Net cash used in financing activities of $55.6 million during the year ended December 31, 2016 relateddividends paid to distributions topreferred stockholders of $75.4 million, repayments on the Revolving Credit Facility of $55.0 million, common stock repurchases of $12.2 million, mortgage principal repayments of $15.7 million, payments of deferred financing costs of $3.0 million, distributions to non-controlling interest holders of $0.7 million and payments for non-designated derivative instruments of approximately $30,000. These cash outflows were partially offset by aggregate proceeds from the Revolving Credit Facility and Fannie Credit Facilities of $106.5$2.4 million.
Net cash provided by financing activities of $332.9$19.1 million during the year ended December 31, 20152019 related to proceeds of $225.6 million from theour Revolving Credit Facility, $150.0 million from our Term Loan, $136.5 million from the Multi-Property CMBS Loan and $37.6 million of $440.0 million to fund acquisitions and contributionsnet proceeds from non-controlling interest holdersthe issuance of $0.5 million.Series A Preferred Stock. These cash inflows were partially offset by payments on our Revolving Credit Facility of $368.3 million, mortgage principal repayments of $67.8 million, distributions to stockholders net of proceeds received pursuant to the DRIP of $66.2 million, Revolving Credit Facility payments of $10.0$51.4 million, common stock repurchases of $10.4$21.1 million, payments offor deferred financing costs of $13.3 million, mortgage payments of $6.4 million, offering costs paid of $0.6$19.5 million, and distributions to non-controlling interest holders of $0.7$0.3 million.
Liquidity and Capital Resources
The negative impacts of the COVID-19 pandemic has caused and may continue to cause certain of our tenants to be unable to make rent payments to us timely, or at all, which has, and could continue to have, an adverse effect on the amount of cash we receive from our operations. In addition to the discussion below, please see the “Overview — Management Update on the Impacts of the COVID-19 Pandemic” section above for additional information on the risks and uncertainties associated with the COVID-19 pandemic and management’s actions taken in response.
As of December 31, 2017,2020, we had $94.2$72.4 million of cash and cash equivalents. WeOur ability to use this cash on hand is restricted. Under our Credit Facility, as amended on August 2020, we are subjectrequired to maintain a covenant thatcombination of cash, cash equivalents and availability for future borrowings under our revolving credit facility under our Credit Facility (our “Revolving Credit Facility”) totaling at least $50.0 million. As of December 31, 2020, $48.3 million was available for future borrowings under our Revolving Credit Facility. Pursuant to an amendment to our Credit Facility in August 2020, certain other restrictions and conditions described below will no longer apply starting in the “Commencement Quarter” which is a quarter in which we make an election and, as of the day prior to the commencement of the applicable quarter we have a combination of cash, cash equivalents and availability for future borrowings under the Revolving Credit Facility totaling at least $100.0 million, giving effect to the aggregate amount of distributions projected to be paid by us during the applicable quarter, and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 62.5%. As of December 31, 2020, our ratio of consolidated total indebtedness to consolidated total asset value for these purposes was 61.7%. The Commencement Quarter may be no earlier than the fiscal quarter ending June 30, 2021. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We, for example, may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of our common stock) on our common stock until the Commencement Quarter. Moreover, beginning in the Commencement Quarter, we may only pay cash distributions provided that the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter.
Following the amendment in August 2020, our Credit Facility also restricts our sources of liquidity. Until the first day of the Commencement Quarter, we must use all of the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. The availability for future borrowings under the Credit Facility is calculated using the adjusted net operating income of the real estate assets comprising the borrowing base, and availability has been, and may continue to be, adversely affected by the decreases in cash rent collected from our unrestrictedtenants and income from our operators that have resulted from the effects of the COVID-19 pandemic and may persist for some time. See “Item 1A. Risk Factors. Our Credit Facility restricts our ability to use cash
that would otherwise be available to us, and there can be no assurance our available liquidity will be sufficient to meet our capital needs.”
We expect to fund our future short-term operating liquidity requirements, including dividends to holders of Series A Preferred Stock, through a combination of current cash equivalents must be equal to at least $30.0 million at all times.on hand, net cash provided by our property operations and proceeds from the Revolving Credit Facility. Our principal demands for cash will beare for funding our ongoing development project, acquisitions, and capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), and share repurchasesdividends to holders of our Series A Preferred Stock. We closely monitor our current and distributionsanticipated liquidity position relative to our stockholders.current and anticipated demands for cash and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our future liquidity requirements, and available liquidity, however, depend on many factors, such as the on-going impact of COVID-19 on our tenants and operators and our ability to complete our pending dispositions on their contemplated terms, or at all.
Preferred Stock Equity Line with B. Riley Principal Capital, LLC
On September 15, 2020, we entered into a preferred stock purchase agreement and registration rights agreement with B. Riley Principal Capital, LLC (“B. Riley”), pursuant to which we have the right from time to time to sell up to an aggregate of $15 million of shares of our Series A Preferred Stock to B. Riley until December 31, 2023, on the terms and subject to the conditions set forth in the purchase agreement. This arrangement is also referred to as the “Preferred Stock Equity Line.” We control the timing and amount of any sales to B. Riley under the Preferred Stock Equity Line, and B. Riley is obligated to make purchases of up to 3,500 shares of Series A Preferred Stock each time (as may be increased by mutual agreement by the parties) in accordance with the purchase agreement, upon certain terms and conditions being met. We did not sell any shares under the Preferred Stock Equity Line during the year ended December 31, 2020.
Financings
As of December 31, 2020, our total debt leverage ratio (net debt divided by gross asset value) was approximately 44.5%. Net debt totaled $1.2 billion, which represents gross debt ($1.2 billion) less cash and cash equivalents ($72.4 million). Gross asset value totaled $2.6 billion, which represents total real estate investments, at cost ($2.6 billion) and assets held for sale at carrying value ($0.1 million), net of gross market lease intangible liabilities ($22.1 million). Impairment charges are already reflected within gross asset value.
As of December 31, 2020, we had total gross borrowings of $1.2 billion, at a weighted average interest rate of 3.6%. As of December 31, 2019, we had total gross borrowings of $1.1 billion at a weighted average interest rate of 4.0%. As of December 31, 2020, the carrying value of our real estate investments, at cost was $2.6 billion, with $0.9 billion of this amount pledged as collateral for mortgage notes payable, $0.6 billion of this amount pledged to secure advances under the Fannie Mae Master Credit Facilities and $0.9 billion of this amount comprising the borrowing base of the Credit Facility. These real estate assets are not available to satisfy other debts and obligations, or to serve as collateral with respect to new indebtedness, as applicable unless the existing indebtedness associated with the property is satisfied or the property is removed from the borrowing base of the Credit Facility, which would impact availability thereunder.
We expect to fund our future short-term operating liquidity requirements, including distributions, through a combination of current cash on hand,utilize proceeds from DRIP,our Credit Facility to fund future property acquisitions, as well as, subject to the terms of our Credit Facility, other sources of funds that may be available to us. These actions may require us to add some or all of our unencumbered properties as security for that debt or add them to the borrowing base under our Credit Facility. Unencumbered real estate investments, at cost as of December 31, 2020 was $0.2 billion. There can be no assurance as to the amount of liquidity we would be able to generate from adding any of the unencumbered assets we own to the borrowing base of our Credit Facility. Pursuant to the Credit Facility, any resulting net cash provided byproceeds from these dispositions prior to the Commencement Quarter must be used to prepay amounts outstanding under the Revolving Credit Facility.
Mortgage Notes Payable
As of December 31, 2020, we had $550.4 million in gross mortgage notes payable outstanding. During the first quarter of 2020, we assumed one mortgage for $13.9 million in connection with one of our property operations and proceeds fromSHOP acquisitions.
Credit Facility
Our Credit Facility consists of two components, the Revolving Credit Facility the Fannieand our Term Loan. The Revolving Credit FacilitiesFacility is interest-only and other secured financings. Other potential future sources of capital include proceeds from securedmatures on March 13, 2023, subject to one one-year extension at our option. Our Term Loan is interest-only and unsecured financings from banksmatures on March 13, 2024. Loans under our Credit Facility may be prepaid at any time, in whole or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations, if any.in part, without premium or penalty, subject to customary breakage costs. Any amounts repaid under our Term Loan may not be re-borrowed.
American Realty Capital Healthcare Trust III, Inc. Asset Purchase
On December 22, 2017, we purchased 19 properties from HT III in the Asset Purchase. Concurrently,In March 2020, we borrowed approximately $45.0an additional $95.0 million under the Revolving Credit Facility and added 15 properties, including 14a portion of which was used for general corporate purposes. Subsequently, we have not borrowed additional amount under the Revolving Credit Facility.
In the fourth quarter of 2020, we repaid $4.4 million of the 19 properties purchasedRevolving Credit Facility from the proceeds of the Michigan SHOP disposition and $17.6 million from the disposition of the skilled nursing facility in Lutz, Florida. These amounts represented all the Asset Purchase,cash proceeds from these dispositions.
The total commitments under the Credit Facility are $630.0 million including $480.0 million under the Revolving Credit Facility. The Credit Facility includes an uncommitted “accordion feature” that may be used to increase the commitments under either component of the Credit Facility by up to an additional $370.0 million to a total of $1.0 billion. As of December 31, 2020, $323.7 million was outstanding under the Credit Facility and the unused borrowing availability under the Credit Facility was $48.3 million. The amount available for future borrowings under the Credit Facility is based on either the value of the pool of eligible unencumbered real estate assets comprising the borrowing base, underor a minimum debt service coverage ratio with respect to the Revolving Credit Facility. This advance was used to fund a portionborrowing base. Both of these amounts are calculated using the adjusted net operating income of the amount requiredreal estate assets comprising the borrowing base, and, therefore, availability under our Credit Facility has been adversely affected by the decreases in cash rent collected from our tenants and income from our operators due to complete the Asset Purchase.
At the closingeffects of the Asset Purchase, we paid HT III $108.4 million, representing the purchase price under the Purchase Agreement of $120.0 million, less (i) $0.7 million reflecting prorationsCOVID-19 pandemic, and closing adjustments in accordance with the Purchase Agreement, (ii) $4.9 million reflecting the outstanding principal amount of the loan secured by HT III’s Philip Center property assumed by us at the closing in accordance with the Purchase Agreement, and (iii) $6.0 million deposited by us into an escrow account in accordance with the Purchase Agreement. This escrow amount, less any amounts paid or reserved for pending or unsatisfied indemnification claims that we may make pursuantcontinue to the Purchase Agreement, will be released to HT III in installments over a period of 14 months following the closing. In addition, we incurred $1.2 million in closing and other transaction costs. As of December 31, 2017 we have a $196,000 net payable to HT III included on our Consolidated Balance Sheet.
Financingsadversely affected.
As of December 31, 2017, our total debt leverage ratio (total debt divided by total assets)2020, $150.0 million was approximately 40.1% and we had total borrowings of $950.2 million, at a weighted average interest rate of 3.93%. As of December 31, 2016, we had total borrowings of $625.3 million. We expect to increase our leverage over time and utilize proceeds from our Revolving Credit Facility and our Fannie Mae Master Credit Facilities as well as other new and current secured financings to complete future property acquisitions. Such actions may require us to pledge some or all of our unencumbered properties as security for that debt. The gross carrying value of unencumbered assets as of December 31, 2017 was $436.8 million. We may borrow if we need funds to satisfy the REIT tax qualifications requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding net capital gain). We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
On June 30, 2017, we entered into the MOB Loan and borrowed $250.0 million secured by 32 of our properties. We applied $175.0 million of the MOB Loan proceeds to repay amounts outstanding under our Revolving Credit FacilityTerm Loan, and obtained a release of certain of the mortgaged properties securing the MOB Loan from the borrowing base under the Revolving Credit Facility. The MOB Loan requires us to pay interest on a monthly basis with the principal balance due on the maturity date of June 30, 2022. As of December 31, 2017, we were in compliance with the financial covenants under the MOB Loan.
In October 2017, we paid down $104.8$173.7 million of the outstanding balance on our Revolving Credit Facility in conjunction with the $154.0 million expansion of our Fannie Credit Facilities. In November 2017, we added 13 real estate assets to the borrowing base of the Revolving Credit Facility and subsequently borrowed $54.0 million thereunder. In December 2017, as discussed above, we borrowed approximately $45.0 million under the Revolving Credit Facility to fund a portion of the amount required to complete the Asset Purchase. Later in December 2017, we entered into the $82 million Bridge Loan, the net proceeds of which were primarily used to repay $35.0 millionwas outstanding under the Revolving Credit Facility. The Bridge Loan has a floating interest rate equal to one-month LIBOR plus 2.5% per annum and a maturity date of December 28, 2019. Subject to meeting certain conditions, including a minimum debt yield and debt service coverage ratio, the Borrowers have the right to extend the maturity date for one year.
As of December 31, 2017, $239.7 million was outstanding under the Revolving Credit Facility and the unused borrowing capacity under the Revolving Credit Facility was $27.6 million. Availability of borrowings is based on a pool of eligible otherwise unencumbered real estate assets comprising the borrowing base thereunder. The equity interests and related rights in the Company’sour wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Revolving Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The applicable margin used to determine the interest rate under both the Term Loan and Revolving Credit Facility matures on March 21, 2019.
The Revolvingcomponents of the Credit Facility requires us to meet certain financial covenantsvaries based on a quarterly basis. The Advisor has elected to, without any interest accrual, defer cash payment of $1.7 million in certain fees and reimbursements due to the Advisor as of December 31, 2017. The Advisor’s deferral enabled us to comply with such covenants as of December 31, 2017. These deferred fees and reimbursements are due to the Advisor upon demand within two business days' written notice and no later than June 30, 2018.our leverage. As of December 31, 2017,2020, the Revolving Credit Facility and the Term Loan had an effective interest rate per annum equal to 3.21% and 4.95%, respectively. The Credit Facility prohibits us from exceeding a maximum ratio of consolidated total indebtedness to consolidated total asset value, and requires us to maintain a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges on a quarterly basis and a minimum consolidated tangible net worth. As of December 31, 2020, we were in compliance with the financial covenants under the Revolving Credit Facility. There can be no assurance thatBased upon our current expectations, we believe our operating results during the Advisornext 12 months will agreeallow us to defer future fees or reimbursements, including deferrals requiredcomply with these covenants. Please see “Item 1A. Risk Factors. Risks Related to meet financial covenants per the Revolvingour Indebtedness.”
Fannie Mae Master Credit Facility.Facilities
As of December 31, 2017, $295.22020, $355.2 million was outstanding under the Fannie Mae Master Credit Facilities. We may request future advances under the Fannie Mae Master Credit Facilities by adding eligible properties to the collateral pool or by borrowing-up against the increased value of the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. Future advances based on the increased value of the collateral pool may only occur during the first 5 years of the termuntil November 2021 and not more than oneonce annually for each of the Fannie Mae Master Credit Facilities.
On March 2, 2018, we incurred approximately $64.2 million in aggregate additional indebtedness Borrowings under the Fannie Mae Master Credit Facilities. Giving effectfacilities bear annual interest at a rate that varies on a monthly basis and is equal to this Advance, as of March 2, 2018, approximately $359.4 million was outstanding under the Fannie Credit Facilities. Allsum of the $61.7current LIBOR for one month U.S. dollar-denominated deposits and 2.62%, with a combined floor of 2.62%. The Fannie Mae Master Credit Facilities mature on November 1, 2026.
Capital Expenditures
During the year ended December 31, 2020, our capital expenditures were $21.9 million, of which approximately $4.6 million related our MOB segment, $4.0 million related to our NNN segment and $12.8 million related to our SHOP segment. All other capital expenditures were typical in nature for the net proceeds, after closing costs,other properties in our portfolio. We anticipate this rate of this advancecapital expenditures will be similar for the MOB, NNN and SHOP segments throughout 2021, however, the recent economic uncertainty created by the COVID-19 global pandemic will continue to impact our decisions on the amount and timing of future capital expenditures. Our capital expenditures in 2021 were usedfunded using cash on hand, and we also expect to prepay a portion of the indebtedness under the Bridge Loan. Following this prepayment, as of March 2, 2018, approximately $20.3 million was outstanding under the Bridge Loan.fund future capital expenditures using cash on hand.
Acquisitions — Year Ended December 31, 2020
On April 7, 2017,During the year ended December 31, 2020, we through a wholly-owned subsidiarycompleted the acquisitions of our OP, completedtwo multi-tenant MOBs, three single tenant MOBs and four SHOP for an aggregate contract purchase price of $109.6 million. The acquisition of a single tenant, triple-net leasedone multi-tenant MOB for a contract purchase price of $12.5 million.$5.7 million, was completed during the three months ended December 31, 2020. The property isproperties acquired during the year ended December 31, 2020 are located in Lancaster, CaliforniaIllinois, Pennsylvania, Ohio and comprises 77,000Florida and comprise approximately 340,783 square feet. We accounted forfeet and were funded with proceeds from financings (including amounts borrowed under our Credit Facility), the purchase as an asset acquisition.
On July 13, 2017, we, through a wholly-owned subsidiaryassumption of the OP, completed its$13.9 million mortgage in an acquisition, of a single tenant, triple-net leased MOBand cash on hand.
Acquisitions — Subsequent to December 31, 2020 and Pending Transactions
We acquired one property subsequent to December 31, 2020 for a$6.6 million. We have signed two PSAs to acquire two MOBs located in Ohio and Oklahoma for an aggregate contract purchase price of $13.5approximately $10.1 million. We anticipate using cash on hand to fund the consideration required to complete these acquisitions. The property is located in Canton, GeorgiaPSAs are subject to conditions and comprises approximately 38,000 square feet. We accounted for the purchase as an asset acquisition.there can be no
assurance we throughwill complete any of these acquisitions, or any future acquisitions or other investments, on a wholly-owned subsidiarytimely basis or on acceptable terms and conditions, if at all.
Acquisition of Non-Controlling Interest
In November 2020, we purchased all of the OP, completed its acquisitionoutstanding membership interests in the joint venture that owns the UnityPoint Clinics in Muscatine, Iowa and Moline, Illinois for approximately $0.6 million, funded with cash on hand. Following this transaction, the properties were wholly owned by us and added to the borrowing base under our Credit Facility.
Dispositions — Year Ended December 31, 2020
During the year ended December 31, 2020, we sold nine properties (one MOB, seven SHOPs and one skilled nursing facility in Lutz Florida) for an aggregate contract price of a single tenant, triple-net leased MOB for a contract$40.4 million, which resulted in an aggregate gain on sale of $5.2 million. Eight of these properties (seven SHOPs in Michigan and one skilled nursing facility in Lutz Florida) were sold in the fourth quarter of 2020 and had an aggregate purchase price of $7.0$31.8 million, which resulted in an aggregate gain on sale of $2.9 million There were no mortgages on these properties, however the property in Lutz, Florida was part of the borrowing base under the Credit Facility, as well as four Michigan properties, and one of the Michigan properties was part of the Capital One Fannie Mae Credit Facility.
Which respect to the sale of the Michigan SHOPs, in November 2020, we received payment of the full $11.8 million sales price for all 11 of the Michigan SHOPs, less $0.8 million held in escrow, and transferred seven of the properties to the buyer. The remaining four properties were transferred to the buyer at a second closing in January 2021 when the $0.8 million held in escrow was released to the buyer. Of the properties transferred at the initial closing, four were part of the borrowing base under the Credit Facility, one was part of the collateral pool under the Fannie Mae Master Credit Facility with Capital One and two were unencumbered. Of the properties transferred at the second closing, three were part of the borrowing base under the Credit Facility until the initial closing and one was unencumbered. At the initial closing, $4.2 million of the net proceeds was used to repay amounts outstanding under the Fannie Mae Master Credit Facility with Capital One, $4.4 million of the net proceeds were used to repay amounts outstanding under the Revolving Credit Facility, with the remainder used for closing costs. Following the sale of the SHOP in Lutz, Florida, all $17.6 million of the net proceeds were used to repay amounts outstanding under the Credit Facility.
Dispositions — Subsequent to December 31, 2020
Subsequent to December 31, 2020, we did not dispose of any properties.
We have entered into two definitive PSAs to sell the property in Jupiter Florida for $65.0 million and a skilled nursing facility in Wellington, Florida for $33.0 million. The property is located in Big Rapids, Michigansales of these assets are subject to conditions, and, comprises approximately 20,000 square feet. We accounted fordue to the purchase as an asset acquisition.
On September 28, 2017, we, through a wholly-owned subsidiarypersistence of the OP, completed its acquisition of a senior living facility for a contract purchase price of $20.8 million. The property is located in Evans, GeorgiaCOVID-19 pandemic and comprises approximately 64,000 square feet. We accounted for the purchase as an asset acquisition.
On December 22, 2017, we completed the Asset Purchase, as described above. We accounted for the purchase as an asset acquisition.
As of February 28, 2018, we had $13.5 million in assets under two executed letters of intent. Pursuant to the terms of these letters of intent,other factors beyond our obligation to close upon these acquisitions is subject to certain conditions customary to closing, including the successful completion of due diligence and fully negotiated binding agreements. Therecontrol, there can be no assurance that we will completebe able to meet these acquisitions. We intendconditions and that these dispositions will be completed on their contemplated terms, or at all. With respect to use advancesthe skilled nursing facility in Wellington, Florida, closing may not occur unless, among other conditions, certain occupancy and revenue levels have been maintained at the property for a period of time. The property in Jupiter, Florida is not currently encumbered by any mortgage debt or part of the borrowing base under our Credit Facility. The skilled nursing facility in Wellington Florida is part of the borrowing base under our Credit Facility. Pursuant to the terms of the amendment to our Credit Facility in August 2020, the net cash proceeds from ourany completed dispositions must be used to prepay amounts outstanding under the Revolving Credit Facility and the Fannie Credit Facilitieswill therefore not be available to fund acquisitions.
Assets Heldus for Sale
In January 2017, we entered into an agreement to sell eight of our skilled nursing facility properties in Missouriany other purpose. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for an aggregate contract purchase price of $44.1 million which would have been $42.0 million if closing had occurred in 2017. The purchase agreement provided for an extended closing period to include seven closing adjournment periods, each requiring a non-refundable deposit through the final closing adjournment date, September 28, 2018. Although we believe the sale of the Missouri SNF Properties is probable, therefuture borrowings. There can be no assurance that the salethese conditions will be consummated per the terms of the Missouri SNF PSA or at all. See Note 3 - Real Estate Investments.met.Share Repurchase Program
Our Board has adopted the SRP, which enables our common stockholders to sell their shares of common stock to us under limited circumstances. At the time a common stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash. There are limits on the number of shares we may repurchase under this program during any calendar year. We are only authorized to repurchase shares using the proceeds secured from our DRIP in any given period, although the Board has the power, in its sole discretion, to determine the number of shares repurchased during any period as well as the amount of funds to be used for that purpose.
On June 14, 2017, we announced that our Board approved and adopted an amended and restated SRP that superseded and replacedUnder the existing SRP,currently effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of our common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP, including that shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equalAdditionally, pursuant to the then-current Estimated Per-Share NAV.
The following table reflectsSRP, the number of shares repurchased cumulatively through December 31, 2017:
|
| | | | | | | |
| | Number of Shares Repurchased | | Average Price per Share |
Cumulative repurchases as of December 31, 2016 | | 975,030 |
| | $ | 23.73 |
|
Year ended December 31, 2017 (1) | | 1,554,768 |
| | 21.61 |
|
Cumulative repurchases as of December 31, 2017 (2) | | 2,529,798 |
| | $ | 22.43 |
|
_____________________________
(1) Includes 1,554,768 shares repurchased during the year ended December 31, 2017 for approximately $33.6 million at a weighted averagerepurchase price per share of $21.61. Excludes rejected repurchase requests received during 2016 with respect to 2.3 million shares for $48.7 million at a weighted average price per share of $21.27 and 373,967 shares repurchased during January 2018 with respect to requests received following the death or qualifying disability of stockholders during the six months ended December 31, 2017 for approximately $8.0 million at a weighted average price per share of $21.45. In July 2017, following the effectiveness of the amendment and restatement of the SRP, the Board approvedequals 100% of the Estimated Per-Share NAV in effect on the last day of the fiscal semester, or the six-month period ending June 30 or December 31.
The amendment to the Credit Facility on August 10, 2020 provides that we may not repurchase shares of our common stock until the Commencement Quarter. In light of this amendment, the Board suspended repurchases under the SRP effective August 14, 2020. The Board has also rejected all repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 20172020 until the effectiveness of the suspension of the SRP. No further repurchase requests under the SRP may be made unless and until the SRP is reactivated. Prior to September 30, 2017, which was equal to 267,723the Commencement Quarter, we may not repurchase shares repurchased for approximately $5.7 million at an average price per share of $21.47. No repurchases have been orour common stock. Beginning in the Commencement Quarter, we will be permitted to repurchase up to $50.0 million of shares of our common stock (including amounts previously repurchased
during the term of the Revolving Credit Facility) if, after giving effect to the repurchases, we maintain cash and cash equivalents of at least $30.0 million and our ratio of consolidated total indebtedness to consolidated total asset value (expressed as a percentage) is less than 55.0%.
No assurances can be made with respectas to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP.when or if our SRP will be reactivated.
Non-GAAP Financial Measures
This section includesdiscusses the non-GAAP financial measures we use to evaluate our performance including Funds from Operations ("FFO"(“FFO”), Modified Funds from Operations ("MFFO"(“MFFO”) and Net Operating Income ("NOI").NOI. While NOI is a property-level measure, MFFO is based on our total performance as a company and therefore reflects the impact of other items not specifically associated with NOI such as, interest expense, general and administrative expenses and operating fees to related parties. Additionally, NOI as defined here, includes straight-line rent which is excluded from MFFO. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”), an industry trade group, has published a standardized measure of performance known as FFO, which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT'sREIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We definecalculate FFO, a non-GAAP measure, consistent with the standards set forthestablished over time by the Board of Governors of NAREIT, as restated in thea White Paper on FFO approved by the Board of Governors of NAREIT as revisedeffective in February 2004December 2018 (the "White Paper"“White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization related to real estate, gains and after adjustments for unconsolidated partnershipslosses from the sale of certain real estate assets, gains and joint ventures.losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures if any, are calculated to reflect FFO. Our FFO on the same basis.
calculation complies with NAREIT’s definition.
We believe that the use of FFO provides a more complete understanding of our operating performance to investors and to management, and 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.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT'sNAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association ("IPA"Institute of Portfolio Alternatives (“IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.
We definecalculate MFFO, a non-GAAP measure, consistent with the IPA'sIPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline"“Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price
consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, 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, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses (which include costs associated with a strategic review we conducted during the year ended December 31, 2016) and capitalized interest.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 once our portfolio is stabilized. Our Modified FFO (as defined in our Credit Facility) is similar but not identical to MFFO as discussed in this Quarterly Report on Form 10-Q. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP 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 makepay dividends and other distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline may be published or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
Accounting Treatment of Rent Deferrals
All of the concessions granted to our tenants as a result of the COVID-19 pandemic are rent deferrals with the original lease term unchanged and collection of deferred rent deemed probable (see the “Overview - Management Update on the Impacts of the COVID-19 Pandemic” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information). As a result of relief granted by the FASB and SEC related to lease modification accounting, rental revenue used to calculate Net Income and NAREIT FFO has not been, and we do not expect it to be, significantly impacted by these types of deferrals. In addition, since we currently believe that these deferral amounts are collectable, we have excluded from the increase in straight-line rent for MFFO purposes the amounts recognized under GAAP relating to these types of rent deferrals. For a detailed discussion of our revenue recognition policy, including details related to the relief granted by the FASB and SEC, see Note 2 — Significant Accounting Polices to our consolidated financial statements included in the Annual Report on Form 10-K.
The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2020 | | 2019 | | 2018 |
Net loss attributable to common stockholders (in accordance with GAAP) | | $ | (78,781) | | | $ | (88,087) | | | $ | (52,762) | |
Depreciation and amortization (1) | | 79,643 | | | 79,744 | | | 82,226 | |
Impairment charges | | 36,446 | | | 55,969 | | | 20,655 | |
(Gain) loss on sale of real estate investment | | (5,230) | | | (8,790) | | | 70 | |
| | | | | | |
Adjustments for non-controlling interests (2) | | (526) | | | (595) | | | (484) | |
FFO (as defined by NAREIT) attributable to common stockholders | | 31,552 | | | 38,241 | | | 49,705 | |
Acquisition and transaction related | | 173 | | | 362 | | | 302 | |
(Accretion) amortization of market lease and other lease intangibles, net | | (80) | | | (4) | | | 255 | |
Straight-line rent adjustments | | (2,405) | | | (3,561) | | | (1,863) | |
Straight-line rent (rent deferral agreements) (3) | | 280 | | | — | | | — | |
Amortization of mortgage premiums and discounts, net | | 60 | | | (162) | | | (263) | |
Loss on non-designated derivatives | | 102 | | | 68 | | | 157 | |
Capitalized construction interest costs | | — | | | (2,756) | | | (3,198) | |
Deferred tax asset valuation allowance (4) | | 4,641 | | | — | | | — | |
Adjustments for non-controlling interests (2) | | (9) | | | 31 | | | 24 | |
MFFO attributable to common stockholders | | $ | 34,314 | | | $ | 32,219 | | | $ | 45,119 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
(In thousands) | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | December 31, 2017 |
Net loss attributable to stockholders (in accordance with GAAP) | | $ | (6,139 | ) | | $ | (4,716 | ) | | $ | (24,136 | ) | | $ | (7,557 | ) | | $ | (42,548 | ) |
Depreciation and amortization (1) | | 20,240 |
| | 19,068 |
| | 18,814 |
| | 18,441 |
| | 76,563 |
|
Impairment charges | | 35 |
| | — |
| | 18,958 |
| | — |
| | 18,993 |
|
Gain on sale of real estate investment | | — |
| | (438 | ) | | — |
| | — |
| | (438 | ) |
Gain on asset acquisition | | — |
| | — |
| | — |
| | (307 | ) | | (307 | ) |
Adjustments for non-controlling interests (2) | | (99 | ) | | (77 | ) | | (175 | ) | | (92 | ) | | (443 | ) |
FFO attributable to stockholders | | 14,037 |
| | 13,837 |
| | 13,461 |
| | 10,485 |
| | 51,820 |
|
Acquisition and transaction-related | | 2,845 |
| | 1,743 |
| | (261 | ) | | (1,341 | ) | | 2,986 |
|
Amortization of market lease and other lease intangibles, net | | 119 |
| | 76 |
| | 27 |
| | 14 |
| | 236 |
|
Straight-line rent adjustments | | (1,052 | ) | | (367 | ) | | (504 | ) | | (1,243 | ) | | (3,166 | ) |
Amortization of mortgage premiums and discounts, net | | (440 | ) | | (439 | ) | | (400 | ) | | (297 | ) | | (1,576 | ) |
Loss on non-designated derivative instruments | | 64 |
| | 43 |
| | 22 |
| | 69 |
| | 198 |
|
Capitalized construction interest costs | | (418 | ) | | (484 | ) | | (566 | ) | | (617 | ) | | (2,085 | ) |
Adjustments for non-controlling interests (2) | | (5 | ) | | (4 | ) | | 8 |
| | 16 |
| | 15 |
|
MFFO attributable to stockholders | | $ | 15,150 |
| | $ | 14,405 |
| | $ | 11,787 |
| | $ | 7,086 |
| | $ | 48,428 |
|
_______________________
(1) Net of non-real estate depreciation and amortization.
(2) Represents the portion of the adjustments allocable to non-controlling interests.
(3) Represents the amount of deferred rent pursuant to lease negotiations which qualify for FASB relief for which rent was deferred but not reduced. These amounts are included in the straight-line rent receivable on our consolidated balance sheet but are considered to be earned revenue attributed to the current period for purposes of MFFO as they are expected to be collected. (4) This is a non-cash item and is added back as it is not considered a part of operating performance.
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate.estate portfolio. NOI is equal to total revenues, excluding contingent purchase price consideration,revenue from tenants less property operating and maintenance expense.maintenance. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property'sproperty’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to makepay distributions.
The following table reflects the items deducted from or added to net loss attributable to common stockholders in our calculation of NOI for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 36,862 | | | $ | 2,492 | | | $ | (15,690) | | | $ | (102,445) | | | $ | (78,781) | |
Impairment charges | | 12,551 | | | — | | | 23,895 | | | — | | | 36,446 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,922 | | | 23,922 | |
Acquisition and transaction related | | — | | | — | | | — | | | 173 | | | 173 | |
General and administrative | | 95 | | | — | | | — | | | 21,477 | | | 21,572 | |
Depreciation and amortization | | 74,017 | | | 6,617 | | | 419 | | | — | | | 81,053 | |
Interest expense | | 2,036 | | | — | | | — | | | 49,483 | | | 51,519 | |
Interest and other income | | — | | | — | | | — | | | (44) | | | (44) | |
Loss on non-designated derivative instruments | | — | | | — | | — | | 102 | | | 102 | |
Loss on sale of real estate investments | | — | | | — | | | (5,230) | | | — | | | (5,230) | |
Income tax expense | | — | | | — | | | — | | | 4,061 | | | 4,061 | |
Net income attributable to non-controlling interests | | — | | | — | | | — | | | 303 | | | 303 | |
Allocation for preferred stock | | — | | | — | | | — | | | 2,968 | | | 2,968 | |
NOI | | $ | 125,561 | | | $ | 9,109 | | | $ | 3,394 | | | $ | — | | | $ | 138,064 | |
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the year ended December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to common stockholders (in accordance with GAAP) | | $ | 14,097 | | | $ | 1,552 | | | $ | (3,519) | | | $ | (100,217) | | | $ | (88,087) | |
Impairment charges | | 43,125 | | | — | | | 12,844 | | | — | | | 55,969 | |
Operating fees to related parties | | — | | | — | | | — | | | 23,414 | | | 23,414 | |
Acquisition and transaction related | | 7 | | | 28 | | | — | | | 327 | | | 362 | |
General and administrative | | 93 | | | 11 | | | 11 | | | 20,415 | | | 20,530 | |
Depreciation and amortization | | 76,430 | | | 2,087 | | | 2,515 | | | — | | | 81,032 | |
Interest expense | | 213 | | | — | | | — | | | 55,846 | | | 56,059 | |
Interest and other income | | 2 | | | — | | | — | | | (9) | | | (7) | |
Loss on non-designated derivative instruments | | — | | | — | | | — | | | 68 | | | 68 | |
Gain on sale of real estate investments | | — | | | — | | | (8,790) | | | — | | | (8,790) | |
| | | | | | | | | | |
Income tax expense | | — | | | — | | | — | | | 399 | | | 399 | |
Net income (loss) attributable to non-controlling interests | | 23 | | | — | | | — | | | (416) | | | (393) | |
Allocation for preferred stock | | — | | | — | | | — | | | 173 | | | 173 | |
NOI | | $ | 133,990 | | | $ | 3,678 | | | $ | 3,061 | | | $ | — | | | $ | 140,729 | |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to stockholders (in accordance with GAAP) | | $ | 33,735 |
| | $ | (11,158 | ) | | $ | 411 |
| | $ | (65,536 | ) | | $ | (42,548 | ) |
Contingent purchase price consideration | | — |
| | — |
| | — |
| | — |
| | — |
|
Impairment on sale of real estate investments | | 9,741 |
| | 9,252 |
| | — |
| | — |
| | 18,993 |
|
Operating fees to related parties | | — |
| | — |
| | — |
| | 22,257 |
| | 22,257 |
|
Acquisition and transaction related | | 2,800 |
| | 101 |
| | — |
| | 85 |
| | 2,986 |
|
General and administrative | | — |
| | — |
| | — |
| | 15,673 |
| | 15,673 |
|
Depreciation and amortization | | 72,628 |
| | 4,470 |
| | 10 |
| | 533 |
| | 77,641 |
|
Interest expense | | 3,625 |
| | 6 |
| | — |
| | 26,633 |
| | 30,264 |
|
Interest and other income | | (6 | ) | | — |
| | — |
| | (300 | ) | | (306 | ) |
Gain on non-designated derivative instruments | | — |
| | — |
| | — |
| | 198 |
| | 198 |
|
Gain on sale of real estate investment | | — |
| | — |
| | (438 | ) | | — |
| | (438 | ) |
Gain on asset acquisition | | — |
| | (307 | ) | | — |
| | — |
| | (307 | ) |
Income tax benefit | | — |
| | — |
| | — |
| | 647 |
| | 647 |
|
Net loss attributable to non-controlling interests | | 7 |
| | 1 |
| | 17 |
| | (189 | ) | | (164 | ) |
NOI | | $ | 122,530 |
| | $ | 2,365 |
| | $ | — |
| | $ | 1 |
| | $ | 124,896 |
|
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the year ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to stockholders (in accordance with GAAP) | | $ | 25,997 |
| | $ | (81 | ) | | $ | 1,090 |
| | $ | (47,881 | ) | | $ | (20,875 | ) |
Contingent purchase price consideration | | (138 | ) | | — |
| | — |
| | — |
| | (138 | ) |
Impairment on sale of real estate investments | | — |
| | — |
| | 384 |
| | — |
| | 384 |
|
Operating fees to related parties | | — |
| | — |
| | — |
| | 20,583 |
| | 20,583 |
|
Acquisition and transaction related | | (19 | ) | | — |
| | — |
| | 3,182 |
| | 3,163 |
|
General and administrative | | — |
| | — |
| | — |
| | 12,105 |
| | 12,105 |
|
Depreciation and amortization | | 94,815 |
| | 2,830 |
| | 708 |
| | 533 |
| | 98,886 |
|
Interest expense | | 6,096 |
| | — |
| | — |
| | 13,785 |
| | 19,881 |
|
Interest and other income | | (7 | ) | | — |
| | — |
| | (39 | ) | | (46 | ) |
Loss on non-designated derivative instruments | | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
Gain on sale of real estate investment | | — |
| | — |
| | (1,325 | ) | | — |
| | (1,325 | ) |
Gain on sale of investment securities | | — |
| | — |
| | — |
| | (56 | ) | | (56 | ) |
Income tax benefit (expense) | | — |
| | — |
| | — |
| | (2,084 | ) | | (2,084 | ) |
Net loss attributable to non-controlling interests | | 1 |
| | — |
| | — |
| | (97 | ) | | (96 | ) |
NOI | | $ | 126,745 |
| | $ | 2,749 |
| | $ | 857 |
| | $ | — |
| | $ | 130,351 |
|
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the year ended December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Same Store | | Acquisitions | | Dispositions | | Non-Property Specific | | Total |
Net income (loss) attributable to stockholders (in accordance with GAAP) | | $ | (22,103 | ) | | $ | 4,616 |
| | $ | 133 |
| | $ | (24,388 | ) | | $ | (41,742 | ) |
Contingent purchase price consideration | | (612 | ) | | — |
| | — |
| | — |
| | (612 | ) |
Impairment on sale of real estate investments | | — |
| | — |
| | — |
| | — |
| | — |
|
Operating fees to related parties | | — |
| | — |
| | — |
| | 12,191 |
| | 12,191 |
|
Acquisition and transaction related | | 13,887 |
| | — |
| | 319 |
| | 473 |
| | 14,679 |
|
General and administrative | | 8 |
| | — |
| | — |
| | 9,725 |
| | 9,733 |
|
Depreciation and amortization | | 117,020 |
| | 2,830 |
| | 772 |
| | 302 |
| | 120,924 |
|
Interest expense | | 4,470 |
| | — |
| | — |
| | 5,886 |
| | 10,356 |
|
Interest and other income | | (15 | ) | | — |
| | — |
| | (566 | ) | | (581 | ) |
Gain on sale of real estate investment | | — |
| | — |
| | — |
| | — |
| | — |
|
Gain on sale of investment securities | | — |
| | — |
| | — |
| | (446 | ) | | (446 | ) |
Income tax expense | | — |
| | — |
| | — |
| | (2,978 | ) | | (2,978 | ) |
Net loss attributable to non-controlling interests | | (17 | ) | | — |
| | (3 | ) | | (199 | ) | | (219 | ) |
NOI | | $ | 112,638 |
| | $ | 7,446 |
| | $ | 1,221 |
| | $ | — |
| | $ | 121,305 |
|
Refer to Note 15 — Segment Reporting to our consolidated financial statements found in this Annual Report on Form 10-K for a reconciliation of NOI to net loss attributable to stockholders by reportable segment. Dividends and Other Distributions
In May 2013, we began paying distributionsDividends on a monthly basis to stockholders of record each day of the preceding monthour Series A Preferred Stock accrue in an amount equal to $0.0046575343 per day (for the year 2016 only, $0.0046448087 per day$1.84375 per share of common stockeach year ($0.460938 per share per quarter) to reflect that 2016 was a leap year.)Series A Preferred Stock holders, which is equivalent to $1.707.375% per annum on the $25.00 liquidation preference per share of common stock. In March 2017,Series A Preferred Stock. Dividends on the Board authorizedSeries A Preferred Stock are cumulative and payable quarterly in arrears on the 15th day of January, April, July and October of each year or, if not a decrease inbusiness day, the rate at which we pay monthly distributionsnext succeeding business day to stockholders, effective asholders of April 1, 2017, to $0.0039726027 per day, which is equivalent to $1.45 per annum, per sharerecord on the close of common stock. In February 2018,business on the Board authorized a further decrease in the rate at which we pay monthly distributions to stockholders, effective for record dates asdate set by our board of directors and afterdeclared by us.
From March 1, 2018 until June 20, 2020, we paid distributions to $0.0023287671 per share per day, which isour common stockholders, at a rate equivalent to $0.85 per annum, per share of common stock. Distributions arewere payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
TheOn June 29, 2020, the Board approved a change in our common stock distribution policy whereby we would no longer declare distributions based on daily record dates. Instead, any future distributions authorized by the Board on shares of our common stock were to be paid on a monthly basis in arrears based on a single record date during the applicable month.
As noted herein under our Credit Facility we may not pay distributions to holders of common stock in cash or any other cash distributions (including repurchases of shares of the Company’s common stock), subject to certain exceptions. These exceptions include paying cash dividends on the Series A Preferred Stock or any other preferred stock we may issue and paying any cash distributions necessary to maintain our status as a REIT. We may not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom. Beginning in the Commencement Quarter we will be able to pay cash distributions to holders of common stock, subject to the restrictions described below. There can be no assurance as to if, or when, we will be able to satisfy these conditions. We may only pay cash distributions beginning in the Commencement Quarter and the aggregate distributions (as defined in the Credit Facility and including dividends on Series A Preferred Stock) for any period of four fiscal quarters do not exceed 95% of Modified FFO (as defined in the Credit Facility) for the same period based only on fiscal quarters after the Commencement Quarter. Until four full fiscal quarters have elapsed after the commencement of Commencement Quarter, the aggregate amount of permitted distributions and Modified FFO will be determined by using only the fiscal quarters that have elapsed from and after the Commencement Quarter and annualizing those amounts.
On August 13, 2020, the Board changed our common stock distribution policy in order to preserve our liquidity and maintain additional financial flexibility in light of the continued COVID-19 pandemic and to comply with an amendment to the Credit Facility described above. Under the new policy, distributions authorized by the Board on shares of our common stock, if and when declared, are now paid on a quarterly basis in arrears in shares of our common stock valued at the Estimated Per-Share NAV in effect on the applicable date, based on a single record date to be specified at the beginning of each quarter. On October 1, 2020 and January 4, 2021, we declared dividends payable in 0.01349 shares of our common stock on each share of our outstanding common stock. This amount was based on our prior cash distribution rate of $0.85 per share per annum. The stock dividends were paid on October 15, 2020 and January 15, 2021 to holders of record of our common stock at the close of business on October 8, 2020 and January 11, 2021. See “— Overview” for additional information on the impact of the stock dividends.
Subject to the restrictions in our Credit Facility, the amount of dividends and other distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").Code. Distribution payments are dependent on the availability of funds. The Board may further reduce the amount of dividends or distributions paid or suspend dividend or distribution payments at any time and therefore dividend and distribution payments are not assured. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.
During the year ended December 31, 2017, distributions paid to common stockholders and OP Unit holders totaled $138.1 million, including $61.2 million which was reinvested into additional shares
The following table shows the sources for the payment of distributions to common stockholders preferred stockholders, including distributions on unvested restricted stockshares and OP Units, but excluding distributions related to Class B Units as these distributions are recorded as an expense in our consolidated statement of operations and comprehensive loss, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | March 31, 2020 | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | December 31, 2020 |
(In thousands) | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions |
Distributions: | | | | | | | | | | | | | | | | | | | | |
Distributions to common stockholders not reinvested in common stock issued under the DRIP | | $ | 13,225 | | | | | $ | 13,729 | | | | | $ | 4,400 | | | | | $ | — | | | | | $ | 31,354 | | | |
Distributions reinvested in common stock issued under the DRIP | | 6,322 | | | | | 6,267 | | | | | 2,015 | | | | | — | | | | | 14,604 | | | |
Dividends to preferred stockholders | | 173 | | | | | 742 | | | | | 742 | | | | | 742 | | | | | 2,399 | | | |
Distributions on OP Units | | 86 | | | | | 87 | | | | | 28 | | | | | — | | | | | 201 | | | |
Total distributions (1) | | $ | 19,806 | | | | | $ | 20,825 | | | | | $ | 7,185 | | | | | $ | 742 | | | | | $ | 48,558 | | | |
| | | | | | | | | | | | | | | | | | | | |
Source of distribution coverage: | | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (2) | | $ | 18,952 | | | 95.7 | % | | $ | 12,294 | | | 59.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 24 | | | 3.2 | % | | $ | 41,807 | | | 86.1 | % |
Proceeds received from common stock issued under the DRIP (2) | | 854 | | | 4.3 | % | | 6,267 | | | 30.1 | % | | — | | | — | % | | 718 | | | 96.8 | % | | 6,751 | | (3) | 13.9 | % |
Available cash on hand | | — | | | — | % | | 2,264 | | | 10.9 | % | | — | | | — | % | | — | | | — | % | | — | | (3) | — | % |
Total source of distribution coverage | | $ | 19,806 | | | 100.0 | % | | $ | 20,825 | | | 100.0 | % | | $ | 7,185 | | | 100.0 | % | | $ | 742 | | | 100.0 | % | | $ | 48,558 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (in accordance with GAAP) | | $ | 18,952 | | | | | $ | 12,294 | | | | | $ | 10,537 | | | | | $ | 24 | | | | | $ | 41,807 | | | |
Net loss attributable to stockholders (in accordance with GAAP) | | $ | (24,744) | | | | | $ | (22.811) | | | | | $ | (10,500) | | | | | $ | (43,514) | | | | | $ | (78,781) | | | |
|
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| | Three Months Ended | | Year Ended |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | December 31, 2017 |
(In thousands) | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions | | | | Percentage of Distributions |
Distributions: | | | | | | | | | | | | | | | | | | | | |
Distributions to stockholders | | $ | 37,536 |
| | | | $ | 34,538 |
| | | | $ | 32,759 |
| | | | $ | 33,090 |
| | | | $ | 137,923 |
| | |
Distributions on OP Units | | 169 |
| | | | 177 |
| | | | 129 |
| | | | 215 |
| | | | 690 |
| | |
Total distributions (1) | | $ | 37,705 |
| | | | $ | 34,715 |
| | | | $ | 32,888 |
| | | | $ | 33,305 |
| | | | $ | 138,613 |
| | |
| | | | | | | | | | | | | | | | | | | | |
Source of distribution coverage: | | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations | | $ | 18,633 |
| | 49.3 | % | | $ | 17,092 |
| | 49.3 | % | | $ | 11,128 |
| | 33.8 | % | | $ | 17,114 |
| | 51.4 | % | | $ | 63,967 |
| | 46.1 | % |
Proceeds received from common stock issued under the DRIP (2) | | — |
| | — | % | | 146 |
| | 0.4 | % | | 8,795 |
| | 26.7 | % | | 13,864 |
| | 41.6 | % | | 22,805 |
| | 16.5 | % |
Proceeds from the sale of real estate investments | | 18,656 |
| | 49.5 | % | | 726 |
| | 2.1 | % | | — |
| | — | % | | — |
| | — | % | | 19,382 |
| | 14.0 | % |
Cash received in asset acquisition | | — |
| | — | % | | 859 |
| | 2.5 | % | | 6 |
| | — | % | | — |
| | — | % | | 865 |
| | 0.7 | % |
Available cash on hand (3) | | 416 |
| | 1.2 | % | | 15,892 |
| | 45.7 | % | | 12,959 |
| | 39.5 | % | | 2,327 |
| | 7.0 | % | | 31,594 |
| | 22.7 | % |
Total source of distribution coverage | | $ | 37,705 |
| | 100.0 | % | | $ | 34,715 |
| | 100.0 | % | | $ | 32,888 |
| | 100.0 | % | | $ | 33,305 |
| | 100.0 | % | | $ | 138,613 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | |
Cash flows provided by operations (in accordance with GAAP) | | $ | 18,633 |
| | | | $ | 17,092 |
| | | | $ | 11,128 |
| | | | $ | 17,114 |
| | | | $ | 63,967 |
| | |
Net loss attributable to stockholders (in accordance with GAAP) | | $ | (6,139 | ) | | | | $ | (4,716 | ) | | | | $ | (24,136 | ) | | | | $ | (7,557 | ) | | | | $ | (42,548 | ) | | |
______________________(1) Excludes distributions related to Class B Units and distributions to non-controlling interest holders other than those paid on our OP Units.The decrease in total distributions was due to the change in the timing of our distributions to common stockholders and the change to declaring distributions in common stock (as opposed to cash) beginning in October 2020 (see disclosure above).
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(1) | Excludes distributions related to Class B Units and distributions to non-controlling interest holders other than those paid on our OP Units. |
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(2) | Net of share repurchases during the period. |
| |
(3) | Includes proceeds received from credit facilities and mortgage notes payable. |
(2) Assumes the use of available cash flows from operations before any other sources.
(3) Year-to-date total does not equal the sum of the quarters. Each quarter and year-to-date period is evaluated separately for purposes of this table.
For the year ended December 31, 2017,2020, cash flows provided by operations were $64.0$41.8 million. We had not historically generated sufficient cash flow from operations to fund the payment of dividends and other distributions at the current rate prior to switching from paying cash dividends to stock dividends on our common stock. As shown in the table above, we funded distributions with cash flows provided by operations, as well as proceeds received from common stock issued under our DRIP and available cash on hand, comprised of proceeds from financings and dispositions. Because shares of common stock are only offered and sold pursuant to the saleDRIP in connection with the reinvestment of investment securities,distributions paid in cash, participants in the sale of real estate investments and financings. To the extentDRIP will not be able to reinvest in shares thereunder for so long as we pay distributions in excessstock instead of cash flows provided by operations,cash.
Our ability to pay dividends on our stockholders' investment may be adversely impacted. Distributions paid from sourcesSeries A Preferred Stock and starting with the Commencement Quarter, other than our cash flows from operations will result in us having fewer funds available for other needs such as property acquisitionsdistributions and other real estate-related investments.
We have historically not generated sufficient cash flow from operations to fund distributions. The amountmaintain compliance with the restrictions on the payment of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot give any assurance that future acquisitions of real properties, if any, will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by the Board in establishing a distribution rate to stockholders.
If we do not generate sufficient cash flows from our operations to fund distributions, we may have to further reduce or suspend distributions. We have funded a portion of our distributions from, among other things, DRIP proceeds, borrowings and proceeds from the sale of real estate investments. A decrease in the level of stockholder participation in our DRIP could have an adverse impactCredit Facility depends on our ability to continue to use DRIP proceeds. Borrowings required to fund distributions may not be available at favorable rates, or at all, and could restrictincrease the amount of cash we generate from property operations which in turn depends on a variety of factors, including the duration and scope of the COVID-19 pandemic and its impact on our tenants and properties, our ability to complete acquisitions of new properties and our ability to improve operations at our existing properties. There can borrow for investmentsbe no assurance that we will complete acquisitions on a timely basis or on acceptable terms and other purposes. Likewise, the proceeds from any property sale may notconditions, if at all. Our ability to improve operations at our existing properties is also subject to a variety of risks and uncertainties, many of which are beyond our control, and there can be available to fund distributions. Distributions paid from sources other than our cash flows from operations also reduce the funds available for other needs such as property acquisitions, capital expenditures and other real estate-related investments.no assurance we will be successful in achieving this objective.
We may not have sufficientstill pay any cash from operations to make a distribution requireddistributions necessary to maintain ourits status as a REIT status, whichand may materially adversely affect an investment in our common stock. Moreover,not pay any cash distributions (including dividends on Series A Preferred Stock) if a default or event of default exists or would result therefrom under the Board may change our distribution policy, in its sole discretion, at any time.Credit
Further, paying distributions from sources other than operating cash flow is not sustainable particularly where limited byFacility. The amendment provided that the termscovenants restricting payment of instruments governing borrowings. For example, our Revolving Credit Facility imposes limitations on our ability to pay distributions to stockholders and repurchase shares of common stock. Distributions to stockholders are limited, with certain exceptions, to a percentage ofthreshold based on Modified FFO (as defined inand requiring maintenance of a minimum ratio of consolidated total indebtedness to consolidated total asset value and a minimum ratio of adjusted consolidated EBITDA to consolidated fixed charges did not apply for the Revolving Credit Facility (which is different from MFFO as discussed in this Annual Report on Form 10-K)fiscal quarter ended June 30, 2020. In addition, the lenders waived any defaults or event of defaults under those covenants that may have occurred during the applicable period as follows: (i) for the six months ending March 31, 2018, 130% of Modified FFO; (ii) for the nine months endingfiscal quarter ended June 30, 2018, 120%2020 as well as any additional default or event of Modified FFO; (iii) for the twelve months ending September 30, 2018, 115% of Modified FFO; and (iv) for the twelve months ending December 31, 2018 and for each period of four fiscal quarters ending after that period, 110% of Modified FFO. This covenant was amended twice during 2017default resulting therefrom prior to permit us to pay a certain level of distributions, but there isAugust 10, 2020. There can be no assurance that our lenders will agreeconsent to futureany amendments if needed, or if Modified FFO is not sufficient.waivers that may become necessary to comply with our Credit Facility in the future.
Loan Obligations
The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Revolving Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities require interest only payments through November 2021 and principal and interest payments thereafter. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2017,2020, we were in compliance with the financial and reporting covenants under our loan agreements.
Following the amendment to our Credit Facility in August 2020, until the first day of the Commencement Quarter, we must use all the net cash proceeds from any capital event (such as an asset sale, financing or equity issuance) to prepay amounts outstanding under the Revolving Credit Facility. We may reborrow any amounts so repaid if all relevant conditions are met, including sufficient availability for future borrowings. There can be no assurance these conditions will be met. Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable, Revolving Credit Facility and Fannie Mae Master Credit Facilities and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of December 31, 2017.2020. The minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of December 31, 2017,2020, the outstanding mortgage notes payable and loans under the Revolving Credit Facility and Fannie Mae Master Credit Facilities had weighted-average effective interest rates of 4.3%3.9%, 3.3%3.2% and 3.9%2.6%, respectively.
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| | | | Years Ended December 31, | | |
(In thousands) | | Total | | 2021 | | 2022 - 2023 | | 2024 -2025 | | Thereafter |
Principal on mortgage notes payable | | $ | 550,361 | | | $ | 1,191 | | | $ | 7,625 | | | $ | 2,237 | | | $ | 539,308 | |
Interest on mortgage notes payable | | 108,961 | | | 15,971 | | | 45,387 | | | 47,603 | | | — | |
Principal on Revolving Credit Facility | | 173,674 | | | — | | | — | | | 173,674 | | | — | |
Interest on Revolving Credit Facility | | 27,875 | | | 5,575 | | | 11,150 | | | 11,150 | | | — | |
Principal on Term Loan | | 150,000 | | | — | | | — | | | 150,000 | | | — | |
Interest on Term Loan | | 37,125 | | | 7,425 | | | 14,850 | | | 14,850 | | | — | |
Fannie Mae Master Credit Facilities | | 355,175 | | | 130 | | | 7,316 | | | 8,993 | | | 338,736 | |
Interest on Fannie Mae Master Credit Facilities | | 53,913 | | | 9,314 | | | 18,464 | | | 18,031 | | | 8,104 | |
Lease rental payments due (1) | | 39,944 | | | 747 | | | 1,540 | | | 1,560 | | | 36,097 | |
Total | | $ | 1,497,028 | | | $ | 40,353 | | | $ | 106,332 | | | $ | 428,098 | | | $ | 922,245 | |
_________
(1) Includes all payments due on both operating leases and direct financing leases. See Note 16 — Commitments and Contingencies to our consolidated financial statements included in this Form 10-K for additional information. |
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| | | | Years Ended December 31, | | |
(In thousands) | | Total | | 2018 | | 2019 — 2020 | | 2021 — 2022 | | Thereafter |
Principal on mortgage notes payable | | $ | 415,365 |
| | $ | 83,534 |
| | $ | 42,356 |
| | $ | 251,820 |
| | $ | 37,655 |
|
Interest on mortgage notes payable | | 85,138 |
| | 17,854 |
| | 26,853 |
| | 20,680 |
| | 19,751 |
|
Revolving Credit Facility | | 239,700 |
| | — |
| | 239,700 |
| | — |
| | — |
|
Interest on Revolving Credit Facility | | 9,733 |
| | 7,983 |
| | 1,750 |
| | — |
| | — |
|
Fannie Credit Facilities | | 295,169 |
| | — |
| | — |
| | 3,663 |
| | 291,506 |
|
Interest on Fannie Credit Facilities | | 100,219 |
| | 11,458 |
| | 22,947 |
| | 22,850 |
| | 42,964 |
|
Lease rental payments due(1) | | 47,089 |
| | 852 |
| | 1,722 |
| | 1,734 |
| | 42,781 |
|
Total | | $ | 1,192,413 |
| | $ | 121,681 |
| | $ | 335,328 |
| | $ | 300,747 |
| | $ | 434,657 |
|
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(1) | Lease rental payments due includes $3.3 million of imputed interest related to our capital lease obligations. |
Election as a REIT
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. Commencing with suchthat taxable year, we werehave been organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner but can provide no assurance can be givenassurances that we will operate in a manner so as to remain qualified for taxation as a REIT. In order toTo continue to qualify for taxation as a REIT, we must among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to U.S. federal corporate income tax on thatthe portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as U.S. federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 9 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the accompanying consolidated financial statements.various related party transactions, agreements and fees. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, our Credit Facility (which includes a Revolving Credit Facility and a Term Loan) and the Fannie Mae Master Credit Facilities, bearsbear interest at fixed rates and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We will not hold or issue these derivative contracts for trading or speculative purposes. As of December 31, 2017,2020, we had entered into six non-designated interest rate caps with a notional amount of approximately $295.2$359.3 million and twonine designated interest rate swaps with a notional amount of $250.0$578.5 million. We do not have any foreign operations and thus we are generally not directly exposed to foreign currency fluctuations.
Mortgage Notes Payable
As of December 31, 2017,2020, all of our debt consistedmortgages are either fixed-rate ($171.9 million) or variable-rate ($378.5 million), before consideration of both fixed and variable-rate debt. Weinterest rate swaps. Our mortgages had fixed-rate secured mortgage financings with ana gross aggregate carrying value of $414.3$550.4 million and a fair value of $411.7$549.6 million as of December 31, 2020.
Credit Facilities
Our Credit Facilities are variable-rate, before consideration of interest rate swaps, and are comprised of our Revolving Credit Facility, our Term Loan and our Fannie Mae Master Credit Facilities. Our Credit Facilities had a gross aggregate carrying amount of $678.8 million and a fair value of $673.6 million as of December 31, 2020.
Sensitivity Analysis - Interest Expense
Interest rate volatility associated with all of our variable-rate borrowings, which totaled $1.1 billion as of December 31, 2020, affects interest expense incurred and cash flow to the extent they are not fixed via interest rate swap. As noted above, we have nine designated interest rate swaps with a notional amount of $578.5 million, which effectively creates a fixed interest rate for a portion of our variable-rate debt. We also have six non-designated interest rate cap contracts, which are substantially out of the money and, therefore do not currently affect our near-term interest rate sensitivity. The sensitivity analysis related to the portion of our variable-rate debt that is not fixed via designated interest rate swaps assumes an immediate 100 basis point move in interest rates from their December 31, 2020 levels, with all other variables held constant. A 100 basis point increase and decrease in variable interest rates on the portion of our variable-rate debt that is not fixed via designated interest rate swaps would increase and decrease our interest expense by $4.8 million.
Sensitivity Analysis - Fair Value of Debt
Changes in market interest rates on our fixed-rate debt impact theinstruments impacts their fair value, of the mortgage notes, buteven if it has no impact on interest due on the mortgage notes.them. For instance, if interest rates rise 100 basis points and the balances on our fixed rate debt balance remainsinstruments remain constant, we expect the fair value of our obligationobligations to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 20172020 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $5.2$37.2 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $6.0$35.2 million.
At December 31, 2017, our variable-rate Revolving Credit Facility and Fannie Credit Facilities had an aggregate carrying and fair value of $534.9 million. Interest rate volatility associated with these variable-rate borrowings affects interest expense incurred and cash flow. The sensitivity analysis related to all other variable-rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2017 levels, with all other variables held constant. A 100 basis point increase andin market interest rates would result in an increase in the fair value of our nine designated interest rate swaps by $28.5 million. A 100 basis point decrease in variablemarket interest rates onwould result in a decrease in the fair value of our variable-rate Revolving Credit Facility and Fannie Credit Facilities would increase and decrease ournine designated interest expenserate swaps by $4.3 million and $4.2 million, respectively.$30.2 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 20172020 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), our management,disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the supervisionExchange Act is recorded, processed, summarized and withreported within the participationrequired time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of our Interimcontrols can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our Chief Executive Officer and Chief Financial Officer, carried out an evaluation, together with other members of our management, of the effectiveness of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, onas of December 31, 2020 at a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.reasonable level of assurance.
Management'sManagement’s Annual Report on Internal Control over Financial Reporting
ManagementOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in RuleRules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act and as set forth below. Under Rule 13a-15(c), management must evaluate, with the participation of the Interim Chief Executive Officer and Chief Financial Officer, the effectiveness, as of the end of each calendar year, of our internal control over financial reporting. The term internalAct. Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principles andin the United States of America.
Our internal control over financial reporting includes those policies and procedures that:
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1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
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2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
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3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements. |
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. ProjectionsAlso, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, ourOur management conducted an evaluation ofassessed the effectiveness of our internal control over financial reporting as of December 31, 2017 using2020. In making that assessment, management used the criteria issuedset forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO)(“COSO”) in the Internal Control-Integrated Framework (2013). Based on that evaluation,its assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective as of December 31, 2017.based on those criteria.
KPMG LLP, an independent registered public accounting firm, was engaged to audit the consolidated financial statements included in this Annual Report on Form 10-K and their audit report is included on Page F-2 of this Annual Report on Form 10-K. The rules of the SEC do not require, and thisThis Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. The effectiveness of our internal control over financial reporting has not been audited by our independent registered public accounting firm because we are a “non-accelerated filer” as defined under SEC rules.Changes in Internal Control Over Financial Reporting
No change occurredDuring the three months ended December 31, 2020, there were no changes in our internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2017 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Item9B. Other Information.
On March 15, 2018, our board of directors approved an amendment and restatement of our bylaws (as amended and restated, the “Bylaws”), which became effective as of the date of approval. The amendments contained in the Bylaws, among other things:None.
Increase the threshold for stockholders to call a special meeting from the current threshold of 10% to a majority and establish more detailed procedures related to stockholders calling a special meeting of stockholders.
Provide that directors are elected by a plurality of the votes cast instead of a majority of outstanding shares of common stock entitled to vote who are present at the meeting.
More fully develop the advance notice provisions for stockholder nominations for director and stockholder business proposals, including to expand the information required to be disclosed by the stockholder making the proposal, any proposed nominees for director and any persons controlling, or acting in concert with, such stockholder and to require a stockholder proponent to appear in person or by proxy at the applicable meeting to present each nominee for election as a director or the proposed business, as the case may be.
Increase the maximum number of directors from 10 to 15.
Delete the requirement that independent directors nominate replacements for vacancies among the independent directors’ positions.
Delete language regarding our election to be subject to Section 3-804(c) of the Maryland General Corporation Law (the “MGCL”), as we have already made this election in our charter.
Remove references to outdated provisions concerning loss of deposits and the giving of bonds by directors.
Provide that, unless we consent in writing to the selection of an alternative forum, that the state and federal courts in Baltimore, Maryland are the exclusive forum for certain litigation, including: (i) a derivative lawsuit; (ii) an action asserting breach of duty; (iii) an action pursuant to any provision of the MGCL; and (iv) an action asserting a claim governed by the internal affairs doctrine.
Make other revisions to reflect amendments to the MGCL, conform to changes made to our charter in 2015, clarify certain corporate procedures and conform language and style.
This summary of the material changes to the Bylaws is qualified in its entirety by the Bylaws attached as Exhibit 3.2 to this Annual Report on Form 8-K and incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Parkoffice: 650 Fifth Avenue – 4- 30th Floor, New York, NY 10022,10019, Attention: Chief Financial Officer.
Our codeCode of ethicsBusiness Conduct and Ethics is also publicly available on our website at www.healthcaretrustinc.com/corporate_governance.html.www.healthcaretrustinc.com. If we make any substantive amendments to the Codecode of Ethicsethics or grant any waiver, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
The information required by this Item is incorporated by reference towill be set forth in our definitive proxy statement to be filed with the SEC with respect to our 20182021 annual meeting of stockholders.stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference towill be set forth in our definitive proxy statement to be filed with the SEC with respect to our 20182021 annual meeting of stockholders.stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
Restricted Share Plan
We have an employee and director incentive restricted share plan (as amended from time to time, the “RSP”), which provides us with the ability to grant awards of restricted shares to our directors, officers and employees (if we ever have employees), and, among other eligible persons, employees of the Advisor and its affiliates who provide services to us. For additional information, see Note 11 — Equity-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K.
The following table sets forth information regarding securities authorized for issuance under the RSP as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) ) |
| | (a) | | (b) | | (c) | |
Equity Compensation Plans approved by security holders | | — | | | — | | | 3,027,609 | | | (1) |
Equity Compensation Plans not approved by security holders | | — | | | — | | | — | | |
Total | | — | | | — | | | 3,027,609 | | | (1) |
________
(1) The total number of shares of common stock that may be subject to awards granted under the RSP may not exceed 5.0% of our outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 3,445,866 shares (as such number may be further adjusted for stock splits, stock dividends, combinations and similar events). As of December 31, 2020, we had 93,775,746 shares of common stock issued and outstanding and 421,135 shares of common stock that were subject to awards granted under the RSP. For additional information on the RSP, please see Note 11 — Equity-Based Compensation to our consolidated financial statements included in this Annual Report on Form 10-K. The other information required by this Item is incorporated by reference towill be set forth in our definitive proxy statement to be filed with the SEC with respect to our 20182021 annual meeting of stockholders.stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference towill be set forth in our definitive proxy statement to be filed with the SEC with respect to our 20182021 annual meeting of stockholders.stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference towill be set forth in our definitive proxy statement to be filed with the SEC with respect to our 20182021 annual meeting of stockholders.stockholders to be filed not later than 120 days after the end of the 2020 fiscal year, and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements:
See the Index to Consolidated Financial Statements at page F-1 of this Annual Report on Form 10-K. 2. Financial Statement Schedules:
The following financial statement schedule is included herein at page F-42 of this Annual Report on Form 10-K: Schedule III — Real Estate and Accumulated Depreciation
(b) Exhibits
See Exhibit Index below.
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 20172020 (and are numbered in accordance with Item 601 of Regulation S-K):
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| | | | | | | | | | |
Exhibit No. | | Description | |
(1)
| | Articles of Amendment and Restatement for Healthcare Trust, Inc.
| |
| | Articles Supplementary of Healthcare Trust, Inc. relating to election to be subject to Section 3-803 of the Maryland General Corporation Law, dated November 9, 2017.
| |
| | Articles Supplementary relating to the designation of shares of 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock, dated December 6, 2019.
| |
| | Amended and Restated Bylaws of Healthcare Trust, Inc. | |
| | Articles SupplementaryAmendment to Amended and Restated Bylaws of Healthcare Trust, Inc. | |
| | Articles Supplementary designating additional shares of 7.375% Series A Cumulative Redeemable Perpetual Preferred Stock | |
| | Agreement of Limited Partnership of Healthcare Trust Operating Partnership, L.P. (f/k/a American Realty Capital Healthcare Trust II Operating Partnership, L.P.), dated as of February 14, 2013 | |
| | First Amendment to the Agreement of Limited Partnership of American Realty Capital Healthcare Trust II, L.P., dated as of December 31, 2013 | |
| | Second Amendment to the Agreement of Limited Partnership of American Realty Capital Healthcare Trust II, L.P., dated as of April 15, 2015 | |
| | Third Amendment, dated December 6, 2019, to the Agreement of Limited Partnership of Healthcare Trust Operating Partnership, L.P., dated February 14, 2013
| |
| | Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
| |
| | Rights Agreement, dated May 18, 2020, between Healthcare Trust, Inc.,and Computershare Trust Company, N.A., as Rights Agent. | |
| | Second Amended and Restated Advisory Agreement, dated as of February 17, 2017, by and among the Company, Healthcare Trust Operating Partnership, L.P. and Healthcare Trust Advisors, LLC
| |
(12)
| | Amendment No. 1, dated as of July 25, 2019, to the Second Amended and Restated Advisory Agreement, by and among Healthcare Trust, Inc., Healthcare Trust Operating Partnership, L.P. and Healthcare Trust Advisors, LLC
| |
| | Amended and Restated Property Management and Leasing Agreement, dated as of February 17, 2017, by and among the Company, Healthcare Trust Operating Partnership, L.P. and Healthcare Trust Properties, LLC
| |
| | Employee and Director Incentive Restricted Share Plan of the Company |
| | Senior Secured Revolving Credit AgreementFirst Amendment, dated as of March 21, 2014April 9, 2018, to Amended and Restated Property Management and Leasing Agreement, by and among American Realty Capital Healthcare Trust, IIInc., Healthcare Trust Operating Partnership, L.P., KeyBank National Association, the other lenders which are parties to this agreement and other lenders that may become parties to the agreement |
| | Increase Letter, dated April 15, 2014, with KeyBank National Association, relating to the Senior Secured Revolving Credit Agreement dated as of March 21, 2014 by and among American Realty Capital Healthcare Trust II Operating Partnership, L.P., KeyBank National Association and the lenders party thereto |
| | Increase Letter, dated July 31, 2015, with KeyBank National Association, relating to the Senior Secured Revolving Credit Agreement dated as of March 21, 2014 by and among American Realty Capital Healthcare Trust II Operating Partnership, L.P., KeyBank National Association and the lenders party thereto |
| | Agreement for Lease of Real Property, dated as of June 14, 2014, by and between American Realty Capital VII,Properties, LLC and Pinnacle Health Hospitals |
| | First Amendment to Agreement for Lease of Real Property, dated as of July 16, 2014, by and between American Realty Capital VII, LLC and Pinnacle Health Hospitals |
| | Second Amendment to Agreement for Lease of Real Property, dated as of August 1, 2014, by and between American Realty Capital VII, LLC and Pinnacle Health Hospitals |
| | Third Amendment to Agreement for Lease of Real Property, dated as of September 26, 2014, by and between American Realty Capital VII, LLC and Pinnacle Health Hospitals |
| | Fourth Amendment to Agreement for Lease of Real Property, dated as of October 10, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC, ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | First Amendment to Senior Secured Revolving Credit Agreement, dated September 18, 2014, to the Senior Secured Revolving Credit Agreement dated as of March 21, 2014, between American Realty Capital Healthcare Trust II Operating Partnership, LP, American Realty Capital Healthcare Trust II, Inc. and KeyBank National Association, individually and as agent for itself and the other lenders party from time to time |
| | Fifth Amendment to Agreement for Lease of Real Property, dated as of October 22, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | Sixth Amendment to Agreement for Lease of Real Property, dated as of October 31, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | Seventh Amendment to Agreement for Lease of Real Property, dated as of November 12, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
|
| | |
Exhibit No. | | Description |
| | Eighth Amendment to Agreement for Lease of Real Property, dated as of November 21, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | Ninth Amendment to Agreement for Lease of Real Property, dated as of December 5, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | Tenth Amendment to Agreement for Lease of Real Property, dated as of December 12, 2014, by and between American Realty Capital VII, LLC, ARHC BRHBGPA01, LLC, ARHC FOMBGPA01, LLC, ARHC LMHBGPA01, LLC and ARHC CHHBGPA01, LLC and Pinnacle Health Hospitals |
| | Indemnification Agreement, dated as of December 31, 2014, with Directors, Officers, Advisor and Dealer Manager | |
| | Indemnification Agreement, dated April 14, 2015, with Mr. Randolph C. Read | |
| | Second Amendment to Senior Secured Revolving Credit Agreement, dated June 26, 2015, by and among American Realty Capital Healthcare Trust II Operating Partnership, L.P., American Realty Capital Healthcare Trust II, Inc., KeyBank National Association individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties dated as of March 21, 2014 |
| | Indemnification Agreement, dated December 3, 2015, between the Company, Leslie D. Michelson and Edward G. Rendell |
| | Third Amendment to Senior Secured Revolving Credit Agreement, dated February 17, 2016, by and among Healthcare Trust Operating Partnership, L.P., Healthcare Trust, Inc., KeyBank National Association individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties dated as of March 21, 2014 |
| | Indemnification Agreement, dated March 10, 2016, between the Company and Katie P. Kurtz |
| | Form of Restricted Stock Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of Healthcare Trust, Inc. |
| | Indemnification Agreement, dated October 6, 2016, with Edward M. Weil, Jr. |
| | Consulting Agreement, dated as of October 11, 2016, by and between International Capital Markets Group, Inc. and Healthcare Trust, Inc. |
| | Fourth Amendment to Senior Secured Revolving Credit Agreement, dated as of October 20, 2016, by and among Healthcare Trust Operating Partnership, L.P., Healthcare Trust, Inc., KeyBank National Association, individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties, dated as of March 21, 2014. |
| | Master Credit Facility Agreement, dated as of October 31, 2016, by and among the borrowers party thereto and KeyBank National Association. | |
| | First Amendment to Master Credit Facility, dated April 26, 2017, by among the borrowers party thereto and KeyBank National Association
| |
| | Reaffirmation, Joinder and Second Amendment to Master Credit Facility, dated October 26, 2017, by among the borrowers party thereto and KeyBank National Association
| |
| | Master Credit Facility Agreement, dated as of October 31, 2016, by and among the borrowers party thereto and Capital One Multifamily Finance, LLC. |
| | Indemnification Agreement, dated December 27, 2016, with Lee M. Elman |
| | FifthReaffirmation, Joinder and First Amendment to Senior Secured RevolvingMaster Credit Agreement,Facility, dated as of February 24,March 30, 2017, by and among Healthcare Trust Operating Partnership, L.P., Healthcare Trust, Inc., KeyBank National Association, individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties, dated as of March 21, 2014borrowers party thereto and Capital One Multifamily Finance, LLC
| |
| | Purchase Agreement,Second Amendment to Master Credit Facility, dated as of June 16,October 26, 2017, by among the borrowers party thereto and among Healthcare Trust, Inc., Healthcare Trust Operating Partnership, L.P., ARHC TRS Holdco II,Capital One Multifamily Finance, LLC American Realty Capital Healthcare Trust III, Inc., American Realty Capital Healthcare Trust III Operating Partnership, L.P. and ARHC TRS Holdco III, LLC.
| |
| | Third Amendment to Master Credit Facility, dated March 2, 2018, by among the borrowers party thereto and Capital One Multifamily Finance, LLC
| |
| | | | | | | | | | | |
Exhibit No. | | Description | |
| | Amended and Restated Loan Agreement, dated as of June 30, 2017December 20, 2019, by and among the borrower entities party thereto, Capital One, National Association and the other lenders party thereto.thereto
| |
| | Amended and Restated Guaranty of Recourse Obligations, dated as of June 30, 2017December 20, 2019, by Healthcare Trust Operating Partnership, L.P. in favor of Capital One, National Association.Association
| |
| | Amended and Restated Hazardous Materials Indemnity Agreement, dated as of June 30, 2017December 20, 2019, by Healthcare Trust Operating Partnership, L.P. and the borrower entities party thereto, for the benefit of Capital One, National Association.Association
| |
| | First Amendment to Employee and Director Incentive Restricted Share Plan, Effective as of August 8, 2017. |
| | Amended and Restated Employee and Director Incentive Restricted Share Plan of Healthcare Trust, Inc., effective as of August 31, 2017. |
|
| | |
Exhibit No. | | Description |
| | Form of Restricted Stock Award Agreement Pursuant to the Amended and Restated Employee and Director Incentive Restricted Share Plan of Healthcare Trust, Inc. |
| | Sixth Amendment to Senior Secured Revolving Credit Agreement, dated as of October 20, 2017. |
| | Loan Agreement, dated as of December 28, 2017, among the borrower entities party thereto and Capital One, National Association. | |
| | Guaranty of Recourse Obligation, dated as of December 28, 2017, by Healthcare Trust Operating Partnership, L.P. in favor of Capital One, National Association. | |
| | Hazardous Materials Indemnity Agreement, dated as of December 28, 2017, by Healthcare Trust Operating Partnership, L.P. and the borrower entities party thereto, for the benefit of Capital One, National Association. | |
| | First Amendment to Master Credit Facility, Loan Agreement, dated as of April 26, 2017,10, 2018, by and among the borrowers party thereto, and KeyBank National Association,
as lender | |
| | Reaffirmation, Joinder and Second Amendment to Master Credit Facility,Promissory Note A -1, dated October 26, 2017,as of April 10, 2018, by amongthe borrowers party thereto in favor of KeyBank National
Association, as lender | |
| | Promissory Note A-2, dated as of April 10, 2018, by the borrowers party thereto in favor of KeyBank National Association, as lender | |
| | Guarantee Agreement, dated as of April 10, 2018, by Healthcare Trust Operating Partnership, L.P. in favor of KeyBank National Association, as lender | |
| | Environmental Indemnity Agreement, dated as of April 10, 2018, by the borrowers party thereto and Healthcare Trust Operating Partnership, L.P. in favor of KeyBank National Association,
as indemnitee | |
| | Reaffirmation, Joinder and First Amendment to Master Credit Facility, dated March 30, 2017, by among the borrowers party thereto and Capital One Multifamily Finance, LLC
Form of Indemnification Agreement | |
| | Amended and Restated Senior Secured Revolving Credit Agreement dated as of March 13, 2019 by and among Healthcare Trust Operating Partnership, L.P., KeyBank National Association and the other lender parties thereto
| |
| | First Amendment, dated March 24, 2020, to Amended and Restated Senior Secured Revolving Credit Agreement dated as of March 13, 2019 by and among Healthcare Trust Operating Partnership, L.P., KeyBank National Association and the other lender parties thereto | |
| | Second Amendment to MasterFirst Amended and Restated Senior Secured Credit Facility, dated October 26, 2017, byAgreement, entered into as of August 10, 2020, among Healthcare Trust Operating Partnership, L.P., Healthcare Trust, Inc., the borrowersother guarantor parties thereto, Keybank National Association and the other lenders party thereto and Capital One Multifamily Finance, LLC
thereto. | |
| | Third AmendmentLetter from KPMG LLP to Master Credit Facility,the Securities and Exchange Commission dated March 2, 2018, by among the borrowers party thereto and Capital One Multifamily Finance, LLC
18, 2019
| |
| | List of Subsidiaries of Healthcare Trust, Inc. | |
| | Consent of PricewaterhouseCoopers LLP | |
| | Consent of KPMG LLP | |
| | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| | Second Amended and Restated Share Repurchase Program of Healthcare Trust, Inc. | |
101 * | | XBRL (eXtensible Business Reporting Language). The following materials fromAmendment to Second Amended and Restated Share Repurchase Program of Healthcare Trust, Inc.'s Annual Report on Form 10-K for the annual period ended December 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations | |
| | Second Amendment to Second Amended and Comprehensive Loss, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash FlowsRestated Share Repurchase Program
| |
| | Third Amendment to Second Amended and (v) the NotesRestated Share Repurchase Program
| |
| | Fourth Amendment to the Consolidated Financial Statements.Second Amended and Restated Share Repurchase Program
| |
| | Fifth Amendment to Second Amended and Restated Share Repurchase Program
| |
| | | | | | | | | | | |
*Exhibit No. | Filed herewith |
Description | |
(1)101.INS * | Filed as an exhibit to | XBRL Instance Document - the Company’s Quarterly Report on Form 10-Q forinstance document does not appear in the quarter ended March 31, 2013 filed withInteractive Data File because its XBRL tags are embedded within the Securities and Exchange Commission on May 13, 2013. |
Inline XBRL document.
| |
(2)101.SCH * | Filed as an exhibit to the Company’s Quarterly Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission on March 7, 2014. |
XBRL Taxonomy Extension Schema Document.
| |
(3)101.CAL * | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the Securities and Exchange Commission on May 15, 2014. |
XBRL Taxonomy Extension Calculation Linkbase Document. | |
(4)101.DEF * | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the Securities and Exchange Commission on August 7, 2014. |
XBRL Taxonomy Extension Definition Linkbase Document. | |
(5)101.LAB * | Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 filed with the Securities and Exchange Commission on November 14, 2014. |
XBRL Taxonomy Extension Label Linkbase Document. | |
(6)101.PRE * | Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 15, 2015. |
XBRL Taxonomy Extension Presentation Linkbase Document. | |
(7)104 * | Filed as an exhibit to | Cover Page Interactive Data File - the Company's Quarterly Report on Form 10-Q forcover page interactive data file does not appear in the quarter ended June 30, 2015 filed withInteractive Data File because its XBRL tags are embedded within the Securities and Exchange Commission on August 12, 2015. |
Inline XBRL document. | |
(8) | Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 11, 2016. |
| |
(9) | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the Securities and Exchange Commission on August 15, 2016. |
________
| |
(10) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2016. |
| |
(11) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2016. |
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(12) | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed with the Securities and Exchange Commission on November 10, 2016. |
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(13) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2017. |
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(14) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2017. |
| |
(15) | Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 21, 2017. |
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(16) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2017. |
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(17) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2017. |
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(18) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2017. |
| |
(19) | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the Securities and Exchange Commission on August 14, 2017. |
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(20) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2017. |
| |
(21) | Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the Securities and Exchange Commission on November 14, 2017. |
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(22) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2018. |
(1)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2016.
(2)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the Securities and Exchange Commission on November 14, 2017.
(3)Filed as an exhibit to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on December 6, 2019.
(4)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 20, 2018.
(5)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on May 19, 2020.
(6)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2020.
(7)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the Securities and Exchange Commission on May 13, 2013.
(8)Filed as an exhibit to the Company’s Quarterly Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission on March 7, 2014.
(9)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2017.
(10)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2019.
(11)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2020.
(12)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2019.
(13)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2018.
(14)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 15, 2015.
(15)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the Securities and Exchange Commission on August 15, 2016.
(16)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed with the Securities and Exchange Commission on November 10, 2016.
(17)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 27, 2019.
(18)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2018.
(19)Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2018 filed with the Securities and Exchange Commission on August 3, 2018.
(20)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 14, 2019.
(21)Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 24, 2020.
(22)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2020.
(23)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2019.
(24)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2017.
(25)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019.
(26)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 27, 2019.
(27)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2019.
(28)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 21, 2019.
(29)Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2020.
Item 16. Form 10-K Summary.
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 19th29th day of March, 2018.
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| | | | | | | |
| HEALTHCARE TRUST, INC. |
| By | /s/ W. Todd JensenEdward M. Weil, Jr. |
| | W. Todd JensenEdward M. Weil, Jr. |
| | Chief Executive Officer and President
(and Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Name | | Capacity | | Date |
| | | | |
/s/ Leslie D. Michelson | | Non-Executive Chairman of the Board of Directors, Independent Director | | March 29, 2021 |
Leslie D. Michelson | | | | |
| | | | |
Name | | Capacity | | Date |
| | | | |
/s/ Leslie D. Michelson | | Non-Executive Chairman of the Board of Directors, Independent Director | | March 19, 2018 |
Leslie D. Michelson | | | | |
| | | | |
/s/ Katie P. Kurtz | | Chief Financial Officer, Treasurer and Secretary | | March 19, 201829, 2021 |
Katie P. Kurtz | | (and Principal Financial Officer and Principal Accounting Officer) | | |
| | | | |
/s/ Edward M. Weil, Jr. | | Chief Executive Officer, President and Director | | March 19, 201829, 2021 |
Edward M. Weil, Jr. | | (Principal Executive Officer) | | |
| | | | |
/s/ Elizabeth K. Tuppeny | | Independent Director | | March 19, 201829, 2021 |
Elizabeth K. Tuppeny | | | | |
| | | | |
/s/ Edward G. Rendell | | Independent Director | | March 19, 201829, 2021 |
Edward G. Rendell | | | | |
| | | | |
/s/ Lee M. Elman | | Independent Director | | March 19, 201829, 2021 |
Lee M. Elman | | | | |
| | | | |
/s/ B.J. Penn | | Independent Director | | March 29, 2021 |
B.J. Penn | | | | |
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Financial Statement Schedule: | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders
of Healthcare Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidatedbalance sheetsof Healthcare Trust, Inc.and its subsidiaries (the "Company"(the “Company”) as of December 31, 20172020 and 2016,2019,and the related consolidated statements of operations and comprehensive loss, of changes in equity and of cash flows for each of the years in the three-year periodthen ended, December 31, 2017, andincluding the related notes and financial statement schedule III (collectively,as of December 31, 2020 and for the "consolidatedyears ended December 31, 2020 and 2019listed in the accompanying index(collectively referred to as the “consolidated financial statements"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results ofitsoperations and itscash flows for each of the years in the three-year periodthen ended December 31, 2017, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
We also have audited the adjustments to the 2018 consolidated financial statements to retrospectively apply the stock dividends as described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2018 consolidated financial statements taken as a whole.
Basis for Opinion
These consolidatedfinancial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company’s consolidatedfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. fraud.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Purchase Price Allocations for Property Acquisitions
As described in Notes 2 and 3 to the consolidated financial statements, during the year ended December 31, 2020, the Company completed real estate acquisitions of $110.7 million. For acquired properties with leases classified as operating leases, management allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. Management utilizes various estimates, processes and information to determine the as-if vacant property value. Management estimates fair value using data from appraisals, comparable sales, discounted cash flow analysis and other methods. Fair value estimates are also made using significant assumptions such as capitalization rates, fair market lease rates, discount rates and land values per square foot. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases. Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the
Report of Independent Registered Public Accounting Firm
leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases.
The principal considerations for our determination that performing procedures relating to purchase price allocations for property acquisitions is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of tangible and intangible assets acquired and liabilities assumed; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to capitalization rates, fair market lease rates, discount rates and land values per square foot; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) reading the purchase agreements and lease documents; (ii) testing the completeness and accuracy of underlying data used by management in the fair value estimates, and (iii) testing management’s process for estimating the fair value of tangible and intangible assets acquired and liabilities assumed, including testing management’s projected cash flows and evaluating the accuracy of valuation outputs. Testing management’s process included evaluating the appropriateness of the valuation methods and reasonableness of the significant assumptions related to capitalization rates, fair market lease rates, discount rates and land values per square foot. Evaluating the reasonableness of the significant assumptions included considering whether these assumptions were consistent with external market data, comparable transactions, and evidence obtained in other areas of the audit. In conjunction with certain purchase price allocations, professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of certain assumptions utilized by management related to capitalization rates, fair market lease rates, discount rates and land values per square foot.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 29, 2021
We have served as the Company's auditor since 2019.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Healthcare Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the effects of the stock dividend described in Note 1, the consolidated statements of operations and comprehensive loss, changes in equity, and cash flows of Healthcare Trust, Inc. and subsidiaries (the Company) for the year ended December 31, 2018, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). The 2018 consolidated financial statements before the effects of the adjustments described in Note 1 are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the effects of the stock dividend described in Note 1, present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the effects of the stock dividend described in Note 1 and affecting per share amounts in the consolidated statements of operations and comprehensive loss, changes in equity, Note 2, Note 8 and Note 14, and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company'sCompany’s auditor since 2014.from 2014 to 2019.
Chicago, Illinois
March 19, 201813, 2019
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
ASSETS | | | | |
Real estate investments, at cost: | | | | |
Land | | $ | 212,651 | | | $ | 207,335 | |
Buildings, fixtures and improvements | | 2,133,057 | | | 2,004,116 | |
Acquired intangible assets | | 276,015 | | | 269,616 | |
Total real estate investments, at cost | | 2,621,723 | | | 2,481,067 | |
Less: accumulated depreciation and amortization | | (512,775) | | | (427,476) | |
Total real estate investments, net | | 2,108,948 | | | 2,053,591 | |
Assets held for sale | | 90 | | | 70,839 | |
Cash and cash equivalents | | 72,357 | | | 95,691 | |
Restricted cash | | 17,989 | | | 15,908 | |
Derivative assets, at fair value | | 13 | | | 392 | |
Straight-line rent receivable, net | | 23,322 | | | 21,182 | |
Operating lease right-of-use assets | | 13,912 | | | 14,351 | |
Prepaid expenses and other assets (including $1,278 and $394 due from related parties as of December 31, 2020 and 2019, respectively) | | 34,932 | | | 39,707 | |
Deferred costs, net | | 15,332 | | | 13,642 | |
Total assets | | $ | 2,286,895 | | | $ | 2,325,303 | |
LIABILITIES AND EQUITY | | | | |
Mortgage notes payable, net | | $ | 542,698 | | | $ | 528,284 | |
Credit facilities, net | | 674,551 | | | 605,269 | |
Market lease intangible liabilities, net | | 10,803 | | | 12,052 | |
Derivative liabilities, at fair value | | 38,389 | | | 5,305 | |
Accounts payable and accrued expenses (including $299 due to related parties as of December 31, 2020) | | 42,271 | | | 43,094 | |
Operating lease liabilities | | 9,155 | | | 9,133 | |
Deferred rent | | 6,914 | | | 8,521 | |
Distributions payable | | 742 | | | 6,901 | |
Total liabilities | | 1,325,523 | | | 1,218,559 | |
| | | | |
Stockholders’ Equity | | | | |
7.375% Series A cumulative redeemable perpetual preferred stock, $0.01 par value, 2,210,000 and 1,610,000 authorized as of December 31, 2020 and 2019, respectively; 1,610,000 issued and outstanding as of December 31, 2020 and 2019 | | 16 | | | 16 | |
Common stock, $0.01 par value, 300,000,000 shares authorized, 95,040,783 (including 1,265,037 shares paid as a stock dividend on January 15, 2021) and 92,356,664 shares of common stock issued and outstanding as of December 31, 2020 and 2019, respectively | | 938 | | | 923 | |
Additional paid-in capital | | 2,104,261 | | | 2,078,628 | |
Accumulated other comprehensive loss | | (39,673) | | | (7,043) | |
Distributions in excess of accumulated earnings | | (1,108,557) | | | (971,190) | |
Total stockholders’ equity | | 956,985 | | | 1,101,334 | |
Non-controlling interests | | 4,387 | | | 5,410 | |
Total equity | | 961,372 | | | 1,106,744 | |
Total liabilities and equity | | $ | 2,286,895�� | | | $ | 2,325,303 | |
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
ASSETS | | | | |
Real estate investments, at cost: | | | | |
Land | | $ | 201,427 |
| | $ | 187,868 |
|
Buildings, fixtures and improvements | | 1,955,940 |
| | 1,872,590 |
|
Construction in progress | | 72,007 |
| | 60,055 |
|
Acquired intangible assets | | 256,678 |
| | 234,749 |
|
Total real estate investments, at cost | | 2,486,052 |
| | 2,355,262 |
|
Less: accumulated depreciation and amortization | | (309,711 | ) | | (241,027 | ) |
Total real estate investments, net | | 2,176,341 |
| | 2,114,235 |
|
Cash and cash equivalents | | 94,177 |
| | 29,225 |
|
Restricted cash | | 8,411 |
| | 3,962 |
|
Assets held for sale | | 37,822 |
| | — |
|
Derivative assets, at fair value | | 2,550 |
| | 61 |
|
Straight-line rent receivable, net | | 15,327 |
| | 12,026 |
|
Prepaid expenses and other assets | | 22,099 |
| | 22,073 |
|
Deferred costs, net | | 15,134 |
| | 12,123 |
|
Total assets | | $ | 2,371,861 |
| | $ | 2,193,705 |
|
LIABILITIES AND EQUITY | | | | |
Mortgage notes payable, net | | $ | 406,630 |
| | $ | 142,754 |
|
Credit facilities | | 534,869 |
| | 481,500 |
|
Market lease intangible liabilities, net | | 18,829 |
| | 20,187 |
|
Accounts payable and accrued expenses (including $1,637 and $862 due to related parties as of December 31, 2017 and December 31, 2016, respectively) | | 38,112 |
| | 27,080 |
|
Deferred rent | | 6,201 |
| | 4,986 |
|
Distributions payable | | 11,161 |
| | 12,872 |
|
Total liabilities | | 1,015,802 |
| | 689,379 |
|
Stockholders' Equity | | | | |
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding as of December 31, 2017 and December 31, 2016 | | — |
| | — |
|
Common stock, $0.01 par value, 300,000,000 shares authorized, 91,002,766 and 89,368,899 shares of common stock issued and outstanding as of December 31, 2017 and December 31, 2016, respectively | | 910 |
| | 894 |
|
Additional paid-in capital | | 2,009,197 |
| | 1,981,136 |
|
Accumulated other comprehensive income | | 2,473 |
| | — |
|
Accumulated deficit | | (665,026 | ) | | (486,574 | ) |
Total stockholders' equity | | 1,347,554 |
| | 1,495,456 |
|
Non-controlling interests | | 8,505 |
| | 8,870 |
|
Total equity | | 1,356,059 |
| | 1,504,326 |
|
Total liabilities and equity | | $ | 2,371,861 |
| | $ | 2,193,705 |
|
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Revenue from tenants | | $ | 381,612 | | | $ | 374,914 | | | $ | 362,406 | |
| | | | | | |
Operating expenses: | | | | | | |
Property operating and maintenance | | 243,548 | | | 234,185 | | | 220,997 | |
Impairment charges | | 36,446 | | | 55,969 | | | 20,655 | |
Operating fees to related parties | | 23,922 | | | 23,414 | | | 23,071 | |
Acquisition and transaction related | | 173 | | | 362 | | | 302 | |
General and administrative | | 21,572 | | | 20,530 | | | 17,275 | |
Depreciation and amortization | | 81,053 | | | 81,032 | | | 83,212 | |
Total expenses | | 406,714 | | | 415,492 | | | 365,512 | |
Operating loss before gain (loss) on sale of real estate investments | | (25,102) | | | (40,578) | | | (3,106) | |
Gain (loss) on sale of real estate investments | | 5,230 | | | 8,790 | | | (70) | |
Operating loss | | (19,872) | | | (31,788) | | | (3,176) | |
Other income (expense): | | | | | | |
Interest expense | | (51,519) | | | (56,059) | | | (49,471) | |
Interest and other income | | 44 | | | 7 | | | 23 | |
Loss on non-designated derivatives | | (102) | | | (68) | | | (157) | |
Total other expenses | | (51,577) | | | (56,120) | | | (49,605) | |
Loss before income taxes | | (71,449) | | | (87,908) | | | (52,781) | |
Income tax expense | | (4,061) | | | (399) | | | (197) | |
Net loss | | (75,510) | | | (88,307) | | | (52,978) | |
Net (income) loss attributable to non-controlling interests | | (303) | | | 393 | | | 216 | |
Allocation for preferred stock | | (2,968) | | | (173) | | | 0 | |
Net loss attributable to common stockholders | | (78,781) | | | (88,087) | | | (52,762) | |
Other comprehensive income (loss): | | | | | | |
Unrealized (loss) gain on designated derivatives | | (32,630) | | | (11,625) | | | 2,109 | |
Comprehensive loss attributable to common stockholders | | $ | (111,411) | | | $ | (99,712) | | | $ | (50,653) | |
| | | | | | |
Weighted-average common shares outstanding — Basic and Diluted (1) | | 94,639,833 | | | 94,433,640 | | | 93,593,719 | |
Net loss per common share attributable to common stockholders — Basic and Diluted (1) | | $ | (0.83) | | | $ | (0.93) | | | $ | (0.56) | |
| | | | | | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Revenues: | | | | | | |
Rental income | | $ | 95,152 |
| | $ | 103,375 |
| | $ | 93,218 |
|
Operating expense reimbursements | | 16,605 |
| | 15,876 |
| | 12,759 |
|
Resident services and fee income | | 199,416 |
| | 183,177 |
| | 140,901 |
|
Contingent purchase price consideration | | — |
| | 138 |
| | 612 |
|
Total revenues | | 311,173 |
| | 302,566 |
| | 247,490 |
|
| | | | | | |
Operating expenses: | | | | | | |
Property operating and maintenance | | 186,277 |
| | 172,077 |
| | 125,573 |
|
Impairment charges | | 18,993 |
| | 389 |
| | — |
|
Operating fees to related parties | | 22,257 |
| | 20,583 |
| | 12,191 |
|
Acquisition and transaction related | | 2,986 |
| | 3,163 |
| | 14,679 |
|
General and administrative | | 15,673 |
| | 12,105 |
| | 9,733 |
|
Depreciation and amortization | | 77,641 |
| | 98,886 |
| | 120,924 |
|
Total expenses | | 323,827 |
| | 307,203 |
| | 283,100 |
|
Operating loss | | (12,654 | ) | | (4,637 | ) | | (35,610 | ) |
Other income (expense): | | | | | | |
Interest expense | | (30,264 | ) | | (19,881 | ) | | (10,356 | ) |
Interest and other income | | 306 |
| | 47 |
| | 582 |
|
Gain (loss) on non-designated derivatives | | (198 | ) | | 31 |
| | — |
|
Gain on sale of real estate investment | | 438 |
| | 1,330 |
| | — |
|
Gain on asset acquisition | | 307 |
| | — |
| | |
Gain on sale of investment securities | | — |
| | 56 |
| | 446 |
|
Total other expenses | | (29,411 | ) | | (18,417 | ) | | (9,328 | ) |
Loss before income taxes | | (42,065 | ) | | (23,054 | ) | | (44,938 | ) |
Income tax (expense) benefit | | (647 | ) | | 2,084 |
| | 2,978 |
|
Net loss | | (42,712 | ) | | (20,970 | ) | | (41,960 | ) |
Net income attributable to non-controlling interests | | 164 |
| | 96 |
| | 219 |
|
Net loss attributable to stockholders | | (42,548 | ) | | (20,874 | ) | | (41,741 | ) |
| | | | | | |
Other comprehensive income (loss): | | | | | | |
Unrealized gain on designated derivative | | 2,473 |
| | — |
| | — |
|
Unrealized gain (loss) on investment securities, net | | — |
| | 6 |
| | (469 | ) |
Comprehensive loss attributable to stockholders | | $ | (40,075 | ) | | $ | (20,868 | ) | | $ | (42,210 | ) |
| | | | | | |
Basic and diluted weighted-average shares outstanding | | 89,802,174 |
| | 87,878,907 |
| | 85,331,966 |
|
Basic and diluted net loss per share | | $ | (0.47 | ) | | $ | (0.24 | ) | | $ | (0.49 | ) |
Distributions declared per share | | $ | 1.51 |
| | $ | 1.70 |
| | $ | 1.70 |
|
(1) Retroactively adjusted for the effects of the Stock Dividends (see Note 1).
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except for share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | Accumulated Other Comprehensive Income | | | | | | | | |
| Number of Shares | | Par Value | | Number of Shares | | Par Value | | Additional Paid-in Capital | | | Distributions in Excess of Accumulated Earnings | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance, December 31, 2017 | 0 | | | $ | 0 | | | 91,002,766 | | | $ | 910 | | | $ | 2,009,197 | | | $ | 2,473 | | | $ | (665,026) | | | $ | 1,347,554 | | | $ | 8,505 | | | $ | 1,356,059 | |
Common stock issued through distribution reinvestment plan | — | | | — | | | 1,720,633 | | | 17 | | | 35,720 | | | — | | | — | | | 35,737 | | | — | | | 35,737 | |
Common stock repurchases | — | | | — | | | (759,867) | | | (8) | | | (14,194) | | | — | | | — | | | (14,202) | | | 0 | | | (14,202) | |
Share-based compensation, net | — | | | — | | | 0 | | | 0 | | | 1,244 | | | — | | | — | | | 1,244 | | | — | | | 1,244 | |
Distributions declared on common stock, $0.92 per share (1) | — | | | — | | | — | | | — | | | — | | | — | | | (86,543) | | | (86,543) | | | — | | | (86,543) | |
Distributions to non-controlling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (492) | | | (492) | |
Unrealized gain on designated derivative | — | | | — | | | — | | | — | | | — | | | 2,109 | | | — | | | 2,109 | | | — | | | 2,109 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (52,762) | | | (52,762) | | | (216) | | | (52,978) | |
Balance, December 31, 2018 | 0 | | | 0 | | | 91,963,532 | | | 919 | | | 2,031,967 | | | 4,582 | | | (804,331) | | | 1,233,137 | | | 7,797 | | | 1,240,934 | |
Impact of adoption of ASC 842 | — | | | — | | | — | | | — | | | — | | | — | | | (87) | | | (87) | | | — | | | (87) | |
Issuance of Preferred Stock, net | 1,610,000 | | | 16 | | | — | | | — | | | 37,601 | | | — | | | — | | | 37,617 | | | — | | | 37,617 | |
Common stock issued through distribution reinvestment plan | — | | | — | | | 1,481,395 | | | 15 | | | 27,195 | | | — | | | — | | | 27,210 | | | — | | | 27,210 | |
Common stock repurchases | — | | | — | | | (1,103,263) | | | (11) | | | (21,102) | | | — | | | — | | | (21,113) | | | — | | | (21,113) | |
Share-based compensation, net | — | | | — | | | 15,000 | | | — | | | 1,319 | | | — | | | — | | | 1,319 | | | — | | | 1,319 | |
Distributions declared on common stock, $0.83 per share (1) | — | | | — | | | — | | | — | | | — | | | — | | | (78,685) | | | (78,685) | | | — | | | (78,685) | |
Preferred stock dividends declared, $0.11 per share | — | | | — | | | — | | | — | | | — | | | — | | | (173) | | | (173) | | | — | | | (173) | |
Distributions to non-controlling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (346) | | | (346) | |
Unrealized loss on designated derivative | — | | | — | | | — | | | — | | | — | | | (11,625) | | | — | | | (11,625) | | | — | | | (11,625) | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (87,914) | | | (87,914) | | | (393) | | | (88,307) | |
Rebalancing of ownership percentage | — | | | — | | | — | | | — | | | 1,648 | | | — | | | — | | | 1,648 | | | (1,648) | | | |
Balance, December 31, 2019 | 1,610,000 | | | 16 | | | 92,356,664 | | | 923 | | | 2,078,628 | | | (7,043) | | | (971,190) | | | 1,101,334 | | | 5,410 | | | 1,106,744 | |
Issuance of Preferred Stock, net | — | | | — | | | — | | | — | | | (59) | | | — | | | — | | | (59) | | | — | | | (59) | |
Common stock issued through distribution reinvestment plan | — | | | — | | | 875,986 | | | 9 | | | 14,595 | | | — | | | — | | | 14,604 | | | — | | | 14,604 | |
Common stock repurchases | — | | | — | | | (705,101) | | | (7) | | | (10,539) | | | — | | | — | | | (10,546) | | | — | | | (10,546) | |
Share-based compensation, net | — | | | — | | | 0 | | | — | | | 1,345 | | | — | | | — | | | 1,345 | | | — | | | 1,345 | |
Distributions declared in common stock, $0.21 per share (1) | — | | | — | | | 1,248,197 | | | 13 | | | 19,646 | | | — | | | (19,659) | | | 0 | | | — | | | 0 | |
Distributions declared in cash on common stock, $0.42 per share (1) | — | | | — | | | — | | | — | | | — | | | — | | | (38,839) | | | (38,839) | | | — | | | (38,839) | |
Preferred stock dividends declared, $1.84 per share | — | | | — | | | — | | | — | | | — | | | — | | | (2,968) | | | (2,968) | | | — | | | (2,968) | |
Distributions to non-controlling interest holders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (201) | | | (201) | |
Unrealized loss on designated derivative | — | | | — | | | — | | | — | | | — | | | (32,615) | | | — | | | (32,615) | | | — | | | (32,615) | |
Buyout of NCI | — | | | — | | | — | | | — | | | | | — | | | (88) | | | (88) | | | (495) | | | (583) | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (75,813) | | | (75,813) | | | 303 | | | (75,510) | |
Rebalancing of ownership percentage | — | | | — | | | — | | | — | | | 645 | | | (15) | | | | | 630 | | | (630) | | | 0 | |
Balance, December 31, 2020 | 1,610,000 | | | $ | 16 | | | 93,775,746 | | | $ | 938 | | | $ | 2,104,261 | | | $ | (39,673) | | | $ | (1,108,557) | | | $ | 956,985 | | | $ | 4,387 | | | $ | 961,372 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Accumulated Other Comprehensive Income | | | | | | | | |
| Number of Shares | | Par Value | | Additional Paid-in Capital | | | Accumulated Deficit | | Total Stockholders' Equity | | Non-controlling Interests | | Total Equity |
Balance, December 31, 2014 | 83,718,853 |
| | $ | 837 |
| | $ | 1,850,169 |
| | $ | 463 |
| | $ | (129,406 | ) | | $ | 1,722,063 |
| | $ | 10,114 |
| | $ | 1,732,177 |
|
Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Common stock issued through distribution reinvestment plan | 3,305,297 |
| | 33 |
| | 78,469 |
| | — |
| | — |
| | 78,502 |
| | — |
| | 78,502 |
|
Common stock repurchases | (894,338 | ) | | (9 | ) | | (21,151 | ) | | — |
| | — |
| | (21,160 | ) | | — |
| | (21,160 | ) |
Equity-based compensation, net | 5,599 |
| | — |
| | 60 |
| | — |
| | — |
| | 60 |
| | — |
| | 60 |
|
Distributions declared | — |
| | — |
| | — |
| | — |
| | (145,137 | ) | | (145,137 | ) | | — |
| | (145,137 | ) |
Contributions from non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 500 |
| | 500 |
|
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (698 | ) | | (698 | ) |
Unrealized loss on investments | — |
| | — |
| | — |
| | (469 | ) | | — |
| | (469 | ) | | — |
| | (469 | ) |
Net loss | — |
| | — |
| | — |
| | — |
| | (41,741 | ) | | (41,741 | ) | | (219 | ) | | (41,960 | ) |
Balance, December 31, 2015 | 86,135,411 |
| | 861 |
| | 1,907,549 |
| | (6 | ) | | (316,284 | ) | | 1,592,120 |
| | 9,697 |
| | 1,601,817 |
|
Common stock issued through distribution reinvestment plan | 3,234,746 |
| | 33 |
| | 73,597 |
| | — |
| | — |
| | 73,630 |
| | — |
| | 73,630 |
|
Common stock repurchases | (6,660 | ) | | — |
| | (170 | ) | | — |
| | — |
| | (170 | ) | | — |
| | (170 | ) |
Equity-based compensation, net | 5,402 |
| | — |
| | 160 |
| | — |
| | — |
| | 160 |
| | — |
| | 160 |
|
Distributions declared | — |
| | — |
| | — |
| | — |
| | (149,416 | ) | | (149,416 | ) | | — |
| | (149,416 | ) |
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (731 | ) | | (731 | ) |
Unrealized gain on investments | — |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 6 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (20,874 | ) | | (20,874 | ) | | (96 | ) | | (20,970 | ) |
Balance, December 31, 2016 | 89,368,899 |
| | 894 |
| | 1,981,136 |
| | — |
| | (486,574 | ) | | 1,495,456 |
| | 8,870 |
| | 1,504,326 |
|
Common stock issued through distribution reinvestment plan | 2,813,635 |
| | 28 |
| | 61,178 |
| | — |
| | — |
| �� | 61,206 |
| | — |
| | 61,206 |
|
Common stock repurchases | (1,554,768 | ) | | (16 | ) | | (33,583 | ) | | — |
| | — |
| | (33,599 | ) | | (28 | ) | | (33,627 | ) |
Equity-based compensation, net | 375,000 |
| | 4 |
| | 466 |
| | — |
| | — |
| | 470 |
| | — |
| | 470 |
|
Distributions declared | — |
| | — |
| | — |
| | — |
| | (135,904 | ) | | (135,904 | ) | | — |
| | (135,904 | ) |
Contributions from non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 472 |
| | 472 |
|
Distributions to non-controlling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (645 | ) | | (645 | ) |
Unrealized gain on designated derivative | — |
| | — |
| | — |
| | 2,473 |
| | — |
| | 2,473 |
| | — |
| | 2,473 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (42,548 | ) | | (42,548 | ) | | (164 | ) | | (42,712 | ) |
Balance, December 31, 2017 | 91,002,766 |
| | $ | 910 |
| | $ | 2,009,197 |
| | $ | 2,473 |
| | $ | (665,026 | ) | | $ | 1,347,554 |
| | $ | 8,505 |
| | $ | 1,356,059 |
|
(1) Per share amounts retroactively adjusted for the effects of the Stock Dividends.
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (75,510) | | | $ | (88,307) | | | $ | (52,978) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 81,053 | | | 81,032 | | | 83,212 | |
Amortization (including write-offs) of deferred financing costs | | 4,059 | | | 9,171 | | | 8,633 | |
Amortization of terminated swap | | 846 | | | 0 | | | 0 | |
Amortization of mortgage premiums and discounts, net | | 60 | | | (162) | | | (263) | |
(Accretion) amortization of market lease and other intangibles, net | | (80) | | | (4) | | | 255 | |
Bad debt expense | | 2,708 | | | 6,464 | | | 14,797 | |
Equity-based compensation | | 1,345 | | | 1,319 | | | 1,244 | |
Loss (gain) on non-designated derivative instruments | | 102 | | | 68 | | | 157 | |
(Gain) loss on sales of real estate investments, net | | (5,230) | | | (8,790) | | | 70 | |
Impairment charges | | 36,446 | | | 55,969 | | | 20,655 | |
Deferred tax valuation allowance | | 4,641 | | | 0 | | | 0 | |
Changes in assets and liabilities: | | | | | | |
Straight-line rent receivable | | (2,409) | | | (3,831) | | | (7,744) | |
Prepaid expenses and other assets | | (63) | | | (9,667) | | | (16,888) | |
Accounts payable, accrued expenses and other liabilities | | (4,554) | | | 2,632 | | | 2,191 | |
Deferred rent | | (1,607) | | | 1,510 | | | 810 | |
Net cash provided by operating activities | | 41,807 | | | 47,404 | | | 54,151 | |
Cash flows from investing activities: | | | | | | |
Property acquisitions and development costs | | (94,984) | | | (91,998) | | | (128,056) | |
| | | | | | |
| | | | | | |
| | | | | | |
Capital expenditures and other assets acquired | | (21,892) | | | (16,719) | | | (12,910) | |
Proceeds from sales of real estate investments | | 34,385 | | | 62,468 | | | 25,903 | |
Net cash used in investing activities | | (82,491) | | | (46,249) | | | (115,063) | |
Cash flows from financing activities: | | | | | | |
Payments on credit facilities | | (26,091) | | | (368,300) | | | (80,000) | |
Proceeds from credit facilities | | 95,000 | | | 225,618 | | | 147,753 | |
Proceeds from term loan | | 0 | | | 150,000 | | | 0 | |
Proceeds from mortgage notes payable | | 0 | | | 136,513 | | | 118,700 | |
Payments on mortgage notes payable | | (1,048) | | | (67,797) | | | (63,263) | |
Payments for derivative instruments | | (97) | | | (2,147) | | | (131) | |
Payments of deferred financing costs | | (2,241) | | | (19,532) | | | (3,354) | |
Proceeds from issuance of preferred stock, net | | (1,016) | | | 37,617 | | | 0 | |
Common stock repurchases | | (10,539) | | | (21,113) | | | (14,202) | |
Distributions paid on common stock | | (31,354) | | | (51,427) | | | (55,329) | |
Dividends paid on preferred stock | | (2,399) | | | 0 | | | 0 | |
Buyout of non-controlling interest holders | | (583) | | | 0 | | | 0 | |
Distributions to non-controlling interest holders | | (201) | | | (346) | | | (492) | |
Net cash, provided by financing activities | | 19,431 | | | 19,086 | | | 49,682 | |
Net change in cash, cash equivalents and restricted cash | | (21,253) | | | 20,241 | | | (11,230) | |
Cash, cash equivalents and restricted cash, beginning of year | | 111,599 | | | 91,358 | | | 102,588 | |
Cash, cash equivalents and restricted cash, end of year | | $ | 90,346 | | | $ | 111,599 | | | $ | 91,358 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (42,712 | ) | | $ | (20,970 | ) | | $ | (41,960 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 77,641 |
| | 98,886 |
| | 120,924 |
|
Amortization of deferred financing costs | | 6,170 |
| | 4,523 |
| | 3,737 |
|
Amortization of mortgage premiums and discounts, net | | (1,576 | ) | | (1,937 | ) | | (1,933 | ) |
Amortization of market lease and other intangibles, net | | 236 |
| | 168 |
| | (101 | ) |
Bad debt expense | | 12,413 |
| | 15,425 |
| | 7,291 |
|
Equity-based compensation | | 470 |
| | 160 |
| | 60 |
|
Gain on sale of investment securities | | — |
| | (56 | ) | | (446 | ) |
Gain on non-designated derivative instruments | | 198 |
| | (31 | ) | | — |
|
Gain on sales of real estate investments, net | | (438 | ) | | (941 | ) | | — |
|
Impairment of held-for-use investments | | 18,993 |
| | — |
| | — |
|
Changes in assets and liabilities: | | | | | | |
Straight-line rent receivable | | (6,242 | ) | | (8,210 | ) | | (12,535 | ) |
Prepaid expenses and other assets | | (10,345 | ) | | (9,467 | ) | | (12,893 | ) |
Accounts payable, accrued expenses and other liabilities | | 8,688 |
| | 545 |
| | 5,203 |
|
Deferred rent | | 471 |
| | 630 |
| | 1,333 |
|
Net cash provided by operating activities | | 63,967 |
| | 78,725 |
| | 68,680 |
|
Cash flows from investing activities: | | | | | | |
Investments in real estate | | (188,928 | ) | | (38,746 | ) | | (570,134 | ) |
Deposits returned for unconsummated acquisitions | | 50 |
| | — |
| | 1,000 |
|
Deposit received for unconsummated disposition | | 1,125 |
| | 100 |
| | — |
|
Capital expenditures | | (8,278 | ) | | (7,476 | ) | | (6,885 | ) |
Purchases of investment securities | | — |
| | — |
| | (93 | ) |
Proceeds from sales of investment securities | | — |
| | 1,140 |
| | 19,278 |
|
Proceeds from sales of real estate investments | | 757 |
| | 25,890 |
| | — |
|
Proceeds from asset acquisition | | 865 |
| | — |
| | — |
|
Net cash used in investing activities | | (194,409 | ) | | (19,092 | ) | | (556,834 | ) |
Cash flows from financing activities: | | | | |
| | |
Proceeds from credit facilities | | 380,170 |
| | 106,500 |
| | 440,000 |
|
Repayments of credit facility borrowings | | (326,800 | ) | | (55,000 | ) | | (10,000 | ) |
Proceeds from mortgage notes payable | | 336,897 |
| | — |
| | — |
|
Payments on mortgage notes payable | | (65,335 | ) | | (15,650 | ) | | (6,389 | ) |
Payments for undesignated derivative instruments | | (214 | ) | | (30 | ) | | — |
|
Payments of deferred financing costs | | (14,388 | ) | | (3,040 | ) | | (13,283 | ) |
Proceeds from issuance of common stock | | — |
| | — |
| | 6 |
|
Common stock repurchases | | (33,599 | ) | | (12,184 | ) | | (10,413 | ) |
Payments of offering costs and fees related to common stock issuances | | — |
| | — |
| | (629 | ) |
Distributions paid | | (76,717 | ) | | (75,432 | ) | | (66,214 | ) |
Contributions from non-controlling interest holders | | 472 |
| | — |
| | 500 |
|
Distributions to non-controlling interest holders | | (643 | ) | | (731 | ) | | (698 | ) |
Net cash provided by (used in) financing activities | | 199,843 |
| | (55,567 | ) | | 332,880 |
|
Net change in cash, cash equivalents and restricted cash | | 69,401 |
| | 4,066 |
| | (155,274 | ) |
Cash, cash equivalents and restricted cash, beginning of year | | 33,187 |
| | 29,121 |
| | 184,395 |
|
Cash, cash equivalents and restricted cash, end of year | | $ | 102,588 |
| | $ | 33,187 |
| | $ | 29,121 |
|
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Cash, cash equivalents, end of period | | $ | 72,357 | | | $ | 95,691 | | | $ | 77,264 | |
Restricted cash, end of period | | 17,989 | | | 15,908 | | | 14,094 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 90,346 | | | $ | 111,599 | | | $ | 91,358 | |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 47,878 | | | $ | 47,621 | | | $ | 43,266 | |
Cash paid for income taxes | | 315 | | | 447 | | | 407 | |
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
Common stock issued through distribution reinvestment plan | | $ | 14,604 | | | $ | 27,210 | | | $ | 35,737 | |
Common stock issued through stock dividends | | 19,659 | | | 0 | | | 0 | |
Accrued capital expenditures (payable) | | 1,287 | | | 0 | | | 0 | |
Mortgage assumed in acquisition | | 13,883 | | | 0 | | | 0 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 26,097 |
| | $ | 18,512 |
| | $ | 7,867 |
|
Cash paid for income taxes | | 28 |
| | 339 |
| | 374 |
|
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
Common stock issued through distribution reinvestment plan | | 61,206 |
| | 73,630 |
| | 78,502 |
|
Accrued repurchases included in accounts payable and accrued expenses | | — |
| | — |
| | 12,014 |
|
Assumption of mortgage notes payable used to acquire investments in real estate | | 4,897 |
| | — |
| | 100,058 |
|
Premiums and discounts on assumed mortgage notes payable | | — |
| | — |
| | 1,492 |
|
Liabilities assumed in real estate acquisitions | | 1,056 |
| | — |
| | 882 |
|
Asset acquisition (inflows/outflows from operations) | | 416 |
| | — |
| | — |
|
Asset acquisition (inflows/outflows from investing activity) | | (723 | ) | | — |
| | — |
|
Asset acquisition gain | | 307 |
| | — |
| | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
Note 1 — Organization
Healthcare Trust, Inc. (including, as required by context, Healthcare Trust Operating Partnership, L.P. (the "OP") and its subsidiaries, the "Company") invests in healthcare real estate, focusing on seniors housing and medical office buildings ("MOB"), located in the United States for investment purposes. As of December 31, 2017, the Company owned 185 properties located in 30 states and comprised of 9.0 million rentable square feet.
The Company which was incorporated on October 15, 2012, is a Maryland corporation that elected and qualified to be taxed as aan externally managed real estate investment trust for U.S. federal income tax purposes ("REIT"(“REIT”) beginning with its taxable year endedthat focuses on acquiring and managing a diversified portfolio of healthcare-related real estate, focused on medical office buildings (“MOBs”), healthcare properties leased on a triple-net basis (“NNN properties”) and senior housing operating properties (“SHOPs”). As of December 31, 2013. 2020, the Company owned 193 properties located in 31 states and comprised of 9.4 million rentable square feet.
Substantially all of the Company'sCompany’s business is conducted through the OP.
In February 2013, the Company commencedHealthcare Trust Operating Partnership, L.P. (the “OP”), a Delaware limited partnership, and its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to $1.7 billion of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts.wholly owned subsidiaries. The Company closed its IPO in November 2014 and as of such date the Company had received cumulative proceeds of $2.0 billion from its IPO. As of December 31, 2017, the Company has received total proceeds of $2.2 billion, net of shares repurchased under the Share Repurchase Program (as amended, the "SRP") (see Note 8 — Common Stock) and including $256.3 million in proceeds received under the DRIP.On April 7, 2016 (the "NAV Pricing Date"), the Board approved an estimate of per share net asset value ("NAV"). On March 30, 2017, the Board approved an updated estimate of per-share net asset value ("Estimated Per-Share NAV") as of December 31, 2016. Subsequent valuations will occur periodically, at the discretion of the Board, provided that such estimates will be made at least annually. Pursuant to the DRIP, the Company's stockholders can elect to reinvest distributions by purchasing shares of the Company's common stock. Prior to the NAV Pricing Date, the Company offered shares pursuant to the DRIP at $23.75 per share, which was 95% of the initial offering price of shares of common stock in the IPO. Effective April 7, 2016, the Company began offering shares pursuant to the DRIP at the then-current NAV approved by the Board (see Note 8 — Common Stock).The Company has no employees.Company’s advisor, Healthcare Trust Advisors, LLC (the "Advisor"“Advisor”) has been retained bymanages our day-to-day business with the Company to manage the Company's affairs on a day-to-day basis. The Company has retainedassistance of our property manager, Healthcare Trust Properties, LLC (the "Property Manager"“Property Manager”) to serve as the Company's property manager.. The Company’s Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to (“AR Capital, LLC, "AR Global"Global”), the parent of the Company's sponsor, American Realty Capital VII, LLC (the "Sponsor"), as a result of which they areand these related parties and each have received or will receive compensation and fees and expense reimbursements fromfor providing services to us. The Company also reimburses these entities for certain expenses they incur in providing these services to the Company for services related to managing its business. The Advisor,Company. Healthcare Trust Special Limited Partnership, LLC (the "Special“Special Limited Partner"Partner”), which is also under common control with AR Global, also has an interest in the Company through ownership of interests in the OP.
The Company has declared quarterly dividends entirely in shares of its common stock equal to 0.01349 shares of common stock on each share of outstanding common stock (“Stock Dividends”) on October 1, 2020 and Property Manager alsoJanuary 4, 2021. These Stock Dividends were issued on October 15, 2020 and January 15, 2021 to holders of record of common stock at the close of business on October 8, 2020 and January 11, 2021, respectively. Dividends payable entirely in shares of common stock are treated in a fashion similar to a stock split for accounting purposes specifically related to per-share calculations for the current and prior periods. The aggregate impact of these Stock Dividends on the Company’s weighted-average share amounts used in its per-share calculations was an increase of 0.02716 shares, cumulatively, for every one share of common stock. NaN additional shares, except for the Stock Dividends, were issued during the three months ended December 31, 2020. References made to weighted-average shares and per-share amounts in the accompanying consolidated statements of operations and comprehensive income have received orbeen retroactively adjusted to reflect the increase of 0.02716 shares for every share outstanding due to the Stock Dividends. Additionally, other references to weighted-average shares outstanding and per-share amounts have been retroactively adjusted for the Stock Dividends and are noted as such throughout the accompanying financial statements and footnotes.
On April 3, 2020, the Company published a new estimate of per-share net asset value (“Estimated Per-Share NAV”) as of December 31, 2019. The Company’s previous Estimated Per-Share NAV was as of December 31, 2018. Unlike the per share amounts in this Annual Report on Form 10-K, the Estimated Per-Share NAV has not been retroactively adjusted to reflect the payment of dividends in the form of common stock and will not be adjusted for Stock Dividends the Company pays in the future until the Board determines a new Estimated Per-Share NAV. Paying dividends in additional shares of common stock will, all things equal, cause the value of each share to decline because the number of shares outstanding will increase when Stock Dividends are paid; however, because each stockholder will receive compensation, fees and expense reimbursements relatedthe same number of new shares, the total value of our common stockholders’ investment, all things equal, will not change assuming no sales or other transfers. We intend to publish Estimated Per-Share NAV periodically at the investment and managementdiscretion of the Company's assets.board of directors (the “Board”), provided that such estimates will be made at least once annually.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”).
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation, including amounts within rental income, resident services and fee income, cash flows from operating activities and cash flows from financing.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has controlling financial interests. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests as of and during the period consolidated.subsidiaries. All inter-company accounts and transactions have beenare eliminated in consolidation.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity's expected losses or receive portions of the entity's expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity ("VIE"). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity's economic performance or (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE's operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company's ability to direct the activities that most significantly impact the entity's economic performance, its form of ownership interest, its representation on the entity's governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards set forth in GAAP. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, powerauthority to make decisions and contractual and substantive participating rights of the partners/other partners or members as well as whether the entity is a VIEvariable interest entity (“VIE”) for which the Company is the primary beneficiary.
The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company'sCompany’s assets and liabilities are held by the OP.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, real estate taxes,impairments, fair value measurements and income taxes, as applicable.
Out-of-Period Adjustments
During the year ended December 31, 2019, the Company identified certain historical errors in its tax provision and its net deferred taxes asset as well as its statements of operations and comprehensive income (loss), consolidated statements of changes in equity, and statements of cash flows since 2014, which impacted the quarterly financial statements and annual periods previously issued. Specifically, the Company had overstated intercompany rent on certain leases with the taxable REIT subsidiary (“TRS”) and reflected a portion of depreciation on REIT assets in the TRS’s tax provision, thereby overstating previously recorded tax benefits, deferred tax assets and net income by $0.8 million, $0.3 million and $0.2 million for the years ended December 31, 2018, 2017 and for Pre-2017 periods, respectively. The intercompany rent and allocation of depreciation only affected the tax provision and did not affect the pre-tax consolidated financial results. The Company concluded that the errors noted above were not material for the period ended December 31, 2019 or any prior periods and has adjusted the amounts on a cumulative basis in 2019.
During the year ended December 31, 2019, the Company did 0t record quarterly interest expense related to borrowings under the Revolving Credit Facility (as defined below) that were borrowed and repaid during the fourth quarter of 2019. The amount of interest expense and related payable that should have been recorded was $0.3 million. In 2020, the Company identified that the cumulative interest payable balance was understated, and as a result a true up entry was recorded to record the payable and related expense, resulting in an out of period adjustment. The Company concluded that the errors noted above were not material for the period ended December 31, 2019 or any prior periods and has adjusted the amounts on a cumulative basis in 2020.
Impacts of the COVID-19 Pandemic
During the first quarter of 2020, the global COVID-19 pandemic that has spread around the world and to every state in the United States commenced. The pandemic has had and could continue to have an adverse impact on economic and market conditions, including a global economic slowdown and recession that may continue for some time. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of December 31, 2020, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of December 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.
Starting in March 2020, the COVID-19 pandemic and measures to prevent its spread began to affect the Company in a number of ways. In the Company’s SHOP portfolio, occupancy has trended lower since the second half of March as government policies and implementation of infection control best practices have materially limited or closed communities to new resident move-ins which affects the Company’s ability to fill vacancies. The Company has also continued to experience lower inquiry volumes and reduced in-person tours during the pandemic. In addition, starting in mid-March 2020, operating costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as the Company’s operators took appropriate actions to protect residents and caregivers. At the SHOP facilities, the Company bears these cost increases. These trends accelerated during the second, third, and fourth quarters of 2020 and into the beginning of the first quarter of 2021 as the surge of new COVID-19 cases that started in late 2020 crested, and may continue to impact the Company in the future and have a material adverse effect on the Company’s revenues and income in the other quarters thereafter.
The financial stability and overall health of the Company’s tenants is critical to its business. The negative effects that the global pandemic has had on the economy includes the closure or reduction in activity of some of the Company’s MOBs and other healthcare-related facilities as well as restrictions on activity and access for many of the Company’s seniors housing properties. The economic impact of the pandemic has impacted the ability of some of the Company’s tenants to pay their monthly rent either temporarily or in the long term. The Company experienced delays in rent collections in the second, third and fourth quarters of 2020 although collections have been approximately 100%. The Company has taken a proactive approach
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
to achieve mutually agreeable solutions with its tenants and in some cases, during the year ended December 31, 2020, the Company executed lease amendments providing for deferral of rent.
For accounting purposes, in accordance with ASC 842: Leases, normally a company would be required to assess a lease modification to determine if the lease modification should be treated as a separate lease and if not, modification accounting would be applied which would require a company to reassess the classification of the lease (including leases for which the prior classification under ASC 840 was retained as part of the election to apply the package of practical expedients allowed upon the adoption of ASC 842, which doesn’t apply to leases subsequently modified). However, in light of the COVID-19 pandemic in which many leases are being modified, the FASB and SEC have provided relief that allows companies to make a policy election as to whether they treat COVID-19 related lease amendments as a provision included in the pre-concession arrangement, and therefore, not a lease modification, or to treat the lease amendment as a modification. In order to be considered COVID-19 related, cash flows must be substantially the same or less than those prior to the concession. For COVID-19 relief qualified changes, there are two methods to potentially account for such rent deferrals or abatements under the relief, (1) as if the changes were originally contemplated in the lease contract or (2) as if the deferred payments are variable lease payments contained in the lease contract.
For all other lease changes that did not qualify for FASB relief, the Company is required to apply modification accounting including assessing classification under ASC 842. Some, but not all of the Company’s lease modifications qualify for the FASB relief. In accordance with the relief provisions, instead of treating these qualifying leases as modifications, the Company has elected to treat the modifications as if previously contained in the lease and recast rents receivable prospectively (if necessary). Under that accounting, for modifications that were deferrals only, there would be no impact on overall rental revenue and for any abatement amounts that reduced total rent to be received, the impact would be recognized ratably over the remaining life of the lease. For leases not qualifying for this relief, the Company has applied modification accounting and determined that there were no changes in the current classification of its leases impacted by negotiations with its tenants.
The Company has taken precautionary steps to increase liquidity and preserve financial flexibility in light of the uncertainty resulting from the COVID-19 pandemic. These steps include borrowing an additional $95.0 million under the Credit Facility (as defined below) in March 2020 to provide more cash on the Company’s balance sheet. A portion of the $95.0 million in borrowings was used for general corporate purposes and for acquisitions. The Company has not borrowed additional amounts subsequently. In August 2020, the Company amended the Credit Facility as part of its efforts to continue addressing the adverse impacts of the COVID-19 pandemic. For additional information on the Credit Facility amendment see Note 5— Credit Facilities. Revenue Recognition
The Company’s revenues, which are derived primarily from lease contracts, include rent received from tenants in MOBs and triple-net leased healthcare facilities. As of December 31, 2020, these leases had a weighted average remaining lease term of 6.5 years. Rent from tenants in the Company’s MOB and triple-net leased healthcare facilities operating segments (as discussed below) is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable for, and include in revenue from tenants on a straight-line basis, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease modification is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. Pursuant to certain of the Company’s lease agreements, tenants are required to reimburse the Company for certain property operating expenses, in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties. Under ASC 842, the Company has elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For expenses paid directly by the tenant, under both ASC 842 and 840, the Company has reflected them on a net basis.
The Company’s revenues also include resident services and fee income primarily related to rent derived from lease contracts with residents in the Company’s SHOPs held using a structure permitted under the REIT Investment and Diversification and Empowerment Act of 2007 and to fees for ancillary services performed for SHOP residents, which are generally variable in nature. Rental income from residents in the Company’s SHOP segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Also included in revenue from tenants is fees
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
for ancillary revenue from non-residents of $13.3 million, $15.4 million and $8.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. Fees for ancillary services are recorded in the period in which the services are performed.
The Company defers the revenue related to lease payments received from tenants and residents in advance of their due dates. Pursuant to certain of the Company’s lease agreements, tenants are required to reimburse the Company for certain property operating expenses related to non-SHOP assets (recorded in revenue from tenants), in addition to paying base rent, whereas under certain other lease agreements, the tenants are directly responsible for all operating costs of the respective properties.
The following table presents future base rent payments on a cash basis due to the Company as of December 31, 2020 over the next five years and thereafter. These amounts exclude tenant reimbursements and contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items. These amounts also exclude SHOP leases which are short-term in nature.
| | | | | | | | |
(In thousands) | | Future Base Rent Payments |
2021 | | $ | 94,144 | |
2022 | | 87,762 | |
2023 | | 75,205 | |
2024 | | 68,210 | |
2025 | | 58,757 | |
Thereafter | | 165,642 | |
Total | | $ | 549,720 | |
The Company continually reviews receivables related to rent and unbilled rents receivable and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Under the leasing standards (see the “Recently Issued Accounting Pronouncements” section below), the Company is required to assess, based on credit risk only, if it is probable that the Company will collect virtually all of the lease payments at lease commencement date and it must continue to reassess collectability periodically thereafter based on new facts and circumstances affecting the credit risk of the tenant. Partial reserves, or the ability to assume partial recovery are no longer permitted. If the Company determines that it is probable it will collect virtually all of the lease payments (rent and common area maintenance), the lease will continue to be accounted for on an accrual basis (i.e., straight-line). However, if the Company determines it is not probable that it will collect virtually all of the lease payments, the lease will be accounted for on a cash basis and a full reserve would be recorded on previously accrued amounts in cases where it was subsequently concluded that collection was not probable. Cost recoveries from tenants are included in operating revenue from tenants beginning on January 1, 2019, in accordance with new accounting rules, on the accompanying consolidated statements of operations and comprehensive income (loss) in the period the related costs are incurred, as applicable.
Under ASC 842, which was adopted effective on January 1, 2019, uncollectable amounts are reflected as reductions in revenue. Under ASC 840, the Company recorded such amounts as bad debt expense as part of property operating expenses. During the years ended December 31, 2020, 2019 and 2018 such amounts were $2.7 million, $6.5 million and $14.8 million, respectively, which include bad debt expense related to the NuVista and LaSalle Tenants (see Note 3 — Real Estate Investment, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
TheAt the time an asset is acquired, the Company evaluates the inputs, processes and outputs of eachthe asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statementstatements of operations.operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets. See the “Purchase Price Allocation” section in this Note for a discussion of the initial accounting for investments in real estate.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
Disposal of real estate investments that represent a strategic shift in operations that will have a major effect on the Company's operations and financial results are required to be presented as discontinued operations in the consolidated statements of operations. No properties were presented as discontinued operations during the years ended December 31, 2020, 2019 and 2018. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale, most significantly that the sale is probable within one year. The Company evaluates probability of sale based on specific facts including whether a sales agreement is in place and the buyer has made significant non-refundable deposits. Properties are no longer depreciated when they are classified as held for sale. There were $0.1 million and $70.8 million in real estate investments held for sale as of December 31, 2020 and 2019, respectively (see Note 3 — Real Estate Investments, Net to the consolidated financial statements included in this Annual Report on Form 10-K for additional information). As more fully discussed in this Note under Recently Issued Accounting Pronouncements - ASU No. 2016-02 Leases, all of the Company’s leases as lessor prior to adoption were accounted for as operating leases and they continue to be accounted for as operating leases under the transition guidance. The Company evaluates new leases originated after the adoption date (by the Company or by a predecessor lessor/owner) pursuant to the new guidance where a lease for some or all of a building is classified by a lessor as a sales-type lease if the significant risks and rewards of ownership reside with the tenant. This situation is met if, among other things, there is an automatic transfer of title during the lease, a bargain purchase option, the non-cancelable lease term is for more than major part of remaining economic useful life of the asset (e.g., equal to or greater than 75%), if the present value of the minimum lease payments represents substantially all (e.g., equal to or greater than 90%) of the leased property’s fair value at lease inception, or if the asset so specialized in nature that it provides no alternative use to the lessor (and therefore would not provide any future value to the lessor) after the lease term. Further, such new leases would be evaluated to consider whether they would be failed sale-leaseback transactions and accounted for as financing transactions by the lessor. For the three-year period ended December 31, 2019, the Company has no leases as a lessor that would be considered as sales-type leases or financings under sale-leaseback rules.
The Company is also the lessee under certain land leases which were previously classified prior to adoption of lease accounting and will continue to be classified as operating leases under transition elections unless subsequently modified. These leases are reflected on the balance sheet as of December 31, 2020 and 2019, and the rent expense is reflected on a straight-line basis over the lease term in the consolidated statements of operations for the years ended December 31, 2020, 2019, and 2018.
The Company generally determines the value of construction in progress based upon the replacement cost. During the construction period, the Company capitalizes interest, insurance and real estate taxes until the development has reached substantial completion.
Purchase Price Allocation
In both a business combinations,combination and an asset acquisition, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and fixtures.tenant improvements on an as if vacant basis. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values.
In asset acquisitions, the Company allocates the purchase price as well as other costs of acquisition, such as transaction costs, to tangible and identifiable intangible assets or liabilities based on the basis of relative fair values. This cost accumulation model is unique to asset acquisitions and differs from business combinations as there is no goodwill recognized.
The Company generally determines the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease including any below-market fixed rate renewal options for below-market leases.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e. location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above-above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the years ended December 31, 2020, 2019 and 2018 were accounted for as asset acquisitions.
For acquired properties with leases classified as operating leases, the Company allocates the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed, based on their respective fair values. In making estimates of fair values for purposes of allocating non-controlling interests,purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. The Company estimates fair value using data from appraisals, comparable sales, discounted cash flow analysis and other methods. Fair value
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
estimates are also made using significant assumptions such as capitalization rates, fair market lease rates, discount rates and land values per square foot.
Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates and the value of in-place leases. Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from six to 24 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases.
The aggregate value of units issued or percentageintangible assets related to customer relationship, as applicable, is measured based on the Company’s evaluation of investment contributed at the datespecific characteristics of acquisition, as determinedeach tenant’s lease and the Company’s overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. The Company did not record any intangible asset amounts related to customer relationships during the years ended December 31, 2020 and 2019.
Gain on Dispositions of Real Estate Investments
Gains on sales of rental real estate after January 1, 2018 are not considered sales to customers and will generally be recognized pursuant to the provisions included in ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”).
Gain on sales of real estate prior to January 1, 2018 are recognized pursuant to the provisions included in ASC 360-20, Real Estate Sales (“ASC 360-20”). The specific timing of a sale was measured against various criteria in and ASC 360-20 related to the terms of the applicable agreement.
Real estate investments thattransaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are intended to be sold are designated as "held for sale"not met, depending on the consolidated balance sheets atcircumstances, the lesserCompany may not record a sale or it may record a sale but may defer some or all of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale.the gain recognition. If the disposal,criteria for full accrual are not met, the Company may account for the transaction by applying the finance, leasing, profit sharing, deposit, installment or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company's operations and financial results, the operations of such real estate investments would be presentedcost recovery methods, as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods. There were $37.8 million in real estate investments held for sale as of December 31, 2017. There were no real estate investments held for sale as of December 31, 2016.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciatedappropriate, until the development has reached substantial completion.
The assumed mortgage premiums or discountssales criteria for the full accrual method are amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are accreted as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.met.
Impairment of Long LivedLong-Lived Assets
IfWhen circumstances indicate that the carrying value of a property may not be recoverable, the Company reviews the assetproperty for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If an impairment exists, due to the inability to recover the carrying value of a property, the Company would recognize an impairment loss is recordedin the consolidated statement of operations and comprehensive (loss) to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss isrecorded would equal the adjustment to fair value less estimated cost to dispose of the asset. ImpairmentThese assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.earnings.
Reportable Segments
The Company has determined that it has 3 reportable segments, with activities related to investing in MOBs, triple-net leased healthcare facilities, and seniors housing properties. Management evaluates the operating performance of the Company’s investments in real estate and seniors housing properties on an individual property level.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, 7 to 10 years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion. The value of certain other intangibles such as certificates of need in certain jurisdictions are amortized over the expected period of benefit (generally the life of the related building).
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The value of customer relationship intangibles, if any, is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Above and Below-Market Lease Amortization
Capitalized above-market lease values are amortized as a reduction of revenue from tenants over the remaining terms of the respective leases and the capitalized below-market lease values are amortized as an increase to revenue from tenants over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statements of operations and comprehensive loss prior to the adoption of ASU 2017-2 on January 1, 2019. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective, with any ineffective portion of a derivative’s change in fair value immediately recognized in earnings. After the adoption of ASU 2017-2, if the derivative qualifies for hedge accounting, all of the change in value is recorded in other comprehensive income (loss).
Non-controlling Interests
The non-controlling interests represent the portion of the equity in the OP that is not owned by the Company as well as certain investment arrangements with other unaffiliated third parties whereby such investors receive an ownership interest in certain of the Company’s property-owning subsidiaries and are entitled to receive a proportionate share of the net operating cash flow derived from the subsidiaries’ property. Non-controlling interests are presented as a separate component of equity on the consolidated balance sheets and presented as net loss attributable to non-controlling interests on the consolidated statements of operations and comprehensive loss. Non-controlling interests are allocated a share of net loss based on their share of equity ownership. See Note 13 — Non-Controlling Interests for additional information.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
CashReportable Segments
The Company has determined that it has 3 reportable segments, with activities related to investing in MOBs, triple-net leased healthcare facilities, and Cash Equivalents
Cash and cash equivalents includes cash in bank accounts as well asseniors housing properties. Management evaluates the operating performance of the Company’s investments in highly-liquid money market funds with original maturitiesreal estate and seniors housing properties on an individual property level.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of three monthsup to 40 years for buildings, 15 years for land improvements, 7 to 10 years for fixtures and improvements, and the shorter of the useful life or less. Asthe remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion. The value of December 31, 2017 and 2016, approximately $17.9 million and $10,000 was heldcertain other intangibles such as certificates of need in money market funds withcertain jurisdictions are amortized over the Company's financial institutions.expected period of benefit (generally the life of the related building).
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company ("FDIC") up to an insurance limit. At December 31, 2017 and 2016, the Company had depositsvalue of $94.2 million and $29.2 million, of which $79.9 million and $16.1 million, respectively, were in excessin-place leases, exclusive of the amount insured byvalue of above-market and below-market in-place leases, is amortized to expense over the FDIC. Althoughremaining periods of the Company bears riskrespective leases.
The value of customer relationship intangibles, if any, is amortized to amountsexpense over the initial term and any renewal periods in excessthe respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of those insured by the FDIC, it does not anticipate any losses asbuilding. If a result.tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
Restricted Cash
Restricted cash generally consists of resident security deposits and reserves related to real estate taxes, maintenance, structural improvements, and debt service.
Deferred Costs, Net
Deferred costs, net, consists of deferred financing costs related to the Company's Revolving Credit Facility and deferred leasing costs. Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costsAssumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective financingmortgages.
Above and Below-Market Lease Amortization
Capitalized above-market lease values are amortized as a reduction of revenue from tenants over the remaining terms of the respective leases and the capitalized below-market lease values are amortized as an increase to revenue from tenants over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below-market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements usingis to minimize the effectiverisks and costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest methodrate risk, are considered fair value hedges. Derivatives designated and includedqualifying as a hedge of the exposure to variability in interest expenseexpected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statements of operations and comprehensive loss. Unamortized deferred financing costs are expensed ifloss prior to the associated debtadoption of ASU 2017-2 on January 1, 2019. If the derivative is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expenseddesignated and qualifies for hedge accounting treatment, the change in the period in which it is determined that the financing will not close. As of December 31, 2017 and 2016, the Company had $12.9 million and $10.7 million of deferred financing costs, net of accumulated amortization of $11.4 million and $6.7 million, respectively.
Deferred leasing costs, consisting primarily of lease commissions and professional fees incurred in connection with new leases, are deferred and amortized over the termestimated fair value of the lease. As of December 31, 2017 and 2016, the Company had $2.3 million and $1.4 million in deferred leasing costs, net of accumulated amortization of $0.5 million and $0.2 million, respectively.
Revenue Recognition
The Company's rental income is primarily related to rent received from tenants in MOBs and triple-net leased healthcare facilities. Rent from tenants in the Company's MOB and triple-net leased healthcare facilities operating segments (as discussed below)derivative is recorded in accordanceother comprehensive income (loss) to the extent that it is effective, with any ineffective portion of a derivative’s change in fair value immediately recognized in earnings. After the termsadoption of each lease on a straight-line basis overASU 2017-2, if the initial termderivative qualifies for hedge accounting, all of the lease. Because manychange in value is recorded in other comprehensive income (loss).
Non-controlling Interests
The non-controlling interests represent the portion of the leases provide for rental increases at specified intervals, GAAP requiresequity in the OP that is not owned by the Company to record a receivable, and includeas well as certain investment arrangements with other unaffiliated third parties whereby such investors receive an ownership interest in revenues on a straight-line basis, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expirationcertain of the initial termCompany’s property-owning subsidiaries and are entitled to receive a proportionate share of the lease. Whennet operating cash flow derived from the Company acquiressubsidiaries’ property. Non-controlling interests are presented as a property, the acquisition date is considered to be the commencement date for purposesseparate component of this calculation.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Resident services and fee income primarily relates to rent from residents in the Company's seniors housing — operating properties ("SHOP") held using a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") and to fees for ancillary services performed for SHOP residents. Rental income from residents in the Company's SHOP operating segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed.
The Company defers the revenue related to lease payments received from tenants and residents in advance of their due dates.
The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the allowance for uncollectible accountsequity on the consolidated balance sheets
or records a direct write-off of the receivable inand presented as net loss attributable to non-controlling interests on the consolidated statements of
operations.operations and comprehensive loss. Non-controlling interests are allocated a share of net loss based on their share of equity ownership. See Note 13 — Non-Controlling Interests for additional information.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with the IPO. Offering costs of the Company (other than selling commissions and the dealer manager fee, as discussed in Note 9 — Related Party Transactions and Arrangements) may be paid by the Advisor, the Former Dealer Manager or their affiliates on behalf of the Company. Offering and related costs included (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Former Dealer Manager for amounts it paid to reimburse the itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. The Company was obligated to reimburse the Advisor or its affiliates, as applicable, for offering costs paid by them on behalf of the Company, provided that the Advisor was obligated to reimburse the Company to the extent offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offering exceed 2.0% of offering proceeds, net of repurchases and DRIP. As a result, these costs were only a liability of the Company to the extent aggregate selling commissions, the dealer manager fees and other organization and offering costs did not exceed 12.0% of the gross proceeds determined at the end of the IPO. As of the end of the IPO in November 2014, cumulative offering costs did not exceed 12.0% of the gross proceeds received in the IPO (See Note 9 — Related Party Transactions and Arrangements).Equity-Based Compensation
The Company has a stock-based incentive award plan for its directors, which is accounted for under the guidance of share based payments. The expense for such awards is included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note 11 — Share-Based Compensation).Income Taxes
The Company elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), as amended, commencing with the taxable year ended December 31, 2013. If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income tax to the extent it distributes all of its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company’s REIT taxable income to the Company’s stockholders. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by the U.S. President. The Company is not aware of any provision in the final tax reform legislation or any pending tax legislation that would adversely affect its ability to operate as a REIT or to qualify as a REIT for U.S. federal income tax purposes. However, new legislation, as well as new regulations, administrative interpretations, or court decisions may be introduced, enacted, or promulgated from time to time, that could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is adverse to the Company's qualification as a REIT.
If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. The Company distributed to its stockholders 100% of its REIT taxable income for each of the years ended December 31, 2017, 2016 and 2015. Accordingly, no provision for federal or state income taxes related to such REIT taxable income was recorded in the Company's financial statements. Even if the Company continues to qualify for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.
Certain limitations are imposed on REITs with respect to the ownership and operation of seniors housing communities. Generally, to qualify as a REIT, the Company cannot directly or indirectly operate seniors housing communities. Instead, such facilities may be either leased to a third party operator or leased to a taxable REIT subsidiary (“TRS”) and operated by a third party on behalf of the TRS. Accordingly, the Company has formed a TRS entity under the OP to lease its SHOPs and the TRS has entered into management contracts with unaffiliated third party managers to operate the facilities on its behalf.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Acquired intangible assets and liabilities consisted of the following as of the periods presented:
The following table discloses amounts recognized within the consolidated statements of operations and comprehensive loss related to amortization of in-place leases and other intangible assets, amortization and accretion of above- andabove-and below-market lease assets and liabilities, net and the accretionamortization of above-marketabove-and below-market ground leases, for the periods presented:
The following table details the major classes of assets associated with the properties that have been classified as held for sale as of December 31, 2017:2020 and 2019:
lease the mortgaged properties have indemnified the MOB Lenders against losses, costs or liabilities related to certain environmental matters.
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of December 31, 2017,2020 and 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company'sCompany’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments, are incorporated into the fair values to account for the Company'sCompany’s potential nonperformance risk and the performance risk of the counterparties.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2017.2020.
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair values of short-term financial instruments such as cash and cash equivalents, restricted cash, straight-line rent receivable, net, prepaid expenses and other assets, deferred costs, net, accounts payable and accrued expenses, deferred rent and distributions payable approximate their carrying value on the consolidated balance sheets due to their short-term nature.
The fair value of the mortgage notes payable is estimated using a discounted cash flow analysis, based on the Advisor'sAdvisor’s experience with similar types of borrowing arrangements. Advances underarrangements, excluding the Revolvingvalue of derivatives. At December 31, 2020, the carrying values of the Credit Facility and the Fannie Mae Master Credit Facilities are considereddo not approximate their fair values due to be reported atthe widening of credit spreads during the period. At December 31, 2019, the carrying amounts approximated their fair value, because their interest rates vary with changes in LIBOR.values.
The Company may use derivative financial instruments, including interest rate swaps, caps, collars, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings.
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company'sCompany’s operating and financial structure.structure as well as to hedge specific anticipated transactions. Additionally, in using interest rate derivatives, the Company aims to add stability to interest expense and to manage its exposure to interest rate movements. The Company does not intend to utilize derivatives for speculative purposes or purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company, and its affiliates, may also have other financial relationships. The Company does not anticipate that any of theits counterparties will fail to meet their obligations.
Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.value of $38.4 million at December 31, 2020.
On February 17, 2017, the members of a special committee of the Board unanimously approved certain amendments to and a restatement of the Amended and Restated Advisory Agreement, as amended (the "Original A&R Advisory Agreement"),then effective advisory agreement, by and among the Company, the OP and the Advisor (the "Second“Second A&R Advisory Agreement"Agreement”). The Second A&R Advisory Agreement, which superseded, amended and restated the Originalpreviously effective advisory agreement (the “Original A&R Advisory Agreement,Agreement”), took effect on February 17, 2017. The initial term of the Second A&R Advisory Agreement is ten years beginningexpires on February 17, 2017,2027, and is automatically renewable for another ten-year term upon each ten-year anniversary unless the Second A&R Advisory Agreement is terminated (i) with notice of an election not to renew at least 365 days prior to the applicable tenth anniversary, (ii) in accordance with a change of control (as defined in controlthe Second A&R Advisory Agreement) or a transition to self-management, (see the section titled "Termination Fees" included within this footnote), (iii) by 67% of the independent directors of the Board for cause, without penalty, with 45 days'days’ notice or (iv) with 60 days prior written notice by the Advisor for (a) a failure to obtain a satisfactory agreement for any successor to the Company to assume and agree to perform obligations under the Second A&R Advisory Agreement or (b) any material breach of the Second A&R Advisory Agreement of any nature whatsoever by the Company.
Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated for any reason other than a termination without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company'sCompany’s independent directors without cause before the economic hurdleEconomic Hurdle has been met.
Subject to approval by the Board, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP.LPA. The number of Class B Units issued in any quarter was equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which was initially equal to $22.50 (the IPO price in the Company’s initial public offering of common stock minus the selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance conditionPerformance Condition to be probable. As of December 31, 2017,2020, the Company cannot determine the probability of achieving the performance condition.Performance Condition. The Advisor receives cash distributions on each issued Class B Units equalUnit equivalent to the cash distribution rate receivedpaid, if any on the Company'sCompany’s common stock. Suchstock in an amount retroactively adjusted to reflect the Stock Dividends, other stock dividends and other similar events. These distributions on Class B Units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss until the performance conditionPerformance Condition is considered probable to occur. As of December 31, 2017, theThe Board hadhas previously approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement.
Effective February 17, 2017, the Second A&R Advisory Agreement requires the Company to pay the Advisor a base management fee, which is payable on the first business day of each month. The fixed portion of the base management fee is equal to $1.625 million per month, while the variable portion of the base management fee is equal to one-twelfth of 1.25% of the cumulative net proceeds of any equity (including convertible debt) raisedequity and certain convertible debt but excluding proceeds from the DRIP) issued by the Company and its subsidiaries subsequent to February 17, 2017 per month. The base management fee is payable to the Advisor or its assignees in cash, OP Units or shares, or a combination thereof, the form of payment to be determined at the discretion of the Advisor.Advisor and the value of any OP Unit or share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.
In addition, the Second A&R Advisory Agreement requires the Company to pay the Advisor a variable management/incentive fee quarterly in arrears equal to (1) the product of fully diluted number of shares of common stock outstanding multiplied by (2) (x) 15.0% of the applicable prior quarter'squarter’s Core Earnings (as defined below) per share in excess of $0.375 per share plus (y) 10.0% of the applicable prior quarter'squarter’s Core Earnings per share in excess of $0.47 per share. Core Earnings is defined as, for the applicable period, net income or loss, computed in accordance with GAAP, excluding non-cash equity compensation expense, the variable management/incentive fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains or losses or other non-cash items recorded in net income or loss for the applicable period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairments of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent and any associated bad debt reserves, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses.expenses (in each case after discussions between the Advisor and the independent directors and approved by a majority of the independent directors). The variable management/incentive fee is payable to the Advisor or its assignees in cash or shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor.Advisor and the value of any share to be determined by the Advisor acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. No variable management incentive fee was incurred for the years ended December 31, 2020, 2019 and 2018.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee ofon a monthly basis, equal to 1.5% of gross revenues from the Company'sCompany’s stand-alone single-tenant net leased properties managed and 2.5% of gross revenues from all other types of properties respectively.managed, plus market-based leasing commissions applicable to the geographic location of the property. The Company also reimburses the Property Manager for property level expenses incurred by the Property Manager. The Property Manager may charge a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties, and the Property Manager is allowed to receive a higher property management fee in certain cases if approved by our Board of Directors (including a majority of the independent directors).
If the Company contracts directly with third parties for such services, the Company will pay themthe third party customary market fees and will pay the Property Manager an oversight fee of up to 1.0% of the gross revenues of the property managed.managed by the third party. In no event will the Company pay the Property Manager or any affiliate of the Property Manager both a property management fee and an oversight fee with respect to any particular property. If the Property Manager provides services other than those specified in the Property Management Agreement, the Company will pay the Property Manager a monthly fee equal to no more than that which the Company would pay to a third party that is not an affiliate of the Company or the Property Manager to provide the services.
On February 17, 2017, the Company entered into the Amended and Restated Property Management and Leasing Agreement (the “A&R Property Management Agreement”) with the OP and the Property Manager. The A&R Property Management Agreement was entered into to reflect amendments to the original agreement between the parties and further amends the original agreement by extending the term of the agreement from one to two years, until February 15, 2019. The A&R Property Management Agreement will automatically renewrenews for successive one-year terms unless any party provides written notice of its intention to terminate the A&R Property Management Agreement at least ninety90 days prior to the end of the term. Neither party provided notice of intent to terminate. The current term of the A&R Property Management Agreement expires February 17, 2021.The Property Manager may assign the A&R Property Management Agreement to any party with expertise in commercial real estate which has, together with its affiliates, over $100.0 million in assets under management.
The following table details amounts incurred, forgiven and payable in connection with the Company'sCompany’s operations-related services described above as of and for the periods presented:
Fees and Participations Incurred in Connection with a Listing or the Liquidation of the Company'sCompany’s Real Estate Assets
If the common stock of the Company is listed on a national exchange, the Special Limited Partner will be entitled to receive a promissory note as evidence of its right to receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the market value of all issued and outstanding shares of common stock plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled toinvestors in the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions.Company’s initial public offering of common stock. No such distribution was incurred during the years ended December 31, 2017, 20162020, 2019 and 2015. Neither2018. If the Special Limited Partner noror any of its affiliates can earn bothreceives the subordinated incentive listing distribution the Special Limited Partner and its affiliates will no longer be entitled to receive the subordinated participation in net sales proceeds andor the subordinated incentive listing distribution.
Under the Second A&R Advisory Agreement, upon the termination or non-renewal of the agreement, the Advisor will be entitled to receive from the Company all amounts due to the Advisor, including any change inof control fee and transition fee (both described below), as well as the then-present fair market value of the Advisor'sAdvisor’s interest in the Company. All fees will be due within 30 days after the effective date of the termination of the Second A&R Advisory Agreement.
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company and asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Prior to August 2017, the RSP provided for an automatic grant of 1,333 restricted shares to each of the independent directors, without any further approval by the Board or the stockholders, on the date of his or her initial election to the Board and thereafter on the date of each annual stockholder meeting. The restricted shares awards granted as annual automatic awards prior to August 2017 were subject to vesting over a five-year period following the date of grant.
In August 2017, the Board amended the RSP to provide that the number of restricted shares comprising the automatic annual award to each of the independent directors would be equal to the quotient of $30,000 divided by the then-current Estimated Per-Share NAV. These restricted shares vest annually over a five-year period in increments of 20.0% per annum beginning with the one-year anniversary of initial election to the BoardNAV and the date of the next annual meeting, respectively.
Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall beare subject to the same restrictions as the underlying restricted shares.
In November 2014, the Company partially funded the purchase of an MOB from an unaffiliated third party by causing the OP to issue 405,908 OP Units, with a value of $10.1 million, or $25.00 per unit, to the unaffiliated third party.
The Company also has investment arrangements with other unaffiliated third parties whereby such investors receive an ownership interest in certain of the Company'sCompany’s property-owning subsidiaries and are entitled to receive a proportionate share of the net operating cash flow derived from the subsidiaries'subsidiaries’ property. Upon disposition of a property subject to non-controlling interest, the investor will receive a proportionate share of the net proceeds from the sale of the property. The investor has no recourse to any other assets of the Company. Due to the nature of the Company'sCompany’s involvement with these arrangements and the significance of its investment in relation to the investment of the third party, the Company has determined that it controls each entity in these arrangements and therefore the entities related to these arrangements are consolidated within the Company'sCompany’s financial statements. A non-controlling interest is recorded for the investor'sinvestor’s ownership interest in the properties.
The following table summarizes the activity related to investment arrangements with unaffiliated third parties.
The Company evaluates the performance of the combined properties in each segment based on net operating income ("NOI"(“NOI”). NOI is defined as total revenues excluding contingent purchase price consideration,from tenants, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss). The Company uses NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. The Company believes that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property'sproperty’s results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by the Company may not be comparable to NOI reported by other REITs that define NOI differently. The Company believes that in order to facilitate a clear understanding of the Company'sCompany’s operating results, NOI should be examined in conjunction with net income (loss) as presented in the Company'sCompany’s consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of the Company'sCompany’s performance or to cash flows as a measure of the Company'sCompany’s liquidity or ability to makepay distributions.
The following table reconciles the segment activity to consolidated total assets as of the periods presented:
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company or its properties.
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of December 31, 2017,2020, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following:following disclosures: